A currency for international exchanges

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By JOSÉ RICARDO FIGUEIREDO*

A broad basket of raw materials can back a currency for Mercosur trade relations

As a contribution to the discussions about the construction of a currency for Mercosur trade relations, this text proposes the creation of a currency anchored in a wide basket of raw materials.

It is impracticable, or at least very problematic, to use a currency defined as a combination of national fiat currencies, because the inflationary issue is always a source of unpredictability, especially in Latin America. The international exchange currency will need material backing, at least as a reference.

A product can be used as the basis of a unit of value if it has characteristics of standardization, liquidity and certain durability. These characteristics are found in many raw materials of mineral, vegetable and animal origin. Select, among these, the raw materials marketed worldwide, and whose prices can be obtained by consulting the main world merchandise exchanges. It is not just about raw materials that are too primary, such as iron ore, for example, but mainly raw materials with a certain level of processing, such as tubular steel or sheet steel, etc., which have greater value.

It is proposed here, initially, the construction of a unit of value from the prices of this basket of goods, broad and detailed, with a determined weight corresponding, as much as possible, to the importance of each product in the world economy. In this way, the value of this material base currency in terms of the most internationally relevant fiat currencies can be determined by any country. Such breadth and transparency would give the Latin American currency universal appeal.

In the long term, commodity prices tend, on the one hand, to increase due to the depletion of reserves and the growth of environmental costs, but, on the other hand, they tend to decrease due to new exploration and production technologies. This gives the value of this materially based currency stability, in the medium to long term, which is superior to any national fiat currency.

It is a fact that the prices of some raw materials, such as oil, for example, tend to fluctuate a lot depending on the momentary situation of the world economy, while food products, for example, tend to be more stable; the composition of a varied basket of raw materials reduces these oscillations. Other oscillation damping mechanisms can be created, such as price fixing by a moving average relative to a certain period.

In addition to their abstract role as a unit of account, raw materials are a means of exchange and a store of value. Evidently, it is not feasible to demand in each contract the mobilization of the plurality of raw materials that define the value of the currency. In contracts between countries or between economic zones, payments can be made with goods of commercial interest, which are part of the import tariffs of the country that accepts the currency.

The value of transactions would be fixed by the reference unit based on the multiplicity of raw materials, but payments could be made, ultimately, with a reduced number of goods, or even a single one, at market prices. But commodities can be represented by bonds, papers, and transactions can also be made through such bonds.

Latin American countries are exporters of raw materials, so this material base currency would guarantee us means of payment. A policy of forming reserves through the storage of goods, to support the currency, would tend to accelerate the economy, while a policy of forming reserves in fiduciary international currency tends to be recessive. For importing countries, on the other hand, acceptance of the currency assures them of fundamental raw materials.

This proposal has antecedents. A proposal by Keynes, at the Breton Woods meeting, involved the creation of an international currency founded on the ballast of thirty fundamental commodities; the proposal was defeated in favor of the North American proposal that established the dollar as a currency for international relations, anchored in gold. Currency anchored in a basket of goods was also later presented by the American mathematician John Forbes Nash Jr.

Civilizations grew on the basis of material currency; fiat currency is historically recent. In pre-capitalist relations, payments were mainly made in non-monetary goods, and even currencies were based on the intrinsic value of the metal, be it gold, silver or copper. Under capitalism, paper money was for a long time a representation of value in metal, presumably there was metal backing in central banks to cover issues.

Emission completely unrelated to ballast was already discussed in the XNUMXth century. Karl Marx, for example, described the possibility of fiduciary currency which, however, would thrive in one country after another, despite the eventual hyperinflation phenomena that fiduciary currencies make possible. But gold continued to be a reference for international relations until the beginning of the seventies, when the North American president Richard Nixon unilaterally broke the Breton Woods agreement, which established a fixed parity between dollar and gold.

Noble metals were being abandoned as backing for currencies at national and, later, international levels, because they did not handle the amount of currency needed to move economies. What is proposed here is a coin backed by a sufficiently broad set of raw materials to be able to break the quantitative limits of any metal coin.

For the planning and control of this currency, it is necessary to create an institute involving economists from the various Mercosur countries, to carry out studies on the proper composition of goods in the currency, and also to study the need for physical reserves and think of mechanisms, in addition to the broad basket, to minimize price fluctuations.

*Jose Ricardo Figueiredo He is a retired professor at the Faculty of Mechanical Engineering at Unicamp. Author of Ways of seeing production in Brazil (Associated Authors\EDUC). [https://amzn.to/4aUSmP3]

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