Academics & Economists
The views below are presented in reverse chronological order
Summer 2004. “A global currency for a global economy” by Basil Moore in the Journal of Post Keynesian Economics.
Abstract…
When using national currencies in international trade, both flexible and fixed exchange rate systems pose a number of problems. The most important is a large deflationary bias on the global economy, as deficit countries are forced to try to attain a positive current account balance to protect their exchange rate. The author advances a Post Keynesian policy proposal for a common global currency, where exchange rates vanish and countries no longer have an external balance constraint. In order to move toward a common world currency, two approaches are considered: a top-down approach, consisting of a global central bank (or a small number of competitive regional central banks), which is politically unfeasible, and a bottom-up approach, consisting of blocs of countries that chose to dollarize or euroize. The paper proposes a dollarization/euroization plan for the global economy. This would enable economies to pursue expansionary domestic policies since they would no longer face an external balance constraint.
Hugo Narrillos Roux, Universidad Complutense, Madrid
Hugo’s article, “Divisa Unica y Establidad Económica Mundial”, is in Spanish, but he has provided an abstract in English with the translated title, “Single currency and worldwide economic stability”. The paragraph below comes from the abstract.
"In this essay we try to show that the pro arguments weigh more than those against, and we give the 10 characteristics we think our SGC should have. Maybe one of the main outcomes of our study is : in order to reach a SGC it is compulsory that the economies involved go through a very deep economic integration and, in order to do so, it is compulsory to establish supranational bodies to overlook those processes." (5 July 2004).
Robert Mundell His Web Page – “World Currency”
"A few economists have recently recognized the merits of and need for a world currency. Whether that can be achieved or not in the near future will depend on politics as well as economics. But it is nevertheless a project that would restore a needed coherence to the international monetary system, give the International Monetary Fund a function that would help it to promote stability, and be a catalyst for international harmony. As Paul Volcker has put it, ‘A global economy needs a global currency.’
The benefits from a world currency would be enormous. Prices all over the world would be denominated in the same unit and would be kept equal in different parts of the world to the extent that the law of one price was allowed to work itself out. Apart from tariffs and controls, trade between countries would be as easy as it is between states of the United States. It would lead to an enormous increase in the gains from trade and real incomes of all countries including the United States.
Another dimension of the benefits from a world currency would be a great improvement in the monetary policies of perhaps two-thirds of the countries of the world. The benefits to each country from a stable currency that is also a universal currency would be enormous. If the whole world were dollarized, there would be a common inflation rate and similar interest rates, a considerable increase in trade, productivity and financial integration, all of which would produce a considerable increase in economic growth and well-being." (copied from Professor Mundell’s website, 040627)
Also, see his speech, “The International Monetary System and the Case for a World Currency” in Warsaw on 23 October 2003, at the Leon Kozminski Academy of Entrepreneurship and Management.
Ralf Dahrendorf, in article “A Definition of Democracy” in the Journal of Democracy, October, 2003, page 103, wrote:
…"In the long run, I even think that we will see what Nobel prize-winning Economist Robert Mundell has predicted: a single global currency in the not-too-distant future…."
Ralph Bryant, in his 2003 Book, "Turbulent Waters"
In the chapter "Don’t Ask Too Much Too Soon, But Don’t Be Too Timid Either!" at pages 413, 414, he wrote:
"…The crystal ball is much too murky to reveal the multiple innovations in communications and financial technology that are likely. We can vaguely discern that the number of separate national currencies and separate exchange rates still in existence might be much smaller. The idea of a few common currencies for large regions – conceivably, even a single common currency for the entire world – might be seriously debated by policymakers as well as academics…
Our grandchildren’s grandchildren, for example, might well be discussing the possible evolution of a world central bank and the political independence of that bank from supranational federalist institutions and from national governments."
Christopher H. Budd
“International Net Worth Transfers; Exploring the Concept of a One-world Currency”
"This essay explores the prospects for a universal currency based not on economic nationalism or superpowerdom but on global economic partnership. It argues that, although geopolitically challenging, this is the ‘true’ logic of modern economic history and that the same logic leads to the concept of inter-country net worth transfers as a means for achieving what previously was the task of the gold standard and pegged exchange rates, namely, economic equilibrium between the various parts of the world economy" (unpublished, March 2004. Send comments to Christopher Budd, one of the signers of our letter to the OECD member Finance Ministers in 2003)
Philip Arestis and Santonu Basu
“In recent years financial liberalization, although not necessarily able to deliver a higher growth rate or for that matter to bring efficiency in the financial sector (Arestis and Demetriades, 1997), has brought a new twist in the process by introducing a highly politicized term, that of financial globalization. The term financial globalization refers to the process by which financial markets of various countries of the globe are integrated as one. We wish to argue that although financial liberalization is a necessary condition for financial globalization, it is not a sufficient condition for it. The introduction of a worldwide currency managed by a single international monetary authority is the sufficient condition.” This quote is from the Abstract of their article, “Financial Globalization: Some Conceptual Problems” posted 5/5/03, with Social Science Research Network, Social Science Electronic Publishing.
