World currency: Wikis

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The US dollar, and euro to a lesser extent, are by far the most used currencies in terms of global reserves.

In the foreign exchange market and international finance, a world currency, supranational currency, or global currency refers to a currency in which the vast majority of international transactions take place and which serves as the world's primary reserve currency. In March 2009, as a result of the global economic crisis, China and Russia have pressed for urgent consideration of a global currency and a UN panel has proposed greatly expanding the IMF's SDRs or Special Drawing Rights.

Currencies have many forms depending on several properties: type of issuance, type of issuer and type of backing. The particular configuration of those properties leads to different types of money. The pros and cons of a currency are strongly influenced by the type proposed. Consider, for example, the properties of a complementary currency.

Contents

The U.S. dollar and the euro

Worldwide use of the euro and the U.S. dollar      United States      External adopters of the US dollar      Currencies pegged to the US dollar      Currencies pegged to the US dollar w/ narrow band      Eurozone      External adopters of the euro      Currencies pegged to the euro      Currencies pegged to the euro w/ narrow band Note that the Belarusian ruble is pegged to the Euro, Russian Ruble and U.S. Dollar in a currency basket.

Since the mid-20th century, the de facto world currency has been the United States dollar. 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" (255).

Many of the world's currencies are pegged against 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. The dollar continues to dominate global currency reserves, with 63.9% held in dollars, as compared to 26.5% held in euros (see Reserve Currency).

Since 1999, the dollar's dominance has begun to be eroded by the euro, which represents a larger size economy, and has the prospect of more countries adopting the euro as their national currency. The euro inherited the status of a major reserve currency from the German Mark (DM), and since then its contribution to official reserves has risen as banks seek to diversify their reserves and trade in the eurozone continues to expand.[1]

As with the dollar, quite a few of the world's currencies are pegged against the euro. They are usually Eastern European currencies like the Estonian kroon and 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, Montenegro, San Marino, and Vatican City.

As of December 2006, 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 (today equivalent to circa US$968 billion).[2]

History

Spanish dollar: 17th-19th 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 ever 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 U.S. 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 and Sardinia, as well as in the Franche-Comté (France), and in the Spanish Netherlands. It was also used in other European states including the Austrian Habsburg territories.

19th - 20th centuries

Prior to and during most of the 1800s, 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.

In the period following the Bretton Woods Conference of 1944, exchange rates around the world were pegged against 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 against the United States dollar. However, as the United States remained the world's preeminent economic superpower, most international transactions continued to be conducted with the United States dollar, and it has remained the de facto world currency.

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[citation needed], 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.

Hypothetical single supranational 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) [3], 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 organisations) involved in the transaction. No such official currency currently exists.

There are many different variations of the idea, including a possibility that it would be administered by a global central bank or that it would be on the gold standard.[4] Supporters often point to the euro as an example of a supranational currency successfully implemented by a union of nations with disparate languages, cultures, and economies. Alternatively, digital gold currency can be viewed as an example of how global currency can be implemented without achieving national government consensus.

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. Indeed, on March 26, 2009, a UN panel called for a new global currency reserve scheme which with "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." [5]

Russia and China call for global reserve currency

On March 16, 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 "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."[6][7]

On March 24, 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."[8] Zhou suggested that the IMF's Special Drawing Rights, a currency basket comprising dollars, euros, yen, reais and sterling and 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." [9] 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. [10].

On November 2, 2009, President Nursultan Nazarbayev met with Noble Prize laureates Robert Mundell and Edmund Phelps.[11]

Other proposals for a supranational currency

In March 30, 2009, at the Second South America-Arab League Summit in Qatar, Venezuelan President Hugo Chavez proposed the creation of the Petro as a supranational currency, in order to face the instability that the generation of fiat currency has caused in the world economy.[12] The petro-currency would be backed by the huge oil reserves of the oil producing countries.[13]

Arguments for a supranational currency

Advocates, notably Keynes[14], of a global currency often argue[14] that such a currency would not suffer from inflation, which, in extreme cases, has had disastrous effects for economies. In addition, many[14] argue that a global currency would make conducting international business more efficient and would encourage Foreign direct investment (FDI).

