Home > Greece > The Greek government should create a second currency

The Greek government should create a second currency

from Issue no. 70 of the real-world economics review 

The Greek government should create a second currency to be named the Drachma. The Drachma would be legal tender with the same value as the Euro, but for domestic payments only. Any payment, in the private sector, or to the government, for example for taxes or fees, could be made equally in Euros, Drachmas, or any combination of the two.

The government would start to make all payments, for wages, transfers, etc. with a combination of the two currencies. For example, they could set a ratio of 80% Euro, 20% Drachma. Without any further aid from the EU, the Greek government could increase its spending in this example by 20%.

The government should mandate banks to open a Drachma account parallel to every Euro account so that the Drachma could be freely used in payments through the banking system. There would however be no obligation for a bank to exchange Drachmas for Euros. Also, banks would be prohibited from making loans in Drachma, so that there would be no additional instability introduced because of possibly nonperforming Drachma loans. Each Drachma would again be spent by its recipient, creating a multiplier effect until finally returned to the government in the form of taxes or fees.

Under my proposal, the Greek government could quickly and very substantially increase domestic demand, which was its principal campaign promise and it could do so without the need for agreement on the part of some external authority.

I can see further long term benefits from such a system, not only for Greece, but for all countries of the Euro zone. The introduction of the Euro was a mistake, but abandoning it now would be very costly both in real and psychological terms. Under my proposal, the Euro could be maintained, while giving to the individual countries the possibility of a flexible anticyclical fiscal policy, a possibility that they now lack.

Claude Hillinger

  1. Achilleas
    March 4, 2015 at 5:51 pm

    so this will be a fiat currency that will not be convertible to euros or to any other currency, its quantity will be fully controlled by the Greek CB (there will be no interest rates associated with it). Also, it will not be lent into circulation so the greek government will spend it into circulation and there won’t be any public debt associated with this currency.

    I would be interested in how the MMT/MCT/NCT schools think about this.

    Also, could you comment on the situation where there will be citizens ending up with Drachmas only in their accounts and others who would have mostly Euros.

  2. Donni
    March 4, 2015 at 7:26 pm

    this is so fascinating! Great idea

  3. March 4, 2015 at 10:07 pm

    A two currency system seems to work fine in Cuba. Tourism and money exchanges open up a good avenue. US currency, for example, can be penalized at the airport and everywhere else.

  4. March 5, 2015 at 12:27 am

    Reblogged this on My Desiring-Machines.

  5. Tom Palley
    March 5, 2015 at 3:52 am

    Ever heard of Gresham’s law?

    • Claude Hillinger
      March 5, 2015 at 6:22 pm

      Sure have. My favorit is a modern version that I like to call Gresham’s law of ideas. Primitive and often ideologically motivated ideas tend to drive more sophisticated ideas out of public discourse. I don’t think that either version applies to my proposal. If you think otherwise, its up to you to make the argument.

  6. larrykaz
    March 5, 2015 at 5:29 am

    Since this scheme does not allow for depreciation of the drachma and still ties the hand of government spending via an arbitrary ratio to Euros held, does this really solve the problem or just offer a very modest improvement that will prolong the agony?

  7. March 5, 2015 at 9:46 am

    Well, maybe. During the and 90s and 00s Greece shifted its consumption mix to goods that it doesn’t make (from tomatoes to smartphones), and to a lesser extent re-priced services for foreign consumers (rooms, food, and transport priced for tourists). As a result the Greek economy now suffers from strong coupling to the EU on imports, and somewhat for services. Any monetary solution has to shift the consumption pattern in the opposite direction (from smartphones to tomatoes) and separate domestic/tourist services. Although it’s the right thing to do, people will resist it.

    So the government may create a new fiat currency and make payments in it, but while domestic consumption keeps its preference for imports the domestic currency will act mainly as a monetary tax on imports (a tariff). Services may more easily support dual pricing. Altogether it’s not a bad idea, but we should note that the effect will likely be through a protectionist shift to domestic goods and segregates services rather than an overall demand boost. Now, I have to go out and buy tomatoes…

  8. Macrocompassion
    March 5, 2015 at 10:41 am

    Good idea! I suggested it here a few weeks ago, but somehow my comment was not posted. This idea should be quite obvious to many people, so my question is: why has it not been already introduced? I would guess that the reason is that the rules of the EU and the Euro do not allow it. As I suggested before, the Greek government could seriously consider the effects of breaking these rules!

