Monomoney Mania

The search for better economic policy.
April 16 1999 3:30 AM

Monomoney Mania

Why fewer currencies aren't necessarily better.


A couple of days ago my CW alarm starting buzzing furiously. For something like the sixth time in a month, a businessman I was talking to had just declared, in the tones of someone stating a profound insight, that the modern world economy no longer has room for scores of different national currencies--that the inexorable logic of globalization will soon force most countries to adopt the dollar, the euro, or the yen as their means of exchange. This particular speaker was Latin American, and was clearly influenced by the recent discussion of "dollarization" as a solution to his region's woes, but I have heard pretty much the same line from Asians and Europeans. No doubt about it: A new conventional wisdom has emerged. And you know what that means: It's time to start debunking.


At first sight, it might seem obvious that the fewer currencies there are, the better. After all, a proliferation of national moneys means more hassle and expense, because you keep on having to change money and to pay the associated commissions. It also means more uncertainty, because you are never quite sure what foreign goods are going to cost or what foreign customers will be willing to pay. And as globalization proceeds--as the volume of international transactions rises, both absolutely and relative to world output--the cost of having many currencies also rises. So why not have fewer--maybe only one?

There's also the matter of speculation. The financial crises that have shaken much of the world all started, at least in the first instance, with investors betting that the currency of the afflicted nation would fall in value against harder currencies such as the dollar. Why not spoil the speculators' game by giving them nothing to speculate about--by replacing pesos and reis with portraits of George Washington (or, if you happen to be European, with generic pictures of bridges and gates--for more on European currency design, see this 1997 Slate piece)?

But not so fast. There are still some very good arguments for maintaining separate national currencies. Not only that, while globalization and technological change in some ways are pushing the world toward fewer currencies, in other ways they actually reinforce the advantages of monetary pluralism.

The classic argument in favor of separate national currencies, with fluctuating relative values, was made by none other than Milton Friedman. (One appealing aspect of this particular debate is that it cuts across the usual ideological lines. European socialists like unified currencies, so does the Cato Institute. American liberals like floating exchange rates, so do Thatcherites.) Friedman started from a more or less undeniable observation: Sometimes changing market conditions force broad changes in the ratios of national price levels. For example, right now the Irish economy is booming and the German economy's sputtering. Clearly, prices and wages in Ireland need to rise compared with those in Germany. Now, you could simply rely on supply and demand to do the job, producing inflation in Ireland and deflation in Germany. But even a free-marketeer such as Friedman realized that this is asking a lot of markets and that it would be much easier to keep German prices stable in German currency, Irish prices stable in Irish currency, and let the exchange rate between the two currencies do the adjusting.

Friedman offered a brilliant analogy. He likened exchange rate adjustment to the act of setting clocks forward in the spring. A truly devout free-market believer should--if he is consistent--decry this as unwarranted government interference. Why not leave people free to choose--to start the working day earlier if and only if they feel like it? But in reality there is a coordination problem. It is hard for any one business to shift its work schedule unless everyone else does the same. As a result, it turns out to be much easier to achieve the desired time shift by leaving the schedules unchanged but resetting the clocks. In the same way, Friedman argued, a country whose wages and prices are too high compared with those abroad will find it much easier to make the necessary adjustment via a change in the value of its currency than through thousands of changes in individual prices.


S o there is a trade-off. You don't want too many currencies--you wouldn't want to have separate dollars for Brooklyn and Queens. But when two countries are subject to strong "asymmetric shocks"--which is econospeak for saying that if they shared a common currency one would sometimes be in a boom while the other was in a slump and vice versa--there is a good case for their having separate currencies whose relative values are allowed to fluctuate. The question, then, is whether changes in the nature of the world economy have altered the terms of trade-off--and if so, in which direction.

Now the increasing volume of international trade and investment does, other things being the same, make it more costly to maintain multiple currencies. But other things are not the same, and other forces arguably make the optimal number of currencies in the world larger rather than smaller.

Consider, in particular, the effects of modern information and communication technology--which may also be the driving force behind globalization. Surely that technology has made it easier, not harder, to deal with a world of many currencies. For example, European advocates of a single currency used to delight in pointing out that if you took a grand tour of the European Union, starting with 100 deutsche marks and changing your money into local currency at each stop, at the end you would have only something like 40 marks. This was always a bit of a red herring, since the commissions that businesses pay on foreign exchange transactions are far smaller than the fees at foreign exchange kiosks. But anyway, who needs to change money nowadays? When I go to Europe, I pay for most things by credit card and get petty cash from local ATMs, which are happy to accept my BankBoston card.

Information technology also makes it easier for businesses to deal with the risks associated with fluctuating currencies. It has always been true that such risks could in principle be "hedged" away through; the problem was that the necessary markets were sometimes thin or nonexistent. Thanks to computers, however, investment banks now offer a vast array of financial instruments, and hedging has become much easier.



More Than Scottish Pride

Scotland’s referendum isn’t about nationalism. It’s about a system that failed, and a new generation looking to take a chance on itself. 

iOS 8 Comes Out Today. Do Not Put It on Your iPhone 4S.

Why Greenland’s “Dark Snow” Should Worry You

Three Talented Actresses in Three Terrible New Shows

The Human Need to Find Connections in Everything

It’s the source of creativity and delusions. It can harm us more than it helps us.


Happy Constitution Day!

Too bad it’s almost certainly unconstitutional.

What Charles Barkley Gets Wrong About Corporal Punishment and Black Culture

My Father Was James Brown. I Watched Him Beat My Mother. Then I Married Someone Like Him.

  News & Politics
Sept. 17 2014 12:02 PM Here It Is: The Flimsiest Campaign Attack Ad of 2014, Which Won’t Stop Running
Business Insider
Sept. 17 2014 1:36 PM Nate Silver Versus Princeton Professor: Who Has the Right Models?
Sept. 17 2014 1:59 PM Ask a Homo: Secret Ally Codes 
  Double X
The XX Factor
Sept. 17 2014 1:26 PM Hey CBS, Rihanna Is Exactly Who I Want to See on My TV Before NFL Games
  Slate Plus
Slate Fare
Sept. 17 2014 9:37 AM Is Slate Too Liberal?  A members-only open thread.
Brow Beat
Sept. 17 2014 1:01 PM A Rare, Very Unusual Interview With Michael Jackson, Animated
Future Tense
Sept. 17 2014 12:35 PM IOS 8 Comes Out Today. Do Not Put It on Your iPhone 4S.
  Health & Science
Bad Astronomy
Sept. 17 2014 11:18 AM A Bridge Across the Sky
Sports Nut
Sept. 15 2014 9:05 PM Giving Up on Goodell How the NFL lost the trust of its most loyal reporters.