One currency to rule them all? That seems unlikely, frankly

It doesn’t look like there’s going to be a single global currency, whether it’s based on the dollar or Dogecoin.

Apr 29, 2023

News of new multi-national currencies in South America and Asia leads me to speculate once again: Are we on the way to more, not fewer, currencies because there will be different digital currencies designed for different purposes? The technologies of cryptocurrency mean that literally anyone can create money. But who will? And Why?

Unions

There are four currency unions in the world right now — not only the Euro but also the Central African Economic and Monetary Community, the Eastern Caribbean Currency Union and the West African Economic and Monetary Union — and perhaps more currency unions just around the corner. There has been talk about a common currency for Gulf states for decades, for example, and who knows if this might be revived in the context of digital currency.

What are these unions for? Well, countries benefit in various ways from belonging to a currency union—a group of countries that share a single currency. Businesses can trade and invest across borders more easily. Member countries gain access to larger markets without facing currency risk. And in some circumstances, currency unions can help support their members when they are hit by external shocks. Such unions usually go hand in hand with deeper economic integration. But does that automatically mean more international trade? It seems so. Research shows that since the end of WWII, currency unions have on average been associated with 40% more trade between member countries.

(The gain is not spread evenly though: the ‘thin’ relationships between countries who do not trade much with each other benefit the most from currency unions, with little in the way of a boost for more established trading relationships.)

So: More trade and more prosperity. But there are also significant costs to membership: countries relinquish the independence to formulate monetary policy, which can complicate a country’s adjustment to a shock. At the same time, currency union institutions face their own constraints. Currency unions have a responsibility to serve the interests of all of their members; accordingly, changes to policies with a union-wide impact, like monetary policy, are guided by the needs of the union rather than any one single member.

New Blocs

All of this is background to why I was so interested to read that during his first visit to Argentina as Brazil’s new President, Luis Ignacio Lula da Silva, raised the possibility of his country and Argentina pursuing a joint trading currency called the ‘Sur’ (or ‘South’). The stated purpose would be to promote bilateral trade rather than seeking a monetary union such as exists in the EU, and would involve state-backed loans from Brazilian banks active in Argentina, with Argentina in turn collateralising this borrowing with commodities such as grains or natural gas. That’s pretty interesting because it could be the progenitor of what would in fact be the second biggest currency union in the world.

The Sur is not the only new currency on the drawing board in South America, as it happens. Argentina wants to introduce a preferential exchange rate (the “tech dollar”) for freelancers selling their services overseas so that they are not exposed to the local currency, which does not have a history of stability. They already had a “soy dollar” (Argentina is the world’s third-biggest producer of soybeans, behind Brazil and the United States) which meant that farmers could exchange their dollars earned from soybean sales at a preferential rate (as opposed to at the official exchange rate).

(Actually, Argentina has quite a few exchange rates. Never mind the soy dollar, there was a “Qatar dollar” for Argentinian tourists going to the last year’s World Cup and there is a “Coldplay dollar”, a special exchange rate for paying foreign entertainers, so named because the pop group played a series of sellout concerts in the country.)

At the same time as Brazil and Argentina are working on the Sur, Russia and Iran are working together on a similar regional currency bloc, the "token of the Persian region”, backed by gold to replace the dollar for international payments. As in the case of the Sur, the purpose is not to replace fiat currency in domestic circulation. The executive director of the Russian Association of the crypto industry and blockchain, Alexander Brazhnikov make it clear that this token will be used as a means of payment in international trade.

(Astrakhan is a free-trade zone where Russia has started accepting Iranian merchandise; therefore, the coin would be usable there, for example.)

Note that point about trade.

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Reserved

At the Bretton Woods in 1944, at the conference that established the post-war international monetary order, the economist John Maynard Keynes had proposed a global currency called the “bancor”. The bancor was intended to be an international currency for trade settlement rather than a single country’s domestic currency (i.e., the dollar). Keynes thought this would be a a way of avoiding competition through currency devaluation and tariff barriers because countries would need to set domestic policies so as to rebalance trade. Keynes lost the argument, and the dollar became the currency of international trade and the global reserve currency.

Now we are seeing more and more speculation about about the dollar being overthrown and being replaced by, for example, Chinese digital currency. But, I have to say, that seems distant, to say the least. It is quite difficult to become the global reserve currency. Whether or not the Renminbi will become an international currency is therefore uncertain and, in fact, detailed analysis offers a cautionary tale to optimistic views that China might quickly or straightforwardly emerge as an international currency provider.

(While the use of the dollar in global reserves is undoubtedly falling, it is not being replaced by Yuan or Roubles but by Swiss Francs and Swedish Crowns.)

This leads me to speculate again about the direction of travel. Is it possible that it might be despite currency unions, are we on the way to more, not fewer currencies because there will be different digital currencies designed for different purposes? The technologies of cryptocurrency mean that literally anyone can create money. But who will create money that others want to use? At one level, supranational currency blocs, but within those blocs there will arise local, indeed hyperlocal, currencies to serve specific communities.

The dollar isn’t going to be overthrown by another challenger currency, it’s just going to be steadily less relevant as trade slips into the metaverse and payments follow it, breaking up across a spectrum of different currencies all used for different purposes: some political, some economic, some social and some purely technological.

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Think Local, Act Local

We used to have hundreds of currencies from pieces of eight to doubloons to iron bar and copper tokens. Now, the Dollar is the global reserve currency and the global trade currency. But is that tendency to minimise a law of nature or just the way things are now?

with kind permission of Helen Holmes (CC-BY-ND 4.0)

In his book “Sapiens — A Brief History of Humankind”, the historian Yuval Noah Harari writes about the “cognitive revolution” and human beings gaining the ability to communicate information about relationships and therefore reputation. He talks about the ability of the neolithic clan to remember the mutual obligations that bind people together when they can grasp the idea of a future, and how the group memory does not scale into the settlements of the agricultural revolution, thus necessitating the invention of money. He writes that:

When trust depends on anonymous coins and cowrie shells, it corrodes local traditions, intimate relations and human values.

As society scales beyond the ability of individuals the local (including the money) is given up to the global. But what if the internet, social media and mobile homes mean that we are returning to Harari's “local traditions, intimate relations and human values” as the basis for trade precisely because we can recreate the clan’s diffuse memory of obligations but at population scale?

If this is true, then it is not implausible to imagine that new forms of money will arise that map more closely to the values of the communities they serve. Those communities will not be limited to people, of course. Much if not most trade will be between machines and enabled through repetitional calculus. These transactions, between my car and your garage door, between my flying car and your Amazon drone. We might see communities of robots developing their own money to reflect their own values!

I think it is time for us to think more clearly about an inevitably different future of reputation and currency and start to plan for what it will mean for business.