World currency

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The U.S. dollar (top) and the euro are by far the most used currencies in terms of global reserves.

In international finance, a world currency, supranational currency, or global currency is a currency that would be transacted internationally, with no set borders.

Contents

History

First European Banknotes (17th century)

The first European banknotes were issued in 1661 by Stockholms Banco. Founded by Johan Palmstruch, it was a predecessor of Sweden's central bank Sveriges Riksbank. [1] As commercial activity and trade shifted northward in 17th century Europe, deposits at and notes issued by the Bank of Amsterdam denominated in Dutch guilders became the means of payment for much trade in the western world. [2]

Spanish dollar (17th – 18th centuries)

Spanish dollar of Philip V of Spain, 1739 Philip V Coin silver, 8 Reales Mexico.jpg
Spanish dollar of Philip V of Spain, 1739

In the 17th and 18th centuries, the use of silver Spanish dollars or eight-real coins, also known as "pieces of eight", extended from the Spanish territories in the Americas westwards to Asia and eastwards to Europe. This then formed the first worldwide currency. [3] Spain's political supremacy on the world stage, the importance of Spanish commercial routes across the Atlantic and the Pacific, and the coin's quality and purity of silver helped it become internationally accepted for about three centuries. It was legal tender in Spain's Pacific territories of Philippines, Guam and Micronesia, and later in China and other Southeast Asian countries, until the mid-19th century. In the Americas it was legal tender in all of South and Central America (except Brazil) and in the US and Canada until the 19th century. The Spanish dollar was legal tender in the United States until the Coinage Act of 1857. In Europe it was legal tender in the Iberian Peninsula, as well as most of Italy including Milan, the Kingdom of Naples, Sicily and Sardinia; in the Franche-Comté (France); and in the Spanish Netherlands. It was also used in other European states including the Austrian Habsburg territories.

After Mexican Independence in 1821, the Spanish dollar continued to be used in many parts of the Americas, together with the Mexican Peso from the 1860s onward. The Mexican peso, the US dollar, and the Canadian dollar all trace their origins back to the Spanish dollar. This also includes the use of the caduceus sign [ dubious – discuss ] ($), also known as the dollar sign. [4]

Sterling

Before 1944, the world reference currency was the United Kingdom's sterling. The transition between sterling and United States dollar and its impact for central banks was described recently. [5]

U.S. dollar

Worldwide use of the euro and the US$ .mw-parser-output .legend{page-break-inside:avoid;break-inside:avoid-column}.mw-parser-output .legend-color{display:inline-block;min-width:1.25em;height:1.25em;line-height:1.25;margin:1px 0;text-align:center;border:1px solid black;background-color:transparent;color:black}.mw-parser-output .legend-text{} United States External adopters of the US dollar Currencies pegged to the US dollar Currencies pegged to the US dollar w/ narrow band Eurozone External adopters of the euro Currencies pegged to the euro Currencies pegged to the euro w/ narrow band The Belarusian ruble is pegged to the euro, Russian rouble and US dollar in a currency basket. DOLLAR AND EURO IN THE WORLD.svg
Worldwide use of the euro and the US$
  United States
  External adopters of the US dollar
  Currencies pegged to the US dollar
  Currencies pegged to the US dollar w/ narrow band
   Eurozone
  External adopters of the euro
  Currencies pegged to the euro
  Currencies pegged to the euro w/ narrow band
The Belarusian ruble is pegged to the euro, Russian rouble and US dollar in a currency basket.

In the period following the Bretton Woods Conference of 1944, exchange rates around the world were pegged to the United States dollar, which could be exchanged for a fixed amount of gold. This reinforced the dominance of the US dollar as a global currency.

Since the collapse of the fixed exchange rate regime and the gold standard and the institution of floating exchange rates following the Smithsonian Agreement in 1971, most currencies around the world have no longer been pegged to the United States dollar. However, as the United States has the world's largest economy, most international transactions continue to be conducted with the United States dollar, and it has remained the de facto world currency. According to Robert Gilpin in Global Political Economy: Understanding the International Economic Order (2001): "Somewhere between 40 and 60 percent of international financial transactions are denominated in dollars. For decades the dollar has also been the world's principal reserve currency; in 1996, the dollar accounted for approximately two-thirds of the world's foreign exchange reserves", as compared to about one-quarter held in euros (see Reserve Currency).

Some of the world's currencies are still pegged to the dollar. Some countries, such as Ecuador, El Salvador, and Panama, have gone even further and eliminated their own currency (see dollarization) in favor of the United States dollar.

