Lesson10.

Global monetary-financial relations-part2 : deepening the understanding of

monetary mechanisms and policies

I. The gold standard

1. How the Gold Standard worked
Among the gold-standard countries that allowed gold to move freely, the gold exchange obligation
of the central banks meant that exchange rates were factually fixed. So there was a fixed exchange
rate system with all the advantages and disadvantages. The exchange rate corresponded to
"automatically" calculated ratio of the amounts of gold per nominal of the two currencies.
Under the Gold Standard, a country’s money supply was linked to gold. The necessity of being able
to convert fiat money into gold on demand strictly limited the amount of fiat money in circulation to
a multiple of the central banks’ gold reserves. Most countries had legal minimum ratios of gold to
notes/currency issued or other similar limits.
International balance of payments differences were settled in gold. Countries with a balance of
payments surplus would receive gold inflows, while countries in deficit would experience an
outflow of gold.
In theory, international settlement in gold meant that the system based on the Gold Standard was
self-correcting. Namely, a country running a balance of payments deficit would experience an
outflow of gold, a reduction in money supply, a decline in the domestic price level, a rise in
competitiveness and, therefore, a correction in the balance of payments deficit. The reverse would
be true for countries with a balance of payments surplus.
That was the so called ‘price-specie flow mechanism’ set out by 18th century philosopher and
economist David Hume1.
This was the underlying principle of how the Gold Standard operated, although in practice it was
more complex. The adjustment process could be accelerated by central bank operations (the so
called “rule of the game for gold standard”). In this model we add banks and a central bank and

1 David Hume (1711-1776) developed a model that became known as the gold automatism.
It is based on simplifying assumptions. Only the free circulation of the gold coins is considered and the role of
the banks is neglected. There is also a free trade in goods and no flow of capitals over borders.
When an exporter was paid for his exported goods with gold, he brought it to a mint for minting coins. When
an importer imported goods into his country, he paid for the goods with gold. This was considered as an export of gold.
For country A, which exports more gold for imported goods than it receives for its exported goods it generates
a gold outflow and thus a deficit of balance of payments. Since less gold coins remain in circulation in the country A, a
falling of prices resulted. As an outcome of the price decrease, imported goods became more expensive in the deficit of
payment of country A and their sales declined.
For the other country B, with an inflow of gold, it had the effect of increasing the prices due to an increased
gold in circulation (the gold coin inflow is causing an increase in relative prices). For country B, the goods from the
deficit country A become cheaper, so their consumption could be increased. This resulted in a rise in exports from the
deficit country A and, in turn, imports from B will fall.
This automatic mechanism should lead to a balancing of trade in the medium to long term.
also add not just the free trade of goods (including movement of gold) but also free flow of capitals
over the borders.
The main tool was the discount rate (the rate at which the central bank would lend money to
commercial banks or financial institutions) which would in turn influence market interest rates.
A rise in interest rates would speed up the adjustment process through two channels. First, it would
make borrowing more expensive, reducing investment spending and domestic demand, which in
turn would put downward pressure on domestic prices, enhancing competitiveness and stimulating
exports.
Second, higher interest rates would attract money from abroad, improving the capital account of the
balance of payments. A fall in interest rates would have the opposite effect.
The central bank could also directly affect the amount of money in circulation by buying or selling domestic assets
though this required deep financial markets (this was only done to a significant extent in the UK and, latter, in
Germany).
The use of such methods meant that any correction of an economic imbalance would be accelerated
and normally it would not be necessary to wait for the moment when substantial quantities of gold
have been transported from one country to another.
-The reality is even more complex. The system worked simply because the central banks of the bloc
of gold standard countries agreed that they should be bound by the instructions of a single central
bank-the Central Bank of England, the most influential bank at that time, which was playing by the
''rules of the gold standard''.
When we look at Britain's balance of payments, we see a large deficit on the balance. With such a
deficit, we expect a golden exit and deflationary consequences. However, other aspects play an
important role in this adjustment. Something else is putting pressure on the balance of payments. It
is the fact that there is very significant foreign investment from the British.
The question is how is it possible for Britain to have a trade deficit, and an outflow of gold through
investment abroad?
Flows are coming into Britain and in particular, the stock of foreign investment is providing returns
to Britain that we see in terms of accumulated dividends. We also see that there are exports of
services, particularly finance. This means that not everything is determined by a deficit on the
commodity balance. The situation is not completely unique, but it is rare. Britain was the world's
largest international investor and also the most successful country in terms of exporting its services.
It is the fact that London was the financial centre of the world that made these financial services to
be exported.
It is not surprising that Britain follows the rules of the game because the rules did not weigh as
heavily on Britain as on any other country. It worked smoothly for most (capital) debtor countries
only because Britain and the other creditor states regularly pumped so much capital out and across
their borders. Fortunately for the debtors, most of this capital was supplied in long-term forms
which could not readily be pulled back home in time of trouble, whether real or imagined.

