INSTITUTO EUROPEO DE ESTUDOS ECONOMICOS

MONETARY SIMPLIFICATION EURO/DOLLAR: TOWARDS A GLOBAL

CURRENCY

RAMN TAMAMES

Professor of Economic Structure at Madrid Autonomous University, (UAM) Jean Monnet Chairholder, European Union

Macao, November, 2004

INDEX: 1. Monetary unions in history ............................................................ 1

2. The path to common currency: the Euro as an economic revolution and declaration of independence ..................................... 3

3. Optimum Monetary Areas ............................................................. 5

4. Advantages and disadvantages of a Monetary Union......................... 7

5. A new financial culture.................................................................. 9

6. The monetary union is not a panacea ............................................10

7. The case of the Dollar within monetary simplification.......................11

7.1. Total dollarization ..........................................................12

7.2 Recent integral dollarization............................................12

7.3 The Hong Kong Monetary Agency ...................................12

7.4 The case of Argentina ....................................................14

7.5 De facto dollarization .....................................................14

8. The new Dollarzone .....................................................................15

9. The Euro in the world monetary scenario. The Dollar/Euro rapport ...16

10. Non-dollarized and non-euroized countries .....................................17

11. The common currency and emerging countries ...............................18

12. The first phase in the search for the universal currency, 1865-1944 ..19

13. The efforts for monetary cooperation (1918/1944) ..........................21

14. The most recent expectations of a global currency (since 1944)........23

15. The path to the launching of the Cosmos .......................................26

16. The central bank of the Cosmos and other technical questions..........28

17. Political and economic difficulties in the creation and performance of the Cosmos ................................................................................30

18. Conclusion .................................................................................31

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1. MONETARY UNIONS IN HISTORY In the progressive globalisation of the system of mixed economy, it can be said that a utopian dream came true: the European Monetary Union (EMU) has been performing for three years, and the Euro is a very strong currency. After having been intuited first, and later foreseen EMU, was built between 1987 (Single European Act) and January 1, 2002, when the common currency entered into full circulation1. But this great conquest, far from what is sometimes thought, is not a novel deed, because since ancient times, and indeed in a different context and with very distinct consequences, there have been, previous comparable experiences. This is what happened with the coinage minted by the League of Greek Cities in the third century B.C., or the monetary consolidation carried out by Emperor Diocletian in the third century A.D. to normalize circulation throughout the Empire2. Or the most famous system put into effect by Charlemagne between the eighth and ninth centuries; with a nomenclature that survived until 1971, when with the decimalization of the Sterling, the Pound equalling 20 shillings of 12 pennies each was forever filed away.

In addition to those coins used extensively in Ancient and Medieval times, we would have to add other remarkable cases that were not taken into account so much when depicting the historical events in question. Among them, we must refer to the diffusion of Spanish silver from the 16th to the 19th centuries produced in Mints of the Spanish Viceroyships of New Spain (present Mexico), New Granada (Colombia), Peru and Ro de la Plata (Argentina). Especially the coin known as Real de a Ocho or Spanish Dollar, which was in circulation in practically the whole world, including China, where the Spanish coins arrived aboard the Galen of Manila, from Acapulco; and, once re-stamped, they were put back into circulation within the Celestial Empire. It should also be remembered that the Spanish silver coins was the origin of the Dollar, as stated in the Hamilton Coinage Act, that in 1792 gave the United States a uniform currency with the reference to the Spanish Milled Dollar.

It is also interesting to remark that during the nineteenth century, in the context of Pax Britannica, England circulated its Pound Sterling worldwide, based on the gold standard, assuring complete conversion to the yellow metal, until the definitive abandonment of

1 Ramn Tamames, Este mundo en que vivimos: globalizacin y ecoparadigm, Instituci Alfons el Magnnim, Valencia, 2003, pp. 52-54. 2 H.R. Kramer, Experience with Historical Monetary Unions, in H. Giersch (editor), Integration durch Whrungsunion, Tubingen, Mohr, 1971.

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the standard in 1931, the historic moment in which the Dollar took over as the main world currency. In all other respects, the British hegemony with the Pound should not overshadow the importance of the German Monetary Union, which culminated in 1871 with the birth of the Reichsmark put into effect by Bismarck, the Iron Chancellor. This served as the first antecedent to the later Deutsche Mark, or DM, created by the Ludwig Erhardt monetary reform of 1948; which in the decade of the 1970s became the anchor currency of the European Monetary System (1979) until the birth of the euro (1998) ushered in a new era for European monetary history. Nor can we forget the Latin Monetary Union (LMU). Devised by Napoleon III with the basic purpose of politically compensating, in the South of Europe, the importance of German imperialism in the North. Within the LMU, between 1865 and 1870, were grouped Belgium, France, Italy, Switzerland and Greece. As de facto, although not de iure, the LMU promoted the birth of the Spanish peseta in 1868 as a result of the September Revolution, La Gloriosa, when the effigies of the Bourbons, after the dethroning of Isabel II were substituted by the idealization of the Spanish Nation3. Thus, the LMU project was succesful, though it was restrained by the defeat of Napoleon III in the Franco-Prussian War (1870); it stayed alive until the 1920s, being the source of not a few of the movements that were conceived in pursuit of a universal monetary union, as we shall see in section 12 of this paper. Bimetallism, however, was the inevitable pitfall of the Union.

Also in Europe, the Scandinavian Monetary Union, grouped the Nordic countries, (with the exception of Finland that at the time, was a Grand Duchy within the Czarist Empire) around a common currency that was in effect almost all of the second half of the nineteenth century, until the separation of Norway and Sweden in 19014.

Already in the twentieth century a series of efforts were made

with the aim of achieving a global currency as we shall see in section 12, but it was at the begining of the end of Second World War, when the intention of establishing a real international monetary system acquired a truly global perspective. An idea that was translated into the creation of the International Monetary Fund (IMF) in 1944, with its gold exchange standard for the Dollar. The IMF in fact, technically functioned as a monetary union starting in 1944. Although it is true

3 Ramn Tamames, Estructura Econmica de Espaa, 24th edition, Alianza Editorial, Madrid, 2000, pp. 741 on. 4 Norbert Olszak, Histoire des Unions Montaires, Presses Universitaires de France, Paris, 1996, pp. 67 on.

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that it was from 1958 on (with full convertibility of European currencies to the Dollar), when it achieved full development, until 1971, on the occassion of the Dollars inconvertibility to gold5.

2. THE PATH TO COMMON CURRENCY: THE EURO AS AN ECONOMIC REVOLUTION AND DECLARATION OF INDEPENDENCE

The definitive birth of the Euro had much to do with the changes in the IMF and the Dollar, since the latter was the anchor currency of the international monetary system (IMS) between 1944 and 1971, and therefore the abuse of the Fund rules by the key country with the key-currency was determinant for the IMF. More specifically, the United States with its multinational enterprises and its huge military expenses in Korea first and Vietnam later, located large sums of Dollars out of the country, with the technical impossibility, since 1955, of maintaining gold convertibility; a difficulty only overcome through the agreements made between the U.S. Treasury and the central banks of the IMF countries (except France). But even so, in 1971 the inconvertibility of the Dollar was decided; and consequently the anchor currency of the IMS was devaluated twice (in 1971 and 1973).

In a few words, the IMS, without gold as a standard, and without a solid anchor currency, was definitively finished, and the system, changed to the floating exchange rates, a new situation which caused a lot of market volatility. And it was in order to solve the after-effects of that new monetary chaos that European integration successively undertook the development of the so-called monetary snake (1972/1979), the creation, afterwards of the European Monetary System (EMS 1979/1998), and finally, the Monetary Union (1987); that was implemented through the Delors Report (1989), and the Maastricht Treaty (1993), a true Magna Carta of the common currency. The convergence policy followed these successive preparatory operations, with the five criteria of Maastricht (low public deficit, minimal inflation, reduced interest rates, public debt at a supportable GDP percentage, and monetary stability) in order to transform gradually what would later be the Eurozone into an optimal monetary area. As a matter of procedure, the successive stages and phases of the advance toward the Euro were settled in the Madrid Calendar, 1995, when the name euro was accepted on a proposal coming from German Chancellor Helmut Kohl.

