State Finance in History


Local currency

The sardex: in the FT (September 19, 2015)

A very good illustration of the model "Saving Traps", ST (see the page "Articles"). There have been many examples before, e.g., the Capital Hill babysitting coop (see Sweeney and Sweeney in "Saving Traps"). The sardex works, to some extent, like the endogenous money in ST. It would be the same if agents traded only in sardex. The difference is that they trade both in the sardex network and outside the network with the rest of the economy, in euros. The aggregate quantity of Sardex is zero. The critical feature is that each agent can have a credit. Assume, for example, that all agents are identical in size (only different goods) and that the total quantity of credit is M. The model is isomorphic to a Sardex with no credit and a total supply of Sardex equal to M.

What is the superiority over the Euro? In my view, the critical feature is the local monitoring of the credit. The authors emphasize the personal relations in setting the network. There authors state that the problem of defaults is minor and that they rely on courts only as a last resort. Practically, that means that human relations are more efficient in enforcing credit than "anonymous" banks. Since the Sardex is used only for local transactions, people may also consider a default on the credit balance as an act of disloyalty against the local community. It would be interesting to know more about cases of defaults. Also, the organizers can increase the total credit to the local economy and run a local monetary policy. There is probably an optimal size for such a local currency: more members mean more trading possibilities (externality), but possibly less credit monitoring and enforcement.


  • In Bloomberg, July 31, 2011. [It appeared on the week-end of the power play about the debt ceiling between the US Congress and the president. The article explains the relation between that event and the 1575 crisis in Castile. I did not choose the title, which is wrong.]

A comparison

 2011 (near) deadlock between the US executive and legislative branches about the ceiling of the public debt.

1575 (actual) deadlock between the Castilian executive and legislative branches about the ceiling of the public debt.

There are some (small) factual errors because of the very short deadlines for publication but the core of the argument is valid. The article is based on the paper "Debt policy under constraints...". Philip II put a payment stop on the short-term debt that was supposed to be converted into long-term debt when his parliament (theCortes) refused to increase the taxes that serviced the long-term debt. Because the funds for the short-term debt were raised in the domestic commercial credit market, through Genoese bankers, the commerical credit market froze and commercial fairs (the main one at Medina del Campo) were canceled. The negative impact on economic activity forced the Cortes to relent, after two years. 


  • "Europe requires Euro-bonds," Voxeu, January 10, 2012. [The text draws on historical lessons. It does not advocate the immediate introduction of euro-bonds].