The Economics of Parallel Currencies

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As Greece’s cash crunch continues and its negotiations are moving slowing and tending towards an impasse, it becomes more and more likely that the beleaguered borrower will issue some sort of scrip in order to fund operations while remaining in the Eurozone. How and how well might that work?

By Jérémie Cohen-Setton, a PhD candidate in Economics at U.C. Berkeley and a summer associate intern at Goldman Sachs Global Economic Research. Originally published at Bruegel.

What’s at stake: As Greece faces a severe shortage of euros, the idea of introducing a parallel currency used for some domestic transactions – while keeping the euro in place for existing bank deposits and for foreign transactions – has made a comeback.  Although historical examples of parallel currencies exist, the analysis of the idea remains in its infancy. It remains unclear whether and how one could find the right mechanics.

Biagio Bossone and Marco Cattaneo write that according to several recent media reports, both the Greek government and the ECB are taking into consideration the possibility (for Greece) to issue a parallel domestic currency to pay for government expenditures, including civil servant salaries, pensions, etc. This could happen in the coming weeks as Greece faces a severe shortage of euros. A new domestic currency would help make payments to public employees and pensioners while freeing up the euros needed to pay out creditors.

Ludwig Schuster writes that at the present time, we are talking about around thirty recent proposals calling for a parallel currency in the eurozone, and these have been coming from very different backgrounds. While specific proposals have been mentioned now and again in the media, the response has been barely discernible.

Ludwig Schuster writes that the idea of parallel currencies was discussed before the creation of the euro. It was, for example, proposed to first introduce the euro complementary to the national currencies, to soften the transition to complete integration. As we now know, the political decision-makers went down a different path. Similarly, following reunification, the German Federal Government decided to take the Ostmark out of circulation after introducing the Deutschmark instead of keeping it as a secondary currency during a transition phase (the then Minister of Finance, Oskar Lafontaine, was unable to gain support for this idea).

John Cochrane writes that in modern financial markets, a country doesn’t even need the right to print money in order to, well, print money! Bonds are money these days. Greece can print up small-denomination zero-coupon bearer bonds, essentially IOUs. Gavyn Davies writes these IOUs would not formally be given the status of legal tender, since this is explicitly against the terms of the treaties. Yanis Varousfakis writes that the great advantage of such schemes is that it creates a source of liquidity for the governments that is outside the bond markets, does not involve the banks and lies outside any of the restrictions imposed by European institutions.

Biagio Bossone and Marco Cattaneo write that the introduction of a Greek parallel currency could take place in at least two ways. The first avenue would be for Greece to issue IOUs, i.e., promises to pay to the bearer euros upon a future time expiration. Basically, these IOUs would be euro denominated debt obligations issued and used to replace euros to pay salaries, pensions, etc. The second avenue would be to issue Tax Credit Certificates (TCC) and assign them to workers and enterprises at no charge. TCC would entitle the bearer to a tax reduction of an equivalent amount maturing in, say, two years after issuance. Such entitlements could be liquidated in exchange for euros and used for spending purposes. Liquidation of TCC would take place against purchases of TCC by those who would provide euros in exchange for the right to the future tax cuts.

Robert Parenteau writes that when issuing tax anticipation notes the government is essentially securitizing the future tax liabilities of its citizens, and creating what amounts to a tax credit. This tax credit will not be counted as a liability on the government’s balance sheet (British consols are a historical example of this), and will not require a stream of future interest payments. Thomas Mayer writes that demand for special government debt can be created by requiring employers to pay any increase in the minimum wage in this denomination. To protect banks’ balance sheets, the domestic authorities could tax withdrawal of deposits and money transfers abroad at the rate of the discount of the new means of payment to the euro in the market.

Thomas Mayer writes that as labor costs would accrue in part in euro and in another part in the parallel currency, labor costs composed of both euro and parallel currency would decline against labor costs in euro only. This would raise competitiveness and especially help labor-intensive exports (e.g. tourism).

Historical Examples

Thomas Mayer writes that there are historical examples of a parallel currency introduced during periods of financial stress, only to disappear later. For instance, California in 2009 paid debt in IOUs that circulated temporarily as a parallel currency to the US dollar. The state repurchased these instruments against dollars after the financial tensions had eased. Also, during the US Civil War, the Union states in the north introduced United States Notes to fund war costs. These notes, dubbed ‘Green Backs’, circulated as currency in parallel to the Gold dollar and were later repurchased by the US government. Against this experience, Argentinian provinces issued IOUs during the debt crisis of 2001. But this was only a prelude to the abandoning of the peso-dollar exchange rate link and the introduction of a floating exchange rate regime for the Argentinian currency.

Biagio Bossone and Marco Cattaneo write that none of those attempts have been carried out on large enough of a scale to successfully address the competitiveness problem, and certainly not in the framework of a monetary union managing a parallel currency in an agreed process with the other member states.  J.P. Koning writes that Alberta in 1936 and Greece in 2015 are in similar situations. Both are non-currency issuers within a larger monetary zone. Both have awful credit. Neither is part of a larger fiscal union.  In early August 1936, when the program debuted, an unemployed Albertan was paid, say, a $1 certificate for each $1 worth of road maintenance work rendered. This certificate was to be redeemed by the Alberta government two years hence, or in August 1938, for $1 in Canadian dollars.

