From “Il Sole 24 ore”
For a state to introduce a parallel currency means it is in deep economic and political crisis. The most recent case is Zimbabwe. Therefore, actions or words by politicians that could produce such risk are reckless. Two such actions have already been taken in our country. The first is the distribution of citizens’ income through payment instruments. The second is the parliamentary motion on so-called mini-bots. It would be wise to stop.
Brief review of what currency is in a normal country. The regular and daily development of productive and commercial life requires citizens’ trust in the currency. Citizens demand currency for three different reasons, intertwined with each other, related to the fact that this means of payment: is accepted; does not lose value; protects privacy. In a normal country, currency can be produced by two different entities: the state or private individuals. Public money is produced by the central bank, private money usually by banks. Not only that: private money is accepted also because it can be converted into public money at any moment. Last point: in a country that is both normal and advanced, since the 80s it is taken for granted that the central bank is independent from politics, because all economic and historical analysis has shown that when the politician – once it was the prince, now they are elected by the people – controls money creation, trouble ensues.
The review helps to remember why in the European Union, public money can only be created by the European Central Bank (ECB), to guarantee European citizens. Therefore, the demand for money from citizens is satisfied by a mixed supply – public and private money – in which public money is the indispensable lever for private money to be accepted. At the macroeconomic level, private currencies without any public anchor are not relevant, as they are embryonic or limited phenomena.
However, when a country is in crisis, its public currency tends to no longer be accepted, triggering disorder and uncertainty in daily exchanges. In these cases, one solution is to try to replace the national public currency with a more credible foreign public currency. We talk about “dollarization”, or also “euroization”. Dollarization gives the adopting country the expected benefit for citizens of having a credible public currency, and the expected cost for local politicians of not being able to manipulate it; this is the condition of its success, and depends precisely on the arm’s length distance from local politicians.
But if the local politician wants to try to circulate his own currency, even if the country is dollarized, parallel currencies are born. The politician produces liabilities that he tries to make his citizens use, by encouraging or forcing them. But it is a second-rate currency. At the first crisis of confidence, the use and value of the parallel currency will collapse, causing inefficiencies and inequities.
Take Zimbabwe. Since 2008 it has been a dollarized economy. Since 2016 the State has been circulating its own bond notes – formally guaranteed by official dollar reserves – which should be used as currency, initially with a nominal value of 1 to 1 with the dollar. Unfortunately for citizens, the use and value of the public parallel currency has been anything but regular and stable, with real paralysis when there have been generalized crises of confidence; the latest was last January. In February came the announcement that the unsustainable 1 to 1 exchange rate with the dollar will be abandoned; the market exchange rate is 4 to 1. The cause of the crisis? It seems to be an excess electronic production of bond notes by the government. We would be back to the usual story: if the politician controls the Mint, he abuses it.
Final personal note
But if this is what the parallel currency is, where is the risk? The risk lies with the political side and the banks that together have agreed to be the absolute masters of the currency. www.e-kono.net