The Gold Standard | Not easy

Even the traumatic breakdown of the fixed exchange rates in 1971-73 did surprisingly little subsequently to disturb the conventions for using the dollar as international money for official and private purposes (McKinnon 1979). Under floating (as well as fixed) exchange rates, economies of scale are such that “the use of a currency as (international) money itself reinforces that currency’s usefulness” (Paul Krugman 1984). This reinforcing circularity makes displacement unlikely short of war, exchange controls, or massive inflation in the center country.

Footnote on that page: Because of disruptions from World Wars I and II, the dollar eventually displaced Sterling’s similarly entrenched international role (Benjamin Cohen 1971) – but not without fomenting disorganization in the international economy (Kindleberger 1973). Now, however, no natural ‘successor’ to the dollar is in the offing.

Source: Page 27, ‘The Rules of the Game: International Money in Historical Perspective’, Ronald I. McKinnon, Journal of Economic Literature, Vol. 31, No. 1 (March 1993).


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