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Global Currency

Imagine a single currency, all around the world.  No more converting between Dollars and Euros and Pounds, the money in your wallet is your ticket to ride anywhere.

Sound like a fantasy?  Throughout history it’s been more or less the standard.  The coins from one era might come from Rome or Madrid or London or Beijing, but one accepted unit of exchange was the norm until very recently.  In many ways, the standard now comes from twelve Federal Reserve banks in paper form, printed with green ink.

But we’re a global society now, with total worldwide trade taking up nearly $8T of the global product of $52T.  Is it time for a new global currency that isn’t subject to the needs and politics of one nation?  More and more, the answer is “yes”.  But getting there, as with anything international, is the hard part.

The standard of currency right now is the US Dollar.  This has been true since a month after D-Day when the leaders of the developed world at war sat down at Bretton Woods, New Hampshire, and agreed how to win the peace.  From that day on, nearly all international trade has been priced in US Dollars.

That’s not to say it’s been a comfortable relationship.  In 1971 President Nixon responded to some monkeying around by the French and some other nations by pulling off the Dollar’s convertibility to gold, backing our of our end of the Bretton Woods agreement.  The world responded by … largely ignoring the situation and still using the Buck as the standard, as it is today.  Nevermind that we can print as many as we want and run up huge budget deficits.

Developing nations have been squawking about this relationship for a long time.  Malaysia has called for a return to gold for a long time, as have other predominantly Moslem nations for whom the Qur’an defines gold as the only real money.  China has weighed in strongly lately as well, shocked by the reserves of US T-Bills they’ve found themselves holding as a reserve for their export driven rise to a new standard of living.

In 2009, Zhou Xiaochuan, President of the People’s Bank of China, called for “creative reform of the existing international monetary system towards an international reserve currency,” believing it would “significantly reduce the risks of a future crisis and enhance crisis management capability.”  He’s far from the only one.  There are many plans out there for an international currency, some defined by gold, some by an international bank, but most as a basket of national currencies.

The closest we have to a truly international currency is what the International Monetary Fund (IMF) calls “Special Drawing Rights” (SDR).  It’s a basket of US Dollars, UK Pounds, Euros, and Japanese Yen set by the IMF according to … some standard they set up.  It’s not used much, but it has its appeal.

For an international currency, the first step is a basket like the IMF tried to define – but tied to trade.  And that’s where we get to the total trade by currency (nation, except in the EuroZone).  It’s a much more interesting way to weight the basket of currencies you might use.  This table is total exports and imports, by currency:

Nation or Area Currency Trade, T$ % of Total Running %
1  European Union Euro, EUR or € $4,475 12.6% 12.6%
2  United States Dollar, USD or US$ $3,825 10.8% 23.3%
3 China Yuan, CYR $3,641 10.2% 33.6%
4  Japan Yen, JPY or ¥ $1,596 4.5% 38.1%
5  United Kingdom Pound, GBP or £ $1,150 3.2% 41.3%
6  South Korea Won, SKW $1,082 3.0% 44.3%
7  Canada Dollar, CDN or C$ $921 2.6% 46.9%
8  India Rupee, INR $793 2.2% 49.2%
9  Russia Ruble,  RUB $748 2.1% 51.3%
10  Singapore Dollar, SGD or S$ $719 2.0% 53.3%
11  Mexico Peso, MXN $642 1.8% 55.1%
12  Taiwan Dollar, NTD or NT$ $576 1.6% 56.7%
13  Switzerland Franc, SFr $534 1.5% 58.2%
14  Brazil Real, BRL $471 1.3% 59.5%
15  Australia Dollar, AUS or A$ $461 1.3% 60.8%

After 60% of total it falls off to small potatoes quickly.  But we should also define our currency with something valuable, like commodities.  The most traded commodities in order are oil, coffee(!), steel, and cereal grains.  They could be used to make up another 30% of this currency.  Add in another 10% tied to gold in order to hold value and satisfy the Moslems and Gold-Bugs, and we have an interesting world currency – defined by trade.

