value in terms of goods and services be viewed as predictable. losses in purchasing power will tend to discourage the use of a currency, but so will any excessive price fluctuation that raises the risk of holding it. in addition, if a currency is seen as a viable store of value in times of general uncertainty, it will attract investors even when times are not so uncertain. clearly, many currencies meet this test ; yet few emerge as international currencies. other factors will govern the selection from among the body of sound currencies. one is a strong, competitive economy open to, and active in, international trade and finance. such an economy will naturally generate a large quantity of foreign exchange transactions with at least one leg in the home currency to support its wide - ranging business activity. this factor evidently goes a long way toward explaining the dominance of the dutch guilder in the seventeenth and eighteenth centuries, the british pound in the nineteenth and early twentieth centuries, and the dollar today. another factor is the presence of an open and well - developed financial system, a factor, of course, that tends to be part, perhaps a necessary part, of a strong competitive open economy. a welldeveloped financial system increases the attractiveness of doing business in a currency for at least two reasons. first, such a system offers a number of ancillary services to participants in international markets, who may want to borrow or invest in a currency or to hedge foreign currency positions. to the extent that these activities can be accomplished efficiently in a currency, that currency will be more attractive as a currency in which to conduct business. second, deep and liquid financial markets that offer a full array of instruments and services will attract business from abroad that might otherwise have stayed at home. because of financial market constraints at home or other barriers to efficiency, for example, borrowing or investing abroad in an international currency and exchanging the proceeds for domestic currency might be cheaper than conducting the transactions directly in the home currency. thus, a currency supported by a well - developed financial system is likely to encourage greater international use, above and beyond needs associated directly with international business activity. as a consequence, the volume of gross international capital flows denominated in the currency are likely to be high, adding to its desirability, regardless of whether, on net, these capital flows are positive or negative at any point in time. these international currency determinants are clearly interrelated. strong financial systems tend to develop in strong

system, all too often has contributed to conceal the true level of leverage and risk. it may be that, as in other economic activities, innovation in finance will inevitably entail increasing complexity. in most cases, whether we think of the pharmaceutical industry or big utility networks, the risks attached to this complexity have been identified and mastered. this may be more difficult when human behavior is directly involved, as in financial or epidemiological systems, thus adding another, and different layer of complexity. both the industry and regulators will have to rise up to this formidable intellectual and operational challenge and i am convinced that your conference to day will provide invaluable help in this regard. thank you. references caballero, krishnamurty " collective risk management in a flight to quality episode " the journal of finance vol. lxiii, no. 5, october 2008. caballero, simsek : complexity and financial panics, nber working paper 14997, may federal reserve bank of new york " new directions for understanding systemic risk " economic policy review volume 13, number 2, november 2007. gorton : the panic of 2007. paper presented at the economic symposium of the federal reserve bank of kansas city. jackson hole. august 2008. haldane andrew : " rethinking the financial network ", speech delivered at the financial student association, amsterdam, april 2009 ( available on the boe website ). kashyap, rajan, stein : " rethinking capital regulation ", paper prepared for federal reserve bank of kansas city symposium on “ maintaining stability in a changing financial system ”, jackson hole, wyoming, august 21 - 23, 2008. landau : “ extreme events in finance : some reflexions ”, remarks at the conference on extreme events jointly organised by the banque de france and toulouse school of economics ( tse ), september 3, 2008.