There are more than 250 countries in the world, including countries with uncertain status. They include 159 national currencies, in addition, there is an innumerable amount of regional and digital money. Why are there more currencies in the world than nations? Why do we need different money and why can’t we create a single world currency?
Global or world is the currency in which most of the international payments take place. The first “world coin” of its time was the Aegean states. They were minted on an island in the Aegean Sea, in the city of Aegina. From the 7th century BC, it was one of the most successful trade policies in Greece, so the demand for local coins quickly went beyond Aegina. The city could easily support the issue because it had its own silver mines. In the 6th century, the Aegean states had already gone around the world known at that time: from Illyria to Egypt and from Spain to the Black Sea. In fact, of course, we are not talking about currency, but rather about the monetary system of measures and weights, which played an important historical role in the development of trade.
Money without the state
The idea of introducing a single global currency is not new. What benefits can they have? First of all – convenience. There is no need to buy currency to travel to any country in the world, therefore, there are no costs in connection with currency exchange. There is no need to check the exchange rate for international transactions. Investment between countries is being simplified, international relations are naturally strengthened and financial markets are becoming more stable and accessible.
However, there is a very big problem which concerns the Forex industry. Forex trading features trading currencies and this is the main concept of this field. If there was a single currency the benefits provided by reliable forex brokers would have vanished instantly. The main principle on which this industry is built is exchanging currencies and a single currency would destroy it.
As a result of numerous discussions about the need for a global currency, the International Monetary Fund (IMF) introduced new world money, Special Drawing Rights, in 1969. The main purpose of the SDR was to overcome the contradiction between the international nature of use and the national nature of currencies. No national currency can become a world currency. The failure of this role is due to the fact that no national currency, no matter what economic and political power of the state it relies on, can become full-fledged world money, because it is always created in the interests of one state.
SDRs exist only in the non-cash form in the form of records in bank accounts and are not considered a currency. It is a cashless international unit, first pegged to the sixteen leading currencies in the world, and then to four – the dollar, the euro, the yen and the pound sterling. SDRs have many advantages. For example, the IMF used them as an instrument of international monetary policy during the global economic crisis.
In 2009, the foundation released $250 billion in SDR to help the world deal with the crisis. The creators of the SDR hoped that after that the non-cash unit could become the main reserve asset of the international monetary system. However, this never happened. SDR is now an almost unused instrument of international cooperation. SDRs work as a settlement unit only within the International Monetary Fund, and only a few banks in developing countries use it as a means of payment.
Currency for all?
Although the SDRs have shown their inefficiency, on their basis the European Union has created its own international regional European currency unit. ECU also had no material form, these were records on the special accounts of central banks. This system operated in 1979-1998, and already on its basis formed new world money – the euro. Now 26.5% of the world’s foreign exchange reserves are stored in the euro.
The euro is an example of a single currency operating in several countries. Inside the eurozone, there is no need to think about exchange rates. Prices are easy to compare with each other, which makes trading much easier. Mutual investment between countries with the same currency is also becoming easier. When a company earns income in one currency and in one country and pays salaries in another country with other money, it risks every time, because if the rate changes, the income may stop covering the costs. When the currency is single, there is no such risk.
Another advantage of the euro is that the issue of this currency is regulated by a single Central European Bank. The states that entered the Eurozone refused to have an independent monetary policy. This limits every country, no one can by their own decision, for example, to print extra money and provoke inflation. Although in general, it sounds positive, for each state in this system there are also its disadvantages.
Greece began an economic crisis in 2010, and by 2015 it led to a default, a debt crisis. One in four adults in the country was unemployed and no one gave new loans to the Greek government. There is a theory that Greece would have experienced this crisis less painfully if it had kept its own currency, the drachma. As a last resort, it could be devalued a little. Devaluation makes it easier to pay government debts, which consist mainly of salaries and pensions.
In addition, when the national currency becomes cheaper, exports become cheaper, which could open up new markets for Greece. The cost of services for tourists is also reduced, which attracts new people to the country and supports the tourism business.
Prices in the single currency area are set at more or less the same level. This is convenient, but we should not forget that the income of citizens in different countries can be very different. Price alignment for countries with less prosperous economic conditions results in higher costs for the most necessary things – food, medicine.
In addition, the country’s profits can easily move to a neighboring state, because countries connected by a single currency continue to develop according to their domestic scenarios, they differ, in-laws, policy priorities, social programs. Different ways of development can easily upset the balance and cause an economic crisis.