The overall benefit of the Single Global Currency will be to pro- mote international financial stability, the essential basis of com- merce and economic growth. All of the foreign exchange systems which have been developed since approximately 476 B.C. have failed in this essential goal. In fact, some exchange rate regimes have rendered the international financial system less stable. As noted earlier, Robert Mundell has labeled it, “an absurd currency system.”37
In the lists below of benefits and costs, there are close simi- larities to the benefits and costs of monetary unions, as listed in
Chapter 4. As Ramkishen Rajan wrote in 2000, “...the concep- tual framework with which the costs and benefits of the EMU have been discussed would be just as pertinent in analyzing the feasibility of an AMU [Asian monetary union], or even Global Monetary Union.”38 However, there is a quantum leap from a
world of several monetary unions, which still must relate to each other in the existing multicurrency foreign exchange sys- tem, to a world with one Global Monetary Union.
For some benefits, it’s the leap from “reduce” to “eliminate.” For others, it’s more complicated.
The analysis of benefits and costs is about the utility of the Single Global Currency and not its political feasibility which is covered in Chapter 7.
1. Eliminate the Costs of Foreign Exchange Transactions
It was estimated earlier in this book that the annual cost of the multicurrency foreign exchange system is $400 billion, and that some saved reduction of that cost will come to every country which joins a monetary union. However, each such reduction still leaves the large overhead infrastructure in place in banks, corporations, and international organizations. Upon the imple- mentation of a Single Global Currency, and the gradual disap- pearance of the foreign exchange market, the infrastructure can be dismantled and utilized for other purposes. It’s the differ- ence between seeing several foreign exchange booths at airports with many employees, then seeing fewer and fewer upon the implementation of several monetary unions, and then seeing none.
Included in the $400 billion are the barely quantifiable costs of all the contract provisions for hedging and for denominating a currency for payment, and the legal time spent in preparing and negotiating such contracts.
2. Increase the Value of the World’s Assets by $36 Trillion, and Trigger Additional $9 Trillion GDP activity
The phenomenon explored by John Edmunds and John Marthinsen—an increase in asset values caused by the reduc- tion of currency risk through the formation of a monetary union—would continue with the implementation of the Global Monetary Union. The amount of the increase will be approxi- mately inversely proportional to the level of previous currency risk. The one-time increase in global asset values will occur most dramatically in those remaining countries where there is significant currency risk and/or high inflation, such as in Africa and South America.
The total worldwide increase in financial asset values, attributable to the runup to the Single Global Currency, is esti- mated to be $36 trillion. The IMF recently estimated the total value of financial assets in 2004 at $144 trillion, or approxi- mately 3.5 times the world’s GDP.39 With the elimination of
worldwide currency risk, that average multiple will move closer to the 4.0 asset/GDP multiple in the developed world. Applying that 4.0 multiple to the projected world GDP in 2006 of $45 trillion would bring the value of financial assets to $180 trillion, an increase of $36 trillion.
Using the same multiplier in reverse, the increased annual GDP activity to be expected from the $36 trillion increase in asset values is $9 trillion. Subsequently, annual percentage increases in GDP will bring continued benefits from that one- time increase in asset values. For example, if the 3-G world emerges as hoped by 2024, with a $9 trillion boost (in 2005 dol- lars) to worldwide GDP, a hypothetical 3 percent GDP increase in 2025 would mean that $270 billion, (9 X 3), of the increase would be attributable to the implementation-caused asset value increases. And in 2026, with another three percent increase, there would be an additional $278 billion increase, thanks to the
miracle of compounding. And so on, ad infinitum.
Such amounts of money boggle the mind, and readers are invited to do further research and calculations. What is your estimate of the one-time gain and further annual GDP gains to come from the lowering of inflation and the elimination of cur- rency risk, worldwide?
3. Eliminate the Need to Maintain Foreign Exchange Reserves
With no need to defend an exchange rate and no need to thwart an externally sourced currency crisis and no need to defend against speculators, there would be no need for the Global Cen- tral Bank to maintain foreign exchange reserves. By definition, in a 3-G world there will cease to be international reserves, as there would be no substantial international currency exchange. In 1999, US Federal Reserve Chair Alan Greenspan made a sim- ilar observation, saying, “One way to address the issue of the management of foreign exchange reserves is to start with an economic system in which no reserves are required. There are two. The first is the obvious case of a single world currency.”40
In 1992 the European Commission estimated that by joining together, the future Eurozone members might be able to reduce their total international reserves by one-half or $200 billion.41
When developing countries acquire foreign exchange reserves in the form of low-interest bearing bonds from other countries, they often have to borrow at higher interest rates to finance such borrowing. Professor Dani Rodrik estimates that such a cost could amount to one percent of GDP of such coun- tries.42That’s a substantial cost, and it will be eliminated upon
the adoption of a Single Global Currency by such countries. For example, one percent of Angola’s $20.1 billion GDP43 is $201
million, which is equivalent to about 40 percent of all the for- eign aid received by Angola in 2004.44 In a 3-G world without
the need for foreign exchange reserves, such costs will not be borne by developing countries.
