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Contemporary Logistics 16 (2014) 1838-739X
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Contemporary Logistics
Journal homepage: www.seiofbluemountain.com
Currency Internationalization
International Finance
and
Dominant
Power
in
Renxiang WANG, Yinghua ZHANG
School of Economics, Wuhan University of Technology, Wuhan 430070, P.R.China
KEYWORDS
ABSTRACT
RMB internationalization,
Financial hegemony,
Virtual economy
The internationalization of the Renminbi (RMB) and the participation of competitions for the
dominant power in international finance have become inevitable choices of China’s economic
development. Based on summarizing the concepts of currency internationalization and
dominant power in international finance, this article analyzes the main factors that lead to
these two phenomena, and discusses their relationship. Then, it reviews how US dollars
internationalize, and become a dominate power, or even a kind of financial hegemony, in
international finance. Learning from the experience of US, this article seeks to draw a route
map of internationalizing RMB and China’s gaining the dominant power in international
finance.
© ST. PLUM-BLOSSOM PRESS PTY LTD
1 Introduction
In the virtual economy era, the dominant power in international finance (DPIF) has become a focus of the competition among
different world powers in the international finance today. For those world powers, such as the United Kingdom, the United States,
Germany, Japan, to internationalize their currency is an important step in gaining DPIF. As the second-largest economy in the world,
China has been being troubled by non-internationalized Renminbi (RMB) and the lack of DPIF. So, to promote the
internationalization of RMB and its corresponding DPIF (instead of financial hegemony) has become an inevitable choice in the
healthy development and renaissance of China’s economy. Therefore, to research on the relationship between currency
internationalization and DPIF, and the process of internationalizing US dollar and gaining the United States’ DPIF, is necessary in the
practice of the internationalization of the RMB and China gaining DPIF.
2 The Concepts of Currency Internationalization and DPIF
2.1 Difference between international monetary and currency internationalization
International currency is the implementing currency function as a payment means, value measurement and storage worldwide. Firstly,
it is a payment means in international trade and capital transaction, and the tool that governments intervein currency markets and
balance international payments. Secondly, it is a value measurement in international goods trade and financial transactions, and the
anchor currency to determine the parity of exchange rates and reserve asset. The concept of currency internationalization is different
English edition copyright © ST. PLUM-BLOSSOM PRESS PTY LTD
DOI:10.5503/J.CL.2014.16.016
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from the international monetary. International currency is a result of currency internationalization. Currency internationalization is the
process in which a country’s currency gradually becomes international monetary beyond the scope of legal circulation. Currency
internationalization is a gradual process which generally goes through several stages, including value measurement, payment means,
reserve currency and anchor currency.
2.2 Difference between DPIF and financial hegemony
DPIF is different from financial hegemony. It is a collection of a series of rights such as discourse power and the initiatives, to protect
the interests of one country or economy and maintain the healthy development in the international finance, by cooperation a nd
negotiation, which relies on its own power and influence to lead international financial affairs. Financial hegemony is a hegemony
behavior in international finance where power imposes its own aims, principles or rules upon the international financial s ystem with
its powerful military, political, economic advantages and financial dominance, thereby gaining hegemony profit. Its character istics
are heavily monopoly and compulsory possession, which are unfair and unreasonable. DPIF should be fair, reasonable and equal. It
contains a series of legitimate rights that a country enjoys in the international financial system relying on its economic power and
influence, which is an essential distinction with financial hegemony.
3 The Incentive of Currency Internationalization and Gaining DPIF
Without exception, the world’s largest economies promote internationalization of the national currency, seeking DPIF. The reason is
that currency internationalization can bring out many advantages and huge profits for its issuing country. Mastering DPIF equals
mastering voice and initiative in international finance and economy, and avoiding passive.
3.1 The cause of promoting monetary internationalization
When a country’s economy developing into a certain extent, and its external trade scale being large enough, to promote its sovereign
currency internationalizing is inevitable for an open economy. With the increase of currency internationalization degree and influence,
it can bring extra income for issuers, such as the international seigniorage and inflation tax returns. Issuer also can finance for
international payments deficits by insuring international currency. Issuer’s financial sectors can increase their income by international
loan, investment and trade settlement in goods and services. It would improve the insuring country’s welfare when more foreigners
use of the currency and its international purchasing power increases.
With the global economic integration development, the world economy is more and more closely. Before a super-sovereign currency
comes into reality, the world economy needs a strong economy’s currency as the international currency to meet the needs of
economic development. An international monetary which is supported by a strong economy, and stable value, credit guaranteed, can
improve development of international trade and investment, safeguarding the stability of international financial markets. Thus, a
country’s currency internationalization is not only needs of the domestic economy, but also requirement of the world economy. This
is the result of combined action of the domestic and international factors.