2.Restoration of the Gold Standard (as Gold Exchange standard)

After the First World War, the gold standard was restored in most countries insofar as the Central
banks' gold redemption obligation was reintroduced and correlated with the condition that the
Central banks had to be independent institutions.
By 1919, thanks to wartime lending and a continuing current account surplus, the United States had become
a net creditor in relation to the rest of the world. In the 1920s the surplus remained, and in most years the
American gold stock grew, almost tripling between 1914 and 1930.
Had the United States not exported such large amounts of capital in the 1920s the golden tide would have
flowed even higher. As it was, American gross external assets quadrupled, far outgrowing foreign claims on
the USA. Even though much of the gold was immobilised by American dollars' rules, the American position
was far stronger than the British one (American gold reserves were enormously larger than her external
short-term obligations, while the British situation was exactly the reverse). Fortunately for the world's
confidence in the pound, until 1931 no one knew just how precarious Britain's situation had become.

3. The move away from the gold standard in the interwar period
Initial shape
Unlike the pre-World War I era, the gold standard system was no longer stable during the inter-war
period.
The United States generated large current account surpluses in world trade during the First World
War and the Golden Twenties.
Under the gold standard, current account deficits in many countries, especially Germany, would led
to a steady outflow of gold. For Germany the destabilizing effect of the reparations payments after
the First World War was an added problem. But these current account deficits were offset by
generous lending by the United States (chapter in capital account).
First actions of the US Federal Reserve
-In US The Federal Reserve had become increasingly preoccupied over the course of 1927 by the
Wall Street boom, which they saw as diverting resources from more productive uses. To discourage
stock market speculation, the Federal Reserve Bank of New York raised its discount rate from 3.5
to 5 percent in the first half of 1928.
-In addition, the Fed was concerned by the decline in its gold cover ratio. The late-1920s boom
having augmented stocks of money and credit more dramatically than U.S. gold reserves, the Fed
raised interest rates in what it saw as the responsibility of any central bank.
Its actions were felt both abroad and at home. Higher interest rates kept American capital from
flowing abroad. Tighter money slowed the expansion of the U.S. economy.
Effects abroad
At the turn of the year 1928/1929 the weakness of balance payments of many countries became
apparent. As we saw the US Federal Reserve, in order to curb US overheated economy (the stock
exchange bubble), introduced a policy of high interest rates. That caused a gold inflow from
countries with lower interest rates.
In 1927-28 American capital outflows were of the same order of magnitude as the American current-account surplus.
But these outflows then began to fall, so that in 1930 they financed barely half of that surplus. It used to be thought that
this development had exported the depression from America to Germany, dependent as it was on American capital.
Given the dependence of other countries on capital imports from the United States, the collapse of the recycling process
in 1928 was a difficult blow. The interest-rate increases initiated by the Fed to slow the Wall Street boom and stem the
decline in the gold cover ratio increased the attractiveness of investing in U.S. fixed-interest securities. Higher interest
rates also damaged the creditworthiness of heavily indebted countries suddenly saddled with higher interest charges.
U.S. foreign lending, which had been running at high levels in the first half of 1928, fell to zero in the second half of the
year.
Once capital stopped flowing in, demand in the debtor countries was curtailed. The consequent fall in the relative prices