John Edmunds and John Marthinsen
“We are now at a point at which serious questions are being raised concerning the need for independent national currencies, but such has always been the case. The main point in this book is that enormous amounts of financial wealth can be created or destroyed when countries make choices about having national currencies. They can continue having national currencies, choose to merge their national currencies into supra national currencies, or adopt an internationally recognized currency such as the dollar, euro, or the yen. This decision, which most countries took implicitly or avoided in the past, is now a more conscious, well-publicized decision…. In most countries, the electorate is a long way from being convinced that the national currency should pass into history…. The world financial economy may be reaching a similar watershed, and the balance may be swinging in favor of currency unification and supranational currencies.” Wealth by Association, Global Prosperity Through Market Unification, Praeger, pp 214-217, 2002.
Myron Frankman
“The acceptance of a single world currency requires the renunciation of many nationalist pretensions, both symbolic and real. Whether the discussion relates to free trade the role of markets exchange rate arrangements, or other economic policies, unless there is serious democratically controlled global policy innovation, the outcome will likely be a situation where the devil takes the hindmost, as is currently the case. Economic management for a stable world that does not threaten its own survival requires us to begin in earnest on the next stage of institutional innovation: the reality of a world money and the institutional framework that goes with it. Annals of the American Academy, “Beyond the Tobin Tax: Global Democracy and a Global Currency.” Vol. 581, May, 2002.
Piotr Konieczy, Honors Thesis at the University of Northumbria at Newcastle, U.K.: “Development of International Cooperation in the Areas of Politics, Economy and Security” April, 2002.
He wrote at page 16:
Another important question concerns the issue whether one global currency could ever be introduced. Already, certain countries have phased out their own currencies and replaced it with other (dollar) or joined with other countries in monetary unions (Euro being the most prominent example). Many economists predict that before the process of currency consolidation will be speeding up and at end of 21 st century there will be no more then 3 global currencies (the most probable are dollar, euro and yen). Some of them go even further: Paul Volcker, former chairman of the Federal Reserve Board, predicts that ‘ we are going to end up with one worldwide currency within the next 100 years. ‘ This view is shared by Robert Alexander Mundell [2002] who wrote that ‘The best path to international monetary reform leads through a new international currency called the INTOR based on a G-3 monetary union platform, possibly linked to gold. ‘ We cannot predict if and when new Bretton Woods and single global currency will be introduced, although when many economists, including Milton Friedman, leader of Chicago monetarist school, Richard Moore, global head of foreign exchange in Citibank and Bernard Conolly, chief economist at AIG seriously consider this at least a matter for serious discussion, we can be certain that it will have a profound impact on the future economy."
Robert Mundell
OTTAWA — Canadians should think bigger than working for a single North American currency and begin building consensus toward a single world currency, says Robert Mundell, the Canadian-born Nobel Prize-winning economist. “A global economy requires a global currency,” Mundell said Thursday during a speech at Carleton University’s Sir John A. Macdonald lecture series. “The optimum currency area is not North America, it’s the world.”
During his 100-minute speech, Mundell, an economics professor at Columbia University in New York, delved deep into economic history to explain how the emergence of the United States led the world away from the gold and silver standards of the 18th and 19th centuries, where exchange rates were essentially fixed, to today’s world of mostly flexible currency valuations.
Using his concept of optimal currency areas — a theory he developed in the late 1950s that examines the geographical area in which a single currency would be most effective — Mundell said a North American currency would be largely impractical and that the best thing for the world would be to gravitate toward a single currency.
“I am not an enthusiast of a single currency (for North America) that is different from the U.S. dollar,” Mundell said. He said that the U.S. would never agree to give up its dollar, which was the dominant currency of the 20th century and will probably retain that position in this century.
