Universal Currency:              
Potentials and Pitfalls 

 
 
 
Pascal Lachance 
Student #2100204 
 
Academic Supervisor 
Dr. Saktinil Roy 
 
4/28/2010 
Abstract  
It has been argued by some researchers and observers that a universal currency might
bring greater prosperity and stability for the world economy and community. These
claims are being made in the foreground of an ever globalizing world where common
languages, processes and systems are facilitating interactions across the globe.
Currencies and the financial systems play an important role in such international
transactions. However, the thought that a common currency would facilitate and
promote trade amongst world countries is mainly intuitive in nature. This paper reviews
this proposition, identifies the potential advantages and disadvantages of a global
currency, and offers recommendations based on those findings.

Starting with a literature review of the current and past research on the nature of money,
monetary unions, and global trade, I examine four major areas: i) the optimum currency
area theory and trade volume; ii) propagation of financial shocks; iii) creation of money
and the related impact on sovereignty; iv) the societal benefits. A numerical analysis is
performed on the impact of the European Monetary Union on the growth rates of real
GDP per capita and of average productivity of the member countries. As a baseline
test, a comparison is made to the corresponding growth rates of four non-member
countries.

Mundell’s “optimum currency area” theory is reviewed in the context of a future global
currency. The potential benefits from greater trade volumes and lower transaction costs
are examined. The validity and impact of the “border effect”, the “impossible trinity”
problem, and the related supply and demand issues are also discussed and examined.

Since it has been proposed by a number of researchers that a global currency will
reduce the risk of a financial crisis, I review the nature and causes of the historical
financial crises with particular reference to the impacts of foreign reserves and currency
trading. The relationship and impact of interest rates and inflation rates on financial
shocks are discussed in relation to a universal currency system.

The probable rules and regulations in the creation of money for a global monetary
system are also explored. In this context special reference is made to the potential
impact which the centralization of the process of money creation will have on a state’s
sovereignty. This includes money creation by a central bank, money multipliers, and
bank reserve requirements.

Finally, I examine the potential direct and indirect benefits of a universal currency to our
daily lives in light of the experiences in Europe in specific periods before and after the
establishment of the European Monetary Union. For this purpose, two indicators are
considered: i) growth rate of real GDP per capita; ii) growth rate of average productivity.

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It is found that a common currency could potentially be a powerful tool for countries that
already share strong common attributes. However, the political and fiscal divergences
would make the introduction of a global currency a rather thorny issue. It is
recommended that countries wanting to be part of a monetary union continue to
strengthen their economic and political collaboration at the continent level with the aim
of possibly creating continental monetary unions. A universal currency and a global
monetary system may not be a viable alternative in the near future.

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Table of Contents 

Abstract ........................................................................................................................... 2 
Section 1: Introduction..................................................................................................... 6 
Section 2: Research Purpose and Research Questions ................................................ 7 
2.1. Interest Rates ........................................................................................................ 7 
2.2 Exchange Rates ..................................................................................................... 8 
2.3 Inflation Rates ........................................................................................................ 8 
2.4 National Surpluses and Deficits ............................................................................. 8 
2.5 Transaction Costs .................................................................................................. 8 
2.6 Money Creation Authority....................................................................................... 8 
2.7 Credit Leverage Ratios .......................................................................................... 8 
2.8 Central Governance and Monitoring ...................................................................... 9 
2.9 International Capital Movements ............................................................................ 9 
2.10 Currency Trading ................................................................................................. 9 
2.11 Spread and Absorption of Financial Shocks ........................................................ 9 
2.12 Special Drawing Rights ........................................................................................ 9 
Section 3: Literature Review ......................................................................................... 10 
3.1 Optimum Currency Area & Trade Volume ............................................................... 10 
3.1.1 General Facts ................................................................................................... 10 
3.1.2. Optimum Currency Area Theory ...................................................................... 11 
3.1.3. Trade Volume and Transaction Cost................................................................ 12 
3.1.4 Border Effect ..................................................................................................... 13 
3.1.5 Impossible Trinity .............................................................................................. 14 
3.1.6 Supply and Demand.......................................................................................... 14 
3.1.7 Possible Effects of a Universal Currency .......................................................... 15 
3.2 Spread of Financial Shocks ..................................................................................... 16 
3.2.1 Past Financial Crises ........................................................................................ 18 
Subprime Crisis ...................................................................................................... 18 
Russian Currency and Banking Crises ................................................................... 18 

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 Asian Financial Crisis ............................................................................................. 19 
Mexican Economic Crisis ........................................................................................ 19 
3.2.2 Foreign Reserves .............................................................................................. 19 
3.2.3 Currency Trading .............................................................................................. 20 
3.2.4 Interest Rates .................................................................................................... 20 
3.2.5 Inflation Rates ................................................................................................... 22 
3.2.6 Spreading of Shocks ......................................................................................... 23 
3.3 Creation of Money & Impact on Sovereignty ........................................................... 24 
3.3.1 Money Creation ................................................................................................. 24 
3.3.2 Money Multiplier and Reserve Requirement ..................................................... 25 
3.3.3 Global Monetary Governance ........................................................................... 25 
3.3.4 Impact on Sovereignty ...................................................................................... 27 
3.3.5 Global Currency Implementations ..................................................................... 28 
3.3.6 Summary........................................................................................................... 29 
3.4 Welfare Benefits ...................................................................................................... 29 
3.4.1 Direct Benefit to Individuals............................................................................... 29 
3.4.2 Indirect Benefits ................................................................................................ 30 
3.4.3 Trade Volume – Welfare Benefit ....................................................................... 31 
3.4.4 Capital Flows and Salary Levels ....................................................................... 32 
3.4.5 Summary........................................................................................................... 33 
Section 4: Results ......................................................................................................... 33 
4.1 Real Per Capita GDP Growth Analysis for Euro Countries .................................. 33 
4.2 Real Per Person Employed GDP Growth Analysis for Euro Countries ................ 35 
4.3 Research Questions............................................................................................. 36 
Section 5: Analysis ........................................................................................................ 39 
Section 6: Recommendations ....................................................................................... 40 
Section 7: Conclusion.................................................................................................... 40 
Bibliography .................................................................................................................. 42 

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Section 1: Introduction  
A universal currency that would be used across the globe is currently a topic of
discussion amongst the highest levels of national governments. The issue has recently
been raised by many countries including China and Russia as well as organizations
such as the United Nations and the International Monetary Fund. The main arguments
for such a global federation are the desire to reduce transaction costs, eliminate
currency risk, and to promote overall economic stability. The proof of any benefits of a
potential global currency union is theoretical and the loss of control over monetary
policy, as well as the encroachment on fiscal policy it would bring about, is a concern for
some. The largest economic experiment on this front is the European Monetary Union
(EMU) - one that will undoubtedly provide economists with valuable lessons in building
a universal currency system, should world leaders agree to such a project. Discussions
on this topic are likely to be precipitated by the erosion of the world reserve currency
status of the United States dollar as it continues to lose value due to the country’s low
economic performance and large budgetary deficit.

The aim of this research project is to identify the advantages and disadvantages of a
unique global currency. Advantages will be defined as measures, policies and
processes having a positive impact on gross domestic product, trade, and overall quality
of life. Disadvantages, on the other hand, will be measures, policies and processes
having a negative impact on gross domestic product, trade and overall quality of life.
Economists generally agree that increases in gross domestic product or trade, which
often occur in unison, lead to a higher quality of life. Other items such as low inflation
rates, and the cessation of financial shocks will be examined in concert with the “quality
of life” criteria.

Whether a centralized currency or a balance of centralized and decentralized currencies

would be more advantageous as an impetus towards trade growth and quality of life
improvement is the intent of this examination. Of interest is to determine what
implementations of a global currency would work, what wouldn’t succeed, and which
factors could mitigate the negative effects of a singular global currency. 

Research will be based on a review of the current economic research, models, theories,
regulations and initiatives employed by countries and organizations such as the United
Nations, the World Bank, the International Monetary Fund and the World Trade
Organization. This will be extremely useful in interpreting the current research and
climate of opinion concerning the creation and implementation of a global currency
system. The research will facilitate further exploration and research into the various
areas identified above, in relation to the main objective of the project. The issue of
global finances and currencies is quite relevant, considering the growing number of

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appeals globally to confront the issues associated with the current global or reserve
currency system.

The topics covered in the research begin with the exploration of the concept of an
optimum currency area and trade volume. The spread of financial shocks in a global
currency setting is then investigated. This leads into a review of the creation of money
and its impact on national sovereignty, with the last section being a review of the
welfare benefits arising from the adoption of a universal currency. An analysis of gross
domestic product and productivity data from key European Union countries is performed
to compare the economic growth of countries prior to and following the launch of the
European Monetary Union. It has been found that the potential key benefits from a
universal currency would be born of the stability brought on by the fiscal, trade and
governmental integration requirements of a monetary union. The need to agree on
compromises to many sovereign issues would predispose a successful monetary union
to nations which are already close in relations. Hence, a focus on continental monetary
unions is suggested.

The rest of the paper is organized as follows. In section 2, I discuss the main purpose
of the research project and outline the specific research questions associated with it. In
section 3, I review the literature on the optimum currency area theory and trade volume,
financial shocks, money creation and welfare benefits. Section 4 presents an analysis
of growth of per capita real gross domestic product and of average productivity for post
and pre European Monetary Union. The answers to the research questions are also
discussed in this section. The results are analyzed in section 5 and recommendations
are made in section 6. Section 7 concludes.

