This short article was published in 2002 by the Geneva-based journal, Finance and the Common Good, soon after the euro was launched as a physical currency. Its main argument was that the euro is a national monopoly currency extended to a larger territory which could not possibly meet the economic needs of so diverse a collection of countries and regions. The failure of the Maastricht treaty had been to insist on member states replacing their national currencies with the euro, when it would have made more sense to float their own politically managed currencies alongside a ‘hard’ euro. For the next five years this problem was obscured by general economic growth and appreciation of the euro against its major rival, the US dollar. But the subprime mortgage issue and especially the fall of Lehman Brothers a year ago revealed the shaky foundations of the credit boom and has plunged all countries into deep financial crisis. It is only now that the flaws of the euro system have become evident. So I reproduce the original article here and then add an update written in the light of what we know now.
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The euro coins and notes were introduced on 1st January 2002, with some hopes of a new era for Europe. It is no small thing when 300 million people agree to use a single currency, thereby cancelling national currencies with claims of a continuous link to the middle ages. The euro is a modernist event, if ever there was one, a decisive break with the past, symbolizing the birth of a new social order. Or is it? We need to recapitulate what money is and what it does, before we can answer that question. Accordingly, I review some important dimensions of money:
Money as idea and object —’money of account’ and ‘money proper’ (Keynes);
Money as ‘heads & tails’, the impersonal expression of states and markets;
Money as memory, a meaningful link between persons and communities;
Money as a source of economic democracy, when issued by the people.
Then I assess the euro in the light of these four dimensions, asking whether it offers a measure of emancipation from the limitations of the currencies it replaced.
Money as idea and object
In A Treatise on Money (1930) Keynes asserts, against the origin myth that has money evolving from the barter of commodities by savages, that states invented money. He distinguishes the way in which debts, prices or purchasing power are expressed (”money-of-account”) from what is actually discharged or held (”money-proper”). Money had an insubstantial form, as money of account, and a substantial form, as money proper. It was thus always both an idea and an object; we might say, virtual and real. Money as a convenient means of exchange on the spot, stressed by precursors such as Smith and Marx, seemed to Keynes less important than the emergence of a money standard named by law. Moreover, for almost as long as money proper has existed, it has been recognized that private debts can just as well be used in the settlement of transactions expressed through the money of account; and he calls these acknowledgments of debt “bank money”. The essence of modern state money is that currency of little or no worth is offered to a people by the government in payment for real goods and services, as the sole legal means of exchange within the territory and with the obligation to pay taxes on all transactions using it. Central banks jealously guard the national monopoly, policing the banks who actually issue most of the money. During the last two centuries, state money has oscillated between being based on a commodity (such as gold) and being worthless (’fiat’ or paper money).
In practice most currencies are a hybrid between commodity- and fiat-money. Keynes named this hybrid “managed money”, when a government seeks to maintain a relationship of its currency to an objective standard, while its value is intrinsically artificial.
From the beginning, states and markets were symbiotic. States needed the revenues from taxation of trade and some commodities as symbols of power; merchants needed the protection of law and the establishment of a public standard. Each rested on an individualized concept of society: the state was society centralized as a single agency and the market rested on private property in commodities and money. Society conceived of as people belonging to specific communities and associations was excluded from each of these versions.
Heads or tails?
Take a look at any coin. It has two sides. One side contains a symbol of political authority, most commonly the head of a ruler, hence heads. The other side tells us what it is worth, its quantitative value in exchange for other commodities. Rather less obviously, this is called tails. The two sides are related to each other as top to bottom. One carries the virtual authority of the state; it is a token of society, the money of account. The other says that money proper is itself a commodity, lending precision to trade; it is a real thing (Hart 1986).
There is an obvious tension between the two sides of the coin that goes far deeper than appearances may suggest. For Victorian civilization based its market economy on money as a commodity, gold. In our century, very much under Keynes’s influence, political management of money became for a time normal and then again anathema. Now there is talk once more of “the markets” reigning supreme and of states losing control over national currencies in a process of globalization. Yet the evidence of our coinage is that states and markets are or were each indispensable to money. What states and markets share is a commitment to founding the economy on impersonal money. If you drop the coin and someone else picks it up, they can do exactly the same as you with it. This absence of personal information from the money proper is what recommends cash to people who prefer their transactions to be illegal.
