Modern currency is nothing without trust that governments that use it will back it. And if the once-strong euro can break, what is safe?
So what is it about money that the leaders of the eurozone don’t get?
Money has been around for a while, and it’s not terribly complicated.
The key element is trust. That was true when money was a piece of metal that you could bite or bounce. Now that money is just a piece of paper, it’s even truer. Today’s money is nothing but trust.
That’s why the euro crisis is so bizarre. The euro is, in theory, one of the world’s great currencies. And yet, as this crisis has demonstrated, nobody actually stands behind it. There is no lender of last resort. There is no “full faith and credit.” There’s nobody on the other end of the promise.
And it’s as if the leaders of the eurozone wanted to go out of their way to prove it. They’ve taken us up to the velvet curtain and then themselves, with a self-satisfied smile, pulled it aside to show us that there is no Great Oz.
And in the process they’ve done major, and perhaps irretrievable, damage to their own currency and to the very idea of money in our time. If you can’t trust the euro, what paper can you trust?
As solid as the solidus?
The idea of money may never have been grasped more clearly than in the Byzantine Empire, the great Roman Empire of the East.
From the time Constantine the Great minted the first gold solidus in 312 until the final coin was minted by Basil II, the Bulgar Slayer, around 1020, the solidus was minted at a steady rate of 72 coins to a Roman pound of gold, or 4.48 grams of gold per coin. When coins came back to the imperial treasury — all taxes had to be paid in solidi — they were melted down and restruck. No wonder most Byzantine emperors were proud to put their own images on the solidus.
And it’s clear that the Byzantine emperors understood the power that owning a trusted currency gave them in the world. One of the first acts of the empire after recovering from the chaos of caused by the attacks of the Seljuk Turks in Asia Minor and the Normans in Italy in the 11th century was to reverse the debasement of the currency that had begun in 1042.
By 1080 the solidus was down to 10% gold, as embattled emperors melted down older coins, diluted the gold with silver and then attempted to pay their mercenaries with cheaper money. The empire’s own troops, however, refused to accept the solidus, which had been the most respected coin and the medium of exchange from India to the Baltic, as payment. In 1092, once order was restored in the empire, Emperor Alexios I Komnenos replaced the debased coins with thehyperpyron, a new coin of 20.5-carat gold. The new coins contained 4.45 grams of gold.
That’s a steady currency. A drop of 0.03 grams of gold per coin in roughly 800 years.
The euro is no hyperpyron
Contrast that to the euro.
The currency was created as if it would be a monument to stability. That’s why there are no provisions in the treaties that created the euro for a country to leave the monetary union and go back to its own currency.
But the reality is that the euro is way more leveraged than the solidus, even at its worst. After all, even the debased solidus still contained 10% gold.
Start with the European Central Bank. The bank has official equity capital of just 6.5 billion euros, roughly $8.2 billion. That tiny bit of capital supports a balance sheet that now totals 3 trillion euros — about $3.8 trillion.
How is this possible? It’s possible because the European Central Bank is essentially owned by the national central banks of Europe. They have contributed the bank’s capital in exchange for ownership stakes in the bank. Through that structure, the European Central Bank has a claim on these national central banks.
It you think of it structurally, each national central bank owns a share of the European Central Bank’s balance sheet. All those Spanish, Greek and Italian government bonds, all those mortgage-backed assets, all those loans to French and German corporations that European banks have used as collateral for loans from the European Central Bank ultimately belong, for better or worse, to national central banks.
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