Mainstream economists have been fervently advertising the economic advantages of Europe's single currency, the euro,
which was introduced on 1st January 1999, meant to mark the final and crowning step in Europe's political and economic integration.
The purpose of this article is to revisit and reinterpret the logic of the emergence of the euro
Along the lines of the progression theorem, which denotes, to use a quote from Hoppe,
a theory of the destruction or devolution of money by government. It will be argued in
my paper that the euro is an illustration par excellence of what the progression theorem
holds, namely that states will first replace commodity money with fiat money, second cooperate
Second, cooperate for eliminating competition
between national fiat monies, thereby three,
working towards establishing a world fiat currency,
a process fueled by the propagation
of social democratic socialism.
So, on this chart you would see the content of my paper,
and let us go to part two, on the progression theory.
In What Has Government Done to Our Money from 1963,
Murray Rothbard took recourse
to what can be called the progression theorem,
and I took from an article written by Professor Hülsmann
that it was Joseph Salerno, Professor Joseph Salerno
who coined the term progression theorem.
This progression theorem is actually derived
from praxeology applied to human history.
In that sense, it represents the aphoristic part
of the Austrian historical method, which, as you may know,
rests on the method of understanding.
The progression theorem outlines a praxeologically necessary
sequence of action, as implied by the axiom of human action,
from which a number of irrefutably true propositions
can be logically deduced.
For instance, only individuals act, not collectives as such.
for the Acting Individual, Means for Achieving,
ends are scarce, which requires economizing,
scarcity is a category of human action,
and earlier satisfaction of ones is preferred
over later satisfaction of ones,
a finding which is reflected by positive time preference.
Rothbard's progression theorem based explanation
of why the state replaces commodity money with fiat money
starts with his new theory of the state.
And according to Rothbard, the state is, quote,
that organization which possesses either or both
in actual fact almost always both
of the following characteristics.
A, it acquires its revenue by physical coercion, taxation,
and B, it achieves a compulsory monopoly of force
and of ultimate decision-making power
over a Given Territorial Area, quote, ends.
A central insight in this contact is
that the state has a necessary,
so an inherent tendency for expansion.
As Hoppe said, quote, every minimal government
has the inherent tendency to become maximal government.
Government expansion, of course, has to be financed
and the ultimate pillar of its aggrandizement
is the monopolization of money production.
Once a fiat money regime has been established, government can increase its income at the
expense of those outside government at practically no cost and without having to fear bankruptcy.
And to be in a position to make use of fiat money inflation in particular combined with
the issuance of public debt as an instrument of raising its revenue, government must obtain
in full control, that is, the monopoly over money production.
For as long as there is unhampered currency competition
at the national or international level,
government's ability to make use of inflation
and debt issuance as a source of financing remains limited.
This is because a policy of open and high inflation
would sooner or later make domestic money users
replace the inflated domestic currency
with less inflated foreign currencies.
and so taking recourse to the progression theory,
Rothbard identified a number of steps taken by government
to replace commodity money by fiat money.
In short, government monopolizes the minting
of commodity money, then monopolizes the issuance
of money substitutes, so claims to money proper,
allows for fractional reserve banking and central banking
and then to avoid the collapse of banks issuing
Money Substitute in Excess of Money Proper,
it suspends the redeemability of notes,
thereby severing the link between paper, tickets
and book entries and money proper.
So the letter will be placed by central bank money
resulting in a pure fiat money system.
Now let me go to part three of my paper
titled Monetary Imperialism,
The Path of the Military Means.
Hans-Hermann Hoppe in his article Banking Nation States and International Politics argued that the economically and militarily dominant state will set out to eliminate competition between national fiat monies and establish its own fiat currency as the world's reserve money.
The reserve currency issuing government reaps seigniorage and enjoys a lowering of the cost of debt financing.
financing. According to Hoppe, the economically and military dominant government will pursue
monetary imperialism by military means, that is by aggressive territorial conquest, in
other words, war. And this leads me directly to part four of my presentation. It's titled
From National Fiat Currencies Towards the World Fiat Currency, The Path of Social Democratic
Socialism, the conclusion derived from the progression theory, namely that a group of
nation states will move towards a world fiat currency can be reached without having to
take recourse to the idea that the economically and militarily dominant government employs
military means as argued by Hoppe.
