Introducing a New Currency

Warren Mosler (for example, here) has explained very clearly and succinctly the key steps involved in effectively introducing a currency such as the drachma. (See, also, Bill Mitchell’s recent post, ‘A Greek exit is not rocket science‘.) Fears of exchange-rate catastrophe would be unfounded if these steps were followed.

Of the steps, two would be fundamental if the Greek government chose (or was forced) to issue its own currency:

1. Taxes should be made payable only in drachmas.
2. Government payments should only be in drachmas.

Additionally, existing contracts with government for goods and services should be redenominated in drachmas. There are other details that can be found in Warren’s post.

Step 1 would ensure that households and businesses had to obtain drachmas, even if only to meet their tax obligation. Government spending in drachmas (step 2) would then be possible because of the demand for drachmas established by the first step.

As Warren emphasizes, there should be no automatic or compulsory conversion of euro deposits into drachmas. To the contrary, it would be important that euro deposits simply remained as euro deposits unless and until the deposit holder took steps to convert them into drachmas for tax payments or other purposes. Euros should not be converted into drachmas at a fixed rate, but at a floating one, and then only when such conversion was desired by the holder of euros.

Unless a person or business transacted goods or services directly with government, they would need to obtain drachmas from those who did. Provided government spending remained in sensible relation to an enforced tax obligation, no “market forces” could generate excess supply of drachmas. The new currency would only be supplied in response to demand for it.

One thought on “Introducing a New Currency

  1. The retention of savings in Euros is a key point.

    However I don’t know about the payment of taxes thing. One of the new interesting developments to come out of both the Greece issue and the Scottish separation debate is whether *pegged* non-convertible liabilities work dynamically.

    These things are denominated in a foreign currency (in this case Euros), but are not convertible into Euros and are issued by the government. They are essentially zero-interest permanent bearer bonds issued directly by government and acceptable as payment of taxes *alongside* the foreign currency in question. A parallel currency.

    The idea being is that if they trade at a discount, then people will trade their foreign currency for the liabilities to get themselves an instant tax cut.

    Then you set your tax rates higher than need be to attempt to run a *surplus* – which then pulls in foreign currency from savings as well as all the liabilities you issue.

    It’s sort of a halfway house that eases in functional finance into the system. Over time, as people start to save the government liabilities directly and the budget moves to deficit, you can change the tax policy so that only the government issued liabilities are payable as taxes.

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