A dual-currency solution to the Greek debt crisis

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February 29, 2012 // By: James Skinner

In a letter to the Financial Times last week, Dr Stelios Zyglidopoulos suggested that the treatment prescribed by the EU troika for Greece bears an “eerie resemblance to the now obsolete practice of blood-letting, which was practised by medical doctors for almost 2000 years.” Economists, and the politicians who take their advice, lay claim to special knowledge as to why we periodically plunge into economic recessions. In fact there are no mysterious external forces that dictate the cycles of prosperity – only human failure to understand how to manage the economy in such a way as to create the prosperity and well-being that we all crave. 

Austerity is not the answer to Greece’s problems. Like blood-letting, it will only lead to the weakening of the patient – the Greek people. The objective must be to revive the national economy so it can stand on its own feet and win back the confidence of other countries. The economic problem in the present recession, as always, is how to re-arrange the interaction between humans and their natural resources so that technology can be put to work in order to create a society that is prosperous and fair.

The present crisis is entirely man-made. Having created the mess in the first place, we have the intellectual potential to find a remedy for the mistakes we have made. The first step has to be acknowledgement that the imposition of a single currency on a group of heterogeneous, independent sovereign states, without adequate provision for the internal redistribution of wealth between the members, was a mistake.

The next step is to recognise that Greece has to re-introduce its own national currency, not as a single currency, but in parallel with the Euro. Like water, money is the magic liquid that enables humans to create prosperity out of natural resources. Without water, fertile soil and the plants that grow in it can only dry up and die. Without money, humans sit idle and watch their economy wither and die. Equally, too much money or too much water will cause devastation instead of prosperity. Greece is suffering from a lack of money because the only source, the single currency, has dried up. But there is no law that states that there has to be only one currency.

The third step is to change the way in which money is created and issued, to ensure that there is enough of it and that it goes where it is needed. Issued in the right quantities in the right places, money enables human and natural resources to be combined, through technology, in such a way as to produce the assets, the goods and services that are needed to enable all citizens to flourish and realise their potential.

This means an end to so called “fractional reserve banking”, the presently universally practised (like blood-letting used to be) system of allowing private banks to create money and spend it in ways that will maximise their own profits, regardless of other (national) interests. By enabling the Government, monitored by the Central Bank, to spend newly created money directly into the economy, bypassing the banking sector, the burden of increasing national debt can be avoided. The new money can only be used, of course, to finance an economic programme that is defined in a democratically approved budget. The country will benefit from the fact that the new money will be created, not as debt, but as Government expenditure on goods and services that the nation needs.

This programme for creating a new Greek Drachma, bypassing the private banking sector, could start tomorrow. Its immediate effect would be to get the unemployed back to work. All existing Euro transactions can continue as before, quite separately from the new currency. The two currencies can perfectly well co-exist and run alongside each other. The Greek banks and financial institutions can revert to their proper function as money brokers and providers of payment facilities. Foreign banks will continue to deal in Euros and other currencies as usual.

It will take some time to recover from the strangulation of the Greek economy imposed by the single currency, but at least it should be possible, through judicious spending of the New Drachmas, to get the national economy back to running at its full capacity for the benefit of the Greek people. This will provide the hope and opportunity for the people of Greece that they so tragically lack under the present single currency system.   

Read James Skinner's submission to the Wolfson Economic Prize.


Community Currencies, Macroeconomics

A dual-currency solution to the Greek debt crisis

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