J. of Multi. Fin. Manag.

14 (2004) 305–314

Elements of global financial stability

Fariborz Moshirian∗
School of Banking and Finance, The University of New South Wales, Sydney NSW 2052, Australia

Abstract

The purpose of this paper is to discuss the processes of financial and economic unification that
led to the emergence of the Greenback, as the single currency of the US , and the Euro as the single
currency in the European Union. It will then discuss the issues related to a single global currency in the
context of the IMF’s promotion of global financial stability as one of the key global public goods. The
conditions associated with the theory of the “optimum currency area” including asymmetric shocks
and the mobility of capital and labor are analysed in the context of the processes of globalisation and
international security. The paper indicates that the mobility of capital, active participation of MNCs
and institutional foreign shareholding have created a global economy in which capital now meets
labor rather than, as in earlier decades, labor migrating to locations offering employment, which in
turn has significant implications for the conditions attached to a global single currency.
© 2004 Elsevier B.V. All rights reserved.
JEL classification: G15; G25

Keywords: Financial integration; World federal system; Globalisation; World security

1. Introduction

While the international monetary system, based on the gold standard of the 19th century
was relatively stable, it should be noted that the process of globalisation has changed the
structure of the world economy in such a way that the international monetary system of
the 21st century must satisfy the needs of an increasingly interdependent world whose
functions differ from the 19th and even the 20th century. The history of monetary systems
shows that throughout the world there have been a number of attempts to unify currencies of
some countries and create economies of scale amongst the participant groups and countries.

∗ Tel.: +61 2 9358 5859; fax: +61 2 9385 6730.

E-mail address: f.moshirian@unsw.edu.au (F. Moshirian).

1042-444X/$ – see front matter © 2004 Elsevier B.V. All rights reserved.
doi:10.1016/j.mulfin.2004.05.002
306 F. Moshirian / J. of Multi. Fin. Manag. 14 (2004) 305–314

Amongst others, there was an attempt in Europe in 1800 to create an international currency
(referred to as the Latin Monetary Union) and in the 20th century, apart from the euro,
in Africa, the former French colonies formed a successful currency union (referred to as
Communaute Financiere Africaine). After the uncertainty of the monetary system between
the first and the second world wars, in 1944 the Bretton Woods Agreement established, a
fixed exchange rate regime in which the gold standard was replaced by the dollar standard.
However, by 1971, the fixed exchange regime collapsed and most nations moved to the
current flexible exchange rate regime. The current managed flexible exchange regime also
had its own challenges including instability amongst some of the economies, exchange
rate crisis amongst European and other countries. The recent Asian currency crisis and its
global consequences: the collapse of the ruble, the currency crisis in Brazil and Argentina
are amongst some of the challenges of the current international financial system. In the past,
including the 19th century, there were fewer currencies and those of the colonial powers
were the predominant ones. The emergence of new nations and political independence has
meant that there are now about 200 national currencies. Indeed, the national currency is
often seen as the symbol of national identity. At the same time, the process of globalisation
has encouraged some nations, such as at least 22 European countries to consider the euro
as their national currency.
Following the series of currency crisis which reduced investors’ confidence and created
instability in the world, some people called for reform of the international monetary system.
The Nobel Prize winner Robert Mundell called for an international currency to be traded
in conjunction with national currencies. He also called for coordination of the dollar, the
euro and the yen as a way of creating monetary stability. At the same time, there has been a
push for various regional currencies such as an Asian single currency and others call for the
dollarisation of currencies in the Pacific and elsewhere. Some also called for the emergence
of eurodollar (i.e., a union between the euro and dollar). Some have called for a global
single currency as a way of improving the international monetary system, while others such
as Rogoff (2001) have rejected this notion. Some argue that a global single currency would
require a world government and others believe this is not necessary. Overall, there is a desire
on the part of the nations and international institutions to see a new international monetary
system that could meet the needs and challenges of the 21st century. In the meantime,
it is now well understood that a single currency either for a region or for the world has
enormous financial gains and also the capacity to further unify and effectively mobilise and
use resources more efficiently, particularly, when more than $ 1.3 trillion worth of trade in
foreign exchange markets takes place daily, of which a significant proportion is not for trade
and investment. For instance, according to Edmund and Marthinsen (2002), who refer to the
statistics from the European Commission, the annual savings from carrying out transactions
in a common currency are as high as 1% of GDP. They estimate the annual benefits of a
single currency in the US as about $ 100 billion, which translates into $ 750 per person. In
addition to these gains, the long-term and dynamic gains of a single currency include one
inflation rate amongst all countries, a significant reduction in interest rates, expansion in
investment, development and trade due to the removal of uncertainty. Eventually, similar to
the experience in Europe, one expects a law of one price for similar goods and services. The
low inflation and interest rates associated with one price for similar goods would bring about
enormous financial gains to consumers which are far more important than a one percentage
 F. Moshirian / J. of Multi. Fin. Manag. 14 (2004) 305–314 307