5 Ramn Tamames, Estructura Econmica Internacional, 20th edition, Alianza Editorial, Madrid, 2003, pp. 85 on.

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With the thorough implementation of the Madrid Calendar, the establishment of the Central European Bank would be achieved (May 2, 1998), the moment at which the irrevocable fixed exchange rates between the different currencies from the candidate countries were simultaneously agreed on, in order for the new currency to enter into effect on January 1,1999, still only scriptural, as far as it would become a real common currency on January 1st, 2002, when the Euro bank notes and coins effectively went into circulation6. For Europe, The Monetary Union has meant an ideological, physical and economic revolution. First of all because the differential effect that it supposes in favour of its Member States vis--vis the rest of the world, through the elimination of a considerable amount of transaction costs (according to Ronald Coase). That is to say, the commissions charged for going from one currency to another disappeard, thus generating a considerable incentive for re-growth of trade between members of the Community. In this way, the Euro contributed to the final implementation of the European Single Market, not only for goods, but also for all sorts of factors and services. Moreover, the Pongoing reforms that the European Union carries out continued to be decisive, though now at a faster pace, with the aim of readjusting the global framework of the Union to the significant changes which came about as a result of the common currency. From a political point of view, the culmination of the Monetary Union represented a true Declaration of Independence. Something similar to what happened in the United States in 1776, upon the establishment of the bases that would later lead to the Dollar, that was definitively introduced in 1792, as we have mentioned before.

On the timeline we are travelling on, jointly, the twelve countries which at the time have adopted the Euro, thus creating the Eurozone, constitute the only monetary area comparable in size to that of the U.S. Dollar. It is true, however, that significant changes are still necessary in Europe in order for this comparison to be wholly accepted. Above all in questions such as dimension, functional dynamism, and operating efficiency, in the way the Lamfalussy Report (2001) pointed out: the financial markets in the European Union (EU) are far from being perfectly interconnected and homogenous. The above notwithstanding, the Eurozone is an amazing reality, especially if the historical comparison is made to the U.S. whose

6 Ramn Tamames, Unin Monetaria y Euro: recta final, Espasa, Madrid, 1998, pp 171 on.

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monetary union based, on the Dollar, took 129 years to build; beginning with the aforementioned Hamilton Coinage Act in 1792. Afterwards a full regulation would be made when the Treasury greenback gradually substituted the notes issued by private banks throughout the American Civil War (1861/1865). Some decades later, the Federal Reserve System (FRS) would be created under the auspices of President Wilson in 1913, to create a true central bank that was so necessary. And it was not until 1933, through a very important decision of President Roosevelt, that the FRS would achieve the great powers that it has today, under its current President, Alan Greenspan who has headed the institution since 1987. Facing this evolution and recognising, of course, that in our times, it is necessary to implement any monetary union project faster than before, to make changes in a programmed way accorded by sovereign member countries, it is true that only fifteen years went by from the Single European Act in 1987 to the issuance of the euro in 2002, actually an historical record. The creation of the Euro has been, thus, a real achievement and the authors of that great success are demonstrating, from the very beginning, that they are capable of developing good governance of the common currency, congruent with the entire financial environment. Solving, in a more than reasonable manner, the monetary problems of the Union as it extends and becomes more complex. 3. OPTIMUM MONTARY AREAS (OMA)7 After analysing the monetary simplification based on the Dollar and the emergence of the Euro, and after going over the path that led into the Eurozone, we shall open a parenthesis to look deeper into economic theory related to monetary unions. To assess what makes a common currency a success in multinational areas, as is the case with the Eurozone8. Among the diverse aspects of an OMA, first of all, the macroeconomic coordination of the different countries is definitively obliged; in the aim of achieving, as much as possible, a more and more synchronised economic cycle.

7 I want to express my gratitude to my student from the Asian Europe Institute of the Malaya University Kuala Lumpur, Khoiru Nurrofik for his contributions to sections 9 and 10 of this work. 8 R. Mundell, A Theory of Optimum Currency Areas, American Economic Review, 51, pp. 657-665, September 1961.

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Additionally, for the OMA to be able to exist as such, the best way is that its member countries have open economies9, while keeping in mind that an economic diversification10 is also highly desirable, so as to reduce the strong fluctuations in the relative prices of the States which make up the area. Mundell11 and McKinnon12, on the subject of open economies, insist that nations with large commercial sectors related to external markets are in a better position to profit from any monetary union. Something that is due to the simple fact that in more open economies, the handling of exchange rates to correct imbalances results more effective when there is an active import and export trade. Simply because, in competitive devaluations, what is gained on the one hand is lost on the other. In the above said direction, certain small countries are in a position to gain more from being a member of a monetary union than larger ones. This is due, generally speaking, to the fact that small countries do not have enough resources to develop a wide productive autarky, so that they have no choice but to go for wider international integration. On the other hand, as Kenen pointed out in a theoretical discussion with Mundell and McKinnon, highly diversified production countries are better prepared to be member candidates for an OMA. An assertion that is intuitively understandable, as the business cycles of some segments of products and services are compensated by those of others. The case of California, with a profile of strong concentration in defence industries, is an a sensu contrario example. Additionally, it would be good for the OMA if there were greater mobility of the working force, including broad wage flexibility as well as a very flexible social policy. This would permit workers to go from one geographic area of the monetary zones to another in case of asymmetric shocks. To all of this can be added the desirability of a federal government with real power to implement decisions in all countries of the Union: that is, with enough capacity to generate intraregional

9 R. I. McKinnon, Optimum Currency Areas, American Economic Review, 53, pp. 717-724, September 1963. 10 P. Kenen, The Theory of Optimum Currency Areas: An Eclectic View. Monetary Problems of the International Economy, The university of Chicago Press, 1969. 11 R. Mundell, Does Asia Need a Common Currency?, Pacific Economic Review 7:1, 3-12 Blackwell Publisher Ltd., 2002. 12 R.I. McKinnon, After the Crisis, the East Asian Dollar Standard Resurrected: An Interpretation of High-Frequency Exchange Rare Pegging, Department of Economics, Stanford University, 2000.

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transfers of aid and compensatory income in the case of growing unemployment. In the two latter aspects workforce mobility, and federal government, the Eurozone is in worse shape than the U.S. First of all, due to linguistic barriers, an obstacle to great migrations from one State to another in difficult times. Meanwhile, the prevalent quietism of the EU is helped by better social security systems. In case of infortune, the unemployed worker is able to continue to live in the same place, and generally in his or her own home, which is being paid for through mortgage payments to banks. As far as federal government is concerned, the European Union still has a very serious deficit for providing the required compensatory spending; as far as structural funds, they hardly make up 25 percent of 1.11 percent of the GDP of all of the EU. That is to say, only 0.24 percent of the global GDP of the EU. In both of the questions we have dealt with, there are no prospects of immediate change, but in the face of these problems, the asymmetric shocks in the EU are certainly alleviated within the abovementioned national systems of social protection and investments on a national basis. 4. ADVANTAGES AND DISADVANTAGES OF A MONETARY

UNION The advantages of a monetary union from a microeconomic point of view, as we have already seen, come from the earnings derived from a reduction of transaction costs, in the sense outlined by Ronald Coase, because of the disappearance, among other things, of exchange commissions due to going from one currency to another. It is also important to remark, from a macroeconomic point of view, the decrease in uncertainty as far as future modifications of exchange rates are concerned13, as far as the monetary union means a common currency.

Spains experience in this aspect is a real textbook case. Due to a strong initial overevaluation of the peseta relating to the DM upon entering the EMS in 1989, and since the liberalization of short term capital movements (February, 1992), speculation against Spanish currency was very active, as far as inflation in Spain was far above levels of other European countries. As a consequence, between 1992 and 1995, there were four peseta devaluations, which, according to credible calculations, meant a growth loss of some 6 points of GDP, and 1.5 million more unemployed in only three years: 1992-1994.

