ONE WORLD, ONE CURRENCY: EXPLORING THE ISSUES

A global economy needs a global currency. --Former Fed Chairman Paul Volcker I. INTRODUCTION Along with globalization of trade and finance has come a certain globalization of money. For much of the twentieth century, the main monetary paradigm was a national central bank issuing a sovereign currency; as the number of countries increased, so did the number of currencies. A small number of mostly small countries used a foreign currency for domestic currency, as with Panama, which has used the U.S. dollar since 1903. But for the most part, countries had their own currencies, their own monetary policies, and their own central banks. Yet the monetary landscape has changed importantly in recent years. (1) After a long period of economic and political integration, in 1999 12 European countries began implementing a common monetary policy based on a common currency, the euro, which went into circulation in January 2002. Another three EU members opted out to stay out of the monetary union then, but may join at some time. In addition, the 10 countries that joined the EU in 2004 have to adopt the euro eventually, on timetables that vary by country. The European currency has also been important in the transition economies of Central and Eastern Europe: given the uncertainty and high inflation that came along with the transition, strong international currencies were sought as a store of value, to the extent that 40% of newly printed German marks were estimated to be leaving the country at one point, and several governments hard-pegged their currencies to the mark and then euro via currency boards (Seitz 1995). Over 575 million people live in what will eventually be a broad euro zone, including countries whose currencies are hard-pegged to it. (2) The other important phenomenon has been dollarization. Especially in emerging-market countries struggling with high inflation and persistent macroeconomic imbalances, populations "voted with their feet," opting to use the U.S. dollar in place of or alongside domestic currency as a unit of account, store of value, and/or medium of exchange. Overseas demand for the dollar was so strong that in the mid-1990s, it was estimated that two-thirds of newly issued currency was going overseas (Porter and Judson 1996). Some countries dollarized officially, either by establishing a currency board (Argentina 1992-2001) or by taking domestic currency out of circulation and replacing it with the dollar (Ecuador, El Salvador). But most countries making significant use of the dollar are partially dollarized--that is, using the dollar as well as the national currency in the traditional functions of money. The changing patterns of money use across the globe raise important policy questions. On one hand, this broad rise in the use of major international currencies raises questions about the desirability and feasibility of maintaining national monetary policy, based on central banking and sovereign currency--to the extent that George von Furstenberg (2001) has suggested that national currencies of smaller countries may be endangered species. On the other hand, the euro and especially the dollar are increasingly in a position of being both national currencies and widely used substitutes for other countries' currencies, while being managed with respect to domestic considerations only. This stirs up old questions, raised by Keynes (1943), about whether the world economy might operate more smoothly with some form of global currency. This article outlines some of the issues involved in contemplating the idea of a world currency. Although many influential economists (from Paul Krugman to Jeffrey Sachs) are highly skeptical that this can or will work, many others (from Robert Mundell to Robert Barro, and even at times The Economist) view it as an excellent idea that would reduce the extent to which gyrating values of money upset the world economy. The article first summarizes theoretical perspectives on monetary integration and relates them to empirical patterns in monetary arrangements around the world. …