In the foreign exchange market and international finance, a world currency, supranational currency, or global currency refers to a currency in which the vast majority of international transactions take place and which serves as the world's primary reserve currency. In March 2009, as a result of the global economic crisis, China pressed for urgent consideration of a global currency. A UN panel of expert economists has proposed replacing the current US dollar-based system by greatly expanding the International Monetary Fund's Special Drawing Rights (SDRs).[1]
Currencies have many forms depending on several properties: type of issuance, type of issuer and type of backing. The particular configuration of those properties leads to different types of money. The pros and cons of a currency are strongly influenced by the type proposed. Consider, for example, the properties of a complementary currency.
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Before 1944, the world reference currency was the United Kingdom's pound sterling. The transition between pound sterling and United States dollar and its impact for central banks was described recently.[2]
In the period following the Bretton Woods Conference of 1944, exchange rates around the world were pegged against 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 against the United States dollar. However, as the United States remained the world's preeminent economic superpower, most international transactions continued to be conducted with the United States dollar, and it has remained the de facto world currency.
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, 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.
Since the mid-20th century, the de facto world currency has been the United States dollar. 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" (255).
Many of the world's currencies are pegged against 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. The U.S. dollar continues to dominate global currency reserves, with 63.9% held in dollars, as compared to 26.5% held in euros (see Reserve Currency).
A 2011 study about the current dominant reserve currency in central banks shows that dollar may not be the obvious dominant currency, because of the major part of Unallocated Reserves reported by central banks.[3]
Since 1999, the dollar's dominance has begun to be eroded by the euro, which represents a larger size economy, and has the prospect of more countries adopting the euro as their national currency. The euro inherited the status of a major reserve currency from the German mark (DM), and since then its contribution to official reserves has risen as banks seek to diversify their reserves and trade in the eurozone continues to expand.[4]
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, Montenegro, San Marino, and Vatican City.
As of December 2006[update], 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 (today equivalent to circa US$968 billion).[5]
In the 17th and 18th century, the use of silver Spanish dollars or "pieces of eight" spread from the Spanish territories in the Americas westwards to Asia and eastwards to Europe forming the first ever worldwide currency. 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 over two centuries. It was legal tender in Spain's Pacific territories of the Philippines, Micronesia, Guam and the Caroline Islands 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) as well as in the US and Canada until the mid-19th century. In Europe the Spanish dollar was legal tender in the Iberian Peninsula, in most of Italy including: Milan, the Kingdom of Naples, Sicily, Sardinia, the Franche-Comté (France), and in the Spanish Netherlands. It was also used in other European states including the Austrian Habsburg territories.
When the colony of New South Wales was founded in Australia in 1788, it ran into the problem of a lack of coinage. Governor Lachlan Macquarie took the initiative of using £10,000 in Spanish dollars sent by the British government to produce suitable coins, they simply punched out the centers of the coins. Both the central plug and rims were stamped with a sunburst. The punched centers passed as shillings and the outer rims as five-shilling pieces. The mutilated coins were thereafter no longer acceptable outside of the island, so as a consequence, became the official currency there. These coins to the value of 40,000 Spanish dollars came on the 26 November 1812 on the merchant ship the Samarang from Madras, via the Honourable East India Company. To stop them from leaving the colony the centres were punched out to create two different issues of coins.
There was a central plug (known as a dump) which was valued at 15 pence and was restruck with a new design (a crown on the obverse, the denomination on the reverse), whilst the dollars received an overstamp around the hole ("New South Wales 1813" on the obverse, "Five Shillings" on the reverse). The holey dollar became the first official currency produced specifically for circulation in Australia.
There are other coins/currencies that have been used over the centuries. The Austrian Maria Theresa thaler is still used in some back areas of the Middle East and Africa and was first issued in 1741. There was also the Roman Denarius, which for hundreds of years was the world's premier currency.
Prior to and during most of the 19th century, international trade was denominated in terms of currencies that represented weights of gold. Most national currencies at the time were in essence merely different ways of measuring gold weights (much as the yard and the meter both measure length and are related by a constant conversion factor). Hence some assert that gold was the world's first global currency. The emerging collapse of the international gold standard around the time of World War I had significant implications for global trade.
On 16 March 2009, in connection with the April 2009 G20 summit, the Kremlin called for a supranational reserve currency as part of a reform of the global financial system. In a document containing proposals for the G20 meeting, it suggested that the International Monetary Fund (IMF) (or an Ad Hoc Working Group of G20) should be instructed to carry out specific studies to review the following options:
On 24 March 2009, Zhou Xiaochuan, President of the People's Bank of China, called for "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."[8] Zhou suggested that the IMF's Special Drawing Rights (a currency basket comprising dollars, euros, yen, and sterling) could serve as a super-sovereign reserve currency, not easily influenced by the policies of individual countries. US President Obama, however, rejected the suggestion stating that "the dollar is extraordinarily strong right now."[9] At the G8 summit in July 2009, the Russian president 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.[10]
On 30 March 2009, at the Second South America-Arab League Summit in Qatar, Venezuelan President Hugo Chavez proposed the creation of the Petro as a supranational currency, in order to face the instability that the generation of fiat currency has caused in the world economy.[11] The petrocurrency would be backed by the huge oil reserves of the oil producing countries.[12]
Advocates, notably Keynes,[13] of a global currency often argue[13] that such a currency would not suffer from inflation, which, in extreme cases, has had disastrous effects for economies. In addition, many[13] argue that a global currency would make conducting international business more efficient and would encourage foreign direct investment (FDI).
An often over-looked alternative to an establishment-created global reserve currency is for anyone to adopt already existing mechanisms that traditionally have worked very well in conducting international business. There are, for example, no obstacles for legal or physical persons to start drawing contracts and invoicing in XAU – Gold – as opposed to the USD, EUR or JPY (Japanese Yen).
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),[14] 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.
There are many different variations of the idea, including a possibility that it would be administered by a global central bank or that it would be on the gold standard.[15] 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. Alternatively, digital gold currency can be viewed as an example of how global currency can be implemented without achieving national government consensus.
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."[1]
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[16] suggest that multiple global currencies may offer wider formats for trade as they gain strength and wider acceptance.
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.[17] If the world does not form an optimum currency area, then it would be economically inefficient for the world to share one currency.
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.
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 rate to make the area prosper will be increasingly compromised, since it places wealthiest regions in conflict with the poorest regions in debt.
Usury – the accumulation of interest on loan principal – is outlawed by most major religions.
In Christianity and Judaism, adherents are forbidden to charge interest to other adherents or to the poor (Leviticus 25:35-38; Deuteronomy 23:19). Much awareness of this taboo has been lost. Islam bans usury, called riba.[18]
A large number of religious adherents who oppose the paying of interest are currently able to use banking facilities in their countries which are to regulate interest. An example of this is the Islamic banking system, which is characterized by a nation's central bank setting interest rates for most other transactions.
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