You are on page 1of 3

A Universal Currency

Background
The creation of the Euro in 1999 was a historic and ground-breaking event, as 11 independent nations shed part of their individuality and all adopted the same currency. Surprising its many early skeptics, the Euro matured into one of the most efficient and heavily traded currencies, proving the success of the largest monetary changeover ever. The introduction of the Euro made it possible for people, services, capital, and goods to move freely throughout Europe, greatly facilitating travel and trade. The Euro's success in Europe caused the long dormant idea of a Universal currency to reawaken and to once again become a hot topic. The concept of uniting the entire world under a single currency was first introduced in the 16th century by an Italian noble and while the idea may sound radical even today, it is advocated by many respected economists including Nobel Prize winner Robert Mundell.

Factors Favoring Currency Consolidation


An End to Transaction Costs Everyday, roughly 1.4 trillion dollars are traded via the foreign exchange market. Buried within every transaction are fees and costs that amount to roughly .33% of the total amount exchanged. Although seemingly an insignificant number, when considering the vast volume traded in the foreign exchange markets it amounts to approximately 1 trillion dollars a year! The creation of a single currency would virtually eliminate all of these costs and allow a free flow of money. The money saved from the elimination of transaction costs could be put into positive global needs, such as feeding the hungry or funding research to cure diseases. Troubled Currencies With the rapid evolution of the global marketplace over the last several decades and the immense need for international trade, nations must not only be confident in the strength of their own currency, but also in the strength of their trading partners currencies. Economists speculate that a currency crisis in one nation has the potential to spread fear amongst its trading partners, which could eventually lead to a currency epidemic. The recent and disastrous currency crises in Thailand, Mexico, Argentina and Russia have proven this to be true. The introduction of a universal currency would eliminate the possibility of such a potentially catastrophic situation. Countries in Debt In the modern global market, it is very common for one country to borrow funds from another nation. As a result of the volatility in exchange rates, many creditor nations are concerned with the possibility of depreciation in the value of their loans due to a currency devaluation or crisis. For example, the United States and Japan have the highest national debts in the world and if their currencies were to depreciate in value then their debt would be worth less. While this would be beneficial to debtor nations, their creditors would essentially be losing money. A universal

currency system without exchange rate volatility would ease the fears of creditor nations and might even encourage more lending between nations.

Factors Opposing Currency Consolidation


One Currency = One Monetary Policy Implicit in the introduction of a universal currency is the creation of a central authority to control its monetary policy. The problem of having one monetary policy affect many different countries is that at any given time some economies will be at different points in the natural business cycles then others. For instance, one country's economy might be overheating and in desperate need of a tightening cycle in interest rates, while at the same time a different country on the other side of the world could be suffering through a terrible recession that would need a reduction in interest rates to stimulate the economy. Therefore, decision making at the central authority will be very difficult as it tries to balance the world economy as a whole at the expense of individual nations. Although this issue continues to plague the European Union, it would be a necessary sacrifice in order for the system to function properly and one that not many nations would be willing to make. In addition, nations often utilize the exchange rate system as a "shock absorber" in times of economic trouble and instability. For example, a nation with a large deficit may adopt a soft monetary policy causing their currency to depreciate in value with the purpose being to increase the country's exports and domestic spending. Similarly, many countries fix their exchange rates in order to boost their exports. China pegged the Yuan to the United Sates dollar which allowed their goods to remain the cheapest in the marketplace and gave them a competitive advantage. If a single currency system were adopted, then the ability to use exchange rates as a "shock absorber" or as a business tactic would be lost, potentially damaging exporting nations. Nationalism Nationalism is a very powerful emotion and one vehicle in which it manifests itself is a country's currency. Money is a major part of daily life and it often features illustrations of national heroes or leaders, causing individuals to feel that their currency represents their nation's individuality and sovereignty. Additionally, forcing a universal currency upon individual countries may anger many patriotic citizens. As a result, many governments might oppose the adoption of a universal currency due to the undesired consequence of a decline in individual identity. In fact, the loss of individual identity was one of the key reasons that the United Kingdom declined to accept the Euro as their currency. Governance The creation of a universal currency will require the creation of a universal central bank to manage it. The bank will control the world's interest rates and therefore, its leaders will have considerable influence over individual economies. The process of selecting bank officials and figuring out an appropriate amount of representation for each country will surely be sore points of contention. Also, in order for the bank to function properly, it must be a fully independent institution. If one country or even one continent were to have undue influence on the bank's decisions then it will surely fail. One of the reasons for the Euro's success has been the European

Central Bank's (ECB) deft handling of its monetary policy and the ECB's management of the Eurozone economy. The bank's independence and strong leadership have ensured that for the most part the difficult, but correct decisions have been made.

Final Point
In the aftermath of World War II, the idea of creating a universal currency was discussed at the Bretton Woods Summit, but eventually dismissed because the United States and Great Britain disagreed on which currency to base it on. The United States wanted a dollar-based currency called the "unitas", while Great Britain was in favor of a pound-based currency called the "bancor". In light of this piece of history, it is easy to understand why even the staunchest advocates of a universal currency do not expect its inception anytime soon. Considering that a small dispute over the base of the currency between only two nations was enough to scrap the idea, the idea that the entire world will eventually agree on every single issue seems far fetched at this point in time. Perhaps the future will bring a changed political and economic landscape more receptive to the creation of a universal currency, but until then it will remain a radical idea. Before dismissing the thought entirely though, consider that when the unification of Europe under the Euro was suggested, many initially doubted its prospects for the same reasons as those listed above. However, not only does the Euro exist today, it is a thriving currency worth more then the United States dollar and thus should provide a small ray of hope for those dreaming of a world wide currency.

You might also like