Commodity Currency: An Alternative Route to Currency Union

Proposals have been made for a common currency for East Asia, but the countries preparing to participate need to be in a state of economic convergence. We show that at least six countries of East Asia already satisfy this condition. There also needs to be a mechanism by which the new currency relates to other reserve currencies. We demonstrate that a numéraire could be defined solely from the actual worldwide consumption of food and energy per capita, linked to fiat currencies via world market prices. We show that real resource prices are stable in real terms, and likely to remain so. Furthermore, the link from energy prices to food commodity prices is permanent, arising from energy inputs in agriculture, food processing and distribution. Calibration of currency value using a yardstick such as our SI numéraire offers an unbiased measure of the consistently stable cost of subsistence in the face of volatile currency exchange rates. This has the advantage that the participating countries need only agree to currency governance based on a common standards institution, a much less onerous form of agreement than would be required in the creation of a common central bank.