The Yen, the Yuan and the Yunus

10/04/2009 11:06 am ET | Updated May 25, 2011

In 1944, the economic elite of the allied forces of World War II determined that the exchange rate between any two currencies would be fixed and determined by the amount of gold reserves each country would have deposited in its Central Bank. The price of a dollar was fixed at $35 per troy ounce and other currencies were then pegged to the dollar.

In 1971, the United States of America decided to abandon unilaterally the gold standard, in a time of economic turmoil brought about by the unexpected rise in the price of oil. As the largest economy in the world, the decision of the United States triggered a chain reaction that meant the definitive goodbye to the gold standard and the adoption of floating exchange rates. In a floating exchange regime the value of a currency varies with respect to another as a function of a number of macroeconomic variables that determine the economic stability of a country. From the perspective of a developing country that lacks a strong Central Bank with the ability to control and defend the stability of its currency against other stronger currencies such as the dollar, the pound or the euro, floating exchange rates represent an important risk that anyone should carefully watch out for.

In 2004, Martin Wolf of the Financial Times argued that a global market economy needs a global currency. Wolf noted that the floating rate exchange system was not a better substitute than the gold standard that had collapsed in 1971. Wolf refers to Ricardo Haussman's coined term original sin, by which Haussman refers to developing countries' inability to borrow in their own currencies. Wolf pointed out that 97% of all debt placed in international markets between 1999 and 2001 was issued in a handful of five currencies: US dollar, euro, yen, pound and Swiss franc. A global currency would allow emerging economies to borrow in their own currency and avoid currency mismatches.

In A single currency for Africa, Paul Masson and Catherine Pattillo of the International Monetary Fund look at the effects that a selective expansion of existing monetary unions would have in Africa. The IMF economists remind that the goal of a single African currency had been proposed at the creation of the Organization for African Unity in 1963. The authors compare the synergies seen in the Eurozone with those that could be seen in Africa if a monetary union were to emerge. They point out that synergies in Europe are associated with much better communication and transportation links than in Africa. Masson and Pattillo conclude that a single currency for Africa would only benefit two of the five existing communities, namely Ecowas and Comesa, which are the regions with the greatest financing needs.

Richard N. Cooper of Harvard University presents his proposal for a common currency among rich democracies. For the Harvard scholar, a common currency for the United States, the European Union and Japan "Would credibly eliminate exchange rate uncertainty and exchange rate movements among major currencies, both of which are significant sources of disturbance to important economies". For Cooper, one currency would require a single monetary policy that could be implemented by a board of Governors of national Central Banks.

Are there too many currencies in the world? Brad Setser of RGEMonitor points out that there may be too many pegs to the dollar. Ecuador's dollarization in 1999 is credited for the country's strong 2004 performance. Setser argues that the stellar performance was actually related to the price of oil, from which Ecuador benefited. Dollarization has an intrinsic problem which is the inability to run a tailored monetary policy.

The yunus is the new currency for the poor. Why do the poor need their own currency? A new currency becomes a savings instrument for many poor that live in small or medium countries. These countries are not able to maintain an appropriate control of their currencies and are subject to the attacks of speculators (pirates of heartless capitalism). Many poor cannot or refuse to save in their local currencies because (i) they do not have access to basic financial services (microfinance); (ii) if they do microcredit is emphasized over savings; (iii) their savings would not be guaranteed if they are put in a savings account; and (iv) their savings may lose their value (purchasing power) if the local currency is subject to depreciation and hyperinflation .

What advantages does a new currency bring about? With a new currency the extreme poor can trade with each other without being exposed to currency risk. A Malagasy rice producer can export rice to Bangladesh in exchange for clothing. Because there is no exchange rate risk the transaction is subject to many less impediments than it has been traditionally the case.

A new currency for the poor would profit from economies of scale. The yunus would be used for small transactions. It is an alternative currency, so the national currencies in Madagascar and Bangladesh are always used. The yunus would be the currency of Microfinance Institutions (MFIs) that would lend in yunus. The poor that open a bank account at an MFI would also save in Yunus. MFIs from Madagascar and Bangladesh can lend to each other in Yunus, provided they are subject to the international regulation and supervision of the Bank for the Poor presented in the next section.

A new currency for the poor would increase the trade between low income countries. The nature of world trade would change from North-South to South-South. The bottom billion can move up and start to catch up in income and welfare. A new currency for the poor would become a savings instrument that would not lose purchasing power. The most notorious case of a currency that lost all its purchasing power took place in Zimbabwe in 2008. Zimbabwe's inflation rate in 2008 was 516 quintillion per cent (516 followed by 18 zeros), a rate that surpasses that of Yugoslavia in 1994 or Hungary in 1946. As a result prices in Zimbabwe were doubling every 1.3 days. In January 2009 inflation rates in Zimbabwe seemed to halt, with consumer prices falling 2.3 percent. Had Zimbabweans saved in a stable currency, they would not have lost their savings throughout the hyperinflation episode. A stable currency could have been the euro, the dollar, or the yunus.

Lastly, a new currency for the poor would enable the implementation of a Tobin-like tax. Like the Chiemgauer, the yunus could charge a transaction fee when exchanged into euros or dollars. The exchange fee would help to finance the universal welfare state provided to the extreme poor through the microfinance network as explained. There can only be one name for a new currency for the poor. It credits and honors a visionary of our time, the Banker for the Poor that with his microcredit helped the poor in his country and the world move ahead.