Section 2:  Research Purpose and Research Questions 
In order to determine whether a global currency would be good or bad for the world
economy and community, we must first make a decision on the metrics used to
measure the potential merits and demerits of such a concept. Increases or decreases in
trade, stability and welfare should be regarded respectively as positive or negative
consequences. For gauging the extent or magnitude of the impacts, the following
issues will be examined:

2.1. Interest Rates 
Why are interest rates so important, and why is there a long-term interest rate criterion
for countries to join the European Union (Euro convergence criteria, 2009)? This
conundrum will be explored using the available literature concerning interest rate
variations and the background of this criterion. This approach will shed light on the
issue of a global currency and its possible relationship to interest rates.

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2.2 Exchange Rates 
Here, other than the obvious role of converting to and from different valuations, I will
explore the role floating exchange rates play in the dissipation or amplification of
financial shocks as they spread through multiple countries.

Starr (2006) points out that some favor national currencies and floating interest rates, in
contrast to a global currency, for developing countries by stating that a global currency
is too restrictive for their needs, which require greater flexibility in order to respond to
different business cycles and financial shocks.

2.3 Inflation Rates 
As part of the Maastricht criteria, countries endeavoring to join the EU must have
inflation rates at no more than 1.5 percentage points above the average rate for the
three member states with the lowest inflation rates (Euro convergence criteria, 2009).
The dynamics of inflation rates in integrating diverse economies will be analyzed
through a review of the literature and work behind the agreements currently in place for
the European Union.

2.4 National Surpluses and Deficits 
As Keynes proposed penalties for countries maintaining a deficit or surplus in an
integrated financial system (UNCTAD, 2009), I will review the research relating to this
proposition as well as the effects deficits and surpluses might cause on a globally
integrated system. Discerning if the problem of deficits and surpluses solves itself in a
world with a universal currency will be analyzed.

 2.5 Transaction Costs 
Lower transaction costs are cited by Starr (2006) as one of the primary reasons of the
dollarization of countries. Further literature review will examine this proposition.

2.6 Money Creation Authority 
The authority to create money can be a thorny political issue although in a central
system this authority would lie with a central board, expropriating this power from the
member states. Similar to the restrictions imposed on a state by a gold standard, or
gold-based currency, removal of money creating authority would limit the ability of a
member state to independently create money to stimulate its economy. The current
agreements and mechanics in place within the European Union will be reviewed as the
basis for delving into the issue of where the authority to create money should lie.

2.7 Credit Leverage Ratios 
The ability of banks to leverage their deposits into larger loans is currently regulated at
the state level in the United States. This is a means of creating money that might have
to be regulated at the global level in a universal currency framework. High credit

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leverage ratios in the United States are being blamed for the current economic crisis
(UNCTAD, 2009). A means of identifying ‘real’ money versus ‘leveraged,’ or virtual,
money might also have to be devised.

2.8 Central Governance and Monitoring 
A review of the governing framework for the now 10-year-old European Monetary Union
provides an ideal opportunity to identify the potential strengths, weaknesses, and key
areas of concern involved in such an endeavor.

2.9 International Capital Movements 
It is believed that a universal currency would remove most of the barriers to the free flow
of capital. A literature review with respect to the consequences of free capital
movement will performed to discover the impact this has on trade growth and economic
stability.

2.10 Currency Trading 
The practice of trading currency for profit distorts the value of a state’s money, due to
the influences of speculative manipulation on the supply and demand of a country’s
currency. This leads to the question: would removing this function help or hamper trade
growth and global stability? This question, along with others, will be explored in this
work.

2.11 Spread and Absorption of Financial Shocks 
Does the existence of multiple individual currencies help to attenuate or amplify financial
shocks as they propagate from one country to another? Would having one universal
currency ameliorate this issue, or would it expedite the spread of such financial shocks?

2.12 Special Drawing Rights 
The introduction of Special Drawing Rights (SDRs) from the International Monetary
Fund, along with the European Monetary Union, could be the empirical front that would
bring us closer to an understanding of the dynamics of a global currency. Although not
as strong and liquid as the euro, SDRs are being considered as a potential global
trading currency outside of the North American and European Union trading arenas
(Fox, 2009). The experience to date and planning of SDRs will be researched, through
literature review, to compare, contrast and supplement the research concerning the
euro, as well as the previously asked questions.

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Section 3: Literature Review 

3.1 Optimum Currency Area & Trade Volume 

3.1.1 General Facts 
When two individuals meet face-to-face to perform a transaction, they can quickly agree
on a value for the goods and carry out an exchange. In the example of someone
wanting to trade eggs for a loaf of bread, the transaction involves two individuals who
will meet and conduct the exchange. The goods can be physically inspected by both
parties before changing hands. In this situation, there is no cost fluctuation or risk
premium associated with the purchase and delivery of the goods, the nature of the
goods, how the exchange occurs or the parties carrying out the trade.

In today’s world, with its fully integrated financial networks, this type of trade does not
occur often. However, today’s exchanges include trade risks due to the elements of
time and distance. The point in time at which goods are purchased will impact the
purchase price based on the value of the good or commodity being traded and the
relative value of the currencies used at that moment. The further the transaction is in
terms of geographical distance, the greater the exposure is to different government
regulations. These perfunctory interactions can vary drastically from what the
originating party is accustomed to, thus potentially impacting the costs and risks
associated with the transaction. As the distance between the source and destination
increases, the goods being purchased and the vendor can also become suspect with
regard to credibility and quality. Recourses for a defective lot purchased down the road,
versus half-way around the globe, can be quite different in nature and costs.
Additionally, the delivery means of purchased goods can also affect the purchase price
directly or through the addition of increased shipping and insurance costs.

We can infer that trade costs and risks increase with distance. The increase is
expected to follow a linear growth along distance, with spikes occurring when certain
boundaries are encountered. These boundaries can include national, geographical,
political, language and religious borders.

If one were to consider dollars to be electrons, we could postulate that trading circles,
like any other type of energy flow will funnel through the path of least resistance to get
to their destination. With this example, instead of the positive trying to cancel out the
negative in the circuit, we have the buyer meeting the seller, or supply meeting demand.
Different obstacles and resistances are in the way of these dollars, and at each
encounter they lose a bit of their charge or value. The resulting path becomes a
business trading network based on local demand and supply.

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Trade in the modern marketplace is as simple as using the Internet - where a myriad of
websites will allow a consumer to compare prices around the world for the products
being sought. All this is available in a few keystrokes and mouse clicks. Some online
companies go as far as completing a purchase, including shipment, directly to one’s
home through a single mouse click. This is the case with Amazon’s “One-Click
purchase” patent. Such price transparency has been shown to increase competitive
pressures and result in more trade, based on lower prices (Artis, 2006).

With today’s low energy and shipping costs, certain purchases from the other side of the
globe have become less expensive. Distances have been conquered in such a way to
make geography irrelevant for such transactions.

In the case of personal purchases, a transaction billed in a different currency is usually

handled by a credit card company or converted automatically in the customer’s local
currency by the seller’s online store. This means the customer does not have to be
concerned about anything other than a) shipping costs, b) import or export duties, and
c) laws concerning consumer protection and refunds. The transaction is immediate and
the currency conversion done automatically.

The risk of exchange rate fluctuations between the customer’s currency and the
vendor’s currency, while the purchase is en route, is removed since the transaction has
already been settled. Should the customer’s currency double in value between the time
the shipment was sent and the time it was received, the amount liable for duties and
taxes could very well be doubled, as they are calculated based on the local value of the
package.

Listed below are some of the main risks that international commercial buyers face on a
daily basis:

a) Currency fluctuations between the time of purchase and time of payment for a
contract;
b) Currency fluctuations on foreign accounts or reserves held by the buyer;
c) Contract laws being different in the two countries;
d) Delivery risks.

For this reason, purchases are likely to be done within a certain area. Buyers reduce
their risk by doing business in their own country, in a common currency, and with laws
that are familiar. Purchasing from an established international company with an office,
or even their headquarters, in the buyer’s country can also be relatively risk free.

3.1.2. Optimum Currency Area Theory 
The discussion so far suggests that certain trading areas will generally develop inside
political and geopolitical boundaries. This brings us to the Optimum Currency Area

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(OCA) theory (Mundell, 1961). An optimum currency area is defined as a geographical
region in which, if the entire region shared a single currency, economic efficiency would
be maximized.

Frankel (1998) summarizes the four main relationships involved in Optimum Currency
Area models and calculations as amount of trade, business cycle similarity, labor
mobility and risk-sharing systems. He indicates that a higher rating in any of these
categories imply a higher suitability for a common currency.

We can also look at the world area to cover not just geographical space, but also other
shared-contour attributes which could present, or remove, resistance to financial flow.
Rose & Wincoop (2001) added the following attributes to the standard gravity model
that is used to determine trade interactions: whether the countries were landlocked,
used a common language, shared a common border as well as whether the countries
were colonized by a common third country. Rose & Wincoop (2001) also make the
assumption that nations who are geographically closer will trade more exclusively and
that richer and larger nations will have higher trade amongst themselves as well.
Through this we can infer that the usage of different currencies would inhibit trade
between countries in the same region, depending on the ease of convertibility between
the currencies involved. Following this vein of thought brings us to the issue of trade
volume.

3.1.3. Trade Volume and Transaction Cost 
Rose & Wincoop (2001) indicate that “National money seems to be a significant trade
barrier” and state the statistical impact of membership in a currency union on trade
volume at an amazing 230% trade growth. They question, however, the ranking of
lower transaction costs as the primary driver for this trade increase. The majority of the
literature reviewed is in agreement with the fact that a monetary union will result in a
lower transaction cost in concert with the loss of independent monetary policy (Frankel
& Rose, 1998; Kollman, 2004; Starr, 2006). Another benefit quoted is the elimination of
any risks due to exchange rate fluctuations (Kollman, 2004).