Instead, Canada should fix the loonie’s value to the U.S. and begin urging other countries, notably members of the Asia-Pacific Economic Cooperation forum, to do the same. He said with APEC, which would include China, Japan, Singapore, Canada, Mexico, Peru and Chile, all pegged to the U.S. dollar, more than half of the world’s economic production would effectively be under one monetary system. Meanwhile, in Europe, the Euro would continue to stabilize and would eventually be predictable in its valuation when compared with the U.S. dollar as well." (April 05, 2002, From Halexandria)
February 2002
Robert Mundell. In a Columbia Discussion Paper: “Currency Areas, Volatility and Intervention”
Excerpts…
The classical economists had an unequivocal answer. were virtually unanimous in their support for a common unit of money. From the standpoint of fulfilling the functions of money as unit of price quotation, unit of contract for current and deferred payments, medium of exchange and store of value, a single world currency would be the first best solution. Economists like John Stuart Mill deplored the nationalism that made it impractical: “…So much of barbarism, however, still remains in the transactions of most civilised nations, that
almost all independent countries choose to assert their nationality by having, to their own
inconvenience and that of their neighbours, a peculiar currency of their own.” 1
For most of history currency arrangements have coincided with political units. The larger the political unit the larger the currency area. The existence of multi-nation empires had the side benefit of reducing the number of currencies. Twenty centuries before the euro, in the age of Caesar Augustus, Roman Europe had a common money. If the world were ruled by a single power or a world government today, a world currency would be all but inevitable. If the currency were managed properly it would be an ideal situation…
….Other things equal, the bigger the currency area, the stronger and more efficient it is. The most efficient currency area is the entire world economy just as the most efficient alliance is the entire world….
…Fortunately, the euro has produced a “demonstration effect” elsewhere and its lesson has not been lost in Latin America. The question: why, if it is good for eleven European economies to have fixed exchange rates and indeed a single currency, do international monetary officials keep insisting that the “peripheral countries” stick to flexible rates? Or why, if it is good for fifty American states, several of which have economies far larger than those elsewhere, to have fixed rates and a common
currency, why should the rest of the world be deprived of the advantages of a common international currency?…
…It is easy to see the advantages of fixed exchange rates or a single currency for the world economy.
If the dollar-euro and yen-dollar rates were fixed and a common price index for the combined area was kept stable, the rest of the world would have the attractive option of joining a currency area comprising more than 60 per cent of world output. The world economy would be back to the Bretton Woods arrangements (but without gold). There are, however, two problems in getting to that solution: a convergence problem and a management problem. The convergence problem is getting
price levels, interest rates and exchange rates in line with one another throughout the currency area.
The management problem is setting up the institutional structure for managing the monetary policy of the currency area.
To fix ideas, let us start with the end game. Skipping the convergence problem, suppose that these “AJE” economies have a single-currency monetary union. The three central banks merge and control the high-powered money supply of the three economies according to the need for price stability in
the union as a whole defined in terms of a common index of prices. 15 There will now be small changes in the local inflation rates due to differences between the local and AJE indexes. Except for trade impediments prices will be the same everywhere in AJE as will interest rates on default-free fixed-income securities. Different growth experiences will be accommodated by differentials in money-supply growth: fast-growing regions will attract more money than slow-growing regions.
This setup is a situation where the conditions are ripe for smaller countries 16 outside AJE to fix their currencies to the AJE currency. World monetary union would follow if all countries outside AJE took this path and AJE itself was successful in keeping its price level stable.
In this monetary union, there is of course no role for exchange rate changes inside AJE; in a singlecurrency
monetary union all exchange rates are unity. But no exchange rate changes are necessary.
The typical sources of instability are absent. Governments are forced to keep debt levels sustainable and therefore budgets in balance in the long run. There would be no destabilizing capital
movements; in a common currency area capital moves to where its yield is highest, which, provided tax systems were efficient, would be where capital is most productive. Of course “asymmetric shocks” can occur as changes in demand and supply affect one area differently from the others, but
exchange rate changes are almost never the right way to deal with them. Terms of trade shocks, for example, cannot be overturned by exchange rate changes. While real income is lowered by an adverse terms of trade shock, devaluation only compounds the misery by adding inflation to it. Once
convergence has taken place in a monetary union, it is hard to find any economic reason for breaking it up.
What holds for AJE also holds for Non-AJE but with a difference. The existence of different currencies introduces the possibility of exchange rate changes, the emergence of speculation and different interest rates. A country could achieve complete safety by adopting the currency of AJE….
…The world currency problem could be solved by creating a world central bank producing an international asset backed by reserves of dollars, yen, euros, and gold. Some such arrangement was proposed at Bretton Woods but fell afoul of political difficulties. A pattern recurrent in the history of
money is that the dominant country rejects meaningful monetary reform, probably because it involves power-sharing and a weakening of its monopolistic currency position. But it is not a healthy sign that the only option for smaller countries is to fix their currencies to one of the Big Three, a situation reminiscent of the monetary colonialism of the 19th century. A multilateral solution based on a world central bank and a world currency would involve some power-sharing as well as a fairer
distribution of international seigniorage. The advantages of such a system would be so great that all 12 countries could gain from it….
