The case for a world currency

Abstract

The flexible exchange rate experiment has been a failure. The best test of any monetary system is the degree to which it avoids unnecessary changes in real exchange rates. These changes drastically reduce the gains from trade and disqualify the arguments ordinarily made for free trade areas and the customs unions. By this criterion, the worst period in history has been the period since generalized floating that began in 1973. All of the arguments made for flexible exchange rates have proved to be incorrect. Destabilizing capital movements have rocked the exchange rates between areas that have a high and consistent degree of price stability. Exchange rates consistently overshoot equilibrium, causing harmful shifts between traded and non-traded goods industries and in the levels of indebtedness of rich and poor countries. The dollar–euro exchange rate, first dropping by a large percentage and then rising by an even larger percentage over the past 20 years, between areas that have price stability, is sufficient proof that the markets are not working in a direction and degree that is conducive to economic welfare. The solution lies in creating an international currency that can be used by all countries for international trade purposes. A two-step process is envisaged: First, a convergence of the three or four major currency areas on a common unit of account, called the “DEY” for dollar–euro–yen or dollar–euro–yuan, with a joint Monetary Policy Council to determine monetary policy of the area. Countries could start with large margins and gradually reduce them to complete convergence. Second, the Board of Governors of the IMF (or its replacement) designate the DEY as the platform on which, in conjunction possibly with gold, it will build the new world currency, to be called the INTOR. Both the Keynes and White Plans called for a world currency. Political conditions were not ripe for its inclusion in the Articles of Agreement and that is one of the reasons why the great post-war monetary experiment of the fixed-exchange-rate international system broke down.” Since the creation of the euro, the political configuration of the international monetary system has changed and the United States is no longer the unquestioned “dictator”. It is now very much in America's interest, as well as the interests of the EU, Japan and China, to restore a new international monetary system that would be to the economic benefit of all countries.