On with the dolleuro
Single world currency could add US$36 trillion to worldwide assets
AS GOVERNMENTS and central banks worldwide seek to co-ordinate their policies so as to soften the blows being delivered to economies everywhere, it’s perhaps opportune to consider the possibilities of a single world currency. That is, of course, not a new idea. Six decades ago the great Lord Keynes, from whose thinking the World Bank (WB) and the International Monetary Fund (IMF) were born, suggested a single world reserve currency “to be known as the bancor”.
In 1969, the IMF established the system of special drawing rights (SDRs) to support the post-Second World War Bretton Woods fixed exchange rate system. SDRs were based on a valuation that included the price of gold and a basket of major currencies.
However, the Bretton Woods system collapsed when President Richard Nixon shut the gold window at the US Treasury. That window allowed for the free conversion by foreigners of US$35 into an ounce of gold. Of course, gold then soared and the world has since experienced high levels of currency instability.
Such instability provides opportunities for speculation, as was the case when American financier George Soros made a billion dollars betting against the British pound in the early Nineties. It’s indicative of the dangers of such speculation that Soros gave back most of his pound winnings when he bet in favour of the yen against the US dollar. Live by the sword, etc...
Soros – in his 1987 book The Alchemy of Finance – expressed his support for a single world currency, not that that deterred him from seeking to profit from currency instability. Those who agree with him point out that, with a single world currency, an estimated US$400bn/year in transaction costs would be saved. In a recent book – The Single Global Currency – American economist Morrison Bonpasse cites a staggering figure of $36 trillion that could be added to worldwide assets if a single currency were to be adopted.
Anyone who travels will testify to the exorbitant charges currency dealers – mostly banks – levy on buying foreign exchange. Not only do they charge heavy and apparently unregulated commissions, they also screw the buyer (or seller, as the case may be) on the actual rate of exchange.
Writing in E-Commerce Times, Theodore di Stefano, founder of Capital Source Partners, points out that while a single currency wouldn’t prevent trade imbalances arising, it would eliminate the currency aspect of that. The problem of a trade deficit, such as the US is now experiencing, would in a single currency regime not be eliminated but the currency aspect could be thus removing a central cause of instability.
Di Stefano adds: “There are, of course, other economic concerns about any country being a net importer. But at least the impact of trade imbalance will no longer be of concern regarding currency impacts.”
Currently hanging over the US and the world is the spectre of China panicking over its trillion US dollar holding of the greenback. Out of fear – or, perhaps, for other unkind reasons – China could quite easily send the US dollar tumbling, adding to world currency instability and thus hobbling commercial exchange and intensifying the world economic crisis.
It’s difficult to comprehend the dimensions of the world currency market and it should be borne in mind this market is almost totally unregulated and a haven for manipulators all over the globe. Working in concert but untraceably so from distant corners of the earth, 24 hours a day, these operators can generate massive swings in currencies, particularly a relatively tightly traded unit, such as the rand, by their own buying and selling accounts or for that of their institutional employers or, as is usually the case, for both.
They would be loath to try such tactics in listed shares or bonds with government and exchange regulators keenly on the lookout for such shenanigans. Jail time looms for those who try to manipulate listed entities.
But currency trading just can’t be regulated in the same way. According to the Progressive Policy Institute in Washington, such markets turn over more than $3 trillion/day – more than 10 times the daily stock and bond turnovers and an astounding 100 times the value of all daily trading in goods and services.
A single world currency is, in terms of domination of holdings by major currencies, not so far-fetched a proposition. World reserves are held as to 66% in US dollars, 25% in euros, 3% in yen and 4% in sterling. That’s a total of 98% – leaving 2% in 150 other countries. Just merging the euro and the US dollar into a single currency would account for 91%.
Dollarisation, or the substitution of the dollar for a local currency, has been taking place in many parts of the world, particularly in South and Central America. In the case of the euro, the world has a highly successful laboratory experiment in a single currency that turned into a solid and effective reality. Perhaps that’s what US president elect Barack Obama can do for the world. On with the dolleuro.