Study On Currency Internationalization

For a long time, gold as the universal equivalent had been performing the functions of international currency. It had become the medium of international economic trade for every country. With the development of the society surged to capitalist society, the growth rate conflict between gold production and global economy gradually emerged. The increase of gold production fell far behind the world’s economic growth. In1920s, England established the Gold Standard. Its currency-Pound became the most essential international currency, leading the establishment of International Gold Standard. This signaled the history which lasted for approximately200years when countries struggled to win the top international status and control the supreme power of currency. During the changes of international monetary position and currency hegemony, International Monetary System experienced several alternations as well, which is from International Gold Standard to Gold Exchange Standard and from Bretton Woods System to Jamaican System. Until now, International Monetary System has entered the Jamaican System for nearly30years. This period of time witnessed the frequent outbreaks of international financial crisis or even economic crisis. The existing international monetary system has kinds of malpractice, proved by the Mexican Financial Crisis and Asian Financial Crisis in1990s, as well as America’s Subprime Crisis in2007, which was eventually converted to global financial tsunami. Faced with this situation, the theoretical circles and the government began to seek for revolution for International Monetary System. To establish a more stable and fairer system has become a common appeal and interest to every country, especially developing countries.Under the background discussed above, I concede that it is of great necessity to conduct systematic research into currency internationalization. Currency internationalization is not only a critical phenomenon in international monetary field but also a complex process. It serves as a result of market alternation, requiring that currency issuing country should be politically strong and economically powerful, as well as possess a relatively greater market share in international trade and investment, developed financial markets and stable currency value. As many capabilities needed, most currencies are not able to fulfill its journey to internationalization. Only a few kinds of currencies can perform its functions both domestically and abroad.This paper concentrates on the study of related theoretical problems of monetary internationalization through examining the functions of international currencies. Referring to what is needed to the research problems, the use of normative analysis is combined with empirical analysis; inductive and deductive analyses are intergratedly used; and the combination of historical and comparative analysis is also practiced. In the first place, starting from the nature of currency, the paper analyzes the function of international currency and the distinctiveness of its nature and points out the internal motivation for national currency to internationalize. In the second place, the paper explores the specific conditions that are called for currency internationalization as well as the benefits and cost that currency internationalization brings to the issuing countries. It also summarizes the development of the major international currencies’ internationalization. In addition, this paper investigates the relationship between international currency and International Monetary System, indicating that the nature of International Monetary System is determined by the leading currency in the International Monetary System, and the subrogation of monetary hegemony results in the change of International Monetary System. Finally, the paper goes to the discussion of RMB internationalization.Based on the content, the entire paper can be divided into six chapters demonstrated as follows.Chapter1:Related Theory and Bibliography Review. Currency Substitution Theory and Optimum Currency Area (OCA) Theory are observed and commentated. Bibliographies are generalized and summarized from the aspects of international currency generation mechanism, International Monetary System and RMB internationalization.Chapter2:Nature of Currency and International Monetary. This section starts from the nature of currency, and then signalizes that the currencies nowadays are all credit currencies backed by national power and finally points out currency bears the nature of endogenous and exogenous and the characteristics of short-term non-neutrality and long-term neutrality. Accordingly, the changes in the nature and functions of international currency are studied, and the conclusion that international currency is non-neutral whether short-term or long-term, is made, and the basic contradiction of international currency is innovatively proposed.Chapter3:General Theoretical Analysis of Currency Internationalization. This chapter talks over the conditions needed for currency internationalization and its benefits and cost. Specifically, the conditions include economic strength, perfect financial system, and stable currency value, political and historical factors. The benefits consist of international seigniorage, improvement of trading, capability of influencing other countries’economic decisions, development of financial system and political interest. The cost covers the self-weakened international monetary status caused by Triffin Dilemma, the difficulty of strengthening macro-control, increasing cost of financial stability and the asymmetry of the exchange rate adjustment.Chapter4:Historical Developments of Main Currency Internationalization. This chapter sorts out the process of