A Hard Thing to do in Practice

J.P. Koning writes that the issuance of parallel currencies seems like a hard battle to win as anyone planning a Greek parallel currency faces a conundrum. In order to pay its bills the government can do little more than introduce a volatile asset that trades at varying discount to euros. This asset’s volatility and relative illiquidity won’t make it very popular with its recipients. An attempt to render that asset more acceptable in trade by setting a one-to-one conversion rate to the euro will result in a short-circuiting of the scheme as everyone races to redeem IOUs.

J.P. Koning writes that if the IOUs trade at a variable discount to euros, then their ability to serve as a competing medium of exchange will suffer. This lack of liquidity militates against one of the key selling points of a Greek parallel unit, which is to finance the government by displacing some of the existing circulating medium of exchange, euros, from citizens’ wallets. Preferably, unwanted euros would trickle back to the European Central Bank to be cancelled, reducing the ECB’s seigniorage but augmenting the seigniorage of the Greek state as Greek IOUs rush in to fill the void. However, if the new Greek parallel unit cannot compete with the euro’s liquidity, then there will be very little ‘space’ for Greek IOUs to occupy in Greek portfolios, and little relief for beleaguered government finances.

J.P. Koning writes that if the Greek government tries to promote the liquidity of its parallel currency by having the units trade at a fixed one-to-one rate with euros, then a garbled version of Gresham’s Law would overwhelm Greece. The Syriza government’s willingness to buy bad money from the public with good money will promote mass conversion into euros and thereby drive all the bad money from circulation. Greek parallel units will cease to exist.

Robert Parenteau writes that the discount would reflect risks that Greece either change its mind about accepting its own debt for tax payments, or that it would suspend the roll over, essentially defaulting on this new class of debt. Tyler Cowen writes that the problem is that of credibility.  Even seeing a new currency, no matter what the plan, could cause people to think their bank accounts will be redenominated, leading to bank runs.


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  1. Fair Economist

    An attempt to render that asset more acceptable in trade by setting a one-to-one conversion rate to the euro will result in a short-circuiting of the scheme as everyone races to redeem IOUs.

    If “redemption” happens by paying taxes, this is not a bad effect. It will be hard for Greece to create a true parallel currency and use it to increase the money supply, but I don’t think that’s the goal. Offhand I’d expect that if they made it into a commonly circulating currency it would just displace Euros out of the country and so the money supply increase would be distributed all over the Eurozone. Greece is small enough that that would be a kind of “bailing with a thimble” situation.

    IOUs worked pretty well here in California although in California’s case the fundamental solvency of the state was not at issue – everybody knew once the recession ended, California would be basically OK. Greece is the opposite, in that everybody knows they will eventually default.

  2. craazyman

    You’d have to ask whether latent cooperational structures exist ex-ante of introduction of any parallel currency, such that distribution of an accessible medium of exchange could catalyze those structures into economically measurable and stable forms of cooperation.

    For example, in a society enmeshed in total chaos and anarchy, money won’t do anything, since the reality of omnipresent conflict makes broad based cooperational structures impossible and people might get so deranged they collectively forget how to even cooperate on a social level.

    Conversely, where latent structures exist within a context of reasonable social stability, parallel currency could enable their manifestation the way paints and a brush can enable a trained artist to make a portrait. You can give paints and a brush to a crowd of people, but you won’t get a portrait if they don’t have the requisite idea of how to use them.

    Economics can’t easily answer the parallel currency question since it relies purely on quantitites as the instruments of analysis and not on forms.

    I’d say “Let it rip”. Greece isn’t that far gone.

      1. craazyman

        A little screwing is OK, just not all the way up every butt, since that ruins it completely. It’s not artistic.

        1. susan the other

          Martin Wolf on competitiveness a few days ago. There are two different economies. The stable, eternal economy of everyday living, and the speculative export-import economy of other goods and services. So why not have two currencies? Wherein only one is taxed and protected and the other one can stuff it.

          1. craazyman

            I was thinking about that today. Then it started sliding in my mind like an avalance and I started thinking about a currency for every form of expenditure, to defend and protect the sanctity of that particular activity from the ravages of unctuous and hubristic greed in other areas of life. And then it got to be like gods in Ancient Rome. I read some history that said there was over 1,000 gods, it might have been 10,000, I can’t remember. It got so bad they had to kill them all and go back to just one. It might get like that.

            1. craazyboy

              Economist killed off the many-handed import duty god – then replaced her with currency gods for every occasion. This is why things are so messed up.

            2. OpenThePodBayDoorsHAL

              Bernard Lietaer (our Chief Currency Architect) points out that “monoculture” single currency systems are very low-cost and efficient, but like all monoculture they are very brittle (a single virus can wipe out an entire forest of plantation pines). By contrast, multiple currencies provide resilience. In addition, money is a construct that covers all kinds of relationships: furrea kippu in Japan, for example, is a very successful mutual credit scheme based on elder care, 1 unit equals one hour of elder care, and people earn and spend them freely.
              You might look up LETS, the WIR, Berkshire Bucks, the Bristol Pound, and Sardex in Sardinia. The Ile de France (Paris region) is launching a currency designed to keep the flow of spending local.
              Also important to mention that debt-based is not the only answer either, you can separate money and capital formation. The problem with debt-based is that CBs can only print the principal, they can’t print the interest, so without growth the system collapses (sound familiar?).

