Thursday, May 24, 2012

Big bangs, currency changes and cowardly politicians

If you look at the actions of politicians like Merkel, Sarkozy and Rajoy, it is pretty easy to see that it is unlikely that one day they will suddenly grow a backbone and say “let’s all do a firedrill currency change over the weekend!”

The lowest friction way to a new currency would be to just start issuing IOUs for Euro, and use these to pay for services (California did this a couple years ago and it turned out not to be a big deal). In fact, they could even make these IOUs in handy denominations and on fancy paper so that people can use them to pay for stuff. The government could pass a legal tender law to make it so people have to accept it where they would normally accept Euros.

Effectively it creates a second currency that circulates along with the normal Euro. This already happens in the UK with the Scottish bank notes, and no one complains about it much. (Strangely enough, the Scottish bank notes aren’t even legal tender)

This might even stimulate the economy, as everyone tries to spend their “fake” Euros as quickly as possible. In fact, Gresham’s law would suggest that the new pretend Euro would become the primary circulating currency as people would tend to hoard their Euros or send them out of the country.

1 comment:

Tita said...

Agree about the backbone!

I have repeatedly withdrawn bills at scottish ATMs, forgetting that they will not be accepted in England. I always thought this was crazy i.e. just pigheadedness of the english taxi drivers, restaurant staff, etc.

Now looking at Wikipedia, I realize you are correct and the historical explanation is very interesting *-)...

"Bank of England notes are the only banknotes that are legal tender in England and Wales. Scottish and Northern Ireland banknotes are not legal tender anywhere, and Jersey, Guernsey and Manx banknotes are only legal tender in their respective jurisdictions. The fact that these banknotes are not legal tender in the UK does not however mean that they are illegal under English law, and creditors and traders may accept them if they so choose. Traders may, on the other hand, choose not to accept banknotes as payment as contract law across the United Kingdom allows parties not to engage in a transaction at the point of payment if they choose not to.[16]
In Scotland and Northern Ireland no banknotes, not even ones issued in those countries, are legal tender.[9] They have a similar legal standing to cheques or debit cards, in that their acceptability as a means of payment is essentially a matter for agreement between the parties involved, although Scots law requires any reasonable offer for settlement of a debt to be accepted.
Until 1988, the Bank of England issued one pound notes, and these notes did have legal tender status in Scotland and Northern Ireland while they existed. The Currency and Bank Notes Act 1954 defined Bank of England notes of less than £5 in value as legal tender in Scotland.[21] Since the English £1 note was removed from circulation in 1988, this leaves a legal curiosity in Scots law whereby there is no paper legal tender in Scotland. The UK Treasury has proposed extending legal tender status to Scottish banknotes.[22] The proposal has been opposed by Scottish nationalists who claim it would reduce the independence of the Scottish banking sector.[23]"