IMF Book Forum: Can central banks be outsourced?

• Pages: 176-177

Page 176

The future number of currencies in the world "really does matter for us," Cohen said, "because it bears directly on the governance of money and the management of money, which in turn is a fundamental determinant of the distribution of wealth and power in the world." The traditional assumption is that the number of currencies is set roughly by the number of countries in the world, although there are always exceptions.

An emerging view, however, holds that because the traditional correlation between money and sovereignty is being eroded, the number of currencies will contract sharply in coming years. Many economists foresee states giving up their national currencies and either adopting a popular foreign currency, like the dollar or the euro, or joining a currency union modeled on Europe's Economic and Monetary Union. Monetary management for many countries will no longer be national but, in effect, will be outsourced. This assumes that monetary governance will be concentrated and simplified.

The logic underlying this belief is clear. Financial globalization's disintegration of barriers to the movement of money across countries has produced growing competition among national currencies-a process that Cohen termed the "deterritorialization of money." According to this reasoning, less competitive currencies will be eliminated in the same way that weaker products are eliminated by stronger products in the marketplace. From the point of view of money users, who obviously want to minimize their transaction costs, the fewer the currencies, the better.

Incomplete logic

Cohen argues, however, that this "contraction contention"-albeit popular with some very prominent economists-is wrong. The correlation between money and sovereignty is indeed eroding, but the number of currencies will expand rather than contract, and he predicted monetary governance would become more diffuse and complex rather than concentrated and simplified.

Although the logic behind the contraction contention is not incorrect, Cohen said, it is incomplete. It explains only the demand side's preference for a small number of currencies. Looking at the supply side-made up of states and the private sector- "preferences can be expected to run very much the other way," he observed.

First, a state will resist giving up its national currency because the government derives major benefits...