A currency is the government issued money that is in use within a nation or group of nations. US dollars, Chinese renminbi, Korean won and Brazilian real are currencies. A national currency allows for national self-determination so nations can pursue their own economic policies, although their options are constrained by global economic forces.
Local or regional currencies can supplement national currencies, most notably when communities or regions want to achieve more economic independence. Supranational currencies like the euro reduce economic independence. To maintain some political and economic independence in an increasingly integrated world, currency is the key.
Reserve currencies facilitate international trade. In the past decades the US dollar has been the reserve currency. This arrangement allowed the United States to enjoy a higher living standard and a large military paid for by foreign nations.
This also gave foreign nations a competitive advantage. By buying US Dollars for their reserves, competitors of the United States were able to suppress the exchange rate of their currency and sell their products cheaper, which harmed US exports.
Furthermore, the reserve status of the US Dollar made the FED responsible for the international financial system. The FED had to rescue foreign banks during the financial crisis of 2008 so that the US taxpayer backed up foreign banks.
International Currency Unit
It may be better to have an international reserve currency that is not a national currency. The future International Currency Unit can be a weighed average of national currencies. It may require an international central bank to guarantee stability in the international financial system. As long as central banks make political decisions, an international central bank would be a troublesome construct.
Only when central banks do not set interest rates and do not print currency, it might be feasible to introduce an international central bank. This might require the International Currency Unit to be a Natural Money currency as Natural Money may require little central bank management. With Natural Money currencies, interest rates are not set by central banks. The underlying currencies may need to be Natural Money currencies too.
The euro is a difficult construct. The nations of the euro zone are sovereign but have given up their national currencies. This produced political and economic tensions. Countries in Northern Europe feel that they have to pay for the debts of Southern Europe while countries in Southern Europe feel they are faced with austerity dictated by Northern Europe. The available options appear making the eurozone a federation like the United States or reverting to national currencies.
Returning to national currencies doesn’t have to be the end of the euro. National currencies can be introduced alongside the euro. Alternatively, the euro can become a weighted average of the national currencies making up the euro zone. Existing balances in euro will remain in euro. In the latter case the future euro would look like the proposed International Currency Unit, and it could be a step towards introducing an international currency and an international central bank.
Cryptocurrencies are debt-free and do not need a central bank. They promise an alternative payment system independent from governments and banks as well as an alternative way to issue stock. Proponents of private currencies believe that private currencies like cryptocurrencies can supplement or even replace existing currencies issued by governments and central banks.
Currency is important for political self-determination so governments have usurped the prerogative to issue currencies. Private currencies can undermine the power of governments, hence nations. Cryptocurrencies can facilitate crime, scams and tax evasion, so they their use is likely to become regulated or even banned in the future. Governments may also start to issue cryptocurrencies themselves.
Until now cryptocurrencies have not been stable. Payments are cumbersome. Regular currencies don’t have these disadvantages. The main disadvantage may turn out to be that cryptocurrencies without a holding tax don’t allow for negative interest rates. As negative interest rates may be needed to ensure a stable economy without crises, these currencies may not be suitable as a means of payment.
If there is to be a serious energy and resource constraint in the future, which seems plausible, small-scale production and local trade may replace large-scale production and international trade. Communities, regions and states may feel a need to organise local economies and make them more self-sufficient. In that case, local currencies can be used to stimulate local trade and production, and they may become more important.