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Arguments for and against a single world currency include ease of international trade, protection against economic instability, and political and religious differences. The study of optimal currency areas suggests that not all countries would benefit from a global currency. The decline of the USD as a reserve currency is driving the discussion, but creating a central bank for a world currency raises questions about interest rates and authority.
There are many arguments for and against the creation of a single world currency. Arguments for such a world currency unit include greater ease of international trade, less reliance on the US dollar (USD) and the economy with its large deficit, and potential protection against regional changes or variations in economic stability. Arguments against a world currency include political and religious differences, lack of financial benefits, and interest rate difficulties with wealth redistribution.
In an increasingly globalized market, currency mobility is greater than ever. Some economists believe this could encourage countries to more readily support a single world currency if they believe in its stability. Others, however, believe that the globalized market is allowing for more currency competition, allowing different currencies to compete. Both options carry potential benefits and risks, further fueling the debate about the advantages and disadvantages of a single global currency.
The study of optimal currency areas has led to some arguments for a world currency. According to excellent research on currency areas, places with geographic and capital mobility, high levels of trade, and similar economic cycles may be areas that would greatly benefit from a single currency. Benefits could include reduced transaction costs, greater ease of trading, and increased trust of money.
Studying optimal currency areas, however, demonstrates that the globe is not an optimal currency area. Not all countries are considered economically incompatible and may not benefit from a global currency. Further potential problems include political conflicts, wars and religious differences, with the lack of usury payments in the Islamic tradition being one of these differences. Even within existing areas constrained by a single currency, such as the European Union or the United States, problems have been documented with existing systems.
Declining the dominance of the USD as a reserve currency is another topic driving the discussion and the desire to generate a single world currency. Depending on the currency of a country operating with such a large deficit, it can cause high exchange rate volatility internationally for currencies pegged to the dollar or dependent on its success. As the largest reserve currency, problems with the US economy, such as inflation, can also cause problems for economies around the world.
Assuming that the creation of a world currency would lead to a central bank, further difficulties include the creation of interest rates and the question of who would retain authority over the bank. A world currency might try to calculate interest rates by juxtaposing the richest countries with the poorest in the world, compromising the ability of the central bank to increase prosperity or generate acceptable rates. Authority over the central bank would also be a politically sensitive issue and could diminish the trust member countries had in the bank if their views were not represented.
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