The majority of monetary unions and global currency proponents state the reduction of
trade costs as a major benefit and reason for monetary unions (Barro & Tenreyro, 2007;
Rose, 2004). The reasoning behind this thinking is that lowering trade costs and
complexities will increase the amount of money available, thereby increasing overall
trade. In turn, reductions in the perceived risks of delivery and price fluctuations will
ease the minds of traders doing business with other states. Although not a monetary
union, this was one of the major goals behind the formation of the Zollverein Customs
Union in 1834 (Anderson, 1931; Henderson, 1934) - an alliance that removed the
majority of custom tariffs between the various German states.

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What seems to be left out of this equation is the assertion that, although a monetary
union results in lower transaction costs, it is questionable whether overall economic
activity is stimulated by the lowering of these fees. The transaction costs in question
were someone else’s profit that was spent or invested somewhere else in the world.
The value provided by transactions fees is one area that could be studied further.
Although transaction fees are clearly a trade inhibitor, their economic value does not
disappear from the system. The profits from these transaction fees could possibly be
deposited into longer term investments and therefore their contribution to the GDP, or
the velocity of money, in the economic ecosystem is not as noticeable. The reduction of
transaction fees however is clearly a positive factor in the growth of trade between
countries, which has a positive overall contribution to the welfare of the states
participating in trading activities.

It is also shown in the literature that the benefits will be lower for countries with banking
systems that are more efficient and already incur lower transaction costs (EC, 1990).
As an example, the benefit of joining the European Monetary Union was estimated to be
between only 0.1% and 0.2% of GDP for the United Kingdom (EC, 1990). Though there
may be a wide range of variance in the benefits of these two factors, lower trade volume
and higher transaction cost share a common contributor: the border effect

3.1.4 Border Effect 
The border effect is defined as the difference in price of a good traded on one side of a
border versus the price for the identical good on the other side of the border.

The border effect results in supply and demand rules being bent to accommodate
different currencies, trade complexities and national identification. A theoretical
example of the border effect would be to infer that the amount of trade between
companies in the Canadian province of Ontario and companies in the Canadian
province of British Columbia is higher than with companies in the American state of
Washington. While British Columbia and Washington State are practically the same
distance from Ontario, the fact that Washington State is across a national border could
hamper trade with Ontario based companies.

Hence the adoption of a monetary union does not imply that goods and services will
flow freely through national borders. A global currency will diminish the impact of this
effect, but not totally remove it. Issing (2006) contends that in Europe “border effects
have been reduced to 20% of pre-EMU levels”. Here again, we can assume that overall
economic activity has remained more or less unchanged and that some level of
domestic trade has been replaced by cross-border trade. The border effect reduction
brought about by a monetary union will also have an impact on cross border capital
flows as explained through the ‘impossible trinity’ problem.

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3.1.5 Impossible Trinity 
Mundell’s “impossible trinity” states that in choosing a currency arrangement a country
can only realize two out of the three following objectives: a stable exchange rate, free
capital mobility or a strong domestic monetary policy. In the setting of a potential global
currency, the choice would be clear; a stable exchange rate and free capital mobility is
selected over the ability to maintain a strong domestic monetary policy. On the other
hand, the loss of leverage over monetary policies does not imply a total loss of
response to regional economic issues. Fiscal policy is still available, and the
government of a state can respond with spending programs targeted towards
depressed economic areas. These local economic depressions would also be
addressed by the system-wide balancing effect of proper labor flow to the unaffected
areas. Problems and imbalances can, however, start to develop if markets are not
allowed to operate freely where supply and demand are distorted.

3.1.6 Supply and Demand 
Occasionally obstacles appear, restricting the free and efficient workings of markets.
Countries, organizations and companies can manipulate supply and demand for either
financial or national strategic advantages. This can result in the short-circuiting of basic
theoretical assumptions about economics. Restriction or manipulation of the flow of
energy, basic commodities or labor can result in disequilibrium across any trading
network. Although joining a currency union can remove a country’s ability to use
monetary policy to affect its economy, policies on the domestic and trade fronts are still
available for use. A country, or corporation, can severely limit or withhold the supply of
key commodities with the aim of driving up prices and engendering higher profits. This
would effectively drive up inflation in other countries that rely on imports of these
commodities for regular operations.

Currently, there are several examples of this type of manipulation in the news media.
The Organization of Petroleum Exporting Countries (OPEC) regularly sets production
quotas for its member countries to keep the price of a barrel of crude oil within a certain
price range. As an obvious proof of this fact, the Saudi oil minister stated that “At
between $70 and $80, everyone is happy” (Webb & Luanda, 2009) in referring to the
price of a barrel of oil. Fully-laden oil tankers are also asked to postpone unloading
until such a time when prices are higher (BBC, 2009). In fact, at one point in 2009 more
than 50 tankers were anchored around the British Isles waiting for the price of crude oil
to rise (Derbyshire, Levy, and Massey, 2009). China has also been considering the
limitation of the export of rare earth metals, which are essential elements in the
burgeoning “green” technology industry and several high technology systems. The
country currently holds 95 percent of the global supply of these minerals (Lewis, 2009).

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As of December 18th, 2009, the European Commission is involved in 37 World Trade
Organization disputes (EC, 2010). These disputes range from banana imports, to
poultry exports, to taxes on imported wines in India. These trade manipulations have a
similar effect to currency manipulation, however in the EMU implementation everything
is quoted in euros and there are no trade tariffs within the euro area. With all of this in
mind, we now need to consider the potential effects of a global monetary union.

3.1.7 Possible Effects of a Universal Currency 
Starting with the question raised by Keynes on whether the world economy would be
better off with a global currency, it is shown that in most parts it would. Unfortunately,
due to politics and self interest, getting there will be a lengthy process. Starr (2006)
shows that smaller economies will agglomerate towards the larger ones based on
regional proximity and political affiliation. The smaller, emerging economies have much
to gain in terms of trade growth with the affiliation to a larger currency system and
trading block, such as the European Union.

The article concludes that the world is heading in the direction of fewer, but better,
currencies and that this will have a positive impact on global trade and global integration
by removing fluctuations in intermediary economic activities supporting global trade
(Starr, 2006).

Helliwell and Schembri (2005) point out in the conclusion of their paper that “borders
and separate national currencies represent significant barriers to trade” echoing the
findings of Rose and Wincoop (2001). However, this observation may need better
explanation in terms of more data and further analysis. In particular, this leaves many
questions unanswered; such as how much a sense of nationality factors into a citizen’s
decision to purchase locally versus internationally, how much a common currency would
impact trade, and what are the underlying variables contributing to these barriers?

Another front on the vocalization of the need for a global currency comes from the
current precarious situation of the US dollar, which is the de facto global reserve
currency. The value of the US dollar has been declining over past years, the United
States government has posted a budget deficit for 2009 of 1.4 trillion dollars (White
House, 2010), and the US economy has yet to recover from the subprime mortgage
crisis. Understandably, the budget deficit can be alarming to external investors as it
jumped 308 percent from 2008’s level of $459 billion dollars, and is predicted to remain
in the vicinity of 2009 levels for the next two years (White House, 2010). In expanding
the reach of a currency through a global monetary union, we would be opening up the
global financial system to the economic influences and shocks emanating from all
member countries.

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3.2 Spread of Financial Shocks 
It is at this point that we need to consider the potential impact a monetary union, or
global currency, would have on the velocity, reach and intensity of the spread of
financial shocks.

The reach is defined as the distance a financial shock travels, from its originating point
to other countries, financial systems or monetary unions. The velocity is the
measurement of how quickly it gets there, and the intensity is the determination of
whether there is any amplification or attenuation of the original financial shock.

The optimal result of this monetary union would be a reduction in all three of these
financial shock attributes. That is, the overall effect of a global currency would be to
restrain the area of impact, reduce the velocity of the spread and attenuate the force of
a financial shock. Duration must also be considered as an attribute - best studied within
the realm of macro-economics. The assumption taken is that equalization will happen
after a certain period of time. The worst effect resulting from a global currency would be
the accelerated spreading of an intensified financial shock.

A financial shock is defined as an unexpected event with a large effect on an economy

or the markets, where events are seen as negative or positive. The latter, positive
shocks are simply labeled as productivity gains, bubbles and general economic growth.

Does the fact that we currently have multiple currencies help to alleviate or amplify
financial shocks as they propagate from one country to another? Would the use of only
one global currency mitigate the immediate expansion of a financial shock, or would it
expedite the propagation of such an occurrence? Are the numerous existing currencies
ultimately a better system, where each currency system acts as mini shock absorber?

It was observed that financial shocks propagate extremely rapidly in our current world of
highly-integrated financial systems (UNCTAD, 2009), indicating that in a well integrated
financial market, and what would be proposed under a global currency, financial crises
could quickly spread to the interconnected economies. The report also infers that there
might be some attenuating properties of an integrated system with variable exchange
rates. The capacity of the various national exchange rates to absorb a certain amount
of pressure at every degree of expansion could explain this. The precarious element in
this relation is that if a certain member of the integrated set is able to absorb a larger
portion of the stress, it ultimately might cause its direct neighbours a great deal of
calamity when this accumulation releases into the overall regional economy.

The countries which were quick to abandon the gold parity from their currencies and
allow them to fluctuate were plagued with smaller recessions, but were quicker to
recover than those countries that adhered to the gold standard (The Economist, 2009).

16
Without the constraint of maintaining the gold-price parity they were able to lower
interest rates and thus, stimulate spending locally. In reference to the case of the
political inability of European Union member countries to manipulate interest rates
independently of the European Central Bank, a global currency framework would
present the same problem.

