Wednesday, July 25, 2012

The origins of money, and saving the euro

July 25, 2012

It is really hard to see where the euro is going. Spanish yields are up again today, meaning Madrid’s debt looks less and less sustainable. Yet there is still no clear plan for the euro, new ideas seem to have run out, and there is a lack of progress on old ideas. What is going to happen?

One way to think about the euro’s future is to look at its past, and to go back to the origins of money. There are two leading schools of thought about this. The first was set out 120 years ago in a paper by Austrian economist Karl Menger. In Menger’s theory buyers and sellers agree on a common commodity to use as the medium of exchange. Something small, valuable and divisible is best. It helps if it doesn’t rot. Gold, spices and shells are all good examples. This money is highly “saleable” so everyone accepts it, and this means that traders don’t face the costs associated with barter (the time spent having to scout around looking for the rare person that both wants what you have, and has what you want).

There is no role for government here. The Mengerian theory describes a market-led response to the high transaction costs of barter, in which the private sector defines and uses money as a solution.


Read the Menger paper

Read the Goodhart Paper

No comments: