More is better when it comes to currencies

I missed this when it was first posted in NEF. It proposes what Feasta has always held; that a single currency however efficient for markets, is not optimal when other considerations such as systemic risk is taken into account. It is nice to see that we are not alone and that these ideas are finally getting into to the mainstream.  Of course as any MMTer will tell James Skinner and Tony Greehan it is not necessary to invent or revive another currency to inject debt-free money into the economy.  Any government with its own currency or  could do it in the morning.

19 July 2011

Greece can have both the drachma and the euro

Tony Greenham
Head of Finance and Business 

There is significant evidence that multi-level currencies boost economic resilience. In this letter to the FT, nef trustee James Skinner explains how a new drachma, issued free of debt by the Greek government to revive the domestic economy, could also be the best solution to the sovereign debt crisis and save the euro.

It is not often that the Financial Times gives column space to considering alternatives to the rigid monetary system that Europe finds itself stuck with, but we live in interesting times.

In his recent letter to the FT, James Skinner, one of nef’s trustees, put the case brilliantly for re-introducing the drachma as a domestic currency to operate alongside the euro. As he puts it, there was never any good reason advanced for why national and international currencies could not usefully co-exist.

Crucially, he proposes that a new drachma should be created by the Greek government or central bank, not the commercial banking system, and directly spent into circulation to revive the economy. This is preferable to the current dogma that insists that the money supply should only be expanded by new bank lending. The banking system in Greece (or most G20 economies for that matter) has lost all credibility, and in any case the last thing that the Greek economy needs is more debt.

Here is James’ letter in full:

Parallel currency helps underpin rock solid Swiss economy

Sir, It may well be true that Greece cannot regain its competitiveness while the euro continues to be its sole internal currency, but this does not necessarily imply the “dismantling” of the euro, whatever that may mean. The potential for parallel currencies was debated prior to the introduction of the euro, without any good reasons being found for rejecting the proposal that a national currency could usefully co-exist together with an international currency. It was presumably thought to be too innovative.

However, there have been and still are many examples of parallel or multi-level currencies serving a useful purpose within national boundaries. The best known is probably the Swiss WIR, founded after the 1929 crash and still functioning successfully today, helping to underpin the rock solid Swiss economy. There are good reasons for believing that the reintroduction of the drachma as the national currency of Greece could take place alongside the continued acceptance of the euro as payment for both foreign and internal transactions.

The most effective way to reintroduce the drachma would be for the government to revert to the traditional method of issuing currency. Instead of creating the new money through issuing debt to the private banking sector, as is the general custom at present, the central bank would create new drachmas in the government’s account to allow it to meet payments authorised under the national budget.

The new currency would thus enter the economy as government expenditure payments, not as debt. This would mean the end of fractional reserve banking for drachma transactions. Banks would revert to their traditional role as money brokers rather than currency creators. Bankers would naturally protest at losing the principal source of their excessive wealth, but there are plenty of examples of profitable banks that confine themselves to money broking activities.

The most important effect of the new currency would be to enable the national economy to thrive, with increasing employment. This would help build up the resources needed to enable Greece to pay its way in international transactions, which it is unable to do under present circumstances.

James Skinner
London W4, UK

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