Saturday, 7 February 2015
Cities issue local currencies. Why not Greece?
Numerous cities and regions have issued, and currently issue their own currencies. One of the first was Worgl in Austria in the 1930s, and there’s a currency called “Ithaca hours” in Ithaca in the US. Plus currently in the UK, the cities of Bristol and Lewis issue their own “pounds”. And for all I know there are others in the UK.
Those currencies of course run alongside another currency (the pound in the case of the UK) which serves a bigger “common currency area”. So if Greece issued it’s own Euros (or Drachmas to give the currency another name), that would be the direct equivalent of the Bristol or Lewis pound.
So do local currencies really make sense? Because if they do, that strongly suggests that a Greek local currency would make sense.
Local currencies arise for two reasons. First, as in the case of Worgl, there can be inadequate demand over the entire broader currency area: the 1930s depression in the case of Worgl. Given inadequate demand over such an area, the solution advocated by Keynes (and MMTers) is to print money and spend it (and/or cut taxes). That increases every households’ stock of money, which induces households to spend more, which solves the problem.
Second, and this is essentially the problem in the Eurozone, there can be inadequate demand in a relatively small area (e.g. Greece) caused by that area being uncompetitive relative to the rest of the broader area. The BEST SOLUTION there is internal devaluation which is what austerity in the Euro periphery is supposed to bring about, and indeed IS BRINGING about, but at a painfully slow pace.
The main obstacle to internal devaluation is a problem identified by Keynes long ago: it’s the fact that wages are as he put it “sticky downwards”. That is, employees are reluctant to accept nominal wage cuts. Though as Keynes rightly pointed out, employees are for some bizarre reason not nearly so averse to REAL WAGE CUTS (a phenomenon that occurs for example when the nominal wage remains constant and there’s some inflation). Indeed those real wage cuts were suffered by wide sections of the workforce during the recent crisis, yet mass demands for more pay have been muted.
Now a nominal wage cut is a reduction in the number of units of some widely accepted currency paid for an hour’s work. E.g. a British plumber used to getting £15/hr might refuse point blank to work for £14/hr. That involves loss of dignity for the plumber. The plumber might have nothing else do and might easily be in need of more money. But as Keynes rightly pointed out, many employees (and indeed to some extent the self-employed) refuse to take the logical step of working even a few hours a week at a rate which is lower than the one they are used to – using the conventional measure of pay, that is the broadly accepted currency.
So the solution is simple: use the a different “measure”, i.e. issue a local currency.
Of course there is the disadvantage for the plumber (and indeed ANYONE accepting payment in a local currency) namely that local currency is not accepted OUTSIDE the relevant area: i.e. the local currency will only purchase locally produced goods and services. But that’s EXACTLY WHAT WOULD HAPPEN where an uncompetitive country effects an internal devaluation: goods and services produced OUTSIDE the relevant “locality” become more expensive for “locals”. Thus they tend to switch to locally produce stuff. Indeed, exactly the same happens with conventional devaluation.
Running a local currency alongside a more widely accepted currency does involve some bureaucracy: that is, every firm or employer (private and public) has to work out to what extent it will make sense to take payment in the local currency and in contrast, the more widely accepted currency. For example, a Greek firm that imported cars made in Germany could only accept payment in official Euros.
In contrast, a restaurant in Greece that used only locally sourced food might get away with accepting payment 90% in a local currency and 10% in official Euros.
In fact the latter type of trade has actually ALREADY boomed in Greece in that a significant number of Greeks have give up using official Euros and resorted to barter. All that a local Greek currency would do would be to make that sort of trade more efficient and thus expand that sort of trade.
Eurozone regulations on currency issue.
I’m not an expert on this topic, but I don’t see any problems here. First, I suspect that the EZ doesn’t allow EZ member governments to issue their own currency. But that’s not a problem because as Hyman Minsky put it “Anyone can issue money. The problem is getting it accepted”. I.e. currency / money does not need to be issued by governments. Indeed, at least 90% of the money in circulation in the EZ is issued or “printed” by PRIVATE BANKS!!!! See this Bank of England publication for more details on that.
Next, it is widely accepted in economics that what helps gives any form of money acceptability and value is the fact that taxes can be or have to be paid in that currency. Now if, as I suspect, it is illegal under EZ law for a government to ISSUE a currency other than the Euro, that does not necessarily mean that government cannot accept the local currency in payment of taxes.
And finally on the subject of EZ law, the question as to what the law currency says is irrelevant in the long term. In the long term, the only important question is: “What benefits the country or Eurozone as a whole”. If a national local currency for a country like Greece brings all round benefits, then any laws hindering the issue of such a currency need to be abolished or modified.
Greece: get on with it and issue your own currency.