The idea of global currency has been put forward for years now. But what is global currency? A world currency refers to a currency that is transacted internationally, with no set borders. While it is true more and more firms are becoming multinational and must deal with a number of monetary systems, it is not always feasible to develop one monetary system to do away with the exchange rate. On March 26, 2009 a UN panel of expert economists called for a new global currency reserve scheme to replace the current US dollar based system. Other proposals have been put forth but the all have some difficulties.
The well-known economist, Keynes, advocated a global currency and argued that it wouldn’t suffer from inflation and many argue it would make conducting business more efficient. However, other economists argue that a single world currency is unnecessary because it would bring little benefit and increase costs. I am more inclined to agree with the latter. Kerr in Development of a Worldwide Currency: Is it Feasible? puts forth factors that influence this very question.
Political factors have some of the largest effects on monetary policy after all government is responsible for monetary policies, fiscal policies, spending, global relations, law making, acts of war and more. In areas where governments are stable and their decisions soundly made, the currencies have less risk of changing values quickly and investors are more willing to conduct transactions in a currency whose behavior can be predicted.
In a study conducted over an eight year period Between January 1, 1990 and March 31, 1998 to determine if political forces, economic forces, or technical forces had the largest shift in exchange rates, it was decided that while each factor had an effect on the exchange rate shift, the study determined that the largest changes in the rates were due to political reasons. The study also showed the variety of political conditions that influenced the exchange rates. These events ranged from talks about trade, deciding on secession possibilities, and even sanctions.
Many different political factors influence currency and many currencies have gained and lost value simply based on the stability of the government at the time. 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 countries before a true world currency could be created.
Economic factors also play a large role in influencing currency or can impact the formation of a unified monetary system. If we examine the world economies by looking at the gross domestic product we see the disparity of many of the global economies. The large differences in wealth between nations would place the wealthiest regions in conflict with the poorest regions in debt.
Another important factor that affects currency is the level of technology within a nation. Again it depends on the idea of comparability. Technology in countries using the same currency must be at the same level for any hope of success. In our world today it is easy to see why technologies must be equivalent. As Kerr points out, if a worldwide currency was developed and over 50 % of the countries did not have access to computers, how would electronic commerce, money transfers, and general information exchange take place? These are issues that need to be addressed before worldwide currency can be used.
Technology has a direct affect on the economy of nations as well as production. Clearly speaking, the higher level of technological advancement, the more productive and better off the economy is.
These difficulties exist and stand as obstacles to the development of a world currency. While it may be argued that multinational firms have the capability to help bring about a world currency, it seems that this is not so. Multinational companies would not or could not help to bring about a common global currency. Their main concern is the bottom line and that is profit. They will set up in the country where there are less restrictions and cheaper labor. They often don’t respect national boundaries. Any common currency would have to be achieved by an acceptable political process.
It is difficult to see a world currency in place any time soon. In theory, the development of a worldwide currency seems like a perfect idea. But the perfect world does not exist and what may prove to be successful for one country may not be applicable in another country. As pointed out by Kerr, the political, economic and technological issues are only some of the barriers that must be considered before a worldwide currency can be developed. “Nations are still so far apart on many grounds and this gap does not appear to be closing quickly.” ( Kerr)
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