How a super-currency is unlikely to be the answer to global economic stability

    How a super-currency is unlikely to be the answer to global economic stability

    Monday, 19 August 2019
    This is an opinion article by an external contributor. The views belong to the writer.
    Coins. Credit: Sarah/Flickr

    What will the world’s currency be like in the future?

    There are many opinions regarding this issue, and the problems and defects in the world’s monetary system have begun to be noticed by many. Since the global financial crisis broke out in 2008, Zhou Xiaochuan, governor of the People’s Bank of China had suggested reform of the international monetary system was necessary. The downfall of Lehman Brothers caused global liquidity and the suspension of international, highlighting the inherent vulnerabilities and implicit systemic risks of the international monetary system. Zhou proposed to create an international currency isolated from the economic conditions and interests of any country to develop a “super-sovereign reserve currency” in order to overcome the “intrinsic risk of sovereign credit currency.”

    Paola Subacchi, director of the International Economics Department of the Royal Institute of International Affairs, Chatham House, expressed the view in her book The People’s Money: How China Is Building a Global Currency that in global history, it is rare to have a single currency based on a country’s economic and military forces in the second half of the 20th century. Despite moving at a slow pace, the international monetary system, the global economic order, state governance, and geopolitics are all changing. George Soros expressed his agreement with Zhou’s point of view as well. When Soros was in China back in 2009, he thought Zhou had a unique understanding of the financial market. He agreed that a special joint currency could be formed from combining several sovereign currencies, including the RMB. However, the problem of converting to another currency remains difficult.

    Super-currency 

    Throughout history, the majority of the currencies in the world have relied on geopolitical powers and political rights. From China during its Warring States period (475 BC – 221 BC) to ancient Rome, to countless countries elsewhere in the world, the situation is the same. Whenever a powerful country emerges, its currency follows. Currency is actually a financial unit that reflects the political order. In this way, some say that currency is equivalent to the geopolitical strength of a country. By extension, it is not wrong to say that a superpower has a super-currency.

    Therein lies the question, what makes a country powerful? Historical experience shows that in many cases, a “superpower” is self-styled. Like Great Britain of the past and the United States of today, both of which have been hegemonic world powers at different points in history, very few people question the status of the pound or the dollar. However, once US hegemony began to decline, the dollar gradually weakened and caused a crisis to break out, thereby rendering the world to be helpless. This moment then lots of different thinking to do with currencies. This is the background and basis of the super-sovereign currency theory.

    Gold as a super-currency

    Studies on the history of currency show that currency is strongly influenced by geopolitics. Gold as a precious metal currency has a long history and is the only super-sovereign currency in the world. Along with the evolution of the world political system, civil society and institutions, currency has gradually evolved into a financial symbol loaded with geopolitical significance.

    It started with gold itself and the gold standard was established. In the era of the gold standard, on the surface currencies were still hedged to the monetary system of gold where the monetary value per unit is equivalent to a certain amount of gold. In reality, however, this was only a theoretical value and changes occurred based on geopolitical influence and authoritarian rule. This system led to a serious currency crisis. After that, many countries gave up the seemingly unrealistic gold standard. Thus, the world began to enter the era of geo-currency, also known as the dollar era.

    The era of the geo-currency brought with it the realization of the value of super-sovereign currencies in the global market.

    Geo-currency

    Following the trend of super-sovereign currency formation, starting from the “gold standard” super-sovereign currency, the trend has since been towards geo-currency. This is chiefly because a global market for fair trade is more of an idea and in reality, market transactions will be more likely to be affected by the strong influence and impact of geopolitical factors. The realization of true “super-sovereignty” is not because of value, but because of the position of geographical advantage. The pound was once strong because of the existence of the British Empire; the strength of the dollar was due to the hegemonic position of the United States after the war. Clearly, the so-called “super-sovereign currency” has been replaced by the idea of geo-currency.

    In the modern sense, geography is all about space. Geopolitics is the use of spatial advantages in various resources including economics, industry, military, law, diplomacy, minerals, energy, finance, population, politics, to engage in the competition, integration, and balance of the global system. What makes space so important in the modern world? The key is the demand for capital. Capital is actually a function of space and needs space to digest. Capital will have a major crisis once it leaves space. Modern geopolitics, in reality, is geo-capitalism. There is a strong currency motive behind the space, and the ability to dominate or control the market space is the real foundation of currency.

    This brings us to the question, will there be an era without a superpower? For example, when a superpower is defeated, the world will descend into chaos. At that point, will the era of regional alliances emerge? It is indeed possible, but under such conditions, there is not much value in the super-sovereign currency because the artificially created “walls” that impede global transactions will exist in a more visible way. The value of the super-sovereign currency will also become relatively small and may only exist in a certain area, like the unstable euro. A more pessimistic forecast is that, with the serious regression of globalization, regional currencies will only be used in international smuggling (like in Iran and North Korea) and similar shadow economic activities. This would mean that the significance of super-sovereign currency would be lost.

    In summary, a super-sovereign currency can only be the dream of a free world. The future still belongs to geo-currencies. Geo-currencies can be destroyed by geopolitics or they can be replaced, but they will not altogether disappear.

    Chen Gong