A few economists have recently recognized the merits of and need for a world currency. Whether that can be achieved or not in the near future will depend on politics as well as economics. But it is nevertheless a project that would restore a needed coherence to the international monetary system, give the International Monetary Fund a function that would help it to promote stability, and be a catalyst for international harmony. As Paul Volcker has put it, “A global economy needs a global currency.”
The benefits from a world currency would be enormous. Prices all over the world would be denominated in the same unit and would be kept equal in different parts of the world to the extent that the law of one price was allowed to work itself out. Apart from tariffs and controls, trade between countries would be as easy as it is between states of the United States. It would lead to an enormous increase in the gains from trade and real incomes of all countries including the United States.
Another dimension of the benefits from a world currency would be a great improvement in the monetary policies of perhaps two-thirds of the countries of the world. The benefits to each country from a stable currency that is also a universal currency would be enormous. If the whole world were dollarized, there would be a common inflation rate and similar interest rates, a considerable increase in trade, productivity and financial integration, all of which would produce a considerable increase in economic growth and well-being.