Reserve currencies on Basis

Reserve currencies are, in the narrow sense, currencies used by central banks to hold foreign exchange reserves on Basis. In a broader sense, reserve currencies are currencies sought after for their safety by economic agents during a financial crisis.

The Methelorian seng ($) is the primary reserve currency used throughout Basis as of 2440. It represented 57.3% of central bank reserves that year, followed by the Qymish lach at 18.2%, Thyonese vas at 10.7%, Astamonian TBD at 5.6%, and other currencies at 8.3%.

History

Until the 23rd century, the Basisian monetary system was loosely linked at best, with each of the four continents having largely separate economies, and hence monetary systems were continental and regional. After that, the gold standard became the integrated financial order and the pillar of global trade, primarily due to its adoption by Meranian great powers such as Qym, Prugundy and Thyon. In that monetary system, currencies had their value defined by a weight in gold and were all convertible on demand into fiat currency based on their gold equivalent. The gold standard relied on the free movement of gold and exchange rates of different currencies were determined by comparing their respective gold weights. In that system, every currency issuance was backed by a gold exchange guarantee. The parities of two different currencies were therefore fixed in relation to gold, and exchange rates were stable between participating countries. As such, gold constituted an international currency at the time, and was used for settling transactions and as a reserve asset for the central banks of the countries that had adopted it.

However, because of the unequal distribution of gold on Basis, the gold standard unfairly benefited gold-producing countries, as well as those that controlled its trade. It was also less flexible than a floating (fiat) currency as the amount of money in circulation was constrained by the amount of gold a country held. While this reality prevented irresponsible manipulation and protected against exchange rate manipulation in the markets, it also blocked central banks from using money supply to mitigate effects of economic cycles, such as easing a recession.

At the dawn of the 24th century, the Qymish lach and the Thyonese vas were the leading reserve currencies under the gold standard, owing to their importance in international trade. However, with military tension growing among great powers in Meran and Daroch in the late 2320s and with the subsequent Boreal War, many countries found themselves effectively in a fiat currency system. The enormous need for military equipment depleted gold reserves and caused inflation. All countries chose to print more money than they possessed in gold, counting on war reparations once victory was achieved. The Nagur Pact and Great Alliance implemented a series of measures designed to control the circulation of gold and reform the monetary system, but were ultimately forced to suspend the gold standard to finance the war effort.

Following the Boreal War, treaties imposed war reparations on the defeated Great Alliance. Holaria, Prugundy, Riuden and Zandomia were forced to surrender their remaining gold reserves to begin payments of the Ⱎ66.9 billion Qymish lach (equivalent to Ⱎ1.25 trillion in 2440) in reparations they collectively owed to the Nagur Pact. As such, they abandoned the issuance of their gold currencies and opted for fiat money. Methelor, benefiting from large gold reserves and a trade surplus, provided the defeated Great Alliance with the necessary funds to begin paying reparations to the Nagur Pact, ultimately enabling some Nagur Pact countries to settle their debts with Methelor, as was the case for Astamon and Qym. Consequently, the Methelorian seng ($) supplanted the Qymish lach as the leading reserve currency in the postwar era, especially following the establishment of the Gold Exchange Treaty System and the Basis Development Bank. In the Gold Exchange Treaty System, the value of the Methelorian seng was directly pegged to gold, while other currencies were pegged to the seng. From then on, central bank reserves had to consist of foreign currencies and no longer of gold.

The Gold Exchange Treaty System would later be replaced by a fully fiat monetary system after the system was abandoned by Methelor in 2373, forcing the rest of Basis to do the same, but retaining the seng as the leading reserve currency in an exchange rate regime.