How do states that use a foreign currency as the only legal tender, for example Montenegro which uses Euro, inflate?
And is there any benefit in living under such a state to living under a state with its own currency that can physicaly print money?
My understanding is that they can’t (beyond whatever inflation the Euro has). I don’t know why there would be a benefit at all. You’re still going to suffer the effects of whatever inflation that currency has, without even your own government getting the benefit out of it.
There has to be some reason why they prefer foreign currency to gold though.
Can their central bank do a little fractional reserving and lend money they don`t have, the way the subsidiary banks to the central bank do in other places? Is that inflationary?
The main political reason will be that they will eventually want to join the European Union. Also if their currency had previously been very unstable transferring to a relatively more stable one makes some sense; remember the euro has present market value as money whereas gold does not.
It wouldn’t be surprising if the Montenegroian central bank has fractional reserves which would be inflationary.
The main reason will be political however.
Arguably that is a good thing though since government spending takes resources out of the economy that might have gone to productive uses.
If they can get merchants to accept checks then yes they can.
You bet.
A government is still taking resources out of the economy through inflation, it’s just not your government.
They can’t. The inflation they have is from the producers of the currency.
There is clearly a benefit. The government can not inflate the currency and therefore has one source of stolen wealth unavailable to it. This was especially true for currencies like those in Ireland, Greece, Turkey, Italy, France, etc who were known to steal wealth from their countries through lots of inflation.
The issue that the banks/governments that create the currency steal from your folks. The best example of this is Germany. The Germans are finding out that the Euro Central Bank is stealing their money. It will be interesting to see how tolerant the Germans are of being robbed?
But if you want a stable currency you just need to stop printing more of your local money, no? And that way your subjects (and your taxflow) will even get to enjoy the benefits of a currency with less inflation. It really sounds like whichever government switches to a foreign currency has not got a clue. Not even about its own interests never mind the interests of the governed.
Yes they can.
Governments that use foreign currency cannot inflate by printing currency. However they can still engage in credit expansion through fractional reserve banking. After all, what do banks give you when you get a loan. You get a check, which you then deposit into your account. Loans in a fractional reserve system are just a matter of manipulating numbers in ledgers. In general the fewer options the government has the less problems they can cause, but we had fractional reserve banking, credit expansion, and business cycles when we were on the gold standard, and so using a foreign currency is no guarantee against these things.
Yes but arguments have been made that a different people and structure will be more reliable at not inflating than your own; this was an argument used in support of the Exchange Rate Mechanism since the German’s could be trusted more than the British. And again the main reason for the adoption of the Euro is to join the EU.
Countries use foreign currency in order to have better trade relations. They may not inflate that currency, but their domestic banks may still inflate via fractional reserve banking.
That is not really true. Adopting the Euro is not a requirement, you are actuall expected to first join the EU and can then only adopt it after a few years of following the Maastricht criteria.
Treaty wise that is true, however do you not think that taking on the EU’s currency will help with joining especially when they used to be part of the o so popular Serbia?