gain due to immediate reductions in transaction costs. Furthermore, the unifying force and
the creation of solidarity and cooperation amongst all participants and nations would be
another dynamic gain of a single currency, similar to the experience of the US.
The purpose of this paper is to highlight the evolution of the unification of the United
States of America and now the European Union and analyse those factors in operation in
the process of globalisation and in the search for international security and peace. It argues
that a global single currency could become one of the elements contributing to global
financial stability and unification of the global, financial and economic markets. To this
end: Section 2 discusses the experiences of the US in the 19th century and the emergence
of the Greenback; Section 3 discusses the experiences of the Europeans in establishing the
euro and the European Central Bank (ECB); Section 4 will analyse why, a single global
currency is a global public good; Section 5 deals with international security and financial
stability; Section 6 analyses the role of labor and capital mobility in the construction of a
globally integrated economy; and Section 7 concludes.

2. Financial integration and the emergence of a single currency in the US

The historical sequence of the Independence of the US from the British empire in the
18th century, the unification of all states and regions in the US after the civil war of the 19th
century, the emergence of the Federal Reserve System as a Super Central Bank and then
the use of the Greenback as the single currency for all states in America could be used in
the 21st century, to discuss the emergence of other unions such as the EU and as a model
for the emergence of a single global currency and a World Central Bank. To this effect, it is
useful to briefly review some of the salient features of the US financial union and analyse
its relevance to the challenges of the 21st century.
Prior to the civil war in the US, there were different currencies in circulation in the
various states. There were foreign currencies as well as multiple versions of the dollar
widely in use in the US. As McNamara (2003) states, there were approximately 7000 dif-
ferent kinds of bank notes used as currency. The state banks also issued notes that were
used locally as paper money. The state dollars had different rates and the states also had
independent fiscal policies. There was no central bank in the US, until 1913. Indeed, a
few national banks established after political independent from Great Britain in the 18th
century collapsed, which in turn made the state banks more powerful and more account-
able for monetary policies. While some of the state banks were sound and ran efficiently,
a number were poorly managed and irresponsible in their operations. The bank notes of
the Western States (South) were heavily discounted by the Eastern States (North) due to
financial mismanagement of some banks in the Western States. It was only during the civil
war when the Lincoln administration had to increase its ability to finance the war that a
series of financial reforms in 1862–1863 created a centralized monetary system including
the introduction of the “Greenback” or “United States notes”. These notes were issued by
the federal government as fiat money, full legal tender for all debts publicly and privately
(McNamara, 2003). Furthermore, the financial reform created a national bank system that
led to the replacement of state charted banks with those of the federal chartered ones.
At the same time, foreign currencies and local currencies were removed from the sys-
308 F. Moshirian / J. of Multi. Fin. Manag. 14 (2004) 305–314

