Are We Heading for a World Currency - Essay Example

Are We Heading For a World Currency Yes, we could be heading for a world currency, but the possibility of getting one anytime soon is minimal. The growth of globalization, a process that has been going on for over 5,000 years, necessitates the need for a single global currency (SGC) (Bonpasse 89). There have been debates for and against the idea, but no closing conclusion has been reached yet. Most arguments provide that, in the foreseeable future, the closest the world can get to a SGC is to have currency zones such as the U.S. zone, Euro zone and the Yen zone (Volcker 8). Local markets are the key factors that created such zones. They seem to prosper economically if they are trading in one regional currency. Personally, I agree with the idea of a SGC, but, currently, the vastly varying political and economic landscapes of sovereign countries around the world are posing barriers to it. This paper will list and describe some of the factors, both for and against a SGC, and discuss why it is unlikely to achieve one in the near future. Presently, there exist some economic forces that favor the amalgamation of currencies. Below are some of the influencing factors. Troubled Currencies Since trade is so vibrant and persistent among nations, it is critical for the nations to have confidence in their local currencies and those of their business partners (Volcker 10). A confidence decline in a country’s currency will spread fear among all other countries that share trade relationships and interests with it, further leading to a currency pandemic. An example of this scenario is the currency calamity that befell Mexico, Argentina, Russia and Thailand. The then United States President, Bill Clinton, remarked that solving Mexico’s problems was not only significant to the rest of Latin America, but also developing countries in the whole world (Volcker 11). The fact that the Mexican catastrophe could stretch to neighboring countries in the region and affect their currencies informed this idea. Countries in Debt Countries that have lent money to other countries worry about the possibility of depreciating of the debt owed to them due to the occurrence of a currency crisis or devaluation (Hellyer 43). They seek assurance that their debts will be repaid in currencies that have not depreciated in value. This makes currency stability a worldwide concern and aim. Furthermore, countries that have previously experienced currency crisis stand to benefit if their currencies are converted to regional units (Hellyer 43). This has an effect of reducing fears of currency problems in the future. Multinational Companies Multinational companies face challenges in an attempt to price their products and record profits while working in many currencies (Hellyer 44). A currency consolidation is a welcome relief to financial officers of such enterprises. Online Banking With its already worldwide and well established infrastructure, online banking is a trend poised to last for long. Through it, money is constantly moving across borders without passing through conventional banking systems, making it a contributing economic factor favoring currency consolidation (Bonpasse 127). Factors Inhibiting Creation of a World Currency The factors above have contributed favorably towards the need for a SGC. They, however, raise questions as to how a SGC would be governed (Volcker 4). There seem to be two intertwined, key factors working against them, and they appear to carry the day; world political and economic platforms (Volcker 4). A third factor, religion, poses its own class of difficulty. A combination of all the factors put forward against a SGC has a general suggestion that the current world setting is simply not ready for it (Volcker 6). Religion Some religions, especially Islam, outlaw the amassing of interest on loan principal (Mustaqim 1). Religion forbids the faithful to charge interest to other faithful or the poor. Currently, large populations of religious faithful opposed to the paying of interest are able to access banking services in their countries, which are compliant. For example, the Islamic banking systems in such countries are governed and regulated by their central banks ability to set interest rates for transactions (Mustaqim 1). Having a SGC will take away the regulatory powers of their national central bank. Foreign Exchange (Forex) The Forex market is the most liquid and largest in the world with 182 official currencies, and currently turns more than three trillion United States per day (Hellyer 57). It is feared that a SGC will result in the mass extinction of Forex traders (Hellyer 59). The prescribed result of a SGC is the overall elimination of what is currently perceived as Forex. No Forex instruments will exist to be traded, and nothing will remain to exchange in the foreign exchange (Hellyer 58). Those involved in Forex will have difficulties trading because the knowledge and skills they accumulated over decades will become useless. Politics and Economy Looking at political and economic factors collectively, to achieve a SGC, it would require that a worldwide banking structure be formulated, equipped with monetary strategies on a planetary level (Stewart 71). Fundamentally, the need for a SGC is a central bank with power over all countries, dialects and families. Within an arrangement of this kind, national monetary sovereignty would cease to exist. This includes democratic procedures that may alter a country’s monetary and economic trends through the ballot box. The world supply of a SGC would be fixed and controlled by a new central bank, yet, presently, the control of credit and money is at the core of every country’s national sovereignty (Stewart 71). A great struggle in history has been to gain control over money. Achieving control over its production and dissemination amounts to the control of resources, wealth and people of the world. Once a country gives up control of its credit and currency, it no longer matters who makes its laws (Stewart 71). The suggestion of taking away economic decision making at the national levels from governments in favor of a world central bank was condemned by a former Member of Parliament in Canada (Hellyer 57). He argued that in, such an arrangement of global currency, the interests of a country’s citizens would be subordinated to those of international finance. Countries would no longer be able to practice any independent