Questions of political expediency aside the optimal currency size is really the optimal economic unit with a single currency. To keep it simple I would say one where the local inflation and economic growth rates are approximately the same. If a geographic subset of the economy has a much different average inflation or growth rate from the rest then it is probably better off having its own currency. The result follows by induction. (One could argue for different currencies within the same geographic region for different subsectors of the economy but it looks like madness to do so!)

Thanks for this post. The Greek dilemma (a good Greek word that, except in this case their predicament appears to be more of an “alemma”), has got me thinking about the costs and benefits to an economy and a community when they tie themselves to a larger economic and financial entity.

Clearly the Greeks have suffered by not being able to control their own currency. And likewise, during the recent resources boom here in Australia, old industrial states like NSW and Victoria suffered because of the decisions taken by the RBA to increase rates to take the heat out of the resource state economies (making our dollar appreciate and our exports more expensive – but punishing consumers and producers in NSW who were already in recession). It was clear that having only one institution with one lever, is a very blunt instrument for economic management. If you had a Reserve Bank of NSW meeting today, do you think it would have decided to lift rates?

So the question must be asked what is the optimal size or geographic distribution or economic coherence for a currency zone? I believe you (Mule) could represent this graphically. There would be two lines. One is the benefit of a centralised currency, increased trade and convenience. And on the other, the costs, of being unable to control one’s own specific destiny. And at some point these lines cross. One would imagine that Marrickville issuing its own currency would be low on convenience and a high impediment to trade. On the other hand a single global currency, whilst hugely convenient, would turn us all into Greece/NSW, and that is not an attractive prospect.

So what is optimal, do you think?

Interestingly at the time of Empire, Australia used the British Pound (and each of the separate Australian colonies did so – though NSW famously had experimented with its own currency in the early days, though I doubt they ever envisaged it would end up as the logo for a local merchant bank). As I understand it the values were pegged, but this arrangement fell apart after the Australia left the Gold Standard, “resulting in a devaluation relative to sterling. A variety of pegs to sterling applied until December 1931, when the government set a rate of 1 Australian pound = 16 shillings sterling (1 pound 5 shillings Australian = 1 pound sterling).” (see http://en.wikipedia.org/wiki/Australian_pound). The modern equivalent would see Greece issuing their own – devalued – euros (if they were allowed), but this would kind of defeat the point and convenience of a single currency.

Also Mule, this currency specificity has got me thinking about languages. There is a similarity with the way in which more and more people on the planet are using fewer and fewer languages. There was a time where there were thousands of distinct languages spoken, and today there are only hundreds (there is probably a close correlation between language loss and currency loss). The costs/benefits are similar too. A language spoken by a wider group of people is more convenient and more conducive to trade and intercourse, but less likely to respond to the particular needs of a particular group (so no more 17 words for snow, or 50 or 100 – though sadly, I have to report that this is apparently an urban myth: http://en.wikipedia.org/wiki/Inuit_language#Words_for_snow. But the mathematician in you will be happy to know that they do have a base 20 counting system).

We used to think it axiomatic that language loss was a bad thing (much like species extinction), leading to a loss of linguistic diversity on the planet, and therefore cultural diversity, though now I’m not so sure. For those interested, have a listen to this: http://www.abc.net.au/rn/linguafranca/stories/2009/2734265.htm. Anyway it is hard for me to imagine any particular loss of local benefit from adopting the universal base 10 counting system.

Perhaps on the spectrum of cost/benefit intersections, the loss of a local language is somewhere between losing your base 20 counting system and losing control over your own currency.

It’d be great if you gave it a try!

This sounds like I good idea and I would be glad to join… if I had any idea what all those things were! As things are, I just got dizzy with all these @xxx and links!

I’m getting old, Stubborn

Marco

I am very interested in tools to help manage online communities (I am building them myself) so glad to have found a new toy to play with. I see there are smart people involved in the platform, @statusnet (http://status.net/company)

All the best with this, I’m glad to have met you at #wscm and now learning about this.

Cheers
Tony Hollingsworth