The Past, Present and Future of Universal Currencies — Part one

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The Past, Present and Future of Universal Currencies — Part one

Posted on September 14th, 2018 in PhaseOne,Mindset by Phase One Collective

On the 9th of January 1988, The Economist published a cover story predicting that in 30 years’ time a world currency would be in place. A currency which the American, Japanese, European and many other global economies would start to adopt. The Economist highlighted that such a move would be beneficial to consumers and businesses as prices would no longer be donated in dollars, yen or sterling. Rather, prices would be donated in a singular currency. The Economist named this currency the Phoenix Coin. As it has been 30 years since the publication of this article, it would be interesting to review the concept of a global singular currency — especially as many argue that Bitcoin is the Phoenix Coin.

It is important to note that singular currencies are not a new idea. It is often argued that the first global currency was the Spanish dollar. Developed to compete with its namesake the German daler — the Spanish dollar notably saw widespread usage in China where silver bullion was the only accepted foreign commodity, and in the Americas where we most commonly refer to them as pieces of eight.

In actual fact, it is arguable that when national currencies were backed by gold — gold acted as a global currency. Although many nations had their own economic sovereignty and were able to set their own economic policies to manage exchange rates, their currencies and their economic policies were inseparable from their nation’s gold supply. Whilst on a small scale, gold has been shown to be a stable asset especially in times of economic hardship, it has been shown to be an inefficient asset to model national currencies and economic models on due to the costs of mining, transportation, and storage. This is especially true when economies become more advanced, or experience times of prosperity and thus need to increase their supply of gold to maintain their economic growth ((aggregate demand: investment + government spending + tax + (exports — imports)). If the supply of gold cannot keep up with the demand, then economic inefficiencies occur where economic growth is prevented or even halted and can cause serious increases in unemployment and a reduction in investment and government spending. However, even if supply could always keep up with demand, problems would still occur — especially if a country was investing into another economy, or if a country was at war and needed to maintain the war effort, boost economic growth and sustain a national currency. As said, currencies are pegged by the amount of gold a country has, then for the above to happen a country would need to find a safe way to transport billions of dollars’ worth of gold in an efficient way. The impracticalities of this were highlighted in WW2 when the British Empire had to transport gold from Britain to Canada — evading German U-boats along the way.

The peculiarly named Operation Fish saw the transport of gold bullion which would today be worth the equivalent of 29 billion USD in a single voyage. It was the largest physical movement of wealth in history.

In more recent history, attempts have been made to engineer single currencies. After WW2, the European Economic Area (EEC) was established to support trade and to promote co-operation between the central European countries who had so recently been at war. This developed into the Eurozone which makes use of the single currency: the euro. It was argued that if members of the Eurozone can move freely and have few to no tariffs, then a single currency would be the logical next step.

The market crash of 2008 shone a bright spotlight on the inefficiencies of such a currency. Whilst the idea of a central European bank controlling a single European currency seemed like a progressive way to maintain exchange rates and sustain economic growth, it relied highly on co-operation. When put to the test. such co-operation did not materialize, which provoked an increase in interest rates and thus an increase in the rate consumers had to pay on their debt — including the unsustainable, unsecured household debt which had been a leading catalyst for the stock market crash and global financial meltdown. The Eurozone’s failures in economic and governmental policy making stand as a warning to future generations — policy co-operation is useless without real co-operation.

As the two previous examples of singular currencies have failed due to firstly, the inefficiencies of an asset used to peg a currency on a large scale and secondly, the lack of real co-operation amongst policy makers — many people argue that the currency that The Economist prophesised is actually Bitcoin. Bitcoin is a virtual finite asset which does not suffer from the same mining, transport, or storage issues as gold does — and, as smart contracts can be implemented, it means that economic monetary policies can be made into rules that must be followed and that are not inconvenienced by time or by situational events.

Whilst Bitcoin may have the characteristics which could create a perfect universal currency — that doesn’t mean that it would make any economic sense to do so. There are several pros and cons when it comes to all economic decisions, especially those on a scale like this.

Let us consider a world where Bitcoin is used as the universal currency and price stability has been met through efficient market discovery ceteris paribus. What would be the potential economic pros and cons?

Pros

· Such a universal currency would eliminate currency risk from global markets — currency risk is the profit or loss which arise out of daily fluctuations in a currency’s price. For example, you may face this type of problem if you are traveling abroad and need to change currencies, but when you change back into your national currency you find that you have lost money due to market forces.

· It would eliminate speculative currency trades, resulting in further price stability.

· A universal currency would likely mean the overall interest rates for all economies using the currency would be set closer to the international lending rates.

· It is likely that such a currency would have a centralised bank, or a method of banking to allow an efficient distribution of money and an efficient way to set polices. If this were the case, it would be reasonable to believe that regulations within the banking world would become more transparent and strict — as banks would not be able to set ridiculous rates — or manipulate consumers into inefficient finical products, like negative interest saving accounts.

· Bitcoin is virtual and can be stored with almost no issues and works off smart contracts which have strict parameters which cannot be broken. This means that money transfers between countries or consumers would be done in real time rather than the current method where settlements can be done days after the payment has been sent, and where large transactions take priority.

· The fixed parameters of smart contracts would act as a defence against bad actors within the market. In this case a bad actor could be any large economy imposing trade sanctions on countries they might see as a economic threat.

Cons

· A governmental push towards a universal currency could lead to strict global regulation. If these regulations are designed by political elites who have little understanding of the issues faced by their electorate it could lead to difficulties for consumers.

· As an economy is made up of several factors, only the economies that can walk the thin line between the pitfalls of inflation, interest rates and currency, will survive. When a global currency is thrown into this pot, it would risk make national governments obsolete, especially in managing their own currency.