Europe enjoyed a common currency regime 2,000 years ago. Back then, as today, there was no single common language, rather limited workforce mobility, and quite an active trade network. The Roman Empire brought relative internal peace to a wide area never to be united again. And it brought the sestertius—or, to be more accurate, a coinage of gold, silver, and bronze of which the bronze sestertius became the most commonly spread denomination. It certainly lacked a central bank, but it lasted for many centuries.
As a severe and predictable European debt crisis is slowly unfolding, it seems unlikely that the euro will achieve anything approaching the success or longevity of its distant predecessor. What went wrong, beyond the lack of political vision that is the only thing European governments seem to share?
Europe’s fundamental sin is actually simple. The Maastricht Treaty of 1992, in creating a single legal tender and monopolistic currency for the countries that ratified it, fundamentally undermined the very founding principle it ostensibly enshrined: that of “subsidiarity,” or the principle that holds it is always better for a matter to be handled at a local level than by a centralized authority.
The peculiarity of the Roman political system was indeed its taste for subsidiarity. The imperial government was usually quite happy to restrict itself to the essentials—mainly military defense and the rule of law—while devolving to local civic authorities most of the burden of managing their own issues. As such, the cities and regions, notably in the Greek or Syriac-speaking East, struck their own lower-value bronze coins as a complement to the usually higher-value imperial coins, leading to specific monetary zones.
As a result, the issuance of local money was to a large extent a local matter. Gaius, the second-century jurist, wrote that “money, although it should enjoy the same power of purchasing everywhere, is easier to obtain in some locations and interest rates are lower, while it is harder to find in other locations and interest rates are higher.” (Would that he were available today for a powwow with Mario Draghi, president of the European Central Bank.)
We are touching here on the essential shortcoming of the euro. Since its creation, Greek, Spanish, and Irish banks and governments have been able to borrow like Germans, Austrians, or the Dutch, under the cover of what was perceived to be the implicit uniformity and guarantee of the euro. As such, the common currency fueled insane property bubbles and equally insane public and private indebtedness and corruption. Logically, internal trade imbalances and competitive gaps kept widening. To simplify, life under that common currency regime has been like telling wolves and sheep to enjoy freedom together in open fields, while the suggested write-down on the Greek debt is equivalent to providing more grass to those sheep in the hope they will last longer. Incidentally, if consulted, the sheep may say no to the bailout package and the euro altogether.
America is not so different. There, an even more general asset and liability bubble has expanded under the influence of the low interest rates, counterproductive tax system, and lax regulatory environment that have prevailed for most of the past two decades. Only the dominance of federal over local government debts, the facilities offered by holding the world reserve currency, and the stabilizing role of a few very large foreign sovereign investors effectively funding American consumers through massive purchases of U.S. assets have prevented something similar to (or worse than) the European debt crisis from happening—so far. The current path is neither sustainable nor desirable.
Ancient Rome teaches us two things. The first is that there should be some explicit quantitative policy regarding monetary creation. Ancient economies’ monetary aggregates were capped by the availability of precious metals. Counting on private borrowers to create money leads post-gold-exchange-standards economies to a dangerous dependence on profligacy. This fuels a general sense of irresponsibility at all levels of our societies. Political authorities should not be thinking of ways to encourage essentially bankrupt consumers to borrow more. Consumers should stop thinking of themselves as consumers, reflect on what they bring to the outside world, and adjust their expectations accordingly. Wealth should be a consequence of adding more value, not of borrowing more.
By the same token, the access to unlimited funding, directly responsible for fueling reckless corporate-governance practices, should be curtailed. Flooding the capital markets with dollars has only resulted in a general cash glut at the higher end of the wealth scale while pushing the lower strata of the population into a real deflationary situation, contributing to unacceptable levels of inequality. In not facing these fundamental challenges, current governments will encourage social unrest and force their successors to adopt a combination of predatory taxation, sovereign default, inflation, and devaluation, with unfavorable demographics compounding all these issues.
The second lesson, the devolution of the monetary monopoly of the state, leads to the concept of local (or specific-purpose) subsidiary currencies. People are familiar with air miles, coupons, rewards, and tokens. This could be generalized inside economic zones or even virtual networks. Those who find themselves unwilling or unable to monetize their skills under the mainstream currency system, or who have lost access to credit, should be able to exchange their potential output through local units of account and barter. In doing so they would stand a chance of reintegration into a more open society.
Concerns about taxation and the central currency monopoly are misguided. Any positive contribution, taxed or not, is better than inactivity or, worse, social parasitism.
Still, today, all roads lead to Rome.
Gilles Bransbourg, an economist, historian, and former banker, is a research associate at NYU’s Institute for the Study of the Ancient World and a Roman curator at the American Numismatic Society in New York.