What would the world economic system be like if we functioned with only one currency?
Would third world countries automatically become first world?
I’m not an economist by any means, but would this be helpful or harmful to the world financial crisis if everybody had the same currency in their pockets?
Assuming it’s even possible (which I sincerely doubt) I don’t think much would change. As an amateur student of macro-econ, I think we are pretty close to there already. From my experience traveling -granted to first-world countries…- if you want to buy something in another currency, use your credit card and it works seamlessly. You get the bill with the exchange rate already built in and at least in my case, no “currency conversion” charge.
Now if we REALLY had one currency where I could take my paper to Africa and they would accept it… I think we would just see headache-inducing price swings. For instance here in our country a gallon of milk might cost 3 whereas in another country it would be priced at .30 or $300. A country now like China (which controls the value of their yuan relative to the USD) would probably just start controlling prices instead.
I don’t think it would change anyone’s standard of living, their environments already are what they are and will change largely independent of one another. And taxes wouldn’t really change either, every gov’t is still going to want their piece of that tariff pie.
Prices will still be regulated by scarcity and difficulty to acquire, regardless of if we all come together to pay in Washingtons, Loons, Seashells, or whatever.
What does everyone else think?
I think the question makes the assumption that currency is just an impartially regulated means of exchange. If that were true, there wouldn’t be a problem, but in reality it is practically impossible to divorce a country’s currency policy from it’s general economic policy, which in turn is impossible to divorce from practically any other aspect of it’s policy. So, by my reckoning, the question is really what the effects of a one world government would be, which I think is likely not a GQ question.
In general, the reason Third World countries are Third World is because their leaders are robbing them blind. Taking away control of monetary policy from them would remove one way for them to steal from their people, but there are plenty of others.
And just who, exactly, would reuglate monetary policy? It’s hard enough to run in America, whre we’ve even grown up with one currency mostly. It’s not working out that well in Europe, because while the Euro makes business easier, it makes economies shakier because inflationary needs are not properly met everywhere. trying to run it across the world? Not gonna work.
Money is not really the source of trade imbalances or poverty. In large part, people in Africa are poor because they live in subsistence economies and have virtually no currency of any type. We can argue about whether dollars or euros are better, but both are way above a herd of goats when it comes to wealth building. (And I mean none of that in a negative sense. Those people are doing the best they can to provide for themselves and their families.)
As others have mentioned, a united world currency would just change the rules for monetary policy. As it stands now, the US can affect its own money supply by adjusting reserve rates, interest rates, printed currency, government spending and more. This provides some control over both economic growth and inflation.
With different currencies, each country can manage its own monetary policy according to their own goals. If the US is growing while Europe is shrinking, the US can stifle inflation while the Europeans encourage growth. This can change the relative trade value of the currencies and so its main international impact is on foreign trade balance and investing. With only one currency, you’d have to apply the same monetary policy to everyone. My fear is that the powerful countries would use it at the expense of the poorer countries, but even if it was done perfectly fairly, you’d see some people benefit more than others at any given time.
This is the key point. Sharing a currency only makes sense when you accept that you are essentially one economic area (as is the case in the Euro zone). Movement of goods, people and capital should be free. Sharing a currency (and a central bank that sets interest rates) makes countries interdependent.
Without this economic integration you get the problem Smiling bandit refers to. So when you share a currency you should try to think less in them versus us terms; just as New Yorkers will not blame inflationary pressures on people from Los Angeles. States (as in countries) are man made institutions and so are its borders, there is no reason why systems that work within a country, wouldn’t work in a larger area that interact as if they are the same country (having none of the restrictions I mention above).
If this full integration would be achieved there is a fair possibility of income levels and prices converging to one another. Economic theory in general predicts that there is one market price (even though large distances might allow for differences). The comparative advantage (lower wages) would mean a lot of the production would be shifted to the third world and through this process their level of development would slowly but surely rise up to meet us. Let’s be clear though, this is the theory.
I agree with this 100%. IMO to have one currency, you would have to have one government, which has a blanket policy in every aspect for everyone worldwide. Note that I am saying government, and not an organization that just overlooks (like the UN).
How possible is that in my lifetime? Not a chance. Ever? Who knows.
As others have written, creating a common currency is one of the last steps in economic integration. You can’t have a one currency world until every country is following pretty much a single economic policy with only minor variations.
Many of the comments above overlook the fact that countries with wildly divergent economies sometimes share a currency today. Panama uses the American dollar, and Kosovo and Montenegro have unilaterally adopted the euro. All this requires is that one country cede one particular aspect of government–monetary policy–to either another government (the US) or a supranational entity (the European central bank).
Differences in living standards, as between Portugal and Germany, can remain indefinitely even after the adoption of a common currency.
Under specie standards, the number of currencies in the world was much smaller–effectively one during the heyday of the gold standard between the late 1800’s and the Great Depression. Countries printed their own paper and called it by different names, but they were all exchangable for gold at a fixed price so they were all effectively the same thing.