An often over-looked alternative to an establishment-created global reserve currency is for anyone to adopt already existing mechanisms that traditionally has worked very well in conducting international business. There are, for example, no obstacles for legal or physical persons to start drawing contracts and invoicing in XAU - Gold - as opposed to the USD, the EUR or the YEN.

Arguments and social opposition against a single global currency

Some economists argue that a single global currency is unworkable given the vastly different national political and economic systems in existence.

Loss of national monetary policy

One currency can only be provided by two institutions printing and setting the interest rate on money deposited or lent to banks. However, the central bank is a lender of last resort, and is not, contrary to popular belief, involved in most transactions involving money. The interest rate set by the central bank only indirectly determines the interest rate customers must pay on their bankloans. Given that private firms or persons see different risks with different lendings the interest rate can be very different from one investment to the next, from one person to the next, or one country to the next. In general lending to poor involves more risk, and you need higher interest to compensate for that risk. Still only one set of politics for interest can be made at any time by one central bank. A bigger currency area will generally have less chance of using interest rate to stabilize the economy, because different areas may be in different stages in the boom-bust cycle, and the interest rate setting must be a compromise between the interests of the different part of the currency area.

Political difficulties

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.

Most modern currencies have an interest rate, while one of the largest religions in the world, Islam, is against the idea of paying interest for loans[citation needed]. This might prove to be an unsolvable problem for a world currency, if religious views concerning interest do not moderate. This is not necessarily a fatal flaw, however, as a large number of religious adherents who oppose the paying of interest are still currently able to take advantage of banking facilities in their countries which are able to cater to this. An example of this might be Islamic banking, which operates well enough in nations where the central bank sets interest rates for most other transactions. However, banking systems in the Middle East region are less developed then in the West, and investments such as homebuilding have to rely more on equity or private lendings from family or close friends.

Economic difficulties

Some economists argue that a single world currency is unnecessary, because the U.S. dollar already provides many of the benefits of a world currency while avoiding some of the costs.[15]

If the world does not form an optimum currency area, then it would be economically inefficient for the world to share one currency.

A further argument is most easily conveyed by an analogy. Water carried in a biscuit baking pan will rapidly flow from high points to the lowest point, causing a sudden uncontrollable imbalance that forces the high points higher and the low point lower. The same quantity of water in cups on the biscuit pan will have no such inherent instability. Hegemonic currencies, free of regional limitations, flow rapidly away from high risk areas exacerbating their problems disproportionately to original causes[citation needed]. Such events are very damaging to the prosperity of the affected area. See for example the events leading up to, and subsequence consequences of, the Corralito in Argentina. For those with the power to do so, predicting, or even causing, such capital flights can lead to immensely profitable speculations; so profitable indeed that their likelihood of occurrence increases in proportion with the scale of the currency involved.[citation needed]

Religious difficulties

He also forced everyone, small and great, rich and poor, free and slave, to receive a mark on his right hand or on his forehead, so that no one could buy or sell unless he had the mark, which is the name of the beast or the number of his name.

Rev. 13:16-17 (NIV)

Futurist Christian eschatology typically holds that the rise of a supranational currency could be a hallmark of the End Times.[16] Under this view, the prophetic statements in Revelation 13:16-17 are taken to imply that the one way in which the Antichrist will acquire and exercise power over the Earth during the period of the Tribulation is via hegemonic control of said supranational currency. This power would be acquired by "the Beast" (θηριον) performing miracles[17] and subsequently requiring all people to receive the Mark of the Beast(χάραγμα branded mark, character, coin or money[18]) in their right hands or foreheads (i.e. a place on the body where its absence would be conspicuous) in order to buy or sell, making survival for those on the run (i.e opposers of the religio-economic hegemony) much more difficult.[19]

Religious difficulties with a supranational currency currently exist (see Political difficulties above). According to the Futurist view, to overcome the extant difficulties the Antichrist will use forced religious syncretism[20] (i.e. in the name ofcounterterrorism and world economic stability) to enable the creation of the supranational currency. If this view of the prophecy is fulfilled, then the coming of the said world currency and its enabling technologies will have been predicted by John of Patmos with a lead time of approximately 2000 years.[21]

See also

References

External links


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