Keep in mind I snoozed my way through Economics 101 in college…
If most of Europe can unite and use a single currency, why can’t they extend the principle to envelop the entire world? Is there any roadblocks for having all countries use the Dol-yen-ro as their currency?
IIRC, a global common currency would remove a government’s ability to control its monetary policy. Any given national economy has its natural highs and lows, and they do not naturally coincide across nations. They are able to adjust to these highs and lows by adjusting interest rates to either stimulate or slow the economy. If there were a single currency, they would no longer be able to do that. Here’s why:
Let’s assume the interest rate was low in one country, because they are trying to stimulate the economy, and high in another, because they want to slow it down a bit (to prevent high inflation). Anyone who wanted to borrow money would do so in the low-interest-rate country (LIRC) because it will cost less. Anyone who was investing would want to do so in the high-interest-rate country (HIRC), because they can make more money there. Eventually, all the money would be gone (borrowed) in the LIRC and there would be a massive surplus in the HIRC. Because there is no demand for the money in the HIRC, interest rates would naturally drop. Because there is massive demand for money in the LIRC, the interest rate would rise. Eventually, the two would meet equilibrium. Thus, neither government actually has control over its monetary policy.
I suppose I also should mention that this scenario doesn’t carry to different interest rates between different currencies. There is risk in borrowing in one currency and converting it to the currency you need. In the event that the value of the domestic currency drops in relation to the borrowed currency, you are going to be paying back more than you needed to, thus losing any possible savings, and perhaps losing far more.
Today, I can go into my local store and buy a loaf of bread for 89/100 of a US dollar.
If suddenly the currency that I am using is also being used to prop up shaky economies in different nations, the odds are good that my dollar will suddenly lose a lot of purchasing power here, and gain a bunch in Slumovia.
I don’t know for sure, but this strikes me as a bad idea. Eventually I forsee a time when the world uses only a handful of currencies (The dollar, the Euro, the Yuan and whatever takes prominence once Africa stablizes, I imagine). This will only happen when all the participating states are stable and functioning.
While it could happen (and has begun with the Euro), I don’t think it will last. The minute any one of those nations begins to suffer any significant economic slump, the others will drop it like a hot p’tayta. Given that economies don’t tend to experience their highs and lows in unison (over any kind of long term), it is only a matter of years, and not many at that.
Note that a few countries have adopted the US dollar as their own currency. I recall Ecuador off the top of my head. This trend will probably accelerate over the next few decades until almost all 3rd world countries are using dollars/euros/etc.
A global economy is forming, but it is a very gradual process.
This is incorrect. As long as the US retains control over its monetary policy, another country using USD as a currency would have no effect on the purchasing power of the United States. This is different from a unified world currency, where no one country would effectively have a monteary policy, but it would be undertaken by a Wold-Central Bank (probably).
Having a currency and control over monetary policy allows a country’s Central Bank to adjust in the event of external shocks. Think about it this way. If Slumovia (to use your fictional country) has its own currency, the Central Bank of Slumovia can increase or decrease the monetary aggregates through the interest rate if a decrease in economic activity is foreseen, or if inflation is expanding, etc. This is called monetary policy.
On the other hand, if Slumovia uses the US dollar as a currency, the Slumovian Central bank cannot increase the amount of money in circulation, since dollars only come into the economy from the US (or other foreing countries) as payment for exports, transfers for foreing aid or other ways that I won’t go into right now. Slumovia is not a member of the Fed and therefore has no control over monetary policy in the US, they are subject to the dollars they can receive only through trade or aid, in this example. Therefore, the US would go on their merry way making adjustments in the amount of money in circulation according to their own concerns and the Slumovians would have to either sell more stuff to the US or request more transfers of foreing aid in order to have more dollars. As you can see, there is no effect in the purchasing power of Americans, since they receive the goods and give dollars in exchange, and the Slumovians are subjected to monetary policy decisions from abroad. In this case, you would still go to your local store and buy your bread for 89/100 of dollar.
Monetary unification is different. In the case of Europe, for example, all countries decided to forego their individial monetary policies and place monetary policy decisions in the European Central Bank. In this case, it is the case that one of the member economies could be faltering, while the rest are doing well or viceversa. In this case, since monetary policy decisions would be taken for all of them together, an increase or decrease in interest rates would have an aggregate effect in the purchasing power of all the members, either through inflation or increased investment. In this case, you could say that the national economies which are doing well are temporarily “proping up” the ones that aren’t. Nevertheless, the same happens in the United States. Different states have different economies and different needs at certain times, but they all use the Dollar as a currency and they are all part of the Fed. Decisions are made by a committe that comprises all of the States, as the Committe in the European Central Bank encompasses all the member countries. This is not seen as a problem since the US is one country, and individual states chose to foregoe their individual monetary policies in order to have a unified monetary policy, although the United States might not be an optimum currency area. This means that perhaps it would be better to have different currencies in the Eastern and Western sections of the US, or for the Northern and Southern states, strictly from an economic and monetary point of view. I’ll try to find some references for the theory of optimum currency areas if you want.
As for the OP, I don’t think a world - currency would do any good, precisely because different regions are have different economic fundamentals and different needs at different times, but this doesn’t mean that countries are the best way to be organised from a monetary point of view.