          2. Mel

            There would have to be no inter-convertibility, I think. Else it’s wide open to the kind of damage we see when PE outbids dwellers for housing. (A few) people still have enviable jobs trying to explain how that support of stratospheric prices is a good thing. There’s enough of the fake financial money around to destroy the incipient real-money markets, if it’s allowed.

    1. diptherio

      The Greeks seems to have something of a cooperative culture still. A big Solidarity Economy conference just happened in Athens about three weeks ago and there have been a few stories like this one coming out of Greece:

      Occupy, Resist, Produce
      (How workers at Thessaloníki’s VIOME took over their workplace)

  3. John Merryman

    In personal terms, this would seem to amount to kiting checks.

    There is a much larger issue at play and that is the fundamental concept of money.

    We are taught that it emerged to facilitate barter and so serves as a form of notational commodity, but that’s wrong. Money is a contract. Even gold based currencies are a contract, in that it is a promise to exchange a given amount of gold.

    Basically any asset is backed by a debt and that amounts to a bookkeeping entry and as such, all currencies are voucher systems. No voucher system can function if it accumulates more promises than services and assets that can be exchanged for them, so there has to be a fundamental need to keep strict limits on how many units can be in circulation. Yet our current economies function by trying to keep as many people happy as possible, by treating these notes as a form of property to be accumulated and the best way to store them is to loan them back to the public, so there is a strong incentive for the public to run deficits and store these promises, by creating ever more and the result is a ponzi scheme.

    When the Fed tries to lower the supply of money, one method is to sell the public debt it holds and retire the money it acquires. So who is going to trade their money for those bonds, if not those with more than they currently need? Which goes to say that excess money is in the hands of those with excess money.

    What we need to do is to begin to understand it functions as a society wide promise and as such, displaces many of the other, more organic forms of reciprocity and interpersonal trust. Now we are not going back to tribal cultures, where everyone truly is dependent on the local group, but we can acknowledge that bottom up basis and not assume a system of ever expanding promises can be the basis for a stable social order. We need to recognize that money is not private property and only serves as a useful tool that needs to be kept in check.

    It is bit like refined sugar. Quite appealing in small amounts, but we don’t want to make it the whole diet.

    So at the bottom, people have to understand they still need to rely on those around them and shouldn’t drain too much value out of their communities and environments for these broader currencies.

    While at the top, the powers that be need to understand it is not in their long term interest to corrupt the system of communal trust they need to sustain the societies they wish to govern.

    When this wave does crash, hopefully we learn a few more lessons life has to teach us.

    1. Disturbed Voter

      There are much larger issues in play … not just what is money, but what is the State and what is commerce. If we don’t come up with the right answers, and implement them, then it is game over for Western Civ. And yes, sugar is the corruption of food, just as fiat is the corruption of economics … and a little won’t hurt you, but a sugar only diet will kill you. Our society is in advanced diabetes, in several different dimensions.

      One problem with reforming money, even if one realizes what it is … you have to reform the State and commerce at the same time … so color me skeptical, that we will see any real reform of money. Our present dead end is because of prior attempts at reform … in the context of pervasive State and commercial corruption.

      1. John Merryman

        Yes, there are a lot of deeper issues at work here, but it is matter of which will have to be addressed first.

        Basically I would say the state is the community reaching its bounds and how it reacts to them. Some will be integration with other communities, either through force, cooperation or some combination, creating a larger state, while some with be boundaries, both of physical territory, or delineating boundaries with other states.

        Then Government functions as the central nervous system of this civil organism.

        Yet our current problem is with an economic circulation system suffering many of the issues one would associate with biological circulation issues. Not only diabetes, but clogged arteries, as these primary vessels accumulate fat, rather then pass it through. Resulting in poor circulation to the rest of the economy and high blood pressure to compensate, but which mostly leads to more clogs in the arteries, than better circulation.

        Necessarily when the circulations system is corrupted, the central nervous system deteriorates as well and the state is taken over by the transnational organisms, aka corporations.

        Though as genetic hitchhikers they can be either symbiotic, or parasites on the value flowing through and created by these states. When the states die, they will also suffer, at least those based on healthy economies in these states. Those based on social control might find it great, like maggots on dead flesh.

        Though if we can integrate communal value back into the organic functioning of the community and not have it as a notational superstructure, the ability of external organisms to feed off the community would be seriously reduced.

    2. reslez

      > We are taught that it emerged to facilitate barter and so serves as a form of notational commodity

      What “we” are taught is historically incorrect. Refer to Graeber’s Debt: The First 5000 Years. Modern money isn’t a contract. Money ought to exist in whatever amount is necessary to allow economically useful transactions to take place, such as the hiring of unemployed workers. If there is insufficient money circulating in the economy for this purpose it’s the function of government to supply it.