of the goods they produced was the mechanism by which they boosted their exports and compressed their imports to
bridge the gap created by the evaporation of capital inflows. In other words, the price-specie flow mechanism finally
began to operate.
But with the onset of the Great Depression in 1929, export markets were dealt a further blow, which made the earlier
changes in relative prices wholly inadequate.
Effects in the US
Run for gold and a new raising of interest rates in the US
When the stock market crashed in 1929, the US investors began trading in currencies and
commodities. As the price of gold rose, people exchanged their dollars for gold. The conditions
worsened when banks began failing. People began hoarding gold because they didn't trust financial
institutions.
The Federal Reserve kept raising interest rates, since it was trying to make dollars more valuable
and dissuade people from further depleting the U.S. gold reserves. These higher rates worsened the
Depression by making the cost of doing business even more expensive. Many companies went
bankrupt, creating record levels of unemployment.
The other countries were forced to surpass the US high-yield policy, dramatically reducing bank
lending. At the same time, public spending had to be cut drastically (austerity policy). That caused
worldwide contraction of the money supply and was the impulse that triggered the global economic
crisis.
Bank crisis in the US
Another effect was the severe banking crisis in the early 1930s, which led to credit crunch and mass
bankruptcies. To combat the banking crisis, especially the Bank Runs, banks would have had to be
provided with liquidity. But the gold standard was an insurmountable obstacle to such a policy. The
reason for this obstacle was that the amount of money actually needed in countries with gold
standard currencies was much higher than the ability of central banks to issue gold-backed cash.
Industrial crisis
This fragile financial situation was superimposed on a more fundamental problem: the collapse of industrial production.
The industrial world had seen recessions before, but not like the one which began in 1929. U.S. industrial production
fell by a staggering 48 percent between 1929 and 1932 (German industrial production by 39 percent). Recorded
unemployment peaked at 25 percent of the labor force in the United States; (in Germany unemployment in industry
reached 44 percent).
Conclusion: Impossibility of anti cyclical policies of countries under gold standard
Governments naturally wished to stimulate their moribund economies.
But injecting credit and bringing down interest rates to encourage consumption and investment was
inconsistent with maintenance of the gold standard.
Additional credit meant additional demands for merchandise imports. Lower interest rates
encouraged investment abroad. The reserve losses they produced raised fears of currency
depreciation, prompting capital flight. Governments trying to use policy to halt the downward spiral
of economic activity were confronted by the incompatibility of expansionary initiatives and gold
convertibility.
Unilateral economic policies to combat the economic crisis proved impossible under the gold
standard. The initiatives to increase monetary supply and / or anti-cyclical fiscal policies (reflation)
in the United Kingdom (1930), the United States (1932), Belgium (1934) and France (1934-35)
failed because such measures caused a deficit in current account and thus endangered the gold
standard.
Economic historians agree that the gold standard was the transmission mechanism for spreading the
Great Depression and contributed significantly to the genesis and its length. Over the time, such
mistakes of monetary policy became evident. Gradually, all states suspended the gold standard and
moved to a reflationary policy.
By almost unanimous opinion, there is a clear temporal and contextual connection between the
global shift away from the gold standard and the beginning of the economic recovery.

