Free Money, Currency Substitution, and Regional Currencies

Jonathan Warner, Dordt College


A stable currency contributes to the common good, by (inter alia) reducing transactions costs and making the outcomes of long-term contracts more certain. Unfortunately, government monopolies on the issue of money provide an incentive for abuse. There is a temptation to finance expenditure by excessive seigniorage through over-issuing money, generating inflation. In 1976 Friedrich Hayek proposed the "denationalization” of money, arguing that the idea of legal tender (by which the government monopoly is enforced) should be scrapped, and that competing currencies be allowed to circulate freely. The converse of Gresham's Law should then hold: economic actors could punish issuers of bad money by switching to a superior product (with lower inflation, and hence lower transactions costs). This, in turn, should provide a measure of monetary discipline on governments and central banks, as the loss of ability to issue money (and to exert control thereby on credit creation) is significant.

This paper examines two types of cases where something approaching free money has existed. The first is a case study based on my research into currency substitution in (Turkish) North Cyprus during the 1990's. The Turkish Lira is the official currency of the territory, but was then subject to very high rates of inflation (around 80% per year) and consequent depreciation against other currencies. To shore up the currency, the Turkish Central Bank periodically raised interest rates to well over 100%, causing considerable welfare costs to both Turkey and North Cyprus. While some made windfall profits from the high interest rates, the majority suffered from the effects of rising prices, compounded by fiscal drag that raised the real tax burden on wage-earners. However, unlike in Turkey, residents of North Cyprus were free to open foreign-currency bank accounts, and U.S. dollars, Deutschmarks, and (British) pounds sterling were all generally acceptable for transactions. Data from bank deposits in the Turkish Cypriot banks allow me to measure the growth of currency substitution, and also changes in the proportions of foreign-currency deposits by currency. Secondly, the paper looks at the history of private money in the United States. This material draws on my research into the scrip schemes of the Great Depression and later. Although some local currencies have significant benefits to some groups of people, they involve higher transaction costs than using the government's legal tender, as they are not accepted in payment beyond a given locality, and so will tend to be successful only if there are good reasons for using them. In themselves, though, they may provide some form of monetary discipline on monopoly issuers, as potential new entrants into the money supply business should the official currency suffer debasement. Just as Hayek’s prophetic warning on the dangers of government abuse of monopoly on currency issue has helped restrain Central Banks, making currency issue a contestable market imposes more discipline on issuers to the benefit of all.


Imagine a late night conversation in a dorm near here:

LARRY: We should do something to commemorate the founders of Hillsdale College. A statue, or commission a work of art, or something.

ANNE: Great idea! But how would we pay for it? People are fed up with collections, requests for money for churches, support the troops, get the troops out, support Mitt Romney, ditch Hillary; support Denis Kucinich…

RUTH: We could have a sponsored car wash…

ANNE: Been there, done, that, and last time we didn’t make much. With the drought and this global warming thing, people have begun to think that, for cars, staying home and staying dirty is the thing.

ADAM: We could just issue our own money.

LARRY: But who would use it?

ADAM: Well, everyone. We’d get people to buy it for dollars, and we’d get the local shops to accept it – and the College as well, of course – and so we’d have money to buy the statue, or artwork, or whatever.

RUTH: So we get everyone to use our money, and we spend their dollars on the statue. Great – until people get fed up with Hillsdale money, and want their real dollars back. We won’t have them, and I foresee an unpleasant conversation with the Police Department.

ADAM: No, we have their dollars to give them back, if they want them.

RUTH: But then, if we have to store the dollars, we won’t have any money for the artwork. And we’ll have to worry about somebody breaking in to Larry’s room and stealing all those dollars. Not the greatest plan in the history of the world, Adam.

ADAM: No, we don’t store the dollars, except for a few. We put them in the bank. After a year, the interest we earn from the bank will be enough to pay for the statue. And it will have cost nobody anything. All we have to do is to persuade people that it’s good to use our money rather than dollars. Think of the advantages: businesses will like it, because it means people will spend their money locally. People round here will like it, because they can say that they don’t depend on the government for their money; it’s genuinely free money. And even the bank will like it – see how they’re always trying to persuade us to open accounts with them?

LARRY: So, after a year, we get the statue, the people of Hillsdale feel good, and no-one loses, right?
I’m guessing that conversations like this don’t (often) happen; or, if they do, no-one acts on Adam’s ideas. That is, for most of the time, people are sufficiently satisfied with using government-issued money not to seek out alternatives, even when the Government makes no attempt to enforce its monopoly on monetary emissions by legal means.

It is generally thought that monopolies are bad – reducing choice and consumer surplus. So it makes sense to pose the question as to whether the seeming monopoly powers that governments today have over the issue of money is truly beneficial. Do the benefits of a medium of exchange that must be accepted by legal decree outweigh the costs involved, especially when there is the potential for a government to resort to inflation as a way of financing spending?
There are obvious advantages of having uniformity in money. Easily recognizing what is, and what is not, money is obviously helpful. Before the Civil War, when State-charted banks issued bank notes, both notes of dubious value (from wildcat banks) and counterfeits were common. Notes traded at a discount from par based on the distance from the issuing bank, and estimates put the level of counterfeits at around a third or more of the total notes in circulation. Bank Note Reporters, books that listed all known legitimate notes and details of known counterfeits, were as necessary to businesses as computer antivirus software is today.

