The new global monetary standard

This is a technical appendix to the G20 Communique announced in a separate press notice

Rationale: A global currency standard will give the peoples of the world a common measure of value, linking past, present and future, and connecting peoples across space as well as time. The old complicated network of dozens of currencies is no longer fit for purpose. It merely gives power to the elites that control these national monies without any benefit to the people. It divides the people of the world into separate tribes loyal to their separate currencies. It encourages tribal conflicts. To quote Nobel Laureate Robert Mundell:

“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.”

We, G20 heads of state and governments, have decided that the only way out of the continuing economic and financial impasse is to introduce a new global monetary standard (for reasons spelt out in the Communique).

The global monetary unit  – which will be called the Ikon – will be defined as one trillionth of the total market value of all shares quoted on the world’s recognised stock markets (approx. $50 trillion at end-2012, so one Ikon=$50). National currencies can be denominated in familiar national denominations and continue to circulate but the governments of a core number of leading economies have already opted to join the standard. Measured in Ikons and in all currencies belonging to the Ikon standard, the global share price index will be constant over time. Nations opt to join or leave the standard voluntarily at exchange rates of their choosing. Discipline will be imposed by the market.

Technical description: The Ikon is a constant fraction of the total of tradable equity claims on real assets in the global economy, a globally diversified basket of shares selected to represent ownership of the world’s total invested assets. An Ikon would be an established fraction of the global equity market portfolio, so that its value would increase/decrease with growth/decline in economic activity. One Ikon would initially be calibrated as, say, one trillionth of the outstanding value of all equity shares traded on all the world’s recognized stock markets. Currencies in circulation today would be convertible into Ikon units, and Ikon units will be convertible into bundles of shares, thereby providing money an anchor to the real economy that can be understood and monitored.

Existing national currencies will continue to circulate. However, we will in each of our countries seek legislative approval to join the new, modern world standard – i.e. to fix the exchange rate at which national monies are exchangeable with the new world money. Over the longer run, the value of the new money will appreciate, so that every person who holds money will expect to see the value of their money holdings rise over time – in line with long-term growth. Prices will gradually fall in terms of Ikons.

The new standard in operation: These fixed values will be actively maintained by a currency board that will operate much like the Hong Kong Monetary Authority which buys and sells HKD against USD within narrow margins. In this case, a board hosted by IMF or BIS would regulate the supply of Ikons by passively selling/redeeming shares on demand. Participating central banks would hold Ikon accounts with the currency board which would sell/redeem Ikons for eligible assets such as government debt securities at the market value of the Ikon. Each central bank would remain free to suspend their membership in the Ikon system, and while outside they may revise their exchange rate relative to the Ikon and all other currencies.

The transition: The transition to an Ikon Monetary Standard Unit of Account will take place in a number of stages:

First, in collaboration with BIS and the IMF participating central banks will manage their exchange rates within increasingly narrow ranges to establish stability of expectations amongst households, companies, financial institutions and governments;

Secondly, participating central banks will agree on a common temporary anchor for their currencies, which could take the form of targeting a common price measure or basket of commodities, or even a peg to gold.

In the final stage, the temporary anchor is replaced by an agreement under an international treaty, which defines the Ikon’s globally diversified basket of tradable equity claims on real assets in the recognized exchanges of the global economy, based upon existing information systems in place at each exchange.

Potential criticisms

: It may be objected that consumers will not tolerate swings in the real value of money determined by stock market variations. However, the index of share prices can be expected to be more stable than at present because demand for shares will be dominated by the demand for money, which is quite stable. The monetary shocks and asset price bubbles coming from central banks’ pumping up money supplies under paper money standards will be eliminated. There may be short-term fluctuations in the real value of the money, reflecting shifts of optimism and pessimism concerning economic prospects, but so long as economic growth is expected to continue in the long term, the real value of money will grow. Given this expectation, market agents will find it profitable to offer also (as derivatives) accounts that remain stable in terms of shopping baskets or other price indices – if some clients wish to hold such accounts in place of ikons.

Conclusion
: The integrated reform of the global financial system as a whole proposed by the G20 will go far to provide a strong, rules-based monetary framework for a globalised world financial system. Adjustment of payment imbalances would take place according to a well-known process firsy described by the Scottish philosopher David Hume in the 18th century;  a drain of Ikons from one area to another will automatically change spending patterns and money supplies. Firms will be able to raise funds for investment in the confidence that the sum to be repaid will not be arbitrarily changed by changes in exchange rates or in the value of money. This will put an end to the conflicts between debtors and creditors that have plagued history.