      Money is not a promise or a store of wealth (although savers may try to use it to hedge against uncertainty). Money in itself is nothing. It’s useful only for the transactions it enables. A man can save a million dollars for a disaster, but when disaster strikes it’s food and shelter and other physical and social goods that actually matter.

      > Basically any asset is backed by a debt and that amounts to a bookkeeping entry

      Huh? Why can’t an asset be backed by equity? Nothing in our system of accounting requires everything to be backed by debt.

      Alternate currencies are not equivalent to kiting checks. In some parts of the U.S. check kiting is a felony. Alternate currencies are what happens when a responsible government does what’s necessary to work around anti-human, anti-social rules crafted to enrich banks.

      1. John Merryman

        Whatever it is backed by, it is a promise, an obligation for said backing.

        Anyone can issue money. The problem is getting others to accept it and governments usually have resources to back their promises. The question is whether they use these assets to generate positive, i.e. wealth building, or negative/loss feedback loops. Putting people to work, feeding them, building armies, etc. can be either, so it is best to be moderate in one’s effort and keep track of the effects.

        The example being described for Greece very much was. In fact, it was probably closer to writing bad checks, as they seemed more likely to eventually bounce, then be caught in the nick of time. When you denominate your currency in some other currency, you are effectively writing a check.

        1. OpenThePodBayDoorsHAL

          “Any asset is backed by a debt”, um, no, there’s a rare, very dense shiny element that has no counterparty and happens to be highly coveted and widely-held by central banks. It has no counterparty, and no debt is required to hold it. Beneficial title to a non-rehypothecated unit held on your behalf by a vault provider is also a Tier 1 asset under Basel III.
          And don’t tell me “oh there’s not enough of it to back a money system, of course there is, it’s just a question of price.

      2. John Merryman

        You start by saying money is nothing, then point out it can be asset backed, as well as debt backed. If its backed, its not nothing. It is a promise, a contract.

  4. Jesper

    Some say that Greece is in a liquidity crunch, the same people also say that a new parallel currency would be used/circulated quickly. In other words, the liquidity crunch would be ameliorated by the introduction of a parallel currency and the increased activity should in theory improve the economy.
    If the new currency was something that people and companies would like to keep then the economic activity would barely increase – low multiplier…

    On a related note:
    The velocity of money is at all time lows. The powers that be do not want to change that, the current situation of low velocity money benefits big corporations and banks. If the powers that be actually believed that the velocity of money needed to be increased then there’d be legislation forbidding payment terms of in excess of 30 days and the legislation would be enforced. Small businesses are killed and not even started due to the payment delays from big companies/customers.

  5. jgordon

    If you are already seriously considering what constitutes legitimate alternative currencies, then you’re already part of the way towards asking why there needs to be government involved in the first place.

    A more fundamental question is, what is a government? For example, if/when TPP/TTIP/TISA is ratified, wouldn’t GE then constitute part of the sovereign government of the world and therefore have a legitimate right to issue a currency?

    As mentioned in the article, CA issued a sort of currency before and seemed to draw no objection from the author. What if a local municipality (it’s been done before recently) decides to issue an alternative currency? Is that legitimate?

    A couple of years ago I read about white supremacists in the south who were better armed and trained than the local police. What if they issued an alternative currency and demanded a portion of it be returned every year to support their activities? Wouldn’t their currency be more legitimate than the Federal Reserve’s currency–since at least in their little area they wield more power and authority than the state.

    I’m just pointing out for the author here, but there are already alternative currencies actively in US in Greece and the EU at the moment, and I don’t just mean crypto-coins. For their users, that they don’t have official state sanctioning is a tremendous positive, not a drawback. I find it fairly amusing that the author completely ignored this phenomenon that is actively transpiring in Greece at the moment.

    1. H. Alexander Ivey

      A government needs to be involved because it is the government that ensures the exchange value of the money, not the producers or the consumers of goods, nor the banks that issue the money for the purchase of said goods.

      Money is a 4 way system, that is, it involves 4 players, If I had a white board I could diagram it. (hint to the blog’s hostess :-).

  6. washunate

    It remains unclear whether and how one could find the right mechanics.

    I’m not sure to whom the matter remains unclear?


    Parallel currencies as the phrase is being used work fantastically for short-term cash flow management issues, particularly when you need a public investment now that will be paid for by taxes/user fees dependent upon that up-front investment. This is what R/TANs and the various associated IOUs are. More broadly speaking, we do all sorts of tax credit/cash flow/incentive schemes in public policy. One of the core critiques of the public-private partnership model of contemporary fascism (sorry, uh, governance) is the extreme overuse and systemic misallocation of resources stemming from these kinds of tax shenanigans – but that’s a value judgment for the bigger picture conversation. In strict, narrowly defined operational finance terms, these devices are quite effective at producing short-term activity.

    However, parallel currencies are simply nonsensical when talking about long-term debt management. The debt is not owed in the parallel currency. (unless of course one has the capability of enforcing a fixed exchange rate from the parallel currency into the debt-denominated currency, but if one has that level of power, the parallel currency is irrelevant anyway.)

