top of page
Search

HOW LONG IS A ONE WORLD CURRENCY IN THE MAKING ?

For a very long time.

See the 08 January 1988 cover of The Economist magazine :


And, below a copy of the article :

" Thirty years from now, Americans, Japanese, Europeans and people in many other rich countries, and some relatively poor countries are likely to pay for their groceries with the same currency. Prices will not be quoted in dollars, yen or D-mark, but in, let's say, the phoenix.

The phoenix will be preferred by businesses and buyers because it is more convenient than the current national currencies, which by then seem to be the cause of much disruption to economic life in the 20th century.


In early 1988, this seems a far-fetched prediction. There were many proposals for an eventual monetary union five to 10 years ago but they hardly foresaw the setbacks of 1987. The governments of major economies were trying to move a few inches towards a more managed system of exchange rates- a logical precursor, it seems-and towards radical monetary reform. Lacking cooperation in their underlying economic policies, they messed up terribly, causing the rise in interest rates that led to the October stock market crash.

The stock market crash taught them that the appearance of policy cooperation can be worse than nothing until real cooperation is feasible (i.e. until governments give up their economic sovereignty) further attempts to peg currencies will fail.


But despite all the difficulties governments have in reaching and (even more difficult) adhering to international agreements on macroeconomic policy, there is a growing conviction that exchange rates cannot be left to themselves. Remember that the Louvre Accord and its predecessor, the Plaza Accord of September 1985, were emergency measures to deal with a crisis of monetary instability. Between 1983 and 1985, the dollar rose 34% against the currencies of America's trading partners; since then, it has fallen 42%. Such changes have lowered the pattern of international comparative advantage more radically in four years than underlying economic forces in an entire generation.


In recent days, the world's major central banks, fearing a new dollar, have again intervened collectively in currency markets. Ministers like Britain's Mr Nigel Lawson have converted to the cause of exchange rate stability. Japanese officials are taking seriously the idea of EMS-like arrangements for major industrial economies. Regardless of the embarrassing failure of the Louvre, the belief remains that something needs to be done about exchange rates.


Something will almost certainly happen during 1988. And not long after the

next currency deal is signed, it will go the same way as the previous one. It will collapse. Governments are far from willing to subordinate their domestic objectives to the goal of international stability. A few more major exchange rate disruptions, a few more stock market crashes and probably a few meltdowns will be needed before politicians are willing to face this choice. This points to a tangled series of emergencies, followed by a revamp, followed by an emergency, extending well beyond 2018. Except for two things. As time passes, the damage caused by monetary instability will gradually increase; and the very trends that make that possible make the utopia of a monetary union feasible.


The new global economy

The biggest change in the global economy since the early 1970s is that money flows have replaced trade in goods as the driver of exchange rates. Due to the ongoing integration of the world's financial markets, differences in national economic policies can distort interest rates (or expectations of future interest rates) only slightly, but still evoke huge transfers of financial assets from one country to another.

These exceed the flow of trade income in their effect on the supply and demand for different currencies, and hence their effect on exchange rates.

As telecommunications increase,these transactions will become even cheaper and faster. With uncoordinated economic policies, currencies can only become more volatile.


Alongside this trend, there is another - ever-increasing opportunity for international trade. This too is the gift of advancing technology. Falling transport costs make it possible for countries thousands of kilometers apart to compete in each other's markets. The law of one price (that a good should cost the same everywhere, once prices are converted into a single currency) will increasingly assert itself. Politicians will allow it, national economies will follow their financial markets - increasingly open to the outside world.... This applies to both labor and goods, partly through migration, but also through the ability of technology to separate the worker from the point where he delivers his labor. Indian computer operators will process New Yorkers' paychecks.


In all these ways, national economic boundaries are slowly dissolving. As the trend continues, the attraction of a currency union between at least the major industrial countries will seem irresistible to all but currency traders and governments. In the Phoenix zone, economic adjustment to shifts in relative prices would be smooth and automatic, as it is now between different regions within major economies.


The Phoenix zone would impose strict constraints on national governments.

For example, there would be no such thing as a national monetary policy. Global phoenix supply would be set by a new central bank, perhaps derived from the IMF. World inflation-and thus, within narrow margins, any national inflation rate-would be in its hands. Each country could use taxes and government spending to offset the temporary drop in demand, but it would have to borrow rather than print money to finance its budget deficit. Without recourse to the inflation tax, governments and their creditors would be forced to assess their borrowing and lending plans more carefully than they do now. This represents a great loss of economic sovereignty, but the trends that make the phoenix so attractive take away that sovereignty anyway. Even in a world of more or less floating exchange rates, individual governments have their policy independence checked by an unfriendly outside world.


As the next century approaches, the natural forces pushing the world towards economic integration will offer governments a wide choice. They can go with the flow, or they can erect barricades. Paving the way for the phoenix means fewer pretend policy deals and more real ones, allowing and then actively using international money by the private sector alongside existing national funds. That would let people vote with their wallets for the eventual full currency union. The phoenix would probably start as a cocktail of national currencies, just like the special drawing right now. But over time, its value relative to national currencies would no longer matter, as people would choose it for the convenience and stability of its purchasing power.


The alternative - maintaining policy autonomy - would really create draconian controls on trade and capital flows. This course offers governments a wonderful moment. They can manage exchange rate movements, apply monetary and fiscal policy uninhibitedly, and tackle the resulting inflationary bursts with price and income policies. It is a growth-reducing prospect. Register the phoenix around 2018, and welcome it when it comes."


Recognizable ?

Now, replace the Phoenix with the digital currency.


20 views0 comments

Kommentare


bottom of page