Grassman’s Law

Grassman's Law (Grassmann's Law) goes back to the Swedish national economist Sven Grassman (1940-1992). The approach was published by him in 1973 in a paper in the Journal of International Economics. Grassman disagrees with the view that the US dollar is the dominant means of payment in international foreign trade. Foreign trade transactions, on the other hand, were billed to about two-thirds in the currency of the exporter and a quarter in the currency of the importer. Currencies from third countries play only a subordinate role.

Grassman analyzes the findings in his work using data sets on Swedish and Danish foreign trade. The high share of the US dollar in the global payment transactions in foreign trade of about 21 percent resulted from the almost correspondingly high share of the US economy in the world's foreign trade. The choice of the currency of foreign exchange may, however, be additionally influenced by the availability of credits and bank services. The great importance of US dollars and pounds sterling in international payments was therefore at least partly due to the important role played by American and British banks in the financing of international trade.

However, the choice of the appropriate billing currency for foreign trade can also be influenced by other aspects. Döhring (2008) describes various transactions in which the use of third-party vehicles as so-called vehicle currencies can be optimal. Some exporters, for example, bill their own prices in the currency used by the most important competitors. This can be useful in a situation where one's currency is subject to strong fluctuations. In the event of a long-term appreciation of their own currency, price competitiveness will then deteriorate against alternative suppliers.

With the emergence of the European Monetary Union, the importance of the euro as a billing currency has clearly increased. For exporters from the euro area and the rest of the EU, the euro is now the most important billing currency. According to Döhring (2008), a large proportion of Euro member countries account for between 50 and 61 per cent of their exports to countries outside the euro area. Edit source text Weblinks Edit sourcetext

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