Dollar exit of Gold standard

In 1933, the United States broke away from the gold standard to expand the money supply and end deflation.
This helped curb the banking crisis there and helped the US economy regain growth.
Franklin Delano Roosevelt (US President from 1933 until his death in 1945) decided to suspend the gold
convertibility of the US dollar (as part of its fight against the Great Depression).
A law was passed that allowed silver to be used for coinage. The private ownership of gold was banned from
1 May 1933, in the US gold values exceeding 100 US dollars ( Executive Order 6102 of 5 April 1933). The
entire private gold (coins, bars and certificates) had to be delivered at state reception offices within 14 days
at a fixed gold price.
The government pushed up the dollar's rate by buying gold at higher prices. With the Gold Reserve Act in
1934, the price of gold (well above the market price) was set at $ 35 per ounce. Since the ounce of gold now
cost more dollars, the rise in the gold price led to a depreciation of the dollar to 59% of its last official value.
This devaluation resulted in foreigners being able to buy 15% more American goods and thus promoting
exports (competitive devaluation).
This US move away from the gold standard sparked a chain reaction: Canada (Canadian dollar), Cuba
(Cuban peso), much of Central America, Argentina ( Argentinian peso ) and the Philippines (Philippine
peso) also broke away from the gold standard. These measures worsened the competitive position of the last
remaining members of the gold block and created a spiral of depreciation-devaluation.

Economic history interpretation of the failures of gold standard

Both historians and economists largely agreed that the gold standard did not stabilize prices and the
economy. The widespread idea that the gold standard leads to a special "stability" must be viewed
against the intellectual horizon of the time.
Unemployment was perceived as an economic problem only in the early 20th century. In the
Victorian era, it was common practice internationally to call the unemployed loafers or vagabonds.
This vocabulary reveals that unemployment was perceived as a personality weakness and yet no
macroeconomic influences were recognized behind the rise and fall in the number of unemployed.
A scientific debate on the topic of unemployment began only slowly by the 1880s. At the beginning
of the 20th century the political influence of the workers grew, trade unions became more powerful
and in many countries suffrage restrictions (three-class suffrage, census suffrage ) were gradually
abandoned.
There was also a coincidence in time that high interest rates of central banks discouraged
investment and thus weakened economic growth (and forced unemployment). Nevertheless, the
gold automatism often imposed politicians to act contrary to this knowledge.
Around 1917, electoral restrictions to the detriment of the middle and lower classes were largely
abolished in most countries. As a result, workers' fear of unemployment became a significant
political factor.
In the following years, economic pioneers also discovered the connection between money supply,
credit, economic growth and unemployment. However, these findings did not materialize in the
economic mainstream till until after the Great Depression (Keynesian monetary theory,
monetarism).
All this weakened the existing consensus in favour of the gold standard. Under the gold standard, in
the economy of the pro-cyclical gold automatism, an autonomous monetary policy (a policy
focusing the internal economic well being) was in fact impossible. An expansionary monetary
policy, able to stabilize the money supply and fight a recession was only possible if all countries of
the gold standard pursued an expansionary monetary policy to the same extent.
This fatal rigidity of the gold standard could be inhibited by international cooperation before the
First World War; after the First World War, such cooperation did not materialize. In the 1920s, the
gold standard was not really an anchor of stability, but a major threat to financial stability and
economic prosperity. At the beginning of the Great Depression, under the gold standard,
governments had to watch powerless as the money supply contracted, debt crises began, and the
banking system collapsed to the detriment of the real economy.
All states, by competitive devaluation, had to give up the gold standard. It is an almost unanimous
view that there is a clear temporal and substantive link between the global shift away from the gold
standard and the beginning of the economic recovery.

II. A deeper understanding of monetary constrains-the Impossible Trinity BY FREE

CAPITAL FLOWS
The choice of an exchange rate system depends on many variables including the freedom of capital
to flow into and out of a country. One consequence of allowing free capital flows is that it
constrains a country’s choice of an exchange rate system and its ability to operate an independent
monetary policy (a policy focusing the internal economic well being).
For reasons related to the tendency for capital to flow where returns are the highest, a country can
maintain only two of the following three policies—free capital flows, a fixed exchange rate, and an
independent monetary policy. This tendency is illustrated in Figure 15.1. Countries must choose to
be on one side of the triangle, adopting the policies at each end, but forgoing the policy on the
opposite corner. Economists refer to this restriction as the impossible trinity. The easiest way to
understand this restriction is through specific examples.
The United States allows free capital flows and has an independent monetary policy, but it has a
flexible exchange rate. To combat inflation, suppose the Federal Reserve increases its target interest
rate relative to foreign interest rates, inducing capital to flow into the United States. By increasing
the demand for dollars relative to other currencies, these capital inflows cause the dollar to
appreciate against other currencies. Conversely, if the Federal Reserve reduces its target interest
rate, net capital outflows would decrease the demand for dollars causing the dollar to depreciate
against other currencies. Therefore, the United States, by not having a fixed exchange rate, can
maintain both an independent monetary policy and free capital flows. Countries can adopt only two

