May The Best Currency Win

This article appeared in Forbes on January 21, 2002.

Who needs the Maastricht tests? Poland can’t yet pass them to join Europe’s monetary union. But it could haveCitigroup issue currency within its borders.

The euro, if you can believe its proponents, is a godsend to the 300 million people who are now required to use it. If it’s so great, shouldn’t itbe used all over Europe? The currency’s fans don’t have a good answer to this question.

Launched in 1999, the euro was for three years used only for electronic transactions such as largewholesale payments. But this Jan. 1 the euro became the mandatory circulating currency in the 12countries forming the European Monetary Union. The second launch of the real thing has been promotedwith a multimillion‐​dollar ad campaign, complete with rah‐​rah posters proclaiming, “The Euro: Our Money.“Advertise a government‐​mandated product? It makes you wonder whether the eurocrats fear a mass revoltagainst the new coins and paper money.

Brussels has done all it could to entice European nations other than the current 12 to dump their nationalcurrencies and adopt the euro. The United Kingdom is a prime candidate. If Tony Blair had his way, that’sexactly what would happen. But in November his chancellor of the exchequer, the ever‐​clever GordonBrown, all but deep‐​sixed that dream. In short, the euro won’t cross the Channel on Brown’s watch.

But Brussels’ enthusiasm for new recruits flags when it casts its eyes eastward. To the union’s elite, the 13countries in central and eastern Europe vying for admittance to the august circle have all the appeal ofsqueegee men. Christian Noyer, the vice president of the European Central Bank, as well as figures fromthe mighty German Bundesbank, don’t want any countries to use the euro until they have painfully satisfiedall the Maastricht Treaty conditions, like balancing the government budget, or at least coming reasonably close.

But why shouldn’t countries like Poland be able to use the euro? After all, if the new currency is an elixir for western Europe’s economy, asBrussels maintains, wouldn’t it be a great thing for the rest of Europe?

Think about it. Countries like Poland could use the euro as a unit of account without even joining the union. They could detour the Maastrichtroadblock simply by authorizing private banks to issue their own euro notes. Then well‐​capitalized foreign commercial banks doing businessin Poland could issue euro‐​denominated notes redeemable in official euros.

The benefits brought by private issue of euro notes would accrue both to Poland and to the global economy. A better‐​quality currency wouldimprove the ease with which eastern and central Europe trade goods and services with the West.

Bank‐​issued notes would be much like bank‐​issued traveler’s checks. People would accept the notes if they had confidence in the issuer andreject them if they didn’t. An ABM Amro, Citigroup, ING Barings or Westdeutsche Landesbank Girozentrale would enjoy the confidence ofcustomers. They’d certainly command more respect than some of the central banks now issuing fiat money in eastern Europe. Central bankscan’t be sued; but should a commercial bank break its promise to redeem one of its private euro notes for a real euro, the holder of the notewould have legal recourse. Competitive market forces would also push banks to maintain their vows to redeem. The merest hint of infidelitywould send currency users fleeing to an alternative issuer.

Bank‐​issued notes are nothing new. Traveler’s checks, which resemble currency although they cannot pass from hand to hand without beingendorsed, have been around for decades. Before the 20th century commercial banks issued their own notes in at least 50 nations, notablyincluding the U.S. and Canada. Multiple brands of notes did not confuse people any more than multiple brands of traveler’s checks now do.

Governments took over note issuance from commercial banks not because the private sector was doing a bad job, but becausegovernments wanted the profits for themselves. The record of private issuance of notes was generally good. In some countries bank failurescaused losses to note‐​holders, but the losses were small compared with those inflicted by the central banks that later took over noteissuance.

Even today private banks in Northern Ireland and Scotland issue pound notes redeemable into pounds sterling, and in Hong Kong papercurrency is supplied exclusively by private banks.

If the euro is to be the coin of the realm in most of Europe, private bank notes should come next. Give those central bankers a littlecompetition.