From drachma to the dollar: Common currency conundrum

Illustration: Copilot

With countries around the world still reeling from the volatility of the dollar – the world's principal reserve currency – a strong case is being made for the inception of more common currencies. 

The concept of common currencies dates back to antiquity when civilizations engaged in trade across vast regions. One of the earliest examples is the Greek drachma, used not only in Greece but also in numerous Greek colonies and trading outposts. Similarly, the Roman Empire standardized currency across its vast territories, facilitating commerce and governance. These early instances underscored the importance of uniform monetary systems in fostering economic integration and political cohesion.

During the Middle Ages, the rise of trade networks and merchant guilds necessitated common currencies in Europe. The Byzantine solidus and Islamic dinar emerged as dominant currencies in the Mediterranean, facilitating trade between Christian and Islamic civilizations. The medieval period also witnessed the emergence of banking institutions and bills of exchange, laying the groundwork for modern financial systems.

The expansion of European empires in the 16th and 17th centuries brought forth new common currencies, often imposed upon colonized territories. The Spanish dollar, minted from silver mined in the Americas, became a global currency widely used in trade and commerce. Similarly, the British pound sterling became the backbone of the British Empire's economic supremacy, circulating across colonies from Asia to Africa.

The 19th century saw the adoption of the gold standard, where currencies were pegged to gold, ensuring stability and predictability in international trade. However, the system collapsed during the Great Depression, leading to economic turmoil and the emergence of competing currency blocs. The Bretton Woods conference in 1944 laid the foundation for the modern monetary order, establishing the US dollar as the world's primary reserve currency, backed by gold.

In the latter half of the 20th century, the process of European integration culminated in the creation of the Eurozone and the adoption of the euro as a common currency among member states. The euro not only facilitated trade and investment but also symbolized the continent's aspirations for political unity and peace. Similarly, other regions, such as the Gulf Cooperation Council and the East African Community, have explored the possibility of common currencies to promote economic cooperation and development.

Common currencies still in use

The Euro: The Euro is the official currency of the Eurozone, which consists of 19 of the 27 European Union (EU) member states. It was introduced in 1999 for electronic transactions and later in 2002 as physical notes and coins. 

The Euro is one of the most prominent examples of a common currency and is used by over 340 million people daily.

East Caribbean Dollar: The Eastern Caribbean Currency Union (ECCU) comprises eight countries in the Eastern Caribbean region. These countries use the East Caribbean Dollar as their common currency. The ECCU members include Antigua and Barbuda, Dominica, Grenada, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Anguilla, and Montserrat.

West African CFA Franc and Central African CFA Franc: These currencies are used in the West African Economic and Monetary Union (WAEMU) and the Central African Economic and Monetary Community (CEMAC), respectively. Both monetary unions have common currencies pegged to the euro and are used by multiple countries in West and Central Africa.

East African Shilling: The East African Community (EAC) is an intergovernmental organization composed of six countries in the African Great Lakes region. While the EAC is working towards a common currency, it currently has a common monetary policy framework. Some member countries, such as Kenya, Uganda, and Tanzania, have explored the possibility of adopting a common currency in the future.

Dollarised Economies: Several countries and regions have adopted the United States Dollar as their official currency or use it alongside their own currency. Examples include Ecuador, El Salvador, Panama, and Zimbabwe. Additionally, some territories, such as Puerto Rico and the US Virgin Islands, use the USD due to their status as US territories.

Caribbean Dollar: The Barbados Dollar is used not only in Barbados but also in other countries in the Caribbean region, such as Belize and Bermuda, due to historical ties and economic relationships.

Pacific Franc: The Pacific Franc is the common currency of the French territories in the Pacific Ocean, including French Polynesia, New Caledonia, and Wallis and Futuna. It is pegged to the euro.

A possible fix?

A move by more countries towards a common currency could speed up the process of de-dollarisation – moving away from the dollar.  

But would such a move be feasible? 

The dollar share of official FX reserves fell to a 20-year low of 58% in the fourth quarter of 2022, according to International Monetary Fund data.

The sudden fall "sparked a re-think in countries such as Saudi Arabia, China, India and Turkey about diversifying to other currencies," Reuters reported.

The dollar share of central banks' foreign reserves in the final quarter of 2022 also hit a two-decade low.

Many central banks put rainy day funds in dollars in case they need to prop up exchange rates during economic crises. 

If a currency weakens too far against the dollar, oil and other commodities traded in the US currency become expensive, raising living costs and fuelling inflation.

Many currencies, from the Hong Kong dollar to the Panama balboa, are pegged against the dollar for similar reasons, the Reuters reported.

The almighty dollar also has seen its lock on commodity trading eroding. 

India purchased Russian oil in UAE dirham and rubles last year. 

China also switched to the yuan to buy some $88 billion worth of Russian oil, coal and metals. 

The yuan's share of global over-the-counter forex transactions rose from almost nothing 15 years ago to 7%, according to the Bank for International Settlements (BIS).

These transactions have also led other countries to flirt with the idea of using different currencies for trade.

De-dollarisation, however, would require a vast and complex network of exporters, importers, currency traders, debt issuers and lenders to independently decide to use other currencies. 

The dollar is on one side of almost 90% of global forex transactions, representing about $6.6 trillion in 2022, according to BIS data.

About half of all offshore debt is in dollars, the BIS said, and half of all global trade is invoiced in dollars.

While there may not be a single dollar successor, there could be plenty of alternatives.

The faith in the dollar, however, stays strong. 

Despite the advancements in financial technology and globalization, common currencies face numerous challenges in the present era. 

Economic disparities among member states, sovereign debt crises, and political tensions have strained the cohesion of currency unions like the Eurozone. 

Moreover, the rise of cryptocurrencies and digital currencies poses new questions about the future of traditional monetary systems and central banking.

The dollar may have lost some of its swagger. But there remains enough to still sow confusion regarding forming newer common currencies.