13 P. De Grauwe, Economics of Monetary Union, Oxford University Press, 4th edition 2000.

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Returning to the consequences of an OMA, it also makes the creation of a single market easier by dismantling barriers between member States. This is especially true if foreign investors identify the Union as a single economic space in terms of legal implementation, thus appreciating the typical advantages of scale economies for investments14. On the other hand, among the supposed disadvantages of a monetary union are a series of macroeconomic questions. In this sense, the example most frequently quoted is the loss of independence concerning exchange-rate policies and monetary flows (greater expansion of monetary offer in recessive moments).

For obvious reasons, it is no longer feasible to use both tools against asymmetric shocks in specifical countries inside the common zone. Therefore, such shocks can only be abated in a monetary union thanks to workforce mobility, as was stated above. Stated in another way, when there is a recession in a certain area in a monetary union, an intrazonal flight of workers will occur. In this sense, as discussed earlier, the U.S. experience is illustrative and, until now, of a more positive capacity of adjustment than in the Eurozone. As far as competitive devaluations, which are definitely lost with a monetary union, they are merely short-term economic policy weapons, and even their initial positive results must eventually be paid for. All in all, the rigid and unique foreign exchange of a monetary union pushes for structural changes in the less stable countries, something that is much more fruitful in the long run. As it makes little sense, also in the long run, to use reflation to re-launch the economy, because of the evils created for an inflationist outbreak. Another apparent potential disadvantage of a monetary union is the possibility that capital movements between member States can promote growing disparities, between incomes in rich and poor zones. For the simple reason that the flow of funds tends to accumulate in economically fast-growing areas. But this drawback is not definitive, either, as in a monetary union compensatory tools are implemented. This happened in the cases of the EC/EU, where, in addition to the structural funds, in 1992 the Economic and Social Cohesion Fund was designed expressly to facilitate low-income countries entrance to the EMU.

14 P. Wilson, Prospects for Asian Monetary Cooperation after the Asian Financial Crisis: Pipedream or Possible Reality, Working paper n 151, National University of Singapore, 2002.

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5. A NEW FINANCIAL CULTURE The concept in the title of this section deals with the largest and most convenient set of advantages that can be expected from a monetary union. Thus it was proved by the performance of the Maastricht Treaty, in the process that enabled the majority of the member States of the Monetary Union (MU) to benefit from a new financial culture15. This was possible thanks to the already mentioned convergence policy previously adopted, which consisted of setting precise parameters by all members of the EMU for the most significant variables, to get a better performance on the said five fronts: deficit, inflation, interest rates, public debt level, and monetary stability. All of which permitted greater similarity of the functional structures among the members of the Union, leading towards more adequate conditions for a better performance. However, the above praise, or any other in favour of a monetary union like that of the Euro, should not allow us to fall into triumphalism. Because as the most popular economist, awarded with the Nobel Prize in Economics, Joseph Stiglitz pointed out, the currency is not an end in itself, but simply a means. And in this sense, since the creation of the common currency, the Eurozone, has not seen growth equal to or greater than in the U.S. And all of this, despite the fact that in both cases interest rates are aligned at very low levels. We could argue vis--vis those who blame the Euro for that slow growth that, the new common currency has, in principle, a neutral character, since it does not per se mean a larger potential for economic expansion. Instead, they are the guidelines of economic policy what really dictate the conditions for faster development. And in this direction, there is no doubt that in the last three or four years, the central countries of the Eurozone, France and Germany, have evolved toward semi-recessive situations, independently from the fact that the Euro existed or not. What on the other hand can be criticized regarding the less powerful comparative evolution of the UE vis--vis the U.S. in terms of GDP growth, is that the Central European Bank (CEB) has acted very conservatively. The same as the European Commission, on having defended, tooth and nail, the Stability and Growth Pact (SGP). Which is based on three basic criteria which substitute the previous ones in the Maastricht Treaty: public deficit of no more than 3 percent of the GDP, inflation below 2 percent, and expansion of

15 Ramn Tamames (in collaboration with Mnica Lpez), La Unin Europea, Alianza Editorial, Madrid, 2002, pp. 635-637.

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monetary aggregate M-3 (money in the hands of the people plus bank accounts) at a rate of no more than 4.5 percent annually. Evidently, the SGP is too strict, and even Robert Mundell said, ironically, that, it should always be respected; except when it is not possible. And that moment of exception reached the Eurozone with the asymmetric shocks that are now being experienced; and which have especially affected the French and German economies, causing both governments to implement keynesian policies, in the sense of using deficit spending as an instrument for recovery. This policy of indiscipline with respect to SGP, be it right or wrong, provoked cutting criticism from the Central European Bank (CBE) and the European Commission. Neither of these two bodies noticed, from their very conservative positions, that in the case of asymmetric shocks, one of the few available weapons, not to say the only one, to ameliorate the situation failing competitive devaluations, or autonomous monetary expansion--, is none other than budget handling, as a part of economic policy that does not yet fall under the responsibility of the supranational authority of the EU. As far as this point is concerned, we cannot accept that to be independent means that we have the only solution. The Japanese case can be brought up in this respect, since Tokyo enjoys full autonomous capacities in terms of exchange rates and monetary expansion. However, even with these instruments, the Japanese authorities were unable to find the solution for a depression which lasted more than ten years (1990/2002). Simply, because monetary tools cannot solve deep sociological and institutional problems. 6. THE MONETARY UNION IS NOT A PANACEA We now return to the question of the OMA, going into the heart of the main subject of this paper, in the sense that the monetary union has many advantages. But this does not mean that it is going to solve everything, since the obstacles that prevent growth in a country can be of very different kinds. And, along this line, it seems clear that the policy needed to change such a state of affairs cannot be undertaken by the CBE or the European Commission by themselves, since they are not equipped to do so. It is, thus, the member States who inevitably have to face their internal reforms (sometimes very painful socially), because this deals with an area where subsidiarity persists; that is to say, national powers are not transferred to Brussels, being, therefore, the obligation of the national authorities to set up new growth models, to substitute the former ones, which in fact have become obsolete.

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This is the assumption of the aforementioned French and German economies whose governments have not been able, at least so far, to outline definitive solutions in the context of an increasingly globalized world where competitivity is a real weapon; and when there is no other choice than to be more and more competitive, in order to avoid the process of severe industrial delocalisation, with serious social consequences. In this context, France, instead of improving production in the last few years, gave the green light to its own decline, with the decision to reduce the workweek to 35 hours, which in reality ended up being 30. In other words, the socialist government of Monsieur Jospin promoted the range of some 1,500 hours of work annually, when South Korea is at 3,000 and the USA at 2,300, making further comment unnecessary. In the case of Germany, the situation is more complex, since this was where the first steps were taken towards a welfare state (Bismark, in 1880, with the first social security system). And afterwards and until now, Germany has reached levels of labour protection which will be difficult to maintain in the globalized world in which we live. Therefore, the radical reforms introduced by Chancellor Schrder are irritating to trade unions, but they are indeed indispensable to revigorise the second export power of the world (after the U.S), to avoid being condemned to a slow industrial euthanasia, which could occur if the US enterprises do not react briskly. In conclusion, monetary unions are of great interest due to a series of circumstances. But, in any case, they are not a panacea.

What is clear at any rate is that the path to monetary simplification is a manifest design, a very strong one in the present globalized world. And in the absence, at least for now, of monetary union projects comparable to the growing Eurozone, it seems that the most important currencies already existing, the Dollar and the Euro, will continue to absorb more and more national monetary systems, on a track that inevitably will lead to a global currency as we shall try to show in the rest of this paper. 7. THE CASE OF THE DOLLAR WITHIN MONETARY SIMPLIFICATION We are entering now into the new dynamics of the Euro/Dollar rapport, within the trend of the oft mentioned monetary simplification (Stanley Fisher dixit), that is, when means of payment on a world scale are more and more polarized on the two single world currencies: the Dollar and the Euro.

