thus this article is still a working paper.
Comments are welcome !
Out of the currency mess
Building a global monetary bridge
A reminder: what is money nowadays
tool of exchange, valuation and value storage,
is less and less made of banknotes and coins.
It is more and more an electronic blip.
Money is nowadays mostly created and managed by the banking system, in the
form of bank deposits, which support various, nowadays mostly electronic,
tools of payments and transfers.
Central banks still have a role in money issuing, but chiefly as supervision
institutions and "last resort" lenders.
But what is backing that creation?
What gives money its value?
Money is essentially a chain of legal commitments:
Borrowers committed to banks, themselves committed to depositors,
as detailed in the what is money article.
But as moneys are diverse, and diversely controlled, is the chain
always and everywhere fully safe?
A World monetary collapse in the making
Currently, there is some doubt, even some anguish, about how - at the World level -
the chain of commitments stated above is reliable.
We see a nascent distrust towards the major currencies.
The high volatility in Forex (foreign exchange) quotations is a symptom, the price
rise (and setback) of precious metals is another, the sovereign debt turmoil adds
to the picture.
There is a double problem of trust:
- One linked to how the World financial and economic environment
It suffered a long chain of turmoils and dramatic crises, under the virus of
overleverage (excessive debt), whether public or private, one of the
worst enemies of money (and economy).
To take only a few examples of the unsolved issues, affecting notably some
monetary zones (this roughly relates to what was called up to now the developed
countries that ceded (except a few wiser countries) to the belief that "growth"
can be bought with debts instead of deep structural adaptation).
trade imbalances persist
But structural evolutions play a part too.
Most Western governments are highly indebted
- Some central bank portfolios are filled with dubious assets
or to buy sovereign debts and other risky assets.
They are also keeping low interest rates, in other words their activity,
although highly risky, is unprofitable, which makes worry on their own
safety and on the value of the money they control (central banks are
supposed to be the supreme masters of good money creation and
=> Some of those central banks, currently praised as "lenders of last resort"
that could do wonders at times, could have one day a crisis of trust, as
the money / currency they issue is backed by perilous assets.
- Of course, commercial banks are also weakened
they use some refinancing from central banks, thus depend on the health
of those exalted institutions.
Also insurance companies and investment / hedge funds which
portfolio run similar risk.
There is presently a streak of solvency rating downgrades that lead to
talks about the "recapitalization" of some large banks. Stricter rules for
banks might give an incentive to "shadow banking" to take over dubious
types of lending and fund it via overleverage.
- The other one linked to a more permanent and intrinsic issue :
as the international monetary system is not a system
but an unorganized / erratic blob.
Those genetic flaws have been plaguing it for decades and this article details
them extensively below.
The Bretton Wood agreement after WWII was flawed as based on a national
currency, the US dollar, as a universal reference and official reserve. This
agreement logically collapsed in the 70s although the US dollar kept a quasi-
preeminence in practice, but which is progressively eroding.
global monetary governance that would allow the system to resist
a major storm.
=> A flight from cash towards any other "exchangeable" asset?
While monies would themselves become toxic assets?
=> And as a result a major economic tsunami ?
* Or will an alternative system be implemented before too late?
It supposes that the heads of governments accept NOW to share their
sovereignty, something we can be pessimistic about.
The issue is strongly linked to another, the sovereign debt turmoil.
We have twin menaces here !
a path towards a more consistent World monetary system.
Lack # 1: no monetary pivot, reference, standard
We live in a "multilateral monetary system" based on floating currency rates.
Why not, it can help those currencies to find their own position in the monetary
But there is no universal standard of value to see clearly their
coordinates in the celestial map. As if we had a metric system without meter.
This lack of common reference favors indirectly a "currency war" as currencies
are pitted directly against one another.
The old monetary pivot, the US dollar, is now in some respects a lame duck.
It has also the disadvantage, as seen below, to be managed so as to fit a sole
country's policy, not the overall global interests.