The logical tendency towards a world fiat currency can also be explained by the propagation
of Social-Democratic Socialism, meaning a societal order characterized by private ownership,
but with no owner of the means of production enjoying full control over his property.
Under Social-Democratic Socialism, redistribution policies unfold within each nation state,
even though to a varying degree, and this leads to a growing harmonization of economic
and Social Policies Among Nation States.
This in turn will make it increasingly convenient
for a national government to increasingly engage
in coordinated policy efforts with other nation states.
As noted earlier, any government has an interest
in aggrandizement which can most conveniently be achieved
by its monopolistically issuing
an inflationary fiat currency.
An internationally prevailing social democratic socialism
will therefore work in particular towards eliminating
interstate fiat currency competition.
And the latter can be brought about
through international cooperation in monetary affairs
by way of, say, pursuing a policy
of fixing bilateral exchange rates.
Such a strategy, however, has a couple of shortcomings, though.
For as long as these policies rest on voluntary cooperation
among nation states, those states deviating from the agreement cannot be sanctioned effectively.
What is more, it might not be attractive for those nation states that pursue a relatively
low inflation policy to team up with governments that are already pursuing a relatively high
inflation policy. A political solution to this problem can be found though, namely merging
and investing national fiat currencies into a single currency under the political promise
that the new single fiat currency will be non-inflationary and that would be the first step.
And then once this has been accomplished, embark on a policy of actually high inflation.
That would be the second step.
I should say at this juncture that of course fiat currencies are not only inflationary
As you know, and we heard interesting lectures about what Mises found in his book The Theory of Money and Credit in 1912,
naming that fiat money leads, and necessarily so, to boom and bust cycles, to malinvestment, to social and economic crises.
And once national fiat currencies are established the world over and markets are allowed to work freely and unrestricted in terms of international capital flows,
the still fragmented fiat money world order will increasingly bring about a crisis on an international scale.
And these kind of crises caused by fiat currencies, national fiat currencies, actually work as a catalyst for bringing about a world fiat monetary system
in the monetary system because it sets into motion an economic incentive for governments
to increasingly cooperate in monetary affairs and at this point I would like to show you
one graph just to bring some actual data into the debate.
What you would see is from January 2007 up to March 2012, the so-called Euro Cross Currency
Basis Swap Spread, this red line.
What does it mean?
It shows you the cost of funding, the cost of funding for Euro area banks which try to
get hold of US dollars.
So a bank, for instance in Europe, has not only refinancing needs in dollars or in Japanese
yen, but also in US dollars.
And how can a bank obtain US dollars?
It could either issue a dollar denominated bond, and if that doesn't work, it could do
the following trick.
It could issue a euro denominated bond, take the proceeds, convert these proceeds into
U.S. dollars and at the same time do enter a forward contract, namely getting the dollars
back into euro. And what you would see here is the cost of these transactions. As you
can see in 2008 when Lehman Brothers went bankrupt, the market so to speak dried out.
So it was very difficult for your area banks to obtain dollar funding. And as you can see
The same problem reappeared quite recently.
And at the end of November, the 30th of November, 2011,
the major central banks in the world
announced so-called liquidity swaps,
meaning that they would be prepared to finance any kind
of money needed by banks.
So the US Federal Reserve basically
announced to provide any unlimited amount
of West dollars to all banks in the world and at the same time the European
Center Bank would do the same and so would the Bank of Canada, the Bank of
Japan, the Bank of England and the Swiss National Bank and this is I would say an
unprecedented action taken by Center Bank and it should give you an insight
how far advanced this kind of international coordination of monetary
Policy has already become.
So let me move to the fourth part of my presentation, what the progression theorem tells us about
the euro currency.
Against these theoretical considerations above, we are now in a position to revisit and reinterpret
Europe's process towards setting up a single currency.
And it has been long in the making, the push towards introducing a single currency stems
comes from the early 1970s under the so-called Werner Plan, former Prime Minister of Luxembourg
who suggested that the then six countries participating in the European Economic Community
should converge their economies and currencies. In 1979, the European Monetary System was
set up for reducing the degree of fluctuations of exchange rates between these countries
And in June 1989, the President of the European Commission put forward his so-called three-stage plan for achieving economic and monetary integration,
a plan that resulted in the so-called Maastricht Treaty, which was signed on 7 February 1992,
establishing the European Union and laying down the foundations for a single currency and the European Monetary Union in three successive stages.
