Introduction

This chapter lays out the conceptual framework needed to grasp the challenges facing exchange bankers in late nineteenth-century Asia. It borrows from the transaction cost literature underlying the study of the structure of the international monetary system; and it subscribes to the notion that such structure is the product of international currency competition. In the historical literature, applications of these insights are surprisingly scarce. Yet it is demonstrated that, by (1) settling on the existence of a distinction between ‘center’ and ‘periphery’ and (2) the existence of ‘network effects’, the transaction cost approach may explain the persistence of monetary arrangements in the long run. Remarkably, seemingly ‘retreating’ currencies retain a degree of superiority that would not be warranted in case network effects were absent; vice versa, non-liquid currencies have only a very small chance at climbing the ladder of currency prestige—they are structurally disadvantaged. It is argued that the distinction between center and periphery is real, not just analytical, and has had tangible implications for monetary and financial policy makers in the fields of sovereign debt and trade finance.