….Not much can be done if the leaders of the major currency blocs insist upon policies that lead to volatile exchange rates. But if agreement could be achieved on the desirability of fixed exchange rates among currency blocs each of which have subdued inflation, it would not be a difficult step to go the extra mile and build around the G-3 currencies a world central bank and an international currency that would be the property of all nations.
Robert Mundell
“It is not just an academic idea. People like Paul Volcker have argued that a global economy needs a global currency. Not a single currency, but a parallel international currency that can be used by everybody.” New Perspectives Quarterly, vol 20, #1, Spring 2002 (but the reported forum at the Milken Institute was in September 2002
Robert Mundell
“There is no doubt that a single currency monetary area offers important advantages over a monetary area in which multiple currencies remain. The single currency imposes quick adjustment day in and day out and does not leave time for large imbalances to build up. It rules out speculation about intraunion exchange rate changes. It is also true that the single-currency approach is more difficult to reverse. Moreover, transactions costs and information costs of trade in a single-currency area are much less than in a multicurrency union. These great advantages of the Delors-Masstricht approach must be acknowledged. As it is turning out, the approach adopted sems to have had unparalleled success. It has shown that some of the leading countries of Europe have lost the ‘barbarism’ noted by John Stuart Mill (1848) [see below] ‘that almost all independent countries choose to assert their nationality by having, to their own inconvenience and that of their neighbours, a peculiar currency of their own.’ It is quite another question, however, whether the European model will travel well. Without a complementary development of deeper political integration, other emerging currency areas would be better advised to exploit the advantages of credible currency-board-like arrangements centered around a hegemonic leader or else a parallel-currency arrangement linked firmly to one or more of the largest currency area.” “Monetary Unions and the Problem of Sovereignity”, in Annals, Vol 579, pp 123-152, 2002.
Robert Mundell
“One of the great puzzles of the modern world is why we have such enormous fluctuations in exchange rates among the major currency areas within which there is comparable price stability!… Elsewhere [Wall Street Journal, 3/3/2000] I discussed the possibility of a G-3 Monetary Union, not on the pattern of EMU, which is a single-currency monetary union, but with dollars, euros and yen remaining in existence. The formation of such a union would follow the same procedures adopted for creating the 11-currency monetary union of the EMU, but before the introduction of the single paper currency notes…. In the post-Cold War era, the three major currency areas could provided the leadership not only in mitigating harmful exchange rate instability among themselves but in asserting a leadership position with respect to the international monetary system- culminating, perhaps in a movement to create a new truly international currency…. The case for a world currency is an extension of the same logic that makes a national currency preferable to decentralized provincial currencies.. The advantages of a national currency over multiple provincial or municipal currencies are so obvious that older generations of economists took them for granted…. ” Currency Areas and International Monetary Reform at the Dawn of a New Century”, in Review of International Economics, 9(4), pp 595-607, 2001.
22 October 2001. ” ‘Father of the euro’ now eyes an Asian currency” from Economic Times, India.
Excerpts….
ASIA should aim to create a common currency based on the U.S. dollar and the first step toward that goal could be the dollarisation of Hong Kong, according to Nobel Prize-winning economist Robert Mundell.
Known as the father of the euro for his work on the theory of optimal currency areas that underpins the single European currency, Mundell restated his belief in the need for a world currency based on fixed rates between the dollar, euro and yen.
But even if the proposal for a global monetary union remained a dead letter, Asia could draw on Europe’s experience and set out on its own regional path toward currency stability….
Robert Goldfinger
“This is a polar opposite of private currency: it postulates the emergence of a single global currency. This would be a logical consequence of a broad globalisation trend, a monetary translation of deepening economic integration. The example of the Euro demonstrates, even if some question how convincingly, the feasibility of a single currency in a multinational framework. It is interesting to note that another Nobel Prize winner, Robert Mundell, who played a major role in providing the conceptual underpinning for the euro, has more recently advocated creating a composite global currency, initially backed by gold. Thus, from the euro, the dollar and the yen could emerge the geo….. It is probably for this reason that this alternative has had a considerably lower profile than the private currencies one. However, over the next ten to twenty years the question of a global currency is more than likely to return to the top of the public policy agenda.” MONEY AND ECONOMY: ELECTRONIC MONEY AND INTANGIBLE ECONOMY by Charles Goldfinger Managing Director, Global Electronic Finance and Chairman, Financial Internet Working Group (FIWG). Opinions expressed in this paper do not constitute an official position of the European Commission or FIWG members. 2000
Winter 2000. Harvard Asia Pacific Review. Counterbalance: The Euro in Asia by Ramkishen Rajan.
