Dual Currencies

Harold James, PrincetonImperial College Conference:

Removing the Zero Lower Bound

Classical Definitions of Money

• Unit of Account (for fiscal purposes)• Store of Value (denomination of future

contracts)• Means of Exchange (the heart of the

payments system)

Relationships

• Interest rates (discount rates)• Exchange rates

Contemporary Debate

• Euro discussion: a currency without a country (de Grauwe)

• Financialization / financial globalization / financial elasticity (Borio)

1. The pre-modern world

• Bimetallism: eg Picciolo and Fiorentino

• A shock absorber (Larry Neal)• Inherently more stable (Milton Friedman)• But in practice – outside self-governing city

states and the United Provinces - frequent alteration of relationship of unit of account and metallic unit (debasement)

Nationalization of Money

• 1690s: British Financial Revolution• 1800s: French Financial Revolution

2. Modern Dual Currencies

• In circumstances of extreme fiscal dominance

Weimar inflation

Dollarization

• Weimar Germany• Yugoslavia in late 1980s• Russia in early 1990s• Argentina … repeatedly

3. Synthetic Currencies as Response to Currency Instability

• Since mid-1970s ECU: European Investment Bank, Euratom, ECSC

• Dec. 1981 300m ECU deposits; June 1985 33,432 m

• Successful… until 1992-1993

• Hard ECU?• SDR? Zhou Xiaochuan, in 2009 : “The desirable

goal of reforming the international monetary system, therefore, is to create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies.”

4. Cross-border creation of debt

• Borio:“liberalised financial systems weaken financing constraints, thereby providing more room for the build-up of financial imbalances”

• Need for backstop: central bank swap lines (after Sept-Oct 2008)

• Carry trades fueled by low interest rate environment

Risks

• Problematic backstop in central bank swap lines

• Risk of carry trade unwinding

Modern Developments

• Fiscal pressure

IMF WEO

• Payments technology innovatio

• Capital markets (choice of borrowing)

Conclusion

• SO: this time is different…..