An important consideration in the formation of a monetary union is to have a structure

wherein underlying economic drivers have the freedom to react to and absorb stresses
that would typically be dissipated through changes in the relative value of individual
currencies. Hence, the movement of labor and capital across the borders of states
participating in a monetary union must be considered. The question of labor movement
was thoroughly covered in the European Union, where citizens are allowed the freedom
to work in any EU member country without the need for a work permit or visa (CEC,
2002). With no restrictions on labor movements, a workforce could relocate to where
economic activity is stronger and employment is available. The inflationary and
deflationary dynamics caused by this movement then ensure the leveling of economic
activity across the different areas in question. Off-shoring and outsourcing to countries
with lower labor costs is a similar concept, where instead of the labor moving to a
location where employment is available, the work is relocated to where labor is
available.

Let us consider a hypothetical scenario taking place in the European Union, where a
company is looking at the construction of an industrial facility. The decision on the
location of the new plant would take into consideration several key factors - factors such
as construction costs, future labor costs, operating costs, output quality levels,
availability of expertise, accessibility to raw materials, and shipping costs. The current
levels of local labor costs would also have an impact on the decision, but if the facility is
actually constructed it is expected that the influx of labor would come from areas of the
European Union with lower economic activity levels.

Similarly, capital can flow through national jurisdictions to reach a destination where it is
in demand. Capital flow occurs far more rapidly, and with less legal obstacles, than
labor flow. At the press of a few keys billions of dollars can go half-way across the
globe, to be deposited in a different country in a different currency. The large and
sudden flow of capital has been associated as a major contributor to financial crises and
their spread.

In this context, I will discuss some financial crisis episodes as they relate to global
currency.

17
3.2.1 Past Financial Crises 
Past financial crises include the subprime mortgage crisis (2008), the Russian debt
crisis (1998), the Asian financial crisis (1997), and the Mexican peso crisis (1994).

Each of these four will be reviewed and analyzed within the context of a global currency.

Subprime Crisis 
The most recent of these is the subprime mortgage crisis which originated in the United
States. It was triggered by rising mortgage defaults and foreclosures. The effect of
these defaults trickled back up to securities that were backed by the subprime
mortgages, thus quickly reducing the values of these securities. Since the majority of
banks were holding mortgage-backed securities as part of their capital base, the
reduction of their value created huge losses and also greatly reduced the amount of
credit the banks were able to offer as loans (Gorton, 2009).

In the creation phase of the crisis, a somewhat recursive pattern occurred, as banks
were able to sell the mortgages to investors. Through this process the banks
replenished their funds, which gave them the ability to create more loans, generate
fees, and repeat the process (Sherman and Tana, 2008).

In the years just prior to the crisis, the US banks moved more than 5 trillion dollars of
assets and liabilities off the balance sheet into exotic financial instruments. This
allowed them to ignore the financial regulation regarding minimum capital ratios (Reilly,
2009).

The result of this crisis, which is still being felt today, was that the credit markets froze
up and that the financial services, real estate and home construction industries were
dealt a very hard economic blow.

Russian Currency and Banking Crises 
The Russian financial crisis resulted from two causes: the country’s heavy reliance on
oil exports and the drop in commodity prices triggered by the Asian financial crisis. The
main reason for the Russian crisis was the unsustainable interest on public debt, and
the inflated real exchange rate (Ellman and Scharrenborg, 1998). This of course could
not have happened in a global currency setting, as there would be no opportunity to
sustain an overinflated exchange rate. There would still be the possibility of an
individual state offering higher interest rates than its counterparts to attract a higher
amount of capital. In turn, this might still cause imbalances that would have to be
addressed through some type of corrective measure. The implementation of a higher
interest rate would increase the capital inflow and take this capital away from the other
nations, potentially putting downward pressure on their economic growth. Inflation
would also increase in the country with the higher interest rates, as the new capital got
spent in the local economy. This measure could balance out the issue as rising prices
18
reduce the profitability of projects undertaken with funds procured at higher interest
rates.

Asian Financial Crisis 
The Asian financial crisis started in Thailand in July of 1997 and quickly spread to many
other Asian countries. Although most Asian countries were affected in one way or
another, the countries most affected were Thailand, Indonesia and South Korea, and to
a lower degree Hong Kong, Malaysia, Laos and the Philippines. A Thai baht, which had
been tied to the US dollar, helped the economy of Thailand grow at an average rate of
more than 9% per year from 1985 to 1996. The baht came under speculative attack in
1997 and, after some effort by the government to maintain the link to the US dollar, the
pressure to float the baht became too strong. The currency devalued quickly and the
Thai stock market lost 75% of its value (Asian financial crisis, 2009). Surrounding
countries were mostly affected by foreign investors pulling their money out of Asia and
subsequently refusing to lend money to developing countries.

Mexican Economic Crisis 
In a similar economic situation, Mexico’s peso lost investor confidence when the
government was unable to hold its peg against the US dollar. The peso floated in the
currency market and crashed to an exchange rate of 7.2 pesos to the dollar from its
original value of 4 pesos to the dollar within a week (Economic crisis in Mexico, 2009).
The United States then intervened and bought pesos on the open market to help
stabilize the Mexican economy; it also provided $50 billion in loan guarantees to further
calm the financial markets. The assertion that a country’s foreign currency reserves play
an important role in its ability to maintain a stable currency will now be reviewed.

3.2.2 Foreign Reserves 
Foreign reserves can be an important instrument in the fight against speculative attacks
on a currency. Conversely, if a number of countries decide to start selling their reserves
of the same currency, they can bring about the beginning of a financial crisis that could
lead to the eventual devaluation of the currency in question.

China is currently known to have up to 70 percent of its $1.95 trillion currency reserves
in US dollars (Brown, 2009). The quick movement of this money would have a dramatic
impact on the value of the US dollar and on the welfare of millions, if not billions, of
people. If this amount of reserve capital were in a global currency there would be no
real possibility of movement and, therefore, a much reduced probability of economic
fluctuation attributed to this surplus. The financial equation would then become more
focused on the supply and newly-created demand for the goods that the savers are
interested in purchasing.

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The Chinese government has recently been transferring large amounts of capital from
its holdings of US debt into commodities like mines in Canada (Hoffman, 2010) and
South Africa (Macharia, 2010). Oil developments in South America (Mouawad, 2010)
and farm operations in Australia (Callick, 2008) have also become the targets of
Chinese investments, as China seeks to diversify its reserve holdings with commodities
that are more likely to retain their value than the declining US dollar. As shown in the
above examples, currency attacks and speculative currency trading can put enormous
stress on a country’s foreign reserves.

3.2.3 Currency Trading  
Currency trading distorts the true value of money due to the influences of supply and
demand, based on speculation and manipulation. As a result of the implementation of
universal currency, the trading of currencies would simply disappear. This would
remove the possibility of localized devaluations as every country would be utilizing the
global currency in play.

Although the global value of this new currency would remain constant, its purchasing
power could still vary between different regions and countries. This is described in the
work of Ashenfelter and Jurajda (2001) where the equivalent US dollar cost of a
McDonald’s Big Mac in Belgium, France and Germany were $2.61, $2.62 and $2.36,
respectively, in August of 2000. These three countries are all members of the original
eleven countries which adopted the euro currency in 1999. Although the difference in
Big Mac prices for Belgium and France is minimal, there is nearly a ten percent
difference in price between France and Germany - two adjacent countries that share a
common border of over 450 kilometers.

As discussed in previous sections, the variability of a currency can play a significantly

large role in helping to trigger a financial crisis. Also discussed was the statement that a
stable currency is beneficial to trade and welfare. A Tobin tax, which is a tax on
currency trades, or similar tax on short-term speculative foreign exchange transactions,
would potentially reduce the number of speculative trades on a currency as the
profitability of such operations would diminish considerably. The implementation of a
global currency would remove any such speculative trades or attack as there would be
only one currency in play: one whose value is guaranteed by a lender of last resort
(Calvo, 2009). Another determinant of where money moves to and from is the rate of
interest paid on savings and loans.

3.2.4 Interest Rates  
Interest, being the fee paid for the borrowing of money over time, is an integral part of
our financial and money creation system. In our global setting, where large amounts of
capital can flow freely and quickly across national boundaries, high interest rates on low
risk investments can be a magnet for this capital. This has been recognized and

20
structured into the architecture of the European Monetary Union through a long-term
interest rate criterion that must be met by any country hoping to join the European
Union monetary union and adopt the euro as its currency. It requires that the nominal
long-term interest rate of the interested country be lower than 2 percentage points
above the average inflation rate of the three countries with the lowest current rates in
the European Union (Euro convergence criteria, 2009).

High interest rates in a national economy are documented to decrease economic

activity by promoting the saving of money. Low interest rates do not promote high
levels of savings, but rather higher levels of borrowing. New money is injected into the
economy through forms of business or personal loans and will be consumed, thereby
stimulating the economy. Knowledge of the correlation between interest rates and
economic activity transforms the setting of interest rates into a crucial tool of monetary
policy. In the context of the euro, this tool has been centralized in the European Central
Bank, which issues directives for the member state banks to follow. The European
Central Bank’s primary objective is to keep inflation low in order to maintain price
stability in regions where the euro is used as the base currency (European Central
Bank, 2004).

Although a global currency setting would not dictate the disappearance of this tool, it
would undoubtedly change some of its core dynamics and implications. In the
European Union framework, the European Central Bank is in charge of setting an
interest rate, which is then reflected by the banks in the member countries. In lieu of
having unique interest rates in different locations across the globe, interest rates could
be set individually for loans, depending on their applications, to stimulate different areas
or industries. A similar method has recently been employed in Venezuela, where the
Venezuelan government is attempting to stimulate exports by introducing two different
official exchange rates for the Bolivar (Cancel, 2010).

