A Magazine about the Hudson Valley’s local economy, published by Hudson Valley Current.

Currencies Grow When Decentralized

Cities Used To Have Their Own Money

By Mark Griffith

    How many currencies does the world need? Actually, let’s make this more concrete. The euro was a colossal bet on the proposition that Europe, at any rate, needs only one. You will have noticed that the experiment is going badly. And why is that? There are two main theories: One says that the currency needs more time, and that moves towards greater political integration (for example, a central budget across the eurozone) will make it work the way it should. The other says that the currency zone has basic problems of cohering and will, for vaguely described “cultural” reasons, not work.

    Yet there’s something slightly mysterious about both opinions. With the first, there is no consensus on why the eurozone has taken so long to bring its component economies into line. And as far as the second opinion goes, the very fact that Europe embraced a single currency in the first place tells us something about how well some of those individual national currencies were doing pre-euro. Besides, it seems as though large unified currency zones ought to fly. The United States has one currency and it’s a very wealthy place. Russia, China and India all seem to make it work. How could a patchwork of different currencies be better?

    Historians of money point out that most of history was multi-currency, with distinct currencies linked to cities not countries. The one-country-one-currency paradigm actually dates back only to 18th-century English and French banking centralization. The current arguments over euro policy calls to mind a bitter 19th-century division in the U.S. between East Coast “Hard Money” advocates and Midwestern “Soft Money” (or “Free Banking”) supporters. The East Coast wanted—and got—a central bank controlling all US banks. The Midwest had—and lost—banks free to issue their own bills of deposit that while nominally denominated as dollars, wholesalers could discount based on each bank’s reputation for creditworthiness.

    It turns out that the fastest ever half-century of growth in the US did not take place within a currency union, but a multi-currency era. Such a result can seem anomalous only from the perspective that leads to our two diagnoses of the euro crisis. But there is another point of view.

    In the 1970s, the American/Canadian economist Jane Jacobs reached a radically simple insight. Her lifelong interest in urban history convinced her that cities, not countries, drive economics. Cities are messy, unplanned places where people who otherwise would never meet devise joint projects. Hence, Jacobs argued, all innovation happens in cities. It made sense, then, that each city’s currency should follow its business cycle. Forcing two or more cities to share one currency slowly pumps up one city and sickens the others.

    This focus on cities as the true engines of economics neatly explains both eurozone and pre-euro failures. European national currency zones were already too big—the eurozone made something already oversized even worse. The US is rich despite having one currency, and it suffers huge damaging cycles from being locked into that single currency zone. Long protected by exceptional rates of internal labor mobility, there are now signs that US labor mobility is slowing, and a dollar-bloc handicap is becoming more visible.

    From the Jacobs’ view, the US—or countries such as Canada, Australia, and Brazil—aren’t rich because they constitute one big currency bloc. On the contrary, they would be richer without it. Meanwhile social discontent is rising and it is not hard to imagine a world in which Americans see more of the troubles already engulfing the eurozone.

Mark Griffith is a former financial trader, now journalist covering economics, philosophy, and politics. He co-edited the book Collateral Damage: Global Crash Phase Two (2010) and is based in Budapest. This piece was originally published in aeon.co.