Ideal currency and a sound currency system

Attributes of the Ideal Currency:

If the ideal currency existed in today‘s world, it would possess three attributes:

  • Fixed value. The value of the currency would be fixed in relationship to other major currencies so that trades and investors could be relatively certain of the foreign exchange value of each currency in the present and into the near future.
  • Convertibility. Complete freedom of monetary flows would be allowed, so that traders and investors could willingly and easily move funds from one country and currency to another in response to perceived economic opportunities or risks.
  • Independent monetary policy. Domestic monetary and interest rate policies would be set by each individual country so as to pursue desired national economic policies, especially as they might relate to limiting inflation, combating recessions, and fostering prosperity and full employment.

Unfortunately, these three attributes usually cannot be achieved at the same time. For example, countries whose currencies are pegged to each other are in effect agreeing to both a common inflation rate and a common interest rate policy. If inflation rates differ but the peg (i.e., fixed exchange rate) is maintained, one country‘s goods become cheaper in the other countries. This will lead to unemployment in the high-inflation country. If one country‘s interest rates are higher than the others and the peg is maintained, investors will move funds from the low-rate country to the high-rate country, creating ever more difficulty in maintaining the peg.

Essentials of a Sound Currency System:

Broadly speaking, a sound currency system must fulfil the following conditions:

  • It must maintain a reasonable stability of prices in the country. This means that its internal value (or purchasing power in terms of goods and services in the country concerned) must not fluctuate too violently. This involves regulation of the amount of money in circulation to suit the requirements of trade and industry in the country.
  • A sound currency system must maintain stability of the external value of the currency. This means that its purchasing power over goods and services in foreign countries, through its command over a definite amount of foreign currency, should remain constant.
  • The system must be economical. A costly medium of exchange is a national waste. It is unnecessary. That is why all countries use mostly paper money.
  • The currency must be elastic and automatic so that it expands or contracts in response to the requirements of trade and industry.
  • The currency system must be simple so that an average man can understand it. A complicated system cannot inspire public confidence.