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Being those two poles the real key of the question, we will concentrate first on the Dollar, and later on the Euro. Beginning with the verification that of the 193 member States that make up the United Nations, at least a dozen have the Dollar today as their official currency, or they are linked to it through currency boards, according to Table 1, and the following explanation of the different levels of Dollarization. 7.1 Total Dollarization It was and is the case of Panama, from the founding of the Republic in 1904 to its separation from Colombia, which was induced by the U.S., with the purpose of building the canal through the Central American isthmus. And while Panama does officially have its own currency, the Balboa (1 x 1 to the Dollar), the truth is that it is only used as a calculation unit in budget reports and official documents, and for small local payments in coins. Besides Panama, a sizable number of small republics and other territories have the Dollar as their official currency. This is the case of Liberia, Marshall Islands, Mariana Islands, Puerto Rico, Virgin Islands and other areas with more or less dependence on the U.S. (see table 1). 7.2 Recent integral Dollarization This is the case of Ecuador, which in the year 2000, after several ups and downs, and in the middle of a serious economic crisis, decided to convert its national currency totally, at the rate of 25,000 Sucres to the Dollar. Subsequently, other dollarizations must be mentioned, such as those of El Salvador and Guatemala. And in the future, other Central American countries might follow, including similar projects even regarding Mexico and Colombia. In the case of Venezuela, formal discussions have even been made, such as that of economist Jos Luis Cordeiro. 7.3 The Hong Kong Monetary Agency (HKMA) The HKMA was the first example of this kind of monetary scheme. It was adopted in 1983 by British authorities, when the exchange rate was fixed at 7.80 Hong Kong Dollars for one U.S. Dollar, which has been maintained since then.

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Table 1. Monetary simplification

Monetary unions U.S. Dollar zone

Eurozone WAMO (1) CEAMC (2) CARIBBEAN Monetary Union(3)

CURRENCY BOARDS

(4)

U.S.A Germany Benin Cameroon Antigua y Barbuda Hong Kong Marshall Islands

Austria Burkina Faso Chad Dominica

Micronesia Belgium Ivory Coast Congo Grenada Bosnia Palau Spain Guinea-Bissau Rep. of Gabon St. Kitts and Nevis Bulgaria

Finland Mali Ecuatorial Guinea St. Luca Estonia Panama France Niger Central African

Rep St. Vicente and Lithuania

Ecuador Greece Senegal The Grenadines Djibouti El Salvador Ireland Togo Guatemala Italy Kiribati

Luxembourg Netherlands Leshotho Portugal Namibia Swaziland Andorra Vatican Mnaco San Marino

(1) Countries with Franc AFC, of the African Financial Community, West Africa Monetary Union (WAMO), referenced to the Euro. (2) Countries with Franc AFC, African Financial Community, Central and Equatorial Africa Monetary Community (CEAMC)also referenced to the Euro. (3) Countries of the Caribbean Market, whose common currency is the East Caribbean Dollar. (4) Currency boards referenced to the Dollar (Hong Kong), to the Euro (form Bosnia to Djibouti inclusive). Kiribati is referenced to the Australian Dollar y the other three countries to the South African Rand. Source: Ramn Tamames, Estructura Econmica Internacional, 20th edition, page 124.

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At this currency board, Dollars issued by the Hong Kong Monetary Authority (HKMA) are backed by the international reserves of the former British colony. And as the circulation of Hong Kong Dollars (HK Dollars) is about 12,000 in equivalence to U.S. Dollars, and the reserves of the HKMA are in a position of more than 90,000 U.S. Dollars (data from the end of 2000), obviously there is no risk of inconvertibility or devaluation. 7.4 The case of Argentina The Currency Board (caja de conversion officially) of Argentina was created in 1991 by the Menem-Cavallo tandem (the President of the Nation and his Finance Minister), with the main objective of ending chronic inflation which was causing continuous depreciation of the Peso, and that in practice had led to a de facto Dollarization. Faced with this state of affairs, and keeping the Central Bank working, a convertibility of Peso/Dollar (1 to 1) was established. Theoretically inspired by the HKMA, the Argentine system had two peculiarities. The first was that the rate of convertibility of the Peso was fixed at an over-valued level. The second is that, due to the evolution of events, the Dollar reserves of the Central Bank were submitted to continuous unsteadiness; increasing with the improvement of exports, and the production of massive cash input by foreign investments and the perceptions coming from the privatisation of state enterprises. On the other hand, when the economy was behaving negatively, as was the case since 1998, due to rising inflation, everything worked conversely, until the final decline. Then, the inevitable abandonment of convertibility occurred, along with the almost simultaneous pesification in December 2001. 7.5 De facto Dollarization

However, apart from the different formalizations discussed above, many other countries find themselves more or less dollarized de facto: when using the greenback in savings, or in its role as a shelter currency. As it is also used as a currency for economic calculations, and a very important additional function: as a means of payment in everyday activities in the vast informal economy that prevails in almost all emerging countries. In such circumstances, it turns out that the Federal Reserve System (the Fed) does not work simply as a central bank of the United States, but rather, for all practical purposes, it also acts as the central financial institution to half the world; as Martin Wolf pointed

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out16. Thus, it is clear that the Feds policies affect dollarized countries as much as they do the U.S. 8. THE NEW DOLLARZONE As we have pointed out, in retrospect, from 1958 to 1971, all of the European currencies, as well as the Japanese one, were linked to the Dollar through the IMF. But, after that period, a long sequence begun in 1971, with the introduction of floating exchange rates. In that context, the Asian currencies were more closely linked to the Dollar. Many things changed since then, until the present situation when the most important economies in the Dollarzone, can be divided into two groups: those with fixed or semi-fixed exchange rates, and those that are freer. The first group, which obviously includes the U.S., is the central area: with currencies like the Chinese Renmimbi (or Yuan), the Hong Kong Dollar, etc. The outer circle includes currencies with more fluctuating movements, such as Singapore, South Korea, Taiwan, and a more distant Japan. The inner circle generates 35 percent of the world GDP, and includes 26 percent of the population. And together, the outer and inner circle, represent 53 percent of the world GDP, comprising 52 percent of all the demographic stock. Meanwhile, and as a preview of what we will see when we discuss the Euro, this represents 30 percent of the world GDP, but only 7 percent of the current total inhabitants of the world. A basic topic in the New Dollar Zone understood in this way, is based on large accumulations of reserves in its central banks. 500,000 million Dollars is kept only in continental China, Hong Kong and Taiwan all together Greater China, with the consequence that they have bought U.S. Treasury securities that in 2004 will be worth no less than 200,000 million Dollars (total issuances are around 550,000 million), making a significant contribution to the financing of the U.S. fiscal deficit. The previous remarks explain why central banks in the new Dollarzone, at least for now, seem to be unable to free themselves from the greenback in their possible temptation of entering into the Eurozone. Thus apart from the fact that such an action would affect not only their monetary relation with the U.S., but also other vital

16 Martin Wolf, El Fed y el rgimen monetario gobal, Expansin, April 1, 2004, Spanish versin of an article in The Financial Times.

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parts of their reciprocal policies. Moreover, strong pressure on the Euro could become intolerable for the members of the Eurozone. The case of China within the present scenario, turns out to be especially interesting, as far as the Peoples Republic has had a virtually fixed exchange rate with respect to the Dollar for years: a pegging of 8.3 Renmimbis17. Thereof, if China changed its reference from the Dollar to the Euro, it would practically match the Dollar in monetary mass (M-3); all of this, could mean a radical change in the world economy that, for the time being, is not expected. Another important peculiarity is rooted in the fact that if China ceded to western pressure (EU plus U.S.), and reappreciated its currency, simply letting it float, the manoeuvre would be detrimental for the economy of the worlds most populous country; by restraining its exports, with consequences which would be felt both in the U.S. and in Europe, through increased unemployment and social discomfort in the world economy. On the other hand, by keeping its rigid exchange rate, China is achieving notable stability. 9. THE EURO IN THE WORLD MONETARY SCENARIO. THE

DOLLAR/EURO RAPPORT Facing the new Dollar Zone, to which we referred extensively in the above section, on the other side of the stage is the Eurozone, today with 12 member States with full rights, and in addition to four small European countries with special agreements: Andorra, Monaco, the Vatican State and San Marino. Further more, there are awaiting to enter not only the three nations of the EU-15 who do not yet form a part of Euroland (United Kingdom, Sweden and Denmark, the latter already inside the so-called EMS-bis), and also the ten EU new members of which Estonia, Lithuania and Slovenia have entered into the EMS-bis18. Additionally, the two countries that are advancing towards the joining process (Romania and Bulgaria) will one day find themselves in the Eurozone, without forgetting Turkey, who still faces not a few uncertainties. There are also fourteen African States which will probably be future members of the Euro, as far as their common currency is referenced to the Euro (the CFA franc, see table 1).

