World currencies have evolved from gold to the US dollar, euro, yen, and yuan. They are held in reserve by companies and governments to overcome barriers to foreign trade. Critics suggest a single global currency to replace individual currencies, while proponents believe a supranational currency would eliminate manipulation and fluctuating exchange rates.
A world currency generally refers to a specific currency used by investors and others to conduct international trade. World currencies have evolved from gold in the mercantilist period of the 16th century to the US dollar in the 20th century. These currencies are held in reserve by companies and governments to overcome barriers to foreign trade. The nations that are responsible for printing world currencies are often seen as having monetary hegemony, or control over the global economy. Critics of monetary hegemony have suggested a single global currency to replace the currencies printed by individual nations.
The evolution of the idea of world currency has depended on changes in power throughout history. Gold was considered the world currency for European and Asian traders during the 16th century. The dominance of the British Empire beginning in the 17th century was responsible for the rise of the pound sterling. This global currency was slowly replaced by the US dollar after the end of World War II in 1945. World currencies since the mid-20th century have included the European Union euro, the Japanese yen, and the Chinese yuan.
International traders and investors often look to world currencies to avoid fees associated with currency exchanges. The euro, for example, may be held by an international stock exchange that deals mainly with European companies. Investment firms that handle transactions in popular commodities like oil, gold, and coal often do business in a global currency. National governments with weak currencies can conduct business in a world currency offered by a stronger national economy. All these world currency holders are interested in fast and cheap transactions without complicated currency exchanges.
An economy that prints a frequently used currency can benefit in several ways from this status. Widespread use of a currency often encourages trade deals in new markets. Extensive use of a world currency can expedite stock purchases, business acquisitions, and other investments made by the currency provider. International agencies and exchanges using world currencies can allow national leaders to influence the global economy. This informal guidance may include looser lending rules by international banking groups and tariff reductions by regional governments.
This state of affairs has not been popular with economists concerned with one nation effectively controlling global trade. These opponents of monetary hegemony generally argue that a world currency disempowers most national economies. An alternative suggested by critics in the late 20th century was “supranational” currency which would do away with currencies printed by individual nations in favor of a single currency common to all nations. Its proponents believe that this single currency would eliminate the manipulation of individual currencies and fluctuating exchange rates.
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