Excerpts…
Asia, therefore, needs to intensify efforts to establish economic self-help mechanisms to deal with the current crisis and avoid future problems. ..
Asian Monetary Union
T oday, discussion abounds in Asia about the merits
of maintaining different exchange rate regimes, as well
as the costs and benefits of restraints on capital flows.
In this climate, it may be useful to pay close attention
to the European experience with monetary union. Indeed,
following the successful introduction of the euro and the
economic turbulence of the Asian financial crisis, ASEAN
agreed to study the feasibility of a common currency and
exchange rate system. There has also been popular discussion
about the economic and political feasibility and desirability
of forming an Asian Monetary Union (AMU) similar to the
EMU…
To be sure, the conceptual framework within which the costs and benefits of the EMU have been discussed would be just as pertinent in analyzing the feasibility of an AMU, or even global monetary union….
8 November 2000: IMF Panel (transcript) “One World, One Currency: Destination or Delusion?”
Max Corden: “What about the world? What will happen? Mainly because of the political constraints, the fact that countries will want to do their own thing, I don’t really see a world currency any time soon. I don’t think it’s feasible. I don’t really see how the adjustment burdens could be coordinated, or that there is a willingness to do that.” … The one argument that is qualitatively overwhelming is that it is a great advantage for Maryland and California to have one currency for trade and capital movements. Even if you can’t measure it, it can only be positive. It’s an inconvenience to have to change money and so on. And that’s the sort of thing that Bob Mundell bases all of his arguments on.”
Paul Masson: “So, to sum up, I see a world where currency use is increasingly dictated by private choice, not government fiat, where two major currencies – the U.S. dollar and the euro – will coexist, perhaps uneasily and in competition with each other, but there will also remain a slew of minor currencies. But I would say that the number of currencies will matter less because individuals will have greater options for hedging or choosing the currency in which to transact and will have less need to hold cash balances and hence are less likely to suffer the confiscation by inflation engineered by an irresponsible central bank. So, in conclusion, I think that the “one currency or many” question may be come somewhat less important than it may have been in the past, because there will be further potentially radical changes in the national use of moneys….. I’d just like to return in the one minute to Max Corden’s question which I think is the crucial one–is it desirable to have a single world currency? I would say the answer must be related to the question is it desirable to have a monetary policy that we can work with and effect economic activity and other things that are important. If one doesn’t believe monetary policy has those effects, clearly, there is no value, but I think most people do, and so there is some value to having the independent monetary policy that separate currencies allow.”
Bob Mundell: “But I don’t know anyone who has actually advocated a single currency for the world….. I couldn’t imagine a world democracy with a single currency. I couldn’t imagine that system. I don’t want to quibble with that language there, because I think it is a wonderful idea to raise consciousness about the importance of a world currency and I have been an advocate for a long time of a world currency, and my 1968 testimony to the Joint Economic Committee contained a plan for a world currency. And of course, I regard regional currency developments like the euro as sort of a second-best process. Whenever there is a political handle to latch on to, that gives some additional focus.
I think it is more interesting to talk about not “one world, one currency,” but “one world, one currency area,” defining a currency area as a zone of fixed exchange rates. I would define the gold standard not as a single currency but as a single currency area….
I think that if we think in terms of a world currency, there is no need whatsoever to have a single currency. I think you could only do that with a complete rupture or change in political circumstances – maybe if we were invaded by Mars, they might impose on us a single currency, but each country would still want to keep its own currency.
Let’s start at the end point. Suppose we did have a single currency in the world, a single currency maybe produced by the IMF, or it could be the U.S. dollar. Let’s take the U.S. dollar because that’s a little closer to reality than the IMF having a currency that covered the world. Suppose the U.S. dollar covered the whole world but that each country was a sovereign country. The whole world is dollarized. What would be the upshot of it? Would that be a stable relationship? I think not. It wouldn’t be stable because every country outside the United States would then want to go and create its own currency and gain the seigniorage from doing so.
You don’t need to have a single currency in the world. Every country can have their own currency in the world, and you can still have the benefits of a common currency because you are all using the Canadian dollar, the Mexican dollar, et cetera, et cetera.That would be a solution that would imply, because it is the U.S. dollar, some kind of domination, and that might not be acceptable to the world. Canada doesn’t want to dollarize with the U.S. dollar. Mexico doesn’t want to dollarize with the U.S. dollar. But they can gain the benefits from this to a large extent, or different dimensions of it. There are always different dimensions of currency unification, like the transparency of pricing, a common unit of account–better monetary policy is, of course, the ultimate payoff from it….