policy. Sovereignty over their central banks, a country’s most powerful economic tool, would be vested in a global central bank managed by a world kingship made up of international appointees not accountable to anyone in particular (Volcker 9). Many countries would be set against each other in a power struggle to be in charge of the new currency and oversee its financing and operation. As early as 1944, two economists, Alvin Hansen and John Maynard Keynes proposed an international economic route towards achieving world peace (Bonpasse 154). Although they were primarily interested in promoting employment and developing backward countries, they suggested creating an international exchange fund to facilitate adequate exchange and promote a unified world currency system, prior to the Bretton Woods conference of 1944 which bore the International Bank for Reconstruction and Development and the International Monetary Fund (Bonpasse 153). Keynes’ proposal considered the creation of a new representation of international money apart from gold, which some countries already held in their reserves. He also proposed the name “bancor” for the synthetic money, which was a combination of bank and French name for gold. At the same time, the United States also forwarded their world currency proposal, named “Unitas”, to the Bretton Woods conference (Bonpasse 154). President Roosevelt had directed the secretary of the treasury to come up with plans for a world currency (Volcker 11). This shows that both the British and Americans, at the conference, included provisions for a world currency. However, due to political problems related to the United States, they were never implemented (Bonpasse 153). Being a presidential elections year in the United States, pro isolation forces were opposed to the idea that seemed to represent some degree of sacrificing sovereignty. Eventually, the Bretton Woods system allowed the US dollar to occupy a dominant world position (Volcker 11). Most economists suggest that a SGC is not necessary because it presents restricted additional benefits with additional costs. They argue that the US dollar is already availing majority of the benefits a world currency would, at the same time avoiding the accompanied costs (Volcker 12). Unless the world forms an optimum currency area, it would not make economical sense to share a single currency. With the present differences in political and economic settings, many countries are rendered economically incompatible and are not able to work closely enough to consolidate, produce and sustain a common currency (Volcker 12). There has to be instilled high levels of trust among different countries for a true single currency to be created without undermining the national sovereignty of smaller countries. A SGC in the present situation will also harm wealth redistribution because the interest rates fixed by different central banks determine the interest rates clients have to pay back on bank loans (Volcker 12). These rates have an impact on the interest rates among individuals, business investments and the country as a whole, thus, advancing loans to the poor will entail more risk than to the rich. Because of the larger disparities in wealth in different parts of the world, the ability of the central banks to set interest rates and make the areas prosper will be compromised. This is because it places the wealthier regions in conflict with the poorer regions in debt (Volcker 14). Developed countries are trying to avoid the negative impacts a SGC would have on the current values of their currencies, which are higher than those of Third World Countries. The Third World Countries would suddenly have equal financial worth with the developed countries. Since a country’s currency value is currently determined by the country’s debt and borrowing, the difference between currencies of countries in varying world regions can be enormous (Volcker 12). Some international economists fear that surrendering foreign exchange markets and national currencies have the potential to increase cases of unemployment in other regions of the worlds (Mohan 64). This is because some occupations would be rendered redundant. The presence of a level economic platform would redirect some jobs to particular regions. Some countries are also wary of the idea of losing control over distant bureaucracies and powerful interests. Economists supporting isolationist ideas imply that all currencies stand the risk of being debased (Mohan 69). They insist on the significance of competition among different national currencies around the world, pointing out that it allows businesses and individuals not in agreement with their governments’ direction of monetary policies to choose opposing currencies. The advent of a SGC would leave no room for such alternatives and debates (Mohan 86). As perceived by investors, a country’s currency plays many roles, including being a global measure of its strength, depth and productivity of the economic and political system stability (Stewart 42). That is why, despite the problems facing the US dollar, they still believe it is the safest place to store their wealth. Interest rates on debts dominated by the dollar, like the United States Treasuries, are low. Furthermore, because the flow of trade lends currencies their values, powerful investors advocate for the retention of the status quo of many world currencies (Stewart 44). For example, when Japan’s yen is weaker compared to the US dollar, American traders can choose to buy high end Japanese products for the same price valued in dollars. They argue that more productive countries have their currencies’ values strengthened, giving people earning wages in those currencies higher buying power when buying products priced in different, weaker currencies (Stewart 47). This aspect exhibited itself most openly when China suppressed the value of the yuan, artificially, for many years in order to give its products a higher competitive edge when priced in foreign currencies (Stewart 47). The investors, therefore, do not welcome the idea of a SGC, because it will take away from countries the ability to devalue their currencies at will so that they may price their products competitively. More critics against a SGC are basing their arguments upon the problems being realized by member countries of the Euro zone (Bonpasse 93). Signs of divergence have already popped up, signifying the difficulty of a single monetary strategy to deal with the troubles