Saturday, 5 November 2011

Schlichter on the euro

Detlev Schlichter:
Europe’s problem is not that many different countries share the same currency. Many more and much more different countries did the same between 1879 and 1914 under the gold standard, and it worked very well. The problem is precisely that they do not share an international, apolitical and inelastic commodity money, but a fully elastic and politicized fiat money that comes with build-in expectations of government and bank bailouts.
This is excerpted from a superb interview with ValueWalk, covering a wide range of topics.

I encourage you to read the whole thing.


  1. So you are adding the current Euro trouble to the case for reversion to the gold standard. This is not a good argument.

    Greece (Portugal, and the rest) were encouraged (and supported in their governmental 'credit rating') by EU-central to spend lots of money; too much of it on imprudent purchases, and to fund much of this by borrowing.

    The same policy could have been pursued, even in the days of the gold standard.

    Given the Euro's multi-nation organisation, there is the additional problem that such imprudent government activity cannot be 'put right' (easily) by single-nation inflation of the currency.

    But the real problem is excessive and imprudent government spending, not the lack of gold standard.

    And the fear of many governments world-wide is just this: they too have spent imprudently and beyond their means. Greece's problems exposes this, and that such spending is a bad idea. Greece crashing shows they might crash too. Only if the crash of Greece can be prevented will those other financially imprudent governments reduce their own exposure: to their own imprudence (rather than that of Greece).

    Best regards

  2. Hi Nigel,

    Good to hear from you again.

    I think the theory goes that without central banks using freshly printed money to buy up government bonds and drive down interest rates, governments would find it much harder to borrow. Inflation induced by the deliberate expansion of the money supply also erodes the real value of their debts and corresponding interest payments.

    Certainly we have seen an explosion in debt since 1971, when the last link with gold was broken. Commodity money wouldn't prevent government borrowing, but it would make it harder.

    I think Detlev's main point here was to question those who dismiss the Euro as a non-optimal currency zone. He argues, and I agree, that no zone is optimal. Central planners can never get the interest rates or money supply 'just right'. Only the free market can do this.