The political challenge for establishing a single currency in Europe had been to win over Germany,
the continent's largest and most populous economy with a tradition of hard money.
The latter resulted obviously from the dismal experience made in the early 1920s
when there was hyperinflation through which the former currency, the Reichsmark, was completely destroyed.
In fact, it was the German population's preference for relatively low inflation
that had made the Deutsche Bundesbank, so Germany's central bank,
the least inflating central bank and, accordingly, the DMACC,
being the least inflated currency in Western Europe.
With fully convertible currencies and free flow of capital across Europe,
The monetary policy of the Bundesbank had put an effective limit to high inflation policies in European countries.
The German population's resistance against giving up monetary sovereignty and joining a European single currency was finally overcome with the fall of the Berlin Wall on 9th November 1989.
This event, according to some observers,
resulted in a political deal.
Namely, France demanded replacing the DMACC
by the single currency as the political price
Germany had to pay for the West's approval
to German reunification.
And be that as it may, the German euphoria
of the world's demolition effectively gave the then
so-called ruling a conservative liberal coalition,
which was more inclined to pursue a kind of
Social Democratic Socialism, I may add, government carte blanche.
The government enthusiastically embracing
political integration in Europe agreed to hand over
monetary sovereignty to a supranational body.
This decision could be made by German parliamentarians
without holding a referendum.
The German government's approval to replacing the DMACC
by a single currency came with some conditions though
for Becoming Lingering Stability Concerns
Among the German Electorate.
The institutional framework governing
the European single currency had to comply
with German stability standards,
so-called stability standards.
Most important, the German government
demanded a European central bank constructed
along the lines of the Deutsche Bundesbank.
This included, for instance, that the European
central bank would be politically independent,
dedicated to a monetary policy of low inflation,
and prohibited from financing public sector deficits.
What had long been desired by adherence
to social democratic socialism became reality
as from the 1st January 1999.
National fiat currency were replaced
by the single fiat currency, the euro,
managed by the European Central Bank.
With the euro in place, the economic and political
incentives for individual nation states
to play by the rules declined sharply, to say the least.
As soon as 2003, the ECB had abandoned
its so-called monetary pillar, making it even easier
to pursue an inflationary policy
in terms of increasing bank circulation credit.
With the financial and economic crisis
becoming ever more severe, the ECB has been
increasingly buying bonds since May 2010
and providing the Euro-era banking sector
with unlimited amounts of base money to prevent bankruptcies.
In fact, the ECB policy has already embarked upon a policy
of running the printing press.
This observation corresponds to what was suggested earlier.
It is the logical second step following from the first step,
inflating the single currency above the level
seen in the least inflationary national fiat currencies.
If the chairman allows me two more minutes,
I briefly touch upon the last paragraph,
the way towards world fiat currency.
Under social democratic socialism,
this story, of course, does not end here.
The progression theorem holds that the existence
of national governments brings with it the tendency
for setting up world fiat currencies by non-military means.
It is, of course, beyond the scope and available time
to go into detail about, for instance, various reform proposals which have been put forward
for reforming the international monetary architecture. I would also, I would just like to conclude
with the following. The progression theorem reveals the inherent tendency of pushing towards
a world fiat currency and the introduction of the euro is a step along this path. Such
Such a development bodes badly, I should say, given the economic problems of national fiat
money, namely inflation, malinvestment, indebtedness, you name it.
It goes without saying that a world fiat currency would increase all these bad developments
greatly.
Most important, a world fiat currency is not compatible with a free market society.
It would actually destroy it.
And it was Mises who put it succinctly, quote,
it would be a mistake to assume that the modern organization
of exchange is bound to continue to exist.
It carries within itself the germ of its own destruction.
The development of fiduciary medium
must necessarily lead to its breakdown.
Ladies and gentlemen, by following
the pure progression theorem, we actually
find that the progression theory makes another praxeological case against the state. Thank you very much.