In the foreign exchange market and international finance, a world currency, supranational currency, or global currency refers to a currency that is transacted internationally, with no set borders.
Historical and current world
Spanish dollar (17th – 18th centuries)
In the 17th and 18th century, the use of silver Spanish dollars or "pieces of eight" spread from the Spanish territories in the Americas westwards to Asia and eastwards to Europe forming the first worldwide currency. Spain's political supremacy on the world stage, the importance of Spanish commercial routes across the Atlantic and the Pacific, and the coin's quality and purity of silver helped it become internationally accepted for over two centuries. It was legal tender in Spain's Pacific territories of the Philippines, Micronesia, Guam and the Caroline Islands and later in China and other Southeast Asian countries until the mid-19th century. In the Americas it was legal tender in all of South and Central America (except Brazil) as well as in the US and Canada until the mid-19th century. In Europe the Spanish dollar was legal tender in the Iberian Peninsula, in most of Italy including: Milan, the Kingdom of Naples, Sicily, Sardinia, the Franche-Comté (France), and in the Spanish Netherlands. It was also used in other European states including the AustrianHabsburg territories.
Gold Standard (19th – 20th centuries)
Main article: Gold Standard
Prior to and during most of the 19th century, international trade was denominated in terms of currencies that represented weights of gold. Most national currencies at the time were in essence merely different ways of measuring gold weights (much as the yard and the meter both measure length and are related by a constant conversion factor). Hence some assert that gold was the world's first global currency. The emerging collapse of the international gold standard around the time of World War I had significant implications for global trade.
Before 1944, the world reference currency was the United Kingdom's pound sterling. The transition between pound sterling and United States dollar and its impact for central banks was described recently.
In the period following the Bretton Woods Conference of 1944, exchange rates around the world were pegged to the United States dollar, which could be exchanged for a fixed amount of gold. This reinforced the dominance of the US dollar as a global currency.
Since the collapse of the fixed exchange rate regime and the gold standard and the institution of floating exchange rates following the Smithsonian Agreement in 1971, most currencies around the world have no longer been pegged to the United States dollar. However, as the United States has the world's largest economy, most international transactions continue to be conducted with the United States dollar, and it has remained the de facto world currency. According to Robert Gilpin in Global Political Economy: Understanding the International Economic Order (2001): "Somewhere between 40 and 60 percent of international financial transactions are denominated in dollars. For decades the dollar has also been the world's principal reserve currency; in 1996, the dollar accounted for approximately two-thirds of the world's foreign exchange reserves", as compared to about one-quarter held in euros (see Reserve Currency).
Some of the world's currencies are still pegged to the dollar. Some countries, such as Ecuador, El Salvador, and Panama, have gone even further and eliminated their own currency (see dollarization) in favor of the United States dollar.
Only two serious challengers to the status of the United States dollar as a world currency have arisen. During the 1980s, the Japanese yen became increasingly used as an international currency, but that usage diminished with the Japanese recession in the 1990s. More recently, the euro has increasingly competed with the United States dollar in international finance.
The euro inherited its status as a major reserve currency from the German mark (DM) and its contribution to official reserves has increased as banks seek to diversify their reserves and trade in the eurozone expands.
As with the dollar, some of the world's currencies are pegged against the euro. They are usually Eastern European currencies like the Bulgarian lev, plus several west African currencies like the Cape Verdean escudo and the CFA franc. Other European countries, while not being EU members, have adopted the euro due to currency unions with member states, or by unilaterally superseding their own currencies: Andorra, Monaco, Kosovo, Montenegro, San Marino, and Vatican City.
As of December 2006[update], the euro surpassed the dollar in the combined value of cash in circulation. The value of euro notes in circulation has risen to more than €610 billion, equivalent to US$800 billion at the exchange rates at the time. A 2016 report by the World Trade Organisation shows that the worlds energy, food and services trade are made 60% with US dollar and 40% by euro.
As a result of the rapid internationalization of the renminbi, as of 2013 it was the world's 8th most widely traded currency.
At the end of November, 2015, the Chinese renminbi was designated as one of the world's global currencies, and became one of the currency in the currency basket known as special drawing rights.
Recent proposals (21st century)
On 16 March 2009, in connection with the April 2009 G20 summit, the Kremlin called for a supranational reserve currency as part of a reform of the global financial system. In a document containing proposals for the G20 meeting, it suggested that the International Monetary Fund (IMF) (or an Ad Hoc Working Group of G20) should be instructed to carry out specific studies to review the following options:
- Enlargement (diversification) of the list of currencies used as reserve ones, based on agreed measures to promote the development of major regional financial centers. In this context, we should consider possible establishment of specific regional mechanisms which would contribute to reducing volatility of exchange rates of such reserve currencies.
- Introduction of a supra-national reserve currency to be issued by international financial institutions. It seems appropriate to consider the role of IMF in this process and to review the feasibility of and the need for measures to ensure the recognition of SDRs as a "supra-reserve" currency by the whole world community."
