Editor’s note: A version of this article first appeared at Forbes.com.
What do Dr. Victor Frankenstein and the architects of the euro currency have in common? Answer: They both created monsters.
The euro is not “money” any more than the monster created by Dr. Frankenstein was a man. Whatever resemblances there may be to the genuine article are merely superficial. Nor is government needed to create money, any more than government is needed to create another human being. These things happen naturally.
In the case of money, it develops in the marketplace in response to the need for a medium of exchange for economic goods. Prices are ratios that communicate the degree to which individuals value the marginal (next) unit of the finite supply of economic goods.
Historically, societies around the world frequently found gold and silver to be the most suitable commodities to serve as money. Why? First, people value gold and silver whether they are used as a medium of exchange or not. Second, those metals have the natural advantages of being durable, divisible and portable. Third, it is easy to standardize the quality of each unit.
A government’s perpetual tendency to amass more power impels government leaders to establish a monopoly over money. To facilitate increases in government spending, sovereign powers replace genuine money with fiat money—that is, paper money or, in the digital age, unseen binary data bytes. In doing so, governments and their central banks divorce money from its organic origin as the most marketable commodity in a society.
Commodity money is like a giant oak tree, firmly rooted in the soil of everyday voluntary economic choices. It is an organic, natural part of the economic ecosystem. When governments remove the commodity backing from money, people may continue to use it as a medium of exchange out of habit. Usually, though, legal tender laws compel them to keep using the fiat currency as their “money.” On the surface, everything initially appears as it did before. Beneath the surface, however, the metaphorical oak tree that symbolized money has been separated from its roots. From the time real money is replaced by its fiat counterfeit, it starts to die from within. Eventually it collapses under the stress of some financial or political storm.
The euro is more abominable and more dangerous than your typical fiat currency. Today’s Federal Reserve note (i.e., a “dollar”) is like a giant oak tree that has become a hollow shell. Most of its substance has been eaten away by the inflationary creation of far too many units of fiat currency (all needed to finance government’s insatiable appetite for spending). It still manages to stand, to serve in its weakened and brittle state as the medium of exchange, because it still has the “full faith and credit” of the U.S. government supporting it.
But as pathetic as Federal Reserve notes are, the euro is even worse, because there is no entity whose “full faith and credit” lies behind the euro currency. Each more hopelessly indebted than the other, 17 countries use the euro. Which of their governments can command sufficient economic resources to bail out zombie banks and bankrupt sovereign treasuries?
Returning to the tree metaphor, the euro was grafted together from pieces of 17 (so far) dying fiat currency trees of different species. The euro has had no roots from day one. It did not evolve naturally from market forces. Its trunk was stitched together from pieces of the deutsche mark, French franc and Italian lira fiat currencies, with its main branches from the peseta, the punt, the Dutch guilder and its minor branches from remnants of the fiat currencies of smaller economies, such as the Greek drachma and Portuguese escudo. The sutures that stitched together those decaying fiat currencies consisted of nothing more substantial than lies and empty promises. These were solemn pledges that debts and deficits would never, ever reach levels that were long ago exceeded. The experts who devised the euro currency were naive to have believed that democratic politicians would have the honor or capacity to maintain fiscal discipline.
The euro is a monstrosity doomed to be rent asunder by economic gale-force winds. Like characters in Jean-Paul Sartre’s grim play, “No Exit,” the people who use the euro currency are trapped. Either member countries will abandon the euro, in which case banks, governments, businesses and individuals go through a wrenching period of defaults, write-downs, “haircuts” and bankruptcies, or they lurch onward toward an unviable fiscal union in which Germany, Finland and the few relatively solvent economies are crushed under the unsupportable weight of being expected to bail out the relatively bankrupt countries.
How much longer can the macabre dance of the EU’s Frankenstein currency last? Europeans are paying an awful price for having adopted a Frankenstein currency instead of the real thing.