Should each nation use its own currency or adopt an international currency?

Nation

1 of 7

by David Thill

• 

Write now Print Invite a writer™ Add to Favorites RSS Feed Contact this writer

In today's world, most nations choose to produce and support a currency of their own, rather than join a multi-nation currency such as the
Euro, or adopt the currency of another nation (as Ecuador has done with the American dollar). There are good reasons for this, and except in a few instances, it makes more sense to retain the power, flexibility and sovereignty of a national currency than to tie your people and your nation to a currency controlled entirely by outside forces.

A useful way to think of any currency is that its value is a rough measure of the value of the nation, both to the people who use the currency daily (the citizens) and those outside the nation who want to either buy something from or sell something to a person or corporation in the country. Although there are many other factors that impact the value of a currency, roughly speaking if you divide the value of a country by the amount of that
country's currency floating around in and outside the borders, that is the value of the currency.

This matters most when some shock hits the international economy, and the relative value of one country to another changes suddenly. When oil rocketed up above $US100 per barrel, the oil sands of northern Alberta in Canada
were suddenly worth more to the United States, which is Canada's
largest trading partner. The Canadian dollar duly rose to represent this value. An American corporation wanting to buy a piece of Canada (a tonne of Canadian wheat, 2 hours of a Canadian programmer's time, or a barrel of Canadian oil) had to pay more American dollars to make that purchase. Inside the nation, however, none of those became any more expensive for a Canadian to buy. Having your own national currency can help protect you from shocks outside both your control and your borders.

A national currency is also a powerful tool for helping people when times get hard. The Federal Reserve, the American institution which bears primary responsibility for managing the $US, is widely respected around the world. When the economy heats up, or slows down, the newspapers follow the actions of the "Fed" closely; people expect that the Federal reserve will do something to make sure the economy keeps operating in the best possible way. The main power the Federal Reserve uses to stabilize the economy would not exist without a national currency. To slow the economy down, the Fed raises the "federal funds rate," an interest rate that, through a variety of laws, policies and customs, controls the interest rates of all private banks and lending institutions in the United States. When interest rates go up, people borrow less money, spend less money, consume less, and the economy slows down. When interest rates go down, the economy speeds up. If you do not control your own currency, then someone else is making the decision whether to speed up or slow down your economy and their decision may not be the best one for your own people.

There are a few advantages to joining another currency zone, or even to adopting the currency of another nation entirely, or neither of these things would ever happen. Trading goods and services between two different currency zones is filled with little costs that add up. Every time someone in France wants to buy something from the United Kingdom, she must find someone willing to sell her British Pound Sterling and take Euros in return. Although the modern economy is very efficient at making this kind of transaction, the Frenchwoman still must make a telephone call (for which she has to pay) and speak with her banker (who bills her for the time he works to complete her transaction) who arranges the currency exchange with a broker who adds his own small percentage to the process. These little costs and others exist every time trade happens between currencies. For most countries, the advantages of controlling their own currency are far, far larger than all these little costs added together, but when two (or more) countries are closely tied, have similar economies, have national interests that almost invariably are in step with each other, and generally rely on each other, it can make sense to discard all those little costs and merge currencies. This is what happened at the birth of the Euro; most of the nations of western Europe, already strongly integrated both socially and economically, chose to move from their own individual currencies to a common currency, at the same time passing most power to manage the currency from their own central banks to the new European Central Bank.

Adopting the currency of another nation tends to occur when, for whatever reason, a nation is not seen internationally as being capable of managing its own currency. This can happen most easily to smaller economies which depend on trade. Actions completely outside their control, whether by huge international corporations or large, powerful states, can sometimes throw their economy into complete turmoil. At times like this, it sometimes makes sense to "borrow" the stability of another country by adopting their currency. Both Ecuador and Kosovo, small nations with limited economic development, chose to adopt wholesale the currencies of the US
and Euro Zone respectively. An international shock that could overwhelm the financial system of a small country with its own currency often will not even touch a larger, more liquid currency, and so adopting the currency of a larger or more powerful country can act as a safe zone in times of turmoil. In return for giving up independence and autonomy, the nation gains stability.

For most countries, the advantages of a currency of their own far outweigh the few real disadvantages.

Learn more about this author, David Thill.
Click here to send this author comments or questions.