World currency

The US dollar and euro are by far the most used currencies in terms of global reserves.
In the foreign exchange market and international finance, a world 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.
A world currency is at one extreme of a conceptual spectrum that has local currency at the other extreme.
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.
Contents[hide]
1 The euro and the United States dollar
2 History
2.1 Spanish dollar: 17th-19th centuries
2.2 19th - 20th centuries
3 Hypothetical single "true" global currency
3.1 Arguments for a global currency
3.2 Arguments against a single global currency
3.2.1 Loss of National Monetary Policy
3.2.2 Political difficulties
3.2.3 Economic difficulties
4 See also
5 References
6 External links
//

[edit] The euro and the United States dollar

Worldwide use of the euro and the U.S. dollar: United States External adopters of the US dollar Currencies pegged to the US dollar Currencies pegged to the US dollar w/ narrow band Eurozone External adopters of the euro Currencies pegged to the euro Currencies pegged to the euro w/ narrow band
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 dollarisation) in favour of the United States dollar. The dollar continues to dominate global currency reserves, with 63.9% held in dollars, as compared to 26.5% held in euros (see Reserve Currency).
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.[1]
As with the dollar, quite a few of the world's currencies are pegged against the euro. They are usually Eastern European currencies like the Estonian kroon and 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, Kosovo, 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).[2]

[edit] History

[edit] Spanish dollar: 17th-19th centuries
In the 17th and 18th century, the use of silver Spanish dollars or "pieces of eight" spread from the Spanish territories in the Americas eastwards to Asia and westwards 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 U.S. 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 and Sardinia, as well as in the Franche-Comté (France), and in the Spanish Netherlands. It was also used in other European states including the Austrian Habsburg territories.

[edit] 19th - 20th centuries
Prior to and during most of the 1800s, 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.
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[citation needed], but that usage diminished with the Japanese recession in the 1990s. More recently, the euro has increasingly competed with the United States dollar in usage in international finance.

[edit] Hypothetical single "true" global currency
An alternative definition of a world or global currency refers to a hypothetical single global currency, as the proposed Terra or the Dey (acronym for Dollar Euro Yen) [3], 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 organisations) 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.[4] 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.

[edit] Arguments for a global currency
Advocates of a global currency often argue that such a currency would not suffer from inflation, which, in extreme cases, has had disastrous effects for economies. In addition, many argue that a global currency would make conducting international business more efficient and would encourage FDI.

[edit] Arguments against a single global currency
Some economists[who?] argue that a single global currency is unworkable given the vastly different national political and economic systems in existence.

[edit] Loss of National Monetary Policy
With one currency, there can only be one interest rate.[citation needed] This is not true - government bond spreads in the Eurozone show e.g. Greece 100bps above Germany. This results in rendering each present currency area unable to choose the interest rate which suits its economy best. If, for example, the European Union were to have an economic boom while the United States slumped into a depression, this period would be eased[citation needed] if each could choose (whether by market forces or by fiat) the interest rate which best fitted its needs — in this case, a relatively high interest rate in the former, and a relatively low one in the latter.

[edit] Political difficulties
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.
Most modern currencies have an interest rate, while one of the largest religions in the world, Islam, is against the idea of paying interest for loans. This might prove to be an unsolvable problem for a world currency, if religious views concerning interest do not moderate. This is not necessarily a fatal flaw, however, as a large number of religious adherents who oppose the paying of interest are still currently able to take advantage of banking facilities in their countries which are able to cater to this. An example of this might be Islamic banking, which operates well enough in nations where the central bank sets interest rates for most other transactions.

[edit] Economic difficulties
Some economists argue that a single world currency is unnecessary, because the U.S. dollar already provides many of the benefits of a world currency while avoiding some of the costs.[5]
If the world does not form an optimum currency area, then it would be economically inefficient for the world to share one currency.
A further argument is most easily conveyed by an analogy. Water carried in a biscuit baking pan will rapidly flow from high points to the lowest point, causing a sudden uncontrollable imbalance that forces the high points higher and the low point lower. The same quantity of water in cups on the biscuit pan will have no such inherent instability. Hegemonic currencies, free of regional limitations, flow rapidly away from high risk areas exacerbating their problems disproportionately to original causes[citation needed]. Such events are very damaging to the prosperity of the affected area. See for example the events leading up to, and subsequence consequences of, the Corralito in Argentina. For those with the power to do so, predicting, or even causing, such capital flights can lead to immensely profitable speculations; so profitable indeed that their likelihood of occurrence increases in proportion with the scale of the currency involved