    There are many aspects of this which will affect the internal behavior of the Greek macro-economy, like a sudden inflation with the availability of more money, so it will certainly not be so easy to introduce this change, good as it is. And the exchange rate between the Euro and the New Drachma will certainly begin to change as more of them hit the markets, so the dynamics should not only be of interest but of importance to the nation.

  9. March 5, 2015 at 5:12 pm

    The Greeks need a supplemental monetary injection directly to Greeks as individuals and then a policy like a retail discount mathematically derived and only computed after participating Greek merchants have discovered their prices thus it is not heavy handed price controls, and that is fully rebated back to Greek merchants which enables them to be whole on their overheads and margins. This has the multiple effects of freeing the individual with a costless gift of income, creating a stabilizing guarantee of adequate demand so that the economy not only becomes functional but free flowing as well, and also brackets Greece’s macro-economy completely with a non-intrusive inflation eliminating mechanism that also short circuits the country’s enslaving reliance on the Banking system’s monopoly paradigm of loan only in the area of consumer finance which in developed economies is 60-70% of GDP.

  10. March 5, 2015 at 5:38 pm

    Greece desperately needs a Social Credit monetary reform: http://www.socred.org/blogs/view/an-appeal-to-the-greek-people.

  11. March 5, 2015 at 7:05 pm

    My proposal has little chance of being widely discussed, and even less of being implemented. The reason is Gresham’s law of ideas, which I mentioned also above. Since coming to power, the Syriza government has acted and talked stupidly. They missed no chance to antagonize the creditors while making demands that had no chance. I take that back–they did succeed ic changing ‘Troika’ to ‘Institutions’. Great!

    Instead of rehiring cleaning ladies and janitors, who got their jobs because of political connections, they should have imposed capital controls and limited cash withdrawals from banks. They should have introduced the Drachma as a second currency. Your fear that this would produce inflation is unfounded. Greece is in deflation and depression. One could inject a lot of liquidity before there could be any inflation. Finally, they could and should have used in the negotiations the threat of sovereign default, not of Grexit. Since they are running a moderate primary surplus, they would not be bankrupt if they defaulted and aid were cut off. On this the public discussions are entirely mistaken.

    • March 10, 2015 at 8:23 am

      As a matter of fact, current Finance Minister Yanis Varoufakis supported a Sovereign Currency when I co-interviewed him (for over an hour) in late 2013. You can see the Youtube link and relevant transcript snippet here: http://www.opednews.com/articles/Will-Greece-or-the-EU-Blin-by-Scott-Baker-Assets_Austerity_Debt_Finance-150208-883.html

      For some unfathomable reason the Syrizia government seems intent on squandering its election mandate by alternating antagonizing both the Euro lenders and the Greek voters who elected them. The alternate Sovereign Currency idea is still there, but time to implement it is rapidly running out, especially given the ramp-up times involved.

  12. March 11, 2015 at 11:39 am

    Dear Scott Baker, thank you for your comment. I followed your link. I am amazed how a person so eloquent and intelligent as the Varoufakis in your interview can be such a complete failure once he has political power. For me the iconic moment was when, with a smirk on his face, he told the emmissary of the Troika to go home, the cooperation had ended. A month late he had to swallow the same Troika, with only a change of name!

  13. Olga
    March 12, 2015 at 12:54 pm

    However, can you imagine what will happen in Greece, having drachma (or a new national currency) together with the existence of “foreign” euro?
    With large amounts in euro already in the market and in deposits, issuing a new currency would create a double-divided economy. On the one side, we will have most of our savings in euros. On the other hand, we will have salaries and pensions in drachmas. In a logical way, people will try to exchange drachmas into euro, knowing that it will be an underestimation of drachma. So we will have two Greece: One Greece with individuals with no access to euros and a second Greece of individuals with access to euro, which develop inequalities and underdevelopment .
    You should also have in your mind the large amounts of euro that are already in the market, and even the high possibility of deposits, which is saved out of banks or in foreign accounts abroad. Again people will try to exchange the new currency into euro, knowing that it will be an underestimation of the new currency. And again, we will have two Greece with the power of those with access to euro to be greater than those of no access, and the situation will remind us Turkey of the 80s with its dual economy (“easterners” that worked with local currency and “Europeanized” citizens using marks or dollars). That’s why I insist on that the creation of a new national currency, as “foreign” euro still exist, in this case, it will be disastrous, because in Greece, we do not have our own currency in a stable equivalence (peg) to a foreign one.
    So, it is vital to think also the social impacts of such actions.

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