Posted at 08.10.2018
The recent history of currency exchange rates includes 3 huge changes beginning with the end of the XIX to the end of the XX hundred years. Pure rare metal standard has been the foundation for trading between countries during 1879 and 1914 (Abdel-Monem, n. d. ).
At the start of World War I, this standard ceased to exist and in 1920 countries permitted greater exchange rate flexibility (Jereissati, 1999), which however, didn't last long and following the end of the World Warfare II the Bretton-Woods system has been integrated. This standard has been created therefore of numerous conferences between your World Conflict II winning state governments with the ultimate conference occurring at the Hotel in Bretton Woods, New Hampshire. The typical had taken the name of this last conference's place (Grabbe, 1996, as cited in Tucker, 2008).
In August 15, 1971 Richard Nixon in his speech announced that the price of buck will be no more fixed against platinum. This has end the Bretton-Woods system and has set-off a fresh time in international monetary system. The main feature of the new system is that it's neither a genuine yellow metal standard nor a 100 % pure exchange rate float, but instead a system in between these two extremes (Meese, 1990). This standard is available until today and has been strongly undermined through the latest financial crisis. In this respect, the idea of having an individual global money is widely mentioned as a substitute economic system. This literature review outlines benefits and drawbacks of an individual global currency.
Single global currency, as one can see from the exemplory case of Euro, signifies that countries, where this money would be put in place, ought to be the members of any economic union with one central standard bank, common money, a coherent and binding financial insurance plan. Scandinavian Currency Union (SCU), including Denmark, Norway and Sweden, set up a common money unit, although central bankers in each of those countries maintained control over financial policy and didn't experience significant lack of independence (Bergman, 1999).
The solitary global currency is a much more complicated issue. Background recognizes a whole lot of economic unions of different size, both formal and informal. However the most successful example came from europe, which is the Economic Monetary Union (EMU). There's also two proposed single currencies, which potentially may come close to the Euro. They are the GCC financial union currency and the Asian Monetary Product.
The benefits of a global currency are as follows. To begin with, single money will eliminate deal costs, that are associated with international financial procedures. This will affect both: ordinary residents who plan to spend money in another country and multinational corporations undertaking international trades. Different currencies produce a great deal of inconveniences and obstacles. Exchanging one currency for another always entails currency exchange fees, as banking institutions, which provide such money exchanges, require commissions because of their services. Within the level of countries or even economic unions such expenses on currency exchange fees may reach high portions. By eliminating the need for currency exchange the economic unions may save resources (Buiter, 1999, as cited in Bonpasse, 2008). For instance, the European Commission payment (EC) has estimated that credited to an individual currency across the European Union 13 to 20 billion of Euro were preserved per calendar year (Grauwe, 2007). Moreover the difference between your currencies' exchange rates becomes an obstacle for a free of charge move of trade. As the barrier of different currencies will go away, the amount of international transactions increase. Bordo and Adam (2006) said that neighboring countries, which are members of your common financial union, have a tendency to trade more often with each other. In a report conducted by Micco, Stein, and Ordonez (2003) they found out that trade between European union users increased by 8 to 16%, after EMU was made (as cited in Lane, 2006)
Currency risks nowadays are one of the major cons of the present day international economic climate. Everything, ranged from a natural catastrophe to terroristic assault, may affect the value of the currency and as a result cause loss. Overseas shareholders, as well as stock holders, have to hedge their risk, which also requires additional expenditures. Execution of the single global money will get rid of the risk of damage, due to currency fluctuations. Additionally Bonpasse (n. d. ) highlights that the adoption of an individual global currency will save 400 billion folks dollars each year in foreign exchange transaction costs, which come from trading 3. 8 trillion US us dollars every trading day.
Currency misalignment is an activity when central loan company increases or lessens the value of its money against another for different purposes. One of the most known instances of currency manipulation are the conditions of China and Japan. Both countries artificially undervalued their currencies, which made their exports more competitive. As the value of Yen and Yuan reduces, the costs on Japanese and Chinese language products will therefore fall. It has created a great advantages for Japanese and Chinese products in the market. Today the reduced value of these currencies, which includes nothing to do with the real situation, has created huge complications for the economies of Europe and USA. "Japan and China, predicated on all requirements related to the IMF description, have been persistently manipulating their currencies to gain an unfair competitive benefit" (Preeg, n. d. ). Certainly with a single global currency, currency manipulation by individual countries would be impossible. Moreover you will see no need of such kinds of "unfair" methods.
