The world economy faces a new threat: that many countries are using their currencies as an economic weapon. If too many countries try to weaken their currencies for economic gain – sparking a so-called “currency war’’ – then the fragile global economic recovery could be derailed. Japan, the world’s third-largest economy, is currently facing charges that it is trying first and foremost to lower the value of its currency, yen, to stimulate its economy and get the edge over other countries. Fall in the value of yen would make export from Japan cheaper and provide the country with a powerful weapon to become more competitive in the international market. The methodology is simple. Print more currencies and let it flow freely in the market. For example, the prospect of more yen in circulation has been the main reason behind the yen’s recent fall to a 21-month low against dollar and a near three-year record against euro. To encourage their consumers and businesses to keep spending, central banks in the U.S., Europe and beyond have made it a priority to keep interest rates extremely low. One way of doing this is to use their power to print money to buy up large quantities of bonds. Another method to combat the situation by other ‘affected’ countries is to devalue their respective currencies, taking all back to square one!
THE BACKGROUND
The seed of the so-called “currency war” in the modern world was sown with the formation of International Monetary Fund (IMF) in the last year of World War II where it was decided that future currencies of the world would be pegged to US dollar which would in turn be linked to the value of gold. Apparently it was continuation of the earlier gold standard because the new lead currency, dollar, was linked to it. It was like the mathematical logic taught to us in our elementary class that as “A” is equal to “B” and “B” is equal to “C,” so “A” is equal to “C.” However, this semblance of the old standard waned, rather faded away, in the year 1970 when the US announced unilaterally that their currency was no longer linked to gold. France initially protested but this anarchy settled in and the world simply accepted it as the fate-accompli. As a result every country now is free for printing and floating any amount of currency as it wishes without any reference to any standard, gold or otherwise. This is a “free float,” rather free-for-all, situation.
THE OVERVIEW
The system of free-floating-currencies is one of the reasons of the existing malaise in world economy. This needs to be addressed at the earliest. A discipline in the quantum of currencies in currency in the international market is the call of the day which should, besides other measures, end the uncalled for monopoly of US dollar for good. If going back to the gold standard is not feasible, some other standard needs to be developed. We need a new monetary fund to be formed. Let us call it IMF II in order to keep World War III at bay.