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The Greek Currency Crisis: Historical Parallels
TND Guest Contributor: Paul-Martin Foss |
The continued capital controls and bank closures in Greece have led to a serious shortage of cash. Businesses are unable to pay their workers, they are unable to pay for goods and services, and many ordinary citizens don’t have enough cash to purchase food, water, and other basic supplies. As a result of the shortage of euros in circulation, some businesses have taken to creating their own scrip, essentially paper promises to pay in euros once conditions normalize. As long as they can get other businesses to accept these IOUs, the IOUs could circulate as currency and the lack of circulating euros could be overcome. The Greek government is even considering creating its own IOUs. But Greece is not the only country that has faced a cash shortage. Looking back to historical examples, what might replace euros as circulating money in the near future?
It is important first to remember that, as Carl Menger stated: “Money has not been generated by law. In its origins it is a social, and not a state institution.” That is to say, money was created by market actors in order to serve the needs of trade and exchange. Money arose spontaneously as a means of overcoming the problem of the double coincidence of wants: if the shoemaker wants to buy apples, but the apple seller wants a hat, no exchange takes place. But with money, be it gold, silver, seashells, etc., the shoemaker uses that monetary unit to buy his apples, and the apple seller can use that money to buy a hat from the milliner.
In a pinch, almost anything can serve as money. There is of course the famous case ofcigarettes acting as money in POW camps during World War II. When government-mandated monetary institutions break down, people act to create their own alternatives. Sometimes private individuals and firms step into the breach, other times it is localities or regions who step up to the plate when the central government fails. Human beings want to engage in trade with others to better their position in life, and if no monetary unit is available they will find something to use as money.
One of the classic examples of people banding together to create monetary alternatives is that of German Notgeld, literally translated as “emergency money.” With the onset of World War I, the copper and nickel used to mint small change was needed to produce ammunition, so small coins began to be made out of aluminum and iron, and the existing stock of copper and nickel coinage began to disappear. And with the German government inflating the money supply to pay for the war, the price of silver rose, meaning that silver coins became more valuable for their metal content than for their face value and were consequently hoarded. Silver coins were minted in denominations from 1/2 Mark up to 5 Marks, with 4.2 Marks equaling one dollar. With the disappearance of so much coinage from circulation, everyday commerce became more difficult.
Enter the cities, firms, and Sparkassen (savings banks) who issued their own Notgeld notes. These notes carried face values of anywhere from a few pennies up to several Marks and were intended to fill the immediate need for circulating currency. Notgeld circulated throughout the war, continuing through the hyperinflationary crisis of the early 1920s that destroyed the value of the Mark. Notgeld was an imperfect system because the issuers of these paper notes were tempted, as is any issuer of paper money, to print more and more of it to enrich themselves at the expense of everyone else. Notgeld is definitely not a sound monetary system you would want to emulate on a long-term basis, but it did provide people with at least a rudimentary medium of exchange, enabling daily transactions to continue. Even bad money is better than barter.
The issuance of scrip by Greek firms is a first step towards a Notgeld-type system. It would not be surprising to see such a parallel monetary system develop throughout Greece if Greek banks remain closed for a significant period of time. Germany gives every indication that it is hardening its position, the ECB has refused to give any additional funding to Greek banks, and the new Greek Finance Minister is reputed to be just as firm in his opposition to the troika as Varoufakis was. The longer the two sides refuse to compromise in their negotiations, the weaker the Greek banking system gets, and the more likely it is that a Notgeld-like system will emerge to replace (at least temporarily) the euro. Just don’t tell the Greeks that they’re thinking of emulating something that was made famous by the Germans – they might not appreciate that.
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About Paul-Martin Foss:
Paul-Martin Foss is the founder, President, and Executive Director of the Carl Menger Center for the Study of Money and Banking, an Arlington, VA-based think tank dedicated to educating the American people on the importance of sound money and sound banking.
Prior to founding the Menger Center, Mr. Foss worked in the U.S. House of Representatives for seven years, including six years as Congressman Ron Paul’s legislative assistant for monetary policy and financial services, and one year as Deputy Legislative Director for Congressman Thomas Massie.
As Congressman Paul’s legislative assistant, he assisted the Congressman in his duties as Chairman of the Subcommittee on Domestic Monetary Policy by helping to develop hearing topics, agendas, and briefing Congressmen and their staffs on monetary policy topics. Mr. Foss also was responsible for the management of Dr. Paul’s monetary policy and financial services legislation, including the “Audit the Fed” and “End the Fed” bills, and was co-editor of Ron Paul’s Monetary Policy Anthology, a multi-thousand page compilation of hearing transcripts, lecture transcripts, and other documents related to Dr. Paul’s chairmanship.
Mr. Foss received his Bachelor’s degree from The University of the South (Sewanee), and Master’s degrees from the London School of Economics and Georgetown University’s Edmund A. Walsh School of Foreign Service.
This article appeared on the Carl Menger Center for the Study of Money and Banking and is reprinted with permission, “Creative Commons 4.0.”
Source: http://thenewsdoctors.com/the-greek-currency-crisis-historical-parallels/
