P04　A strong currency crosses borders

Athenian owl drachma/Denarius/8 Reales → Dollar standard

Why does a coin that can be accepted without doubt cross borders?

Four Steps

Similarities

A familiar coin takes less time to verify. That is why it crosses borders.

Differences

The Athenian owl was accepted for its silver; the dollar is supported by institutions, markets, military power, and law.

Applications

The condition for a key currency is not strength, but "being accepted without doubt." To achieve this, multiple conditions are required: highly liquid markets, a supply of safe assets, a legal framework, convertibility, networks, and more.

Limitations

⚠ When referring to the acceptance of a material and the acceptance of a system by the same term, "key currency."

These are the four steps for going beyond "it's similar." The "limitations" step defines the point beyond which historical analogies should not be drawn.

Read at the Modern Money Stations

Stations from the textbook "Modern Money: Whose Debt Is It?" where this structure appears. The four steps for each station are not displayed on the screen in the textbook. Here, you can read them side by side.

Dollars are also created outside the U.S. — Eurodollars

6-01 / Before 2008　1962–2008 London, New York, Basel

Similarities: The pattern of a country's currency circulating outside its borders, with disruptions in that market affecting the home country, also existed in the era when silver coins circulated across borders.
Differences: What is circulating is not metal but deposits in foreign banks, and what resolves blockages is the exchange of liabilities between central banks, known as swaps.
Applications: When you hear of a "dollar funding squeeze," recall dollar deposits outside the U.S. and central bank swap lines.
Limitations: The figures are from a BIS paper and the bank's estimates cited therein. The origins of the Eurodollar market (1950s) are not covered.

When the financial system was on the verge of stopping, what did the central bank do?

7-02 / 2008 and QE　2007–2009, Washington

Similarities: The role of someone lending last during a run is continuous with the crises of the early modern period when public lending institutions were established.
Differences: The recipients of lending expanded beyond banks to include MMFs, the CP market, and foreign central banks, and the means of lending became the expansion of the balance sheet itself.
Applications: When you hear "liquidity provision" in crisis reports, distinguish which of the three groups, to whom, and with what collateral.
Limitations: The scale and results of each program are not covered. Evaluation of the causes of the crisis is also out of scope.

The repo rate becomes the benchmark for contracts.

5-04 / Repo and Collateral　Present New York

Similarities: The idea of creating a "benchmark interest rate" from market transactions is the same as setting exchange rate quotes or determining prices at a commodity exchange.
Differences: The basis for the benchmark is not the submissions of specific banks, but the median of actual transactions collateralized by government bonds.
Applications: When you see a "SOFR-linked" contract, remember that its interest rate comes from the overnight government bond repo market.
Limitations: The calculation of Japanese yen interest rate benchmarks (such as TONA) and the Tokyo Repo Rate is not covered in this station.