    Your only internally controllable options are to increase tax collections, cut spending, and/or repudiate debt.

  7. Older & Wiser

    You paperbuggers can’t stop trying to re-invent the wheel, can ya ?
    You sound like a bunch of clueless school children half-guessing who discovered America.
    Mickey Mouse, no Superman, no Robocop, no The Transformers, no…

    The wheel (and money) have already been invented guys.
    Did you know that ?
    Well, yes.

    The wheel is ROUND, trust me.
    Money is GOLD, and all the rest is CREDIT.

    Don’t fuzz me guys, it was YOUR OWN J.P.Morgan that said it !!!!
    (check it out, read, think some, and then think some more)

    1. paulmeli

      Gold is a commodity. It is not money any more than bananas are money.

      Transactions using gold are barter transactions.

      Take your gold to McDonalds and try to buy a hamburger with it.

      1. MyLessThanPrimeBeef

        Beggars can’t be choosers.

        In Greece, they are buying German cars to preserve what they have. They are not worrying whether cars are money or not (May 12, 2015, Telegraph).

        These buyers are not even holding onto their paper Euros.

        Two days later, reported in the same Telegraph, Germans must have known something about their German cars. The Germans, though not beggars, but quite prosperous, instead, are rushing into buying gold coins and bars (Telegraph, May 14, 2015)

        1. paulmeli

          Fiat currency doesn’t collapse because there is too much of it…fiat currencies collapse when for some reason production collapses. This is not the same as being unable to buy that production i.e. insufficient demand.

          Trying to buy production that doesn’t exist is what causes hyperinflation.

          Whatever people do in panic is usually done in ignorance.

          Germans especially have a poor grip on monetary reality, but are not heads and shoulders worse than the average layperson (or gold-bug).

          1. MyLessThanPrimeBeef

            Not just production collapse, but when the evil empire itself, the USSR, collapsed, its fiat currency collapsed too.

            As for Greeks with some cash left, they want something tangible. The Euro is not collapsing (yet), and they are not thinking that, even though they don’t want to hold it. The Greeks just want to survive. They can’t be choosers. That German car could be the buyer’s retirement plan.

            It’s interesting they are not converting their cash to the dollar, but buying German cars. I don’t know, but maybe it’s hard to get dollars there.

      2. washunate

        Maybe the world’s governments keep some of their monetary foreign exchange reserves in a banana-like substance because our financial rulers are a monkey-like substance?

      3. Older & Wiser

        darling paulmeli,

        Get yourself $ 1200 for an ounce of your gold (got some right ?) and buy us all 120 Big Macs okay ?
        I’ll buy the beer for everybody with only half an ounce of my gold okay ?

        Honey, have you ever asked yourself why Central Banks HOARD gold to the tune of many thousands of TONS ? Or why do they have been repatriating their gold like mad lately ?

        They MUST be in the jewellery business right ?
        Or maybe they are just plain dumb stupid.
        Yeah, that’s probably it…

        1. Yves Smith Post author

          *Sigh*. See how much good that gold does you if we ever have the sort of crisis goldbugs dream about.

          Women in South Vietnam would get gold necklaces, usually beads. A cultural store of wealth for them.

          During the war, they’d trade the beads for vastly less than their metal value for food and medicine.

          Governments make fiat currencies valuable by requiring their use to pay taxes. If things get so bad we don’t have functioning governments, gold won’t be of much use in barter because it’s too hard to break it down to small transaction sizes and verify quality and purity. Cigarettes really are better that way.

          1. washunate

            That actually raises an interesting point for personal finance. I very much agree the gold bug doomsdayer prophecies are unlikely…and if they happened, gold wouldn’t be that much more useful than anything else, anyway. (but then again, that’s why the ‘preppers’ stockpile food, medicine, and so forth…precisely because you don’t want to have to sell your long term savings just to fend off a zombie for a day)

            But outside of the doomsday stuff, if you’re lucky enough to have significant savings to protect, gold has actually served you pretty well within our existing system. That to me is an interesting nuance. The ‘stackers’ are different from the ‘gold bugs’ (who are both different from the paper speculators.) The latter think we need to return to hard money days of linking gold to the dollar (which itself is an interesting remembrance of history since the populist route was bi-metalism; the bankers wanted gold alone to anchor the dollar).

            But the former are simply observing that a half century of monetary spewing means that there are a lot more dollars chasing the gold. Somebody who bought an ounce of gold in 1965 has a lot more dollars to their name today. As does somebody who bought gold in 1995. That doesn’t mean here in 2015 OMG BUY GOLD RIGHT NOW. But it doesn’t mean owning gold is stupid, either. Depends upon people’s personal financial situation, timeline, goals, and overall plan.

            And of course it’s not just gold. Silver quarters and dimes and copper pennies have completely disappeared from US circulation because their metal is worth more fiat than the stamped value upon the coin.


            The interesting macro question we’d all love to know is how much gold do western governments actually possess. Because either they possess a lot – thus stating undeniably that gold is important – or they don’t posses a lot – thus stating undeniably they are a bunch of liars and thieves. Win-Win.