Furthermore, in a great part of the rest of the world, the Euro already circulates on a day-to-day basis, in a clear euroization

17 R. Polk, Willin, Cunto es y dnde va el dinero de China, La Vanguardia, July 11, 2004. 18 The EMS-encore is like a continuation of the first EMS, to facilitate a convergence policy with the aim of eventual access to the Eurozone.

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pattern, similar to the dollarization. At the same time, there are many central banks that in addition to the Dollar are already keeping large sums of Euros in their own international reserves. After visiting the two cases of Dollar and Euro, we must pay some attention to the strong fluctuations in their mutual exchange rate, which fell from approximately 1.17 USD to the Euro in January 2002 to only 0.80; to experience a rise later to 1.30, before falling in the first part of 2004 to a margin of 1.20/1.25. Late trends... The Euros great volatility with respect to the Dollar (or viceversa) was due to a series of circumstances, but above all, to the great volume of European and other countries investments in the bullish U.S. market of the years 1998-2000. Then, with the New Economy crisis, and the fall of those investments, the Euros recovery became apparent. Because of the great importance of both currencies, the maximum authorities of both currencies meet continuously. They are in permanent communication through the FRS and the CEB. Giving rise to the premonition that the a universal currency which is being proposed in this paper, is becoming more and more plausible in the framework of currency simplification growth inside globalization. In that direction we can ask how are the means of payment not going to be globalized if everything else is going towards that target? And additionally, we shall deal with that aspect afterwards, since this would be the only way to put an end to the international monetary crises that cause so many problems; from that of Southeast Asia in 1997 to the Argentinian Peso in 2001, not forgetting the cases of Russia, Turkey, Brazil, etc. 19. 10. NON-DOLLARIZED AND NON-EUROIZED COUNTRIES Within the non-Dollarized and non-Euorized countries, the principal ones are Russia with the Ruble, Japan with the Yen, and India with

19 The Spanish review Informacin Comercial Espaola dedicated its July/August, issue to the monetary and financial crisis, with the following articles to be mentioned: Rafael A. Barber y Manuel Blanca, La interpretacin de las crisis financieras a travs de la literatura acadmica, Omar Feraboli, Crisis monetarias y financieras antes de 1992: los modelos de primera generacin, Jorge Garca-Arias, La estabilidad cambiaria como bien pblico global: algunas consideraciones de eficiencia, Pablo Bustelo, Las crisis financieras en Asia y en Argentina: un anlisis comprado, Miguel A. Alonso y Francisco J. Blanco Jimnez, Los modelos de crisis gemelas en el marco de la literatura sobre crisis monetarias internacionales, Bernardo Hernndez, La evolucin del Fondo Monetario Internacional en una economa cambiante, Kunibert Raffer, Las instituciones de Bretton Woods y las crisis monetarias y financieras, y Luis Miguel Doncel y Jorge Sainz, Burbujas financieras y su mecanismo de transferencia a los inversores individuales: el caso .com.

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the Rupee. In this sense, we can wonder what the future of these countries will be: whether they will opt definitely for the Dollar or the Euro, or if they will be inclined to promote new monetary unions. In the case of the most important of these three cases, Japan, its rejection of any project to widen its own monetary area has seemed clear for some time. But there is now more talk of an integrative space that would comprehend the 10 countries of the ASEAN, Association of SouthEast Asian Nations (Myanmar, Thailand, Laos, Cambodia, Vietnam, Malaysia, Indonesia, Brunei, Singapore, and the Philippines) plus China, Japan and South Korea. It would be the ASEAN plus Three, potentially the largest economic group in the world, amassing more than 2,000 million people, seven times the population of the U.S., and 4 times that of the expanded EU. Although true, such a project is far from being put into practice, despite the repeatedly claimed project of creating an Asian Monetary Fund, autonomous from the IMF20. On the other hand, the countries that make up Mercosur (Brazil, Argentina, Uruguay and Paraguay, with their associates Chile, Bolivia and Peru), have considered the possibility of going to a small Maastricht, in pursuit of a possible common currency. But this idea would demand a macroeconomic convergence policy of great depth, such as the one applied between 1991 and 1998 by the candidates for the creation of the Eurozone. This would be quite difficult to achieve in the medium run in South America. 11. THE COMMON CURRENCY AND EMERGING COUNTRIES21 Martin Wolf, in the Financial Times, on referring to the world monetary situation in August 2004, emphasized the fact that the risk of foreign exchange fluctuations have always existed. But the truth is that it turned out to be very limited until the collapse of the Bretton Woods system in 1971. Since then, however, everything has become more volatile, as shown by the aforementioned Mexican crisis (1994), Southwest Asian (1997), Russian (1998), Brazilian and Turkish (1999), and Argentinean (2000/2002). All of this turmoil had very serious consequences, that some have tried to explain using the model introduced by Ricardo Hausman, professor at Harvard, establishing a simile with the original sin: the incapacity of an emerging country to get a loan outside of its country in its own currency. The way things are, it is not strange that 97 percent of the total international market debt between 1999

20 Stepen Grenville, A currency union is not what Asia needs, Financial Times, August 30, 2004 21 Martin Wolf, We need a global currency, Expansin, August 5, 2004.

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and 2001 was issued in only five currencies: U.S. Dollar, Euro, Yen, Pound Sterling, and Franc. Even the emerging economies that are in a more favourable situation, as is the case with Chile, cannot get loans in their own currency. And whatever the explanation is for this impediment, the limited monetary composition of global loans have significant repercussions in capital movements, which especially benefit large markets with rapid growth expectations. As in the case of the U.S. and China, both in the inner area of the Dollar as was explained above. In view of the aforementioned difficulty, more competitive emerging markets, especially the Asian ones, tried to limit their commitments in convertible currencies, to preserve their financial solidity, based on favouring the entry of direct foreign investments. And to assure stability, the large reserves obtained in this way were transformed to assets in the more advanced countries, basically U.S. Treasury bonds.

Regarding the described current situation, Martin Wolf supports the idea that the world in which external loans contain a great risk for the majority of relatively poor countries, proves to be unadvisable. On the other hand, a stage like the present one, that obliges the country with the reference currency to bear large deficits, can turn out very unstable. There should be an attempt to free these restrictions and the easiest way to do that would be to create a common currency for world economy. A theme that we are definitely entering into. 12. THE FIRST PHASE IN THE SEARCH FOR THE UNIVERSAL

CURRENCY, 1865-1944 It was since the creation of the above-mentioned LMU in 1865, when the possibility of a common world currency was raised, in principle, on the basis of extending the LMU beyond its founding countries. In the controversy at the time, 1866, The Economist explained its thesis in favour of a universal currency: if civilization could have one single currency, it would be a great step in the right direction in thinking that we all have the same blood in our veins. In the same sense, in 1867, and in the context of the Universal Exposition in Paris, Napoleon III called for an International scientific conference on the adoption of a unified system of weight and measures of currencies, which 22 countries attended, always within the framework of the LMU. But the approaches based on having a gram of gold as a unit of calculation, did not completely take shape,

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mainly because of the mistrust that Napoleon IIIs foreign policy provoked; it was during the mentioned conference, July 19, 1867, that he found himself in the situation of profound loss of prestige when Emperor Maximilian of Mexico, his protg, was shot to death by the liberating forces of the legitimate Mexican President Benito Juarez. In reality, neither the Germans nor the Anglo-Saxons wanted Napoleon III to get his way. Nevertheless, the LMU attempts continued, and though lacking an official common institution, a number of countries took on currencies similar to the system envisioned by France. This was the case of Russia, Romania, Monaco, Venezuela, Peru, Chile and Argentina, always with the bimetallic standard, to which there was always a very clear British resistance, since the Sterling was more stable related to the gold standard. Precisely because of this aversion to bimetallism, the economist Bagehot (of The Economist) proposed a plan to bring the United Kingdom and the U.S. together, based on the gold standard, a project that did not get beyond the initial stage. Hence, the LMU continued progressing, at least in the number of its associates, with the incorporation of Greece and the Pontifical States in 1868, which was far from meaning a lack of problems for LMU. This was due especially to the difficulty of bimetallism caused by the 1/15.5 ratio between gold and silver, a rapport that could not be maintained22 because of the discovery of new silver mines. Nevertheless, with the storm of the Franco-Prussian War in 1870 over, the question of a common international currency was re-launched from the U.S., due to the uncertainties that the bimetallic system produced on the Dollar, and the impossibility of adopting the gold standard because of the political influence of the silver producers in the U.S. Far West. With this background, the U.S., the United Kingdom, Russia and the majority of the European States attended the aforementioned conference during 1878. But the meeting came to nothing, and the same can be said of the following meeting in 188123.

