Governor Zhou Xiaochuan of the People’s Bank of China is proposing to reform the international monetary system through the creation of an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run.” He suggested that “special consideration should be given to giving the SDR a greater role. The SDR has the features and potential to act as a super-sovereign reserve currency.” The suggestion closely resembles my proposal for a “world currency unit (WCU)".
The WCU is just a standardized basket of market economy currencies that is weighted by GDP, but with the proviso that each of the constituent currency is indexed against the inflation of that economy. In a substantive sense, the WCU is an “index unit of account” that stands for a unit of real global purchasing power. Bonds denominated in the WCU would yield a real rate of return equal to the nominal rate.
Zhou proposed to expand the use of the SDR to cover international trade, commodities pricing, investment and corporate book-keeping international trade, commodities pricing, investment and corporate book-keeping. The WCU is exactly proposed for these purposes. As a unit of real purchasing power, it compels sovereign nations to repay in real terms what was owed in the first place. Inflating or depreciating away one’s debt becomes no longer feasible.
The WCU therefore promotes fiscal discipline. A currency that links with the WCU has the attractive benefit of very low inflation and thus is subject to very strict monetary discipline. To the extent that most currencies are depreciating in value on account of inflation, however, a country whose currency is tied to the WCU will suffer a loss of export competitiveness. For this reason I have proposed that countries that need some kind of peg tie their currencies to the WCU standard currency basket without indexing against inflation. Moreover, currencies that independently link with the standard currency basket will become linked together in a de facto currency area, even though they continue to have an independent existence.
Statistical evidence shows that higher real oil prices and commodity prices tend to follow dollar weakness. Quoting commodity prices in the WCU will promote stability in real commodity prices and should be helpful for global economic stability. Interested readers are invited to visit the WCU website for daily quotations of the WCU, examples of applications, as well as historical data.
