Anyone who has travelled internationally knows the downside of carrying multiple currencies in your wallet. From converting home currency into the foreign one before departure and then converting it back to the home currency upon arrival, you lose at least a few percentage points if not more. If you are a proficient user of plastic money, you would be familiar with the shock that you get when you receive your credit card statements and the currency exchange rates used by these financial institutions. In short, they make a killing at your expense. But why do we have these “transaction charges”. Academicians would say that it’s all in the strength of the one currency vis a vis the other (remember the “basket of goods” explanation?). Professionals would say that it’s a source of income for the currency operator …sort of fee for service.
The question I ask is why we have different currencies in the world. Wikipedia says that there are no less than 180 currencies recognized as legal tender in United Nations member states, UN observer states, partially recognized or unrecognized states, and their dependencies. But let’s get real here. There may be 180 currencies but who knows them all and frankly, who cares? In reality, there are probably no more than a dozen currencies that one works with when dealing with international financial matters. And within these, may five the ones that really mean something to us – the US Dollar, the Euro, the British Pound, the Japanese Yen and the Indian Rupee (of course!). Which brings me to my moot point – can’t we just live with these few currencies in this world. And the rest of the nations align themselves with one of these. It’s the not first time this idea has crossed anyone’s mind. Famous economist, John Maynard Keynes proposed the idea of one world, one currency.
Towards the end of WWII, Keynes an overarching “International Clearing Union” that potentially every country in the world could join. It would have created a new reserve currency, the “Bancor,” that could only be used for settling international accounts, and member nations would pay a membership quota in proportion to their total trade. Countries in surplus (exports exceeding imports) would receive bancor credit, while those in deficit (imports exceeding exports) would have a negative account. This plan was outrageously simple and transparent. And perhaps this was the reason why it didn’t take off. Certain countries that surpluses from their imperialistic history feared that Keynes’ plan would bring all nations on the same platform too soon. The word “dominance” would disappear from the financial lexicon.
But come of think of it, over half century later, a part of the world did adopt a single currency system and that’s how the Euro was born. Each country adjusted itself for the parity between the home currency (franc, lira or zloty ….) against the Euro. I’m sure there would have been teething problems in the early years but today, over two decades later, Euro is well recognised as an international transactional currency. Travelling anywhere between EU does not require you to change currency. In other words, it has become convenient to say the least. And does one country using Euro as its currency dominate the other? I don’t think so. On the contrary, switching to the euro increased trade amongst member nations by 5% to 20%. Keynes was probably right, but perhaps his timing wasn’t.
Why can’t we extend the success of Euro to other regions of the world? For example: how about if all countries that have their own dollar currency align to the US Dollar? The most obvious benefit of doing so would be the reduction in transaction costs. When you’re talking of international trade running into billions of dollars or euros, even a small change the exchange rate charged by the bank could mean loss of millions to the customers. Banks, as I recall, never trade in a loss.
In addition, there would be somewhat of a levelling of the global playing field with one currency, since nations like China can 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. With one global currency, China would not be able to do this, nor would it have a reason to do so.
There are downsides too. The most obvious downfall to the introduction of a global currency would be the loss of independent monetary policy to regulate national economies. In the 2008 economic crisis in the United States, the US 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 or a regional 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.
The supply and printing of a global currency would have to be regulated by a central banking authority as it’s done for the euro by the European Central Bank. So it does seem that there are no easy routes to adopting one world, one currency system right away. However, I do believe that there are definite long term benefits in this concept and for that it is worthwhile for countries to get together and form a task force to study the feasibility and the impact of one word, one currency system.