Only two serious challengers to the status of the United States dollar as a world currency have arisen. During the 1980s, the Japanese yen became increasingly used as an international currency, [6] [7] but that usage diminished with the Japanese recession in the 1990s. More recently, the euro has increasingly competed with the United States dollar in international finance.

Euro

The euro inherited its status as a major reserve currency from the German mark (DM) and its contribution to official reserves has increased as banks seek to diversify their reserves and trade in the eurozone expands. [8]

As with the dollar, some of the world's currencies are pegged against the euro. They are usually Eastern European currencies like the Bulgarian lev, plus several west African currencies like the Cape Verdean escudo and the CFA franc. Other European countries, while not being EU members, have adopted the euro due to currency unions with member states, or by unilaterally superseding their own currencies: Andorra, Monaco, Kosovo, Montenegro, San Marino, and Vatican City.

As of December 2006, the euro surpassed the dollar in the combined value of cash in circulation. The value of euro notes in circulation has risen to more than €610 billion, equivalent to US$800 billion at the exchange rates at the time. A 2016 report by the World Trade Organization shows that the world's energy, food and services trade are made 60% with US dollar and 40% by euro. [9]

Recent proposals (21st century)

Governmental

  • Enlargement (diversification) of the list of currencies used as reserve ones, based on agreed measures to promote the development of major regional financial centers. In this context, we should consider possible establishment of specific regional mechanisms which would contribute to reducing volatility of exchange rates of such reserve currencies.
  • Introduction of a supra-national reserve currency to be issued by international financial institutions. It seems appropriate to consider the role of IMF in this process and to review the feasibility of and the need for measures to ensure the recognition of SDRs as a "supra-reserve" currency by the whole world community." [10] [11]

On 23 March 2009, Zhou Xiaochuan, then-President of the People's Bank of China, called for a replacement of the US dollar with a different standard using "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." [12] [13] Zhou suggested that the IMF's special drawing rights (a currency basket then comprising dollars, euros, sterling and yen) could serve as a super-sovereign reserve currency, saying that it would not be easily influenced by the policies of individual countries. Then-US President Barack Obama, however, rejected China's call for a new global currency. He stated, "As far as confidence in the US economy or the dollar, I would just point out that the dollar is extraordinarily strong right now." [14] At the G8 summit in July 2009, Dmitry Medvedev expressed Russia's desire for a new supranational reserve currency by showing off a coin minted with the words "unity in diversity". The coin, an example of a future world currency, emphasized his call for creating a mix of regional currencies as a way to address the global financial crisis. [15]

On 30 March 2009, at the second South America-Arab League Summit in Qatar, Venezuelan president Hugo Chavez proposed the creation of a petro-currency. It would be backed by the huge oil reserves of oil-producing countries. [16] Chavez's successor, Nicolás Maduro, in 2018 announced the Petro cryptocurrency, but it does not appear to be used as a currency. [17]

Single world currency

An alternative definition of a world or global currency refers to a hypothetical single global currency or supercurrency, as the proposed terra or the DEY (acronym for Dollar Euro Yen), [18] produced and supported by a central bank which is used for all transactions around the world, regardless of the nationality of the entities (individuals, corporations, governments, or other organizations) involved in the transaction. No such official currency currently exists, although non-inflationary current funds such as MXV/UDI (Mexican unidad de inversión) have been used as a model for a General Global Currency (GGC), a principal reserved current fund based on a complex relationship between national currencies. [19]

Advocates, notably Keynes, [20] of a global currency often argue that such a currency would not suffer from inflation, which, in extreme cases, has had disastrous effects for economies. In addition, many [20] argue that a single global currency would make conducting international business more efficient and would encourage foreign direct investment (FDI).

There are many different variations of the idea, including a possibility that it would be administered by a global central bank that would define its own monetary standard or that it would be on the gold standard. [21] Supporters often point to the euro as an example of a supranational currency successfully implemented by a union of nations with disparate languages, cultures, and economies.

A limited alternative would be a world reserve currency issued by the International Monetary Fund, as an evolution of the existing special drawing rights and used as reserve assets by all national and regional central banks. On 26 March 2009, a UN panel of expert economists called for a new global currency reserve scheme to replace the current US dollar-based system. The panel's report pointed out that the "greatly expanded SDR (special drawing rights), with regular or cyclically adjusted emissions calibrated to the size of reserve accumulations, could contribute to global stability, economic strength and global equity." [22]

Another world currency was proposed to use conceptual currency to aid the transaction between countries. The basic idea is to utilize the balance of trade to cancel out the currency actually needed to trade.