On 24 March 2009, Zhou Xiaochuan, President of the People's Bank of China, called for "creative reform of the existing international monetary system towards an international reserve currency," believing it would "significantly reduce the risks of a future crisis and enhance crisis management capability." Zhou suggested that the IMF's special drawing rights (a currency basket comprising dollars, euros, renminbi, yen, and sterling) could serve as a super-sovereign reserve currency, not easily influenced by the policies of individual countries. US President Obama, however, rejected the suggestion stating that "the dollar is extraordinarily strong right now." At the G8 summit in July 2009, the Russian president expressed Russia's desire for a new supranational reserve currency by showing off a coin minted with the words "unity in diversity". The coin, an example of a future world currency, emphasized his call for creating a mix of regional currencies as a way to address the global financial crisis.
On 30 March 2009, at the Second South America-Arab League Summit in Qatar, Venezuelan President Hugo Chavez proposed the creation of a petro-currency. It would be backed by the huge oil reserves of the oil producing countries.
Single world currency
An alternative definition of a world or global currency refers to a hypothetical single global currency or supercurrency, as the proposed terra or the DEY (acronym for Dollar Euro Yen), produced and supported by a central bank which is used for all transactions around the world, regardless of the nationality of the entities (individuals, corporations, governments, or other organizations) involved in the transaction. No such official currency currently exists.
Advocates, notably Keynes, of a global currency often argue that such a currency would not suffer from inflation, which, in extreme cases, has had disastrous effects for economies. In addition, many argue that a single global currency would make conducting international business more efficient and would encourage foreign direct investment (FDI).
There are many different variations of the idea, including a possibility that it would be administered by a global central bank that would define its own monetary standard or that it would be on the gold standard. Supporters often point to the euro as an example of a supranational currency successfully[dubious– discuss] implemented by a union of nations with disparate languages, cultures, and economies.
A limited alternative would be a world reserve currency issued by the International Monetary Fund, as an evolution of the existing special drawing rights and used as reserve assets by all national and regional central banks. On 26 March 2009, a UN panel of expert economists called for a new global currency reserve scheme to replace the current US dollar-based system. The panel's report pointed out that the "greatly expanded SDR (special drawing rights), with regular or cyclically adjusted emissions calibrated to the size of reserve accumulations, could contribute to global stability, economic strength and global equity."
Another world currency was proposed to use conceptual currency to aid the transaction between countries. The basic idea is to utilize the balance of trade to cancel out the currency actually needed to trade.
In addition to the idea of a single world currency, some evidence suggests the world may evolve multiple global currencies that exchange on a singular market system. The rise of digital global currencies owned by privately held companies or groups such as Ven suggest that multiple global currencies may offer wider formats for trade as they gain strength and wider acceptance.
Blockchain offers the possibility that a decentralized system that works with little human intervention could eliminate squabbling over who would administer the world central bank.
Some economists argue that a single world currency is unnecessary, because the U.S. dollar is providing many of the benefits of a world currency while avoiding some of the costs. If the world does not form an optimum currency area, then it would be economically inefficient for the world to share one currency.
Economically incompatible nations
In the present world, nations are not able to work together closely enough to be able to produce and support a common currency. There has to be a high level of trust between different countries before a true world currency could be created. A world currency might even undermine national sovereignty of smaller states.
The interest rate set by the central bank indirectly determines the interest rate customers must pay on their bank loans. This interest rate affects the rate of interest among individuals, investments, and countries. Lending to the poor involves more risk than lending to the rich. As a result of the larger differences in wealth in different areas of the world, a central bank's ability to set interest rate to make the area prosper will be increasingly compromised, since it places wealthiest regions in conflict with the poorest regions in debt.
Usury – the accumulation of interest on loan principal – is prohibited by the texts of some major religions. In Christianity and Judaism, adherents are forbidden to charge interest to other adherents or to the poor (Leviticus 25:35–38; Deuteronomy 23:19). Islam forbids usury, known in Arabic as riba.
Some religious adherents who oppose the paying of interest are currently able to use banking facilities in their countries which regulate interest. An example of this is the Islamic banking system, which is characterized by a nation's central bank setting interest rates for most other transactions.
- ^Ray Woodcock (1 May 2009). Globalization from Genesis to Geneva: A Confluence of Humanity. Trafford Publishing. pp. 104–105. ISBN 978-1-4251-8853-5. Retrieved 13 August 2013.
- ^Thomas J. Osborne (29 November 2012). Pacific Eldorado: A History of Greater California. John Wiley & Sons. p. 31. ISBN 978-1-118-29217-4. Retrieved 13 August 2013.
- ^"The Retirement of Sterling as a Reserve Currency after 1945: Lessons for the US Dollar ?", Catherine R. Schenk, Canadian Network for Economic History conference,10/2009
- ^"CHRONOLOGY - Milestones in the yen's history". Reuters. 13 March 2008.
- ^Lim, Ewe-Ghee (June 2006). San Jose, Armida, ed. The Euro’s Challenge to the Dollar(PDF). Statistics Department. IMF Working Paper (Technical report). International Monetary Fund. Retrieved 9 February 2013.
- ^FT.com / MARKETS / Currencies – Euro notes cash in to overtake dollar
- ^Wagner, Wieland (26 January 2011). "China Plans Path to Economic Hegemony". Der Spiegel.
