Over the past year there have been murmurings of expansive new proposals for a global reserve currency to replace the long suffering, yet still hegemonic, dollar. One such proposal has been the Bancor.
The Bancor is the theoretical world currency first proposed by Keynes and later brought back on to the agenda by Joseph Stiglitz in Making Globalisation Work. Stiglitz specifically believes that such an all-encompassing currency would usher in a new era of global economic stability.
The Bancor would be a one-world paper currency issued by an international reserve bank. These funds would be transferred to central banks around the world and would provide the reserves which these central banks could use to replace the dollar. However, the Bancor would not eliminate the problem of inflation. Indeed, inflating the money supply would be a global affair occurring in a coordinated, synchronised manner. Crucially, there could be no competing currencies to flee to if high inflation were to take place.
Interestingly, the world has already had a de facto global currency. The gold standard – which effectively precluded high inflation – was in place from 1815 to 1914, a period which has often been termed “the golden age of globalization.” Unfortunately, the outbreak of hostilities in 1914 witnessed the deterioration of monetary discipline, as governments printed money to finance the protracted war.
Rather than further centralising the supply of money as the Bancor would inevitably do, a gold standard transfers control of money from the government to the people and helps insure that governments refrain from the fiscal indiscipline that tends to lead to inflation. As a former governor of the Bank of England, Montagu Norman, succinctly put it: “The gold standard is the best ‘Governor’ that can be devised for a world that is still human, rather than divine.”
The belief that a global reserve currency is requisite for greater global stability is very much rooted in Keynesianism and neo-liberal institutionalism in respect of the erosion of national economic sovereignty, faith in international institutions and the advocacy of fiat paper money. There are, however, numerous historical examples of economic crises resulting from nations perpetually expanding the supply of their fiat currencies and these should serve as a warning to those considering constructing such a scheme. Indeed, if competing currencies are absent, high inflation could be even more likely under the Bancor, while its global status could make the resulting crises more severe.