In addition to the idea of a single world currency, some evidence suggests the world may evolve multiple global currencies that exchange on a singular market system. The rise of digital global currencies owned by privately held companies or groups such as Ven [23] suggest that multiple global currencies may offer wider formats for trade as they gain strength and wider acceptance.

WOCU currency, based on the WOCU synthetic global currency quotation derived from a weighted basket of currencies of fiat currency pairs covering the top 20 economies of the world, is planned to be issued and distributed [24] by Unite Global [25] a centralised platform for global real-time payments and settlement.

Difficulties

Triffin dilemma

Limited additional benefit with extra cost

Some economists argue that a single world currency is unnecessary, because the U.S. dollar is providing many of the benefits of a world currency while avoiding some of the costs [26] However, this de facto situation gives the U.S. government additional power over other countries. If the world does not form an optimum currency area, then it would be economically inefficient for the world to share one currency.

Economically incompatible nations

In the present world, nations are not able to work together closely enough to be able to produce and support a common currency. There has to be a high level of trust between different countries before a true world currency could be created. A world currency might even undermine national sovereignty of smaller states.

Wealth redistribution

The interest rate set by the central bank indirectly determines the interest rate customers must pay on their bank loans. This interest rate affects the rate of interest among individuals, investments, and countries. Lending to the poor involves more risk than lending to the rich. As a result of the larger differences in wealth in different areas of the world, a central bank's ability to set interest rates to make the area prosper will be increasingly compromised, since it places wealthiest regions in conflict with the poorest regions in debt.

See also

Related Research Articles

A currency is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins. A more general definition is that a currency is a system of money in common use within a specific environment over time, especially for people in a nation state. Under this definition, the British Pound sterling (£), euros (€), Japanese yen (¥), and U.S. dollars (US$) are examples of (government-issued) fiat currencies. Currencies may act as stores of value and be traded between nations in foreign exchange markets, which determine the relative values of the different currencies. Currencies in this sense are either chosen by users or decreed by governments, and each type has limited boundaries of acceptance; i.e., legal tender laws may require a particular unit of account for payments to government agencies.

<span class="mw-page-title-main">Euro</span> Currency of the European Union

The euro is the official currency of 20 of the 27 member states of the European Union. This group of states is officially known as the euro area or, more commonly, the eurozone. The euro is divided into 100 euro cents.

<span class="mw-page-title-main">Japanese yen</span> Currency of Japan

The yen is the official currency of Japan. It is the third-most traded currency in the foreign exchange market, after the United States dollar and the euro. It is also widely used as a third reserve currency after the US dollar and the euro.

<span class="mw-page-title-main">Renminbi</span> Currency of China

The renminbi, also known as the Chinese yuan, is the official currency of the People's Republic of China. The renminbi is issued by the People's Bank of China, the monetary authority of China. It is the world's fifth-most-traded currency as of April 2022.

<span class="mw-page-title-main">Australian dollar</span> Official currency of Australia

The Australian dollar is the official currency and legal tender of Australia, including all of its external territories, and three independent sovereign Pacific Island states: Kiribati, Nauru, and Tuvalu. In April 2022, it was the sixth most-traded currency in the foreign exchange market and as of Q4 2023 the seventh most-held reserve currency in global reserves.

<span class="mw-page-title-main">Reserve currency</span> Currencies held by monetary authorities as part of their foreign exchange reserves

A reserve currency is a foreign currency that is held in significant quantities by central banks or other monetary authorities as part of their foreign exchange reserves. The reserve currency can be used in international transactions, international investments and all aspects of the global economy. It is often considered a hard currency or safe-haven currency.

<span class="mw-page-title-main">Currency substitution</span> Use of a foreign currency in parallel to or instead of a domestic currency

Currency substitution is the use of a foreign currency in parallel to or instead of a domestic currency.

<span class="mw-page-title-main">Balance of payments</span> Difference between the inflow and outflow of money to a country at a given time

In international economics, the balance of payments of a country is the difference between all money flowing into the country in a particular period of time and the outflow of money to the rest of the world. In other words, it is economic transactions between countries during a period of time. These financial transactions are made by individuals, firms and government bodies to compare receipts and payments arising out of trade of goods and services.

<span class="mw-page-title-main">Plaza Accord</span> 1985 international agreement on fiscal policy

The Plaza Accord was a joint agreement signed on September 22, 1985, at the Plaza Hotel in New York City, between France, West Germany, Japan, the United Kingdom, and the United States, to depreciate the U.S. dollar in relation to the French franc, the German Deutsche Mark, the Japanese yen and the British pound sterling by intervening in currency markets. The U.S. dollar depreciated significantly from the time of the agreement until it was replaced by the Louvre Accord in 1987. Some commentators believe the Plaza Accord contributed to the Japanese asset price bubble of the late 1980s.

