The current floating system leads nations into boom/bust cycles as a contraction of the money supply is needed to keep the cost of imports down. Britains post-war economic problems accelerated after Sterling was floated and continue to this day. If exchange rates were fixed and anchored to one international currency with periodic revaluations for each country in line with economic growth we could gradually bring the smaller economies into line with major economic powers. Such a system could create unprecedented prosperity over time.

National currencies could still exist but foreign currency reserves could be replaced by the world currency. Of course such a system would have to be run by a council of the worlds central bankers so that it doesn't become hostage to political pressures. If we don't do this fiat money is finished and with it the ability to create liquid credit and prosperity.

Reply: Fixed exchange rates, large currency blocs and the like would be worse than floating rates, leading to lower output

As a simple matter of historical fact and economic logic, there are economies and diseconomies of scale to currency zones; many 'smaller' currencies have disappeared and been amalgamated, sterling was for a long time the global currency, since replaced by the US $ (and quite possibly Euro, who knows?), but conversely most currency unions have fallen apart again (for good or bad reasons). If the reverse were true, that there only economies and no diseconomies of scale, then by now the whole world would be using the same currency.

You can look at languages as a form of currency – most minor languages have died out because you are at an advantage speaking a language that is much more widely used. Happily enough, English seems to have been chosen as the language of international trade. But it will be some time before English is the only language spoken, if ever – for the time being, we have a few large 'language unions' (English, Chinese, Arabic, Spanish) where the benefits of dropping your language and using a more common one are cancelled out by the short run costs of the switch (as well as cultural resistance).

A world currency running alongside national currencies would allow nations to uphold economic sovereignty while at the same time providing stability in international trade. Any hopes that a national currency could act as an international benchmark died a death when the Dollar collapsed in value. Any such new currency would have to be international and established collectively by all major economies around the world. Such a system would restore the credibility of fiat money and stop the damaging flight into commodities, it would also end the destabilizing problem of arbitrage.

A year ago most people I knew thought it was inconceivable that house prices could crash. Funny how perceptions change.

I wonder how low sterling and the dollar could go before the Euro breaks?

I also think that the emerging economies maintaining these dollar pegs is a major cause of the imbalances.

Reply: Yes, an abrupt change yesterday – even more important was the amazing $11 rise in the price of a barrel of oil in a single day.

First, it goes without saying that the larger the geographical area covered by a single policy (be it social or economic) the greater the chance that the policy will not be effective for all. What will always happen is either: (i) the more powerful countries will insist on a policy to their benefit whereas the smaller and weaker will be disadvantaged or (ii) a compromise will be adopted which will not suit anyone.

Secondly, the mechanism for effecting a change in policy is inevitably cumbersome where discussion has to involve numerous national representatives.

Thirdly, the distance between the people and the decision means that practical pressures which help to form acceptable policies in the UK are ineffective. We have seen numerous examples recently of the UK government introducing poorly thought-out policy initiatives which they have been forced to abandon or vary at short notice through the pressure public opinion has exerted. We should, in my opinion, never underestimate the importance of by-elections, the press and such debates as those held on Question Time on BBC1. They all keep our politicians in touch with the mood of the country.

It might be that a decision taken at EU level would be better than one taken in the UK but at least the UK government knows that its very existence depends on its decisions. It might be that our government ministers are intellectual pygmies compared to the EU boffins, but they are our pygmies and the closer they are to us the greater the chance that government will continue to be by consent and not by diktat.

Of course this is a convenience when working with large companies. The practical issue you raise for the Euro as a retail currency would be equally applicable to the use of the US$ should that be the currency in people’s pockets.