It is straightforward to perceive that problems of modern day economic system are money rate fluctuations. As most of the currencies are "free" and aren't set to any value, there's a huge likelihood for money speculations. For instance, speculative opportunities of FOREX market may have a great effect on economics of countries and their finances. The speculative harm on the Swedish Krona in 1992 is a perfect example. The Central Standard bank of Sweden experienced to raise the interest of its currency which triggered devaluation of the Krona. Getting income from currency speculations gets money out of little or nothing. The next benefit from implementing a single global currency would be the elimination of money speculation's existence. The single global currency will show a new choice for speculators: if indeed they wish to speculate, they will need to choose another product, as the amount of money of individuals will no longer be for sale (Bonpasse, 2006).
Another problem of today's economic climate is international reserves or forex reserves. As the opportunity of a currency crash is high, anticipated to currency dangers and currency speculations, every country keeps assets in a variety of foreign currency, which are believed as reserve currencies. Mainly it's the US dollar, not often it's the Euro or the UK pound. However after applying the solitary global money, this hedging method will be pointless. As the central bank or investment company will give up the forex reserves, it'll save a great deal of money. "In 1992 the Western Commission believed that the future Eurozone members could probably reduce their total international reserves by one-half or $200 billion" (Bonapasse, 2008).
Turning to drawbacks of a worldwide Money, the most negative part of it is the fact that countries will eventually lose the capability to control their financial policy. Today every country is able to determine their monetary policy independently. To be able to have an affect on the overall economy, nowadays central banking companies of every country through influencing exchange rates and modifying interest levels, may increase or lower economic activity. However in case of an individual global currency, changes in an area country's finances, will demand changes in the global level. So with the Global Currency countries will eventually lose flexibility in their economic policy. "A consistent insurance policy template to provide macroeconomic balance, will constrain a country's potential to make 3rd party interest levels and exchange rate coverage" (Bonpasse, as cited in Wenzel, 2007, p17).
Another significant drawback of having a worldwide Currency is connected with the difference in economies of different countries. While there are just a few developed state governments with strong economies, the rest of the countries of the world have alternatively weak economies, for illustration nearly all African countries or some Southern American countries. On earth with a currency, the fragile economies shall draw down the rest, more well off countries. If one of the customers will face a crisis, the others must spend their resources to be able to stabilize the situation. An ideal example could be the debt turmoil, which just lately has happened in Greece. While the EU/IMF bailout package wasn't enough, Germany were required to loan about 110 billion Euros to conserve the country from bankruptcy. In addition the crisis acquired a chance to spread to other countries, as it reduced self-confidence in the economies of other European union members.
Global Money as a financial system has been first talked about back in the finish of XIX hundred years. The reasons why this system still has not been implemented are rather social and politics, than inexpensive. The first obstacle is countrywide identity. A lot of the countries consider their currencies as a national symbol, add up to the flag and the anthem. Certainly people will rarely discard their own national symbol, their way to obtain pride. "Some individuals are tempted to view such symbols as they actually their flags and nationwide constitutional documents, and the increased loss of such symbols can be viewed as as a national loss" (Bonpasse, 2008). Just imagine how hard it will be for Us citizens to abandon buck and acknowledge a money with absolutely natural name and with neutral images and signals. In case there is a Global Money it should be absolutely natural, as Euro is.
Political barriers also should be studied in to accounts. In the conditions where political tensions between two countries are possible, employing a single money is an enormous problem. For example, it is difficult to assume how USA, Democratic People's Republic of Korea and Iran, countries which have experienced significant politics tensions, would make a deal in order to accept a single money. Or it is difficult to say how it will work between countries which can be in state of war like North and South Korea. In addition, due to political discords, such issues as supply and printing of the Global Money would be difficult. As an unbiased central loan provider is demanded, the first dispute within the countries would be about the location of the central standard bank. Every person in the global economic union would try to move the blanket over. It really is hard to believe that after gaining regular membership to the global monetary union, countries wouldn't normally start attempting to gain greater affect on the central loan provider and hence the monetary policy.
Though the process of globalization seems to be unstoppable, we remain a long way away from being even near a Global Money. In my viewpoint, implementation of the solo global currency can be set alongside the legends about Eldorado or dreams of Utopia. There is no question that Global Currency has more benefits than costs. The loss of control of the economic policy is a really low price for the other features of this idea. Through the entire history mankind attempted to give birth to a global government. Little league of Countries and UN could serve as instances. Esperanto as a worldwide language also has been a great proposal, which could simplify the understanding between countries. But both concepts were not successful up to the time. Unfortunately the one global currency can be an notion of such type. Although globalization and the web did bring people round the world closer to one another, maybe we are still to different to buy food with the same money. Maybe public and cultural distinctions play much bigger role inside our life, than we think. USSR made an attempt of erasing these differences, but where is the USSR now?