I call it the Trade Weighted Exchange, or TWX (pronounced “Twix”).  It’s an idea that could very well be on the way soon as a replacement for the US Dollar standard.

Why would the US ever give up its position as the world standard currency?  For one thing, it’s going to happen one day, so why not ease into it gradually?  For another, this would definitely lead to devaluation of the US Dollar and help our manufacturing base – causing some inflation in the process, but I also think that is inevitable. It would improve stability.   And as a non-inflating currency for a standard, there would be added pressure on governments around the world to keep their budgets in balance because it would be much harder to win a Currency War.

Is the world ready for the TWX, or something like it?  The answer is a strong “Yes”.  It’s all in how it gets defined.  Here’s one idea, but there are many out there.  Have at it.

11 thoughts on “Global Currency

  1. You fixed the comments! This is an interesting idea and I can see why other nations would like it. For us it would definitely make imports more expensive which is both good and bad. I think I support it especially if it does bring stability and fiscal discipline.

    • Sorry, I still don’t know why it breaks.
      This is a good move for us for many reasons, but the possibility of regaining manufacturing jobs is the best reason. It also would make it possible for the Fed to manage the US Dollar much more effectively, among many other things. And it would probably stabilize prices on commodities – just noticed today that gasoline prices go up and down as much as 35 cents a week!

  2. Interesting idea. Is this the follow up to your post on “what is money”? :)
    What I wonder is if this would help our balance of trade especially if the dollar falls in response. I take it that is part of your plan. I can see how this cuts both ways too.

  3. Here is that balance of trade graph: https://research.stlouisfed.org/fred2/graph/?graph_id=71341&category_id=0 The total amount of money that left the US since 1980 is $8.8T (getting used to everything in trillions yet?) That’s a lot of money to leave our borders, and it should have trashed the US Dollar. But it didn’t because demand has stayed high for the global currency.
    That’s the price of our Empire – above and beyond the price we pay in blood, that is. It’s time we put an end to it all, IMHO.

  4. good luck getting the banks to go along with something that benefits someone other than themselves

  5. Why has demand for the dollar been high? ; )

    Is the world enfatuated with the US, like the way everyone like Kristen Stewart?

  6. My guess is that currently the dollar price of the yuan is too low. I can’t relly explain what China is doing with the yuan. It floats to some extent, but shouldn’t it just float…immediately? Then there could be a one-time adjustment.

    “it’s going to happen one day”…I think we should be careful and not say that that will happen. That’s the pigeon following pigeon thinking that you have criticized in the markets.

    I like the idea of a global currency but it should be in the context of global government, with one central bank and with all nations giving up sovereignty. How do you like those bold apples?

    I think the dollar could remain the world’s reserve currency if Europe gave up theirs and just adopt ours. As a Republican I feel there is nothing wrong with empire. Someone has to run the world. ; )

    • The Yuan is probably low, but I don’t think it’s as low as many pundits claim – probably 5-10%. At PPP it’s pretty close, given that things are cheap there. Inflation may change all that, which is the main reason they need to float it.
      How do they get away with a non-convertible currency? Beats me all to Hell.
      I do think it’s inevitable that the Dollar Standard will fall just because the volatility is a serious risk. When everything was calm and even it was great, but upsets here and there yank the dollar around and prices change like crazy on everything. I was going for stability in my currency design for this reason.
      A single global currency with a central bank? Maybe one day. I’m proposing a kind of interim step and that next one may be desirable some day. But I think that too many developed nations would fight such a thing now so I don’t see how it can happen. Just my thought. I came up with something that would satisfy most of the needs for a global standard and could be implemented right away – rolled out slowly, even. That could catch on soon.

  7. Pingback: A New Beginning | Barataria – The work of Erik Hare

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