Could The Whole World Use Just One Currency?

the world today is home to over 190 countries using 180 currencies to trade invest and collect taxes this is to say nothing of the up-and-comers like crypto currencies and age-old reserves like gold and silver the global economy is complex at the best of times and the foreign exchange or forex market only looks to add an additional layer of confusion to this complexity currency is supposed to be the legal tender that makes trade easier for everyone so this begs the question could the world adopt a single universal currency it sounds like such an obvious solution that would wipe out the frustrations at all levels of global industry from someone desperately trying to exchange yen for euros at the airport all the way up to international companies managing their foreign operations this is not just about convenience though removing the burdens of transactions has a very real impact on the economy humanity has a vault financial system from bartering to gold coins to fiat currency all the way up to the modern day where we make a majority of our transactions completely digitally with every step of this evolutionary process earning and spending money has become easier massively boosting quality of life a single worldwide currency surely sounds like the logical next step in creating a truly frictionless globalized marketplace but of course there are questions that must be answered what are the drawbacks of a single currency how would it be rolled out and do the advantages really make it worthwhile this episode of economics explained was made possible by our fans on patreon if you'd like to gain early access to these videos before they're uploaded to YouTube as well as participate in exclusive Q&A sessions please consider supporting our channel on patreon.com slash economics explained now Universal currencies are not necessarily a totally new thing for hundreds of years gold was almost universally accepted as a standard medium of exchange in the modern world the European Union has adopted the euro to varying degrees of success so perhaps the best way to address the viability of a worldwide currency is to really explore these other currencies do what economists do best and use Europe as the guinea pig mediums of exchange have been around for a very long time we have found examples of everything from seashells to wooden sticks being used to facilitate the exchange of basic societies having a universally accepted medium of exchange made trade far easier than the alternative which was bartering bartering or item to item exchange meant that people ran into a lot of problems say there was a goat farmer looking to do his monthly shopping trip he would need to find people selling the items that he wants and those people would need to also want to trade those items for goats even then it's hard to trade one goat for one loaf of bread because that's not a fair trade but also the goat farmer doesn't need 30 loaves of bread so what do they do divide the goat into 30 it just doesn't work the other major problem that's often overlooked is that say this goat farmer works particularly hard and is very successful it's hard to store wealth in goats they die and are hard to maintain the difficulty involved in trading and the lack of incentive to grow genuine and storable wealth meant that economies were really limited to small communal and self-sufficient villages these small communal villages were great they were the foundations of modern society but they did very little to increase the quality of life of the citizens living within them people more or less had to do everything themselves there was no time to specialize and become an engineer or a scientist because every waking hour was needed just to facilitate the bare essentials it has been said before and it will be said again that financial innovation has been every bit as important as technical innovation throughout history because it's really really difficult to have one without the other all the problems with trading through a bartering system are called frictions by economists by definition a friction is any difficulty incurred in carrying out a transaction if someone gets frustrated that a credit card terminal is down at their local fast-food joint and they can't buy their burger because they forgot their cash that is a transactional friction of course the goat farmer of your was probably facing slightly more significant frictions now most people watching a video on economics don't need the shortcomings of a barter system explained to them that meticulously but the takeaway here is that frictions exist in all types of exchange gold alleviated a lot of these problems then there was gold back cash and then there was fiat currency and today we have our electronic financial system but just the same as the goat farmer not wanting to trade with the neighboring village because of how difficult it was people are reluctant to trade internationally because it adds a significant layer of complexity this in turn stops countries from trading and instead preferring to be more self-sufficient just like self-sufficient villagers totally self-sufficient countries are fine but just like in the villages not specializing reduces the potential for austerity for the entire global economy nowhere was this more apparent than in Europe which is a concentrated area of highly developed economies all with strong independent industries before 1999 if these countries want to collaborate on business deals set up supply chains or even share talented individuals they would find it very difficult to do so the risks of dealing with foreign currency are very significant to a business if Germany ordered 10,000 car engines from Italy and they would need to decide on a currency to exchange in since Italy