The world today is home to over 190 countries (depending on who you ask), using 180 currencies to trade, invest, and of course collect taxes – this is to say nothing of the up-and-comers like cryptocurrencies and age-old reserves like gold and silver.
The world economy is complex at the best of times, and the foreign exchange market only looks to add an additional layer of confusion to this complexity. Currency is supposed to be the legal tender that makes trade easier for everyone. So, it begs the question. Could the world adopt a single, universal currency?
On the surface it seems like the obvious solution to wiping out the frustrations at all levels of global industry, from someone desperately trying to exchange Yen for euros at the airport, all the way up to international companies managing their foreign operations.
But this is not just about convenience. Although it is a fair argument against keeping a room full of goats to barter, than a pocket full of notes and change.
Removing the burdens of transactions has a very real impact on the economy. Humanity has over time, evolved the financial system from bartering wheat, chickens, and goats – to gold coins, fiat currency, and all the way up to the modern day where we make the majority of our transactions digitally. With every step of this evolutionary process, earning and spending money has become easier while massively boosting quality of life.
A single, worldwide currency surely sounds like the logical next step in creating a truly globalised marketplace. But of course, there are questions that must be answered apart from the obvious one of control. Such as…
What are the drawbacks of a single currency? How would it be rolled out? And do the advantages really make it worthwhile?
Universal currencies are not totally a new thing. For hundreds of years gold was universally accepted as a standard medium of exchange, and the European Union has adopted the euro to varying degrees of success also. So perhaps the best way to address the viability of a worldwide currency is to explore these other currencies, and of course do what economists do best… and that is to use Europe as the guinea pig.
Mediums of exchange have been around for a long time, examples of everything from seashells to wooden sticks have been used to facilitate exchange in basic societies. Having a universally accepted medium of exchange also made trade much easier than the alternative – which was bartering. However, bartering, or item-to-item exchange, meant that people ran into a lot of problems.
If a goat farmer were looking to do his monthly shopping trip, he would first need to find the people selling what he wants, and for those people to want to trade those items for his goats. Even then, it’s difficult to trade one goat for one loaf of bread, because that’s not a fair trade. Also, the goat farmer doesn’t need 30 loaves of bread all at once. So, what do they do? Do they divide the goat into 30 pieces? Of course not! Does he trust the seller to disperse 30 loaves over an agreed period of time – as and when the farmer wants them? Unlikely! Bartering just doesn’t work well at all when it comes to fairness in a ‘like for like’ situation.
Another problem that is often overlooked is… let’s say this same goat farmer works particularly hard and is very successful – it’s hard to store wealth in goats because they die… and they also take a lot of maintaining to boot. This difficulty involved in trading and the lack of incentive to grow genuine and storable wealth, meant that economies made up of the individual traders were always limited to small communal and self-sufficient villages. And they were the foundations of modern society. But they did very little in the way of achieving quality of life for the citizens living within them. This meant there was little to no time to specialise in anything, such as becoming an engineer for example, as every waking hour was taken up with ensuring the bare essentials were always met.
It has been said before, and no doubt it will be said again, that financial innovation has been every bit as important as technical innovation throughout history, and that’s because it’s difficult to have one without the other. As we’ve just seen.
Present day Europe, which is a concentrated area of highly developed economies, and on the whole, have strong independent industries – would have had their own problems pre-1999, however. Even then, if these countries wanted to collaborate on business, or set up supply chains, they found it very difficult to do so. That’s because the risks of dealing with foreign currency is extremely significant to a business.
Germany in 1998 might have had problems such as doing business with Italy for the purchase of engines for their cars, only to find the Lira price agreed on had dropped by half against the value of the Deutsche-Mark due to a big German bank collapsing. Now the German company owner will owe twice as much for the contract he had already signed. And this type of thing in particular does happen.
Foreign exchange risk is something that international businesses need to deal with all the time. And they tend to do so by buying insurance on Forex pricing, using derivatives. No problem for the major corporations, but for small to medium enterprises it’s not worth the cost or the headaches. Introducing the euro got rid of this. Not only could Germans put Italian engines in French cars, but they could also assemble them in Spain.
Europe can get away with a centralised currency because all of the participating nations are strong allies – but with so many world nations harboring hostilities at present, a world currency couldn’t work without a central controller.
That brings us swiftly on to cryptocurrencies.
A lot of cryptocurrencies are built on the idea that they will introduce a new medium of exchange that is completely decentralised from any banking institution. These currencies are said to show a lot of potential as ‘the money of the future.’ But for arguments sake, we are going to avoid the problems that a lot of these currencies have, as that is an entire subject in itself. But there is one problem that goes beyond the technical limitation of the cryptocurrency.
If everything did work perfectly, these currencies would have a hard cap on supply. Bitcoin for example, will never have more than 21 million coins in existence. This makes coins very similar to gold, in that both have a limited supply, intrinsic value, and both can be used as a store of wealth. So, if the adoption of such a currency was to become widespread, then financial institutions will just do what they did with gold and use them as a reserve asset. They will issue promissory notes and administer credit on cryptocurrency reserves they don’t truly have.
Some may argue that this will be better than the fiat system we have today, and it probably won’t radically change banking, but… it will introduce an extra layer of complexity that we have been trying to avoid all along.
Oftentimes when economists play around with hypothetical ideas such as a universal, worldwide currency, they will come to the conclusion that it is possible, but not likely to provide many benefits. And in reality, a single worldwide currency would have its advantages, and if it were administered responsibly, these advantages could in fact outweigh the costs. But… this is making the HUGE assumption that something with so much power and influence could be controlled responsibly.
And in the meantime, no country in the world is likely to give up the sovereign power that managing their own currency gives them – just for the hope that they will make online shopping a little bit easier, airports a little less stressful, and business a little bit smoother. Not unless they were all in complete agreement with it that is.