As the reserve currency turns...

Recent talk about the the Canadian dollar reaching parity with the U.S. dollar got me thinking about the history of reserve currencies.

Avinash Persaud wrote in 2004 that the Renminbi will be the next global reserve currency. Regardless of whether or not you agree, it's an interesting and well-written article:

The United States today, as Britain before, has benefited greatly from having the world's reserve currency as its local currency. This has allowed America to spend 22% more than its income over the past five years. No other country could do that but having the reserve currency means you can write checks and nobody cashes them.

But reserve currencies come and go. They are determined largely by whoever is the biggest economic power of the day. Over the past two and a half thousand years there have been over a dozen reserve currencies that no longer exist. Sterling lost its status in the first half of the 20th century, the dollar will lose its status in the first half of this century. The beginning of the end for the dollar will be triggered by an inevitable decision by the Chinese to switch from a dollar peg to a free float - sometime in the next decade.

Losing reserve currency status will lead to a series of economic and political crises in the United States. The world's new reserve currency is an unlikely fellow. It is not the euro and today it is not even convertible.

Barry Eichengreen gives a historical perspective, comparing the dollar to sterling, the reserve currency that preceded it. But he disagrees that China can provide a successor:

Everyone’s favorite heir to the throne, China, will have to solve some very serious problems before its currency begins to become attractive as a repository for other countries’ foreign exchange reserves. Removing capital controls is the least of its problems, in my view. Its financial markets are not very liquid or transparent; indeed, most of the institutional infrastructure needed for Shanghai to become a true international financial center will take decades to install. The security of property rights is uncertain, and making investors feel secure will ultimately require a transition to democracy, the creation of credible political checks and balances, and the development of a creditor class with political sway. While the renminbi is everyone’s favorite candidate for the new reserve currency champion four or five decades from now, such hopes are, in my opinion, still highly premature.