Systematic international trade traces its roots back to the mighty trade rich Roman Empire. In fact the word “pay” originates from the Latin word “pacare” which originally meant to pacify using an appropriate unit of measure that appeased both parties involved in the said transaction.
Over two millennia later, imperialist Britain found itself in a similar position with the pound sterling flowing freely across its multiple colonies as the de facto mode of payment for all trades that took place as the colonies were barred from exporting goods. The failure of the gold standard and the WWII victory paved way for the USD. Post WWII, in the face of a diminished Britain, a shattered France and a devastated Germany, US government adopted protectionist policies by undervaluing the dollar to boost international exports while imposing high import tariffs. This allowed the USD to establish itself as the primary international currency.
Along the way, starting in the 1970s, Japan had displaced Germany as the second largest economy with roaring international exports resulting in vast trade surpluses and enormous foreign exchange reserves. This phase fizzled out in the 1990s as the bubble of the over-appreciated Yen burst, moving Japan into a phase of stagflation for the next two decades. Even so, the Yen at its peak only accounted for 9% of the world’s currency reserves as over 90% of the Yen bonds were held domestically.
The rise of the US Dollar, apart from the previously mentioned global events was fundamentally sustained as a result of the trifecta: highly developed financial markets that operate transparently, high levels of liquid easily interchangeable assets and backing by a relatively stable business friendly government. Undoubtedly, this trifecta was perfected to varying degrees by the four coveted special drawing rights currencies, namely, the US Dollar, the British Pound, the Euro, and the Japanese Yen.
It wasn’t until the Euro, which came into circulation in 2002, was there a competitor worthy enough to challenge the ubiquity of USD. The Euro, backed by a combined economic output of EU, reasonable liquidity and extensive financial markets coupled with a higher trade volume than US, was able to become a reserve currency. While the Euro continues to maintain a significant share in the reserves of most central banks, the ongoing debt crisis and policy negotiations in Greece, Italy and Spain have shaken the investor confidence levels.
The fact that China is now the world’s largest automobile market, the global manufacturing hub, and drove over a fifth of the global economic growth in recent times of recession brings us to an inherently natural yet shocking question: Why is Renminbi yet to be seen or used outside China in a major way? This realization drives home the point, that in a world with three different engines, two types of fuel will not suffice and thus, a third major Currency needs to be adopted in a big way to fuel the...