One World, One Currency: Could It Work?

By Eric Fontinelle | March 05, 2010
One World, One Currency: Could It Work?

In March of 2009, U.S. Treasury Secretary Timothy Geithner let it slip that he was "quite open" to the idea of an eventual move toward a global currency run by the International Monetary Fund. Although many were surprised by this unusual announcement, the idea of a world currency is certainly not a new one. In fact, one of the most frequently cited backers of a single currency is the legendary economist John Maynard Keynes.

Many of Keynes' ideas have moved in and out of favor over the past 70 years. But could one currency really work? (This rock star of economics advocated government intervention at a time of free-market thinking. Learn more in Giants Of Finance: John Maynard Keynes.)

Which Countries Would Benefit
There would be a little something for everyone with a global currency. Developed nations would certainly benefit since there would no longer be currency risk in international trade. In addition, there would be somewhat of a leveling of the global playing field, since nations like China could no longer use currency exchange as a means to make their goods cheaper on the global market.

As an example, many point to Germany as being one of the big winners in the introduction of the euro. Large German firms, which were already some of the most dominant in the world, suddenly had an even playing field. Southern European nations began to demand more German goods, and all of this new money coming into Germany led to considerable prosperity.

Developing countries might benefit considerably with the introduction of a stable currency which would form a base for future economic development. For example, Zimbabwe has suffered through one of the worst hyperinflation crises in history. The Zimbabwean dollar had to be replaced in April 2009 by foreign currencies, including the U.S. dollar. (Find out how this figure relates to your investment portfolio in What You Should Know About Inflation.)

The Downfalls
The most obvious downfall to the introduction of a global currency would be the loss of independent monetary policy to regulate national economies. For example, in the recent economic crisis in the United States, the Federal Reserve was able to lower interest rates to unprecedented levels and increase the money supply in order to stimulate economic growth. These actions served to lessen the severity of the recession in the United States.

Under a global currency, this type of aggressive management of a national economy would not be possible. Monetary policy could not be enacted on a country by country basis. Rather, any change in monetary policy would have to be made at the worldwide level.

Despite the increasingly global nature of commerce, the economies of each nation throughout the world still differ significantly and require different management. Subjecting all countries to one monetary policy would likely lead to policy decisions which would benefit some countries at the expense of others.

Supply and Printing
The supply and printing of a global currency would have to be regulated by a central banking authority, as is the case for all major currencies. If we look again to the euro as a model, we see that the euro is regulated by a supranational entity, the European Central Bank (ECB). This central bank was established through a treaty amongst the members of the European Monetary Union.

To avoid political bias, the European Central Bank does not exclusively answer to any particular country. In order to ensure proper checks and balances, the ECB is required to make regular reports of its actions to the European Parliament, and to several other supranational groups. (The policies of these banks affect the currency market like nothing else. See what makes them tick in Get To Know The Major Central Banks.)

The Bottom Line
At present, it appears that implementing a single currency worldwide would be highly impractical. Indeed, the prevailing theory is that a mixed approach is more desirable. In certain areas, such as Europe, gradually adopting a single currency may lead to considerable advantages. But for other areas, trying to force a single currency would likely do more harm than good.

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