A Single Global Currency
Jul 20, 2007 5:00 AM PT
Since Europe enacted the euro as its common currency, there has been increased discussion about whether or not the world would benefit from a single global currency. At this point, the proponents seem to have a substantial edge; but like anything else, there are proponents and there are detractors.
The Book: The Single Global Currency
I just got through reading this interesting book by Morrison Bonpasse, who is the president of the Single Global Currency Association. It was an eye-opener.
Additionally, I must say that Mr. Bonpasse recently invited me to serve on the association's international board of directors. Because I have both spoken and written about the pros and cons of currency consolidation and I find the topic fascinating, I was happy to accept the appointment.
The book really added to my education insofar as currencies are concerned. I didn't realize that there were so many benefits to currency consolidation. That said, there certainly are detractors to a worldwide consolidation, and I will let the reader make up his or her own mind about this important economic issue.
Benefits to Consolidation
The book explains that because our world has so many currencies, the "transaction costs" related to currency exchange are enormous. It argues that US$400 billion of annual transaction and exchange costs will be eliminated -- obviously not something to be dismissed lightly.
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The book also argues that if we had a single global currency, worldwide assets would increase by about $36 trillion -- again, not something to dismiss out of hand.
In this regard, I was reminded that my trip to Europe this past May was especially painful from an economic point of view. All of my expenditures were, of course, in euros. Unfortunately, the dollar is no longer worth that much against the euro. When I got my credit card bills for the trip, the "translation" of my expenditures to dollars was especially painful. From this personal point of view, I can certainly see the value of one world currency. At this writing, it costs $1.36 to purchase one euro.
Eliminating Global Imbalances
We've all heard of the U.S. balance of payments and/or current account deficit. This is occurring because we are purchasing billions more in foreign goods compared to what we are exporting. The problem is more of a currency problem rather than a trade problem. And with a single global currency, the currency problem disappears.
This problem will by the very nature of a single global currency be eliminated. The U.S. would no longer have to be concerned about importing more than it was exporting insofar as this imbalance creating a potential currency crisis. 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.
Eliminating Crises and Speculation
Do you remember when the brilliant hedge fund manager, George Soros, made a killing in the '90s by his currency bets? Well, Mr. Soros will have to look for another way to garner billions if the world had one currency. The book describes this situation, currency crises and currency speculation, in detail. It also goes on to articulate how these potential crises would be eliminated by the world having one common currency.
Additionally, Morrison Bonpasse recently told me, "Ted, it's a delicious irony that Soros made that bet against the British Pound after writing that the world should move to a single global currency in his 1987 book, The Alchemy of Finance. His message appears to be, 'Hey, if you aren't going to fix this system, it can be a good way to make some significant profits.' Yet, Soros continues to be a supporter of a single global currency."
The Need for Foreign Exchange Reserves
Currently, China is holding substantial foreign exchange reserves in order to, among other things, hedge against any serious threats to its currency. At last count, those reserves exceed $1 trillion dollars. With one world currency, China would no longer have this worry and the United States would no longer be concerned about the possibility that China would "dump" substantial dollars on international markets, thus seriously depressing the U.S. dollar and doing substantial damage to our economy.
The same can be said about India, a steadily growing economic giant. In fact, we can say the same about any burgeoning country in that developed countries won't have to look over their shoulders for potential threats to their currency by economic "upstarts." Here again, the book does a quite decent job explaining issues of this type.
The Road to Implementation
The Single Global Currency gives a lot of attention to the euro and how it has transformed the economic strength of Europe. With a central bank, Europe is now reining in profligate member countries that can't or won't get their economies, spending and inflation in order. In this sense, Europe has been the world leader of the currency consolidation movement.
I was in Europe when the euro was about to be established. There were all kinds of speculation about whether countries like Germany and Italy would "give up" their currencies and use the euro as the exclusive currency. Additionally, there was quite a bit of concern that many citizens of various European countries wouldn't turn in their local currency and exchange it for the euro.
The mavens were afraid that nationalism would take hold and people would simply say no to parting with their much-cherished national currency. Well, the concern was unfounded and there was never any mass movement by citizens to retain their country's historical monetary denominations.
The Single Global Currency makes this phenomenon quite understandable and, for the serious student, it comes with plenty of citations and footnotes. One of the citations comes from an article that I wrote for the E-Commerce Times titled "Monetary Unions: Are We On Our Way?"
Will We Have One Currency Soon?
Of course, no one can predict if or when a worldwide currency consolidation will happen. Presently, we are seeing gathering strength in currency zones such as the dollar, euro and yen. There certainly is consolidation going on because it makes international trade a lot more efficient and seamless.
My best guess is that we'll see more consolidation of currencies, but I wouldn't dare guess when or if we'll see a single global currency. I'll leave that to the mavens like Mr. Morrison Bonpasse. Even if his goal of a single world currency by the year 2024 is optimistic, the prospective benefits warrant further research and planning now, rather than later.
Theodore F. di Stefano is a founder and managing partner at Capital Source Partners, which provides a wide range of investment banking services to the small and medium-sized business. He is also a frequent speaker to business groups on financial and corporate governance matters. He can be contacted at Ted@capitalsourcepartners.com.