tem. The federal government also financed its expenditure by forcing the state banks to
hold government bonds. Despite the success of the federal government in reforming the
monetary system, various currencies continued to operate and other financial challenges
continued until 1913 when the Federal Reserve System was established, which was de-
signed to coordinate the 12 federal banks that were in operation in the US. However, the
turning point of the above evolution of financial markets in the US was the financial re-
form during the civil war and the use of the Greenback as a major currency which gave
impetus to the unification and integration of various states of the US and assisted in the
transformation of the US economy as one of the most successful economies of modern
times. The existence of a Federal and a Supreme Court which interpreted, judged and
upheld various commercial laws which led to the smooth functioning of the monetary sys-
tem, and ensured the legitimacy and the relevance of the federal commercial laws in the
US.1
Using the US integration during the 19th century as a model of global, economic and
financial integration for the 21st century could raise the fact that the US has one language and
one culture, whereas, the present world is divided along the lines of culture, language and
religion. However, one should note the differences of culture, language and religion amongst
the 25 countries forming the current and growing EU. Furthermore, it is noteworthy that,
the historians clearly argued that the antebellum US was marked with significant cultural
and political divisions and besides the enmity between the North and South, there were
many elements of hatred and secessionist movements. Indeed, the US was referred to as
plural (i.e., the US are) until after the civil war. McNamara (2003) refers to the observation
of a prominent European, Chateaubriand, who after his visit to America in the 19th century
stated “It is immensely difficult to create a country out of states without any community
of religion and interests. . . how many centuries will be needed to make these elements
homogenous?” It is also noteworthy that, as stated by McNamara (2003)2 the constitutional
hierarchy of political authority was fiercely contested in the antebellum US and compliance
with the federal US law was very resentful and not welcomed. Indeed, the comparison of
the European Court of Justice with that of the US indicates that current compliance of the
Europeans with this Court is better than when Americans had to comply with the early
federal US law.
It is also noteworthy that, when one compares the industralised and advanced economy of
the North in the US, with the agrarian and less developed economy of the South, one can see
that the antebellum US led to the integration and balanced development of all the regions
of the US, despite their enmity and differences. Such a comparison may well be applicable
to the current North–South relationship in the context of the process of globalisation where
one could argue that both developed and developing countries will significantly gain and
benefit from an integrated global system including a World Central Bank and a global single
currency, despite their major differences in per capita income, technology, culture, religion
and language.

1 In the presence of a global single currency, the same experiences and structure could be relevant in the case
of the world central bank and the importance of other institutions that should support and reinforce the rules and
regulations of this international body.
2 McNamara (2003) was used in this paper for some of the background information about the US history.
 F. Moshirian / J. of Multi. Fin. Manag. 14 (2004) 305–314 309

3. The unification of Europe and a single European currency

The success of the unification of the US and the benefits of one monetary and fiscal policy
backed by one single currency captured the imaginations of the Europeans to envisage the
United States of Europe, in which European nations no longer take up arms against each
other. The Treaty of Rome in 1957 was the beginning of this dream and after the forma-
tion of a common market and a European Monetary System in 1979, European economic
cooperation was significantly enhanced by the vision of a united Europe reflected in the
Delors Report of 1988 which called for the emergence of the “European Community”. This
led to the emergence of the “economic and monetary union” in Europe in 1992 (referred
to as the Maastricht Treaty) which envisaged a single European currency and a ECB. For
11 European countries the single European currency (euro) came into existence as their
common currency in January 1999, and in January 2002 euro notes and coins were intro-
duced in 12 out of the 15 European countries then forming the EU. By July 2002 national
currencies were ceased in these countries. As part of the enlargement of the EU from 15 to
25 countries, resulting in a total population of 450 million, the acceding countries will be
qualified to use the euro as their national currency, after satisfying the conditions required
of them as outlined in the Maastrict Treaty.
At the same time, there have been a number of dialogues between the EU and officials in
the southern and eastern Mediterranean countries with the plan that a Euro-Mediterranean
Free Trade Area will be established by the year 2010. It is noteworthy that the unemployment
rate is very high in the Mediterranean countries and the level of foreign investment is very
low, and yet the market conversion of this area with the EU will have the potential to
transform the economies of this area which could be used as a model for global integration.
The existence of the ECB implies that there is one inflation rate and one monetary pol-
icy throughout the EU. The ECB’s independence from the political influence of national
governments has created a dynamic model of growth and investment in the EU. The euro
is providing coordination and cohesiveness to the expansion of EU activities. The benefits
associated with the euro, as a single currency are enormous, as stated in the introduction to
this paper. Suffice it to add that business gains associated with a single currency are both
long-term and short-term. In the short-term, for instance, the giant Dutch company Philips
estimated that the single currency in the EU saves them $ 200 million per annum in transac-
tion costs. Similar to the US Supreme Court that provided interpretation and reinforcement
of federal commercial laws and rules, the European Court of Justice is a complementary in-
stitution to the ECB. The EU experiences of the ECB, the ECJ and the European Parliament
could also be used to consider the development of the future international institutions that
could support a global single currency including a World Central Bank, a World Supreme
Court and a World Parliament.