<span class="mw-page-title-main">Bretton Woods system</span> Financial-economic agreement reached in 1944

The Bretton Woods system of monetary management established the rules for commercial relations among the United States, Canada, Western European countries, and Australia and other countries, a total of 44 countries after the 1944 Bretton Woods Agreement. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent states. The Bretton Woods system required countries to guarantee convertibility of their currencies into U.S. dollars to within 1% of fixed parity rates, with the dollar convertible to gold bullion for foreign governments and central banks at US$35 per troy ounce of fine gold. It also envisioned greater cooperation among countries in order to prevent future competitive devaluations, and thus established the International Monetary Fund (IMF) to monitor exchange rates and lend reserve currencies to nations with balance of payments deficits.

<span class="mw-page-title-main">Currency board</span> Monetary authority which maintains a fixed exchange rate to a foreign currency

In public finance, a currency board is a monetary authority which is required to maintain a fixed exchange rate with a foreign currency. This policy objective requires the conventional objectives of a central bank to be subordinated to the exchange rate target. In colonial administration, currency boards were popular because of the advantages of printing appropriate denominations for local conditions, and it also benefited the colony with the seigniorage revenue. However, after World War II many independent countries preferred to have central banks and independent currencies.

Foreign exchange reserves are cash and other reserve assets such as gold and silver held by a central bank or other monetary authority that are primarily available to balance payments of the country, influence the foreign exchange rate of its currency, and to maintain confidence in financial markets. Reserves are held in one or more reserve currencies, nowadays mostly the United States dollar and to a lesser extent the euro.

The Convertibility plan was a plan by the Argentine Currency Board that pegged the Argentine peso to the U.S. dollar between 1991 and 2002 in an attempt to eliminate hyperinflation and stimulate economic growth. While it initially met with considerable success, the board's actions ultimately failed. The peso was only pegged to the dollar until 2002.

There are two different types of world currency unit in use today that have different origins and usages.

<span class="mw-page-title-main">United States dollar</span> Currency of the United States

The United States dollar is the official currency of the United States and several other countries. The Coinage Act of 1792 introduced the U.S. dollar at par with the Spanish silver dollar, divided it into 100 cents, and authorized the minting of coins denominated in dollars and cents. U.S. banknotes are issued in the form of Federal Reserve Notes, popularly called greenbacks due to their predominantly green color.

<span class="mw-page-title-main">Currency intervention</span> Monetary policy operation

Currency intervention, also known as foreign exchange market intervention or currency manipulation, is a monetary policy operation. It occurs when a government or central bank buys or sells foreign currency in exchange for its own domestic currency, generally with the intention of influencing the exchange rate and trade policy.

<span class="mw-page-title-main">International status and usage of the euro</span>

The international status and usage of the euro has grown since its launch in 1999. When the euro formally replaced 12 currencies on 1 January 2002, it inherited their use in territories such as Montenegro and replaced minor currencies tied to pre-euro currencies, such as in Monaco. Four small states have been given a formal right to use the euro, and to mint their own coins, but all other usage outside the eurozone has been unofficial. With or without an agreement, these countries, unlike those in the eurozone, do not participate in the European Central Bank or the Eurogroup.

An international monetary system is a set of internationally agreed rules, conventions and supporting institutions that facilitate international trade, cross border investment and generally the reallocation of capital between states that have different currencies. It should provide means of payment acceptable to buyers and sellers of different nationalities, including deferred payment. To operate successfully, it needs to inspire confidence, to provide sufficient liquidity for fluctuating levels of trade, and to provide means by which global imbalances can be corrected. The system can grow organically as the collective result of numerous individual agreements between international economic factors spread over several decades. Alternatively, it can arise from a single architectural vision, as happened at Bretton Woods in 1944.

<span class="mw-page-title-main">International use of the U.S. dollar</span> Use of US dollars around the world

The United States dollar was established as the world's foremost reserve currency by the Bretton Woods Agreement of 1944. It claimed this status from sterling after the devastation of two world wars and the massive spending of the United Kingdom's gold reserves. Despite all links to gold being severed in 1971, the dollar continues to be the world's foremost reserve currency. Furthermore, the Bretton Woods Agreement also set up the global post-war monetary system by setting up rules, institutions and procedures for conducting international trade and accessing the global capital markets using the US dollar.

