Past 2018 and the New Definition of Money
By JC Collins
The wording and terminology surrounding the status of currencies and reserve currencies can often times be confusing. When we add in the phrase “world currency” things can get even more complex. So let’s take a few moments to review what these terms means and how each functions in the broader monetary framework.
The term “domestic currency” is in reference to the currency of a single nation. It is used in commerce and banking within the borders of that specific nation. Small amounts of the currency can be exported to other nations banking system but it is marginal compared to the larger amounts attributed to reserve currencies.
The term “reserve currency” is in reference to domestic currencies which are used in a reserve status. This means that the central banks of other nations will hold in their foreign exchange reserve accounts larger amount of these currencies in order to balance trade. The nation will create more of their own domestic currency to purchase the debt of the nation holding the reserve currency. This currency is held on reserve and used to balance trade accounts.
The term “primary reserve currency” is used in reference to the nation which has the largest amounts of its domestic currency held in the foreign exchange reserve accounts of other nations. In this case, the US dollar is the primary reserve currency as massive amounts of dollars have accumulated in the accounts around the world since the end of WW2.
The Triffin Paradox which we have often referenced here on POM is a reflection of the deficiencies and imbalances which develop when the domestic currency of one nation is used as the international reserve asset.
The term “world currency” has on occasion been used in reference to the US dollar, but this is not an accurate portrayal of what a world currency should and will be in the coming years. The more functional definition of “world currency” is a single global currency, a supranational currency, meaning above the status of domestic or national currency, which is created and supported by a supranational central bank.
This “world currency” would be used for all international transactions, including commerce and banking within a single nation as well as to balance trade accounts, and other business as conducted by corporations, governments, and international institutions.
At this time no such currency has been created or put into operation.
One of the primary supporting cases for the use of a “world currency” is the assumption that it would not produce inflation. An equal case can be made that it would produce inflation and that such inflation is required to grow an economy.
The downside to using a gold standard, as in past economic frameworks, is that gold is inherently deflationary, which shrinks the economy and prevents growth. There are many theories floating around which suggest that a balance between deflationary and inflationary forces can be achieved. Whether this is the optimal architecture for the international monetary system is not known at this time. It would be my analysis that a small and consistent level of inflation is required to produce a sustainable level of growth.
What can’t be debated is that a single world currency would make conducting international business more efficient and effective. The downside would involve a loss of financial sovereignty by individual nations. Something which, I would like to suggest has already happened in a de facto sort of way.
This future quantifiable loss of financial sovereignty would involve the development of a global central bank. It is this bank, as mentioned above, which would issue the world currency.
An alternative to such a world currency would bridge the gap between today’s monetary and financial challenges while allowing for a comfortable transition from nation based fiscal planning to a supranational fiscal planning mandate.
As most readers already understand, the SDR of the International Monetary Fund is being positioned as an alternative to (or more appropriately – the early formation of) a world currency. The first step is to broaden the use of the SDR in a reserve capacity, which is something the IMF, the G20, along with China and the US Treasury Department, are currently working on.
On March 26, 2009, the United Nations, with the support of economists from around the world, expressed the need for a new world currency and exchange arrangement which would slowly phase out the existing unipolar US dollar based framework.
The UN report stated the following:
“The greatly expanded SDR, with regular or cyclically adjusted emissions calibrated to the size of reserve accumulations, could contribute to global stability, economic strength and global equity”.
The transition from the use of domestic currencies in a reserve capacity, to the use of the SDR in a world currency role, to the ultimate creation of a single world currency, will take decades. Each piece of this transition will be complex and will contain inherent threats to macroeconomic stability. The 2018 date of completion which has been thrown around about the implementation of this world currency is no longer valid. There have been many delays and unforeseen hurdles which have pushed the date much further out.
Once the use of the SDR is broadened we will see additional domestic currencies added to the basket composition. Running parallel to this process will be the creation of Regional Currency Units; much like the euro began its life as the ECU, European Currency Unit.
These RCU’s will eventually be added into the SDR weighting and the individual domestic currencies removed.
Eventually the RCU’s will become actual currencies, like the euro from the ECU. The logic from there would dictate that the SDR will consolidate those currencies within its own framework and from that transformation the birth of a single world currency will take place.
But don’t expect this to happen in 2018. Maybe not even in 2028. But you never know.
For those wondering about the rise of digital currencies and such, don’t think for one instance that such things are developing and being created in a separate vacuum from what I have described above. The testing of digital currencies, and perhaps even other forms of transactions, will be incorporated into the transitional methodology surrounding the development of the world currency.
One thing is certain though, by the time the single world currency is implemented, we will not be carrying bills around in our wallets. It’s likely that money will have a completely different meaning at that time and will no longer be a measure of human time and labor. It may very well be a measure of conformity. – JC