4. A global single currency as a global public good

The civil war in the US in the 19th century accelerated the process of integration of
the states and the use of the Greenback as a single currency. In the case of the EU, the
desire to avoid another war between the German and French in Europe led to the Treaty of
310 F. Moshirian / J. of Multi. Fin. Manag. 14 (2004) 305–314

Rome in 1957 and ultimately to the emergence of the euro. In the 21st century, international
security and peace issues, as well as the process of globalisation and its consequences,
are the pressing issues that could galvanise the various nations and people to arise to try
and solve the challenges of this century. As part of a global and all embracing system,
the incorporation of a global single currency could mobilise nations and people to become
willing to work together (while maintaining their diversity as in the EU) .3
The underlying theory used by various people to argue in favor or against a single currency
is the “theory of optimum currency area” developed by the Nobel Prize winner Robert
Mundell. However, it should be noted that Mundell does not argue for a global single
currency but rather, a common currency to be operating in parallel with the existing national
currencies.
The conditions for an “optimum currency area” are that, all the member countries of the
optimum single currency area should be subjected to symmetric shocks, there should be
labor and capital mobility, the participant countries should be exposed to similar external
shocks and the reactions to these shocks should be comparable.4
The relevance of the theory of optimal currency area developed in the 1960s should be
examined in the context of the social, economic and technological conditions of the 21st
century rather than trying to analyse, how we should change the current conditions, in order
for them to conform to the conditions relevant to the time when the optimal currency area
theory was developed. Indeed, the process of globalisation accompanied by the IT revolution
and financial market integration have created an increasingly interdependent world. Most
economic and social shocks now have regional or global underlying reasons which affect
almost all nations. Most asymmetric national shocks could have been avoided, if they were
protected by a globally integrated system. Therefore, those who argue that by having control
over the national currency (i.e., being able to change the value of currency to increase exports
etc.) or forming an optimal currency area within only a few national currencies in order
to be able to better deal with national economic shocks are underestimating the dynamic
processes of the interdependent global economy of this new century.
Indeed, due to an increasing level of interdependence between nations and the process
of globalisation, the IMF (1999) in recent years has identified a number of issues as global
public goods as a way of increasing international solidarity and national and international
accountability for them. A number of financial crisis, including the Asian currency crisis,
triggered the IMF to promote a new financial architecture (see Moshirian, 2002) and refer
to “global financial stability” as a global public good. Furthermore, the challenges of inter-
national security and peace have made “the eradication of poverty” as one of the essential
global public goods. As at the national level, citizens consider hospitals, schools and basic
transport as public goods, the process of globalisation has created an interdependent world,

3 It should be noted that one could also argue that as part of a global single currency, the first step could be

the unification of the Euro with the dollar and then other countries as they become qualified. The other scenario
could be that dollar, Euro and Yen (IMF, 2000) or an Asian currency could first converge (as proposed by some
including Robert Mundell) and later on develop into a global single currency. However, discussion of these issues
are beyond the page limits of this article.
4 To this end, it is noteworthy that in the case of the EU, some years ago, economists used to argue that the

EU’s optimal currency area required a few currencies, rather than one.
 F. Moshirian / J. of Multi. Fin. Manag. 14 (2004) 305–314 311

