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Robert Mundell, Canadian economist and Nobel Prize winner, believes that the world’s financial future can be secured and stabilised by the introduction of a single global currency system.
As major currencies around the world, among them the Euro and the Yen, continue to battle multiple setbacks, Mr Mundell asserts that a new global currency could be the solution – provided the world’s financial leaders are willing to learn from the mistakes made previously with the Bretton Woods system.
Rise and Fall of the First Global Currency System
The Bretton Woods monetary management system was established between delegates from the Allied nations in 1944, as the world struggled to overcome the effects of World War II. This global currency system was the first of its kind, and led to the founding of the International Monetary Fund and the International Bank for Reconstruction and Development. The system required each of the 44 participating countries to adopt a policy that tied its currency to that of the United States, thereby setting fixed exchange rates. The IMF was also granted the ability to bridge temporary imbalances of payments in these countries.
The global currency system ushered in an era of post-war prosperity; however Bretton Woods eventually reached breakdown point in the 1970s, as the Vietnam War and the burgeoning trade deficit put the US dollar under unprecedented pressure. The system’s fate was finally sealed when President Nixon devalued the dollar by unilaterally cancelling the currency’s direct convertibility to gold. Fixed exchange rates were abandoned in favour of floating rates, and market trading determined the value of the world’s major currencies.
A New Solution?
According to Robert Mundell, a new global monetary system would only work effectively if the currency in question belonged to the world, rather than being tied to a single superpower like the USA – as was the case with Bretton Woods. Ideally, this currency should be based on other major world currencies, and should be easily convertible – it could even take the form of a virtual currency.
The renowned economist is not alone in his opinion; since the beginning of the Global Financial Crisis in 2008, numerous policymakers have called for a new international monetary system. “We must rethink the financial system from scratch” said the French President at the time, Nicolas Sarkozy. However, it has become evident that building a global currency system in today’s financial climate would be a complex task, and Mr Mundell concedes that creating such a system within the next five years is an unrealistic goal.
While this solution may not be quick or easy, it may also be the world’s best chance for a thriving global economy.