As Europe struggles with its currency – well, at least parts of Europe – it might be interesting to take a look back at the history of the United States of America, back when they were part of the British Empire. There is a text by Benjamin Franklin from 1729 titled “A Modest Enquiry into the Nature and Necessity of a Paper-Currency“. Here is an excerpt:
There is a certain proportionate Quantity of Money requisite to carry on the Trade of a Country freely and currently; More than which would be of no Advantage in Trade, and Less, if much less, exceedingly detrimental to it.
While this reminds me of the quantity equation, it nevertheless tells us that pragmatism ruled on monetary issues. The monetary circulation can fall short, can exceed the level at which trade of a country would carry on freely and currently, or can just be just right. Franklin correctly recognizes that the circulation of money is needed to carry on “the trade of a country”. One wonders what he would say in a situation like this (data from ECB):
The right hand graph shows that loans to other euro area residents are negative since 2012, which means that the private sector is repaying loans. On a net level this destroys deposits as banks get deposits back that they created when the loans were originally made. Franklin would definitely not been happy about this development of the paper-currency! He recognizes correctly:
Yet if Money grows scarce in a Country, it becomes more difficult for People to make punctual Payments of what they borrow, Money being hard to be raised; likewise Trade being discouraged, and Business impeded for want of a Currency, abundance of People must be in declining Circumstances, and by these Means Security is more precarious than where Money is plenty.
That, I think, is a very good description for the euro area. It is not a country, but it is a currency area, and usually countries and currencies match one to one. It was a big experiment to have one currency for many countries. It seems to end because the politicians in control are not willing to bring about “a certain proportionate Quantity of Money requisite to carry on the Trade of a Country freely and currently“, which could only be done through fiscal spending, it seems.
The monetary circuit in the euro area is not enough to carry on European trade. If it can’t be expanded because of political reasons, than Europe will not be united but fragmented. This would be frustrating, but the US went through some currency regimes before it established a solution that was working. It would not be a scandal to recognize that the institutions of the euro are flawed and that we need reform.