References

  1. ↑ Geisst, Charles R. (2005). Encyclopedia of American business history. New York. p. 39. ISBN   978-0-8160-4350-7.{{cite book}}: CS1 maint: location missing publisher (link)
  2. ↑ Gruben, W.C.; Gould, D.M.; Zarazaga, C.E. (2012). Exchange Rates, Capital Flows, and Monetary Policy in a Changing World Economy: Proceedings of a Conference Federal Reserve Bank of Dallas Dallas, Texas September 14–15, 1995. Springer US. p. 130. ISBN   978-1-4615-6175-0 . Retrieved 3 May 2023.
  3. ↑ A Brief (and Fascinating) History of Money Retrieved 24 Novamber 2023
  4. ↑ Corporation, Bonnier (1 February 1930). "Popular Science". Bonnier Corporation. Retrieved 16 October 2017– via Google Books.
  5. ↑ "The Retirement of Sterling as a Reserve Currency after 1945: Lessons for the US Dollar", Catherine R. Schenk, Canadian Network for Economic History conference, 10/2009 Archived 9 July 2011 at the Wayback Machine
  6. ↑ "CHRONOLOGY – Milestones in the yen's history". Reuters. 13 March 2008. Archived from the original on 7 May 2018.
  7. ↑ The Japanese Yen as an International Currency Retrieved 24 Novamber 2023
  8. ↑ Lim, Ewe-Ghee (June 2006). San Jose, Armida (ed.). The Euro's Challenge to the Dollar (PDF). Statistics Department. IMF Working Paper (Technical report). International Monetary Fund. Archived (PDF) from the original on 29 June 2011. Retrieved 9 February 2013.
  9. ↑ Atkins, Ralph (27 December 2006). "Euro notes cash in to overtake dollar". Financial Times. Archived from the original on 17 August 2007. Retrieved 7 May 2018.
  10. ↑ Russian Proposals to the London Summit (April 2009). Archived 21 March 2009 at the Wayback Machine Kremlin website. 16 March 2009. Retrieved 25 March 2009.
  11. ↑ At G20, Kremlin to Pitch New Currency. Archived 20 March 2009 at the Wayback Machine Moscow Times. 17 March 2009. Retrieved 25 March 2009.
  12. ↑ Zhou, Xiaochuan. "Reform the International Monetary System" (PDF). BIS.
  13. ↑ China presses G20 reform plans. Archived 27 March 2009 at the Wayback Machine BBC News, 24 March 2009. Retrieved 25 March 2009.
  14. ↑ Obama rejects China's call for new global currency Archived 30 May 2013 at the Wayback Machine . AFP, 25 March 2009. Retrieved 25 March 2009.
  15. ↑ Pronina, Lyubov (10 July 2009). "Medvedev Shows Off Sample Coin of New 'World Currency' at G-8". Bloomberg. Archived from the original on 13 June 2010. Retrieved 18 November 2010.
  16. ↑ "Chavez to seek Arab backing for 'petro-currency' – USATODAY.com". www.usatoday.com. Archived from the original on 26 October 2011. Retrieved 7 May 2018.
  17. ↑ Ellsworth, Brian (30 August 2018). "Special Report: In Venezuela, new cryptocurrency is nowhere to be found". Reuters. Retrieved 30 August 2018. The coin is not sold on any major cryptocurrency exchange. No shops are known to accept it.
  18. ↑ ""There's A New 'Dey' Coming!" - Sound The Midnight Cry". www.soundthemidnightcry.com. Archived from the original on 2 June 2016. Retrieved 7 May 2018.
  19. ↑ "GGC Principal Issue Whitepaper".
  20. 1 2 "related sites". Singleglobalcurrency.org. Archived from the original on 4 August 2010. Retrieved 18 November 2010.
  21. ↑ "A Single Global Currency? – Gold Eagle". www.gold-eagle.com. Archived from the original on 24 February 2013. Retrieved 7 May 2018.
  22. ↑ UN panel touts new global currency reserve system. Archived 27 June 2013 at the Wayback Machine AFP, 26 March 2009. Retrieved 27 March 2009.
  23. ↑ "The dollar alternatives – Ven (4) – FORTUNE". CNN. 21 July 2010. Archived from the original on 6 December 2010. Retrieved 18 November 2010.
  24. ↑ "WOCU Currency with Unite Global | News | WOCU". www.wocu.com. Retrieved 28 October 2021.
  25. ↑ January 2019, 9th (9 January 2019). "Unite Global to launch real-time correspondent hub". FinTech Futures. Retrieved 28 October 2021.{{cite web}}: CS1 maint: numeric names: authors list (link)
  26. ↑ Archived 5 February 2005 at the Wayback Machine
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