is doing the selling and Germany is doing the buying it would most likely be done in Italian lira they might agree that 10,000 engines will be produced for 1 million lira sign some contracts and then get to building the engines and let's say for simplicity the exchange rate was 1 Italian lira for one german deutsche mark two months later and the engines are assembled the Italian factory will be ready to settle on the contract but there is a problem now the German deutsche mark is only worth half a lira a massive bank failure in Germany if this happened and this type of stuff does happen then the German carmaker would end up needing to pay twice as much as they had originally planned for for their supply of engines foreign exchange risk is something that international businesses need to deal with all the time and they tend to do so by basically buying insurance on Forex pricing using derivatives this is no problem for major corporations but for a lot of small to medium enterprises it's just not worth the cost or the headaches even if it meant getting slightly worse engines they would rather source them from Germany to avoid these problems altogether introducing the euro got rid of this now Germans could put Italian engines in French cars and assemble them in Spain it was almost as simple as doing business in a single country not only did this make industrial specialization possible but it also made working abroad easier as well today a staggering 4% of Europeans live and work in a country different from their home country this is great because it means that companies offering competitive positions can draw from a larger talent pool that would have otherwise been available to them better workers for the job means more productivity which means more production which means more goods and services to improve everybody's quality of life so it sounds like a win-win all around right less foreign exchange friction means countries can get together to do business more efficiently but of course there are major concerns first of which is that of monetary control the European debt crisis is a major ongoing problem facing a select group of nations in the European Union caused by irresponsible lending to governments businesses and individuals countries like Greece are still feeling the impacts of a global financial crisis that happened 12 years ago this is bad news for all the other nations in the European Union that weren't as irresponsible since they all share the same currency they are all shackled together in international financial markets if Germany wanted to borrow money to fund new infrastructure projects most investors would have no problem with deal Germany is in fact one of the few countries in the world that still has a triple-a credit rating the problem is that the Euro is not quite as stable as Germany is the potential investors would not be so sure that the currency that they loan the money in will be worth anything once it's repaid this means that Germany has to borrow in another currency like u.s. dollars which is a bad deal for them or they have to offer investors a higher interest rate to compensate them for the risk which is again also a really bad deal through no fault of their own Germany has been dragged down by an underperforming member of their team weirdly enough the news isn't any better for Greece either normally if a country is struggling its currency will reduce in value meaning that its exports become artificially cheaper and it becomes more competitive to visit as a tourist the benefits of a free-floating currency tend to self stabilize a country that is having issues but of course Greece was tied to the euro so this didn't happen that Greek holiday was still just as expensive as ever and the nation's exports were being crushed by German exports we have explored the European debt crisis in far more detail when we explore the economy of Greece specifically has these event related to currency though it's best to think about it like this think of Greece as someone who just lost their job this is never a good time but if they are frugal and started looking for a new job as soon as possible they would probably get back on their feet the problem is their roommate Germany still has a great job and insists on ordering in food going out partying and doesn't really like the idea of selling the TV to make ends meet Greece was in a sense being forced to keep up with a lifestyle that was never sustainable to them simply because they shared that apartment with Germany or shared that currency with Germany now currency exchange safety features are great but it could easily be argued that the benefits of the Euro in the European Union have massively outweighed the burdens and if this is the case then why not extend this Universal currency idea to the entire world we have seen the benefits and the burdens are manageable in a long-term but perhaps the biggest question is who would control it in most countries the domestic currency is controlled by a central bank and the federal government these two entities control the creation of money and the setting of the cash ray in Europe the euro is controlled by the European Central Bank which consults with the central banks of member countries to do the same thing and there are a few countries in the world that don't actually control their own currency at all countries like El Salvador and Zimbabwe just use u.s. dollars for domestic and international trade because it is easier and more stable than printing and managing their own currency the same is true for countries like Montenegro and Kosovo which use the Euro while not actually being part of the European Union these countries give up a lot of control to do this for starters it is hypothetically possible for their country to be completely drained