            I do hope if an insider ever leaks a real audit, they leak it to you. That would be a great post.

            1. paulmeli

              I’ve read (Barry Ritholz?) that if you bought gold when it was around $300/oz then today you are still in the red in real terms, and bonds (Treasuries) have outperformed gold and the stock market over that period.

              Regardless of how much gold is possessed there isn’t anywhere near enough to back all the worlds currencies…an ounce of gold would have to go for 100 times more than it does now (shooting-from-the-hip…it may be 1000 or a million times).

              That and it’s extremely unlikely that the stock of gold could be grown fast enough to keep up with the growing economies. Seems like a prescription for deflation and the history of gold-backed currencies tend to support that idea.

              1. washunate

                Yeah, when we’re talking financial returns specifically, that question becomes quite relative. Every investment is in the red relative to, say, Apple stock. But if you went all-in on Apple stock in the mid-90s, you were taking a non-zero chance of being wiped out, that Wall Street would bankrupt the company before it recognized the future profitability. Risk/return.

                The particular issue of bonds I think is going to be a real paradigm shift sometime in the next few years, because the past three decades of performance has been a one-time shot of ever falling rates and emergency socialization of losses. Now that we’ve done all this, there’s just not that much more to do.

                It’s the idea of ‘backing’ currencies that I find intriguing in the hard money/soft money exchange. The whole point of fiat, of freely floating exchange rates, is that no such backing is needed. It doesn’t matter whether the DJIA is 5,000 or 15,000 or 25,000. That’s just betting in secondary markets. The transactional use of the fiat currency in the formal economy is unaffected. It doesn’t matter whether gold is $300 an ounce or $1,200 an ounce or $10,000 an ounce. It doesn’t matter whether a nice house costs $50,000 or $150,000 or $500,000. It doesn’t matter whether some economist’s pet computer model says inflation was 2% or 5% or negative 5% over some arbitrarily short period of time.

                What matters is the relatives distribution of the fiat amongst the population – how the money is being spent – not the absolute price levels. Base 10 math allows us to use decimal points and zeroes quite easily to handle any figure large or small.

        2. Older & Wiser

          Does anyone here care to read and REMEMBER what the US Constitution says about the dollar re gold and silver ? Is it that hard ? I promise it’s short and sweet…

          Does anyone here accept that our forefathers centuries ago went through all of these analyses and much more taking into account what had happened over and over and over and over and over and over …. and OVER AGAIN… with every single fiat money in the history of mankind ?

          Does anyone here understand that the average life span of any and every fiat currency ever used in the history of mankind (more than 3000 thousand ‘legal tender’ currencies, never real money) is less than 50 years ?

          Does anyone know and understand that we are currently navigating the throes of the 4th. (fourth) US dollar in our history as the other three defaulted flat on our faces same as this is one will ?

          Was J.P. Morgan Sr. dumb ?

          What’s wrong with you NC financial experts of sorts ?

          It’s not that goldbugs dream about any special crisis.
          Rather it’s paperbugs actively promoting money crises with ‘legal tender’ paper currencies.

          1. Yves Smith Post author

            Ancient Egypt existed for over nearly 3000 years with many forms of currency, including grain receipts and beer. Rome also did not have a hard currency and the Roman empire lasted longer than ours probably will.

            JP Morgan Sr. lived in the gold standard era. so he was bound by the practices of the system of his day.

            1. OpenThePodBayDoorsHAL

              paulmeli, Older, Yves:
              I think this man knows more about money than everyone on NC combined. Gold is a currency, has been for 5000 years:

              Speaking of Vietnam, my friend’s Dad worked at the US Embassy there in 1975. During the fall, they had a line of people out the door wanting to leave, people with suitcases containing all their possessions. He tells a sad story of a man who came up with a suitcase full of South Vietnamese currency, the response was “I’m sorry sir that paper is no longer worth anything”. Next guy came up with gold bars in his suitcase, response: “right this way sir”.
              Gold is money.

              1. Yves Smith Post author

                I never said gold has not been a currency. The US and Europe were on the gold standard, with interruptions, from the mid-late 1800s (depending on the country) through the Nixon Shock of 1971. I was arguing that the idea that a gold based currency is desirable or that currencies have to be backed on some arbitr

          2. washunate

            But the US Constitution does allow the feds to adopt a freely floating exchange rate. Article I, Section 8 is quite clear that Congress is empowered

            To coin Money, regulate the Value thereof, and of foreign Coin

            What it bars (Article 1, Section 10) is individual states from going against whatever system the USFG configures (other than explicitly allowing gold and silver coins to be used for payment/debt regardless of federal actions).

            Arguing that Congress should adopt and enforce a fixed exchange rate between FRNs and gold or FRNs and silver or FRNs and a variety basket of goodies is a political argument, not a Constitutional one.

            This is where I think the hard money camp has gone off the rails a bit. If you want a Constitutional level of force on monetary policy, it needs to be presented as a proposed amendment to the Constitution itself. I think you will find very little popular interest in this, but that is just a guess on my part.