There were other attempts, in the monetary meetings held in 1892 and 1897, but once again, on these two occasions, no specific formula was found. This was the situation in 1900, when the U.S. adopted the gold standard, thus aligning itself on the side of the most realistic prospect that Britain showed on the question. Afterwards,

22 Interesting the relations that Wolfgang Munchau establishes between the German Monetary Union and the LMU in his article The flaw that threatens the eurozone, in Financial Times, September 6, 2004. 23 E. James, De ladoption dune monnaie de compte internationale considere comme un remde linstabilit des changes (thse sc.Pol. Et con.), Paris, 1922, pp. 106-125. Cited by Norbert Olszak, ob.cit. p. 54.

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international tension, which in the end led to what we now call the World War I, put an end for the time being to the idea of a universal currency. 13. THE EFFORTS FOR MONETARY COOPERATION (1918/1944) The massive fiduciary emissions used to finance Word War I, made any project of a universal currency much more difficult24, and signalled the definitive decline of the LMU, based, as it had been, on uniform coinage minting, a system that virtually stopped functioning in 1925. Coins lost their former importance, in the face of the devastating expansion of bank notes, converted into fiat money, that is to say, of obligatory acceptance, by the people, by virtue of the issuance monopoly of central banks.

To the complex aforementioned difficulties must be added the

fact that in 1914 the United Kingdom abandoned the gold standard to avoid the loss of gold reserves as a consequence of the massive Sterling issues that were promoted to finance the war. But in spite of these complexities, in 1925 being Winston Churchill Chancellor of the Exchequer, the decision was made re-establish the convertibility of gold to Sterling. A project that was the object of most searing criticism from John Maynard Keynes, in a series of articles entitled The Economic Consequences of Mr. Churchill, published in the London newspaper Evening Standard, between the July 22 and 24, 192625. In them, the great economist announced that the United Kingdom, with the return to the gold standard, would enter into a crisis. A prophecy that came true, so that in 1931, due to the occurrence of a strong recession induced by an over-valuated Sterling, the United Kingdom abandoned definitely the gold standard. J.M. Keynes celebrated this defeat with unadorned manners:

There are few Englishmen who do not rejoice at the breaking of our gold fetters. We feel that we have at last free hands to do what is sensible. The romantic era has passed, and now we can begin to discuss with realism what the best policy is. Afterwards, more in the mood of monetary cooperation than in

the search for a universal currency, a series of new ideas came forth in the economic conferences in Brussels (1920) and Genoa (1922). As, likewise, some old approaches like Luigi Luzzatis were discussed, consisting of the cooperation between central banks to agree on

24 This situation was not an obstacle, however, to the production of two concrete monetary unions, even though they were small: Luxembourg with Belgium, and Liechtenstein with Switzerland. Norbert Olszak, ob.cit. pp.57 and 59. 25 The Spanish versin of the articles by J.M. Keynes can be seen in Ensayos de Persuasin, Crtica, Barcelona, 1988.

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exchange rates. Insomuch as F.A. Vanderlip launched the idea of constituting a U. S. and Europe Reserve Bank, taking advantage of the great holdings of gold under the U.S. Treasurys control in Fort Knox, an idea that was developed later with the founding of the IMF.

The aforementioned Genoa Conference, held in the spring of

1922 on the initiative of the United Kingdom and France, with delegates from a total of 34 countries (the U.S. not among them, due to its desire not to get involved with Europe, in its return to isolationism, going against the multilateralist opening by President Wilson), had as its principal goal a return to monetary convertiblities if at all possible at the same rate as before the war. In reality it was an exercise in willingness, as we saw when referring to the United Kingdoms readoption of the gold standard in 1926, that was nothing more than the beginning of a strong crisis that advised against following that track26.

In this ambience of uncertainty in the period between the two

World Wars, we have to point out the role of the Bank for International Settlements (BIS) created January 20, 1930 to develop the Young Plan concerning the German war reparations. With its siege in the Swiss city of Basel, the BIS, according to article 3 of its founding charter, had as its mission to favour cooperation among central banks, a target for which even today it is considered the central bank of all central banks.

In the difficult atmosphere that we have explained, and already

facing the clear impossibility of Germany making the payments for the reparations in the midst of the Great Depression that started in 1929, the Young Plan was cancelled in the Lausanne Conference of June 1932, through the so-called Hoover Moratorium. But in spite of that state of affairs, the BIS continued with its surveys on international monetary subjects, even during the Second World War, when it was necessary to maintain a difficult neutral attitude. And although in 1944, the Bretton Woods Conference recommended the dissolution of the BIS, this did not happen, and the Bank was of great use for the launching of European monetary cooperation starting from the Marshall Plan (1948 and afterwards).

Finally, and to pull together what we have seen about the

creation of the IMF, suffice it to say that in 1942 J.M. Keynes worked on preparing an International Clearing House that would be like a central bank of central banks, more realistic than BIS, in the aim of issuing a global currency with the name of bancors. But the U.S. brought up another approach in a certain way against that proposal,

26 I have paid some attention to this theme in my book La dictadura de Primo de Rivera, Plaza y Jans, Barcelona, 2004.

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based on a report that Henry Dexter White prepared for the Secretary of the U.S. Treasury, Henry Morgenthau. The two plans were debated at length in the founding meeting at Bretton Woods in July 1944, with the final result being the creation of the IMF following the main lines to what we saw in section 1 of this paper. 14. MOST RECENT EXPECTATIONS OF A GLOBAL CURRENCY

(SINCE 1944) The global currency project to which I am referring has more recent antecedents than the ones seen up to now, and naturally very significant ones in an evolutionary ambience. Being possible to remark that at present, circumstances are much more favourable than ever, above all in the monetary simplification process that, as we have seen, is leading to very special rapport between the Dollar and the Euro. The first of these precedents was the aforementioned one by John Maynard Keynes, who in the negotiations to create the IMF (1944) proposed an authentic world currency, to which different countries would successively access to finance their foreign transactions27. An idea that was substituted by the US Dollar as the currency anchor of IMF. On the other hand, and within the European framework, Robert Triffin28 proposed in 1957 the creation of a common European currency, basically following the guidelines of the FRS of the U.S. Later, growing out of the EECs Werner Plan of 1970, monetary union was proposed as an important goal, which finally, in 1991 was given shape as the Maastricht Treaty, according to what we have previously seen in this paper. And if we refer to some projects only on a European scale, it is because of the consequences of their looking to the future, starting with the monetary simplification generated by the Euro. A third initiative was the one suggested in 1987 by The Economist, with the prediction already with the European monetary union in process, and with the Ecu functioning since eight years before, that in three more decades, by the year 2017, there would be a global currency, with the suggested name of Phoenix, the mythological bird that rises up time and again out of its own ashes. I will make another informal and colloquial reference: the interchange of ideas that some Spanish economists had in 1994 with

27 One can refer to the Robert Skidelskys excellent account of the preparation of the Plan, John Maynard Keynes, volume III Viking, New York, 2000. 28 El caos monetario, special version, FCE, Mxico, 1958.