of the following three policies—free capital flows, a fixed exchange rate, and an independent
monetary policy.
In contrast, Hong Kong essentially fixes the value of its currency to the U.S. Dollar and allows free
capital flows. The trade-off is that Hong Kong sacrifices the ability to use monetary policy to
influence domestic interest rates. Unlike the United States, Hong Kong cannot decrease interest
rates to stimulate a weak economy. If Hong Kong’s interest rates were to diverge from world rates,
capital would flow into or out of the Hong Kong economy as in the U.S. case above. Under a
flexible exchange rate, these flows would cause the exchange value of the Hong Kong dollar to
change relative to that of other currencies. Under a fixed exchange rate, the monetary authority
must offset these capital flows by purchasing domestic or foreign currency in order to keep the
supply and demand for its currency fixed and the exchange rate constant. Hong Kong loses the
ability to have an independent monetary policy if it allows free capital flows and maintains a fixed
exchange rate.
Similar to the case of Hong Kong, until 2005 China tied its exchange rate to the U.S. dollar. China
could conduct an independent monetary policy because it sets restrictions on capital flows. In
China’s case, world and domestic interest rates could differ because controls on the transfer of
funds into and out of the country limited the resulting changes in the money supply and the
corresponding pressures on the exchange rate. As these three examples show, if a country chooses
to allow capital to flow freely, it must also choose between having an independent monetary policy
or a fixed exchange rate.
How does a country decide whether to give up a fixed exchange rate, an independent monetary
policy, or free capital movements? The answer largely depends on global economic trends.
The post-World War II era saw substantial integration of markets and increasing international trade.
Countries such as the United States wanted to facilitate this increase in trade by eliminating the risk
of exchange rate fluctuations. In 1944, representatives from major industrial countries designed and
implemented a plan that encouraged fixed exchange rates for the dollar and other currencies while
maintaining independent monetary policies.
Just as with the systems described above, something had to be given up—the free movement of
capital flows.
Participating countries imposed ceilings on the interest rates that banks could offer depositors and
restrictions on the types of assets that banks could invest in. Governments intervened in financial
markets to direct capital toward strategic domestic sectors. Although none of these controls alone
prevented international capital flows, in combination they allowed governments to reduce the
amount of international capital transactions. EXCHANGE RATE SYSTEM
Few nations have allowed their currencies’ exchange values to be determined solely by the forces of
supply and demand in a free market. Until the industrialized nations adopted managed floating
exchange rates in the 1970s, the practice generally was to maintain a pattern of fixed exchange
rates among national currencies. Changes in national exchange rates presumably were initiated by
domestic monetary authorities when long-term market forces warranted it.

III. Examining Bretton Woods (1944-1973) and post Bretton Woods systems
After the Second World War, the Bretton Woods system was created as an international monetary
system with an exchange rate bandwidth, which was determined by the partially gold-backed US
dollar as an anchor currency. The architects of the Bretton Woods system had sought to address
and combine the benefits of the gold standard, as a fixed exchange rate regime (exchange rate
stability + avoiding competitive depreciation) with the benefits of a flexible exchange rate regime
(in particular, the ability to respond unilaterally to macroeconomic shocks with appropriate
monetary policy).
But the Bretton Woods system suffered from the design flaw known as the Triffin dilemma. The
growing world trade has led to an increasing demand for dollar currency reserves. These currency
reserves could only be generated by constant current account surpluses against the USA.
The US, as a reserve currency country, was not subject to the current account adjustment constraints
of other countries, because the debt was financed in foreign currency flowing from abroad, as long
as foreign countries had an interest in investing in currency reserves.
However, constant US current account deficits eventually eroded confidence in the dollar. This system ended in 1973.
On August 15, 1971, US President Richard Nixon raised the link of the dollar to gold ( Nixon shock ). In 1973, the
exchange rates were abandoned.
In 1976, the International Monetary Fund recommended to its members the abandoning of the gold bond for their
currencies. Many states still maintain gold reserves, but a certain gold value of any currency is no longer guaranteed.