But a more effective route to economic democracy lies through people participating in exchange as themselves, not just as the anonymous bearers of cash. Keynes tried to explain that there were not just two types of money, one based on a market for precious objects and the other paper notes made out of thin air, but rather that modern money must be the managed outcome of the interplay between states and markets. But what if money came from the people instead? The German romantic, Adam Mueller, in 1816 came up with a new theory that money expressed the accumulated customs of a nation or people (Volk); while others, such as Bagehot and Simmel, have conceived of money as an expression of trust within civil society, locating value in the management of credit and debt.
In the age of electronic money, other possibilities than heads and tails present themselves. For money is principally a way of keeping track of what people do with each other. It is above all information, a measure of transactions. Money should not be left to the death struggle of the disembodied twins, states and markets. In short, money might become more meaningful than it has been of late.
The meaning of money
The word money comes from Juno Moneta, whose temple in Rome was where coins were struck, making it an early mint. Most European languages retain “money” for coinage (French monnaie, Dutch munt etc.), using another word for money in general, such as silver, cattle or payment. Moneta was the goddess of memory and mother of the Muses. Her name was derived from the Latin verb moneo whose first meaning is “to remind, bring to one’s recollection” (other meanings include “to warn, teach, inform, announce, predict”). For the Romans, money was an instrument of collective memory which needed divine protection, like the arts. As such, it was both a memento of the past and a sign of the future.
A lot more circulates by means of money than the goods and services it buys. Money conveys meanings and these tell us much about the way human beings make communities. Money expresses both individual desires and the way we belong to each other. We need to understand better how we build the infrastructures of collective existence. How do meanings come to be shared and memory to transcend the minutiae of personal experience? Memory played an important part in John Locke’s philosophy of money (Caffentzis 1989). His theory of property rested on the idea of a person who, by performing labour on the things given by nature to us in common, made them his own. But, in order to sustain a claim on his property through time, that person has to remain the same. Property must endure in order to be property and that depends on memory. So, money expands the capacity of individuals to stabilize their own personal identity by holding something durable that embodies the desires and wealth of all members of society.
I would go further. Communities exist by virtue of their members’ ability to exchange meanings that are substantially shared between them. The people form communities to the extent that they understand each other for practical purposes. And that is why communities operate through culture (meanings held in common). Money is an important vehicle for this collective sharing. Communities operate through implicit rules (customs) rather than state-made laws. They may be large or small. If they regulate their members, they usually do so informally, relying on the sanction of exclusion rather than punishment. In the nineteenth century, few believed that the state, an archaic institution of agrarian civilization, could govern the restless energies of urban commercial society. Accordingly, “primitive” communities were studied to throw light on the task of building modern societies according to democratic principles.
The first world war put an end to that. Since then the modern state has often seemed inevitable and small-scale alternatives were hardly relevant. But now centralized states are in disarray, even though their bureaucracies remain powerful. The word is out for devolution to less rigidly organized “communities” or regions. The networks of market economy, amplified by the internet and fast transport, offer more direct access to the world at large. Cheap information allows relations at distance to be made more personal. Now we have to think again about how societies can be organized for their own development.
The meaning of money is that each of us makes it, separately and together. It is a symbol of our individual relationship to the community. This relationship may be conceived of much as the state would have it — as a durable ground on which to stand, anchoring identity in a collective memory whose concrete symbol is money. Or it may be viewed as a more creative process in which we each generate the personal credit linking us to society in the form of multiple communities. The latter, however, requires us to accept that society rests on nothing more solid than the transient exchanges we participate in. And that is a step few people are prepared to take at present.
Future generations may well conclude that we are passing through a cumulative tax revolt of proportions not seen since the end of the Roman empire. The bureaucratic power of states rests on coercion. Revenue collection, both public and private, depends on the authorities being able to force people to pay through the threat of punishment; and territorial monopoly is indispensable to both. This, for all their conflicts of interest, underlies the continuing alliance between large corporations and national governments. The issue is whether borderless trade at the speed of light will permit governments and corporations still to compel payment of their dues.
