Global currency unit

There is a strong case for making of a standard currency unit in the world, like SDR or Global Currency unit.

In 18th & 19th century Britain's Pound Stirling acted as the prime currency due to the dominance of Britain as the economic power. Later German Deutsch mark and French Franc was added to represent the rise in their economic ( and military) muscles. After World War II ( 1944), Bretton woods system, with US dollar deliberately placed at the center of the system, was agreed upon. Bretton woods actually defined the exchange rate of each currency in terms of gold, but shortage of gold led other countries to define domestic currencies in terms of dollar. Hence the US dollar became the center ( sorry, centrE) of this system .

The US government guaranteed all the holders of dollars that, they could sell the reserve dollars in exchange for a fixed rate of gold. When a crisis occurred in 1971 and there was a drastic reduction in reserves of gold at Fort Knox and many other places ( where the gold was held ), the US government declared that it would not be able to gurantee and currencies should be traded floating. Earlier it served the US central bank to run the deficit of US dollars as the trade deficit of US was being financed by the purchase of dollars by other countries.

Notably in 1913 Central bank of US , Federal Reserve was formed to contain the panic of 1907 as the third bank. Fed had government nominee on its board but it had large stakes in it of JP Morgan and other rich banks ( one of them controlled by Rockfeller family). So the government of United States does not control its own central bank, which takes decision on liquidity, flow of currency and impacts its trade.

So the other countries which buy dollars actually fund the deficit of United states and the loan people take is actually from the rest of the world. Being a prime currency also gives a leverage in buying commodities like oil & gold. But ultimately US population is under the debt of its own currency , due to result of promotion of spending theory. Spend more to expand the economy. Now most individuals dont benefit by credit, ultimately they have to pay them ( as you see now in this credit crisis of 2008-9. The value of the dollars have fallen and more unfortunately US is losing credibility as "the" economy. Then who is benefiting ? By playing and getting infusion of tax payers money big corporates are. They didn't take the responsibility of the credit crisis but they are being rewarded by the US government, as the government fears loss of thousands and millions of jobs, leading to further deterioration of its economy.So a few banks ( and its shareholders)would have more control over the economy of America and would be able to manipulate the money flow according to their whims.

In my opinion the control first should be taken by all the governments throughout the world, not only USA. Secondly a prime currency independent of any country's currency should be established as the standard. Now the question is how this world currency ( say) should be bench marked and what should be the rate of exchange.

In order to give each and every country its share there would be a formula to determine their weight in the currency, rather than just a few countries currencies like dollars, euros and yen. I propose a formula, which might be or might not be agreeable but its my point of view.

Lets say, world currency is denoted by W. The countries by 1, 2,3.. Their currencies by x1, x2. Their purchasing power of a basket of essential goods ( in comparison to other currencies in say, 2009) by pp1, pp2.. their population in 2009 by P1, P2... balance of trade by T1, T2... ( in terms of purchasing power parity) . Let ppavg be average of purchasing power parity of all the countries in 2009.

So the weight of each currency would be , W1= pp1*P1 +Function of (T1)

So the world currency would be

W= [(pp1*P1+T1)+ (pp2*P2+T2) +......( ppn*Pn+Tn )]/ Function of (ppavg*( P1+P2...+Pn)

This may not be perfect solution given the already inbuilt biases in the calculation of purchasing power due to economic positions of each country, which doesn't account for the future potential, but at least it takes into account the population and trade balance , which reflects the consumption and savings pattern of a particular country.

At least each economy would be represented according to its "real" buying power, not through artificial manipulations of currency market. In economic theory currency's value is determined by demand and supply, but it neglects the heavy influence of big corporates and countries, which can manipulate the flow of money and liquidity by injecting or buying certain currencies.

Wish to have your opinion and would like you to point at my flaws as I am not an economist. I am a student of economics.

Watch out this column in future and the comments.

Note: The world Currency proposed by Lok Sang Ho of Lingnan university, Hong Kong takes into account the conversion of weight of each currency into US dollars and proposes a basket of a few currencies of dominating countries in addition USA, Japan and Europe, like Australia and Canada. Though it would be agreeable due to less complexity in terms of agreement, it again sets the bias towards a few countries, leaving major countries like China and India and continents like Africa. The agreement would not be feasible because of dynamics of each country, but it would give a more equitable weightage to each country's economy and its population.

Love Pranay

musings from Mountain View, CA

Acknowledgements
http://e-articles.info/e/a/title/Dollar-Crisis-of-1971/

http://en.wikipedia.org/wiki/World_Currency_Unit

http://www.ln.edu.hk/cpps/wcu/index.htm