- ^Frankel, Jeffrey (10 October 2011). "The rise of the renminbi as international currency: Historical precedents". Voxeu.org.
- ^"RMB now 8th most traded currency in the world". Society for Worldwide Interbank Financial Telecommunication. Retrieved 10 October 2013.
- ^Russian Proposals to the London Summit (April 2009). Kremlin website. 16 March 2009. Retrieved 25 March 2009.
- ^At G20, Kremlin to Pitch New Currency. Moscow Times. 17 March 2009. Retrieved 25 March 2009.
- ^China presses G20 reform plans. BBC News, 24 March 2009. Retrieved 25 March 2009.
- ^Obama rejects China's call for new global currency. AFP, 25 March 2009. Retrieved 25 March 2009.
- ^Pronina, Lyubov (10 July 2009). "Medvedev Shows Off Sample Coin of New 'World Currency' at G-8". Bloomberg. Retrieved 18 November 2010.
- ^Chavez to seek Arab backing for `petro-currency'
- ^"There's a New 'Dey' Coming!"
- ^ ab"related sites". Singleglobalcurrency.org. Retrieved 18 November 2010.
- ^A Single Global Currency
- ^UN panel touts new global currency reserve system. AFP, 26 March 2009. Retrieved 27 March 2009.
- ^Zhong, Dale. "World currency, a different proposal - world currency - Quora". worldcurrency.quora.com. Retrieved 2016-01-28.
- ^"The dollar alternatives – Ven (4) – FORTUNE". CNN. 21 July 2010. Retrieved 18 November 2010.
- ^Archived 5 February 2005 at the Wayback Machine.
- ^"The facts about usury : Why Islam is against lending money at interest". Mustaqim.co.uk. Retrieved 18 November 2010.
External adopters of the US dollar
Currencies pegged to the US dollar
Currencies pegged to the US dollar w/ narrow band
External adopters of the euro
Currencies pegged to the euro
Currencies pegged to the euro w/ narrow bandThe Belarusian ruble is pegged to the euro, Russian ruble and U.S. dollar in a currency basket.
In March of 2009, U.S. Treasury Secretary Timothy Geithner let it slip that he was "quite open" to the idea of an eventual move toward a global currency run by the International Monetary Fund. Although many were surprised by this unusual announcement, the idea of a world currency is certainly not a new one. In fact, one of the most frequently cited backers of a single currency is the legendary economist John Maynard Keynes.
Many of Keynes' ideas have moved in and out of favor over the past 70 years. But could one currency really work? (This rock star of economics advocated government intervention at a time of free-market thinking. Learn more in Giants Of Finance: John Maynard Keynes.)
Which Countries Would Benefit
There would be a little something for everyone with a global currency. Developed nations would certainly benefit since there would no longer be currency risk in international trade. In addition, there would be somewhat of a leveling of the global playing field, since nations like China could no longer use currency exchange as a means to make their goods cheaper on the global market.
As an example, many point to Germany as being one of the big winners in the introduction of the euro. Large German firms, which were already some of the most dominant in the world, suddenly had an even playing field. Southern European nations began to demand more German goods, and all of this new money coming into Germany led to considerable prosperity.
Developing countries might benefit considerably with the introduction of a stable currency which would form a base for future economic development. For example, Zimbabwe has suffered through one of the worst hyperinflation crises in history. The Zimbabwean dollar had to be replaced in April 2009 by foreign currencies, including the U.S. dollar. (Find out how this figure relates to your investment portfolio in What You Should Know About Inflation.)
The most obvious downfall to the introduction of a global currency would be the loss of independent monetary policy to regulate national economies. For example, in the recent economic crisis in the United States, the Federal Reserve was able to lower interest rates to unprecedented levels and increase the money supply in order to stimulate economic growth. These actions served to lessen the severity of the recession in the United States.
Under a global currency, this type of aggressive management of a national economy would not be possible. Monetary policy could not be enacted on a country by country basis. Rather, any change in monetary policy would have to be made at the worldwide level.
Despite the increasingly global nature of commerce, the economies of each nation throughout the world still differ significantly and require different management. Subjecting all countries to one monetary policy would likely lead to policy decisions which would benefit some countries at the expense of others.
Supply and Printing
The supply and printing of a global currency would have to be regulated by a central banking authority, as is the case for all major currencies. If we look again to the euro as a model, we see that the euro is regulated by a supranational entity, the European Central Bank (ECB). This central bank was established through a treaty amongst the members of the European Monetary Union.
To avoid political bias, the European Central Bank does not exclusively answer to any particular country. In order to ensure proper checks and balances, the ECB is required to make regular reports of its actions to the European Parliament, and to several other supranational groups. (The policies of these banks affect the currency market like nothing else. See what makes them tick in Get To Know The Major Central Banks.)
The Bottom Line
At present, it appears that implementing a single currency worldwide would be highly impractical. Indeed, the prevailing theory is that a mixed approach is more desirable. In certain areas, such as Europe, gradually adopting a single currency may lead to considerable advantages. But for other areas, trying to force a single currency would likely do more harm than good.