Photo of a proposed united global currency courtesy of Gramma di Storia.
Could a single, global currency replace the U.S. dollar?
Currently, the U.S. dollar is the world’s top reserve currency, meaning other countries hold assets valued in dollars to protect the value of their own currencies.
It also means that the dollar is the world’s primary currency for international trade. In particular this applies to the oil business, where it’s called the petrodollar, as most oil is purchased with dollars.
This desirability of the U.S. dollar is a major benefit to Americans and the U.S. government, as it keeps interest rates low. By some calculations, it saves the U.S. economy $100 billion or more every year.
A United Nations study also called for a new global reserve currency, stating: “”The dollar has proved not to be a stable store of value, which is a requisite for a stable reserve currency.”
But what would replace the dollar? A reserve currency needs to be highly liquid and widely traded, but other existing currencies, such as the Euro, Yen, or British pounds, are simply not in high enough demand.
Here are some other alternatives that have been suggested:
A new gold standard
Instead of using a fiat currency (which we explained here) controlled by a central bank, some have proposed a return to a gold standard, where reserves are backed not by another currency but by the value of physical gold.
Some have argued that China, which has been amassing gold recently, is already on the path to creating this standard.
A global petrocurrency
Speaking to the United Nations in 2009, then-president of Venezuela Hugo Chavez proposed that the world convert to a new petrocurrency, backed by the oil reserves of major producers such as Venezuela and other OPEC countries.
A digital currency
Although they are hardly recognized as official means of payment in most countries, Bitcoin, Dogecoin and the myriad other cryptocurrencies are already being used and traded around the world.
It’s not exactly a reserve currency, but enthusiasts are still calling for Bitcoin to become the world’s primary currency, free of central bank manipulation.
A basket currency
Perhaps considered the most realistic of these proposals, this proposal uses a mechanism that’s already in place: the International Monetary Fund (IMF)’s Special Drawing Rights (SDRs).
An SDR is not a currency in itself, but rather a basket of four currencies, the dollar, euro, yen and British pound. One SDR is worth the sum of these four currencies, weighted based on their importance.
This weight is determined once every five years (next review coming up in 2015), but currently one SDR is 66% of a dollar, 42.3% of a euro, 11.3% of a pound and 9.4% of a yen.
In recent years, China has been positioning the yuan as a viable international trading currency, and is likely angling for inclusion in the SDR, according to Forbes.
Currently, SDRs can’t be held by private parties, only by nations or organizations such as the IMF, and needs to be converted to an existing currency before transactions are completed. It’s not an actual currency, but is used as a way for nations to hold foreign exchange reserves safely.
If it were accepted as a global currency, however it would have the benefit of allowing the nations who have their currencies in the basket to have complete control over its monetary policy, while also being able to influence global economics.