rai of currency with no way to replace it it also means that their banks cannot operate under the standard fractional reserve system that most other banks do which will severely restrict access to credit in these countries if a single world currency was introduced and controlled by a completely independent global central bank this would be a major concern for all countries if they were to let all banks in all countries create money through debt then there would be nothing to stop one country literally just printing itself trillions of these worldwide dollars if they were to restrict this practice entirely and a lot of businesses would not be able to access capital and growth would be severely impacted these kind of restrictions would also usher in a new era of mecan't ilysm meaning that countries would desperately try to hold this universal currency as a store of power similar to how gold was hoarded before the widespread introduction of fiat currencies mecan't ilysm is the idea that a country can achieve wealth and prosperity by stockpiling gold or in this case a hypothetical world reserve currency by exporting more than it ports this kind of mindset would mean that countries would be incentivized to heavily restrict imports because that means that money is being sent overseas to pay for those imports the restriction of trade is literally the opposite of what this universal currency was trying to achieve so this would be a catastrophic failure if domestic banks were allowed to create credit as they can do today in most countries and this would need to have serious controls in place where would these controls come from well hypothetically from the global central bank but who would be in charge of this bank even if it were totally neutral in theory it would still have some kind of leadership structure if the chairman of this global bank were an American would there be concerns from other nations with opposing interests the answer is almost inevitably yes Europe can get away with a centralized currency because all of the participating nations are strong allies if countries were not aligned or even was at war with one another there would simply be no fair way to administer this global currency nations realize this and while they would undoubtedly be advantages it would not outweigh the benefits of the National Liberty that they would be giving up in a world with nation-to-nation hostilities this system will never be adopted and if history has taught us anything it's that there will always be hostilities we would be remiss if we didn't mention cryptocurrency because heaven knows the comments section will a lot of cryptocurrencies are built on the idea that they will introduce a new medium of exchange that is completely decentralized from any banking institution these virtual currencies show a lot of potential as the money of the future now for argument's sake we are going to avoid the problems that a lot of these currencies have for more details on that go and watch our video on the economics of Bitcoin but there is one other problem with such a solution that goes beyond just the technical limitation of these currencies if everything worked perfectly these currencies would have a hard cap on supply Bitcoin for example will never have more than 21 million coins in existence is makes coins very similar to gold in that both of them have a limited supply intrinsic value and can be used as a store of wealth if the adoption of such a currency was to become widespread then financial institutions will just do what they did with gold and use them as a reserve asset they will issue promissory notes and administer credit on cryptocurrency reserves they don't truly have some may argue that this will still be better than the totally fiat system that we have today it probably won't radically change anything major about banking but it will introduce an extra layer of complexity that we have been trying to avoid all along this is always a topic that people are extremely passionate about so let us know how you think such a currency system would work in reality and we will feature the best answer in the next video we do on crypto currencies often times when economists play around with hypothetical ideas like a universal worldwide currency they will come to the conclusion that it is possible but not likely to provide many benefits in reality a single worldwide currency would have its advantages and if it was administered responsibly these advantages could easily outweigh the costs but this is making the huge assumption that something with so much power and influence could be administered responsibly in the mean time no country in the world is going to give up their sovereign power that managing their own currency gives them just for the hope that they will make online shopping a little bit easier airports a little less stressful and business a little bit smoother hi guys I hope you enjoyed the latest video if you did please consider liking and subscribing this video is made possible by our patrons over on patreon if you want to have your say about what country or topic we explore next please consider supporting the channel like these awesome people did thanks guys bye

Channel: Economics Explained

Views: 827,137

Keywords: could the whole world use just one currency, the world wide dollar, worldwide dollar, worldwide currency, world wide currency, global currency, global money, the economics of a global currency, the economics of a worldwide currency, worldwide currency explained, global currency explained, worldwide currency economics explained, global currency economics explained, world wide dollar economics explained, can the whole world use the same currency, economics explained

Id: PZ8-vtR5jng

Length: 17min 25sec (1045 seconds)

Published: Sun Jul 05 2020