Can the Whole World Use One Currency?

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Indexes
  1. Advantages of a One World Currency
  2. Disadvantages of a One World Currency
  3. Final Thoughts

Throughout history, financial advancements have been equally important to technological advancements. Humans have come a long way in transacting with minimal friction, from bartering to bitcoin and everything in between. Humans have always found a way to make earning and spending easier, massively boosting the quality of life.

The UN recognizes 180 currencies as legal tender. Photo by Jason Leung on Unsplash

Advantages of a One World Currency

From the general population to big companies, there is a little something for everyone with a single global currency.

A global currency would eliminate all conversion costs. Exchanging currencies requires a conversion, wherein banks charge a fee. The same happens when you want to transfer money abroad. A single currency would solve this since there is no need to pay any exchange fees regardless of where you are in the world. Furthermore, the money saved on conversion costs can be better utilized elsewhere.

This also eliminates foreign exchange risks. The value of money will remain consistent around the world if there is no multi-currency fluctuation. And since it would not be associated with the economy of any one country, there would be no risk connected with the currency. For example, the case of the Turkish Lira and how investors lost faith in the currency. A direct result of this would be an increase in foreign investment and global trade.

Disadvantages of a One World Currency

Most often than not, a single monetary policy does not fit every country. For example, countries with high growth should raise interest rates to prevent inflation and make saving more appealing. On the other hand, countries with low growth should have lower interest rates to stimulate borrowing. In the case of a single currency, interest rates can not be simultaneously raised in some countries while lowered in others.

In the case of Greece, it could no longer devalue its currency since it was tied to the monetary policy of the EU. It also highlighted the competitiveness gap as it made German exports more appealing than those of Greece. Devaluating the currency in Greece would enjoy multiple benefits, such as artificially cheaper exports, a rise in tourism, and lower trade deficits.

A single world currency would mean that governments would lose their autonomy over drafting economic policies. Governments will have to delegate this authority to a higher power, who might draw up ‘unfavorable’ policies.

For example, countries like China intentionally manipulate their currency to have cheaper exports. Without the option to do so, Chinese exports would lose their competitive edge in the international market.

“Once a nation parts with control of its currency and credit, it matters not who makes that nation’s laws.”

(W.L. Mackenzie King)

Setting up a centralized regulatory body raises another set of questions. Who will be in control of the monetary policies? Will there be any possible bias towards the stronger economies?

If the chairperson of this body is from a particular country, would there be concerns from other countries with opposing interests? Europe can carry a centralized currency because its participating members are strong allies. But in a world with ongoing wars and nation-to-nation hostilities, it wouldn’t seem feasible.

Apart from these major problems, the world will face another few inconveniences. People will lose their sense of wealth. For example, 1 US Dollar is equal to 22956 Vietnamese Dong (as of 6 May, 8:00 pm UTC). This will cause an insane amount of confusion among the general public about prices, paychecks, etc.

Lastly, the transition costs of moving into the new currency will be massive. New money would have to be put in circulation for 7.9 billion people, vending machines and ATMs would have to adapt to a new currency, and the employees of foreign exchange departments will have to be laid off.

Final Thoughts

Nobel Laureate Robert Mundell proposed a theory of “Optimum Currency Areas” in the 1960s. An optimum currency area is a geographical area that would greatly benefit from sharing a single currency. This seems like a practical alternative to having a single global currency.

It seems highly unlikely that any government will give up its sovereign power to manage its currency. To conclude, the cons of having a single global currency far outweigh the pros. But this doesn’t mean that we should put an end to this discussion.

With the emergence of cryptocurrencies, which are cheaper and faster, it has the potential to replace forex transactions. However, they come with their own risks and limitations, with many experts having mixed views on bitcoin as a single global currency.