The world we inhabit today is a strongly interlinked one – in terms of communication definitely but also financially and economically, where the fortunes of countries are interdependent as a result of cross-border trade, travel and investment.
We are thus all citizens of a global economy. However, policy making and banking still remain national, even though there is a global monetary (payment) system comprising of financial institutions, electronic networks, conventions and rules for the smooth functioning of international trade, cross border investment and the general reallocation of capital between nation states. There is no global currency (though strong currencies like the USD, Euro, Yen etc are more global than others) that can be used freely across different countries.
Universal (digital) currency
In this scenario, is there an argument for the establishment of a global monetary system? The advanced level of technology today, makes it possible to have a universal (digital) currency. The current system is riddled with problems – tourists are left with un-spendable foreign coins, firms waste resources trying to hedge currency risks, money is lost in foreign exchange transactions.
With a global currency these risks and waste of resources or currency price wars are eliminated, thus creating an environment for boosting world trade and improving the efficiency of global capital allocation. Global financial stability can be established as long as the system is transparent, harmonized, regulated and supervised with ease.
Towards a global economy
What this implies is a movement towards a global economy with a global central bank and global currency – in other words, a new world order with an authoritarian government structure. It means a decline of democracy the world over. It means a system where financial control is in the hands of an elite private few who can dominate the political structure and the economy of the world as a whole.
I would argue that a global monetary system is undesirable. National banks are accountable to the policy makers of the countries they belong to; they owe their existence to the political system and are mandated to serve the citizens of the country. A shift to a global monetary system, takes power and legitimacy away from the nation-state and transfers sovereignty over the national financial institution to a world power. Governments have to accept a loss of certain monetary controls.
Controlling financial chaos
National banks play a major role in controlling financial chaos, collapse, and recession. The legitimacy of their decisions lies in the laws of the land and the democratic will. A global currency and monetary system takes away the national sovereignty and undermines democracy.
Losing their financial powers also prevents them from taking steps to either devalue to boost exports or borrow to create jobs or even to cut / raise taxes and interest rates when they think is the right time. A financial crisis in one country may well create similar adverse conditions in others. And on a more practical, mundane note, introducing a new global currency would imply huge costs associated with educating the people, changing labels, printing new currency etc.
Reduce currency instability
Not that there are no positives to the concept of a global monetary system – a single currency will reduce currency instability, and foster economic growth. Travelers will not have to change money when crossing borders thus saving on transaction costs. Businesses will not have to hedge costs to counter currency fluctuations nor will they spend on administrative costs of currency exchange. A single currency will eliminate the problem of current account deficits as there will be no need for foreign exchange.
Whether there will be a global monetary system or not is still being debated but if it is to function efficiently, it needs smart policies to control capital flows, total and complete trust between nations, a safety net for when things spiral out of hand and above all, an impartial, objective body to run the monetary system without favoritism or any kind of bias.