Multi-currency system: purpose and features

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:43

In an unstable world, no national currency deserves unconditional trust. The solution to this problem is obvious. It is known as a multi-currency system. Its application creates a number of significant benefits.

General concept

The multi-currency system involves the use of banknotes of several states for settlements and reservations. It can be implemented at the regional, national and global levels. The purpose of introducing such a system is to create favorable conditions for trade and credit. In addition, the use of different currencies as a means of reserve is fully consistent with the well-known principle of diversification.

Conversion of assets into banknotes of the most economically developed countries significantly increases the likelihood of their safety. An important condition for this is the rational distribution of reserves between the most liquid world currencies. As a rule, the financial power of a country leads to the formation of a huge demand for its banknotes on the world market.

Crisis situations

BIn some cases, a multicurrency system arises naturally due to the political and economic instability of a state. If the government finds it too burdensome to issue its own banknotes, it may formally authorize the use of foreign ones. The history of the Zimbabwean dollar is a vivid illustration of this scenario. The catastrophic situation in the economy of this African country has led to an annual inflation rate of 231 million percent.

The national currency cost much less than the paper on which it was printed. The government has decided to ban the circulation of the Zimbabwean dollar. The US dollar, pound sterling, euro and South African rand became legal tender in the country. To date, Zimbabwe has maintained a multi-currency system. The Central Bank of this African republic has not resumed the issuance of national banknotes.

Examples

In addition to the countries affected by hyperinflation, the multicurrency financial system is used by small or economically dependent states. For example, the Swiss franc and the euro are the main currencies of the Principality of Liechtenstein. Located in Central America, the Republic of Panama officially issues its own currency (balboa), but in fact, most of the calculations in the country are made in US dollars. A similar situation exists in Ecuador. The national currency, called the centavo, serves as a small bargaining chip, andUS dollar is used for large settlements.

In addition to small countries with an insufficient level of economic independence, the multicurrency financial system is used by some government entities not recognized by the world community.

Evolution

The idea of using various national means of payment in foreign and domestic trade has been irrelevant for many centuries. By historical standards, it arose in the very recent past. The reason for the emergence of a multicurrency system was the spread of so-called fiat money around the world. This term comes from the Latin word for "order" or "decree". From a practical point of view, fiat money is a unit of account that is not backed by any physical value. They have purchasing power only due to the will of the government, which ordered the population to use them as the only legal tender. The liquidity of fiat money depends entirely on the stability of the political regime. Revolutions or overthrows of governments can quickly devalue a national currency.

Paper tenders, by their nature, are more like shares of commercial companies than a classical form of money. The value of the national currency depends only on the reputation of the state that issued it.

Jamaica Agreement

The current world monetary system was established in1978. The agreement, signed by many countries in the city of Kingston, the capital of Jamaica, provided for a number of important reforms. First, gold was completely excluded from international settlements. Secondly, the multi-currency standard system was legally confirmed. This meant that all national currencies are in an equal position. Under the Jamaican Agreement, no currency can officially have reserve status. This clause of the international treaty had no effect on the real state of affairs in the world. The US dollar actually became the global reserve medium. The global multi-currency settlement system has never been put into practice.