Currency (especially fiat money) is not real wealth. It’s just scorekeeping “points” or bookkeeping abstraction of real wealth.
It’s like the “points” of a football game or hockey game. If the each goal in hockey was “converted” to 6 points instead of just 1, would that make hockey as popular has football? Or if both teams switch the scoring system to use Roman numerals would that make both sports equal? No, because there’s an underlying “real wealth” to each sport that determines its popularity to the public.
The idea is that the “points” are just tabulation markers for underlying accomplishments (successfully pushing a ball or puck past a goal line). When a football team scores 6 points, are those “points” subtracted from another game or another team? No, because those points are just created out of thin air by humans for tabulation to determine a winner. Even though the points are not “real”, teams cannot randomly just add unlimited points to their tally because there are agreed upon “rules” and “referees” to determine how to award those points.
Since money is really more like “points” of a sports game, creating 1 currency (vs ~165 currencies) will not magically lift 3rd world country like Africa out of poverty and make it 1st world status. Africa’s underlying real wealth has to increase.
Can’t see it. The American South existed for a century as an impoverished cousin of the North, despite sharing a currency.
This is one of the issues the nations that adopted the Euro had to contend with, and it’s one of the reasons why the UK decided not to. Say the economy in Finland goes south. Before the Euro they had complete control over their monetary policy. Now they have to appeal to the European Central Bank, which won’t be as willing to make a change if the rest of the Eurozone is doing fine.
I wonder if regions within the US face a similar situation. For example, would the upper midwest be better off if they could set their own monetary policy?
I assume “own monetary policy” would also require prerequisite of “state’s own currency.”
Consider that Arkansas is one of the poorest states in the USA. If one thinks Arkansas could improve its real wealth by creating a separate Arkansas currency with its own monetary policy, you’d have to consider the following:
[ul][li]Arkansas citizens driving outside state borders to buy and sell products[/li][li]citizens buying/selling on the internet[/li][li]citizens commuting to adjacent state for work, earning income in the standard USA currency[/li][li]citizens psychological acceptance – they realize that there’s no advantage to using Arkansas currency – except as toilet paper[/li][/ul]
Basically, you’d have to build a wall around the entire state of Arkansas and an ISP filter to prevent internet transactions. You’d essentially have to insulate Arkansas as if it was a totally separate country within a country. Arkansas would also have to be self sufficient (energy needs such as petroleum, food, technologies such as cellphones, dishwashers, TVs, etc.) The “isolated as country” method is the way to force state’s citizens to use the special state currency.
Monetary policy isn’t a magic wand that can change Arkansas from a state with low-tech economy (chickens and dairy) to a wealthier state like California with hi-value economy (Silicon Valley, Pacific coast tourism, Napa Valley, etc).
The Bank of Canada faced this dilemma back in 2008. The simultaneous increase in oil prices and the Canadian dollar was crippling the economy in Ontario and other regions in the country, but it also led to out-of-control growth in Alberta. The central bank was left in the position where Ontario’s economy needed interest rates to drop and Alberta needed interest rates to rise.
While I totally agree that monetary policy isn’t a magic wand, there is reason to believe that you could eke out an extra couple of percentage points of GDP growth through proper management. My college economics text stated that the difference between Africa and Europe is an average of 1% GDP growth per year for 300 years. Even if you don’t notice the difference in your lifetime, such a difference would matter to your kids or grandkids.
(Of course, that’s a hypothetical benefit which assumes good monetary policies are followed and that the local economy has the potential for that growth.)
Another way of phrasing the OP is, “What if every nation in the world had fixed exchange rates?” A number of richer countries had this before the Great Depression: it was called the gold standard. IIRC, those countries that left the gold standard first tended to recover quicker. The trend has been towards floating exchange rates (or in many cases a “Managed float”).
In the US, states that experience hard times benefit from offsetting stabilizers. The tax revenue they send to Washington tends to decline. Welfare payments to the state go up. And the US has high labor mobility, so the population tends to follow the jobs.
None of these stabilizing features apply to your typical country (though admittedly the European Union has instituted some of them.) Instead, countries in a slump tend to experience depreciating currencies - provided the country has not committed to fixed exchange rates. Depreciation makes foreign goods more expensive (causing locals to substitute in to domestic products) and exports more competitive abroad. Thus, the economy is spurred.
Today we have a global recession and it’s not possible for all currencies to depreciate relative to one another. So other countercyclic policies become appropriate.
FWIW, many countries in west and central Africa use a single currency, the Franc CFA.
The franc CFA is pegged to the Euro, and guaranteed by France. IOW, these countries actually use the Euro under another name.
I just want to make clear that adopting a currency, as is the case with Montenegro and sort of what some of the african countries are doing, is not the same as sharing a currency. These countries have no influence on monetary policy or anything else concerned with the Euro, they just use it. Sharing a currency means that all participating partners are included in decision making proccesses that are of interest to the currency.