Globalization and the "One World Currency"

I want to apologize in advance for the brevity of my thoughts this week.

First, I want to remark on something Evan said. Often we challenge or butress each other's arguments, but when I read: "if globalization is present and increasing at the pace it currently exhibits" I just had to chuckle a little. If only! I understand Evan's point, of course. The broad trajectory is one of globalization and integration, and hopefully it will continue that way. But this is not the situation right now. International trade is imploding, racking up unemployment figures in export-oriented economies like China not in intervals of hundreds of thousands (as in the U.S.) but in millions.


Another thing that may or may not be on the table at the G-20 meeting is this nebulous prospect of a "one world currency". I want to caution people on exactly what is being proposed here. They're not going to throw national currencies out the window; nobody is talking about that. They're discussing the prospect of replacing the dollar as the world reserve currency. Right now, the Chinese central bank and other central banks hold a large amount of dollars because most world trade is conducted in dollars. It's easier for trade to be denominated in a single currency (like the dollar) than many currencies - and to support trade, central banks must hold that reserves of that currency so that importers and exporters can finance their transactions. This is where we get the term "reserve currency". The problem is, the global supply of dollars is governed by the Federal Reserve Board, in Washington D.C.. The Federal Reserve's charter dedicates it to the task of price stability, presumably in the United States.

However, the Fed's activities also influence the value of the dollar reserves held by central banks all over the world. The result is a fundamental conflict of interest. The Fed is often left with a tradeoff between global macroeconomic stability and national macroeconomic stability. Right now, the U.S. economy is under the pressure of a great deal of debt. The Fed (theoretically) has an incentive to increase the money supply and induce inflation to lower the burden of those debts. However, that would also dilute the value of China's massive dollar reserves, and impoverish the Chinese central bank at a stroke of Ben Bernanke's pen. This is why China is pushing for a new international monetary system, and this is why that monetary system is aimed at decoupling central bank reserves from the dollar.

I still don't know what I think about this. Barry Eichengreen has long advocated not a new reserve currency, but a "basket" of multiple reserve currencies. This seems sensible to me, because it would promote stability and not make the same mistake of putting price stability in the hands of a single decision maker.

To bring this full circle, I think any discussion of reforming the international monetary system is a great step forward towards erecting what Evan calls a "deeper pluralism". Sometimes economic policymaking eschews these more fundamental philosophical concerns - but it doesn't have to. Replacing the dollar as the world's reserve currency with a currency basket governed by multiple central banks, or a new IMF currency governed by a committee that is representative of all major powers introduces a great deal of pluralism into the global economy. In Europe, we've already seen how monetary coordination and the "deep pluralism" of the European central bank (which has to balance the needs of Eastern Europe, Western Europe, the Mediterranean, Scandanavia, and the Balkans) has led to greater political integration, cooperation, and peace.

A lot of people fear the world of monetary policymaking and banking. It's mysterious and shadowy. Those concerns may or may not hold water. I think the nature of both conspiracy theories and prophecies is that we don't really know until we know (you know?). I try to be a little more trusting of the situation in general, and optimistic about the direction we're heading. Money is just a neat human invention that has made our lives easier. I don't know too much about monetary economics or monetary policy, but I think the dialogue that's going on now is a great step forward towards a global polity that incorporates the very best from both "cosmopolitan" and "communitarian" visions for the future.