NEW YORK -- Money is a funny thing. Everyone knows what it is.
But money is something that can change a lot over time.
A century ago, there was little question about what money was. It
was gold, period. Or, to be a little more exact, it included
national currencies like dollars and pounds, but only to the extent
they were convertible into gold. There was but one real money.
Now there are dozens and dozens of national currencies, none of
them tied to gold. But there is a hierarchy of currencies that in
practice significantly reduces the real number. That hierarchy is
based not on relative value, which can and does fluctuate, but on
their function in the world economy. The U.S. dollar is clearly No.
At the same time, the nature of money is changing. With no anchor
in precious metals, the task of maintaining the value of currencies
has fallen to central banks, few of which even existed in 1900. It
was the central banks -- most notably the Federal Reserve in the
United States and the Bundesbank in Germany -- that were given
credit for slaying the inflation dragon in the 1980s, leading to
what might be called the cult of the central banker.
The big questions for the international monetary system in the
21st century will revolve around those points: Will the dollar
maintain its supremacy, or will the euro, and perhaps even the
Japanese yen, gain comparable status? How will other countries
manage the value of their currencies? And, perhaps most important,
will central bankers maintain their power and prestige, or will they
stumble and take the blame for some economic problem?
The current supremacy of the dollar does not reflect a brilliant
record as a store of value. If one uses consumer price inflation as
a measure, a 1999 dollar is worth about a nickel in 1900 money.
Measured against gold, the dollar is down 93 percent.
Instead, the dollar's primacy reflects the United States' role as
the world's largest economy, with capital markets that lead the
world. The dollar is the most likely currency to be held as official
reserves by other countries. It is the premier currency of
international lending. Companies from Brazil to Indonesia owe
dollars, not reais or rupiahs. When the real and rupiah were
devalued in the crises of the late 1990s, local companies that had
thought they were in good shape found themselves in severe financial
The euro, the currency of 11 European countries, was created in
part to challenge the dollar's supremacy. Its first year has not
been a smooth one, and the value of the currency has fallen. But the
euro's use in international borrowing has risen.
Some major economies, such as Britain and Japan, can easily keep
floating exchange rates with the dollar and the euro, in part
because those countries have capital markets that can allow
companies to borrow in local currencies.
But for many other currencies, the options are not so clear.
Until the Asian currency crisis, many countries opted for a sort of
nonbinding fixed rate. Their currencies were tied to the dollar,
sometimes with a planned gradual depreciation.
The Asian crisis, however, saw many such currencies plunge in
value and led to a growing consensus that countries must choose one
of two options. They can choose freely floating exchange rates that
rise or fall against other currencies moved by market forces, a plan
that gives governments maximum flexibility but can make it hard for
businesses to plan their affairs. Alternatively, they can adopt an
absolute fixed rate vs. …