An Unexplored Side of the Greek Financial Crisis: Two Economies, One Currency

February, 2004: An elderly busker performs for spare change in Athens, Greece. (Photo via Shutterstock)A busker performs for spare change in Athens, Greece. (Photo: Gabriela Insuratelu /

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Certainly one of the momentous news stories of late is the seemingly irresolvable Greek debt crisis, and what it portends for Greece and for the future of the eurozone in general. There is currently no proposed option that does not involve substantial pain for one or more constituencies.

While the possible causes of this crisis – alternatively identified as tax evasion, “over-generous” social programs, public or private corruption, and misrepresentation by lenders – are under debate, there is one precipitating factor virtually undiscussed. In Greece, and in virtually all Western countries, there exist two substantially separate economies, operating at vastly different scales, with different goals, principles and values – yet both are serviced with a single currency.

In the United States, this is often characterized as “Wall Street” and “Main Street” – in other words, large public and private institutions versus small businesses and individual citizens.

An unbalanced flow of money makes a crisis inevitable at some point.

When economies are designed (as Western economies are) around competition for a limited resource (in this case, the national money supply), those better positioned to compete clearly have an advantage. Simply stated, who is in a better position to compete for the same dollar: a large corporate institution with an army of analysts, lawyers, lobbyists, industry and political connections, or the average citizen?

The competition between corporations and average citizens is obscured as money flows between the two economies – workers are paid by some institutions and then spend those dollars on other institutions. Moreover, the idea that corporations and individuals all have the ability to earn, hold and spend the same dollar creates the illusion of a level playing field, with equal opportunity for anyone who “applies” him or herself.

And in fact, if money flowed freely, there would not be a problem. While all parties have an equal ability to keep money circulating through spending, a problem sets in when a subset of persons (corporate or flesh-and-blood) are in a position to sequester dollars in private investments, thus taking them out of general circulation. If money is analogized as the lifeblood of an economy, imagine a “body” where a few major organs are able to sequester blood for private use while leaving the rest of the body anemic. (At the risk of over-connecting the dots: “anemia” equals “austerity.”)

Investments and the Debt Economy

Some will argue that investments put money to work, also creating social good – and yes, this is often the case. However, even in the best of such cases, the ability of money to circulate freely is constricted. If it were not, the rich could not remain rich. To remain wealthy, there must be an ability to recall dollars at some point; thus “spending” is turned into a “loan.” Moreover, the loan is offered at “interest,” thereby recalling even more dollars than were initially offered.

When stated so simply, it becomes clear that such an unbalanced flow of money makes a crisis inevitable at some point. The only way to delay (not avoid, but delay) it is through continual expansion of the economy – and the money supply in particular. This is euphemistically referred to as “growth.” Yet the above dynamics ensure that each expansion will eventually be absorbed, recreating the crisis at an ever-greater level of inequity.

If the above is true, why is it so difficult to see and respond to? Like the frog-in-the-heating-pan-of-water analogy, changes that happen gradually over time often do not reach conscious awareness. Two such changes pertain to the economy and to the nature of money itself.

For most of human history, we’ve grappled with conditions of frequent scarcity and deprivation – sometimes with fatal consequences. When threatened by scarcity, an adaptive response is to hoard up resources when available, in preparation for anticipated future scarcity. Further, to do so, one needs to become an effective competitor, and to design institutions that support this goal. Today, with all the knowledge, technology and other resources available, life-threatening scarcity need not exist anywhere, for anyone. Yet due to our deep evolutionary conditioning, supported by socioeconomic institutions that were designed to thrive upon and perpetuate scarcity, this is still the primary organizing principle for contemporary economics.

Secondly, the nature of money has undergone a fundamental change, becoming an entirely different phenomenon that operates by different principles. For millennia, money was commonly embodied in material objects of value (precious metals, gems) or tokens directly redeemable for the same. If a horse was worth five gold coins, either were acceptable as a medium of exchange – it’s just that the latter was easier to carry around.

Further, through money’s continued association with objects, outcomes of desire and its power to “grant” them, the material object of money itself comes to take on an almost religious significance. It is probably no coincidence that gold, silver and gems are so frequently utilized in religious iconography.

Under the current system, the only way to expand the economy is through still more debt.

In contrast, the vast majority of today’s money – more than 90 percent – is “virtual.” It exists purely as a concept, a symbol – embodied only by the electronic bits and bytes in a computer, and is mediated with paper checks, magnetic card swipes and digital signatures. Its value comes only through agreement – our mutual faith that the currency is worth what the issuing agency says it is. Most importantly, today’s money exists as debt. Whereas gold and other precious objects might be mined or created, today’s money can only be borrowed.

