Abstract
With the decline in the role of gold in the international economy, the primary method that countries have used to finance payments imbalances has been borrowing and lending denominated in terms of national currencies. In the last century, sterling was the primary reserve currency, while in this century it has been the U.S. dollar. Recently the currencies of a number of additional countries have emerged as international stores of value. These currencies have also served as the primary currencies of denomination of international loans. The introduction of special drawing rights (SDRs) constitutes an attempt to replace national moneys with an international money for use as an international reserve. Its adoption thus far has been only partial, however, and its value remains tied to that of national currencies. In the absence of a credible commitment to a commodity exchange standard, such as the gold exchange standard, the value of assets and liabilities denominated in national currencies has been subject to the political control of the governments and central banks issuing those currencies. The use of these currencies to finance payments imbalances will depend upon the expectations held by international transactors about the strength of these institutions’ commitment to maintain the real values of their currencies.
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