Also, none of the other major currencies is up to the task of becoming such a
Some think about gold as the default reference. The gold price has been raising
for years (presently this bubble is losing some of its resilience). But for various
reasons, shown below, it seems unfit to become a monetary pivot or yardstick.
Is the floating exchange rate system the real problem?
Some accuse that floating exchange rate system (well, not a system, just a free
quasi-natural process in which several goods are offered on the market stalls)
for the instability.
This accusation does not address the real issue.
As long as there is no global currency, and as seen in this article, it can only
be a long term goal, the World lives obviously with a motley and unstable
This is not a flaw in itself: as long as there are several currencies, it would be illusive
to consider that any currency can have a fixed value relation with others ...if we find
a common yardstick (this is what is missing, a point this article will detail) to have
a clear view of that currency's own value .
With this only reservation, this lack of a common reference of value, in a multi currency
world, a floating exchange system is much more flexible than a pseudo fixed
rate system, something the world experienced already several times and which
could not work.
The fixed rates were a source of highly disruptive and speculative moves
with episodic dramatic "competitive" devaluations and reevaluations.
WWII, and collapsed under its contradictions and inconsistencies in 1971.
Moreover, the commercial distortions caused by the unjustified persistence
of some fixed rates, like for the Chinese yuan, do not really makes palatable
a general pullback to that old system.
So, what is the real problem?
but in the fact that there is no commonly recognized
general standard in which to make the quotations.
To have, as is now the case, only a matrix of multiple cross-rates between
all currencies, without a common yardstick (monetary standard), is far from
being transparent (*) as a tool to spot what happens on the forex (foreign
=> When the price of A goes up compared to the price of B,
does this shows a rise of A or a fall of B?
(*) Conjurers, who know all the tricks, would call it an optical illusion.
Lack #2: no global monetary governance
Also, and this is one of the paradoxes of our era of economic and communication
globalization, and whatever the secret but episodic coordination between central
banks, no global institution really supervises the world monetary situation,
in order to:
Provide a common currency price reference as seen above,
the Libor scandal.
Be the World central body that would play the role of
Guarantor / manager of that monetary standard,Universal reserve depository for central banks,Lender of last resortWorld monetary regulator and Court.
- Monitor the global volume of liquidity and credit,
driven by the US monetary policy, just because the US dollar is seen
as the world dominant currency. How can a currency issued unilaterally by a
country on its own interest can be the world currency driving most transactions ?
A recipe for economic instability and distortion!
The IMF is not up to the task, not only in financial firepower but also in legitimacy,
maybe just because it is not a real independent global entity, even less a democratic
body that would represent the world citizens, but a bargaining place between nations
with diverging agendas.
What are not up to the task either are all "inter-governmental" (instead of "global")
bodies, including the UN.
The "democratic globalization" article shows that a global democracy is needed to face
the global challenges.
A new example of the deficient, nation-driven world governance, specifically
in the monetary area, was seen in a Feb. 2011 decision by G20 members
(85 percent of the world economy) to follow economic indicators.
OK, except that they were limited to countries' public debt and fiscal deficits,
private savings rate and private debt, trade balances and net investment
This was a half-measure as - because of China opposition - those indicators
do not include monetary / foreign exchange ones i.e. real exchange rates
(also a truly global currency reserves pool is missing).
Also nothing was decided about if and how those indicators would be used at the
global policy level!
* A private monetary "coup"
By not tackling the issue with a global vision, national politicians run the risk that
their monetary power be overtaken, not by a common sovereign monetary body,
but by large economic and financial groups.
Those private business entities, fearing the instability and fragility of the present
situation, that entails the risk of a general monetary meltdown, and tired to see
governments dithering on the issue, could get tempted to create in an emergency
their own common currency that would become a universal monetary reference.
=> Those groups would as a result make their own money.With their own rules, in their own interest,
in an undemocratic way.
* Regional monetary zones?
Regional monetary zones are in the making, as a palliative for the lack of a stable
and trustworthy currency to deal with the bulk of international trade.