As a monetary union removes the risk of shocks associated with uncovered interest rate
parity (UIP) conditions (Kollman, 2004), the monetary union characteristics of a global
currency would also inherit this benefit.

It is argued by some that there is no evidence for a general relationship between

interest rates and exchange rates (Hnatkovska, Lahiri and Vegh, 2008; Calvo and
Reinhart, 2002) and that most models don’t explain exchange rate movements (Frankel
and Meese, 1987). However, as capital flows from one currency to another with the
objective of accessing higher interest rates, there will be an impact on exchange rates
as demand for the currency being purchased increases, while the demand for the
currency being sold decreases.

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Platt’s (2007) second claim of similar interest rates across regions utilizing a common
currency is also negated by the fact that interest rates across Canada are different,
based on factors such as banking institution, region, credit terms, credit risk, type of
loan required, and type of bank account. Interest rate variations will not be necessarily
minimized through usage of a global currency. As an example, today’s 5-year fixed rate
on a mortgage in Canada was set by the Canadian Imperial Bank of Commerce to a
rate of 5.49%, while Toronto Dominion’s 5-year rate mortgage was set at 4.3%, and that
of Westminster Savings Credit Union at 3.9%. Though interest rates might be the
engine driving the global banking machine, their value can be greatly reduced by
fluctuating inflation rates.  

3.2.5 Inflation Rates 
Inflation is defined as the increase of the price of products and services over time. The
short-term effects of inflation seem to be upward pressure on wages and prices. In the
long term, the effect is from the increase in the money supply - where more dollars start
chasing fewer goods, which brings about reduced purchasing power of the currency
(Inflation, 2009).

Honohan and Lane (2003), and Lane (2006) state that the European Central Bank has
had success in setting the medium-term inflation rate in the euro area at approximately
2 percent. This is in accordance with the 1992 Maastricht Treaty requiring countries
joining the European Union to have an inflation rate no higher than 1.5 percentage
points above the average of the three lowest European Union member countries. The
authors also submit that countries with higher medium-term inflation will benefit from
lower, real interest rates, as demand is stimulated in countries where credit and housing
markets grow stronger than in other countries. This will result in increased prices and
over time, the different economic areas will equalize.

Lane (2006) observed that “inflation differentials can be attributed to equilibrating

forces.” This means that although the inflation rates have been varying across the
member states of the EU this is a temporary phenomena while other factors adjust
themselves for potential convergence. Optimistically, this will result in some level of
economic equilibrium across the euro area, which is one of the major goals of the
European Monetary Union.

Issing (2006) suggests that because the euro-area countries have a greater uniformity
and lower levels of specialization, they are less exposed than the various areas of the
United States to asymmetric shocks. This indicates a potential welfare problem as
other research has shown that the adoption of a monetary union amongst a group of
countries will generate an increase in localized specialization. This specialization
hypothesis speculates that states will concentrate and will, in due time, specialize in
areas where they have a competitive edge (Krugman and Veneables, 1995).

22
An increase in the risk of financial shocks due to specialization becomes apparent,
since it requires more time to retrain labor and convert to either commodity production,
or another type of specialized production. For the individual, if the demand for the
products and services in their area of specialization disappears they will be forced to
retrain for a move into a different occupational sector and potentially a new location, or
move into a more generalized and commoditized occupation.

As a theoretical example; if a small country specialized entirely in the production of a

particular type of bananas, and it was discovered that the product had a negative health
impact, demand would to drop to nil. The residents would have to either relocate or
quickly familiarize themselves with a different product. If the industry is heavily
capitalized towards banana production it could potentially take years to reinvent itself.
Hence, a high degree of specialization is undesirable and somehow, the implementation
of a global currency would have to take this into account for the protection of the welfare
of the member states and their residents. A certain minimum threshold of localized
basic food production or housing production capacity would ideally be enforced to
provide a buffer for the potential economic shocks tied to specialization.

Lane (2006) states that in the euro area larger differences exist in services than in
goods. He also reasons that services cannot be repackaged and resold as easily as
tangible products, thus limiting their reach and tradability. The fact that you can’t
realistically package a service and ship it across borders in the same manner as
tangibles is a point that also needs to be considered in relation to labor movements.
This has interesting implications for service-based economies. The United States is
continually moving towards the direction of a service economy, and could potentially
see a higher level of inflation as a result of this specialization.

Platt’s (2007) claim that if we were utilizing a universal currency, such as the United
States’ dollar, the inflation rate and interest rate would be similar everywhere is difficult
to imagine. Monthly inflation statistics published by the government of Canada show
that provinces in this country, which are using the Canadian dollar, have inflation rates
that vary considerably between the provinces. As an example, the inflation rates
between January 2006 and January 2007 in Ontario and Prince Edward Island were
1.4% and 5.9% respectively (Inflation, 2010). This evidence, and the fact that inflation
varies across countries, regions within a country, and by the type of goods and services
purchased, bring doubt to the claim of stability and growth resulting from common levels
of inflation and interest derived from the utilization of a global currency system. With
this understanding we can now examine the overall spread of financial shocks.

3.2.6 Spreading of Shocks 
A global currency would definitively remove any risk of currency crisis. However,
financial crisis could still occur through the overstimulation of the economy in different

23
sectors or areas. The removal of differences in basic economic drivers such as inflation
rates, interest rates and public debts across the euro area will dramatically hamper the
creation and spread of financial crises as well.

Issing (2006) states that an advantage of flexible exchange rates is that they can absorb
shocks as they try to cross national borders; and that the movements of nominal
exchange rates due to temporary shocks can offset the shock`s effects. In a universal
currency world, financial shocks and their propagation would be greatly reduced, mainly
due to the fact that there would be no opportunity for a differential force to build between
two different currencies. Like the European Monetary Union, any global currency
agreement would have to include convergence criteria on basic economic drivers. One
of the most basic of these is the actual creation of money. Our next point of focus in
this discussion is where the authority to create money will lie once a global currency has
been established.

3.3 Creation of Money & Impact on Sovereignty 
3.3.1 Money Creation 
The authority to create money can be a thorny political issue. In a centralized system
this authority would lie with a central board. By taking away the power from the member
states, the creation of money is then left to an independent third party with no affiliations
to any country, e.g. IMF, WTO, and UN. This removes the ability for countries to 'print'
money as a means of correcting an economic problem without addressing the problem’s
underlying causes. This could be compared with the gold standard, where currencies
tied to gold required physical gold reserves. The fact that the amount of gold is limited
and cannot be created, and is used as currency and backing of currency, disallows
countries from printing money to inflate their way out of a problem.

One of the basic tenets of current monetary policy practice is to lubricate an economy
by increasing the money supply as GDP increases. Quantitative easing is a similar, but
different, practice in monetary policy that is employed to create money and stimulate the
economy to increase the GDP.

This concept was reflected in the Latin Monetary Union of 1848, where each member
state was only allowed to mint 6 franc coins per capita (Einaudi, 2000). Although this
was a voluntary restriction, its existence was rooted in an assumption that all things
being equal, GDP would increase linearly proportional to population count. This is
logical in that each individual has a certain capacity for work and production, and has a
certain basic quantity of needs for nourishment and shelter. These factors, combined
with any other averaged consumption of the times, would give a reasonable estimate of
the basic strata of economic activity in a simple economy. Ensuring that there is

24
enough money in circulation to accommodate the population’s basic needs, plus a
certain level of discretionary spending, is certainly a sound economic plan, effectively
preventing high levels of inflation and deflation.

One of the main considerations in establishing a global currency would be the

determination of the rules and rights of printing money. The manner in which new
money is created and introduced into the financial system would have to be agreed
upon by all founding parties and be based on rules and mechanisms that have been
orchestrated to maintain financial stability across member states. A centrally-based
and mutually agreed-to mechanism for the creation of new money would also prevent
any member states from using monetary policy to create more money and inflate their
way out of an economic problem to the detriment of the other states and their general
economic stability. This restriction is also one of the primary reasons for the
independence of central banks from the main governmental body of a country. This
arrangement provides a safeguard against potential currency manipulation by the
government. Another form of money creation is performed by the banks through the
use of the money multiplier.

3.3.2 Money Multiplier and Reserve Requirement 
Banks are required to have a reserve of capital in order to create loans on this capital.
The Basel accord sets the amount of leverage a bank can have at 15:1 (Basel Accords,
2009). One of the issues relating to the subprime crisis of 2008 was this credit leverage
ratio. Some banks’ ratios were reported to be as low as 1 to 40 (Coffee, 2008).

In a fractional banking environment the money multiplier is an important factor which

literally allows bank to create money, in the form of new loans, based on the amount of
capital they have in deposits. The ability of banks to leverage their deposits into larger
loans is currently regulated at the state level in the United States. This is a means of
creating money that would likely be regulated at the global level in a universal currency
framework. High credit leverage ratios in the United States are being blamed for the
current economic crisis (UNCTAD, 2009). A means of identifying ‘real’ money versus
‘leveraged’, or ‘virtual’, money may also have to be devised. The tracking and
regulation of real and leveraged money is a task that would require coordination by the
member countries of a global monetary union. This global monetary governance would
require the proper framework and authority to function properly,

3.3.3 Global Monetary Governance 
The central bank of a monetary union will, in all likelihood, not be deeply concerned
about local problems, but rather be focused on the aggregate of local problems. This
begets the question of how one is to react at the local level and to wonder what tools
would be available. This brings about the impetus for increased movement of capital
and labor.