Well, we move forward to the question of what countries need to do when they form a currency area. Europe’s example has given us a lot of good lessons for it. There are five things you need to do when you form a currency area, and Europe has done all of these things. You need first of all to have a common target for monetary policy–it may be an inflation target. It has to have a common measure of inflation–EUROSTAT has created the Harmonized Index of Consumer Prices–you have to have the same index measuring inflation in each country. Then, you need to lock exchange rates, and then you need a common monetary policy, and then you need a system for dividing up the seigniorage.
That provides the framework, the ingredients, the tool kit, for creating a currency area. In order to do that, when you lock exchange rates, the countries that lock exchange rates don’t have any other monetary policy except that dictated by the head authority of the whole area.
So I think that there is a world of difference between a three-currency and a one-currency monetary union. Now, any kind of monetary union has to have either a single monetary policy or a coordinated monetary policy.
January 2000.
Paul Volcker
“Paul Volcker said in January this year that ‘if we are to have a truly global economy, a single world currency makes sense’. However, he immediately added that he would not live to see this single world currency” Source: Ms Sirkka Hämäläinen, Member of the Executive Board of the European Central Bank, at conference at European Institute, New York, September, 2000, in speech titled, “The euro and the dollar – new imperatives for policy co-ordination”. In Robert Mundell’s 2001 article in the Review of International Economics, above, he cites a similar statement, “As Paul Volcker has aptly put it, ‘A global economy needs a global currency.’ Why not?”
21 May 1999. “Testimony of Judy Shelton” before
BEFORE THE UNITED
STATES HOUSE OF REPRESENTATIVES
COMMITTEE ON BANKING AND FINANCIAL SERVICES HEARING ON EXCHANGE
RATE STABILITY IN INTERNATIONAL FINANCE
Excerpts…
Currency chaos has been a major factor in recent global financial turmoil. Establishing an orderly international monetary system would be a tremendous boon to global financial stability and would contribute significantly to productive economic growth around the world….
Regional currency unions seem to be the next step in the evolution toward some kind of global monetary order. Europe has already adopted a single currency. Asia may organize into a regional currency bloc to offer protection against speculative assaults on the individual currencies of weaker nations. Numerous countries in Latin America are considering various monetary arrangements to insulate them from financial contagion and avoid the economic consequences of devaluation….
As Prof. Robert Mundell of Columbia University has observed: “The only closed economy is the world economy.” The world economy today is rapidly becoming a global common market. As we have seen in Europe, the sequence of development is (1) you build a common market, and (2) you establish a common currency. Indeed, until you have a common currency, you don’t truly have an efficient common market….
Remember that the ultimate purpose of floating rates was to stabilize exchange rates. The goal of any monetary system is to provide a stable frame of reference for evaluating the relative appeal of goods and services, or investment opportunities, wherever they may be available. When a premium must be paid to compensate investors for the risk of foreign exchange loss, or where competitive depreciation permits some sellers to underprice their goods at the expense of others, markets are compromised. Financial instability results when market participants recognize that currencies do not accurately reflect the true value of competing products and investments in the global marketplace…
Ideally, every nation should stand willing to convert its currency at a fixed rate into a universal reserve asset. That would automatically create a global monetary union based on a common unit of account. The alternative path to a stable monetary order is to forge a common currency anchored to an asset of intrinsic value. While the current momentum for dollarization should be encouraged, especially for Mexico and Canada, in the end the stability of the global monetary order should not rest on any single nation….
Barry Eichengreen and Nathan Sussman
“How then is the international monetary system likely to look in 2020, when the question is seen from this vantage point? The historical perspective developed here does not suggest a high likelihood of radical changes in the system, such as a single world currency or three regional monetary unions centered on the dollar, the euro, and the yen…. This vision of the international monetary architecture in the year 2020 suggests that the currency conundrum will not be solved by some grand design adopted at a new Bretton Woods Conference. It will be solved in a market driven fashion, with arrangements evolving in different ways in different parts of the world. Looking even further down the road, it is possible to envisage more radical outcomes. But this is something for future generations to write papers about.” IMF Working Paper “The International Monetary System in the (Very) Long Run”, 2000.
Jeffrey E. Garten, Dean of the Yale School of Management and former Assistant Secretary of Commerce.
In a New York Times Op-Ed, “Needed: A Fed for the World “, Garten wrote, "This is what now must occur on a global scale. The world needs an institution that has a hand on the economic rudder when the seas become stormy. It needs a global central bank….