In Asia, such attempts - inspired by the Euro, which was a first dent on the
US dollar hegemony - can be detected, as based on the reciprocal acceptance of
currencies in trade operations and on currency swaps between central banks.
There is no reason that the inter-Asiatic trade, in full growth, be done in US
This does not means that the Chinese yuan, a largely non convertible currency
up to now, will become soon a new world monetary standard.
Maybe a similar zone will also emerge soon in Latin America.
Or one among other emergent countries
Also some alliances between large zones can be initiated.
For example the largest and most advanced emerging countries, which have some
distrust towards the US dollar and the US debt in which a big portion of their
monetary reserves are invested, will probably participate to a support fund of
But how stable and permanent can be such alliances ?
Anyway, such a limited monetary multilateralism under the hand of regional
blocks can bring some more trust and facilitates some transactions.
But it does not solve the global issue, it even creates new divisions, and it does
not cancel the menace of a worldwide storm.
* A World money?
There are few chances that a unique and fully legal World currency can be
launched and can work in a foreseeable future as:
It adapts poorly to territories with highly different statesof economic development.
might be imagined.
The opposition of nation-states, would be too strong.
and conservation of riches, as something "sovereign", a symbol of state power and
a (hazardous) way to manipulate their economy,
Those two reasons are not fully convincing.
* The notion of "optimal monetary areas" is reductive.
It is often used only as a brilliant academic pretense.
* Nations might not stay blind eternally, opthalmic technologies are progressing.
But unless we make some minimal progresses toward a World federation, a
full-fledged world money seems out of sight.
=> Global democracy would need one day an all-purpose
legal World currency that all Earthlings would use.
But this is a long term goal.
A transition step is needed.
and monetary standard?
The transition step mentioned above would be based on
An official world monetary standard,
as an universal reference of value.
It has to be implemented urgently,
before the global monetary tsunami strike!
Because of its defects (see below), it would not be up to the task.
Instead, a "virtual gold", as the seed for a WOMO (World Money), would be
better appropriate nowadays.
It would start as:
Such a virtual being would seem to be made out of nothing (of course, this is not
true, as seen below) but only at the time of its creation (like the numbers, or like
our languages in general).
As soon as important transactions, contracts, quotations and financial
commitments and instruments are written with it, it will be a tangible
reference of value.
- To be effective and have a full consistency the WOMOST:
Thus it will need to be backed by economic commitments, just
as all monies are made nowadays as seen above, but with a global
supervision that is presently lacking.
Should be managed in a cooperative way,
public legitimacy and to avoid any national hegemony to take over.
=>Here we have the other leg of the biped :
A World monetary institution (the WOMOI).
minimum step to face the present situation, which is getting more and more
chaotic and disastrous without common global reference and governance.
This first step, still far from a full fledge universal money, would be limited to:
At the governance / supervision level, a World federal monetary authority
As a section of it, at the operating level,
It would have some of the attributes of a central bank (a central bank of
central banks ?)
WOMOST / World
WOMOI / World
* The reference and pivot for
It would be thus compatible
with floating exchange rates
* With a self standing value,
as an independent standard
based neither on precious
metals nor currency baskets.
* Also an optional quotation
tool for bonds, stocks,
* Democratic federal cooperative statute
* Supervisor of the world financial and
banking system, including "sovereign"
* Legal power to put in check any (blatant)
monetary and financial distortion / excess (in
goods / asset prices, interest and exchange
rates, money creation, debt (overleverage),
public budgets, financial market practices,...)
* Central bank of central banks (reserve
pool and liquidity supply bank for a smooth
money flow between the various monetary
Nation-states stay anchored to independent national currencies (or at best
continental currencies as in Europe), whatever the problems they entail and
the crises they tend to lead to.
Another thing is that money holders believe that a traditional nation is a
better warranty than a world institution, because the nation's taxpayers
are going to ...pay if the nation's central bank defaults.
This is based on the dubious belief that nations are really and fully accountable
towards the rest of the world when they collapse financially.