Nation-states are too big for the small things and too small for the big things (Daniel Bell). Central powers will be devolved to regional or local government bodies, since people are more likely to fund public projects nearer to home. At the same time, they will seek out more inclusive institutions (federations, international networks and single-issue pressure groups) better suited to addressing global problems. The territorial dimension of society will therefore devolve to more local units. These will retain a modified ability to coerce revenues from their members, at a level limited by the sanction of personal mobility. To some extent, support for bodies and projects beyond the local level will be voluntary because of the scope for evading unwanted taxes. The US government is, for similar reasons, now seeking to persuade other public authorities to keep their hands off the internet.
How might public economies be organized without effective means of coercing payment? The Swiss government has recently released its stock exchange from state supervision, because it could not make good its threat to punish offenders. It has encouraged the exchange to draw up its own rules with the principal sanction of excluding transgressors. This example is likely to become much more widespread with the erosion of territorial power. People will then have to turn to their own forms of association and to more informal means of regulation. We could participate, on our own terms, in many forms of money and in the circuits of exchange corresponding to them.
Modern bureaucracy, as embodied in law, markets and science, has undermined the meaningful attachment of persons to the social order of which they are a part. It follows that, when bureaucracy fails, the means of personal connection will have to be reinvented. There are many antecedents for building communities on the basis of individual members’ moral and religious commitment. The growth of NGOs financed by charitable donations could likewise be enrolled in expanding this point. Marcel Mauss was far-sighted when he sought to trace the foundations of the modern economy to its origin in the gift, rather than in barter as the conventional myth holds. Mauss’s emphasis is consistent with the idea of money as personal credit, linked less to the history of state coinage than to the acknowledgment of private debt. I have suggested that the meaning of money lies in the myriad acts of remembering that link individuals to their communities.
The need to keep track of proliferating connections with others is mediated by money as a means of collective memory. People will voluntarily enter circuits of exchange based on special currencies. At the other extreme, we will be able to participate as individuals in global markets of infinite scope, using international moneys of account (such as the euro), electronic payment systems of various sorts or even direct barter via the internet. In many ways, it will be a world whose plurality of association, even fragmentation, will resemble feudalism more than the Roman empire.
In such a world, one currency cannot possibly meet all the needs of a diversified region’s inhabitants. The shift to ever more insubstantial versions of money proper — from metals to paper to bits — has exposed the limitations of central bank monopolies, reduced now to maintaining a single money of account that cannot equally accommodate the economic interests of its parts. In response, people have already started generating their own money, not just as isolated alternatives, but in multiple forms, offering individuals a variety of community currencies linked by increasingly sophisticated electronic payment systems.
The technical form of money is becoming ever more insubstantial — from precious metals to paper notes to ledger entries to electronic digits. In the process money is revealed as pure information and its function as an accounting device (money of account) takes precedence over its form as circulating objects (currency or money proper). The euro began life, for two years, in a wholly virtual form, as money of account, without an objective existence as currency. During this time, it lost over 20% of its value against the dollar, reflecting global financial markets driven by exchange of instruments derived in all sorts of imagined ways from assets with a monetary value, including money itself. This gave the arrival of the notes and coins last January a tangible objectivity in a world of runaway intangibles. The banks of course will still create over 90% of all euros in the form of loans, but the actual currency seemed above all to be a symbol of a new political era. Some people were reported to have used their starter kits to make a display on the living room table. Almost all suppliers took advantage of the switch to round prices upwards. Apart from this, given that the participating national currencies had been linked together within EMU for a decade or more, the euro seems to have made little difference to people’s experience of money either as an idea or as an object.
What about heads or tails? Has the euro altered the balance between states and markets on which so much of twentieth century economic history hinged? The euro may not be a national currency, but it does aim to be federal, like the dollar, and the twelve participating countries represent in effect a league of states. Joining a larger currency bloc is a way of trying to cope with “the markets” — the global tide of virtual money which threatens to swamp the independence of national economies. But the euro is still a form of state money and its management is likely to be even less democratically accountable to the public than its national precursors. The euro is in principle a throwback to the Bretton Woods era of fixed parity exchange rates, at least for the participating countries, and it does not take much imagination to figure out that some parts of the European economy will suffer from its rigidity. At least the euro coins have generally dispensed with the heads of rulers.