Accordingly, while coins and bills may be durable for a number of years, the rest of the money supply is not fixed; it comes into existence when bank loans are made, and goes out of existence when the loans are repaid (hence the term “fiat” currency). That is why crises of credit, such as happened in 2008, are so threatening to a country.

Yet this subtle but profound change in the nature of money escapes most people. When someone takes out a $500,000 loan for a home purchase, I suspect many people still hold a subconscious image that, somewhere in the bowels of the bank, wheelbarrows full of gold doubloons are being carted from one room to another. In fact, all that happens is that a bank agent sits down at a terminal and types a five followed by five zeros into the account.

Unbelievable as the above may sound if you’ve not heard it before (as John Kenneth Galbraith says, “The process by which banks create money is so simple that the mind is repelled”), it would not become a problem for Greece or other debtors except for one additional feature of debt-money: It comes with an interest charge. Although the principal money is created when a loan is issued, the money to pay interest charges is not. It is up to the borrower to go out into the world and appropriate this additional money by whatever means necessary. If the borrower cannot, default and bankruptcy/forfeiture are the result.

The perversity of this arrangement is that, at any point in time, there is never enough money in the economy to repay all loans plus interest charges. This would unavoidably lead to bankruptcies and foreclosures, except that these negative outcomes can be delayed or minimized if the economy is expanding – hence the obsession with continuous economic growth. The second perversity is that, under the current system, the only way to expand the economy is through still more debt. (It’s like bailing a sinking boat with a bucket that has a hole in the bottom – and the larger the bucket, the larger the hole.) The current economic model hinges on the premise that an economy can be expanded to infinity. Yet such phenomena as Greece’s plight, the eurozone crisis, as well as climate change, resource wars and the like, indicate that this may not be possible.

A Solution

Without needing to reinvent the entire economy or even substantially disrupt the status quo, there is a surprisingly simple solution to crises such as the one Greece is facing. It begins with acknowledgment of the two separate economies identified above, with their different needs and operating principles, and then utilizing parallel currencies designed to best meet the needs of each.

The large institutional economy can continue to operate as usual, serviced by the euro. For individual citizens and small business, a complementary currency would be instituted. (For now, let’s call it Drachma2, though it might be expedient to identify a credit-based currency such as this as a “coupon” rather than as a “currency,” since coupons are backed by the faith and credit of the issuer.)

In order to avoid recreating the current problems with the euro, and also to avoid massive inflation, the Drachma2 needs to be conceived of and to operate by some fundamentally different principles. This is not illogical because the principal goals of each currency are different. Debt-based currency like the euro is primarily directed toward investment, growth and capital accumulation – the larger, the better. In contrast, the Drachma2 would be primarily about commerce – the transactional exchange of goods and services. And importantly, we propose it would be implemented on a credit basis rather than debt.

A practical example of the operational difference is in the notion of “savings.” With debt-based currencies, storing money in accounts is promoted as virtue – for two reasons. Banks need capital reserves against which they can write more loans. Secondly, debt-based economies are prone to boom-and-bust cycles, and a cash reserve is frequently needed to see the person or corporation through the down cycle.

In contrast, with a credit-based currency, the goal is to keep money circulating and doing work, to the greatest degree possible. Excessive saving impedes this flow, with the result that the economy becomes anemic.

With credit-money, there must be a homeostasis to the system. Sufficient money needs to circulate to facilitate all the transactions needed for a robust economy and a happy citizenry, but not so much that its value begins to degrade through inflation. While regulating this (or any) money supply could become a bureaucratic nightmare, fortunately in this case, a natural self-regulatory mechanism exists that requires little bureaucratic intervention. Since the goal is to keep Drachma2s productively circulating, money that is dormant in accounts is not fulfilling this goal, and should be withdrawn from the system in order to avoid inflation. This could be done through a negative interest charge (known as “demurrage”) for currently inactive money. It might be made progressive depending upon the length of storage.

Although separate, the two economies (institutional and personal) would continue to interact. For example, workers could be paid in either currency, and consumer items would generally carry a dual price tag. (The latter is not a foreign concept. Today, merchants often have a cash price and a credit price for some items. Retailers often have special “club card” pricing.)

While any major change to an established system meets with some resistance, the above appears to be a win-win for all parties concerned. Suffering citizens are once again able to conduct their lives, and are less inclined to complain and revolt. Social programs no longer need to be funded with debt-money, thus reducing the need for taxation to pay interest charges. (Note that the vast majority of the current Greek bailout money is going to pay loan and interest charges.) On the institutional side, euros that had been diverted to fund social programs are now fully free to fund investment activity. And robust business activity in both economies makes for a healthier, more productive country and a stronger international partner.

Sadly for Greece, it may well be serving as the proverbial canary in the coal mine for future economic travails more broadly around the globe. At the same time, it may also serve as a test case, and ultimately an example of an evolved economy that meets the needs of all stakeholders. Let us hope for the latter.