With the elimination of foreign exchange reserves would go also all the analyses by economists of such reserves, and all the reporting and tracking of the values of those reserves and their composition.45Another reason to discard the fifth wheel.
However, to the extent that some international currencies remain in use alongside the Single Global Currency, some for- eign exchange reserves would be needed. Even facing such an option might encourage some planners to reconsider the need for those extra currencies and seek to remove them, for the same reasons that the legacy currencies in the Eurozone were removed.
The Global Central Bank would still maintain domestic reserves of units of the Single Global Currency to protect bank- ing liquidity, as would any currency area central bank.
When the conversion is made to a Single Global Currency, decisionmakers would need to develop a plan of how to deal with the existing reserves of international currency, and with the gold in the vaults. In March 2005, the central banks of the world had international reserves worth 2.609 trillion IMF SDRs ($3.712 trillion].46
A major question for the establishment of the Global Central Bank will be the future role for gold, whether as money or as a reserve commodity or simply as a prized metal.47Its use will be
a political question, rather then economic, and gold has many, vocal advocates.48
4. Eliminate the Risks of Excessive Capital Flows Among Currencies and Countries
Kavaljit Singh argues in Taming Global Financial Flows-A Citizen’s Guidethat “it is increasingly being accepted that capital controls
consider the large benefits and small costs of a Single Global Currency as the preferred method of coping with capital flows, compared to the small benefits and large costs of capital con- trols.
In a 3-G world, there will be no need for capital controls among nations.
5. Reduce the Cost of Operating an Entirely Separate Monetary System
Thanks to economies of scale, it costs less per capita to admin- ister foreign exchange monetary policy for a monetary union than for its individual country members, and the economies of scale increase as the monetary union expands. As the number of currencies decreases, the cost of administering the multicur- rency foreign exchange system also will decrease until it reaches the logical end point of zero—with a fully implemented Single Global Currency.
6. Eliminate the Balance of Payments/Current Account Problem for Every Country or Monetary Union
The balance of payments is the sword of Damocles50 hanging
over every central bank because a lingering current account imbalance threatens a lowering of the value of a currency, and even possibly a currency crisis. Rodrigo de Rato, head of the IMF, makes the point that current account imbalances are not only a problem for the United States and China. He said, “Many countries need to share the burden of reducing global imbal- ances and sustaining growth. Furthermore, since these imbal- ances will eventually be corrected, one way or another, it is worth bearing in mind that a disorderly adjustment of global imbalances would harm all countries.”51Conversely, an orderly
adjustment or transition to a Single Global Currency will help all countries.
Regarding balances of trade, there still will be some concern in a 3-G world about whether countries are frequent net importers of goods and services, as that imbalance may lead to a general decline in a country’s overall wealth. No one in net exporting countries will worry. However, such imbalances will not lead to devaluation of the currency, nor to a currency crisis. There will continue to be concerns about the quality of trade and such issues as whether a country is exporting raw materi- als and importing high technology products, or the reverse. In any case, the balance of payments aspect of such considerations will disappear for countries participating in the Global Mone- tary Union. A trade deficit is not a serious problem unless there is foreign exchange involved and thus becomes a currency problem. As Benn Steil and Robert Litan wryly observed, “It’s the Currency, Stupid,”52paraphrasing the political mantra of the
political campaigns for US President Bill Clinton, “It’s the econ- omy, stupid.”
7. Separate the Value of Money from the Value of a Par- ticular Country
Since the establishment of modern states, their citizens have struggled to determine what functions ought to be performed by directly elected government bodies and what functions by semi-public and private organizations. Laws are created by elected officials, but they are enforced by judges who are usu- ally appointed. Airports are often run by appointed authorities. Local banks are typically owned by their shareholders.
The concept of the state controlling the peoples’ money is relatively new, as currencies previously were issued by private banks or other organizations.
A recent shift has seen the increased independence of central banks so they are not perceived as being appendages of gov- ernments. The movement of the responsibility for money away
from national central banks and toward monetary union central banks represents a further shift. Even in those countries with independent national central banks, they are still perceived as being part of the governments, due to the numerous links between them. In the United States, the seven members of the Board of Governors of the Federal Reserve are all appointed by the President, and then confirmed by the Senate. Another indi- cation of the close relationship of the central bank to the US Government is the multi-billion dollar Exchange Stabilization Fund (ESF) which is managed by the US Treasury to intervene in the foreign exchange markets to support the US dollar or support currency stabilization efforts by other countries.53 The
Federal Reserve Board also intervenes in the foreign exchange markets.