            I agree with you that there are paper bugs who live off crises (I believe shock doctrine is the phrase you are looking for in leftist circles). But there’s nothing explicitly unconstitutional about a soft money system. The long-term survivability of a currency bloc is based upon whether money is invested productively or squandered wastefully. The quantity of money is irrelevant.

  8. kevinearick

    Commercial Banking for Idiots

    You cannot see anything at the aggregate level, but derivatives of individual behavior aggregated. The Fed looks at noise, and sees whatever it wants to see, reinforcing itself, as do most individuals, and therefore assumes that it sees the economy. You are still hearing media experts stating that the economy is 75% consumption, and therefore consumption must be subsidized with financial policy, which is an incredibly stupid statement, parroted by all the participating consumers.

    Peer pressure, what public education teaches as an organizing principle, to maintain the status quo, is a passive enterprise, which is why empires are passive, and run by passive aggressive sociopaths. War is just the ultimate misdirection, which changes nothing. All participants compete for something for nothing, creating artificial scarcity, which can only end in war, which never ends. What has changed in the Middle East, over thousands of years, but the names of the corporations?

    You still hear financial experts stating that debt works, on the assumption that labor can be replaced by machines, and the middle class working for debt is still in frenzy about being replaced by machines, designed and built by people who have never worked a day in their lives, graduating from University as experts in the process. Net, all participants are passive investors in a top-down empire that is simply distributing debt, which intelligent labor, which is becoming incredibly scarce as a result, will not accept, and the bloggers have the audacity to pretend that they are somehow on labor’s side, defining labor for the purpose.

    The Fed and Congress have completely disabled bottom-up business development, on the assumption that scale is what wins wars, which are never won. The banks aren’t banks. They are simply arbitrary debt distributors, seeking a return on no work, and getting it, real estate inflation. Living standards have been falling steadily, despite all the talk, on a platform built for the purpose, yet the line of reasoning remains the same. Somehow passive investment, which created the situation, is going to be the solution, if we just hire the right politician.

    There is bridge between where the economy is and where it must go, and all the critters are at an abutment, the wrong one, bidding up the price of real estate, expecting a solution, hoping others will die building the bridge for them, calling the result economic activity. Community banks, the proffered solution some time ago, still use the same parameters as TBTF banks, loans on sunk cost real estate and credit reports on empire debt as income.

    So, you have a job 600 miles away. You need gas, a hotel, equipment rental and more tools. Further, the issue is recurring. Call it recurring business expense, call it a line of credit, call recurring reimbursables, call it whatever you want. Are you going to put your children’s home up for collateral to build a bridge for other people to increase tax on your children? Are you going to pay 200% interest to the loan sharks? Or, are you going to let the critters kill each other, until they choose to wake up?

    FDR didn’t solve anything. Empire has been kicking the can down a dead end road for thousands of years, with the likes of JPM and Goldman, hiring salespeople to gather their family’s income, and invest in more of the same. Blaming JPM and Goldman only serves to change the name on the corporation. Thousands of years, and all participants are pointing at other participants as the problem, promising change.

    Tall Paul does know banking better than the others, but none of them are labor, nor are the denizens being defined as labor. Labor doesn’t work for Uber.

  9. Paul Spring

    Just a shell game. It is pretty clear that years of financial greed and lack of investment in Greek society has left them without the expertise and capabilities to provide for themselves and without the ability to provide services to the rest of the world in exchange for the products and services they cannot produce domestically. (The US is heading in that direction too) “Greek-backs” would only be recognized domestically at best, and would not be of much use if the domestic “shelves” are bare. Who’s going to sell an iPhone in return for Greek-backs?

    Greek debt must be forgiven and a Greek “New Deal” needs to be implemented. There is no pea under any of the shells.

    1. HotFlash

      Of course Greeks wouldn’t be able to buy iPhones with drachmae or whatever they call it. ( I’d go with drachma myself since it would seem less like funny money and also Very Greek and reassuring exp to old people, like the old days. But I digress.) The whole point of a parallel currency in this case is to pay Greeks, not buy imports or pay Euro-debt, and use the precious euros to pay the damn bankers. Salaries of Greek civil servants would be pid in drachmae, ditto pensions and probably suppliers, or perhaps they would be part and part. Lots of these types of currency exist, eg the Swiss WIR (

      The advantage of a Greek-only currency would be that Greeks would have to spend their drachmae on Greek services and goods. That’s actually a lot of stuff, you know, and all the basics as in necessary for life — food, rent, health services, clothing, taxes. They can also buy things that make life civilized, such as flowers, restaurant meals, education, taxi rides, music, theatre, cute shoes and wine. All these things can be produced in Greece, and with some ingenuity and time to get things in gear, maybe they can make Greek iPhones — the Italians invented the Arduino ( Guess they’d be gPhones, but still. The tech is not impossible and could even be a cottage industry. Yes, components would pro’ly have to be imported, but they are cheap like dirt and would be a good use of the precious Euros. Drachmae would not be suseptible to capital flight, as they are no good outside of Greece.

      I am guessing that Greeks think this is coming, and that is why they are spending their Euros now on, for instance, German cars.

