

If Greece should have its own currency, why not U.S. states?  - spottiness
http://blogs.law.harvard.edu/philg/2011/06/23/if-greece-should-have-its-own-currency-why-not-u-s-states/

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mdasen
Having one's own currency doesn't simply solve the problem. Plenty of Latin
American countries know this first hand.

Basically, having your own currency allows you to print however much money you
want to print. By issuing more currency, you as the state get to take
resources from people without having to tax them. As the number of dollars
increases, the value of each dollar decreases.* If you do this too much, you
get hyperinflation. Because you are printing so much money, the value of that
money drops at a ridiculous rate. I actually had an econ professor in college
from Peru who said that during the worst days, a shopkeeper would close shop
to get sales into the bank because if they waited until the end of the day,
they would have lost so much value. Car companies would want to not sell cars,
because the cars held their value more than currency did - so much for losing
money when you drive it off the lot.

It is really hard to break out of a cycle of high inflation. Once the trust in
the system is lost, it can be really hard to get it back. Many countries, in
order to rid themselves of this hyperinflation, start using the currencies of
other countries that manage their currency properly. For example, Panama,
Equador, and El Salvador all use the US Dollar as their currency. Zimbabwe has
started using a mixture of foreign currencies for trade. That eliminates the
chance for them to print more money when they need and they have to rely on
any loans they might get - which would be minimal given their credit ratings.

A devaluation of your currency and the inflation that come with it like that
isn't good. It does allow you to get out of certain debts more easily, but it
also means that investors don't want to invest or lend to you. If you have a
history of using a trick to get out of your obligations, lenders don't want to
lend to you. For most intents and purposes, such a huge devaluation is a
sovereign default - which is what people are worried about with Greece. If you
were able to pay back a fraction of your mortgage (say, 10%) through some
devaluation, it wouldn't be a default, but it would mean that the bank was
getting back a fraction of the money they had given you - even if the nominal
value was the same. So, from the bank's perspective, it means they didn't get
paid back even if they nominally did. (And if there were a way for individuals
to do this, banks would treat it as harshly as a bankruptcy when making future
credit decisions).

So, this wouldn't even be good for Greece. It might have meant that Greece
would have seen inflation of 20%, 50%, 1000% per year for the past decade and
their economy would have faltered along the way rather than them being able to
hide the debt through funky accounting, but it wouldn't be a good option.
Likewise, being able to print extra money isn't a boon for states either.
Government revenue should come from taxes. A little can come from money
printing in a way that is ok,* but taxes need to be the real source of
government revenue. If you spend much more than you take in (a certain amount
of debt for investment can be quite wise), you're going to get into trouble
whether you can print your own money or not.

* In a manner of speaking. If the number of dollars increases at the rate of economic increase, the value of each dollar stays exactly the same (and helps protect against deflation). It's a smaller fraction of the pie (economy), but the pie is now larger.

~~~
hammock
A separate currency for Greece may not have solved Greece's problems, but
that's not the point. What it does it make Greece responsible for its own
problems, protecting Europe a little bit more and aligning incentives better.

It's about responsibility, not a magic bullet.

~~~
sethg
The problem is not Greece’s alone: it’s not like Greece invaded Germany and
forced German banks to loan them money.

Furthermore, if Greece had stayed on the drachma and let it weaken against the
euro, then Greek exports to the eurozone would have been cheaper, and imports
from the eurozone would have been more expensive, so Greece would have had
less of a trade deficit.

~~~
PanosJee
Actually it happened but via versa. Germany invaded Greece back in 1940.
Greece had huge loses and Germans looted the banks and the gold of the
country. Greece up to day has never even _requested_ for war compensation
(about 100 billions). On the other side Greece has benefited from EU help that
has been wasted thanx to Greek corruption but again Germany contributed to the
corruption! Search for Siemens, Mann and submarines scandals. Anyway it's not
that much of Germany's fault but the Greek's

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rrrazdan
Because US has intra-state fiscal transfers. Money is transferred from one
state to another, indirectly. So richer states in some senses subsidize the
poorer states. And they can borrow based on their combined financial outlook.(
aka Federal Bonds). So you have a fiscal policy that is somewhat cohesive, a
monetary policy that is completely cohesive. And this is why US states cannot
have different currencies.

Besides long story short, inter state trade would be severely burdened by
different currencies. One of the primary reasons for Euro was to facilitate
trade.