States actually would benefit from using their own currency, depending on if you look at it from one given states’ perspective relative to anothers’. But the U.S. as a whole would suffer big time and the end result would be that every state would be eaten alive for lack of resources and strength of currency. So, what I am saying is that it does hurt the states individually, you just don’t realize it because they benefit ten-fold from having a solid national currency.
A one world currency implemented over time in say 30 years would destroy a lot of competitive advantages for bigger countries. It would be one big step away from Captialism, so, assuming no big wars, I doubt it will ever happen.
In other words–the lending rates all over the USA are determined by the central banks’ rates; there aren’t state banks that control lending rates within the state itself.
But, basically, you could say this debacle of international finance (one-world currency) has already occurred here. California’s dollars are propping up the dollars in Mississippi, etc. If each state still had its own currency (like colonial times), undoubtedly we’d see 1,000,000-unit bills given out as small change at some states’ currency exchange centers.
Of course, the economic disparity across the various states is not nearly as dramatic as that b/w the USA and some third-world nations, for example.
Since I haven’t read this argument yet, here is my two Eurocents worth.
Any modern currency system is not based on actual bullion but on trust and the premisse that the government/central bank will sensible control the volume of paper/metal money. Monetarians and Keynesians may disagree on the exact amount desirable (partly using the instrument of money printing/destroying for macro-economic policy purposes), but they are in agreement that there has to be some limit. For less scrupulous governments it is highly seductive to print additional money to make up for budget deficits. The effects of such a policy may show up only after a while, but are no less disastrous for that (see Germany 1920’s). Hence the central bank must be sufficiently disciplined.
If you want a world currency, you also must have someone control the printing of currency, i.e. a central bank. Barring a world government I do not see how all countries are going to agree on putting that much power in one organisation that no country directly controls. There are further problems in distributing possible profits from putting more currency in the economy, but I guess those are secondary to the premier question: who controls the central bank.
(that’s what you get for staying awake during Economy 101 )
The fact that some countries use U.S. dollars as currency does not change the above: they are counting on the U.S. Government having the discipline to keep a tight reign on the total amount of currency.
When the government issues two currencies, and demands that they both be par, the debased one will drive out the more valuable one. This is Gresham’s Law, one of the basic tenets of economics, and it applies here as has been alluded to above: If one country starts minting-n-printing to beat the band, knowing it is printing OUC (Official Universal Currency) and therefore on a par with the US Treasury and the Bank of England, its OUC will be easier to get and easier to spend, while being by fiat worth the same as American and British OUC, and so will become the most-used currency gobally because nobody has a say what currency they will accept (“This note is legal tender for all debts public and private, and don’t let me catch you saying different!”).
With the current system, a fiscally corrupt regime in, say, Somalia can’t really have an effect on the Greenspan Greenbacks in the US or the British Pound in the UK because in a system with no fiat, Gresham’s Law is inverted: Nobody wants to be paid in funny money (even though all money is equally hilarious, some of it happens to be valuable), so nobody will accept kopecks if they can get cents, or Pesos if they can get Pounds. Good money drives out bad when the fiat has been lifted.
Derleth says it better than I did, and in proper economic terms to boot. :o I wrongly assumed that you must have one central bank. Since no-one would agree on one central bank, each country would have its own, and then you’d see Gresham’s Law in operation (must weave that into conversation more often).
Well, that’s what you get for not getting an Economics major.
Although I agree with you in principle, I disagree with the statement that states in the USA would benefit from using their own curreny. States in the USA are artificial political units based on territoriality, and not necessarily comprise optimum currency areas. For example, it could be that New York City should have a different currency than the rest of the State of New York if only economic considerations were taken into account. On the other hand, several states in the Mid-West for example, could effectively form an optimum currency area, since economic activities are similar within among them. This is only an example and is not based on any studies that might exist, but it illustrates the point.
It could also be that an optimum currency area could comprise territorial areas that were far appart if economic activities undertaken placed them within an optimum currency area. In other words, it could be that California and New York City should have a currency all of their own, while Washington State and the rest of New York City should have another one. The same might apply to different countries located in different continents. As I said, further research into Optimum Currency Areas is required to back up these claims, but theoretically it is possible.
it does apply to the individual U.S. states, or at least U.S. regions. Many economists divide the U.S. into different economic zones as it is. It’s true that since we’re such a large country, it’s harder to come up with interest rates tailored for individual regions. As with all political issues, we muddle through on compromises (like whether gold or silver should back the dollar around the turn of the century.) But monetary policy is only one part of the overall economy, and only one of government’s tools. By having such a large, stable country, we have other ways to help pull lagging regions out of slumps, like a massive budget to spend on poorer states, lots of internal investment and lots of foreign money being invested here. The South used to be a totally export based economy, but the American government and American investors have poured money into the region for 150 years, helping to shape the regional economy into something very different. Now the South has one of the world’s largest GDPs when it is counted as a distinct economic unit. So fiscal policy matters too. And the presence of strong regions within a country can mean that when one region has a downturn, it’s not necessarily victimized by massive currency fluctuations; so again our size and our “anchor areas” can moderate downturns. Ultimaltely I think the inherent stability of a huge nation outweighs the cost of an imprecise monetary tool. Check out this article on how one economist divides the U.S. into regions, and how the regions are converging economically, not diverging. http://www.bea.doc.gov/bea/papers/kanepaper.pdf
There is something in economics called an “optimum currency area” theory – implying that currency areas can be too big or too small. Anyone know much about it?