3.2 The reason of gaining DPIF
DPIF relates to a country’s economic healthy development and financial security, and even the world economic development and
financial stability. The country with DPIF enjoys the initiative, voice and great economic and political interests while other country
without DPIF can’t enjoy. Lacking DPIF is hugely harmful to the economic development and financial safety of a country, especially
a powerful one. The country with DPIF must have international monetary dominance, which can avoid foreign exchange risk and
resources waste on huge foreign exchange reserves, in addition, obtaining the international seigniorage and other huge gains. The
country has the international financial market dominance, which grasps the power of pricing international financial assets and
commodities, leading international capital flow, regulating and controlling the initiative of international financial market. It is the
dominant power in international financial affairs, which has the advantage of ensuring domestic interests.
3.3 The relationship between monetary internationalization and gaining DPIF
Monetary internationalization, international monetary dominance, and DPIF is a hierarchical progressive relationship. International
monetary dominance is the core of DPIF. If a country’s currency is not an international currency, it is impossible to have international
monetary dominance and DPIF. As a result, currency internationalization is the precondition of mastering DPIF, a breakthrough to
gain DPIF. A country’s currency completed internationalization to be international currency, which is not only one important step to
gain DPIF, but also a performance to master DPIF.
4 The Process of US Dollar Internationalization and US Gaining DPIF and
Financial Hegemony
DPIF is essentially different from financial hegemony. There is no doubt that a country with financial hegemony must have DPIF.
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The process of US gaining DPIF and financial hegemony also is the one of dollar internationalizing and dollar hegemony forming,
which experiences three stages generally.
4.1 The initial stage (1900-1944)
In this stage, the dollar began to be internationalized, and the U.S. got its dollar’s international monetary status. After in the second
half of the 19th century, the United States rapidly industrialized as the world’s economic power beyond the UK, which has laid on solid
economic foundation for dollar internationalization. But the dollar had little international impact due to the confusion of American
monetary system and the instability of the dollar value during the period. To end the chaos, in 1900, the United States set up the gold
standard by the Gold Standard Act. In 1913 the United States established the Federal Reserve System by the Federal Reserve Act.
These acts effectively guaranteed the long-term convertibility of the dollar, and the unity, authoritativeness of the United States’
monetary policy. Thus they opened the journey of dollar internationalization and the United States striving for DPIF.
The twice world wars provided a perfect opportunity for dollar internationalization, changing the balance of power between the
United States and European countries, which achieved the rise of the dollar and the leap of the U.S. financial power. During the
world wars, because of the stable political environment and the economic rapid development, the United States became a heaven
attracting talents, capital and gold all over the world. After World War Ⅱ the United States possessed 70% of the world’s gold
reserves. At the same time, large amounts of war materials and capital output strengthened the position of America's leading
economic superpower. Britain and other European powers’ economies were greatly weakened, and the United States overtook Britain
in foreign trade, international credit and financial development. The role of the United States and the United Kingdom were reversed,
where America became a creditor nation and Britain became the debtors. But the pound was still the main international currency due
to its historical inertia, and the dollar didn’t surpass the pound's status.
4.2 The completion stage (1944-1973)
In this stage, the U.S. truly achieved dollar internationalization, and gained DPIF status. The key world’s currency is provided
generally by the strongest economic strength. The British economy was far behind the United States due to wars, which lost the
economic foundation of monopolizing international monetary. Western Europe and Japan mired in post-war economic chaos. They
urgently needed the U.S. aid to restore economic reconstruction. After the World War Ⅱ, the United States rose sharply to the first
world power. With its powerful military, science and technology, and economic strength, the United States occupied the position of
overlord of the world. The dollar became the core of the Bretton Woods System established in 1944. The world came into the era of
the dollar, and the United States mastered DPIF, which laid a foundation for the America financial hegemony.
The establishment of the Bretton Woods System has not only realized the dollar’s truly internationalization, ensured the legal status of the
dollar international monetary, but also eliminated pounds by the formulation design. “Dollar be linked to gold, national currencies be
pegged to the dollar” formed the international financial system where the dollar was the core. “Double hooks” system, in fact, made
the dollar as a payment method and international reserve currency with gold equivalently. Thus this determined the dominance status
of dollar international monetary, and the United States gained DPIF, enjoying all the consequent benefits. As one of results of the
Bretton Woods System, the establishment of the International Monetary Fund and the World Bank made the United States enjoying
the absolute leadership. The United States enjoyed the dominance right in the international financial institutions and formulating
international financial rules. In addition, after the World War Ⅱ, the United States carried out the “Marshall Plan”, which was an
economic aid for Germany, Britain, Japan and other countries’ and sending dollars to overseas constantly. This plan broadened the
dollar’s liquidity and scope, and enhanced the influence of the dollar and the world's dependence on the dollar.