=> This is this first crucial step this article proposes below
But then, what World monetary standard?
No, not gold, but economic commitments (credits)
Some see a come back of gold as a monetary standard. New cooking in an old pot!
Gold use as a reference of value has spanned several millenaries of human economic
It has often been glorified as the absolute, even transcendental reference.
Gold came back into fashion and its price has been raising for years,
although there is now some backlash
This might have given the impression that this mythic metal was on the way to
become the absolute trusted value
Actually this dramatic (at the moment interrupted) rise have shown, precisely, that
the gold value is highly unstable, making it unfit to become a monetary pivot in our
Is really a rare and glistening metal extracted from the Earth adapted to this new
A highly evolutive globalization era in which the reference of value should be
the whole World economy.
A dynamic environment in which the mass of available money should evolve as far
as possible in direct relation to the growth of economic activities and exchanges.
The available monetary instruments give an universal right on all riches and their
value does not have to be correlated to the value of a specific asset.
Here, let us look at some of the gold shortcomings:
- Physical gold is not practical to
and expensive asset which,frankly, does not have much direct economic use.
Gold does not have a stable value (high volatility).
fluctuate largely and rapidly because of erratic offers and demands
The gold value is not linked to economic activities and trade needs.
Actually it would bring a deflationist bias because of its limited and feebly growing
available quantity on a long period.
The same defects affect other assets, whether "hard" ones such as commodities
and softer ones such as corporate shares.
As for some even "softer" social or individual assets, such as human knowledge (it
is often said that we live more and more in a "information and knowledge society"),
not only their value is generally less determinable, but there is no way to transform
it into an exchange tool. Ask an alchemist!
Thus it is not just by chance that modern money, as said in this article's introduction,
is based instead on credits, as assets that represent human commitments related to
authority acting as a global reserve bank
A world monetary pilot and a World monetary pool
A monetary globalisation could lead to:
1) A World financial authority that would act:
As the authority and Court
financial institutions (as was the case of the subprime crisis) as countries
(sovereign debt crisis)
It will have a direct (supranational) legal authority, and an adequate staff
and technical equipment to put in check blatant:
Monetary and financial unbalances / excesses
exchange rates (commercial dumping via undervalued currency),
public budget and public debt levels.
Abusive financial practices under cover of "innovation"
investigation technical and human resources and powers. Including paid
informers and undercover agents as financial crime is as high a menace
as terrorism or drug dealing.
A good overseeing system is more important than an hyper regulation
which is so cumbersome that it cannot really be applied, and which cannot
foresee what funny businesses will be imagined in the future.
That investigating body should not limit itself to banks but should also
have an eye on "non-banks'. Its area should cover any financial outfit
of some importance.
Other imbalances, by a narrow coordination with other world institutions
practices to avoid harmful distortions.
- As the supervisor of the world monetary agency / bank
aspects (bizarrely not covered by the IMF presently)
As the supervisor also of a global bank guarantee fund,
that could entail a global systemic financial risk.
2) A World monetary reserve bank
(a kind of super central bank at the global level)
a true world standard currency.
The full 1) + 2) system, a totally different
"IMF - International Monetary Fund", that would be
* democratically governed (see "the piloting authority" chapter),
could be called, as already seen above:
the WOMOI (World Monetary Institution)
Floating exchange rates would not disappear
OK, a new standard is to be found.
But not like the old "bancor" project, sorry Keynes.
That reference of value would have been at the same time highly volatile / speculative
(as based on the price of commodities) and over-rigid (with fixed currency rates linked
to the standard).
The new standard, in this first step, would just be a common and independent
pivot of value to measure the value of the other currencies on international
foreign exchange markets (Forex).
Presently, if there is a big change in the Euro - Dollar rate, how do you know
which one rises and which one falls if there is no global pivot / price reference ?
The exchange rates would still be floating, as flexibility is necessary in this step
(by the way, pressure should be applied to China to make its money convertible and
And the global unit of accounts, this common meter or kilogram, the WOMOST issued
by the WOMOI, would allow to gauge better the general state of currency fluctuations.
