Wim Duisenberg, the 70-year old Dutch founding chairman of the European Central Bank, died today at a moment when his creation, the euro, is under threat. According to Italian Prime Minister Silvio Berlusconi, “everybody” has been “screwed” by the euro. Berlusconi’s statement is generally perceived as marking the beginning of the campaign for the Italian general elections of May 2006. A shrewd politician, the Prime Minister is expressing the gut feeling of many Italians.
Earlier this month European Meltdown, a report by HSBC, the world’s second largest bank, caused a stir by suggesting that countries such as Italy, the Netherlands and Germany might benefit from switching back to their national currencies of yesteryear. One of the reasons for the overwhelming Dutch rejection of the European Constitution two months ago is perceived to be a general sense of having been cheated when the guilder was replaced by the euro in 2002.
Recently the economist Hans-Hermann Hoppe explained how and why “everybody” has been harmed by the introduction of the euro.
Money develops naturally in a free market because there is a need for a highly marketable goods facilitating exchange. Historically such goods have been gold or silver. Money was originally a commodity money with an intrinsic value. Over time all states have destroyed the commodity money by replacing gold and silver with paper money. This was done in a three-stage process.
First the states established for themselves the monopoly to mint gold and silver. This monopoly allowed them to reduce the content of gold and silver in the coins. The second step was to monopolize the right to issue money substitutes, such as paper tickets entitling the bearers to a certain quantity of gold or silver. This monopoly allowed the state to print more paper tickets than the gold or silver available. This in turn caused inflation: a fall in the market value or purchasing power of the paper tickets. Thirdly, and finally, because the state felt that sooner or later it would have to admit that it was virtually bankrupt because it no longer possessed sufficient amounts of gold or silver to repay the value on all the tickets, the tie between between paper and gold and silver was cut, creating a pure paper money.
The latter has allowed the states to produce money at will – something they could never do under a gold or silver standard. Producing money, however, did not produce additional wealth. Doubling the amount of money in this way does not imply that a society has become twice as rich as before, because the amount of goods has remained the same. Doubling the amount of money only affects prices – a process which leads not to the creation but to the redistribution of wealth. Prices will adjust. Unfortunately, they do not do so overnight but need some time to adjust. The people who get the new money (i.e. the additional bank notes and coins) first, before the adjustments take place, are in a position where they can buy at the initially lower prices. It are always the Central Bank, the leading commercial banks and the leading clients of these banks (including the government) who receive the new money first. These are the ones who gain at the expense of the people whose income has not gone up yet when the prices gradually begin to rise. The increase in the amount of money redistributes wealth to those who control the supply of money at the expense of the ordinary citizens who get the new money very late in the game. In this way the citizens (“everybody”) get cheated.
The existence of multiple national currencies prevents such a thing from happening because if one country prints more paper tickets than others the value of its currency will fall against other currencies. In a system of various currencies governments cannot inflate as much as they like. If they do, they risk the devaluation of their own currency. By reducing the competition between different paper moneys, through the creation of a single currency, the European monetary authorities have been able to redistribute wealth in a stealthy fashion. Ordinary people, however, feel they have been robbed. The euro eliminated the previously existing barriers against inflation and against redistribution of wealth in favour of the state.
The euro is a currency which is more inflationary than the most inflationary of the previously existing currencies. This explains why even the Italians are complaining. Monetary centralisation is as bad as political centralisation. The worst thing that could happen is the creation of a world paper money issued by a world central bank which, by definition, can no longer fall against any other paper currency because there is no other paper currency. The euro has been a decisive step in the direction of such a “mundo.” Let us therefore hope that the euro collapses before the “mundo” cheats us all.
The part about monetary centralisation starts at 23 minutes into the recording and ends at 31 minutes.