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A parallel currency?

Arnold Kling has brief thoughts here about the phenomenon of air miles. The “bonus” miles one accumulates due to air travel now equate to about $700 billion of value, according to a study that Kling cites. That is a lot of money. He is not very keen on air miles, largely it seems because he dislikes the way that dinner table companions go on about them. I know how he feels. An acquaintance of mine, who shall remain nameless, would constantly brag about how many air miles he got via Virgin or whatever… zzzzzz

On a more serious note however, one can see how some people might want to treat the air miles market as a sort of parallel currency. $700 billion dollars worth of air miles could buy one a lot of goods and services, conceivably, if exchanged by barter. Clearly they are highly restricted in terms of liquidity, the key advantage of money. But during a period of high inflationary stress, I could see how air miles could become quite popular as a medium of exchange.

The idea of competitive currencies is often rightly associated with the late F.A. Hayek. The idea seems to have gone rather quiet of late. Perhaps because we currently live in a period of relatively low inflation, the fears about the dangers of monopoly money and hubristic central banks have faded. It would be highly complacent, however, to assume that the current benign low-inflation environment will last forever. These things seldom do. Hayek’s idea may be ready for a comeback.

16 comments to A parallel currency?

  • guy herbert

    One of my greatest objections to Air Miles has always been that they don’t work with Virgin–they have their origin in a promotion for the Evil Empire of British Airways.

  • guy herbert

    One reason the argument for competitive currencies has gone a bit quiet might be that capital and exchange controls have gone almost everywhere civilized (and quite a few places that aren’t) so the existing ones are doing a bit competing on the quiet, ERM notwithstanding.

    (I submit the danger to open global competition is coming from another angle: the cartelisation of regulation and taxation.)

  • Chris Harper

    It can last a long time.

    The currency was stable for 350 years prior to the Great War.

  • Johnathan

    Chris, fair point. Arguably the period of high inflation in Weimar Germany, post-WW2 Latin America and 1970s Britain/elsewhere were unusual. Of course the post-WW2 inflation period coincided with the baleful influence of Keynes, who for some reason or other is still taken seriously even though his theoretical economics has been largely put through the shredder.

    The preceding 350 years you mention did, of course, coincide with the period in which money was based on precious metals.

  • HJHJ

    The European single currency was originally proposed as a ‘common currency’ i.e. not necessarily replacing national currencies. Margaret Thatcher missed this and let France, in particular, manage to get a single currency agreed ‘behind her back’ during a European dispute (I can’t remember what the dispute was now).

    I used to work in Belgium for a pan-European French-owned company. We supplied components both to various divisions of the parent company and to other companies. Especially within the company, but also to some outside customers, we did business in ECU (European Currency Units – a weighted basket of European currencies widely quoted at the time). This worked very well, sharing currency risks and removing disputes over the currency in which to trade. Only to Belgian customers did we quote in local currency (Belgian Francs).

    This worked very well and I often wonder whether formalising the ECU into a common currency whilst keeping national currencies would have provided some of the advantages of the Euro without the disadvantages (which outweigh the advantages, in my opinion).

  • Johnathan

    HJHJ, very interesting comment. I recall some way back that Nigel Lawson advocated a common currency for the EU, backed possibly by gold, but the idea got nowhere. Given that the Italians may be threatening to leave the euro and revert to the lira (not sure whether this is a scare or not), then having a fallback common currency option for those who need it strikes me as a good idea.

  • fieldmarshallstack

    Nice idea, but the air miles are really no better than scrip in a “company town”, subject to the rules of the company…like in coal mine camps.

    The airlines could just as easily back out of their commitment to air miles in times of inflationary stress, but would be loathe to, due to the bad animus and loss of goodwill by those that were left hanging by the airline…when and if “good times” were to return, the customer would have moved on to the next most lucrative deal.

  • In the US several airlines have a program where people can donate their airmiles to soldiers and their families so they can see each other (especially if the military person is injured). I believe there are other programs where you can donate airmiles to the ‘Make a Wish Foundation’ and other similar charities.

  • Chris Harper

    the air miles are really no better than scrip in a “company town”

    Once true but not anymore. Company scrip could only be spent in a single company store, but air miles are becoming more liquid all the time. Available in more and more ways and usable in more and more places.

  • HJHJ


    The problem is that it is now hard to imagine both common currency and the Euro existing at the same time.