Also, the policy of the WOMOI, as a global monetary pilot, would allow to control
any wild rate skidding..
An independent standard
As a universal near-currency, used as national / continental central bank reserves or
for asset / commodity market quotations and contract quotations, as seen below,
the WOMOST, World monetary standard, should be
independent of national / continental currencies.
It should be self-standing to avoid a "circularity" that would contaminate its value
with the vagaries of national / continental currencies.
The value of those currencies should refer to that standard, but the standard should
not be enslaved to the value of those currencies.
Practically, its value should not reflect a "basket" of national / continental
currencies as is the case for the IMF's Special drawing Rights (SDR).
It has anyway to be noted that the IMF did not went far enough in issuing bonds
denominated in SDRs, that would have accustomed the financial circles to the idea
that a World monetary unit is feasible, and to the need of a market to use it.
Technically, what issuing process, securities, governance?
The piloting authority
Only a central body, the WOMOI, which attributes are described above, and that
would be - a decisive improvement - totally autonomous and democratically
appointed (*), can organize and monitor the creation of a credit commitment money
adapted as well to the economic activity as to the general need of the economic players.
This global institution, a kind of "super central bank", would issue the reference
It would also control in some way the national / continental central banks
that issue their own ones, as that institution would be in charge of the cash-register
of last resort.
(*) It should one day become a "one man one vote" World citizen cooperative,
even if the road towards that goal is long and hard so as to avoid its domination by
businesses, nations and politicians with their agendas. Maybe the issue of local
sections would arise, but for crucial questions the vote should be worldwide.
This is a condition of legitimacy and of independence for the WOMOI and
of reliability and sustainability for the WOMOST (**).
The WOMOI should be independent like the magistrates and jurors of a Court, with
a full separation of powers. Montesquieu-style monetary governance!
Also, the WOMOI should not just be a producer of arcane but self-defeating
hyper regulation but a legal body with a highly competent staff, extensive,
sophisticated and adaptive means and full authority to anticipate, investigate, stop
and sanction any serious deviation from sound fundamental principles
(**) if not it would just be another international treaty that some country could
quit or consider not binding, or more probably that would be condemned to inertia
as the partners would spend their time squabbling, like in existing inter-national
institutions, instead of taking decisions and reacting to situations.
Central banks refinancing, reserves pooling, money issuing
The balance sheet of the WOMOI, should not be too large.
Its goal is not to compete with the overall commercial banking system.
That system will create (of course under the supervision of the WOMOI) its own
interbank monetary market in WOMOST for cross-financing operations
The WOMOI should stay mostly a regulator, a lender of last resort and a holder
of a universal monetary reference, but not the everyday refinancing body.
Also the commercial banks would create by themselves accounts, traveler cheques
and other instruments in WOMOST.
The WOMOI balance sheet would include
* As Assets (credits and investments / reserves)
Some, mostly exceptional, short term credits to central banks,
the monetary risk situation of the related zone.
Also accounts written in those other central banks currencies
A limited amount of Treasury bonds,
written in WOMOST.
Can they be called "credits" or "reserves"?
Let us say that they are credits that are supposed to be liquid enough
to act as "exchange reserves", enabling the WOMOI to intervene on
the foreign exchange markets by buying, selling and swapping other
- As a "cushion" ("reserves") some other assets and investments,
Commodities, stocks, corporate bonds and other liquid enough assets would
not be totally excluded but also in small doses as too volatile.
* As Liabilities (resources)
- Equities, which could be of two kinds (two sections, or shareholder funds)
A equity: world citizen shares.
of the WOMOI.
- Class B equity: subscribed by governments, central banks, world institution
The A section would be given more vote than the B section, at least in
proportion to its equity contribution, for example 5/1.
As the equity capital should be sizable from the start, the A section
could at the origin represent over 99% of the subscribed capital and
given 95% of the votes, a ratio to be progressively lowered.
