In the past
Owl silver coins were used even outside their home country.
A strong currency crosses borders
Why does a coin that can be accepted without doubt cross borders?
Athenian owl drachma/Denarius/8 Reales → Dollar standard
Money Across Borders in 3 Minutes
1See it
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In the past
The silver itself had value, so it was accepted as is.
In the past
The Denarius and the 8 Reales also crossed borders.
What's similar
A familiar coin takes less time to check.
Today
Today, the dollar is the world's central currency.
Dollar standard
Today
The dollar is backed by systems, markets, military power, and law.
A useful perspective
To be a central currency, being 'beyond doubt' is more important than strength.
A useful perspective
This requires markets, safe assets, laws, exchange, and connections.
A word of caution
Be careful not to use the same term 'key currency' for money valued for its material versus money backed by a system.
2In numbers
8Reales
The '8 Reales,' one of the coins that crossed borders.
3What would you do?
You sold something at a foreign market. For payment, you are offered 'a coin you've never seen before' and 'a coin you see every day.' Which do you accept?
Pick one
The coin you see every day
A familiar coin takes less time to check. That's why this kind of money has been used across borders.
The coin you've never seen before
First, you have to take the time to check if it's real and what it's made of. A coin you don't have to doubt makes the transaction go faster.
The owl silver coin was accepted for its silver, while the dollar is accepted because of systems, markets, military power, and law. Even though what backs them is different, being 'beyond doubt' is the key to crossing borders.
4Read more
Representative Historical Scenarios
- The Silver Mines of LaurionOverview: the world Greece the late 6th–5th centuries BC
- The Northern Trade RoutesOverview: the world Byzantium the 9th–10th centuries
- A mint of the New WorldSpain The eight reales the 16th century
- Bretton WoodsOverview: the world United States AD 1944
Contemporary Financial Scenarios
Situations from the book where this theme appears. We present a comparison with past situations for each case.
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.
How to compare past and present
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."
To go beyond "they are similar," we also describe the differences, what can be applied today, and where past examples should not be applied to the present (limitations).
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