In an unstable world, no national currency deserves unconditional trust. The way to solve this problem is obvious. It is known as a multicurrency system. Its application creates a number of significant advantages.
General concept
The multicurrency 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 lending. In addition, the use of various currencies as a reserve tool is fully consistent with the well-known principle of diversification.
The conversion of assets into banknotes of the most economically developed countries significantly increases the likelihood of their preservation. 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 in the world market.
Crisis situations
In some cases, a multicurrency system arises naturally due to the political and economic instability of a state. If the government considers it too burdensome to issue its own currency, it can officially authorize the use of foreign ones. The history of the Zimbabwean dollar is a clear illustration of this scenario. The catastrophic situation in the economy of this African country led to an annual inflation rate of 231 million percent.
The national currency was much cheaper than the paper on which it was printed. The government has decided to ban the circulation of the Zimbabwean dollar. The legal tender in the country was the US dollar, pound sterling, euro and South African rand. To date, a multicurrency system has been maintained in Zimbabwe. The central bank of this African republic has not resumed issuing national banknotes.
Examples
In addition to countries affected by hyperinflation, small or economically dependent states use the multicurrency financial system. For example, the Swiss franc and the euro are the main monetary units of the Principality of Liechtenstein. The Republic of Panama, located in Central America, officially issues its own currency (balboa), but in fact the majority of payments in the country are in US dollars. A similar situation has developed in Ecuador. The national currency, called centavo, serves as a small bargaining chip, and for large settlements the US dollar is used.
In addition to small countries with insufficient levels of economic independence, a multicurrency financial system is also used by some government entities that are not recognized by the international 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 originated in the very recent past. The reason for the emergence of a multicurrency system was the spread around the world of the so-called fiat money. This term comes from the Latin word for "order, " or "decree." From a practical point of view, fiat money is a unit of account not provided with any physical values. They have purchasing power only thanks to the will of the government, which ordered the population to use them as the only legal means of payment. The liquidity of fiat money depends entirely on the stability of the political regime. Revolutions or overthrows of governments can quickly depreciate the national currency.
Paper payment methods by their nature are more like not the classic form of money, but the shares of commercial companies. The value of the national currency depends only on the reputation of the issuing state.