internationalization of Pound, Dollar, Euro and Yen and analyzes the generality and speciality of these four currencies, which not only serve as the evidence for the previous theoretical analysis but foreshadow the following research on the relationship between major international currencies and the International Monetary System.Chapter5:Major International Currencies and International Monetary System. This part mainly researches into the relationship between major international currencies and International Monetary System, indicating that pound hegemony dominated the establishment of International Gold Standard. Moreover, the face-off between pound and dollar hegemony promoted the formation of International Gold Exchange Standard, while Dollar hegemony led the establishment of Bretton Woods System. The declining dominant status of dollar transferred Bretton Woods System to Jamaican System and the future International Monetary System will turn out to be one superpower and multi powers.Chapter6:Discussion of RMB Internationalization. This chapter outlines the current situation and existing problems of RMB internationalization. Then, the conditions of RMB internationalization are analyzed from two contrary aspects-the fundamental terms and the restricted factors. As for benefits and cost, the emphasis is the comparison of their speciality between RMB and other currencies. Lastly, principles that should be attached to RMB internationalization are recommended and the issues needed to deal with are pointed out.The primary viewpoints of this paper can be summed up to four aspects.Firstly, in the credit monetary age today, a country’s currency should be issued by its own government. In the international sphere, however, it is ideal that a certain kind of creditable authority should have the supreme power to issue super-sovereign international standard currency. But currently, due to the lack of reality, the functions of international currency are supposed to be represented by a specific country’s currency. The situation where national currency is acting as international currency caused the fundamental contradiction of international currency, which is the locality of interest represented by the issuing country of international currency and the inherent requirements of overall interest for international currency’to serve the worldwide economy.Secondly, international currency is non-neutral so that it can be exploited to seek benefits for the issuing country. Therefore, two consequences can be seen. For one thing, capable countries will spare no effort to impel the process of its own currency’s internationalization and promote its position on the world stage. For another thing, different currencies occupy different and unequal international status. The non-neutrality of international currency determines the non-neutrality of international monetary system, in which discourse power and benefits allocation of each country are unequally distributed.Additionally, currency internationalization, which brings about both benefits and cost, calls for certain conditions. Currency internationalization is a dynamic process, so as to its conditions, cost and benefits. Its profits/cost will strength/weaken its conditions. They possess their relativity as well.In the last, currency hegemony during specific historical time ruled the formation of International Monetary System at that period and the alternation of currency hegemony led to the change of International Monetary System. The change could be fundamental, for instance, from International Gold Standard to Bretton Woods System. If the power of the old hegemony is declining but a new one has not yet been established. International Monetary System will step into transitional system, such as International Gold Standard and Jamaica System. Meanwhile, the constantly changing economy and politics around the world imply that the positions of each international currency would be adjusted as the reality changes. Consequently, International Monetary System will remain in a continuously evolving process. A permanent and steady arrangement is never possible to exist.The possible innovative points in this paper can be as follows.(1) Different starting point. Different from most bibliographies that begin with the study of currency internationalization’s history and existing state, this paper utilizes the nature of currency, especially the nature of international currency, as the breakthrough point. It discusses the distinctive nature of international currency and shows out that the analysis of the nature of currency in traditional currency theory is not completely applicable to international currency.(2) Propose the fundamental contradiction of international currency. That is the locality of interest represented by the issuing country of international currency and the inherent requirements of overall interest for international currency to serve the worldwide economy. International currency will eventually serve to the issuing country’s interest, which is the internal motivation for countries to propel the development of their currency internationalization.(3) To put forward the idea that currency hegemony during specific historical time ruled the formation of International Monetary System at that period and the alternation of currency hegemony led to the change of International Monetary System. The historical process of currency hegemony can be sequenced as Pound hegemony, then Pound hegemony declination and Dollar’s start-up, then Dollar hegemony and finally Dollar declination. According to this process, the International Monetary System is divided into two stable systems-International Gold Standard and Bretton Wood System, as well as two transitional systems-International Gold Exchange Standard and Jamaican System.