Forex: Money as Medium in Foreign Exchange
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If we leave aside the technicalities and the modalities or means of achieving single money, the question remains whether it is a good idea when applied to FOREX.
As changes in tastes, production, functions, technology, factor proportions, levels of income, and so forth occur, countries must adjust without independent monetary, fiscal, exchange, or commercial policies and must rely on coordinated action by others.
The political sovereignty is painful.
The economic costs may be high.
Is the game worth the candle? Are the benefits economic or political?
The argument for a larger currency area is largely the argument for money in general. Money serves as a medium of exchange, unit of account, store of value, and standard of deferred payment.
The foreign exchange market can discharge the function of money as a medium of exchange. But if foreign exchange rates fluctuate, it is difficult without a stable unit of account to calculate costs and prices abroad.
Foreign exchange cannot function properly as a store of value to bridge temporary gaps between the receipt of income from abroad and its expenditure, and there is no standard of deferred payment for the making of long-term contracts for lending, or long-term for purchase and sale of commodities. Money is a public good, which makes it possible to obviate barter. When no money is provided, foreign trade and investment are not limited but the functions of money must be discharged privately, at private cost, with the result that trade and investment must decline, in the long-run.
The economic benefits of international money are substantial. The political benefits probably alter as the countries making up the currency area change. Europe wants a single currency in part because it wants to build a monetary rival to the dollar--- a political purpose, though not necessarily an unworthy one.
The political benefits of world money, however, would be more questionable. The political costs and benefits, moreover, are associated with the nature of the system that is adopted. There are strong economic reasons for believing that is difficult to create single world money or to reinstall gold as world money, which is different from the moneys used in at least one important country or area.
Gold, or SDRs, for example, would be less acceptable to international markets than national or monetary-union currencies like the pound sterling of 1913, the dollar of 1960; or perhaps the ECU of 1984.The reason is found in the fact that markets like to avoid excessive transactions, and in the idea, debated in classical monetary theory, that market acceptance rather than government fiat determines what is money.
