More than centuries of complex monetary systems and complex denominations, there has always been a currency or two that distinguished and had a significant impact on international economic and financial structures. From the Greek drachma of the third century BC to the 20th century American dollar, a currency has always increased at any time to dominate the global monetary system.
An inherent feature of an important international currency is its stability. This will be done in turn on several factors that Robert Mundell, professor of economics and winner of Nobel prizes, lists in his 1998 document on the euro. Mundell identifies five factors that affect the stability of a given currency, namely: the size of the transaction domain, the stability of monetary policy, the absence of controls, strength and continuity of the issuing state and the value. delay.
1. Size of the domain of transactions. The size of the market on which the currency is distributed affects its liquidity and ability to withstand financial and economic crises. German reunification in 1990, for example, became a burden as heavy in the economy of the country it has almost brought to the collapse of the latter. An increase in public spending has had to be funded by loans and the Eastern Germany’s combat economy needed to be relaunched. The total cost of the grouping was estimated at 1.5 billion euros. Now imagine if it happened to the much smaller economy in Malta. Although it has crossed Germany less than two decades to recover, it would have taken a smaller country more time to get out of the pits and the consequences would have been much worse. Also consider that a cash used of 100 million people is certainly more liquid than a circulating currency between a population of 10 million.
2. Stability of monetary policy. A stable monetary policy implies a controlled rate of inflation and no steep and extent fluctuation of the exchange rate of a currency. Taking another example of the history of Germany, the hyperinflation of the German brand in the 1920s made it almost worthless that a new currency should be issued. Mundell stated that there are several ways to achieve a stable monetary policy. Focusing on a stable exchange rate would be the best displacement for a small open economy located near a financial giant (like Belgium in Germany). For the greatest states, control the rate of inflation would be a more effective way to ensure a strong monetary policy.
3. Absence of controls. Currency checks are restrictions imposed by the state on the purchase / sale of foreign currencies by the residents or the purchase / sale of local currency by non-residents. These restrictions are authorized by the International Monetary Fund for the transition of economies, but would constitute a ridiculous thing to impose a targeted currency involved in international transactions. The currency would not be effective in international monetary systems if it is largely inconvertible.
4. Force and continuity of the central state. Political stability is a prerequisite for monetary stability. In simple terms, a state of collapse takes its currency with it, while a solid state gives way to a stable currency. The Swiss franc, for example, is considered a candidate with a capita because of the political neutrality of Switzerland. The military power of the United States is also cited as an important factor in maintaining the dominance of the dollar.
5. Delay value. The important currencies of the past had a good thing for them: they were convertible into gold or silver. It was their delay value. The US dollar was also equivalent to gold during the Bretton Woods system. After avoiding a Fiat currency, the strength of the dollar depended on the US reputation as a strong state and a military super-superpower. On the other hand, the euro as an emerging major currency has not yet established its delay value.