World currency unit
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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.
Whereas during the United Nations Monetary and Financial Conference (Bretton Woods) negotiations British delegate John Maynard Keynes favoured the bancor, the United States' delegation preferred US Dollar hegemony with the dollar priced against gold.
There are two different types of World Currency Unit in use today that have different origins and usages.
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 bonds, a debt instrument that is issued globally and is subscribable by people and institutions around the world. Simply put, it is a GDP-weighted basket of key currencies each of which is indexed against inflation for the relevant countries. The WCU is defined with respect to a base year, so that each unit represents the same global purchasing power as at that base year. The unindexed basket, called the benchmark basket of key currencies, is the basis for the derivation of effective exchange rate indices that has been demonstrated to be both easy to compile and superior to most official effective exchange rate indices.
The WOCU is more closely tied to the Bretton Woods era and agreements and is more Eurocentric in its currency outlook.
How it works
Today, there are two distinct products which have adopted the name "World Currency Unit".
The basket is reweighed bi-annually 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, it is used as a reference currency for global investors and companies seeking to mitigate bilateral exchange rate volatility.
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, 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 and exchange loss risks.
- Ho, Lok Sang (2000). "Towards a New International Monetary Order: The World Currency Unit and the Global Indexed Bond" (PDF). The World Economy 23 (7): 939–950. doi:10.1111/1467-9701.00310. Retrieved 2007-07-03.
- Coats, Warren(1989) "In Search of a Monetary Anchor : A 'New' Monetary Standard," IMF Working Paper No. 89/82.