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respect to the topic with Michel Camdessus, Managing Director of the IMF, on the occasion of a work lunch that was hosted by Guillermo de la Dehesa, at the time chief executive officer of the Banco Pastor. At that meeting, and at my suggestion, we broached the subject, and in the course of the conversation, Camdessus proposed the idea that besides the currencies of the U.S. and the future EU (the Ecu was the issue, as the euro was not yet talked about), the Chinese Renmimbi; and perhaps the Rouble (a big recovery on the part of the Russian currency being necessary) could be considered. In other words, the proposal was: to go to a basket of currencies. Later on, in about 2001, Robert Mundell, Nobel Prize in Economics, because of his theory on Optimum Monetary Areas (the much-commented OMA), proposed that there be an alignment of exchange rates of 1 Dollar = 1 Euro = 100 Yen29 with fixed exchange rates. Also circa 2001, and when the new Euro was still in its phase of a scriptural currency, the German Vicechancellor at the time, Oskar Lafontaine, proposed that between the Dollar and the Euro there be established a target-zone, that is, a fluctuation band with a fixed floor and ceiling. However, the exit of Lafontaine from the German government a few months later, due to political differences with Chancellor Schrder, made that proposal fall into oblivion. To the former proposals would have to be added the very recent one by Martin Wolf, which we saw in section 11. At least for economies in emerging markets, said Wolf, the world currency would be of great help. In its absence, the world with freedom of capital movements will never function satisfactorily. I might not live to see it, concluded Wolf, but I have confidence that future generations will be witnesses to these changes. In any case, and entering into future considerations vis--vis global currency, the situation today is much more favourable, than in 1944, 1987, or 1990. As already has been seen, the Euro has traversed a long path, bettering its conditions until achieving the position of being on much appreciated terms with the Dollar. Because of this, it is a good occasion for the IMF to broach the subject of a universal currency. That was my proposal in June 2004 to Rodrigo Rato30, the newly named Managing Director of the IMF, as part of his possible grand design as the head of the Fund for the five-year period 2004/2009, since

29 In an interview in Business Week, around 2000. 30 Article published in La Razn, Madrid, June 13, 2004, under the title Un gran designio para Rato en el FMI: la moneda universal.

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He shouldnt be content to keep on acting as the great international fireman, to act as a fire-fighter for great monetary turmoil Thus, the International Monetary Fund should call for a think tank, to study seriously the possibility, not far off, of a future global currency, which would return to the organism born in Bretton Woods in 1944, 60 years ago, its germinal transcendence.

It is clear that the global currency poses a series of questions like seignorage, political competition, economic policies, previous convergence, etc. But lets not forget that the creation of the Euro could be regarded as a true laboratory to promote a currency, certainly for a more limited universe, but in any case as a very promising beginning of a world arrangement. A global currency seems to me, on more or less term, inevitable, based on the axiom that a global world needs a global currency. In the same way that was useful the axiomatic idea of Maastricht, that a single market needed a single currency. Apart from the previous remarks, a global currency is fitting to bring more peaceful prospects to the world economy, avoiding serious world financial crises, promoting savings and investments within a framework of stability; facilitating capital movements, and promoting trade on all fronts, without more competitive devaluations. For this and much more, it would be important to have available a common currency, in the course of more and better globalisation of mankind. To conceive the tools necessary for such a great reform of the IMF, a recent antecedent from Kofi Annan is available: in 2004 he created a think tank for a thorough revision of the United Nations, of extreme necessity, especially keeping in mind the events of the Security Council of the United Nations when discussing a possible second war in Iraq. The aim in mind in my already cited article of June 2004 addressed to the Managing Director of the IMF, is very similar: to form a brain trust, which should seriously study the not far off possibility of a future global currency. In the case of my personal proposal, the name that I suggest for the global currency is the Cosmos, a word which in ancient Greek means, simultaneously, universe (with its derivations of cosmic ray or cosmogony, etc.) and beauty (the root of the word cosmetics).

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15. THE PATH TO THE LAUNCHING OF THE COSMOS As far as a modus operandi for the global currency, the experience of the Euro is extremely useful, as we can demonstrate by quickly outlining the question how to go to the cosmos. In this sense, the first thing to determine by the aforementioned IMFS committee of experts, would be to decide if a transition period could be necessary to achieve a certain convergence, as was the case of the Euro. It is not a trivial question, and it cannot be solved ex ante. It should be the first result of negotiation between the four negotiating parts of our hypothesis: China, the U.S., the European Union, and Japan. It is clear, prima facie, that in the case of the countries who ended up forming Eurozone, they were adjoining States with considerable previous monetary cooperation (all of the EMS were members from 1979 to 1998). But in the assumption of the Cosmos, lacking this situation, the decisions to be made would depend on a number of circumstances. Also as a working hypothesis to this respect, a system of Stability and Growth Pact (SGP) could be established, analogous to that of the Eurozone; with references, at least, to public deficit, inflation and M-3; but not with the strictness of the SGP. Entering into the essence of the question, it would be necessary, as we said before, to form a basket of currencies, for which we put forth the hypothesis that it should be composed of the four currencies above mentioned: the Dollar, the Euro, the Renmimbi, and the Yen. The weight of each currency in the basket would be calculated by the arithmetic average of two percentages of each member State (or set of States in the case of the Euozone): in terms of GDP, and population, the same method to fix the capital of the CEB. In this way, the percentages could be the following (only a simulation):

GDP Population Countries Bill $ % Millions %

% currency weight in basket (1)

China........................ 5,0 16,7 1.300 58,3 037,5

European Union.......... 10,0 33,3 500 22,4 027,9

U.S........................... 11,0 36,6 300 13,4 025,0

Japan........................ 4,0 13,4 130 5,9 009,6

30,0 100,0 2.230 100,0 100,0

(1): % GDP + % population / 2

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The Cosmos (divided into 100 cents), would be a basket currency, and therefore, should have a certain value, according to respective values of currencies of the member countries. In this way, taking the Dollar as an anchor, the composition of the basket of the Cosmos would be the one detailed in the following table:

Currency Weight of each currency (%)

Exchange value of M.R./$

Participation in $

Basket of currency

Dollar.......................... 025,0 1,000 0,250 0,250 Renmimbi.................... 037,5 0,120 0,375 3,112 Euro........................... 027,9 1,200 0,279 0,232 Yen............................. 009,6 0,083 0,096 8,000

100,0 1,000 NOTE: M.R. = market rate

Stated in other words, the initial weight of the Cosmos as a

basket of currencies at the moment of setting up, at the current market exchange rate, would be 25 cents of a Dollar, 3.112 Renmimbis, 0.23 euros, and 8 yens. This value of the Cosmos, equivalent to a Dollar initially (only by accident), would fluctuate according to the day-to-day exchange rate, until reaching the stage of irrevocable conversion among the four currencies. At that moment, each currency would have an unmodifiable value with respect to each of the other three currencies. An exchange rate table like the following one would be formed:

Currency Renmimbi Euro Dollar Yen Renmimbi 1,000 -- -- -- Euro -- 1,000 -- -- Dollar -- -- 1,000 -- Yen -- -- -- 1,000 Nota: the values marked with - would be fixed at the accorded date.

Between the fixing of the irreversible exchange rate between

the four currencies and the fixing of the definite value of the Cosmos, there could be a certain period of time. Let us remember that in the EMU that was from May 2 to December 31, 1998. However, the situation would not be exactly the same. Thus, we must remember that the anchor currency of the EMS was the Deutsche Mark (DM) and each of the currencies of the future MU were changed to Euros according to their respective irrevocable exchange rates with the DM, after having established the value of the DM, according to the exchange rate of the Ecu in Dollars on the New York Stock Exchange.

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Then, in the case of the Cosmos Union, how would it be done? The procedure would consist of taking the exchange rate of the Cosmos in Dollars at the foreseen date in the New York Stock Exchange quotation. The moment of fixing this value, logically would have to be December 31, to begin with the new currency in a completely new year. The Cosmos would have its own birth, first only as a scriptural currency, that is, as a monetary unit with functions for financial issuance, etc. And some time would have to go by (not less than a year) to print Cosmos notes and mint Cosmos coins.