in which it is accepted that certain global public goods are essential and should be provided
by the international community (Moshirian, 2003). In other words, the events of the last
fifty years have created such an interdependent world that we can no longer protect the na-
tional, economic, financial and security interests of some nations at the expense of others.
One of the key factors ensuring global financial stability is the development of a global
single currency. This would avoid currency fluctuation and in some cases currency crisis
and the enormous negative consequences associated with them. As argued by Moshirian
(2002, 2003), there is a need for the extension and establishment of new international in-
stitutions such as a World Central Bank that could facilitate and coordinate those factors
which maintain the necessary global public goods. However, for the purpose of this paper,
suffice it to say that a global single currency will significantly contribute to global financial
stability, in the same way that a stable national currency has been instrumental in national
financial stability over many decades. However, once the global single currency is seen in
the context of a “Global public good”, it would not be difficult to see why establishing an
integrated global economy of which all nations are members and able to fully participate
and reap the benefits would require a global single currency, and a World Central Bank
that coordinates all the national central banks and ensures both international and national
accountability and financial soundness. The recent research by various people including
Becker et al. (2000) and Rousseau and Sylla (2001) indicate that in the 20th century when
nation building was important, sound national financial institutions were instrumental for
strong economic growth in various countries and their absence, one of the key causes of
economic failure and social disorder. Similarly, in the 21st century when global financial
stability is one of the main global public goods, one can see that the existence of a sound
global monetary system with an effective World Central Bank, a global single currency and
good national networking and accountability will significantly increase global economic
growth and “global financial stability”.

5. International security and financial stability

One of the pressing issues in this century is international security and peace. Its absence
affects both individual countries’ financial markets and the entire global financial market.
The events of September 11 and the reaction of the global financial markets to this and
subsequent events highlights the significance of the interdependence of the global economy
and the way one or two events in one or two parts of the world would result in symmetric
financial and economic shocks in most countries of the world.
As identified by the IMF and others, the eradication of poverty is another global public
good and international security and peace issues or the lack of it in recent years have
highlighted the necessity of addressing the “eradication of poverty” as one of the most
important global public goods. The data from the World Bank indicates that over the next
25 years or so, the population of developed countries will increase by only 50 million,
whereas the population of developing countries will increase by 1.5 billion. In other words,
unless the developing countries are going to be integrated into the global economy and
be part of a global federal system which will include a mechanism for the emergence of
international institutions including a global single currency, similar to the experiences of the
312 F. Moshirian / J. of Multi. Fin. Manag. 14 (2004) 305–314

US in the 19th century where the “South” became integrated into the “North” or in recent
times, the formation of the EU and the membership of small European countries such as
Greece, Portugal and now the Eastern European countries which have less than one half of
the per capita income of the rich Western European countries now expanding this union,
international security and peace will become an even more urgent and important issue on
which the world is already spending more than $ 1000 billion dollars, a year in military
expenditure alone.5 Indeed, international security and peace is itself a global public good.
Similarly, the price volatility and over-supply of some agriculture commodities which
could lead to asymmetric shocks are the consequence of a divided global economy, which
does not currently operate on the principle of comparative advantage. This could be remedied
by an integrated global economy as analysed by Moshirian (2003) rather than manipulat-
ing the national currency value in order to deal with these types of crisis. Similarly, the
asymmetric shocks due to climate change resulting in drought or flood in some parts of the
world, could only be remedied if the world economy is fully integrated and environmental
issues are globally addressed and at the same time, there is an appropriate system of com-
pensation and support (similar to the one in operation in the EU or the federal system in the
US) at the international level. In other words, in the same way that at the present time, all
asymmetric shocks in one or a few states of the US or countries in the EU are remedied at
the federal(US) or EU levels, the 21st century could (in an integrated global system) deliver
a similar insulation against the effects of shocks, to a particular sector, nation or region at
the international level.

6. Capital and labor mobility for a single global currency

With respect to the capital and labor mobility conditions satisfying the requirements of
an “optimal currency area”, one should again consider these two conditions in the context
of the dynamic evolution of the global economy in the 21st century and then consider its
ramifications for a global single currency. One of the stumbling blocks for considering the
integration of all nations into a global system is that some argue that the labor mobility
envisaged in most economic integration theories cannot be implemented due to the fact that
it is almost impossible to allow all workers from say China, India or Brazil to travel freely,
choose wherever they wish to find a job and settle there, and hence the unification of the
global economy is idealistic.
However, one of the features of the 20th century was the emergence of the multinational
corporations (MNCs) which made capital mobility possible and the transfer of technology
feasible. Consequently, one of the phenomena of the dynamics of the economy of the 21st
century is that the process of globalisation has created an environment in which corporations
are almost forced to become MNCs and at the same time be able to compete with each other
at the international level. Indeed, the movement of capital and technology have been one
of the extraordinary developments of the 20th century as foreign direct investment (FDI)
as well as investment in foreign financial markets, including stocks and bonds, have inten-

