Sunday, July 15, 2012

Who's Afraid Of Another Currency?

(Sorry, this article still needs editing.)

The Treaty of European Union (the Maastricht Treaty) states the purpose of the Community in Article 2.

The Community shall have as its task, by establishing a common market and an economic and monetary union and by implementing the common policies or activities referred to in Articles 3 and 3a, to promote throughout the Community a harmonious and balanced development of economic activities, sustainable and non-inflationary growth respecting the environment, a high degree of convergence of economic performance, a high level of employment and of social protection, the raising of the standard of living and quality of life, and economic and social cohesion and solidarity among Member States.’

Some of the actual steps, such as a common currency, are laid out in Articles 3 and 3a.

Money has been around for thousands of years and there have been many ways to make it. Certain types of sea shells, the shells of certain sea snails, metal lumps and coins, certain weights of barley, and printed notes have all been used as money. In recent years, electronic money has been used. Humans have not found that the nature of the money counters is as important as the concept of money, the number of units, and which currency the money is denominated in.

In recent centuries, there has been a trend toward reducing the number of currencies and a trend toward paper banknotes with a few types of coins minted for the smallest denominations. Money became nationalized, and generally one currency was made dominant within national boundaries. This facilitated trade within the nation and the national currency was a source of national pride.

In the extreme, there are many today who believe that only gold is real money. They essentially believe that there is only one real currency, a universal currency, and that money should be (or at least represent) fixed quantities of gold. This is the general idea behind the various proposed gold standards.

Without being a scholar on the history of the European Economic and Monetary Union, it is difficult to know what the arguments were for a single currency, or whether there were any arguments at all. Perhaps everyone assumed that, just as political unification of Germany in the nineteenth century meant monetary unification of various German currencies into the mark, the political unification of Europe in the twentieth century could only mean monetary unification of the various national currencies into the euro.

Another possibility is that separate national currencies were seen as impediments to trade and the flow of capital. National currencies in the hands of national central banks might tempt national governments to implement nationalistic monetary policies during economic downturns, tending toward economic divergence rather than the convergence required by the treaty.

Another purpose may have been competition with the United States. There may have been a desire to create the euro to compete with the U.S. dollar. That way, the union could issue euro-denominated debt backed up by an aggregate economy that was larger than the economy of the United States.

Finally, we might speculate that there was an enticing vision that any group of Europeans could get on a train, travel to any other EMU country, and spend the euros in their pockets just as easily as they could at home.

All this made the capitalists very happy – a single currency, free trade, and free flow of capital. It looked good, and it worked well for about ten years. However, even on the capitalist side of capitalism, there were some concerns about the lack of a firm fiscal policy and questions about how a single monetary policy could deal with potentially very diverse fiscal policies. Those fears proved well-founded.

In fact, the failure of capitalism in Europe was the very impetus that started us searching for solutions on the other side of capitalism, the side that supports capitalism in general, but acknowledges the structural problems in capitalism and does not hold so strongly to the ideas of a single currency, free trade, and free flow of capital. As we have said elsewhere, it is hard to see how adhering to these principles has helped Greece in the current economic crisis.

There is little doubt that at the time the Masstricht Treaty was conceived, a single currency looked like the best solution. The cost of multiple currencies was high.

Money technology has changed since then, and the cost of multiple currencies is quite diminished now. Indeed, many companies set up gift cards and rewards programs that have some of the characteristiscs of money, and electronic money, credit card transactions, and debit transactions have the effect of physical transactions without any physical money changing hands. Food stamps in the United States act a lot like money. Finally, many credit cards allow transactions anywhere in the world in "foreign" currencies using spot exchange rates that neither the buyer nor the seller necessarily ever sees or needs to know.

With good credit cards, any group of people can travel to Europe and spend money using their cards just as easily as they can anywhere else. It does not take exchanges to physical euros to do that any more.

Briefly, it does not seem necessary to refute the argument for the euro in order to be consistent with tradition or with history. We think that the vast majority will agree with us that these things have no place in these discussions.

It seems that the purposes of the euro are to allow Europe to have a union currency that can compete against the U.S. dollar and to discourage or prevent individual members from going their own ways with their own currencies. However, money technology has reached the point where this can be handled a different way. The ease of electronic commerce means that while European governments can participate in the euro zone, each government can have one or more currencies that are only used internally. This will prevent the governments from going their own ways and allow the euro to compete with the dollar, but it also gives the governments the flexibility to deal with the problems caused when the common market becomes unbalanced.

As far as travel is concerned, even if Greece uses the drachma internally, other Europeans could still easily travel to Greece and electronically exchange euros for drachmas at spot rates regulated by the Greek government. Greeks in the drachma system could do the same kind of thing when travelling in the rest of Europe, the difference being that their exchange would be drachmas for euros.

There no longer seems to be any reason to force all Europeans to be paid in euros and for them to spend in euros. It seems to be enough that the governments use euros in external dealings and prevent any internal currencies from being used or collected externally. With the advent of electronic money, it should be relatively easy for national governments to maintain membership in the euro zone and at the same time to restrict and regulate the use of any internal currency, keeping the ability to make sure their citizens have enough currency. It is now clear that they cannot always rely on other European nations to do that for them.

TheOtherSideOfCapitalism (

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