of every constituent member. As much as the first decade of sharing a common currency was uneventful, cracks began appearing within the continent with the deepening of the global recession (Bonpasse 93). Among the original objectives of the Euro was to increase the European economy’s overall productivity because smaller and weaker countries had to get more competitive with stronger, larger countries. Ironically, the reverse occurred (Bonpasse 94). The weaker countries, without having to produce neither more goods nor services, began enjoying higher purchasing powers. Europe’s overall growth in productivity slowed down from 1.6 percent annually in the period prior to the Euro, to half that rate in the era of the Euro. The critics also note that the euro suffers from disjointed political structures governing the economy it represents (Bonpasse 94). With the actuality that each constituent country of the zone can issue their own debts, the Euro is effectively used in as many different bond markets as exists the number of countries in the zone. Because each country fixes its own spending and tax policies, some of them now bear debts that exceed their gross domestic product. Although they have been liberated from the undesirable impacts of fluctuating currencies, the Euro zone countries now face a different and often more painful impact of the sudden and unusual ideas of global investors (Bonpasse 99). The costs of borrowing are much higher in countries with heavy debts like Portugal, Greece, Spain and Ireland as compared to Germany, which has the largest accumulated savings. This scenario presents the indebted countries with limited and difficult choices which could not have arised back in the era when they could devalue their local currencies. For instance, according to a Center for European Reform report of 2006, Italy is facing some harsh choices (Bonpasse 101). It could choose to either boost productivity through massive wage reductions, or continue lagging behind as the slowest developing economy among the member countries. Another difficult option would be to abandon the Euro and devalue its debts, and then create its own currency. However, this step, like with other euro zone countries with high debts, rides on the risk of making borrowing much more difficult. The strongest argument by the critics is that unless and until the world forms a single government to oversee uniform monetary and fiscal policies, it will not be practical to grant sufficient powers to any independent body to formulate a functional SGC (Volcker 21). They hold this to be especially true in the global recession times that require the most painful choices. Such is the situation that kicked off the collapse of gold’s standards in the 1930s. Additionally, as long as the global economy is still made up of an array of local economies governed by different countries, a SGC would not do much to remove the imbalances that will result from the different economic interests and policies sought by those sovereign countries (Volcker 21). As suggested by Robert Mundell, an economist and Harvard professor, economically reasonable boundaries for a common currency zone need not theoretically correspond with national boundaries (Bonpasse 114). Although the theoretical suggestion makes sense, it is, however, argued that political and national boundaries of countries are known to exist. Therefore, the thought of joining into a common currency raises an immediate issue of burden sharing (Bonpasse 114). A new point of view presented is that Europe is not suffering a financial crisis, but rather, a currency crisis. It gives an example that Spain’s ratio of debt to GDP is substantially lower compared to the United States. Still, Germany’s ratio of debt to GDP matches that of the United States. Ironically, it is Spain that is in crisis, and not Germany (Volcker 50). To further stress on the point of currency crisis, and not financial crisis, arguments against a SGC point out that it is not the European countries which have gone beyond their abilities to borrow, but rather, a few of the European countries have gone beyond their abilities to borrow in Euros (Volcker 51). They take note that the limits are not imposed by the markets, but the European Central Bank. It is not in doubt that the United States, Britain or Japan are able to generate dollars, pounds sterling or yens respectively to pay their own bills and debts (Volcker 52). But there is open doubt from anti SGC forces that Italy or Spain can generate the needed Euros. Their main reason to doubt this is that Italy and Spain, unlike the United States, Britain or Japan, do not possess the powers and ability to create their own money (Volcker 52). With the exception of Greece, which is considered an exceptional case, the rest of the troubled euro zone countries could immediately recover their ability to borrow by quitting the Euro and resuming their former national currencies. They challenge the pro SGC forces to understand this truth or be blindsided by all the risks they are exposing to themselves (Volcker 51). In conclusion, the only apparent, and immediate, escape route for the hard pressed and a debt laden Euro zone member country is to abandon the Euro currency (Volcker 57). Abandoning the Euro is not an easy option, but is touted to be less painful than what they are suffering in their present status (Bonpasse 116). Sticking to the Euro zone means they will have to continue leaving with substantial levels of depression, increasing taxes, higher unemployment levels and colossal cutbacks in social security. Another example presented is that, over the past two years, Portugal has managed to cut down on government spending by eight points of GDP. To realize the same scale in spending cuts, the United States would have to unreservedly abolish Medicare and Social Security (Volcker 69). As presented by arguments both for and against a SGC, the world would need, and be headed for it, but is just not ready, with the political and economic platforms that exist. Works Cited Bonpasse, Morrison. The Single Global Currency. New York: Routledge, 2006. Print. Hellyer, Paul. Funny Money. Texas: Chimo Media, 1994. Print. Mohan, Joshi. International Business. New York: Oxford University Press, 2009. Print. Stewart, Walter. Bank Heist. Chicago: HarperCollins, 1997. Print. Volcker, Paul. Changing Fortunes: The World’s Money and the Threat to American Leadership. New York: Times Books, 1992. Print. Read More