Rise of Chinese currency to take time

In other words, China will have to fully open its capital account before the renminbi can become a true international currency.

This will require putting banks and state-owned enterprises on a fully commercial footing.

All this is a reminder that the task will not be completed overnight.

But the United States’ own history suggests that the process can be completed more quickly than is sometimes supposed.

As late as 1914, the dollar played absolutely no international role.

No central bank held its foreign reserves in dollars.

No one issued foreign bonds in dollars.

Instead, they all went to London, allowing British banks to underwrite their transactions and conducting their business in sterling.

Even US importers and exporters requiring trade credits obtained them in London rather than New York and did their business in sterling rather than dollars.

That London rather than New York still dominated in 1914, when the US economy was already more than twice the size of Britain’s, reflected the latter’s head start as an industrial power, an exporter, and a foreign investor.

This is a reminder that incumbency is a considerable advantage in the competition for reserve-currency status.

But this situation also reflected the fact that the US lacked the market infrastructure needed for the dollar to play an international role.

In particular, the US lacked a liquid market in trade acceptances, the instrument used to finance imports and exports.

And it lacked a central bank to backstop that market.

This changed in 1914 with the creation of the Federal Reserve System.