'Foreign' Money and 'Austerity' Haven't Caused Greek Stagnation

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The on-going "Greek Financial Crisis" is chock full of lessons about the nature of the entity that serves the functions of money in an economy. Historically, people have chosen to use as money everything from notched wooden sticks to metal coins to pieces of paper printed by governments. When alternatives have been available, people have chosen to hold on to "high-quality-money" and rid themselves of the lower quality forms of money. Sometimes that has meant the illegal holding of foreign forms of money-like US dollars or German marks-instead of the official currency of their own country.

Today, the vast majority of Greek citizens answer pollsters that they want to continue using the ‘euro'-a currency provided by the European Central Bank-rather than return to the ‘drachma'-the fiat currency previously issued by the Greek central bank. At the same time, Greek voters elect politicians who promise to reject economic policies that would be essential to remaining within the "euro zone." As The Wall Street Journal recently commented on Greek preference for euros over drachmas "... they also keep electing candidates who campaign against reform ... (who) promised voters he opposed the bailout before he supported it in office." This inconsistency reveals the inherent tensions arising from forms of money and the associated economic policies of a country.

It comes down to this: a specie currency-gold and silver-imposes sound economic policies on a country. A fiat currency-issued by central banks-requires sound economic policies. What is happening in the euro zone-and clearly in the case of Greece-the imposition of sound economic policies is being demanded by politicians of foreign governments, not advocated by domestic politicians. As the Journal put it, "The conceit remains that external forces can mandate reform. But creditors lack the means to enforce reform, while successive Greek governments on left and right lacked the desire or political skill to implement them."

Greek citizens have been reacting the same as other people in countries that have been subjected to International Monetary Fund or dominant trading partners' dictates. They hear their politicians say, "those evil foreign devils are forcing us to do things that harm us." Instead, what they need to hear is Greek politicians who forcefully declare, "I don't care what the IMF, the ECB, or the German finance minister says, here are the things that we Greeks must do in order to have a strong, growing and prosperous economy?"

The crucial point is this: in a democracy there must be popular domestic support for the policies of government. Authoritarian governments can impose unpopular policies up to a point, but ultimately, democracies require the consent of the governed. If the domestic politicians keep saying, "I hate doing this as much as you do, I know it is bad for us, but we have no choice because of the demands of unreasonable foreign creditors," then the policies will be rejected-perhaps violently-by many and maybe a majority of the population.

These lessons were evident in the aftermath of the Asian Currency Crisis of the late 1990s. As the president of Korea said at the time, the crisis "... had a silver lining. The current restructuring of banking institutions in Asia will improve those institutions. Without the crisis atmosphere, the reforms would have been much longer in coming." The case of contemporary Greece-as well as Italy and others in the euro zone-requires much more than restructuring and recapitalizing banking companies. There is no mystery about the components of a "Hayekian infrastructure" of a market economy. In the words of Joseph Schumpeter, "The essential point to grasp is that in dealing with capitalism, we are dealing with an evolutionary process. . . . Capitalism, then, is by nature a form or method of economic change and not only never is but never can be stationary."

The Greek economy has become ossified by its regulations, tax laws, labor and environmental laws, pensions systems, cronyism, patronage and corruption in the legislature, as well as barriers to foreign capital. The stagnation of the Greek economy was not caused by foreign-imposed "austerity," but by domestic policies built up over decades. Greek citizens must now make a fundamental choice-doing nothing is not an option. Either abandon their overwhelming preference for a stable currency offered by remaining in the euro zone, or support politicians who clearly and firmly advocate fundamental structural reforms for the right reason-because it will be good for Greeks in the long run-not because evil foreigners are demanding such punishments for past sins.

The transition to "home-grown" economic policies may be starting to get underway in Greece. The current left-wing government is now asserting that foreign-imposed policies have been rejected, and the new policies will come from within. Yanis Varoufakis, Greece's finance minister has said, "We are no longer following a script given to us by external agencies. Once you have a relationship of equals, the co-operation can be a lot more fruitful." This week the Greek government has put forth a set of reforms they think will do the trick. They now have four months to put meat on the bones and get the package adopted by parliament.

There is no choice to be made between sound money and sound economic policies. People (including politicians) living under a gold standard adhered to fiscal discipline whether they liked it or not. A sound form of money dictated sound economic policies-or the harsh punishment of currency devaluation and debt default. In national fiat currency regimes, where there has not been the political wisdom and will to maintain fiscal discipline, monetary discipline has been lost-inflation and currency depreciation has inevitably resulted. If the Greek populace remains firm in its desire to hold on to a sound form of money, it will seek political leaders who advocate the policies essential to that end. Even leftist politicians cannot wave magic wands and promise to have it both ways.


Dr. Jerry L. Jordan is a Senior Fellow of Atlas Network's Sound Money Project.  He was President of the Federal Reserve Bank of Cleveland for 11 years, served as a member of President Reagan's Council of Economic Advisors, and was also a member of the U.S. Gold Commission.  

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