The idea of adopting a universal currency has been floated for a long time. However, its coming to fruition remains elusive. What does it mean? Why are some pushing for the use of a uniform currency? Are there benefits in having it or will it just cause problems?
What is a universal currency?
As the phrase implies, it is a currency that is meant to be accepted everywhere. It would be the result of agreements among the different governments of the world to use one system of money. Think of it as the compulsory euro for all nations across continents. The idea of a universal currency is boosted by the perceived success of the euro, something that can result in better global trade as it can become almost comparable to how local commercial transactions are undertaken.
The establishment of one currency for all entails the creation of a global monetary union that can possibly solve currency-related crises and economic risks. This transnational organization is useful in ensuring consistent regulation and addressing existing and emerging problems associated with the way currencies are handled to enable international trade and evaluate the fiscal health of states.
Isn’t the US dollar already the universal currency?
Upon reading this question posited in this post’s title, you may be wondering: Isn’t the US dollar the universal currency just like how English is viewed as the universal language? This is an excellent comparison that serves as a good starting point for discussing the concept of a universal currency.
The US dollar is like the English language because it is widely used worldwide on a voluntary basis. Some may be forced to use it, but out of circumstances they also elect to get themselves into, like the intention to enable communication with English-speaking countries, they use it to establish ties and conduct trade. It’s not compulsory for other countries to learn and use English, but they opt to do it because they want access to things that are in English.
The US dollar is a necessity for many countries, but it is not mandatory for everyone to use it. It’s not similar to how the Euro is the established currency for the members of the European Union under the eurozone, supplanting the currencies the member nations used previously. Many countries keep dollar reserves and use the US dollar because the value of their currencies are pegged on it.
Here’s a brief history of how the US dollar became the foreign exchange standard. In the past, most countries followed the gold standard, wherein currencies are pegged on the value of gold. However, this kind of system became inconvenient for international trade. That’s why the governments of several countries came up with the 1944 Bretton Woods Agreement, which paved the way for the US dollar to become the benchmark for establishing the value of a country’s currency. This allowed the countries that were parties to the agreement to back their currencies with dollars instead of gold.
In short, the US dollar is not a universal currency. It is only regarded as a “world currency,” serving as the basis for determining foreign currency exchange rates. For it to become a universal currency, every (or virtually all) countries worldwide should be using it in lieu of the currencies they use at present. There should no longer be any need for exchange rates and currency conversions when a universal currency is in place. Some say that bitcoin has a better chance of becoming the universal currency, but it’s too early to tell, especially considering how the falling bitcoin price is making people lose interest in the cryptocurrency.
What are the pros and cons of a universal currency?
There are compelling reasons for having a universal currency. They can be summarized as follows:
• Standardization results in simplification. Having a single currency makes it considerably easier for the economies of different countries to interconnect. Trading can be made faster and without the complex procedures and complication of international trading dynamics. Additionally, it takes away the problems brought about by currency exchange volatility and brings about the era of superfast international money transfers.
• Trading can become faster and less costly. With a universal currency, foreign currency conversions are eliminated, which means not only a simpler process but also a generally lower cost of trading. Foreign exchange trading costs and hedging are taken out of the picture. The need for financial translation will remain, though, as the adoption of one currency for all does not eliminate the need for translations in financial statements or records that may have to be examined by businessmen and governments who speak different languages.
• It will be difficult to engage in price manipulation. If countries that trade internationally use the same currency, the problem of artificial currency devaluation disappears. As such, price manipulation by exporters is prevented for the most part. There are exporting countries that intentionally devalue their currencies to make the prices of their goods appear lower compared to those of other exporters, hence more attractive to foreign markets. Additionally, a universal currency can eradicate speculative currency traders cannibalizing the international money market.
• The problem of hyperinflation falls. Situations similar to what is happening in Venezuela can be avoided if everyone uses a universal currency. The extreme inflation situation in the South American republic happened because their currency’s value depends on the local political and economic situations, two things that have clearly been on a disastrous downward spiral in the past years. A universal currency’s value is fixed for all, so it is shielded from the effects of anything that happens in the local political and economic environment.
On the other hand, there are also noteworthy drawbacks. These disadvantages particularly apply to the local situations and perspectives of countries.
• Local fiscal policy setting can be affected significantly. The economic and political settings of the world’s countries are not the same. Some are rich, while many are poor. Some have democratic governments, while others are ruled by dictators or authoritarian regimes. It would be difficult to address specific local economic concerns if a country does not have control over its currency.
Countries may need to cut interest rates to address an economic turmoil, something that is impossible to do without the corresponding control over the currency used in the country. Under a universal currency, fiscal policy becomes limited to taxation and government spending. It takes away the control over the supply and value of money.
• A single central bank for all countries can only draft one currency policy for everyone. As such, it is not capable of addressing the specific problems of certain countries. It cannot set different interest rates and reserve levels for banks in different countries.
• Economic problems in one or a few countries can send shockwaves to the rest of the world. This is best exemplified by what is happening in the European Union. The collapse of the economy of Greece and the depression suffered by Spain and Portugal have rippled throughout the rest of the EU, not sparing even the established economic giants such as Germany and France.
• Countries with stronger economies are in a better position under the regime of a universal currency. While powerful economies are not immune from the effects of economic agitation in smaller countries, they are still in an advantageous position in the adoption of a universal currency. This is because they will most likely have better representation in the universal central bank and fiscal policy making.
Can we have a universal currency?
The idea of having a universal currency is worth aspiring for. However, at present, it is highly improbable. In the European Union, for example, nine member countries are not part of the eurozone. These countries that are still using their old money systems are the United Kingdom, Denmark, Poland, Sweden, Hungary, Romania, Croatia, Bulgaria, and Czech Republic.
The first two in the list are legally exempt from mandatorily using the euro. The rest of the nine, however, are expected to join the eurozone eventually after they comply with certain requirements. Still, they have the option not to comply. The most common reasons for rejecting the euro are as follows:
• Monetary policy independence including the ability to set inflation-controlling measures and currency devaluation
• Freedom to decide on policies to address challenges specific to a country
• Having an independent lender of last resort (the independent central bank of the country that has its own currency)
Given the diversity of the economies and governments of different countries around the world, many will surely refuse to adopt a universal currency in accordance to the reasons mentioned above or on account of some other justifications. It’s also worth noting that if ever the universal currency is decided to be printed on the basis of some underlying thing of value such as gold, the United States will most likely oppose it. This is because the United States has been printing dollars mainly because of the global demand and supply for the currency, not because of an underlying asset.
In summary, it will be very difficult to convince the governments of the world to support the establishment of a universal currency. The cons and risks outweigh the pros, at least for now. A universal currency may only come close to becoming a reality if a world war happens and ends up destroying most parts of the world, leaving a few survivors who may want to start life again under one world government and economic system.
Businesses still need competent translators even under a universal currency
Universal currency simplifies international trading and removes the barriers created by currency differences. However, in communicating or sharing financial information, proficient, precise, and contextually accurate language translation is still going to be necessary. As such, Day Translations, Inc. and its global network of language experts will remain relevant. For inquiries, you may send us an email at Contact us or through telephone at 1-800-969-6853.
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