If for some reason, all the countries of the world decided to adopt one universal currency, or everyone agreed to use the dollar, euro, yen, etc., what effect would that have on the global economy? Would it really be all that bad? Obviously some countries are less well-off, productive, etc than others, but couldn’t their “value” be expressed in some way other than the value of their currency? Is the need for seperate currencies mostly an issue of national pride?
I’m no economist as a look at my bank statements would prove, but I’ve been force-fed arguments about the Euro before our upcoming referendum, so in short (and I probably have it wrong):
Having a common currency in economies that differ widely in, for instance, stability or productivity is considered a Bad Thing, because different economies might need different monetary adjustments made and suffer from different problems.
Locking currencies together removes one of the adjustment possibilities, devaluation.
Weak economies tend to suffer from inflation, but if the currency was globally locked, the inflation would be felt everywhere. Locking weak & strong economies together makes the strong economies suffer from the weak ones’ ailments.
There’s definitely way more, but national pride doesn’t really enter it.
Is there an economist in the house ?
S. Norman
What about in the US? Parts of Alabama may be in much worse financial shape than Silicon Valley, but they all still use the dollar. Inflation is an issue, but somehow it still works out.
The problem is, What country or countries would decide how much money is printed out each year?
A lot of countries with economically inept governments would be the major downfall. It doesn’t take a rocket scientist to figure out that a government can’t just print up a bunch of bills and use them to pay off their debts, but in the third world it happens unnervingly often. Many South American (and I would suspect African, though I don’t really know) countries have gone through spectacular hyperinflation recently for this exact reason.
So if you had a single global currency, you would have to do one of two things: you could just ignore this problem, and the result would be a very unstable currency (a severe detriment to the economy); or, you could mandate that every country follow some pretty strict guidelines on monetary policy , or have a single international body in charge of everybody’s monetary policy. Both of these are basically just politically impossible.
isn’t there some latin american country that has made the US dollar their official currency?
Yeah, and I’ll be damned if I can remember which one. Argentina? Peru? Anyway, they didn’t quit make the dollar their currency; they just announced that you could take their currency into the central bank and exchange it for genuine US dollars anytime you wanted. They did this, btw, to put a halt to their hyperinflation, which was caused by what I described above. IIRC, the dimwits who were previously in charge of their monetary policy (maybe it was just the head of their central bank, but it might have been the nation’s executive) got replaced by someone with some economic sense. I think their economy is doing a lot better since that happened.
http://www.senate.gov/~jec/basics.htm
And that’s just the basics!
Ecuador
Has it helped them?
Just to wade in with my two cents worth, speaking as a banker though not a forex specialist. If there was one global currency and some countries started printing money right, left and center, you would get inflation not an unstable currency. The reason is that in order to have an unstable currency you have to have something to measure it against. The example of the strength of the US$ given that there are weaker contributers such as Alabama is slightly misleading, perhaps the Dollar would be stronger if Alabama wasn’t slowing down the economy? For a global currency to work you’d have to have a global central bank which was trusted and independant of government, such as the Fed is or the Bundesbank was. Since regulation of interest rates is a very very sensitive topic for states, the chance of getting a global currency soon are about the same as the chances of getting a global government. For a good example of what stands in the way of such a project, and the difficulties it may encounter once it gets started, look at the Euro.
There was a discussion on the related topic of adopting U.S. dollar as national currency, a few months ago… If I were a good person, I’d find the link.
There are a few countries that use the U.S. dollar as their currency, Ecuador being the newest. There are other countries (like Argentina and Hong Kong) that peg their currency to the U.S. dollar at a fixed rate (ARS 1 = USD 1, for Argentina; and HKD 7.77 = USD 1 for Hong Kong, for instance) that effectively doesn’t vary.
Back to the OP: If we all adoped one currency, there’d be lots of currency traders who’d be out of business, and would turn to a life of crime on the streets.
Seriously, any such move would certainly require that a world-wide body (U.N. or whatever) determine how much of the currency can be printed; no one in their right mind would let some of those petty dictators have control over how many global-currency-bills they could print up.