Effective collaboration among finance ministries and treasuries is also unlikely to materialize. These agencies are responsible to elected legislatures, and politics in the industrial countries is more preoccupied with internal events than with international stability.
An independent central bank with responsibility for maintaining global financial stability is the only way out. No one else can do what is needed: inject more money into the system to spur growth, reduce the sky-high debts of emerging markets, and oversee the operations of shaky financial institutions. …"
(New York Times, 23 September 1998)
James Tobin
"In his keynote address, James Tobin of Yale University said a fixed exchange rate is intrinsically fragile, and it was hard to understand why developing countries still clung to fixed or pegged exchange rates. He scoffed at recurring nostalgia for a fixed rate system, countering that floating rates should be credited with accomplishing economically desirable revaluations without currency crises. A single global currency might offer a viable alternative to the floating rate – but not soon, and not without its own problems, according to Tobin." ("IMF Survey", Volume 27 Number 9, May 11, 1998)
Robert Guttmann as presented by James K. Galbraith in Book Review.
Review of: How credit-money shapes the economy, The United States in a global system by Robert Guttmann: Galbraith, James K. (Reviewer) Two penultimate chapters are devoted to the question of institutional monetary and economic policy reform. As Guttmann writes, “we confront the issue of international monetary reform without any of the known options having proved themselves to be workable in the long run” (p. 385). But he makes the case, anyway, for a new global money. In line of descent from Keynes’ Bancor plan, the SDR, and the ECU, Guttmann proposes a “supranational credit money” (SNCM) that would work provisionally as the “international extension” of national credit monies. In contrast to Bancor and SDRs, however, SNCM (essentially, lines of credit issued by an international monetary authority) would be used for all current and capital account transactions. Guttmann envisages SNCM as a first step toward the adoption of a single global currency." Journal of Economic Literature; 33(4), December 1995, pages 1989-1990.
Robert Guttmann
"International monetary reform is necessary, because the system we have now in place is flawed. The use of national credit-money as world money is an inherently unstable arrangement. On their own, dollars, yen and other key currencies represent fully effective money only at home, within the country of their issue." (p 427).
[As he wrote his book in 1994, before the 1999, 2002 adoption of the euro he did not have the advantage of seeing its success in collapsing 12 currencies into one. As an interim step toward a single global currency he proposed a new form of credit-money, the SNCM (SupraNational Credit Money) and wrote] "Rather than reaching for the most difficult and utopian version, the introduction of a single currency for the entire world economy, it would be much more realistic to conceive of this new form of world money [the SNCM] as used soley in international transactions between countries. This kind of arrangement allows national currencies to exist but confines them to strictly domestic circulation for transactions within their countries of issue. This was precisely the basic idea behind the plan Keynes put forward at the Bretton Woods Conference. But, unlike his Bancor proposal, the supranational credit-money (SNCM) of the future should function fully as money. (p 431)
"…national central banks will keep reserve accounts with an international monetary authority (IMA) which issues the SNCM, accompanied by equvalent domestic currency payments to and from individuals….. In sum, international payments are made by and to individual market participants in their own currencies, complemented by transfer of SNCM-denominated funds between countries." (p 432).
"Our SNCM proposal, even though surely a radical break with existing international monetary arrantements, may itself be only an intermediate stage on the journey toward the ultimate level of monetary integration – the adoption of a single currency for all (domestic and international) transactions wordwide. We still have a long way to go before this idea can become reality. But eventually, perhaps in a generation or two, the globalization of economic activity may have reached such a degree as to make national currencies obsolete." (p. 444)
HOW CREDIT MONEY SHAPES THE ECONOMY – The United States in a Global System, by Robert Guttmann, 1994, M.E. Sharpe.
James Tobin – 1994
"Tobin, an economist at Yale, issued a proposal in 1978 for what is sometimes known as the Tobin Tax. Tobin wrote in the UN’s Human Development Report 1994 that a world currency would be ideal but unlikely to come to fruition in the next few decades. The ‘realistic second-best option’ would be a tax on international currency transactions." from “Sovereignty or Subjugation: Tacking on an International Tax “ by Paul Weyrich, in The American Daily, 10/6/05.
