What is a World Currency?

A world currency typically 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 U.S. dollar in the 20th century. These currencies are held in reserve by businesses and governments to surmount barriers to foreign trade. Nations that are responsible for printing world currencies are often seen as possessing monetary hegemony or control over the global economy. Critics of monetary hegemony have suggested a single global currency to replace currencies printed by individual nations.

The evolution of the world currency idea has depended on power shifts throughout history. Gold was considered the world currency for European and Asian traders through the 16th century. The dominance of the British Empire starting in the 17th century was responsible for the British pound’s rise. This global currency was slowly replaced by the U.S. dollar following the end of World War II in 1945. World currencies since the mid-20th century have included the European Union’s euro, the Japanese yen, and the Chinese yuan.

International traders and investors often seek out world currencies to avoid fees associated with currency exchanges. The euro, for example, may be held by an international stock exchange that deals largely with European companies. Investment firms which handle transactions for popular commodities like oil, gold, and coal often conduct business in a world currency. National governments with weak currencies may conduct their business in a world currency offered by a stronger national economy. All of these world currency holders are interested in quick and inexpensive transactions without complicated currency swaps.

An economy that prints a frequently used currency can benefit in several ways from this status. The widespread use of a currency often encourages trade agreements in new markets. Extensive use of a world currency can streamline stock purchases, business acquisitions, and other investments made by the currency provider. International agencies and exchanges that use world currencies may 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 among economists concerned about one nation effectively controlling global trade. These opponents of monetary hegemony usually contend that a world currency takes power away from the majority of national economies. An alternative suggested by critics at the end of the 20th century was the "supranational" currency which would eliminate currencies printed by individual nations in favor of a single currency common to all nations. This single currency would, its proponents believe, eliminate manipulation of individual currencies and fluctuating exchange rates.