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“Money, as money, satisfies no want; it’s worth to any one, consists in its being a convenient shape in which to receive his incomings of all sorts.” – John Stuart Mill, Principles of Political Economy

Daily Telegraph columnist Jeremy Warner has concluded that the euro has “destroyed” Europe. It’s when journalists write about currencies that one wishes Adam Smith, David Ricardo and John Stuart Mill (to name three) were still around to relieve them of their confusion.
Currencies don’t “destroy” a country or continent simply because currencies quite simply are. They’re a measure. Nothing else. As Mill long ago put it, they materialized thanks to “the want of a common measure for values of different sorts.” I’ve got bread, but I want the vintner’s wine. The problem is that the vintner has no interest in my bread, though he lusts for the butcher’s meat. Money is the “common language” that allows those three producers of different goods to trade with one another despite wants that are the opposite of coincident. We produce so that we can get money, but in truth, we produce so that we can get all that we don’t have.

Thinking about so-called “money supply,” it’s logically abundant where there’s lots of production, and scarce where there’s very little economic activity. Money is the proverbial “ticket” that can be exchanged for everything else, so it makes sense that tickets are in copious supply wherever the rich and economically productive are, and then it similarly makes sense that there’s always a “shortage” of tickets wherever the unproductive hang their hats. Applied to Warner’s London, Chelsea, South Kensington and Belgravia rarely have a “Pound supply” problem, but Brixton, Hackney and Peckham nearly always do.

What needs to be stressed here is that “money supply” is merely an effect of productive economic activity, not a driver of it. To see why, Warner need only consider a theoretical attempt by the Bank of England to stimulate lending in Dagenham, a relatively poor (by London standards at least…) part of city. The central bank would buy bonds from banks there, suddenly banks in Dagenham would have lots of Pounds to lend, but they would exit the downtrodden area between breakfast and lunch. Banks don’t long stay in business by making loans to people and business who lack the means to pay them back. In that case, a Pound supply “increase” in Dagenham in the morning would be in Mayfair by the afternoon.

The Dagenham example is a reminder that when central banks naively seek to stimulate economic growth, they do no such thing. Money always and everywhere goes to where it’s treated well. Central banks can’t alter this reality despite the wishes of a discredited economics profession. Attempts to boost money supply in economically weak areas will always fail, while at the same time well-to-areas don’t need central bank “ease” to begin with. Savers are lined up trying to direct their wealth toward those with the means to pay monies borrowed back. The economically productive quite simply don’t need the very central banks that similarly can’t help those who aren’t productive.

That’s what’s so comical about Warner’s assertion that what little European growth there is exists thanks to “the drip feed of central bank money printing.” Really? How? Economic growth springs from talent being matched with capital on the way to production. If we then accept Warner’s gross oversimplification of ECB policy as “money printing,” why on earth would the latter drive economic growth?

Implicit in “money printing” is a devaluation of the euro that would logically slow investment. Investors buy future currency income streams when they invest, which tells us that printing (usually an explicit attempt by monetary authorities to devalue a currency) would be an investment deterrent. Warner might reply that the printing would stimulate buying, but the latter isn’t growth. If buying or consumption were the same as growth, policy for the Pound, dollar and euro would be heavily accented toward constant devaluation to reduce any incentive to save. We would all be very poor since wealth always and everywhere results from saving. Devaluation mocks the saver while rewarding the prodigal at which point growth capital is scarce. Somehow Warner thinks devaluation powers growth.

Of course, all this speaks to the obvious problem with Warner’s rather confused argument. A currency on its own could never “destroy” anything, and certainly not a continent. At the same time, bad currency policy can weaken a country or a continent. When money floats in value it’s less reliable as a measure meant to foster trade and investment. To blame a currency itself for a country or continent’s problems is the equivalent of a short person blaming a foot ruler for his diminutive stature. Money’s not the problem, but floating money whereby the measure deprives an economy of a common language can surely cause problems. Warner doesn’t touch on this.

Instead, he blames the euro for creating a situation in which “economies were growing apart, not together.” Warner believes the lack of harmonic growth indicts the euro since the European states that utilize the currency have not been growing “richer together.” Yet that was never the purpose of the euro, at least not to the mildly sentient.

England has a common currency in the Pound, but has this equalized growth in England? No, and it’s obvious why it hasn’t. Money is once again an effect of economic growth, not a driver of it. It’s only a measure. Pounds are once again plentiful in England where economic activity is frenzied, and scarce where it isn’t. Implicit in Warner’s argument is that money is wealth. No. Money, per Adam Smith has one purpose only: to help circulate “consumable goods.” Wealth is what we create. Money is what we use to facilitate the exchange of the wealth we create. Nothing more.

Applied to the U.S., we have a common dollar across 50 different states with very different tax and fiscal policies. But has the dollar lifted West Virginia, Mississippi and Louisiana up to the economic level of California, Texas and New York? Obviously not. Money is not magic. Neither is currency union. All a currency can do – and this is a good thing – is facilitate trade and investment among producers, consumers, savers and entrepreneurs.

Warner’s belief that the euro has “destroyed” Europe simply speaks to his confusion about what money is. It’s the equivalent of a basketball coach fingering foot-rulers that unceasingly measure 12 inches as the reason his team of 5’7″ players consistently lose. But the foot ruler is merely a measure confirming reality. So is money. Where production is abundant, so is money, where production is light, money is once again scarce.

If the euro has a weakness, it has to do with the fact that it floats. This deprives it of its sole purpose as a measure. Worse, all global currencies still maintain at least a vague peg to the dollar. Since 2001 the dollar has weakened substantially, and while the euro is up on the dollar since ’01, the latter masks the bigger truth that both currencies have lost a lot of value since in the 21st century. The much higher price of gold measured in both currencies since 2001 represents the clearest evidence of broad currency weakness. This has predictably reduced investment in both the U.S. and Europe with predictably sluggish consequences.

So yes, Europe has a problem, but it’s not the euro itself. The problem is euro policy, along with all manner of government barriers to growth in Europe more broadly. For Warner to blame the euro itself for Europe’s woes is the equivalent of a portly person yelling at the scale.