25
Issing (2006) states that the enforcement of the rules relating to the Stability and Growth
Pact for the euro area is problematic. Excessive deficits of some European Union
member countries are pushing those countries outside of the prescribed ranges. The
ability to dismiss a country from the European Union or to force it to restrict its spending,
does not seem realistic. This is of course, a problem as individual states are
encouraged to take on more risk because it can be absorbed by the overall group,
hence reducing their risk exposure. If there is a negative impact as a result of an
imprudent action, the augmented risk is absorbed and cushioned by the whole. Under a
global currency countries would be unable to expand their money supply directly
through monetary policy but could increase it by securing loans. The European Union
example of a centralized European currency fosters a different type of exposure to
national loan defaults, since the national currency itself would be impacted.
Unbalanced budgets and lack of debt servicing gives rise to currency devaluation. For
the European Union this impact would spread to the rest of the member states with the
depth of the impact increasing along with the size of the defaulting country. Although
the euro currency would be impacted proportionally to the economic size of the
defaulting country, the main result would be that the country in question would itself face
higher interest rates and find it more difficult to borrow funds from external capital
sources. In the case of a global currency higher interest loans would be the only
resulting impact, and obviously, no currency depreciation would occur, because in
theory there would be nothing else to depreciate against.

A sound case for a global central bank (Garten, 2009), without the direct implementation
of a global currency, can be the logical first step in bringing countries into alignment with
global currency flows and fostering stability in the world’s economies. The point made
is that a global central bank would oversee the more than two dozen existing financial
institutions large enough to cause problems on the global economic stage. The
recommendations include devising a number of national regulatory approaches, the
oversight of large global financial institutions, and setting standard debt-to-equity ratios
for lending institutions. Such a global central bank could engage in pre-emptive
simulations and models to proactively probe weak global economic points or linkages.
The article acknowledges that one of the main obstacles with a global central bank is
that each country wants to give their institutions competitive advantages over the
others.

This could be where, as a global entity, we start moving away from competition and into
cooperation in regards to our international economic infrastructure. At that point,
questions of ambition, alignment and trust are brought forward, and a paradox arises:
Would a global currency help advance these, or are they first necessary for the
establishment of a unique international monetary system?

26
Other authors advocate that we do not need to convince everyone at the onset. Smaller
groups, such as the European Union, can gain economic momentum and, at certain
point, acquire a critical mass that entices neighboring nations to join in for the obvious
benefits of being involved in the trade group.

A global central bank would keep the economy running smoothly once everyone agrees
on the rules for the creation of money. There is a conviction that the state cannot be
trusted to maintain a stable currency due to political pressures (Bordo and James,
2006). The term ‘tying hands’ applies to and indicates the beneficial characteristic of
central banks to adhere to economic principles rather than capitulate to political
pressure in the process of money creation. New rules will have to be developed for
localized responses and application of monetary policy.

In his observations, John Law saw that the problems of Scotland arose from a shortage
of money which caused an underutilization of resources (Murphy, 1991). Hence the
question becomes one concerning the means of properly applying local capital
injections with the goal of stimulating local portions of the economy. This will be a major
concern within the construct of a global currency system. A centralized monetary policy
will greatly erode state sovereignty, requiring concessions from some member states,
as many rules and regulations will have to be harmonized.

3.3.4 Impact on Sovereignty 
One of the costs of converting to a common currency would be the loss of the stabilizing
benefit of applying monetary policy locally to smooth out financial shocks (Artis, 2006).
This will obviously erode the popularity of local politicians as they will be seen to have
no control over the economic situation of their constituents. A current example of this
situation is taking place in the euro zone with the financial crisis facing the Greek
government. Greek citizens are witnessing external politics dictate the parameters
within which their government can enact fiscal policy.

Most certainly, this will be viewed by most as a negative impact, since local politicians
will no longer have the wherewithal to effectively and quickly respond to local economic
issues. The residents of these regions or localities will neither see, nor understand the
benefits to the greater good of a more stable economic system when they are
experiencing local problems. In his paper ‘The Case for the Amero’ Grubel (1999),
reviews the notion that Canada and the United States could implement a fixed
exchange rate to circumvent the political issues around a common currency. He
however rejects the idea, based on the fact that future governments could simply
abandon the fixed rate as needed.

27
A current, but limited, implementation of a universal currency that floats on the average
of the relative currency values of its member countries is the International Monetary
Fund’s introduction of Special Drawing Rights.

3.3.5 Global Currency Implementations 
The introduction of Special Drawing Rights (SDRs) from the International Monetary
Fund, along with the euro, could be the empirical front which upon which we gain a
better understanding of the dynamics of a global currency implementation. Although not
as strong and liquid as the euro, SDRs are being considered as a potential global
trading currency outside of the North America and the European Union (Fox, 2009).

Special Drawing Rights (SDRs) are portrayed as a potential replacement to the US

dollar as a reserve currency, and potentially a global currency. Fox (2009) identifies
situations where the usage of SDRs would have been beneficial during past
experiences. He suggests that the current financial crisis could have been triggered by
the US dollar’s special status on the world stage, augmenting the United States’ ability
to accumulate a federal deficit close to 2 trillion dollars without any counter balancing
action (Fox, 2009).

Although these policies would most certainly create an imbalance, a direct cause and
effect relationship between the current global financial crisis and the United States’
federal debt is not apparent. In contrast, the fact that a greater sum of money was
generated internally within the US through the leveraging of deposits to loans at a ratio
of 1 to 35 points (Fox, 2009), calls attention to a greater danger. It is evident that the
United States needs even more money to be created than what we see revealed as
official debt and current account figures. This scenario, if explored through modeling,
could expose that money is being created “out of thin air”, through the steep leveraging
of bank deposits. This “phantom” capital is then transferred across borders in exchange
for hard goods. The accumulation of such transfers would create a financial bubble
which must burst at some point. This conviction leads me to believe that the federal
deficit of the United States has an impact on the health of global finances, but more as a
secondary driver than a primary influence. Its main impact is directly from the US
economy which, when it slows down, affects the global economy. The solution to the
deficit that has been created lies in fiscal belt tightening measures aimed at reducing
the escalating gap between income and expenses.

In 2009 the G-20 agreed to allow the International Monetary Fund (IMF) create an
additional $250 billion in Special Drawing Rights (SDRs) (Allocation of SDRs, 2009).
This was a major step forward from the total of $31.9 billion in SDRs initially created by
the IMF in 1981. At the same time, China is supporting the usage of SDRs as a global
currency. The tracking of SDRs as they flow through different countries will give rise to
a study of the potential dynamics of a global currency.

28
3.3.6 Summary 
Monetary policy is an indispensible tool that can be used by states to stabilize their
economy. By removing this instrument and placing it in the hands of a centralized body
might cause tremendous political friction between the governments and citizens of the
affected member states.

Conversely, the removal of the control over national monetary policy will deflect political
blame away from local politicians who will, in turn, be able to better focus on strategic
issues in place instead of dealing with the short term, economy-related financial and
political issues.

Although this should not be the norm, any global currency could get sidestepped by a
commodity possessing a certain level of liquidity, like gold, oil or food, for either large or
local transactions. If a commodity is in sufficient demand, a market for the commodity
should develop, with trades taking place using the global currency, assuming there is no
currency shortage.

The short term stability gained from the removal of monetary power from the member
states would be a benefit to the overall stability of the group, as no one member state
would be able to ‘inflate its way’ out of a problem and consequently cause inflation
across the entire union. Barring any financial manipulation, the market should behave
properly and adjust prices based on supply and demand. Should there be no demand
for a product of a certain type, or from a certain locality, the population would have to
change their production focus or change their location. This circumstance would be no
different in the presence of a global currency, than what it is with a local currency.
Ultimately, the global financial system is an infrastructure that is meant to facilitate and
empower our daily activities. Let us explore some of the benefits which a universal
currency could bring us.

3.4 Welfare Benefits 
A currency system, much like any other tool, machine, process or structure is created to
fulfill a purpose. One of the main purposes of currency is liquidity, where its value can
be quickly and widely used for transactions. In defining a potential world currency with
worldwide acceptance and ease of use, we must first consider whether this in itself
would bear direct benefits. Deeper insight into this question can be gained from a
review of personal activities that could be impacted by a global monetary union.

3.4.1 Direct Benefit to Individuals 
In reviewing my routine personal purchasing activities over the past few months, I would
be hard pressed to find an example of a situation in which a common currency would
have impacted me directly in any beneficial way. My purchases of food, gasoline,

29
clothing, books and other items are all based in dollars and I would receive no direct
benefit if the items were priced in euros, or if the Canadian dollar was accepted in
China. Insurance, rent, mortgage payments and utilities are all debited automatically
from my bank account and here, as well, would have no direct benefit from a common
currency. In a purchase of a product from Greece through the online trading site EBay
the quoted price was automatically converted into dollars – a transaction as easy as if it
would have been carried out with a global currency. The only issues of concern were
the customs tariffs and shipping costs, on which a global currency would not have had
any impact. This simple example infers that a global currency would have little direct
benefit to the average citizen’s daily transactions across the world. My belief is that
financial and political integration would bring about many more direct beneficial changes
to an individual’s daily life than a global monetary alliance. After finding a lack of
substantial direct benefits we now examine the potential indirect benefits of a global
currency.

3.4.2 Indirect Benefits 
In extending this thinking to the material that has been covered thus far in this paper,
and looking at the indirect consequences a global currency would produce, the question
that arises is whether we can point to any tangible benefits beyond the lowering of cross
border transaction costs and the minimization of currency fluctuation risks.

Platt (2007) puts forward an estimate of potential yearly savings of $400 billion in
foreign exchange transaction costs. Platt fails to consider however, the fact that this
$400 billion was also someone’s profit and actually stimulated the overall economy as
well. Hence the net gain from saving the costs of currency exchange transactions could
very well be close to zero.

