World Currency Unit
Encyclopedia
A world currency unit is a concept of monetary foreign exchange that surfaced after the Great Depression and the financial crisis created by World War II uncovered the deficiencies of the Gold Standard
Gold standard
The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard...

.

Whereas during the United Nations Monetary and Financial Conference
United Nations Monetary and Financial Conference
The United Nations Monetary and Financial Conference, commonly known as the Bretton Woods conference, was a gathering of 730 delegates from all 44 Allied nations at the Mount Washington Hotel, situated in Bretton Woods, New Hampshire, to regulate the international monetary and financial order after...

 (Bretton Woods) negotiations British delegate John Maynard Keynes
John Maynard Keynes
John Maynard Keynes, Baron Keynes of Tilton, CB FBA , was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics, as well as the economic policies of governments...

 favoured the Bancor
Bancor
The Bancor was a supranational currency that John Maynard Keynes and E. F. Schumacher conceptualised in the years 1940-42 and which the United Kingdom proposed to introduce after the Second World War...

, the United States' delegation preferred US Dollar hegemony
Dollar hegemony
Dollar hegemony is the hypothesized monetary hegemony of the US dollar in the global economy. Henry C.K. Liu popularized the term in the article "Dollar Hegemony has to go" in Asia Times, April 11, 2002...

 with the dollar priced against gold.

There are two different types of World Currency Unit in use today that have different origins and usages.

History

The WCU was proposed by Lok Sang Ho of Lingnan University, Hong Kong. The WCU was first intended to be the basis for denominating global bond
Global bond
A global bond is a bond which is issued in several countries at the same time. It is typically issued by large multi-national corporation or sovereign entity with a high credit rating. By offering the bond to a large number of investors, a global issuance can reduce borrowing cost....

s, a debt instrument that is issued globally and is subscribable by people and institutions around the world.

The Wocu is more closely tied to the Bretton Woods era and agreements and is more Eurocentric in its currency outlook.

The Wocu

Today, there are two distinct products which have adopted the name "World Currency Unit".

The Wocu
Wocu
The World Currency Unit Wocu is a standardized basket of currencies: the national currencies of the 20 largest national economies measured by GDP...

 (contraction of World Currency Unit) is a standardized basket of currencies — the national currencies of the 20 largest national economies measured by GDP.

The basket is reweighed quarterly according to the relative growth of the economies, whereby constituent currencies are replaced by other currencies should the size of the GDP be overtaken by that of another national economy.

Conceived as an apolitical and global alternative to the ECU
European Currency Unit
The European Currency Unit was a basket of the currencies of the European Community member states, used as the unit of account of the European Community before being replaced by the euro on 1 January 1999, at parity. The ECU itself replaced the European Unit of Account, also at parity, on 13...

, it is used as a reference currency for global investors and companies seeking to mitigate bilateral exchange rate volatility.

The WCU

The WCU - World Currency Unit (WCU) is an indexed
Indexed unit of account
When an indexed unit of account is used in contracts, payments are indexed to the price level in such a way that changes in the inflation rate have no effect on the real value of payments. Non-indexed units, such as contracts written in currency units, incur inflation risk...

 unit of account
Unit of account
A unit of account is a standard monetary unit of measurement of value/cost of goods, services, or assets. It is one of three well-known functions of money. It lends meaning to profits, losses, liability, or assets....

 that stands for a unit of real global purchasing power
Purchasing power
Purchasing power is the number of goods/services that can be purchased with a unit of currency. For example, if you had taken one dollar to a store in the 1950s, you would have been able to buy a greater number of items than you would today, indicating that you would have had a greater purchasing...

.

Since each unit by design represents a stable unit of purchasing power, the stipulated interest rate on WCU-denominated bonds represents a real interest rate. In principle, the common denomination of bonds by issuers from different parts of the world using the WCU, as well as the greater transparency of real interest rates, will produce more efficient capital markets
Efficient market hypothesis
In finance, the efficient-market hypothesis asserts that financial markets are "informationally efficient". That is, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made.There are...

, as savers and borrowers around the world converge in their understanding of what each basis point of interest means and are protected against two key sources of uncertainty, namely inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...

 and exchange loss risks.

See also

  • Special Drawing Rights
    Special Drawing Rights
    Special Drawing Rights are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund . Not a currency, SDRs instead represent a claim to currency held by IMF member countries for which they may be exchanged...

  • Euro
    Euro
    The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...

  • North American currency union
  • African Monetary Union
    African Monetary Union
    The African Monetary Union is the proposed creation of an economic and monetary union for the countries of the African Union, administered by the African Central Bank...

  • Bancor
    Bancor
    The Bancor was a supranational currency that John Maynard Keynes and E. F. Schumacher conceptualised in the years 1940-42 and which the United Kingdom proposed to introduce after the Second World War...


External links

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