The dollar, the Euro and Greeceby Fotis Fitsilis*
The ongoing global economic crisis is best understood when knowing our monetaryhistory. In particular, the study of the creation of the United States (U.S.) dollar andits comparison with the other major monetary union, that of the euro area, revealvaluable information and offer conclusions about the evolution of the Europeancurrency in the future.
The birth of the U.S. dollar
The United States of America began as 13 independent colonies, each with its owncurrency. Massive inflation and different cultures, customs and traditions among thecolonies led to large divergence in the real value of the individual currencies. Afterthe American Revolution and the Declaration of Independence, in 1776, the U.S.decided to establish a central government and chose a central currency that wascalled Continental Currency. The individual currencies were exchanged against thenew currency at different rates and the first unified U.S. currency, the U.S. dollar,was released in 1793.However, the government quickly recognized that individual States, the old colonies,had to be relieved from the burden of the debt they carried. The new federalgovernment absorbed their debts into a U.S. national debt, thus allowing the Statesto make a new beginning. By doing so, the federal government guaranteed theconsistency of the new country. Additionally, by maintaining control of the newcurrency, it was able to indirectly control the debt through the mechanisms of devaluation and production of new money.
Comparing the dollar to the Euro
At first sight, one single European currency (the Euro) in a large common market of approximately 500 million people is strong enough to directly compete with thedollar. But monetary theorists and politicians with foresight (Robert Mandel, HelmutKohl and others) have long warned that without political integration, and hencecentral fiscal policy, the euro was doomed to fail. The current situation seems to justify their concerns, at least temporarily.In contrast to the creation of the U.S. dollar, the 17 member states of the Eurozonecreated a common currency without absorbing the national debts into a commondebt. Thus, in just 10 years, inequalities in production and consumption, especiallybetween north and south Europe, led into a deep debt crisis in the Eurozone, whichis exacerbated by the ongoing crisis in the global financial markets.