1Commit to a prediction
Fifty countries trade with one another. Five currencies begin in equal use, with ten countries using each. Every country has its own preferences among the five, based on factors such as geography and politics. From time to time, each country reconsiders which currency to use for trade, and it gives some weight to its own preferences and some weight to how many other countries already use each currency.
When other countries' choices carry a little more weight than a country's own preferences, how many of the five currencies do you expect to remain in wide use, meaning used by at least one country in ten?
2Recognize a familiar problem
Module 1 showed that a village with 20 goods needs 190 exchange rates under barter but only 19 prices once one good serves as money. Countries face the same arithmetic. If every pair of currencies traded directly, 150 currencies would require 11,175 separate currency markets. If every currency trades only against one common currency, 149 markets are enough.
A currency that plays this role is called a vehicle currency. A business in Brazil paying a supplier in Korea can convert reais to the vehicle currency and the vehicle currency to won, using two deep, inexpensive markets instead of one thin, costly one. The more countries use the vehicle currency, the deeper and cheaper those markets become, which draws in still more users. Economists call this self-reinforcing pattern a network effect.
3Model network effects
The model assigns each of 50 countries a random set of preferences among five currencies, labeled A through E. In each round, every country on average reconsiders its choice once and selects the currency with the highest score. A currency's score blends the country's own preference with the share of all countries already using that currency. The slider sets how much weight goes to other countries' choices.
Run the model several times at the same setting. Because preferences and timing are random, the winning currency can differ from run to run.
Loading the Python engine. This takes several seconds on the first visit.
Share of the 50 countries using each currency, round by round.
4Compare the model with the world
Real currency use can be measured in several ways. The chart compares the three most widely used currencies on two of them. The first is the share of official foreign exchange reserves, the savings that central banks hold in other countries' currencies. The second is the share of foreign exchange trades in which each currency is bought or sold. Because every trade involves two currencies, the second set of shares adds up to 200 percent.
Sources. Reserves from the IMF Currency Composition of Official Foreign Exchange Reserves, first quarter of 2026. Trades from the BIS Triennial Central Bank Survey, April 2025, which reports average turnover of $9.6 trillion per day.
The dominance is not uniform. According to the Federal Reserve's 2025 review of the dollar's international role, the dollar is used to invoice about 96 percent of trade in the Americas and 74 percent in the Asia-Pacific region, while the euro leads in Europe at 66 percent. Consider which feature of the model could produce a regional pattern of this kind.
5Reconcile and weigh the arrangement
Lock in a prediction in Step 1, then run the model at the default setting to compare.
Why does the model tip so sharply?
When other countries' choices carry little weight, each country follows its own preferences and all five currencies survive. Above a threshold, a currency that gains a small lead by chance becomes more attractive to every country, which widens its lead further. Small early advantages grow into total dominance. Try weights between 30 and 55 percent to locate the threshold, and notice that the outcome near it becomes unpredictable.
What does the issuing country gain?
In the 1960s the French finance minister Valéry Giscard d'Estaing described the dollar's position as an "exorbitant privilege." Because the world needs dollars for trade and reserves, foreign governments and investors hold large amounts of U.S. government debt. That steady demand can lower U.S. borrowing costs. A dominant currency also gives its issuer influence, because access to the currency's payment system can be restricted. In 2022, for example, the United States and its allies immobilized the foreign reserves of Russia's central bank.
What does the arrangement cost, and whom?
In 1960 the economist Robert Triffin identified a tension that now bears his name. To supply the world with enough of its currency, the issuing country must run persistent deficits with the rest of the world, which over time can undermine confidence in the currency itself. Costs also fall on other countries. When the Federal Reserve raises interest rates to address conditions in the United States, countries and companies that borrowed in dollars face higher payments, whether or not their own economies need tighter conditions.
Is the arrangement permanent?
The model shows that a dominant currency can be very stable, because every user benefits from staying with the others. History shows that dominance can still shift. The British pound held the leading role before the dollar replaced it during the twentieth century. Today some central banks are adding other currencies and gold to their reserves, and the renminbi's share of foreign exchange trading has risen in every BIS survey since 2013. Whether these changes mark the beginning of a transition or remain marginal is a matter of active debate.
6Inspect the code
Nothing on this page is hidden. The Python below is the exact code that produced your model results, running in your browser through Pyodide.
Show the Python model
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