The economic destiny of 300 million Europeans is now tied to the fortunes of a single currency whose management cannot possibly meet their varied needs and interests. If government of modern societies from a fixed central point has always been anomalous, this is even more likely to be true of Europe in the near future. Its constituent states will come under pressure from their own people for more flexible instruments of economic management. The euro cannot do the job all by itself. National monopolies of money have in any case only been around since the 1850s. Now would be a good time to recognize the need for a variety of monetary instruments, for as many in fact as our communities.
An editorial in the French newspaper, Libération, of 1st January 2002 celebrated the euro as a revival of the spirit of the Roman empire under the heading ‘Rubicon’:
La marche de César sur Rome fut l’acte fondateur d’une Pax romana qui étendit son empire plusieurs siècles durant d’un bout a l’autre de l’Europe, garantissant au continent prospérité et civilisation. Les Européens n’ont jamais tout ˆ fait perdu le souvenir de cet age d’or·. L’euro, véritable icone de l’Union européenne, est une nouvelle réincarnation de l’éternel projet d’unité d’un vieux continent hanté par sa longue histoire de conflits sanglants· (p. 3)
Moneta returns to claim her cultural legacy and a left-wing newspaper temporarily abandons its republicanism to invoke the idea of empire. If money is memory, then the euro provokes very long memories indeed, as well as a degree of amnesia. Whatever we may think of Rome’s political system, the promise of overcoming the fragmentation of European sovereignty inherited from feudalism is indeed the huge symbolic prize conferred by monetary union. The European Union is a community, not a state; and its founding principle of subsidiarity ensures that there is room for many levels of community underneath. Ironically, by suppressing their own national currencies, some EU countries may encourage the formation of parallel exchange circuits, employing virtual deutschmarks or francs as community currencies. There is a good deal to be said for European unity in the face of the world economy today; but there is bound to be scope for less inclusive monetary instruments to complement the euro, just as French or Parisian identity is hardly erased by a currency that crosses borders in Europe.
Is the euro a step towards money that genuinely reflects the interests of people in general? The technical forms of currency are relatively insignificant — notes, coins, cheques, ledgers, plastic, digits — and the euro embraces them all. The most important forms concern the money of account and, after several thousand years of state money linked to scarce commodities, it will take some effort to embrace another form, people’s money. Territorial states are an anachronism today. Digitalization encourages a growing separation between society and landed power. The euro involves only a limited break with the territorial principle. Its logic is still that of a central bank monopoly within an expanded territory. The best that can be said for it is that the national governments of Euroland are likely to be more constrained in their ability to raise taxes beyond the norm for the region. And of course, travelers throughout Europe will be less subject than before to usurious exchange rates. But against this, the management of the European economy from a single fixed point will impose costs on regions ill-suited by the common monetary policy. And it is still the case that people will finance governments and the banks through the imposition of a monopoly currency as sole legal tender.
There are other democratic possibilities. We can make our own money rather than pay for the privilege of receiving it from our rulers. Already social experiments involving community currencies are breaking new ground, thanks to the possibilities inherent in the new information technologies. The European Commission is at this time studying the scope of community currencies as one answer to the problem of electronic micro-payments. The next chapter of monetary history will be written by new approaches addressing the parts that the euro alone cannot reach. But the euro itself will probably be with us, well, for as long as European people think of themselves as a community for some purposes.
All of the above is quite abstract, but the global economic crisis of 2008-9 makes itquite concrete. The European Union has been in an institutional quagmire for so long that we no longer notice that it does not have a political or administrative means of making economic policy, however slowly. The accession of so many Eastern European members has added further divisions to that between North and South. The committees in Brussels take longer than ever to discuss issues and usually fail to reach agreement. The European Central Bank may have been slow to respond to the crisis because of its own inertia, but this underlying political paralysis must surely have contributed too.