~~~
sethg
Also, when one part of the country is doing poorly, it benefits from Federal
taxes paid by people in wealthier parts—e.g., no matter how much Michigan’s
state budget is in the toilet, Michigan’s senior citizens will still get their
Social Security checks.

The eurozone has the worst of both worlds: Greece can’t devalue its currency
to alleviate its fiscal problems _and_ there’s no Europe-wide social safety
net to assist Greek people who are being screwed.

~~~
roel_v
No, that is orthogonal to the currency issue, you can have the same currency
and no wealth transfer or different currencies and wealth transfer.

~~~
nhaehnle
As the Greece example shows very clearly, this does not work in the long run.

By the way, this is also the reason that the gold standard failed. The gold
standard was essentially a currency shared by the entire world. This had some
advantages for international trade, namely no or reduced exchange rate risks.

However, differences in how productivity developed in different countries
ultimately led to countries being squeezed out of money to the point where
politicians either had to default or rule by violence against their own
citizens.

A currency cannot survive for very long unless there is a significantly sized
central authority that balances inequalities and acts in the interest of all
citizens of the currency zone.

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ctdonath
FWIW:

US Constitution, Article 1, Section 10 - Powers prohibited of States: "No
State shall ... coin Money; emit Bills of Credit; make any Thing but gold and
silver Coin a Tender in Payment of Debts ..."

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Typhon
It's a matter of national sovereignty. Greece has it, or should have it, as it
is one nation. American states don't have it, as the USA are one nation
(that's the idea, anyway).

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toddh
Why are states the magical unit? How about towns? Neighborhoods? Around banks?
This was the situation before the republicans created a national currency
during the civil war. Isn't attaching currencies to physical locations a
little old fashioned?

~~~
lucasjung
States are sovereign entities, the others are not. However, under the
Constitution states give up some of their sovereign rights, among them the
right to mint their own currency.

~~~
toddh
States were sovereign entities before the Constitution. Now power is derived
from the people, not states.

~~~
lucasjung
That is orthogonal to the issue of sovereignty; in fact, many of the framers
firmly believed at _all_ political power is derived from the consent of the
governed, regardless of the form of government. They wanted to build a
government where that consent is given through ballots rather than taken
through coercion.

The states are sovereign entities, and one of the most important features of
the Constitution is that it preserved their sovereignty even as it subsumed
them into a single nation. That is what the word "federal" means: a single
nation made up of many sovereign states.

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teyc
Actually, the problem is harder. For instance, in Australia, those working in
the resources sector are enjoying a boom while the rest of the economy is in
the doldrums. The so called two-speed economy means that the Reserve Bank has
a difficult time controlling inflation by means of interest rate.

~~~
nhaehnle
This is actually one of the most important arguments in favour of using fiscal
policy for employment and inflation targeting.

Monetary policy (i.e. the interest rate) is just such a blunt tool, and its
effects are really not that well understood.

~~~
teyc
It is politically very difficult, because the government is then seen to be
putting brakes on the most promising sector in the economy.

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Gustomaximus
I think 3 good, (but not necessarily main reasons) to NOT have state
currencies are;

1)It will add a big cost to the economy of doing business. Every time you try
and do business between states you will have to change money and some banker
will take a small cut on the transaction. And this will add up large amounts
it cost the economy. This is a large reason why Europe went to the euro.

2) We have seen how some states manage their affairs. If they are in control
of currency they have the potential to make an even bigger mess of things. Bad
management will end up with a Zimbabwe type hyper inflation. This risk is
reduced in a larger centralised organization... though arguably the US gov is
doing this too much right now...

3) It is symbolic of unity.

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maurycy
Given that money is created by debt[0], one could say that U.S. states already
have their own currencies, i.e. IOUs. Such currencies are not more real than
bits in MasterCard's databases.

A much harder question, though, to ask is what, after all, is currency?

[0]. <http://en.wikipedia.org/wiki/Money_creation>

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wccrawford
I expected an interesting debate about currency and unfairness between states,
and instead I find someone's ideas on how to screw retired people out of what
they've earned.

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gravitronic
A currency post without a bitcoin reference? Anybody holding btc, sell now:
the bubble is over.

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nazgulnarsil
it's so cute when modern scholars reinvent things.

pro tip: we already had a war over this.

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ignifero
Each US state is not a single economy, whereas Greece is an independent
economy with pegged currency. Multi-speed economies exist in many countries
(believe it or not, even inside greece).

~~~
PanosJee
and this is exactly the problem of EU. Single currency without common economy.
Greece has a strong currency but a weak economy. It does not work!

