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Note to Greece: Mixing Currency and Politics Doesn't Work

July 27, 2015 in Economics

By George Selgin

George Selgin

Greece’s monetary troubles have dominated the headlines now for weeks, releasing a torrent of analysis assigning blame or proposing solutions. Yet that torrent overlooks the bigger tragedy in which the recent Greek drama is but the latest act:  governments’ misuse of currency as a tool of politics.

What currency is meant to do—and how the euro betrays that purpose

Ask any competent economist what currency is and he or she will tell you that it’s a generally accepted medium of exchange meant to overcome the difficulties of barter. A specialist might go on to explain how certain currency systems do a better job of facilitating exchange and of avoiding financial crises than others. Few would think of currency as a tool of politics.

The euro’s creators, in contrast, meant it to serve not just as a medium of exchange but as a symbol of European solidarity. By treating currency as a political tool, they unwittingly put politics at loggerheads with economics. Economic considerations demanded that the European Central Bank resist bailing out fiscally irresponsible eurozone members. Politics, on the other hand, insisted that that the eurozone be held together by hook or by crook. So far politics has prevailed. But precisely because it has, the euro’s fate hangs in the balance.

The euro’s predicament is nothing new.”

The current situation is not without precedent

The euro’s predicament is nothing new. Governments have long considered currency a tool of politics, and currency has long been the worse for it. Until modern times, governments routinely looked upon currency not as a medium of exchange but as a source of easy revenue. They made the minting of currency a royal “prerogative” and illicit minting a capital crime, so they could, in a pinch, pay their bills in adulterated coin. As a result, ancient and medieval history are chock-full of currency debasements and accompanying turmoil, from the Roman emperors’ gradual conversion of the denarius from a silver to a copper coin to the “Great Debasements” of Henry VIII and Edward VI.

Although paper money was originally developed as a substitute for governments’ crummy coins, that didn’t keep medieval governments from perceiving its fiscal advantages: Printing paper was, after all, even easier than minting metal discs. Early central banks, including the Swedish Riksbank, the Bank of England and the Bank of France (not to mention the last-named bank’s ill-fated predecessor, John Law’s Banque Royale), were all meant to be government piggy-banks. Their creators couldn’t care less whether their monopoly privileges might …read more

Source: OP-EDS

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