Mundell's (1961) 'impossible trinity' gives us a choice of two out of the following three
possible benefits: stable exchange rate, free capital mobility, and strong domestic
monetary policy. Joining a global monetary union and foregoing a strong domestic
monetary policy causes a country to strive for a stable exchange rate and free capital
mobility. A stable exchange rate, as well as the influx of capital into a region or
economy, can be viewed as beneficial. However, there are instances in which a country
might prefer to retain capital for the economic stimulation of a region.

An additional, potential benefit of economic stability is the reduction of financial shocks

caused by the reduced potential for differentials in inflation and exchange rates to build
up to a size which could cause shocks. For this to happen, the creation of money must
be restrained and controlled by a central source to prevent local governments and
politicians from inflating their way out of an economic problem. This can be a
disadvantage though, when localized creation of money would be exactly the right
remedy for a temporary economic downturn. Currently, the mayor of Lansing, Michigan,

30
who is also running for the post of Governor of the State of Michigan, is proposing the
creation of a state-owned bank to offer loans at low interest rates to local businesses
and students (Hoffman, 2010). Mayor Bernero states that Michigan’s economy is being
suppressed by the fact that hundreds of job-creating projects by Michigan-based
enterprises are being denied financing by the banks. This sentiment is also echoed by
lawmakers from the states of Maryland, Massachusetts, Minnesota, and New Mexico,
who want to transfer more money to smaller financial institutions in their states, thereby
giving them the ability to issue more loans to businesses and individuals (Simon, 2010).
Would this be akin to pouring fuel on the fire, as the main purpose of a central bank
being autonomous from the government is to restrict government officials from printing
money to get out of difficult situations? Many American states that have been
considering state-owned banks point to the 90-year-old Bank of North Dakota as a
success story. The bank holds $3.9 billion in assets and has provided $351 million in
profits to the North Dakota treasury since 1997 (Simon, 2010). North Dakota has an
impressive record for staving off the current economic crisis and recession; in 2008 its
economy had the largest percentage growth of all US states, and it kept unemployment
down to 4.2% (Rappeport and Bullock, 2009).

Kollman (2004) states that “It has long been recognized that a potential key benefit of a
Monetary Union is the elimination of exchange risk, while a “cost” of MU is the loss of
monetary policy autonomy.” Both of these results can have a positive or negative
impact on trade and state welfare. While the removal of exchange risk is an advantage
that will grow in consequence and impact over the long term, the loss of localized
monetary autonomy can hamper the state’s short-term reaction to localized crises.

Greece is now facing a similar problem, in which its central bank is unable increase the
money supply due to restrictions and conditions imposed by the central European bank,
and it is also facing difficult borrowing conditions from the bond markets and foreign
countries (Granitsas, 2010). Given these examples, we can now look at trade volume
and its welfare impacts in the context of a universal currency.

3.4.3 Trade Volume – Welfare Benefit 
A main argument used for the implementation of a global currency is the relationship
between trade volume and welfare benefits Rose and Wincoop (2001). This point has
its weaknesses. Kollmann (2004) states that the impact of a monetary union on state
welfare is greater in high-trade areas where the reduction of shocks minimizes the
number of trade flow disruptions and hence facilitates a larger amount of trade. This is
in comparison to low-trade areas where, even when there are fluctuations in trade flows,
the overall effect is much smaller.

Based on sustainability arguments, it can be argued that there isn’t a linear relationship
between trade volume and welfare. A finite set of natural resources will act as an

31
environmental damper on economic growth and reduce the increase in growth to near
zero, and potentially even negative, to reach a sustainable state. This is in contrast to
studies which have pointed out that there is such a relationship. Another area to review
in regards to welfare benefits is the equalization effect of opening borders to capital and
labor flows.

3.4.4 Capital Flows and Salary Levels 
Friedman (2005) states that the flow of capital between two countries, such as in the
case of an American company moving a factory to India, results in the narrowing of
global inequalities. This is done by increasing the number and wages of Indian workers,
while decreasing the number and lowering the wages of American workers. The
concept of economic equalization, which has been alarming to the North American
worker, works on a weighted average basis. As a gross mathematical example, if we
take the population of the United States versus the population of India, we compare a
population of 304 million against one of 1,147 million. This comparison gives us an
approximate ratio of 1:4, or 25 percent. In theory, the flow of capital towards an
economic model of equilibrium would require that the average salary of an American
worker drop by four dollars per hour to increase the average salary of an Indian worker
by one dollar per hour.

The United States Department of Labor’s 2008 Occupational Employment Statistics

published an average wage of $42,270 per year, or $20.32 per hour, for American
workers. We can also assume a $10,000 per year, or $5 per hour, average for Indian
workers. Using this available information, a rough calculation determines that the
hypothetical equilibrium point is a salary of $16,000 a year, or $8 per hour.

In such an equilibrium equation, due to the larger population of India, the American
workers’ salary must drop by 64% to afford a 60% salary increase for the Indian
workers. The issue here is not that the American worker’s salary would have to drop by
about half to increase the Indian worker’s salary, but rather what that decrease signifies
to the American worker. The quality of life of the American worker would have to be
greatly reduced to yield equilibrium. This would be of grave concern to the American
population, with the result being pressure for politicians to enact protectionist measures. 

This brings up a number of key questions: would the use of a global currency accelerate
the flow of capital investments between countries? Would these transfers be beneficial
to G20 nations? Would they be solely beneficial to the recipient countries? Most
importantly, would a unique currency be a benefit to the aggregate global economy? 

Although we have not seen a reduction in the income of this magnitude for American
workers due to globalization, we cannot dismiss the likelihood of arriving at the same

32
point over a longer period of time through the lack of growth in real income. Simulation
models capturing these parameters would be worthwhile to explore. 

Friedman (2005) points out that the amelioration of the poverty level is an effect of
international trade. This introduces two points that need to be researched. The first is
whether a universal currency would help increase international trade, and the second is
whether the factors behind such betterment are still valid in current times and in the
current context of globalization. He points out that this betterment of the poverty level
allows families to keep their children in school longer; and encourages the reduction of
child labor in affected regions. This would be a widespread net benefit, locally and
globally.

3.4.5 Summary 
The two main positive associations of a global currency to a better welfare are first,
higher levels of trade, which bring about better welfare through income on the side of
the seller, and affordability on the side of the buyer. Secondly, the reduction of risk and
the spreading of financial shocks give rise to greater stability in trade, income and
purchasing power.

Despite the apparent evidence, monetary policy, or monetary integration, does not
seem to be the main agent in bringing about any great level of welfare betterment on
these fronts. Rather, fiscal and political integration, which is brought upon participating
states, seems to be the real foundation upon which these benefits are supported. This
supposition is becoming evident in the issues faced by EU member countries, such as
with the Greek debt crisis. As such, we can envision monetary unions as only a step in
the right direction toward better overall global welfare.

Section 4: Results 
The topics covered in the literature involved in this research project ranged from basic
microeconomic concepts to macroeconomic data as well as the philosophical and
political concepts of a sovereign state. These different concepts need to be positioned
and associated in order to begin answering the global questions about a global
monetary union. The literature review executed in the research framework has yielded
some interesting facts on a few areas of consideration for the topic. Also included is a
numerical analysis of per capita GDP growth data for the original European Monetary
Union members to see if the benefits of the union would be directly reflected in higher
economic growth.

4.1 Real Per Capita GDP Growth Analysis for Euro Countries 
The euro was introduced in 1995, and officially adopted as an accounting currency
across member countries on January 1st, 1999. The real per capita GDP growth data in

33
these tables show an analysis of two 5-year periods: the first spanning the years from
1995 to 1999 and the second from 2001 to 2005.

34
The results indicate an average real per capita GDP growth rate for European Union
countries of 3.30% for the years 1995 to 1999, versus 1.53% for the years 2001 to
2005. This is a drop of over 50% in real per capita GDP growth rate for the period after
the introduction of the European Monetary Union. The results can be contrasted to
2.76% and 1.90% for the same periods for average real per capita GDP growth rates for
the four non European Union countries used as a comparison. This translates into a
drop of 31.2% for the non-EU countries in contrast to the 53.6% drop for European
Union countries.

This is a sub-par performance, which could be explained by the initial costs related to
the introduction of the euro. However, this data clearly does not demonstrate any per
capita GDP growth advantages related to the European Monetary Union. A similar
analysis can now be performed on productivity.

4.2 Real Per Person Employed GDP Growth Analysis for Euro Countries 
The real per person employed GDP growth data in these tables show an analysis of two
5-year periods: the first spanning the years from 1995 to 1999 and the second from
2001 to 2005.

35
As can be seen from these two tables, the first set of data, which represents real per
person employed GDP growth from 1995 to 1999, gives us an average yearly growth of
1.53% for EU member countries, versus 2.08% for the non-EU countries. The 5 years
following 2000, represented by the 2001 to 2005 data, shows an average per capita
GDP growth of 0.84% for the EU members, versus 1.58% for the non-EU countries.
This infers that the real per person employed GDP growth in the European Union
countries dropped by 45.1% after the introduction of the euro, while the non-European
Union countries represented in this chart dropped by only 24%. As in the case of the
drop in real GDP per capita growth for the same period for EU countries, this is close to
twice the drop of the other countries compared. This could also be explained by the
initial costs involved in introducing the euro. Next, I turn to the findings related to my
specific research questions.

4.3 Research Questions 
Interest, Exchange, Inflation Rates and the Spread and Absorption of Financial
Shocks

Interest rates have been shown to be important for the impact they have on saving,
borrowing and inflation. It is important to have similar interest rates for the different
member countries of a monetary union to ensure an economic balance. Although
interest rates can be lowered to stimulate the economy, and brought higher to
encourage savings, this is usually coordinated at the national level.