    I have long thought that it was a pity that the concept of a common currency became synonymous with a single currency without most people realising that they need not necessarily be the same thing. It is unfortunate for Europe that a more market-led approach of adopting a parallel common currency was not tried. It would have taken almost no bureaucracy and no compulsion to formally introduce the concept and see how widely it was used. I suspect that it would have been very useful for business whilst retaining national sovereignty and the flexibility that is a key advantage of national currencies which can vary in value against each other.

    I’m not entirely clear why Nigel Lawson thought tht a common currency would need to be backed by gold. Defining its value by reference to a weighted basket of currencies would have been simpler and sufficient, surely (although I’m not a banker, so perhaps someone will tell me it’s more complex than this)?

  • Johnathan

    HJHJ, I cannot really say whether a gold-backed currency is the best; I know there are some “gold-bugs” out there (Alan Greenspan used to be one before he joined the dark side and became a central banker), but a commodity basket system could be okay. This is a fascinating area for original economic research. There ought to be a few phDs in this somewhere. Any takers?

    I think there is a fairly clear reason why the common currency issue was killed dead. It would not have given the EUfanatics what they wanted, namely, a device to impose their vision on the EU. A shame. A common currency model is more evolutionary, more “Burkean” if you like. It is the sort of pan-European market idea that would appeal to genuine classical liberals.

  • dave_b

    This is a fascinating area for original economic research. There ought to be a few phDs in this somewhere. Any takers?

    It was tried in the United States and failed miserably. A commodity basket has the inherent problem of one or more of the commodities always being either above or below world market valuations. The government exacerbates the problem by instituting price controls to maintain the price level; therefore, if the government sets a maximum rate below the market rate, there will be a shortage, and if the government sets the minimum rate above the market rate there will be a surplus. I’m not sure if I advocate a return to the gold standard either, but one thing I do remember from reading Rothbard is that he was a bit upset that gold standard advocates had been marginalized into being called “gold bugs”. However, the more I read and research the gold standard and how a fiat currency causes artificial inflation and the boom and bust cycle, I have to admit that they have a good point.

  • HJHJ


    France was the driving force behind the single currency – they wanted it to “stand up to the USA” as part of their general feeling that it’s necessary to do this (without saying why) but also because of painful memories of Franc devaluation in the past when the US failed to come to the Franc’s “assistance”. Doesn’t being macho about a currency and the exchange rate seem dated these days?

    The French slipped through the change from the EU’s commitment to a common currency (which wasn’t explicitly defined as a single currency) to an explicit single currency when Margaret Thatcher had absented herself from discussions (the exact reason for which, infuriatingly, I can’t remember).

    Incidentally, I don’t know whether you thought I was suggesting a “commodity basket system” or whether this was just your thought. I was talking about a weighted basket of European currencies, which was what the ECU was. Quite how you would adjust the weighting as more countries join or the relative size of their economies change, I don’t know.

    Like you, I favour a more “Burkean” pragmatic evolutionary model. Burke vs the French revolution – we all know which prevailed at the time and I don’t think anything has changed (or should).

  • John K

    It is unfortunate for Europe that a more market-led approach of adopting a parallel common currency was not tried. It would have taken almost no bureaucracy and no compulsion to formally introduce the concept and see how widely it was used.

    I think you’ve answered your own question there. If a scheme does not involve increased bureaucracy or more power for bureaucrats, what attraction would it have to the Nomenklatura?

  • Robert Alderson

    The Economist reports that NuLabour have a plan to introduce another parallel currency.

    Under the scheme, which is being proposed by the education department and is due to begin trials next year, the card would act as a store of value, rather like a supermarket loyalty card. Each card would start with a £12 credit from the government, plus a further £12 a month for children from low-income families. That money could be spent only on specified goods, ranging from such wholesome things as swimming lessons to trips to the cinema. Cigarettes, chocolate and other foul vices would be off-limits.

    The article is on the subscription part of their website so I can’t link to it but this BBC story has some more details.

  • I heard a piece on the BBC recently about a parallel currency in Kenya: mobile phone minutes. Safaricom will sell you minutes from kiosks which you can transfer to other subscribers using SMS messaging. So, if your mom back in the small town needs some cash, you can transfer some minutes to her account, which she will in turn will transfer to the account of the grocer in the market. This works out well, since banks and other conventional transfer agents are few and expensive over there. I don’t know if signs in the market are listing “Chickens: 15 minutes or one call to the UK”, but the ingenuity of the carrier and their customers is heartening.