4.3 The evolutional stage (1973 - present)
In this stage, Dollar standard system was formed, and the U. S. began to gain financial hegemony. As the key international currencies
under the Bretton Woods System, the dollar enjoys many privileges as well as the international obligations of exchanging gold.
American dollar guarantees the stability of the dollar's value to the world at a fixed parity (35 dollars an ounce of gold). However, it
is difficult to maintain the balance of dollar liquidity and stability due to the natural defects of the Bretton Woods System — the
“Triffin Dilemma”. Since gold continuously flowed out of the United States, the dollar crisis occurred frequently. In 1973, the United
States unilaterally promised to abandon converting dollars into gold at the agreed exchange rate according to “expanding the U.S.
deficit, increasingly issuing dollar is good for America in short-term, but adverse to balance world economy in the long-term”
(Michael Hudson’s research report, 1971). The Bretton Woods System collapsed finally.
This seems to be a performance of dollar weakness; however, it is actually the beginning of the dollar standard system and the U.S.
financial hegemony. After this, because of the influence of the U.S. power and the formation of dollar network, the dollar
international monetary status has not been changed. Namely it is still the main international currency, even appearing the
phenomenon of dollarization in Latin America. The only change is that dollars became a privilege currency that it only enjoys the
benefits of the international monetary status, without international obligations of gold convertibility. This in itself is a kind of
hegemony that the United States unilaterally declared to stop dollars’ linkage to gold, and any other country can only be forced to
accept it. Today’s international financial system has essentially characterized by the world dollar standard system and the U.S.
financial hegemony. Of course, the excessive use of dollar privilege and financial hegemony, constituted to be one of the main
reasons of international financial crisis in 2008 and American economic structure imbalance, thus to be unsustainable.
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5 Experience of US and Its Enlightenment to China
Although in the internationalization of currency and competition for DPIF, China’s current social background, international
environment, and strategic objectives are different from the United States, the experience of the dollar internationalization and the
United States striving to DPIF is still worthy lessons for China.
5.1 Monetary internationalization as the premise to DPIF status
The dollar internationalization and DPIF of America is directly related. After the Bretton Woods System forming and the dollar truly
internationalizing, America began to master and enjoy a series of voice, initiative and even hegemony in the field of international
finance. At the same time, America’s DPIF strengthened the international currency status of the dollar. China should actively promote
the internationalization of the RMB, allowing RMB to gradually become denomination currency, medium of exchange in the regional,
bilateral or international trade, ultimately realizing the internationalization. China should actively develop the international financial
market, playing the role of the RMB in the international commodity trading. Especially as China has replaced the U.S. to be the
world's largest consumer of oil, iron ore, coal and other resources products today, China should extend the influence of the
corresponding futures markets with RMB valuation, in order to expand the scope of application and influence of the RMB, to master
the corresponding pricing power.
5.2 Relatively long run to internationalize currency and gain DPIF
The United States experienced more than half a century to realize the dollar truly internationalization, from it became the world’s
economic power over Britain in 1870, to the Bretton Woods System establish in 1944. The twice world wars provided a great
opportunity for the United States, or else it is likely to experience a longer time. China should clearly recognize its own national
conditions. China is the world’s second largest economy now, but it still has large gap with the United States. Therefore, the
internationalization of the RMB and gaining DPIF should be prepared for a long time, not only progressive, but also steady, not too
hastily. The priority of China is still to develop the economy, improving the economic strength and ability to resist risks. If there
would be no special strategic opportunity, the journey of the RMB internationalization is likely to experience a longer time than the
United States. But this does not represent that China has nothing to do. On the contrary, China should actively and steadily promote
the RMB internationalization, for greater space of DPIF.
5.3 Seeking for DPIF rather than financial hegemony
Currency internationalization and DPIF means interest, as well as more international responsibility, which should be responsible for
international financial and economic developments. In 1960s and 1970s, the sharply increasing U.S. budget deficit and trade deficit,
and uncontrolled issuance of the U.S. dollar resulted in the international community sold dollars for gold, which is a reaction against
irresponsible practice of the United States. As a result, the United States and the world economy continued to slump. Now the United
States still bears the consequences of the economic downturn caused by 2008 international financial crisis originated in itself. China
will implement the internationalization of the RMB to gain corresponding DPIF instead of financial hegemony. This also means that
China will take on more international responsibilities. Therefore, China should be ready to this aspect. China should cultivate more
senior talents who understand international financial and economic legal affairs, and accelerate domestic reform. China should set up
kinds of system mechanisms which can adapt to the participation of more international affairs in the future, to take on more
international responsibility. China should fully prepare for internationalizing RMB and guiding international financial affairs.
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