36
While preventing the flow of capital from one euro region to another, the requirement to
keep interest rates for European Union member countries within a certain band could be
relaxed, with the effect of stimulating or slowing down the economy in different euro
regions.

Exchange rates have had a buffering effect on the spreading of economic shocks
across national boundaries. The worldwide integration of our financial systems has
facilitated the spread of financial shocks across countries (UNCTAD, 2009). With
various stock exchanges being interconnected throughout the world and the exchange
of currencies almost instantaneous through the markets, a common global currency
would, on one side, facilitate such spread of shocks but conversely, would also negate
the shock concept, as all currencies would be the same and would have no capacity to
endure or dissipate stress.

The initial requirement for similarity in inflation rates for countries wanting to join the
European Union was set to prevent any disturbing economic force from impacting the
other countries in a negative way. Once part of the European Union, inflationary
dynamics allow economies to balance out fundamental economic drivers such as labor,
commodities, capital and interest rates.

National Surpluses and Deficits

This seems to be one of the most destabilizing factors facing an integrated economic
system. Keynes also considered this as a potentially major problem (UNCTAD, 2009)
and wanted to impose fees or fines on countries having a surplus or deficit. In the end,
imbalances on this front will rectify themselves, but the economic and social costs can
be enormous and long-lasting.

We are currently witnessing such an adjustment in the case of Greece as part of the
European Union. The end result will most likely be a higher cost of borrowing, and
government budget cuts reducing the benefits and services to Greek citizens. As
Greece can no longer simply print money to help itself out of this situation, its appetite
for budget deficits will be curbed dramatically, since it will no longer be able to afford the
rates on new loans. In the European Union the concern with Greece is that the higher
risk and rates could start spreading to other countries within the Union and
subsequently, drive up the cost of borrowing for everyone.

A similar situation is developing in the United States with its nearly 1.5 trillion dollar
budget deficit. The major difference between the Greek and American situations is that
the US dollar is already considered the world’s reserve currency. The impact this
increased borrowing and lack of savings will have on the global economy is not well
understood. The Chinese government has already stated that it doesn’t have the
capacity to absorb the new debt even if it wanted to, as the US recession is also hitting

37
Chinese exports. In fact, China has expressed serious concerns about the safety of its
dollar-linked assets and has been asking for re-assurances that the United States will
not print its way out of the recession (Evans-Pritchard, 2009). This would severely
impact the real value of Chinese holdings of assets linked to the US dollar.

Transaction Costs

Although the topic of transaction costs seem to be one of the major reasons for the
adoption of a common currency, estimates of the GDP gain on this range from minimal
to astronomical. The United Kingdom decided against the euro as a common currency
partly due to the benefits potentially being only 0.1% of GDP (EC, 1990). Transaction
costs that disappear from transactions also disappear from the economy until these
savings are used against a new purchase. This argument has not been found to be of
any great impact.

Money Creation Authority

The inability to create money, and inflate its way out of an economic problem, will be a
major readjustment for any country joining a monetary union. This is currently being
demonstrated through the Greek debt crisis. This is an erosion of what was considered
a sovereign right by countries, and now in the European Union there is movement
towards a European economic government, or a governance group, which will have
some level of oversight over the finances of member countries. This shows that
monetary and fiscal policies are intertwined and need to be closely monitored.

Credit Leverage Ratios

This is an area where economic fundamentals can be further distorted. Potentially

bypassing the creation of ‘real money’, the creation of credit could act against policy to
restrict monetary intervention. As shown, the creation and accounting of credit was a
major contributor to the subprime mortgage crisis in the United States. Credit creation
and credit leverage ratios are as important as money creation; however, the creation of
credit doesn’t seem to have the same level of governance and regulation.

International Capital Movements

In maintaining an average economic landscape across its member countries, the

European Union is hoping to minimize any disruptive flow of capital from one member
country to another. If return and risk is equivalent across member states, capital should
then flow from one region to another based on different criteria.

38
Special Drawing Rights

The concept of Special Drawing Rights (SDRs) is one in which the spread of risk across
many different countries and economies could potentially lead to a currency with a more
stable value. This is in contrast to the US dollar being used as the global reserve
currency, when the United States is currently going through a recession and the value
of the US dollar is suffering. Klaffenbock (2008), in his research paper on reforming the
global financial architecture, states that we should abandon the notion that any single
nation’s currency be used as the global reserve currency, based on the current situation
with the US dollar. The SDRs are currently limited in scope and size, and can only be
traded by governments. The amount of SDRs has recently been increased and there is
talk of allowing companies to start using SDRs in international transactions.

Section 5: Analysis 
The issue of a global currency remains a complex one. An analysis of GDP growth data
for European Union member countries did not show an important positive growth
difference between the years before and after the adoption of the euro as an accounting
currency in member states. In the short term this detracts from the benefit of stronger
economic growth brought on by a potential global currency. This is somewhat
confirmed by the ease of currency conversion in today’s digital age and the study
showing very minimal potential benefits from the United Kingdom’s usage of the euro as
a common currency (EC, 1990).

Impacts on border effects of a common currency would lead to more inter-national

trade. However any considerable external trade gains are realized, they are likely to
come at the expense of internal trade, hence nullifying any overall economic growth.

If not growth, then perhaps stability could make the case for a global currency. The
requirement of member countries to converge on key economic drivers does the
majority of the work towards this stability requirement. In a global setting, however,
could we really discriminate between those who have gained access to a global
currency and those who have not? In this case, countries with the highest GDP levels
would have to agree to convergence as a cornerstone of any global currency plans.
Smaller economies, whose economic fundamentals may not yet be in line with the rest
of the union, could then join without having a large impact on the group. In joining,
some of these countries would have to absorb significant financial shocks and change,
as is the case with Greece today. It is improbable that a global currency would be
utilized by all countries of the planet, as the economies of developing countries have
very different needs and dynamics than those of the G8 member countries.

39
In a truly global currency environment capital would be held in one bank and would be
allocated to both corporations and countries alike. This would bring higher economic
stability by removing potential oscillations in capital flow but would also bring about
centralized control of capital allocation. A global economy must find the right balance
between centralization and decentralization. A universal currency would remove some
level of decentralized management as the functions associated with the nationality of a
currency would disappear. This process is currently in development with the European
Union’s economic governance project. This will bring about a sovereignty and identity
crisis for European Union member countries. The countries of the world are much more
diverse than the countries represented in the European Union. A global currency, and
its framework, would be dramatically stressed if a worldwide implementation was
undertaken at this point in time.

Section 6: Recommendations 
The creation and usage of a global currency would bring about a multitude of issues to
solve in the short term, but would, in the long term, result in a more stable global
economic landscape. For this to happen, the various political and social agendas
around the world would have to start converging. Otherwise, a global currency would
not survive and alternate means of trade would be developed at the national or local
levels.

For this reason, individual countries should keep working towards currency alignment
and financial integration at the continental level where the Optimum Currency Area
criteria (Mundell 1961) such as proximity, language and culture, have a stronger
correlation. The European Union has already formed a currency union for Europe.
Other groups and agreements such as the North American Free Trade Agreement
(NAFTA), the Organization of Petroleum Exporting Countries (OPEC) and the African
Union could be the stepping stones leading toward new currency unions.

For these reasons, this paper recommends that countries work towards continental
monetary unions, as opposed to a global currency union.

Section 7: Conclusion 
This research paper reviewed the literature related to monetary unions and global
financial networks. The main areas covered in relation to a universal monetary union
were: the concept of an optimum currency area and trade volume, the spread of
financial shocks, the creation of money and its impact on sovereignty, and welfare
implications. A numerical analysis of the differences in the growth of the per capita
Gross Domestic Product (GDP) and of the productivity of key European Union member
countries before and after the introduction of the euro was also conducted.

40
It was found that within a universal monetary union, currency shocks would be
eliminated. They would, however, be replaced by financial shocks in which capital
would move from one region to another based on economic or speculative pressure.
Local currencies would no longer exist to buffer the local economies from this
movement. National surpluses and deficits would still remain a potential problem in a
global currency world, but the increasing influence of other countries on a nation’s
economic affairs will most likely have a dampening effect on the damages caused by
these. The savings associated with lower international transaction costs has been
found to not be a strong argument for a universal currency as they are minimal, and do
not contribute to additional economic activity. The loss of monetary policy associated
with participation in a global monetary union will also lead to the erosion of fiscal policy,
as other countries will now have a louder voice in the affairs of the state.

This will also bring about some loss in sovereignty. Credit leverage ratios and the
creation of credit-based money have been found to be as important as the creation of
physical currency and should be regulated just as closely; otherwise, it could lead to
further erosion of sovereignty and financial crises. The harmonization of the economic
landscape across the European Union is beneficial in that it should prevent uneven
capital flows. This would be the same in a global currency setting should similar rules
be applied. The most advanced, and mature, instrument available today which could be
utilized as a potential universal currency is the concept of Special Drawing Rights
(SDRs), as utilized by the International Monetary Fund (IMF). They currently act as a
global currency for member states of the International Monetary Fund and have the
benefit of being valued based on the average of multiple currencies and to be
independent of any foreign state.

In conclusion, a currency is simply an instrument of commerce, and not a replacement

for sound economic and budgetary policy. The main benefit of a global currency would
be the balance and stabilization of fiscal policy which would be effectuated through
slow, but sure, financial, political and regional integration. With the considerable
differences amongst countries of the world, continental monetary unions have a higher
probability of success due to the higher level of similarities of countries on the same
continents.

41
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