The idea of a world currency is certainly not a new one. In 1969, the International Monetary Fund (IMF) created the Special Drawing Rights (SDR) as a supplementary global reserve asset. The SDR's value is based on a basket of five currencies: the U.S. dollar, the Japanese yen, the euro, the British pound sterling, and the Chinese renminbi.
While the SDR is not a currency in the classic sense, it does serve the purpose of supplementing member countries' official currency reserves and providing liquidity during times of economic distress. According to the IMF's Articles of Agreement, the SDR was intended to be "the principal reserve asset in the international monetary system."
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 global currency really work?
- The idea of a global currency is not a new one—the International Monetary Fund (IMF) created the Special Drawing Rights (SDR) in 1969 as a global reserve asset to supplement member countries' reserves.
- Among the benefits of a global currency would be the elimination of currency risk and conversion costs in international trade and finance.
- Economically developing nations would benefit from a stable currency and the removal of currency barriers, which would lead to increased trade among nations.
- A global currency could have several disadvantages, such as precluding nations from using monetary policy to regulate their economies and stimulate economic growth.
- Because monetary policy could not be enacted on a country-by-country basis, it would have to be implemented at a global level, which could lead to monetary policy decisions that benefit some countries at the expense of others.
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.
Conversion Costs Eliminated
A global currency would mean 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 to €19 billion were saved per year in transaction costs.
Furthermore, breaking down a currency barrier leads to increased trade among nations. Again, if we take the European Union as an example, switching to the euro increased trade amongst member nations by 5% to 20%.
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 thus 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.
Economically developing nations 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 developed nations being negatively impacted rather than developing nations. For example, Germany had to bail out 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 at 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 among 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.