Governments come and go, as does the confidence held in those governments. Governments are responsible for fiscal pol- icy, and they assess taxes and spend funds on education, defense, and health care. Sometimes their budgets are balanced and sometimes they are not. Sometimes those countries are hit by natural disasters or their boundaries change. Such non- monetary volatility should not affect the value of the peoples’ money, just as it should not affect the length of a meter nor the weight of a gram.
Moving responsibility for the value of money to a regional monetary union achieves some separation from national gov- ernments, and the logical end of that movement is to the Global Monetary Union.
8. Eliminate National Currency Crises for Member Countries of the Global Monetary Union
Almost by definition, a currency crisis occurs when holders of a currency, or securities or contracts denominated in a currency, flee that currency to refuge in another currency. With a Single
Global Currency, there would be no realistic “other currency.” While there has been considerable debate about the precise causes of the currency crises of the 1990s, two general causes emerge: expectations and currency mismatches. Kenneth Kasa wrote, “a consensus has emerged that expectations are at the heart of the matter.”54 Some economists look at expectations
about monetary and fiscal policies and others at what is hap- pening in the overall economy, but the overall expectation is that a currency crisis IS a possibility in every existing currency in the multicurrency foreign exchange system. In a Single Global Currency world, such a crisis will NOT be the expecta- tion.
Benn Steil and Robert Litan note that a currency mismatch is at the root of every recent currency crisis, and they arise in part because 97 percent of all securities sold in the international markets are denominated in only five currencies: US dollar, euro, yen, UK pound, and Swiss franc. When the securities of those five currency areas are excluded, the percentage is still a high 85 percent.55A typical currency mismatch might occur as in
Russia in 1998, where large loans were denominated in dollars and payment became difficult when the ruble lost value. There were insufficient dollar reserves in the central bank to repay all the loans denominated in dollars, and then panic selling of the ruble occurred. With a Single Global Currency, there can be no currency mismatch because there is no other large currency, and loans will be denominated in the Single Global Currency.
One outcome of currency crises, and even for those facing the risk of currency crises, is that people with the ability to send money or wealth out of the country at risk will do so. The mid- dle class and the poor do not have that option, and will suffer the consequences of that risk. While there still will be other types of risk in member countries of a Global Monetary Union, currency risk will no longer be a factor to consider. This change
will hopefully contribute to keeping funds in developing coun- tries at home where they can be invested, rather than being sent to Geneva, London, Miami, or Singapore.
While it’s possible for confidence to decline in a global cur- rency if it’s mismanaged, it would not occur for the reasons we currently attribute to the causes of recent international currency crises, i.e., because speculators and others are converting vast amounts of the Single Global Currency into other currencies. By definition, there would be no other currency which could absorb such transfers. Also, what would such a decline in con- fidence mean in a Global Monetary Union? Every member country government would be accepting, and usually requir- ing, the Single Global Currency as the means of payment of taxes and other debts. Thus, the effect of declining confidence might translate into inflationary expectations where prices would be raised through fear that a currency would be less valuable.
9. Eliminate the Possibility of Currency Exchange Rate Manipulation and Intervention by Countries
A significant source of tension among countries has been the concern that other countries manipulate the exchange rates of their currencies to their own advantage by buying and selling massive amounts of currency in the foreign exchange markets. Curiously, this concern always has seemed to mean that a coun- try would intervene to devalue its currency rather than revalue; but this is something that economists will no longer need to study.
Despite its record-setting trade and budget deficits, the US government continues to point fingers at others for such cur- rency manipulation. For example, following the G-7 Finance Minister meeting in London in December 2005, US Secretary of the Treasury John Snow stated, “even with the change of July
21, China’s new exchange rate system has operated with too much rigidity. This rigidity constrains exchange rate flexibility in the region and thus poses risks to China’s economy and the global economy. The G7 noted that further flexible implementa- tion of China’s currency system would improve the functioning and stability of the global economy and the international mon- etary system.”56While Secretary Snow’s press release indicated
that representatives from China were at that meeting, it’s ques- tionable whether he will make a similar statement when China’s legitimate status as a member of the G-7 is affirmed. With its GDP already larger than Italy’s, which had held the No. 6 rank, China was expected to overtake France and Britain in 2005 and to assume the No. 4 spot behind the United States, Japan, and Germany.57
Not all agree that China has been manipulating its currency by pegging it constantly for about ten years to the US dollar. Junning Cai argues that countries that intentionally do not pru- dently manage their current account balances are guilty of trade manipulation, which is just as serious as currency manipula- tion.58
While acknowledging the responsibility of the United States for most of the world’s financial imbalances, Mr. Snow’s under secretary for international affairs, Tim Adams, continues to view the exchange rate as a major means to the end of eliminat- ing those imbalances. He urged the IMF in 2006 to strengthen its surveillance of exchange rates to ensure that the “right” exchange rate equilibrium is reached.59
However, such a “right” exchange rate, like “manipula-