Robert Mundell: How to Become a Global Currency

Could the world one day switch to a single currency? In other words, is it possible to have a global currency? The concept is a subject that has been debated both in the market environment and on an academic level.

In recent times when crypto assets have been on the agenda frequently, it is necessary to delve into the theoretical foundations of the discussions on the subject.

The main motivation for writing this article was the lack of theoretical basis in discussions about crypto assets. Market transactions and pricing of crypto assets are not within the scope of this article or mine.

It is imperative to discuss crypto assets within the framework of the concept of the optimum currency area, developing financial technologies, banking and central banking. Because there is a subject that affects the structure of the economy, finance and banking, and therefore has the power to affect many variables ranging from income distribution to growth.

Robert Mundell, who passed away on April 4, 2021, wrote a 1961 article titled “A Theory of Optimum Currency Areas” in which he discussed the concept of the optimum currency area, which is considered an academic turning point in the discussions of monetary union and global currency. However, the very important infrastructure of the concepts and explanations discussed in this article is also found in a 1957 article by Mundell: “International Trade and Factor Mobility” .

The fact that these titles, which include the most basic concepts of economics such as monetary theory and policy, international economics, and macroeconomics in an open economy, are almost nowhere in the market environment for crypto assets reveals the necessity of discussing the subject at a conceptual level.

First of all, it is necessary to start discussing whether crypto assets fulfill the functions of money . The feature of “being an instrument of economic policy”, which is among the functions of money, requires that crypto assets be under the control of monetary policy, that is, a central bank, in order to be considered money. Therefore, there is no need to discuss the concept of “decentralization” regarding crypto assets to the point of not being under the control of a central bank. Because crypto assets do not have the feature of being money, they are not instruments of economic policy.

The concept of “decentralization” is considered as an area where there are no banks or other financial intermediaries. In order for a central bank to exist, it is necessary to talk about the concept of “money”. In this case, it makes no sense categorically to say that the central bank, by definition, does not exist in the world of crypto assets.

Throughout history, the amount of money in the market has been determined by states as a tool of economic policy, even in periods when central banking did not exist. In ancient times, coins were produced by mixing various metals, primarily silver, and later gold. The amount of metals used determined the amount and value of money. The amount and value of money first affected the general level of prices. On the other hand, money is also a symbol of the political power and importance of the state.

The determination of the amount of money in circulation in the market, that is, the feature of money as an instrument of economic policy, is realized in today's world through the monetary policy practices of central banks and the monetary transmission mechanism.

What conditions does Mundell's concept of an optimum currency area suggest are necessary?

1. Labor mobility must be ensured. An increase in unemployment due to a negative conjuncture in one of the countries included in the monetary area will necessitate the labor force to be able to freely move to other countries. In order to ensure mobility, there must be laws that include uniformity in many areas (social security system, work permits, customs laws, etc.). Otherwise, flexibility cannot be achieved in the labor market. It is not possible for economic policies to provide stabilization in a monetary area where there is no labor force flexibility. However, mobility has a wide-ranging content that includes cultural aspects in addition to legal regulations.

2. The free movement of capital and price and wage flexibility are another condition of the optimum money area. Goods, services and money must be able to adapt to economic developments within the framework of supply-demand balances. It should be noted that in Mundell's articles from 1957 and 1961, the Bretton Woods system was valid and there was no free movement of capital.

3. The existence of a central budget management is another necessary condition within the concept of optimum currency area. When the currency area is considered as a country, public expenditures and tax policies that accompany monetary developments and are used when necessary will serve to achieve stabilization. It is essential within the framework of the concept of stabilization that the financial supports required by the conditions are valid throughout the currency area. In fact, the absence of a central budget in the Euro Area is the fundamental weakness of the monetary area in question.

4. The countries that are included in the currency area must have similar cyclical fluctuations. The existence of conjunctural developments that contain contradictions in different regions will create effects that make it impossible to achieve uniformity in economic policies. Otherwise, asymmetric effects will occur. In order for the monetary and fiscal policies used in an expansionary or contractionary direction to have similar effects throughout the currency area, the countries that are members of the currency area must have similar cyclical fluctuations, which requires the existence of similar economic structures.

The above theoretical foundations convey a clear message: crypto assets cannot function as a global currency.

There is a need to discuss the amount of money, monetary policy and the transmission mechanisms through monetary policy.

The stability of the value of a currency and the existence of a strong institution behind it are also one of the elements that make money money and are extremely important. Instability in the value of any currency reduces trust in that currency and causes society to seek other currency alternatives. For example, this is one of the important reasons underlying the concept of dollarization. Dollarization expresses that a currency has significantly lost its characteristics of being a common measure of value and a savings tool due to insecurity.

Despite what has been written above, we cannot ignore the existence of those who see crypto assets as a rebellion against the current state structure. However, I have not seen any suggestions from those who support this rebellion on how to manage economic policies; I have not come across any coherent and scientific writing on this subject.

Although it is not possible for any money or crypto assets to fulfill the function of a global currency as claimed by the claimants, it is certain that the payment methods and financial services that are formed and spread within the framework of crypto assets have very important effects on the functioning of central banking and the banking system and the operation of monetary transmission mechanisms. This issue needs to be analyzed separately.