Growing capital mobility

Since the collapse of the Bretton Woods System in the early 1970s, a slow but then dramatically accelerating shift away
from the earlier regime of pegged but-adjustable exchange rates has occurred. As late as 1970 the idea of floating the
exchange rate was almost unheard of except as a temporary expedient in extraordinary circumstances. But by 1990
roughly 15 percent of all countries had moved to floating rates. By 2006 this share had risen to nearly 30 percent. The
movement away from pegged-but-adjustable rates was especially prominent in the advanced countries. By 2006 such
intermediate arrangements had essentially disappeared, in favor of monetary unification in Europe and floating
elsewhere. In emerging markets, where monetary unification was generally not an option (at least not yet), soft pegs did
not disappear, but floating similarly gained ground.
These trends are most immediately the consequence of rising capital mobility. In the aftermath of World War II,
memories of the debt crisis of the 1930s and the fact that defaulted foreign bonds had not yet been cleared away
discouraged investors from looking abroad. Those who might have done so were constrained by tight controls on
international capital flows.
The maintenance of capital controls had been authorized by the Articles of Agreement negotiated at Bretton Woods in
order to reconcile exchange rate stability with other goals: in the short run, concerted programs of postwar
reconstruction; in the long run, the pursuit of full employment.
Those capital controls were integral to the Bretton Woods System of pegged but adjustable rates. By loosening the link
between domestic and foreign finance, they allowed governments to alter domestic financial conditions in the pursuit of
other goals without immediately destabilizing the exchange rate. Controls were not so watertight as to obviate the need
for exchange rate adjustments when domestic and foreign conditions diverged significantly, but they provided breathing
space to organize orderly realignments and ensured the survival of the system.
Controls on capital movements were also seen as necessary for reconstructing international trade. If volatile capital
flows destabilized currencies, governments might again be tempted to defend them by raising tariffs and tightening
import quotas, as they had in the interwar years. If countries devalued, their neighbours might again retaliate with tariffs
and quotas of their own. The lesson gleaned from the 1930s was that currency instability was incompatible with a
multilateral system of free international trade. Insofar as the recovery of trade was necessary for the restoration of
global growth, so were currency stability and, by implication, limits on capital flows.
But the conjunction of free trade and bound finance was not stable. Once current account convertibility was restored at
the end of the 1950s, it became difficult to know whether a specific foreign exchange transaction had been undertaken
for purposes related to trade or to currency speculation. Firms could under-invoice exports and over-invoice imports to
move capital out of the country. More generally, it became impossible to keep domestic markets tightly regulated once
international transactions were liberalized. As financial markets joined the list of those undergoing liberalisation, new
channels were opened through which capital might flow, and the feasibility of keeping finance bottled up diminished
accordingly.
The consequence was mounting strains on the Bretton Woods System of pegged but adjustable rates. Governments
could not consider devaluing without unleashing a tidal wave of destabilizing capital flows. Hence parity adjustments
during the period of current-account convertibility were few and far between.
The knowledge that deficit countries hesitated to adjust rendered surplus countries, now fearing the costs, reluctant to
provide support. And the freedom for governments to pursue independent macroeconomic policies was constrained by
the rise of capital mobility. When doubts arose about their willingness to sacrifice other objectives on the altar of the
exchange rate, defending the currency could require interest-rate hikes and other painful policy adjustments that were
politically unsupportable. Confidence in currency stability and ultimately stability itself were the casualties.

