May 24, 2012 7:58 pm

A new Europe of competing currencies

Unused needs and unused hands cannot exist side by side indefinitely

Suppose that Greece were to leave the euro. The best guess one can make is that the country would go through a period of hell for a year or two, after which it would have a reasonable prospect of expansion and prosperity.

Whatever might be decreed during a transitional emergency, the euro would be unlikely to disappear from the country. It would make sense for exporters and tourist operators to gain some competitive advantage by using newly devalued drachmas. But many organisations, for instance in shipping and finance, might find it convenient to continue using euros. The main difference is that the Greek government would have to finance its own budget, but would be free of German-led instructions on how to run its affairs.

Yet this has consequences beyond Greece. It might be a first step towards a new Europe in which businesses and other economic agents would have the opportunity and responsibility to decide in which currencies to denominate their transactions and hold their cash.

This would be nothing new. In the Middle Ages, the Venetian ducat and the Florentine florin circulated well outside their countries of origin, with the pound sterling circulating on the periphery. These currencies in principle consisted of gold or other precious metals, but with the ever-present danger of clipping there was much on which currency traders could exercise their wits. There have been episodes of so-called free banking in the US and the UK in the past few hundred years. But they nearly all had an explicit or implicit bullion value, and their success was measured by how low the discounts on them were, relative to their stated metal value.

In more modern times, a proposal for currency competition was put forward by the UK towards the end of the last century as an alternative to the European single currency, then in its planning stage. One problem was that there was nothing in British law to stop agents making a contract in any mutually agreed currency, whether that was dollars, sterling or cowrie shells. Legal tender only came into the matter if the denomination of a contract was unspecified. So there was little specific to propose. But the main problem was that the core EU countries had already decided to go ahead with full monetary union. So there was no real discussion. The same fate awaited a later British proposal for a “hard ecu”, a complex idea that perhaps half a dozen people understood.

Currency competition is now coming into its own through the sheer course of events. One reason why we can be reasonably confident of this is that it is mainly an extension of what is already happening. Go into a large department store or hotel in almost any big European city and you can pay in Swiss francs, sterling or dollars as well as euros. The main queries will relate to the credit standing of the customer, not the currency being offered. Taxi drivers are a law unto themselves but can usually be induced to accept payment in a variety of media.

We have come a long way from the scene I witnessed in Salzburg railway station when news broke that President Richard Nixon had floated the dollar (at the urging of one Paul Volcker). Some American tourists were outraged that the superintendent of a sleeping coach (who happened, as luck would have it, to be French) refused to accept dollars. They regarded any surcharge on the original ticket price as barefaced robbery. I had the devil’s own job to persuade the superintendent that the dollars were worth more than nothing and the Americans that it was worth a modest surcharge not to have to sleep on the floor. Such scenes could not take place today in a world where a variety of floating currencies are a fact of life.

Private enterprise currencies could also come into existence. Companies and individuals might ultimately accept and swap balances on, say, the books of a transport or telephone authority. I doubt if people will accept indefinitely a situation in which unused needs and unused hands exist side by side because of nationally decreed austerity. It is not difficult to imagine exchanges of credit notes that would amount to a de facto increase in the money supply.

Many people will regard a world even of competing conventional currencies exchanging at variable rates as very much a last resort. But is it? Governments are then free to make their own policy choices without being dictated to by international busybodies intent on preserving artificial parities or currency unions. Maybe a world currency would be best of all as there would be no other unit against which it could be debased. But even that is uncertain. For if the guardians of the world currency got things wrong, all of us would suffer.

But with several competing currencies, there would be a greater chance of the managers of some of them getting things more nearly right. A noted American psychoanalyst once wrote a book entitled The Fear of Freedom. Nowhere is this more apparent than in the economic sphere.

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