One World, One Currency: What Is It and Could It Work?

Many economists over the years have wondered whether it is possible to have a single unified global currency and what form it might take. Similarly to other finance-related topics, the issue is incredibly complex. It raises the questions of centralization, equal distribution of resources, regulation, and many more similarly challenging notions.

In this article, you will learn about some potential benefits of having just one world currency, possible disadvantages of such a system, and what reserve currencies are currently used by financial institutions.

What Are Some Potential Benefits of World Currency?

While it is difficult to tell what it will be like to have a universal currency, it’s still possible to make some educated guesses about the potential benefits.

No conversion fees

One of the most significant advantages of a global currency is free movement of assets worldwide. Currently, exchange fees charged by banks are an inevitable part of international transactions. Depending on the sums that are converted, the fees can lead to significant losses, which is especially relevant for businesses that trade internationally.

At the same time, individuals will also benefit from the drop in conversion rates. For instance, with one currency used globally, you can travel to a different country without worrying about exchanging your money. The eurozone, a currency union of the EU 20 member states using the euro (€), is an excellent example of this model.

Risk elimination

Current international trade comes with numerous risks that traders try to minimize in different ways. The issues can include anything, from political instability to regulatory changes and exchange rate fluctuations. If we imagine that all countries use a single world currency, such problems will be less prominent. For instance, there has been a significant reduction in transaction costs when the majority of European countries started using the euro.

Higher stability of the currency

Switching to one currency can be particularly beneficial to developing countries. The lack of stability and the high risk of hyperinflation are among the main problems faced by such economies. Thanks to a global currency, a country will be less prone to excessive inflation and could focus on strategic economic development.

There have been plenty of instances when the dollar has replaced a local currency in countries to achieve a higher level of stability. For instance, this happened in the Pacific, the Caribbean, and some countries in Latin America.

More opportunities for fair trading

Having different currencies acts as a barrier to fair and effective trading, as there are plenty of limitations and problems that inevitably occur. Pricing manipulations are unavoidable when we deal with countries using different currencies.

One of the common examples of such manipulations is China undervaluing its currency and thus lowering prices for goods that are sold at higher costs by other countries. Obviously, when all countries rely on the same currency for financial transactions, this will no longer be a problem.

World Currency: What Are Some Challenges of Implementing It?

We have discussed the potential advantages of a unified international currency, but there are also several issues this system can create.

All countries will be affected differently

It is no secret that the economies of countries differ significantly, with some being more developed than others. As we mentioned in the advantages, having a global currency will have a positive impact on developing countries. But what about developed nations? The likely scenario is that high-income countries will have to help out developing ones to prevent them from financial collapse.

More centralization than can be handled fairly

Having a single currency means that the financial system of the world will become centralized to the highest degree. Someone or something will have to control the economic processes, like an elected committee or a similar institution. The concern is that a single group of policymakers having that much control over the global economy creates a potential for power abuse and corruption on a scale that it simply impossible today.

Problems with regulating the supply of money

Another issue that will arise is how money should be printed and supplied. There will need to be a central transnational establishment to regulate the entire process, similar to how the European Central Bank works for the euro. The global financial institution will need to oversee everything and make reports to show that there is no bias against any particular country. This can get incredibly complicated on such a large scale and require significant resources.

What Are the Other Reserve Currencies?

Even though we are far from using a single currency, some currencies are held by central banks and other financial institutions in higher quantities compared to others. These are referred to as reserve currencies, and they are held by countries for numerous reasons, from paying for imports to minimizing economic shocks and servicing debts.

The US dollar is the most widely used reserve currency in the world, particularly in North and South America. The two other notable reserve currencies are the Japanese yen and the EU euro. The euro continues to be the number one currency in Europe, while countries in Asia have their economies significantly tied to the use of the yen.

Despite the Chinese yuan becoming more important on a global scale, it is not a significant reserve currency at the moment. One of the biggest reasons is the restriction on its outflow from the country. Unless this changes, the Chinese yuan won’t be used to the same degree as the dollar.

Final Thought

The implementation of a single-world money system continues to be discussed on a global scale, but with the current state of affairs, it seems that this won’t be a positive shift. The majority of economists from different countries agree that having different currencies is a better approach for a world as it is today.

If we take Europe and its prevalent use of the euro, it improved trading and made pricing more transparent, so there have been clear benefits. It is difficult to say whether the same will work on a global scale or whether it will cause more problems. For this reason, the idea of a single currency will likely stay in theory for at least several decades in the future.

FAQ