23 February 2006

Growing Interest in Reducing Number of Currencies, Worldwide

Single Global Currency

Two recent newspaper articles in the Financial Times and New York Times have highlighted the need to reduce the number of currencies in the world.

On 17 January 2006, Benn Steil wrote the Op-Ed, "The Developing World Should Abandon Parochial Currencies". An excerpted paragraph reads,
"Today, the best option for developing countries intent on globalising safely is simply to replace their currencies with internationally accepted ones, namely the dollar or the euro. Latin America 's star economic performer in 2004 was politically volatile Ecuador , which grew at 6.6 per cent with 2.7 per cent inflation, the lowest in 30 years.. Ecuador dollarised in 2000. If the European Union were wise, it would change its policy on extending the euro entirely and offer to assist Turkey and others in adopting it immediately."

On 16 February, Danie Gross wrote "The Case for Fewer but Stronger Currencies", which begins as...
"OUTSOURCING isn't just a one-way street on which rich countries shift jobs overseas. In recent years, some developing countries have contracted out the work of setting monetary policy to the United States. Ecuador and El Salvador, in 2000 and 2001, respectively, abandoned their own currencies, adopted the dollar and placed their monetary policy in the capable hands of Alan Greenspan , then the chairman of the Federal Reserve.
When outsourcing involves manufacturing and software programming it is often endorsed by economists and condemned by populist political leaders. So, too, is the tactic of outsourcing of monetary policy — known as dollarization, or euro-ization. After all, noted Robert E. Litan, senior fellow at the Brookings Institute, "currencies are symbols of national sovereignty, and countries are reluctant to give them up."
And yet nations can impose enormous costs on their citizens when they take extraordinary efforts to maintain independent currencies. "Devaluations of currencies cost people their savings and bring on rapid inflation," said Benn Steil, a senior fellow at the Council on Foreign Relations and co-author with Mr. Litan of "Financial Statecraft" (Yale University Press, 2006). The two argue that the globe's mélange of 200-plus currencies, backed only by the faith of investors, is inefficient and dangerous. Many emerging economies, they say, would be well advised to swap their currencies for strong, stable, widely used ones like the dollar or euro...."

In response, I wrote to Mr. Gross the email below:

Dear Mr. Gross,

Thank you for today's column. Indeed, the case for fewer currencies is strong, and the logical conclusion of the trend is a single global currency. The remaining questions are When? and How rough will the transition be?

I'm writing a book, "The Single Global Currency: Common Cents for the World" which builds upon the work of the economists you cited. To several of them, I've sent copies of the current manuscript, which is attached. Publication is planned for early April.

With a single global currency, there will be no current account deficits and no currency crises and no need to retain foreign reserves and no transaction costs for foreign exchange. I estimate that the world will save approximately $400 billion per year in transaction costs and when the single global currency is implemented, the value of the world's assets will increase by $36 trillion.

Dollarization is one route, but its major disadvantage is political as Barry Eichengreen observed in your article. As the Eurozone grows, and as other monetary unions are created, as in the Arabian Gulf, the U.S. likely will feel pressure to formally expand the formal use of the Dollar. One possibility, for example, is monetary union with Canada and Mexico, and with that will come seats on the important Federal Reserve Committees. Many economists have considered such a union.

Perhaps a future column can explore the prospects for a single global currency? Can I send you a copy of the book upon publication? We won't be sending "advance" copies, but I could send a final .pdf file about 20 days before publication, if you would like.

If you have the opportunity to scan or read the attached copy, which is about 90% done, I'd be interested in your comments.

Very truly yours,

morrison


morrison bonpasse
President, Single Global Currency Assn.
P.O. Box 390, Newcastle, ME 04553 USA
207-586-6078
www.singleglobalcurrency.org

2 Comments:

Chad Lupkes said...

Morrison,

I've been reading your work, and the "World currency" article on Wikipedia. I've long been in favor of moving towards a stable monetary foundation for the globalized economy, and I've come to the following conclusions.

First, currency flux is a dangerous thing in a global economy because companies and individuals can't be sure what effect changes in that flux will have on what prices they pay or can charge across national borders. Different currency values create a barrier to trade that doesn't need to be there.

Second, most of the objections that you list on your website can be answered. Changing interest rates to cool or boost an economy is only one thing that could be used to take control of economic growth. Peter Barnes in his book Capitalism 3.0 describes a possible system of controlling growth by controlling the advertising tax rates in the media. If you want to boost the economy, you reduce the tax rate and advertising increases. If you want to slow things down, you increase the rate, advertising goes down and people don't buy as much. This type of control could be placed market by market without having any effect on interest rates charged to banks.

When countries peg their currency to the US Dollar or completely adopt the dollar as their own currency, do they have a seat opened for them on the Federal Reserve? Because the policies that are decided at that level affect Equador, El Salvador, Panama and the other countries, I believe they should have a voice in the decisions.

The question of a single currency name or diversified currencies all pegged to a central value doesn't matter much to me. Whether the US Dollar and the Canadian Dollar are used interchangeably or eliminated in favor of another type of currency is the real question, and I would choose allowing each country to have their own name, be it Dollar, Euro, Yen or whatever, but with fixed exchange rates. What is important is that the other economic factors are recognized, and that inflation put under control.

Here's a question. What if the amount of currency in the world was pegged to world population? If we said that the banks were allowed to print currency notes based on their population growth, what would that do to the money supply, and how would having a solid value foundation under that currency do to the global economy?

Anyway, I look forward to reading more.

Chad Lupkes
Seattle

7:13 PM  
morrisonbonpasse said...

Chad,
Thanks very much for your knowledgeable comments, which are addressed below.
1. Agreed. Currency fluctuations are risky and coping with them is a waste of time and money.
2. Agreed. There are others ways to manage the ups and downs of an economy besides manipulating the exchange rates.
3. Regarding dollarization, it has been, so far, a unilateral process for Ecuador, El Salvador and Panama. They have no voice at the Federal Reserve, which is unfortunate. From time to time, some citizens in Canada have considered whether to join the U.S. dollar in a North American Monetary Union, but the U.S. has shown little interest to date. When such a plan is seriously considered, the Federal Reserve would have to grant one or two seats, on its various boards, to Canada. The U.S. will begin such serious consideration when it realizes that the euro is surpassing the dollar in worldwide usage and as a reserve currency. Then, the U.S. will see its need for partners. Another alternative will be to simply merge with the euro and stop this senseless contest to see which currency is number one.
4. I agree that the name of the future Single Global Currency is not important in the financial sense, but it IS important for the process of gaining public acceptance and even support for a Single Global Currency. It's important that all the citizens of the world call their Single Global Currency by the same name, with allowances for local pronounciation and spelling. The europeans are dealing with this issue now.
5. I know little about how central banks control the actual amount of money in circulation, but it's complicated by the increasing use of electronic money which is never printed as currency. Basically, the banks control the money supply to what is needed by people and their corporations and governments to conduct their business. Fixing it to population growth seems too rigid. Hopefully, and as an aside, population growth in the world will stop and we may even see a decline in the world's population as the earth cannot support so many people.

1:46 PM  

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