I have always been intrigued by the concept of a super-currency. What if we use a single currency – say, a piece of paper, called Worldollar or Worlduro or Worldupee. My terms are eccentric, but the idea is not.
When I was a child, I used to ask this question: why can’t our nation print rupee notes in plenty if we need the money so badly? Not only I but many would have asked this innocent, even if daft, question. Upon thinking, it is not hard to guess why this is not feasible. The total combined physical wealth of the world is constant, and our currencies are mere indicators of that wealth. We could have easily measured that wealth in rice, wheat, iron, coal, oil, colleges, institutes, houses, hospitals etc of a nation. But needless to say, a currency is the simplest index of that.
But what about the relation between the currencies of two nations? How much should an Indian rupee measure against the US Dollar? Both are evaluating the physical wealth of their respective nations. But the catch point is they are using different yardsticks and also different lengths of the yardsticks to measure that wealth. A common denominator had to be found. And the economists found this common base in Gold. The yellow metal’s reference was famously called ‘the Gold Standard’ and simply meant that the country’s currency could be converted into Gold at a fixed exchange rate. Thus, the exchange rate between two currencies could be determined by the difference in their rates to an ounce of gold. Widely operated between 1875 and 1913, this system was the first formal step towards fixing the exchange rate. Apart from providing a simple fixed conversion scenario, it also guarded against inflation as nations printed their currencies vis-à-vis their gold reserves. But the concept was not without flaws. Even a small shift in gold reserves, like discovery of new gold mines, frantic sell of gold, could send the whole exchange topsy turvy. It was especially felt during the 2nd World War when there was a massive spending of gold by the Allied Powers.
To reconstruct the economic world in the aftermath of World War II, the big minds sat in the now-famous Bretton Woods Conference in 1944. Amongst other things, they decided to fix the exchange rate of a currency to gold via the US Dollar. Thus, a new player, the US Dollar, was introduced and its conversion was fixed at $35/ounce. A national currency had to exchange with US Dollars which in turn was linked to Gold. In effect, the exchange rates were still linked to Gold. But it took a massive toll on US Dollars. Some countries, France in particular, started buying Gold from the US keeping its dollar reserves minimal. This led to a severe depletion of gold, notoriously called the ‘flight of gold’ in the US. Already under strain from the Vietnam War, President Richard Nixon decided to abrogate this system once and for all in 1971.
This led way to the ‘fiat currency’ or ‘free-floating currency’ where the currency is not linked to any physical commodity but the gauged value of the goods and services. While this system provides more flexibility to adapt to the current market situations, it also provides a basket case for illogical and manipulated rates. No wonders the market rates have seen so big fluctuations, leading to inflation, deflation, recession, economic crises, not experienced so frequently earlier.
That leads us to the question of a Universal Currency. Why can’t we then have a single currency to get around all this nonsense? It is easier thought than implemented. Each nation has its own sets of goods and services, and hence defined policies and guidelines aligned to its interests. No two countries can accept to use a single currency unless they both see their interests being served. See how long Euro has taken to be adopted. It unilaterally favoured the richer nations of EU at the expense of the newer joinees.
The closest we have managed to get as a super world-currency is the SDR (Special Drawing Right), conceived by International Monetary Fund (IMF) in 1969 and operating it since then. Not an actually practiced currency, SDR is a proportionate representation of the four major currencies : USD, Euro, Yen and GBP in the world. Each country has its quota of SDRs in the IMF fund, and these SDRs can be freely converted into usable currencies of the respective nations. Not surprisingly the richer founder nations gave themselves bigger quotas, and hence so much hype and hoopla made by the new economic giants, China and India, now to redress the balance in their favour.
It is not tough to see why this exchange between currencies will always remain a source of immense speculation and conflict. Every monetary system has/had its loopholes, and no individual or nation has left a chance to exploit that. Thus, the concept of a single currency, where the consensus of economic policies and intentions is monumental, will remain a chimera, at least in the near future where the times are even more uncertain.
