I have this question because I want to know why to divide it? If it's not divided then we can easily use the money anywhere and we won't need to use currency exchange. I will focus on some economics reasons not mentioned explicitly so far.
There are economic benefits to having your own currency. There was a lot of interest in the question of what areas should have the same currency. It is in general not immediately obvious that different countries should have the same currency, or even that the same country should have the same currency everywhere.
Your question boils down to asking whether the whole world is an OCA - and the short answer is no. The pros of having different currencies are that you can use monetary policy to offset shocks. Especially for trade shocks, because monetary policy can change the exchange rate of a currency to affect trade. For example if Germany and France are hit by different shocks, then they will want to conduct different monetary policies, which they can't if they share the same currency.
The main cost of different currencies are transaction costs of exchange, which can hamper things like trade and tourism. Therefore an area should have the same currency is an OCA if it is subject to the same shocks or other factors are present, such that those shocks are absorbed without monetary policy.
This thinking leads us to the four most important criteria for an area to be an OCA. You can use these criteria to evaluate whether countries should have the same currency and to answer your question.
It is worth noting, that the pioneer in this literature was Robert Mundell with his paper. The other two most important works are Kenen and Mckinnon The criteria are:. The regions should have similar business cycles. As mentioned, if the countries tend to experiene similar shocks, then they will require the same monetary policy. In that case there is no reason for them to have different currencies! High labor mobility across regions. If there is a recession in one region and people can move to another one as a response, then monetary policy is less important in adjusting to the shock, as labor itself adjusts.
This is a reason why countries can usually have the same currency within their whole territory. For example, people who lose their job in one U. If that wouldn't be possible, then adjusting to the recession with monetary policy would be more important.
That is why the freedom of movement agreement is so important for the Euro to be sustainable. Note that wage flexibility would be required here as well.
Capital mobility. The reasons are similar as for labor mobility. If a region becomes less developed, then returns to capital there will increase. If markets are free, then capital can travel from the more prosperous region to the one hit by the shock, thereby mitigating the negative effects of the shock.
Note that price flexibility must be given here for these effects to occur. A risk sharing system, such as fiscal transfers. Since monetary policy can't be used, we would need fiscal policy. Fiscal transfers from unaffected areas can help with negative shocks in another region. The Eurozone has a no-bailout clause, so this condition wasn't given during the Greek crisis. However, this was de facto abandoned. This is unsurprising to those familiar with the theory of OCAs.
Product Diversity Kenen. Trade shocks, which monetary policy can help with, usually occur to certain industries and not the whole economy. If countries produce a variety of products, they will be less likely to suffer from large demand shocks. Hence, more diverse economies will face fewer trade fluctuations and see smaller increases of unemployment if shocks occur to one industry.
This also reduces the need for monetary policy stabilization, since any given shock has a small impact on the overall economy. Sometimes further criteria are also given, but they are less important.
These include "solidarity" as well as homogenous preferences across regions, for similar reasons as the condition of similar business cycles. So you can use these criteria to evaluate whether certain countries or areas should have the same currrency or not.
All these criteria are definitely not fulfilled for the whole world, so there is a role for different currencies. An issue with the theory of OCAs is that it is unclear how much weight we should give to each criterium.
So it could be unclear how to evaluate whether two countries who partially fulfill some of the criteria should have the same currency or not. This looked something like "This paper is exchangeable for 10 gold coins at this location".
This meant you had to go to that specific kingdom to get the paper bill converted into gold. These papers evolved into what we now call banknotes , and kept tied to a specific country. Money supply control: having your own currency allows governments to fund themselves by producing more money, or stimulate exports by devaluing their currency. Look at the euro-zone difficulties with the government debt of Greece: this could be solved with consequences, of course if they had their own currency.
There are also many countries without their own currency. For example, Ecuador and Panama both use the US dollar as their official currency. See this list for more examples. There are several reasons why you might like to adopt another country's currency, but common factors are. Therefore, people start more and more to use foreign currency for transactions e. Therefore, one solution is simply to get rid of your own currency and adopt a foreign one.
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There would be a little something for everyone with a global currency. All nations would certainly benefit since there would no longer be currency risk in international trade. Traders would no longer have to hedge their positions in fear of currency fluctuations.
A global currency would mean all transaction costs related to international finance would be eliminated as well. Exchanging currencies always requires a conversion, which banks charge as a fee, and there can be a loss in value in changing one currency to another. Having one global currency would eliminate all of this. Individuals traveling abroad would benefit as well as businesses conducting operations in other countries.
Furthermore, breaking down a currency barrier leads to increased trade among nations. In addition, there would be somewhat of a leveling of the global playing field with one currency, since nations like China could no longer use currency exchange as a means to make their goods cheaper on the global market.
For a long time, China has manipulated its currency, undervaluing it, and thus making the price of its exports more competitive across the world. This has been a detriment to the economies of other nations. With one global currency, China would not be able to do this, nor would it have a reason to do so. Economically developing nations would also benefit considerably with the introduction of a stable currency, which would form a base for future economic development.
For example, Zimbabwe suffered through one of the worst hyperinflation crises in history. The Zimbabwean dollar had to be replaced in April by foreign currencies, including the U. The most obvious downfall to the introduction of a global currency would be the loss of independent monetary policy to regulate national economies. For example, in the economic crisis in the United States, the Federal Reserve was able to lower interest rates to unprecedented levels and increase the money supply in order to stimulate economic growth.
These actions served to lessen the severity of the recession in the United States. Under a global currency, this type of aggressive management of a national economy would not be possible. Monetary policy could not be enacted on a country-by-country basis. Rather, any change in monetary policy would have to be made at a worldwide level. Despite the increasingly global nature of commerce, the economies of each nation throughout the world still differ significantly and require different management.
Subjecting all countries to one monetary policy would likely lead to policy decisions that would benefit some countries at the expense of others. Typically, this would result in developed nations being negatively impacted rather than developing nations. For example, Germany had to bail out Greece when its economy had all but collapsed, spending billions of euros to prevent Greece from entering bankruptcy.
The supply and printing of a global currency would have to be regulated by a central banking authority, as is the case for all major currencies. If we look again at the euro as a model, we see that the euro is regulated by a supranational entity, the European Central Bank ECB.
This central bank was established through a treaty among the members of the European Monetary Union. To avoid political bias, the European Central Bank does not exclusively answer to any particular country. In order to ensure proper checks and balances , the ECB is required to make regular reports of its actions to the European Parliament and to several other supranational groups. Indeed, the prevailing theory is that a mixed approach is more desirable.
In certain areas, such as Europe, gradually adopting a single currency may lead to considerable advantages.
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