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 (IMF). 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? (For more, see: Giants of Finance: John Maynard Keynes.)
Who Would Benefit?
There would be a little something for everyone with a global currency. All nations would certainly benefit since there would no longer be currency risk in international trade. Traders would no longer have to hedge their positions in fear of currency fluctuations.
All transaction costs related to international finance would be eliminated as well. Exchanging currencies always requires a conversion, which banks charge as a fee, and there can be a loss in value in changing one currency to another. Having one global currency would eliminate all of this. Individuals traveling abroad would benefit as well as businesses conducting operations in other countries. Economic data estimates that when European countries switched to the Euro, €13 billion-€20 billion were saved per year in transaction costs.
Furthermore, breaking down a currency barrier leads to increased trade amongst nations. Again, if we take the European Union as an example, switching to the Euro increased trade amongst member nations by 8%-16%.
In addition, there would be somewhat of a leveling of the global playing field with one currency, since nations like China could no longer use currency exchange as a means to make their goods cheaper on the global market. For a long time, China has manipulated its currency, undervaluing it and therefore making the price of its exports more competitive across the world. This has been a detriment to the economies of other nations. With one global currency, China would not be able to do this, nor would it have a reason to do so.
Developing countries would also benefit considerably with the introduction of a stable currency, which would form a base for future economic development. For example, Zimbabwe 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.
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 2008 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 a 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 that would benefit some countries at the expense of others.
Typically this would result in the developed nations being negatively impacted rather than developing nations. For example, Germany had to bailout Greece when its economy had all but collapsed, spending billions of Euros to prevent Greece from entering bankruptcy.
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 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.