5 In this context it is noteworthy that according to the World Bank one billion people live on less than $ 1 a
day and nearly half the world’s population lives on less than $ 2 per day.
 F. Moshirian / J. of Multi. Fin. Manag. 14 (2004) 305–314 313

sified. In effect, FDI has become more important than trade. Furthermore, in recent years,
the foreign institutional shareholders which are investing in many companies in the devel-
oping countries are becoming another source of capital mobility between developed and
developing countries. Thus, international capital flows and MNCs operations are making
borders irrelevant. In this climate, international rules and effective international institutions
and binding agreements such as minimum wages, human rights, investment incentive, and
at the same time measures to deal with the growing power of the MNCs and other issues
to protect the interdependence and the realisation of the full potential of capital and la-
bor are imperative and are in effect another global public good (Moshirian, 2002, 2003).
Therefore, in the 21st century, in most instances, capital is going to labor rather than labor
meeting capital. In other words, in the presence of capital mobility and internationalisation
of companies and competition, workers’ mobility and their cross-borders are not essential
requirements of global integration. Furthermore, a number of studies demonstrate that once
the economic and political conditions are favorable, MNCs are willing to invest and develop
their business in different parts of the world. For instance, the massive investment in China
by MNCs have created a great opportunity for workers to find employment within China
rather than Chinese workers having to leave China in search of employment. In the case of
Eastern European countries joining the EU, estimates by the European Commission are that
due to the convergence of the economy of these countries with the rest of the EU, there is
going to be more and more investment by MNCs and economic growth of about five percent
per annum will be sustained for the years to come in these countries. The experiences of
Western Europe also indicate that due to the formation of the EU, not only have countries
such as Spain, Portugal and Greece benefited from this union, but also some of the regions
such as the North East of Italy, the South of Germany and Ireland have rapidly developed.
Furthermore, the research in Europe indicates that millions of workers from Spain, Italy
and Portugal who used to work in other parts of the EU are now returning to their own
countries, as their economies have transformed as a result of being part of the EU. In
other words, in the age of IT and capital mobility through financial market integration
and global mobility amongst the MNCs, both rich and poor countries could be part of an
integrated global system that is maintained and developed by international institutions such
as a World Central Bank and a global single currency. However, in the long-term as the per
capita income of all nations converges, labor mobility may no longer be an issue of concern.

7. Conclusion

While in the US, the Greenback was supported by the federal government, in the case of
EU, a single currency was established in the absence of a European government and hence
a single European fiscal policy. In other words, while some debate that a global single
currency should ideally be backed by a world federal government and be part of a global
federal system, it is not an absolute prerequisite. A World Central Bank, independent from
the national governments could bring about a global single currency and become the impetus
for acceleration of the process of integration. One of the scenarios could be to consider the
EU and to some extent the US experiences, where a global single currency could first
be in circulation in parallel to the national currencies and then gradually replace national
314 F. Moshirian / J. of Multi. Fin. Manag. 14 (2004) 305–314

currencies as the nations fulfill the requirements to use the single global currency as their
currency. As the process of unification accelerates, similar to the US experience, a global
single currency should be part of a global federal system (similar to the US experience and
to some extent the EU) that has the capacity to compensate, subsidise and tax all nations,
industries and people that are going to be affected by the global federal system. In this
way, there will be enormous gains associated with a global single currency and yet, global
institutional and financial capacity should be in existence in order to compensate those
sectors and nations negatively affected by global competition, and to support those that
require more investment and technology transfer. They could also support research and
projects that are of global benefit and will assist the international community in the process
of integration.
As to whether the economic unification of the US or the EU followed the same con-
ditions attached to the theory of the optimal currency area, the short answer is “yes” and
“no”. In other words, their single currencies were the by-products of issues affecting these
two regions’ challenges for unification and have assisted in the process of integration and
development of all parts of these two regions. A similar experience may well be relevant to
the challenges of integration in the 21st century.

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