At the time of establishing the basis to determine the input of the four currencies in the Cosmos basket, we must consider if, among the criteria to take into account, it would be necessary to include also some reference to the monetary mass, the aggregate M-1, that is to say, money in the hands of the people. But, it seems that such a criterium, would not be necessary, due to the great differences of the aggregate according to the countries, depending on the habits in terms of management of means of payment (notes and coins to pay in cash, plus checks, credit cards, etc.). Thus, in the case of the Euro, within the candidate countries, Finland had a M-1 equivalent to only 3 percent of the GDP, while in Germany it was up to 12 percent, due to the fact that a great volume of DM were circulating outside the country. In the case of Spain, it was up to 14 percent, due to the very limited use of the cheque, and above all, because of the high incidence of informal economy. 16. THE CENTRAL BANK OF THE COSMOS AND OTHER

TECHNICAL QUESTIONS Following again the model of the Euro, each of the four central banks building the Cosmos would be technically responsible for issuances and minting, with common rules, of course, for both tasks. Also, going along with how it was done in the European Monetary Union, the Cosmos Central Bank, CCB, would be the agent of the System of Cosmos Central Banks, SCCB). The registered capital of the CCB would be formed analogously to the composition of the basket of currencies (i.e., the arithmetic average of the percentages of population and income). In the same way, the problem of seignorage would be solved technically. In other words, the benefits of each central bank by the way its assets are administrated, would no longer depend on its monetary mass alive in the world (in the case of the Dollar, today there is more Dollar circulation outside than inside the U.S.). The

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distribution of earnings if the CCB should be done according to the respective capital share of the four members: China, U.S., EU, and Japan. In the case of the U.S., to a lesser degree than the EU, there would be a loss of benefits, as happened with Germany in the EMU. But this would be a consequence of the process of creation of the new universal monetary union, and would be compensated by other factors. Naturally, when other States entered the CCB, the registered capital of the CCB would have to evolve with the above-mentioned criteria of GDP and the population. As also, for the founding countries, and for the rest of the member States, there would have to be a periodic revision of capital percentages according to their evolution. Thinking about the aforementioned incorporations, in the case of the Dollar, there could be a previous operation, in the sense that all of the countries formally within the Dollar area such as Panama, Ecuador, El Salvador, etc would have to enter formally into the FRS of the U.S., or be inside other aggregate structures to be able to jump into the Cosmos as part of the Dollar area; a question that, certainly, would generate serious technical and political problems. But also, let us remember that at the formation of the European Monetary Union, the previous monetary zone of Belgium and Luxembourg entered as a whole to form a part of the Eurozone. In the case of China, it is also necessary to refer to prior operations, so that the Popular Republic, its two special administrative regions of Hong Kong and Macao, and possibly Taiwan, could form their own monetary union, with the aim of entering as a single unit in the Cosmozone. It is also interesting to get some perspective on the subject of the Pound Sterling. In that case, there is the possibility, always as a hypothesis, that on the occasion of the Cosmos announced birth, the United Kingdom, still using its own currency (because of not having decided to enter into the Eurozone) would bring up the question that the Pound be the fifth currency in the basket to form the Cosmos. But, an initiative such as that, would not make sense, as the United Kingdoms economy is much less than the ones corresponding to the four monetary areas referred to; even less than half of the smallest of them, the Yen. Therefore, the United Kingdom would have to opt to go previously into the Dollarzone, or enter into the Eurozone. This last option seems the most natural one, as the United Kingdom was one of the signing countries of the Maastricht Treaty, and because the presence of the United Kingdom as part of the FRS of the U.S. would

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be a much more difficult topic. This arrangement of the Pound with the Euro, would mean, of course, that at the moment of the birth of the Cosmos, the Pound would be converted through the Euro, at its previously fixed irreversible exchange rate with the Euro. Therefore, the United Kingdom would become a direct part of the CEB, and due to that, of the SCCB, and then the CCB. Naturally, the currency exchange would be directly Pound to Cosmos. The organigram of the BCC would also be settled, inevitably, by negotiation between the four founding parts. Logically, precedents of the SRF and the BCE would have great value.

In a similar way, the same thing would happen with the functions of the BCC, being one of the principal ones the fixing of basic interest rates. In this sense, and taking into consideration the universal extent of the institution, the idea that the rate could have some sort of regional differentiation, at least for a certain transitory period, is not to be ruled out. 17. POLITICAL AND ECONOMIC DIFFICULTIES IN THE

CREATION AND PERFORMANCE OF THE COSMOS The entire project related to the Cosmos is clearly utopian, but in the sense of this word in the Oxford Dictionary, when it is said that utopia is a state of affairs ideally perfect, based on the concept in the book of the same name published by Thomas More, in 1516; a work, we must remember, in which an imaginary island with political and social systems of maximum perfection was described. But whether or not the proposal is utopian and therefore achievable, notwithstanding with great effortis not of real impossibility, as the evidence shows us that there are many utopian visions that have been achieved: from the abolition of slavery in most countries, to the workweek of less than 36 hours; something that Thomas Moore clamoured for in his famous book. The difficulties in making a monetary union with the four most important currency areas of the planet are considerable, indeed. But they also were overwhelming in the case of the formation of the Eurozone. And nevertheless, here it is, with its present 16 countries that could reach the number of 45 in not more than 8 or 10 years.

It is clear that there are also many political difficulties that can be greater than the ones that existed when, during the second half of the nineteenth century and the first part of the twentieth (as we have previously seen), there were so many attempts to start a universal currency in any of its forms. But at present the main difficulties could come from the dominant politics of the U.S., that has one of its basis

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in the leadership of the Dollar, as a de facto global currency. At least between 1931 and 1998, that is, since the British withdrawal of the Pound from the gold standard until the creation of the Euro. Of course, the Dollar has been one of the most notable instruments of U.S. hegemonic dominance in the world, especially from the start of the Marshall Plan (1947), that is to say for at least 57 years. But while this is true, it is no less true that the Dollar is not what it used to be. With the birth of the Euro in 1999, there is another currency competing with it on a world scale. And as we said before, the stability of the Dollar depends on its relations with the EU, China and Japan, the other three monetary areas to which the Cosmos project refers.

Otherwise, it is not possible to forget that the present dominant phase (Bush II) of the U.S. does not have to be a constant in the history of the great country of the U.S. We cannot overlook the great multilateral offers of Wilson (League of Nations) and Roosevelt (United Nations). As it is not possible to ignore, as we have already seen in this paper, that the U.S. was one of the protagonists of the search for a universal currency for almost 100 years, in the last thirty years of the nineteenth century and the first half of the twentieth. But remembering these precedents, the most important thing for the U.S. as far as moving towards a global currency is concerned, is that its multinational companies and financial market are better prepared to take advantage of the new means of payment in them international activities. Finally, let us emphasize that being the global monetary union a final destiny manifest in the globalisation era, it is much better to be situated at the head, and not try to continue being an independent currency headed towards relegation. The Germans have seen it in this way since 1991 with the signing of the Maastricht Treaty. This being possible only, to tell the truth, because of the reunification of the two parts of Germany with the previous condition in the Kohl/Mitterand pact, moving towards a common currency instead of waiting for a dominant DM to act as one. 18. CONCLUSION I am sure that many of the readers of this paper could object that the whole effort of dealing with the prospect of a global currency is completely futile. Of, course this is an assertion that we respect, but with which we cannot agree.

First of all, because experience shows that there is a long

historic trail leading towards a global currency. Secondly,

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globalisation has reached a very high level, and a new step forward in the monetary field is called for. Thirdly, the track to a monetary global union is much easier today than some time ago, taking into account international currencies simplification. Fourth, we have the factual basis that the building of the Euro is a very useful experience in the trend towards a global currency. Fifth, many of the present difficulties in the world economy come from the lack of a global currency.

And last, but not least: a global currency represents, indeed, an effort to solve many world economic problems. But it also means a way to forge everlasting peace, as Immanuel Kant proposed some two centuries ago, in 1795.