  10. JohnB

    Of the four criticisms of these plans at the end, I think only the last one – citizens fears of a redenomination upon seeing a parallel currency, leading to an accelerated bank run – is valid for TAN’s; with the other criticisms not applying to them.

    TAN’s ‘negative feedback’ nature, where any discount leads to greater demand for TAN’s, would – I believe – solve any potential liquidity problems.

    I’d be interested in seeing more discussion of the Gresham’s Dynamic here though – I believe TAN’s would be less prone to that, compared to the other plans, but it’s an important consideration whenever there are parallel currencies.

  11. Jeremy Grimm

    Here goes — another comment outside areas I where I have knowledge.

    As I recall there was an Austrian town that created a parallel currency during the first Great Depression. The town used the currency to put its unemployed to work fixing the roads and making other repairs. The currency was accepted as payment for the town’s property taxes. The money was reasonably successful at putting people to work and providing a plausible reason not to foreclose on homes and farms because of unpaid taxes. Once it’s success became known outside this town, the higher government had it stopped.

    I also recall payments made to the American Colonial Soldiers by the Continental Congress using a “created” money, promissory notes to be paid after a successful Revolution against Britain. Unfortunately many farmers fighting in the Colonial Army needed a currency they could use to pay debts and buy seed for their farms. Speculators purchased the promissory notes, with “hard” currency [pounds sterling?] often for small fractions of their face value. After the successful Revolution, Alexander Hamilton made strong arguments for paying the promissory notes based on their full face value, even though the greatest part of them had found their way into the hands of speculators. To redeem the notes, the Continental Congress enacted an excise tax on distilled liquor — an important product of the Northeastern farms from which had come many of the Colonial soldiers forced to sell their promissory notes. This led to a great deal of unhappiness culminating in what is called Shay’s rebellion.

    [I am old, so please correct any lapses of my memory.]

    After reading today’s post I am not sure which kind of parallel currency it speaks of. The idea of paying government workers with this parallel currency sounds more like the promissory notes issued by the Continental Congress than the currency created in Austria to put people to work and avoid foreclosures on local property as a result of municipal foreclosures.

    1. Disturbed Voter

      Your memory is better than you give credit to it ;-) I agree that the most likely form of parallel currency will either be drachmas paid out to government employees and government contractors … and then circulated thru the local economy as liquidity … or they will simply adopt the yuan aka “ren min bi”. Depends on how closely they will work with the AIIB … which will function as the replacement for the IMF … but that can only happen if the IMF/ECB loans are repudiated. The Chinese have no interest in supporting Europe or Nato.

  12. Stephen Clark

    I think the Lincoln Greenbacks went past a parallel currency. Lincoln was faced with 25% interest rates to finance the war, he just paid the Greenbacks into circulation to run the war and I think it was the main currency during the war.

    They were eventually bought out but not until they had their status changed several times based on who was holding. Redeemable when congressmen held them, not redeemable when they didn’t. Money was made on the resolution of the issue.

    There is good literature on Lincoln’s money policy versus the Confederate’s, I’ll try to find a link on that.

    Greece should issue, make it payable in taxes and then let it float, not peg it to the Euro. It might open another door out for Greece.

  13. Drew

    Seems to me that the way to do this is to set up local currencies, such as a scrip that would be accepted by people in a town. This could be used by the baker to pay the farmer for eggs, who would redeem it to the barber. It wouldn’t require explicit government input. However, a smart bank could get in the game by setting up a parallel banking system to store and track it, then expand the acceptance across the country. When – I mean if – Greece defaults, the government might then simply piggy back on this to form a new currency.

    This would be kind of like the old Chinese system of renimbi for locals and exchange currency for foreigners.

  14. Vteodorescu

    Parallel currencies in a modern state will not coexist for long, due to the Gresham dynamic, as originally presented : bad money drives out good money.

  15. Steven Greenberg

    If MMT is correct in that the only real restriction in printing money is the capacity of the economy to produce up to the level of the money printed, then the current policy of putting a lot of people out of work, certainly seems counterproductive. If a parallel currency allows the government to stimulate the economy, and increase its output, that would seem like the right approach. So, the government ought to be able to put people to work at least to the extent that they would collect the iou’s back as tax payments. I am not so sure how much farther the government could go to make the parallel currency be viable. Maybe you could think of the parallel currency establishing a barter system where that would facilitate the citizens exchanging these ious to put themselves back to work.

    This would also have the beneficial effect of keeping the employment and production circulating within Greece and out of the hands of the rest of Europe.

  16. Niels Buenemann

    One catch is that issuing a parallel currency outside the control of the European Central Bank is clearly against EU law – but then again these rules are there to be bent.
    Consider the following extracts of the two main EU treaties:

    Article 3 of the Treaty on European Union (TEU)
    4. The Union shall establish an economic and monetary union whose currency is the euro.

    Article 3 of the Treaty on the Functioning of the European Union (TFEU)
    1. The Union shall have exclusive competence in the following areas:
    (c) monetary policy for the Member States whose currency is the euro;

    Article 282 TFEU
    1. (…). The European Central Bank, together with the national central banks of the Member States whose currency is the euro, which constitute the Eurosystem, shall conduct the monetary policy of the Union.

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