'Foreign' Money and 'Austerity' Haven't Caused Greek Stagnation

by Jerry Jordan

Real Clear Markets
February 26, 2015

The on-going "Greek Financial Crisis" is chock full of lessons about the nature of the entity that serves the functions of money in an economy. Historically, people have chosen to use as money everything from notched wooden sticks to metal coins to pieces of paper printed by governments. When alternatives have been available, people have chosen to hold on to "high-quality-money" and rid themselves of the lower quality forms of money. Sometimes that has meant the illegal holding of foreign forms of money-like US dollars or German marks-instead of the official currency of their own country.

Today, the vast majority of Greek citizens answer pollsters that they want to continue using the ‘euro'-a currency provided by the European Central Bank-rather than return to the ‘drachma'-the fiat currency previously issued by the Greek central bank. At the same time, Greek voters elect politicians who promise to reject economic policies that would be essential to remaining within the "euro zone." As The Wall Street Journal recently commented on Greek preference for euros over drachmas "... they also keep electing candidates who campaign against reform ... (who) promised voters he opposed the bailout before he supported it in office." This inconsistency reveals the inherent tensions arising from forms of money and the associated economic policies of a country.

It comes down to this: a specie currency-gold and silver-imposes sound economic policies on a country. A fiat currency-issued by central banks-requires sound economic policies. What is happening in the euro zone-and clearly in the case of Greece-the imposition of sound economic policies is being demanded by politicians of foreign governments, not advocated by domestic politicians. As the Journal put it, "The conceit remains that external forces can mandate reform. But creditors lack the means to enforce reform, while successive Greek governments on left and right lacked the desire or political skill to implement them."

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