There is a pervasive air of unreality about the crisis in Europe. It’s as if people believe that the whole affair is an Anglo-Saxon imbroglio. In fact, the Italian finance minister said that there was no crisis in his country since bank managers there don’t speak English! There has as yet been no serious effort to deal with the ‘toxic assets’ of European banks. It is true that French banks were generally more restrained than their British and American counterparts, but Europe is much more heavily exposed to the ’emerging markets’ of Eastern Europe, Latin America and Southeast Asia than banks elsewhere. The Japanese were preoccupied with their own bank crisis. The Americans were milking their own people. So the Europeans jumped in to make up the gap with Wall Street and the City of London. Spain has three times the debt exposure in Latin America as US banks. Austria has dodgy loans out in Eastern Europe equal to its Gross National Product, the Swiss have 50% and even the Swedes 25% of GNP. Meanwhile, Hungarians were persuaded to take out mortgages in yen and Swiss francs for the sake of marginal interest rate savings, not knowing they would lose their houses when the national currency imploded. So all this still has to come home to roost.
Germany, like Japan and China, suffered a savage drop in demand for their manufactures. The Germans responded with a call for austerity, belt-tightening, unlike the hot money being pumped out by central banks elsewhere, including the ECB. This set them at odds with most of their European partners, not least France. Having elected a president committed to a Thatcherite programme of cost-cutting in government, France found that Sarkozy, to the disgust of his own party, now embraces the ‘French social model’ he came to bury and promises to exceed the Maastricht limit on government debt indefinitely, while hiring Joseph Stiglitz and Amartya Sen to explain the economic crisis!
Britain, where New Labour came to power committed to joining the euro, has unwittingly implemented the ‘hard ecu’ policy once advocated by the Tories, whereby the national currency floats alongside a euro to which most British companies and individuals have access, as do the Swiss. The Financial Times once described the UK as nothing more than a glorified hedge fund; and, when the credit crunch came, Britain was by far the most exposed to its ravages. If Blair and Brown had joined the euro, the Bank of England would have been powerless. As it was, Mervyn King engineered a radical devaluation which is ongoing and by far the best solution to what to do with all that debt. Moreover, there is some scope for improved exports (at least for services like education and tourism). The Swiss too have made it clear that they would sacrifice their hard currency and private banking sector, if necessary, to save their hi-tech manufacturing exports.
All the countries that stayed out of the euro responded faster and more flexibly to the crisis: Sweden, Norway (whose krona is bidding to replace the Swiss franc as a refuge currency), even Iceland which, after suffering disaster more acutely than anywhere, has devised a package of measures that seem already to be boosting recovery. This contrasts starkly with the countries of the eurozone. Ireland, after a brief period as a ‘Celtic tiger’ with Europe’s highest growth rate, was crushed by the fiscal rigidity imposed by the ECB. Spain is in free fall. Greece and Italy face a bleak future. Austria bids fair to become the first bankrupt country under the new dispensation. Outside the Eurozone, Eastern Europe, especially the Baltic republics of Lithuania, Latvia and Estonia, who seemed to be doing so well in the credit boom, is hurting badly enough for Stalinism to look good in comparison.
It is hard to avoid the conclusion that, of all the world’s regions, Europe will be the permanent loser from this global crisis. The EU is stuck. The demography is in decline. There is an absence of political will at the EU level. The euro has been a handicap. So far, its value has stayed remarkably high, given the underlying problems, probably because the dollar and sterling are courting devaluation and risk hyperinflation if the bond market collapses, Japan is in deep trouble and the Chinese have not yet made the yuan fully convertible. Where is all the money to go? For now, the euro. But if a serious attempt is made to develop an alternative to the dollar, whether Chinese or some international currency, the euro’s days are numbered.
W. Bagehot 1999 (1873) Lombard Street: a Description of the Money Market. New York: Wiley.
G. Caffentzis 1989 Clipped Coins, Abused Words and Civil Government in John Locke’s Philosophy of Money. New York: Autonomedia.
K. Hart 1986 Heads or tails? Two sides of the coin. Man, New Series, Vol. 21, No. 4. (Dec., 1986), 637-656.
J.M. Keynes 1930 A Treatise on Money (two volumes). London:Macmillan.
M. Mauss 1990 (1925) The Gift: the Form and Reason for Exchange in Archaic Societies. London: Routledge.
A. Müller 1931 (1816) Elemente der Staatskunst: Theorie des Geldes. Leipzig: A.Kröne.
G. Simmel 1978 (1900) The Philosophy of Money. London: Routledge & Kegan Paul.