Deposits by national / continental central banks
reserve instrument for them.
Some national central banks that are swimming in dollar-denominated reserves
could find some relief in transferring a part of them to the WOMOI so as to have
them written in WOMOST.
Traditional reserve instruments (in other currencies, in gold...) used by central
banks will coexist, but the "super-reserve" currency, the WOMOST might
gradually build up to reach a key proportion of their reserves in their own balance
- Also WOMOST- denominated bonds,
They would be here also subscribed by central banks and governments, but should
be offered after a while to the general public, and traded in bond markets.
The IMF decision to issue 5 year SDR notes in 2011 will give some experience
on how central banks and financial markets react to an experience in that direction.
Maybe a first batch of banknotes,
general public can consider that it can also be "its" money, that they can even start
to use it, by anticipating a full fledged World money.
What the WOMOST would be used forThe three blades:
* Standard of currencies value,
* International quotation tool
This triangle means that its two "primary" double role of
* A common currency exchange standard (for forex quotes)
be necessary to enlarge from the start its role by making it a reference in key
international economic and financial transactions.
economic values and a tool of exchange.
Thus, could be progressively quoted in WOMOST:
The international commodity markets and major asset market,
The large international contracts,
The issuance of sovereign bonds (and other bonds).
Some saving deposits offered by banks worldwide.
volatility for commodities, currencies and financial assets, that are due not
only to natural economic factors (years of fat cows vs. years of skinny ones,
to take a known allegory) but also to a lack of coordination and harmonization *
of economic and fiscal policies between the countries involved.
But the WOMOST would anyway bring some buffer to global asset prices as
they would not be linked to the situation of a national / continental currency used
to quote them and which could itself have period of high volatility.
To give an example, who can say in the current system, when the price of oil
quoted in US dollars rises, if the cause is a shortage of oil or a glut of dollars?
Making it a largely used / sustainable system
collapse that is menacing but also if it has all the traits of a sustainable system,
therefore if it is
Legitimate: as seen above,
squabble, but a global federal democratic institution with its own authority.
- Highly trusted:
independent governance and a strong political weight. But it should also
have sizable stable resources (see above also on what its balance sheet
Even if the WOMOST would not be a full fledged money, it should offer at
least the same guaranty, and preferably a higher one, than national currencies.
- Largely used,
bonds issuing, contract and markets reference...) so to obtain a huge market
volume that guarantees full liquidity for any transaction whatever its
Largely accessible and usable:
to those currencies.
Side currenciesThere are private currencies used locally - or more universally in small circles -
with their value either self referenced or linked to an official currency
Well, another thing, more general: every person could be declared to be a bank
which can create a limited sum of its own money...
The only difference with official money is that nobody that is not a member of
such closed system has to accept those "club tokens" as currencies.
They can be seen only as additional monetary tools. But beware, the "bitcoin"
experience is far from convincing
Can we go further
(hypothesis of a World money)?
To be strong and trusted, a unique full-fledged World money would rest on
institutions on the World scale with enough political and economic and political
What prior steps?
At least a well advanced World organization towards that goal,
Or, at best, isolated federal bodies that would deal with
Only after that first step towards some World wide organization, a
full-fledged World money would be in sight.
It is hard to imagine it implemented fast, whatever the urgency.
Nations still prefer to bite at each other.
They shun the idea of a real counter power that would make the 21st century
World emerge as a civilized one.
There is still the idea that money is a sovereign attribute, not just an economic tool
(of course to be issued within a legal framework and a legal supervision, to protect
the users) .
Also nations are tempted to manipulate their money according to their trade and
fiscal situations, an expedient to compensate their economic weaknesses instead
of tackling them.
How would it work?
controlling a network of official territorial banks (the nodes of the network).
This would be rather similar to the European Central Bank or the Federal Reserve
But in a more democratic way, as it would be based (as said before for its embryo,
the A section of the WOMOI) on a cooperative statute.
as it would depend on a real World political integration
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