Dollar: Is it time for a new global currency?

“Global currency” or “The Super Currency”, the terms have marked a lot in recent News
headlines. The demand that caught eyes just before the G20 meet, has gained significant
momentum in last few weeks. Russia and China who kept the proposal have gained support from
France and India. Dollar on other hand has support from likes of Japan and Canada. With other
countries not decided yet, a consensus seems to be a far deal.

History

The concept of a Global currency is not a new one. It was first proposed by an
Italian named, Gasparo Scaruffi, in his work called Alitinonfo around 1582. With the liberation
of most of the world's territory from colonialism, the number of currencies continued to grow.
Back in the nineteenth century, at the Paris conference of 1867, a plan for a world currency
linked to gold coins in multiples of 5 gold French francs was widely discussed but never
achieved the agreement of Britain, the world's leading financial power. Less than a century later,
by the time of Bretton Woods, a world currency figured in both the major plans for the post-war
world monetary order. The British plan by John Maynard Keynes for a World Clearing Union
envisaged a world currency called "bancor." The official American plan carried by Harry Dexter
White envisaged for a world currency called "unitas." In the negotiations leading up to the
charter itself, however, the Americans backed away from the idea of a world currency and
insisted on an international monetary system based on gold and the dollar. When gold became
undervalued by post-war inflation, the dollar reigned supreme.

Advantages

So good so far, but do we really get any advantage of switching to a single global currency?
Definitely we do, that’s why the issue comes up every time USD is seen in doldrums

• In today's multi-currency world, there is significant currency risk, especially for those
currencies managed by single nations where national economic goals obscure the need
for monetary stability. As the global financial turmoil spread in 2008, Iceland's currency
collapsed, Hungary and Poland were left reeling, only to be saved by efforts from IMF.
 The common assessment was that belonging to the Euro-zone would have avoided the
currency risk and the resulting substantial hardship within each nation.

• Currency fluctuation is something that has been an area of concern for most of the
nations. For example, the value of Pound decreased by 23 percent in relation to the euro
over the past year, which is a dramatic shift between two of the world's major reserve
currencies. Investors and business people and even travelers need assurance that today's
money will be worth the same tomorrow.

• In addition, a single global currency would eliminate the need for foreign exchange
reserves, which now total more than (US)$4 trillion in underutilized assets. It would
eliminate approximately $400 billion spent annually in foreign exchange transactions.

Alternatives

So, what all options do we have: Euro, GBP, Renminbi or Special Drawing
Rights? The outlook for the euro and sterling is bleak while currencies such as the renminbi,
rouble and rupee will always have shortcomings until the Chinese, Russian and Indian
economies become established financial powers. In any case the renminbi and rupee are not fully
convertible. Switching to any other national currency would raise the similar problems as dollar,
which leaves us only with the SDR.

But is the SDR concept feasible?

• The SDR is backed by nothing other than the good faith and credit, of the IMF and it has
no intrinsic value. It might be easy to say that dollar is backed only by the good faith and
credit of the U.S. government. In reality, however, the dollar is backed by the goods and
services produced by the American people and their willingness to trade those goods and
services for dollars. With this willingness to trade real things for dollars extending to
people around the world, the value of the dollar becomes backed not just by the U.S.
people or the U.S. government but by literally all the world's producers and consumers
interconnected through global supply chains.
• A one-size-fits-all international currency will never meet diverse world needs. Countries
growing at different rates have different requirements. Faster-growing countries need a
rapid supply of money while that may create inflation problems in a slow-growing
country. The SDR could not accommodate these differing needs. Its value is set by the
policies of the IMF, which in turn are subject to the competing political and economic
interests of international diplomats.

• Embracing the SDR will result in a loss of transparency. The process of setting the supply
and value of the dollar is highly transparent. People around the world know exactly what
the Federal Reserve is doing as it adds dollars to the system or adjusts interest rates. Even
the rationale for the changes is quickly apparent from Fed statements. The IMF is far
more opaque.

• The SDR will create new financial complexities and opportunities for corruption. Use of
the SDR would add an additional step to every international transaction. Buyers and
sellers would have to convert their local currency into SDRs. Some would have to change
first into a convertible currency and then into SDRs. This would create new opportunities
for arbitrage and corruption or, at the very least, make the process more expensive with
an additional transaction fee.

Conclusion

Whenever a financial crisis has arisen there have been calls to replace the
dollar as the global reserve currency. The trouble is that there is no credible alternative.
No other national currency is viable. As for the SDR, a currency basket comprising
dollars, Euros, yen and sterling, there are far too many draw backs. Certainly, the IMF is
in no position to become a pseudo-central bank. Perhaps the answer is reserve currency
diversification, as the Russians have suggested too, including emerging market currencies
which itself looks to be a farfetched solution. Until these considerable obstacles are
overcome it appears the dollar will continue as the global reserve currency even if there is
little appetite among central bankers for it to remain so.
 References

• Exchange Rates, Currency Areas and the International Financial Architecture by Dr.
Robert A. Mundell, Columbia University -- 1999 Nobel Laureate

http://www.usagold.com/gildedopinion/mundellprague.html

• Interview of Morrisn Bonpasse, President, Single Global Currency Association

http://www.singleglobalcurrency.org/index.html

• “New global currency looks remote prospect” by Sudip Roy

http://www.euromoney.com/Article/2171718/New-global-currency-looks-remote-
prospect.html

• “Global Currency Proposal: Good Diplomatic Theater but Bad Policy” by Ambassador
Terry Miller, Director of the Center for International Trade and Economics at The
Heritage Foundation

http://www.heritage.org/research/tradeandeconomicfreedom/wm2364.cfm

• http://www.theglobeandmail.com/report-on-business/calls-grow-to-supplant-dollar-as-
global-currency/article1207242/

-Submitted by

Sumit Singh, NMIMS , MBA CORE, 2nd Year

Brijesh Toshniwal, NMIMS , MBA CORE, 2nd Year