Growing Interest in Reducing Number of Currencies, Worldwide
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,
President, Single Global Currency Assn.
P.O. Box 390, Newcastle, ME 04553 USA