Richard Cooper
“…I suggest a radical alternative scheme for the next century: the creation of a common currency for all of the industrial democracies, with a common monetary policy and joint Bank of Issue to determine that monetary policy. Individual countries would be free to determine their fiscal policy actions, but those would be constrained by the need to borrow in the international capital market…. Exchange rates can be most credibly fixed if they are eliminated altogether, that is, if international transactions take place with a single currency. But a single currency is possible only if there is in effect a single monetary policy, and a single authority issuing the currency and directing the monetary policy. How can independent states accomplish that? They need to turn over the determination of monetary policy to a supranational body, but one which is responsible collectively to the governments of the independent states…. This one-currency regime is much too radical to envisage in the near future. But it is not too radical to envisage 25 years from now, and indeed some such scheme, or its functional equivalent, will be necessary to avoid retrogression into greater reliance on barriers to international trade and financial transactions.” Foreign Affairs, Fall 1984, pp. 166-184
James Tobin
In his article “A Proposal for Monetary Reform”, which concerned his proposed tax on currency transactions, Professor Tobin discussed monetary union as one of the possible solutions to the key problem- excessive mobility of capital across currencies:
"…There are two ways to go. One is toward a common currency, common monetary and fiscal policy, and economic integration. The other is toward greater financial segmentation between nations or currency areas, permitting their central banks and governments greater autonomy in policies tailored to their specific economic institutions and objectives. The first direction, however appealing, is clearly not a viable option in the foreseeable future, i.e., the twentieth century. I therefore regretfully recommend the second, and my proposal is to throw some sand in the wheels of our excessively efficient international money markets.
But first let us pay our respects to the “one world” ideal. Within the United States, of course, capital is extremely mobile between regions, and has been for a long time. Its mobility has served, continues to serve, important economic functions: mobilizing funds from high-saving areas to finance investments that develop areas with high marginal productivities of capital; financing trade deficits which arise from regional shifts in population and comparative advantage or from transient economic or natural shocks. With nationwide product and labor markets, goods and labor also flow readily to areas of high demand, and this mobility is the essential solution to the problems of regional depression and obsolescence that inevitably occur. There is neither need for, nor possibility of, regional macroeconomic policies. It would not be possible to improve employment in West Virginia or reduce inflation in California. even temporarily, by changing the parity of a local dollar with dollars of other Federal Reserve Districts. With a common currency, national financial and capital markets, and a single national monetary policy, movements of funds to exploit interest arbitrage or to speculate on exchange rate fluctuations cannot be sources of disturbances and painful interregional adjustments.
To recite this familiar account is to remind us how difficult it would be to replicate its prerequisites on a worldwide basis. Even for the Common Market countries, the goal is still far, far distant. We do not have to resolve the chicken-egg argument. Perhaps it is true that establishing a common currency and a central macro-economic policy will automatically generate the institutions, markets, and mobilities which make the system viable and its regional economic consequences everywhere tolerable. The risk is one that few are prepared to take. Moreover, EEC experience to date suggests that it is very hard to contrive a scenario of gradual evolution towards such a radically different regime, even though it could well be the global optimum.
At present the world enjoys many benefits of the increased worldwide economic integration of the last thirty years. But the integration is partial and unbalanced; in particular private financial markets have become internationalized much more rapidly and completely than other economic and political institutions. That is why we are in trouble…"
Of his specific proposal for a tax, Tobin continued:
My specific proposal is actually not new. I offered it in 1972 in my Janeway Lectures at Princeton, published in 1974 as The New Economics One Decade Older, pp. 88-92. The idea fell like a stone in a deep well. If I cast it in the water again, it is because events since the first try have strengthened my belief that something of the sort needs to be done.
The proposal is an internationally uniform tax on all spot conversions of one currency into another, proportional to the size of the transaction. The tax would particularly deter short-term financial round-trip excursions into another currency…."
[This paper is Prof. Tobin’s presidential address at the 1978 conference of the Eastern Economic Association, Washington DC. It was originally published in the Eastern Economic Journal, Volume IV, No. 3-4, July/October 1978, pp. 153-159]
James Tobin
“What has come to be known as the Tobin Tax on foreign exchange transactions originally appeared in a lecture presented by James Tobin in 1972 and was developed more fully by him in 1978…..Given the recent interest in the Tobin Tax, it is appropriate to remind the reader that he offered it “regretfully” as a second best. The first best solution being “a common currency, common monetary and fiscal policy, and economic integration.” As noted in “International Taxation: The Trajectory of an Idea from Lorimer to Brandt” By Myron J. Frankman World Development 24 May 1996, 2000
John Maynard Keynes
[Bancor proposal at Bretton Woods conference in 1944. Text to be added later]
John Stuart Mill
“Let us suppose that all countries had the same currency, as in the progress of political improvement they one day will have… So much of barbarism, however, still remains in the transactions of the most civilized nations that almost all independent countries choose to assert their nationality by having to their own inconvenience and that of their neighbors, a peculiar currency of their own." Principles of Political Economy, 1865, as cited by Myron Frankman, above in “Beyond the Tobin Tax”.