Actually, I think that we are slowly moving in that direction, although we don’t realize it… the almost universal presence of ATMs and the ability to charge on the same credit cards around the world mean that individuals don’t need to worry about currency conversations and exchanges as much as they used to. As purchase of foreign goods becomes more common, the importance of currency distinctions will slowly dissipate, IMHO.
It’s easy for non-economists to simply fail to see the issues when it comes to money and currencies. However it is important to realise that [list=1]
[li]An important task of any government is to make sure that boom times don’t happen uncontrollably and that cessions are over as painlessly and quickly as possible[/li]
[li]Drivers of booms and recession are not necessarily within the control of a region. The price of oil is a good example of something outside the control of a net importer of oil that will have a significant impact on their economy. Different regions will therefore experience recessions at different times, even if they all have the same currency.[/li]
[li]Stabilising this recession will partly happen from automatic economic checks. It will also be attempted by government via fiscal policies (i.e. tax-spending) and monetary policies (i.e. controlling the money supply). However:[list=A][/li]
[li]Automatic checks rely largely on the exchange rate automatically shifting to push the economy back into line.[/li]
[li]In the case of a world currency, control of the money supply would be out of the hands of a single nation. Furthermore, interest rates (a method of controlling demand) would also be beyond control.[/li]
[li]Fiscal policy as a counter to recession is all but useless without monetary policy to back it up.[/list=A][/li]
[li]The result of all this is that governments have lost the ability to ease their countries through boom and bust times.[/list=1][/li]
I’d also like to reinforce the point made earlier about inflation. Inflation is directly linked to the money supply. If some crackpot decides suddenly to print 50% more money than there was previously, expect to see inflation rise to 50%.
[/quote]
Saying all this, I can hear the questions now: Why does a single currency work in the US and why are European countries seeking to develop the Euro?
[ul][li]In the US there is absolute freedom of movement. This means that if one area is in recession, workers could (in principle) just up and move to an area not in recession. This is a natural way of easing that region out of recession and preventing the prosperous region from getting out of control. Further, the economies across different states is not that different, at least in comparison to with, for example, an African country.[/li]
[li]European countries seeking to join the Euro must meet strict convergence criteria. This means that on joining their Economies ought to be synchronous. Furthermore, developed western continental European countries have similar economic cycles anyway.[/li]
Note that Europe also guarantees free movement in order to try to replicate the US’s labour-movement balance to recession. We can expect this particular guarantee to be much less successful than in the US however, due to language barriers.[/ul]
So the dollar and the Euro are actually two examples of how careful you must be in order to attempt a widespread currency. In fact I note that in my country (UK), we find it difficult enough coming up with an economic policy that benefits all of this country. (See the current thread in GD, “Can anyone think of a good reason why Britain should join Europe?”)
To summarise - expect any world currency to be a long, long way off.
CKDextHavn - Your point about money = credit cards etc is well made. However, the currency ‘electronic money’ is denominated in is still an existing currency, not a generic “VisaDollar”.
regards,
pan
Those interested in this thread might also check out the discussion of Cecil’s column on central banking.
If you are searching for material on this topic, try “optimal currency areas” as a search term.
Crudely speaking the benefits of having your own currency are [ul][li]revenue from the right to print money (seigniorage)flexibility in dealing with shocks outside your system.[/ul][/li]The downside is that those undertaking cross-border transactions face higher costs, both in terms of changing from one currency into another and the sovereign risk that government behaviour might change the value of transactions. This is a cause of some inefficiency
Having your own currency means your economy can adjust via the exchange rate as well as wages, prices and fiscal policy within your economy. The end result of the adjustment process is liable to be similar, but you may get there via a less painful route.
From a recent survey paper on the subject:
As others have said, in the case of Equador they have decided that they are incapable of self-control and are to use the US currency as a substitute for their own competence.
picmr
Sorry, the first part of that quote should be “The benefits of currency union will be greater the greater…”