Conclusion
The obvious conclusion is that greater exchange rate flexibility is an inevitable consequence of rising international
capital mobility. It is important, therefore, to recollect the period prior to 1913 when high international capital mobility
did not preclude the maintenance of stable rates. Before World War I there was no question of the priority attached to
the gold standard peg. There was only limited awareness that central bank policy might be directed at targets such as
unemployment. And any such awareness had little impact on policy, given the weakness of trade unions, and the
absence of parliamentary labor parties.
There being no question of the willingness and ability of governments to defend the currency peg, capital flowed in
stabilizing directions in response to shocks. Workers and firms allowed wages to adjust because they knew that there
was little prospect of an exchange rate change to erase the consequences of disequilibrium costs. Together these factors
operated as a virtuous circle that lent credibility to the commitment to pegged rates.

The international monetary today-a competition of fiat currencies

 The end of the Bretton Woods monetary order was a watershed in world monetary history. This epochal
transformation shifts the focus of analysis from the exchange rate regime to the money object and the basic
properties of monetary arrangements.
Following the demise of fixed exchange rates, the current monetary setting has often been defined as a “non-
system,” in view of the contrast between its unstructured nature and Bretton Woods or the gold standard.
This assessment, however, may merely refer to the absence of formal rules, certainly not to the lack of a
model, which is in fact readily identifiable in the theory of competitive money supply, applied to an
international context.
Benjamin Klein challenged the case for monopoly in money issue, showing that this is founded on
indistinguishability between currencies. In a world of imperfect information, if product quality cannot be
evaluated by the goods’ physical characteristics, consumers rely on brand names. Fiat money is a case in
point. Quality and brand name of fiat money relate respectively to price stability and predictability.
On this theory, high confidence money drives out low confidence money because consumers evaluate the
predictability of money’s future exchange value.
Hence, in a competitive setting, there is an incentive for price stabilization even in the absence of rules. A
country can gain from raising seigniorage revenue but at the cost of depreciating its brand name capital.
Thus, it faces a dynamic optimization problem that also includes non-economic objectives, such as political
hegemony for the issuer of the vehicle currency and participation in a financial and economic community for
others.
Monetary stability in a fiat money world may appear somewhat surprising, given the absence of constraints on
countries’ behavior, but it is the product of competition.
The reserves of the individual reporting countries and institutions are confidential. Thus the following table is a limited
view about the global currency reserves that only deals with allocated reserves:

Currency composition of official foreign exchange reserves (1965–2018)

 v
 t 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006
 e
61.74 62.72 65.36 65.73 65.14 61.24 61.47 62.59 62.14 62.05 63.77 63.87 65.04
US dollar
% % % % % % % % % % % % %
Euro (until 20.67 20.16 19.13 19.14 21.20 24.20 24.05 24.40 25.71 27.66 26.21 26.14 24.99
1999 - ECU) % % % % % % % % % % % % %
Deutsche
mark
Japanese 5.20 4.89 3.95 3.75 3.54 3.82 4.09 3.61 3.66 2.90 3.47 3.18 3.46
yen % % % % % % % % % % % % %
Pound 4.42 4.54 4.34 4.71 3.70 3.98 4.04 3.83 3.94 4.25 4.22 4.82 4.52
sterling % % % % % % % % % % % % %
French
franc
Chinese 1.89 1.23 1.07
renminbi % % %
Canadian 1.84 2.02 1.94 1.77 1.75 1.83 1.42
dollar % % % % % % %
Australian 1.62 1.80 1.69 1.77 1.59 1.82 1.46
dollar % % % % % % %
Swiss 0.14 0.18 0.16 0.27 0.24 0.27 0.21 0.08 0.13 0.12 0.14 0.16 0.17
franc % % % % % % % % % % % % %
Dutch
guilder
Other 2.48 2.50 2.37 2.86 2.83 2.84 3.26 5.49 4.43 3.04 2.20 1.83 1.81
currencies % % % % % % % % % % % % %
Source: World Currency Composition of Official Foreign Exchange Reserves International Monetary