When the buck stops

Ken Rogoff asks, "Has the moment come to replace the dollar?" His answer is: "Maybe not quite yet....but soon." (His article, which I came across on Real Clear Markets, is for Project Syndicate, but it seems to have been posted in the The Daily Star of Lebanon, of all places, before it is available there.)

At current market exchange rates, the European Union is now larger economically than the US. New central and eastern European members are bringing enormous dynamism and flexibility. At the same time, the European Central Bank has gained considerable credibility from its handling of the global credit crisis. Indeed, if the euro zone can persuade Great Britain to become a full-fledged member, thereby acquiring one of the world's two premier financial centers (London), the euro might start to look like a viable alternative to the dollar.

In 1971, as the dollar collapsed towards the end of the post-World War II fixed exchange-rate system, US Treasury Secretary John Connally famously told his foreign counterparts that "the dollar is our currency, but your problem." And the dollar's exalted global status has survived ever since, despite many episodes of neglect and abuse.

World currency standards have enormous inertia. The British pound only forfeited its role to the US dollar after more than 50 years of industrial decline and two world wars. But it could happen a lot faster this time. As central bankers and finance ministers ponder how to intervene to prop up the dollar, they should also start thinking about what to do when the time comes to pull the plug.

I did a piece on the same subject for The Atlantic last May. The article goes into some of the advantages that the US has derived from the dollar's reserve-currency status, and what is at stake if that should change.

The dollar’s status as the global currency confers more advantages on the United States and its citizens than you might think—advantages far beyond convenience for international travelers (though let us not underestimate that). The dollar’s popularity has moved real resources from the rest of the world to the United States. And on a much larger scale, through an economic sleight of hand in global financial markets, it has allowed the country to sustain an otherwise impossible standard of living. These wonderful tricks, unfortunately, may not work much longer. When they start to fail, as they eventually must, the dollar’s peculiar global role will suddenly become a focus of attention. You don’t know what you’ve got till it’s gone.

Comments

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Posted by peter acevedo | April 8, 2008 2:45 PM

As the dollar declines, the question should not be which national or regional currency will replace it. What is needed is a Single Global Currency, managed by a Global Central Bank within a Global Monetary Union. (See www.singleglobalcurrency.org)
The benefits of a Single Global Currency are staggering, and the world should begin now to plan for a Global Monetary Union. Regional monetary unions, such as in Europe, the Caribbean and West Africa, are also beneficial, but their biggest problem is that they necessarily exist in a multi-currency world and their currencies fluctuate unpredictably.
The world needs a Single Global Currency and the sooner, the better. We have the dollar and the euro and credit cards, but citizens of the U.N's 192 countries still use about 141 currencies and pay about $400 billion annually to buy and sell other currencies when they are needed for conducting international transactions. There are surely better uses in the world for that $400 billion.
1. The existence of the 15-nation, soon to be 16 and later 25-nation, eurozone shows that monetary union can be successful. The eurozone is expanding because the people of the Europe want stable money. They don't want money the value of which fluctuates unpredictably. The best long term solution for stable money is the Single Global Currency.
2. The Single Global Currency will eliminate currency risk and the risk of currency crises and almost all concern about balance of payments or the current account.
3. The goal of the Single Global Currency Assn. (www.singleglobalcurrency.org) is a Single Global Currency by 2024, to be managed by a Global Central Bank which would operate in a manner similar to the European Central Bank or the Eastern Caribbean Monetary Union Central Bank. The governance of the Global Central Bank should be representative of ALL the people of the world, and their respective governments and financial institutions.
4. In the meantime, other regions are exploring the creation and expansion of monetary unions in Latin America, West, South and East Africa, the Arabian Gulf and South and East Asia. A key value of a monetary union is that the value of its money does not depend upon any particular national government, but upon the management of a central bank, the primary goal of which is stable money.
5. Implementing a Single Global Currency within a Global Monetary Union will take time. What is needed now is more research and writing about the prospects and planning. Is the claim of $400 billion in potential savings from the avoidance of foreign exchange transaction costs a reasonable estimate? If not, what IS the total value of the cost of exchanging $3.2 trillion every working day? (Travelers pay between 1-2% to exchange money, so try applying that percentage to the $3.2 trillion daily exchange. Most currency exchange transactions are at a much lower rate, but these numbers give a sense of the sheer scale involved.)
6. It is true that within a monetary union, individual countries no longer control their monetary policy, but in return they get more stable money and lower inflation and lower interest rates. The power to control monetary policy often meant the power to inflate a currency to please the exporters, but those policies came at a cost to importers and to those whose assets were denominated in the inflating currency. The costs and benefits of inflating a currency work out to about a zero sum game.
7. From underdeveloped countries, much of the wealth is sent to safe financial centers to avoid the risks of currency failure. With a Single Global Currency, that incentive to send money out of a country would no longer exist. To be sure, other risks will remain, but not currency risk.
8. The value of assets in countries with risky currencies is depressed due to that risk. When those countries move, perhaps in an intermediate step, to a regional monetary union currency, and then to a Single Global Currency, the value of those assets will increase dramatically, approximately by $36 trillion, due to the elimination of currency risk.
9. To some, the implementation of a Single Global Currency seems unrealistic, but consider how realistic the euro looked in 1995 when it only had a name and the deutschmark was supreme, and the French had their francs and the drachma was one of the oldest continuously used currencies in the world. The Single Global Currency is not a panacea, and it will not eliminate global inequalities of wealth and income, but it will provide vast benefits to the world.
It's time to start planning now for a Single Global Currency.

Posted by Morrison Bonpasse | April 8, 2008 10:23 PM

I'm not going to read all of what you've written above, but a "Single Global Currency" wouldn't work and won't for a very long time.

You can't have a single currency over a region where the cost of living and real prices are so vastly different. The European Union is just barely uniform enough for this to work.

Posted by TH | April 9, 2008 1:31 AM

Dear Clive,

Kenneth Rogoff is an exclusive monthly commentator for Project Syndicate, which is a not-for-profit syndicate that distributes opinion commentaries around the globe. The Daily Star in Lebanon in one of our member newspapers, we sent them the article by Professor Rogoff. Thanks.

Posted by Nicolas | April 16, 2008 10:10 AM