A common unit of account makes transactions easier; money is more readily identified as such, and conversion costs are reduced. One of the benefits touted for the Euro for the citizens of EU member states that have adopted it is the greater transparency of prices across borders, the elimination of the costs of converting between currencies, and the elimination of exchange rate risk on delayed payments across borders. The chief perceived costs for these countries that decided to adopt the Euro were largely the threats of price-rises, the costs of converting machines to accept the new money, and the confusion it was felt people would feel from having to deal with an unfamiliar set of notes and coins.

A stable currency that maintains its purchasing power over time confers further benefits. The risks involved in accepting deferred payments are reduced, encouraging the making of contracts, and so encouraging investment, stimulating output and economic growth. While a low rate of inflation, as long as it is stable and predictable, may be beneficial, the fear is that it is all too easy for inflation to get out of hand. The problem with a monopoly on the issue of currency is that the issuer would seem, prima fasciae, to have an incentive to over issue. The issuer can take advantage of the seigniorage that accrues to the first user, while imposing costs (in terms of reductions in purchasing power) on subsequent users and on those holding previously-issued money. Turkey during the 1980’s presents a good example of the abuse of this power: to finance the building of the Atatürk Dam (and the rest of the Southeast Anatolia irrigation project). Turgut Özal deliberately created large quantities of new money, producing inflation rates of well over 60% per year. To prevent such abuses, Friedrich Hayek recommended that the only way to ensure monetary stability was to remove the monopoly on monetary issue held by governments: to denationalize money. Only in this way, he thought, could the cycle of inflation and deflation be broken, government spending constrained, and economic nationalism weakened. Or, if this idea were deemed impractical, then a gold standard system was the least worst of the remaining options, as it limits the ability of a government to issue money.

But there may be some significant impediments to a monopoly issuer’s ability to produce too much money. Firstly, it may be possible for consumers and businesses to “punish” the issuer of money by reducing their holdings of money – by switching to other monies or by moving money into other kinds of assets. Turks have long kept savings in gold, something the high inflation of the 1980’s and 90’s did nothing to discourage. The net result is likely to be (even) higher inflation, as the velocity of circulation increases as the money supply rises. Secondly, realizing this, and because of the costs of over issuing in and with much less fuss, than had been predicted. More seriously, one can join Britain’s Prime Minister, Gordon Brown in doubting that Euroland really is an optimal currency area. F. A. Hayek, Denationalization of Money (London: Institute of Economic Affairs, Hobart Paper 70, 1976, 1978, 1990) terms of foregone investment, the issuer may have an incentive to exercise restraint. To be able to receive a continuing income from seigniorage, it is in the issuer’s interests to aim for high growth in incomes, which generates greater demand for money, which can then be met by increasing the money supply without increasing inflation. Further, given the poor reputations of governments for the operation of appropriate monetary policy to ensure price stability, governments might try to commit themselves to controlling monetary emissions, either by some constitutional rule, or through ceding monetary control to an independent central bank, or (for small countries) adopting a currency board arrangement. In as far as the private sector finds these commitments credible; a benign monopoly can be the result.
An alternative policy would be to remove the issuer’s monopoly: to allow free competition between different types of money, Hayek’s denationalization of money. The rest of this paper explores this option by examining two case studies: North Cyprus in the period from 1987, and the United States in the 1930’s. In both of these cases, the official legal tender was defective: high inflation in Turkey meant that the Turkish Lira, the de facto official currency of North Cyprus had ceased to be a good store of value (there was too much money); whereas in the U.S. Great Depression the problem was a lack of purchasing power – a cash shortage plus hoarding of banknotes (there was too little money). When a currency ceases to be a good store of value currency substitution (“dollarization”) is the likely result; when the only available monies cease to be an effective medium of exchange, or is defective in some other way, some form of monetary substitute – scrip – is likely to appear. However, if there are no strong reasons not to use the official government-issued money, the use of substitutes is likely to be very limited.

North Cyprus

The self-declared Turkish Republic of Northern Cyprus (TRNC) covers the northern third of the Mediterranean island of Cyprus. It is the result of the division on the island in 1974, when Turkish troops invaded to protect the Turkish Cypriot community from potential genocide after a coup engineered in Greece installed a former terrorist as head of the (Greek) Cypriot government. The TRNC is recognized only by Turkey, and is subject to a number of embargoes. As a result, the only foreign banks operating are from Turkey, which compete with a number of local Turkish Cypriot banks.
The official currency of Cyprus is the Cyprus pound (CYP), which is to be replaced with the euro in January 2008. The Cyprus pound was held at parity with sterling via a pseudo-currency board arrangement from independence until the collapse of the Bretton Woods system in the early 1970’s. It continued to be used in North Cyprus until 1978, when the Turkish Lira replaced it, and all CYP-denominated bank accounts were changed into Turkish Lira (TRL) at the then-official exchange rate.

However, no restrictions were placed on the use of foreign currencies, or on the holding of foreign currency deposits in local banks, and, given the high rates of inflation associated with the Turkish Lira there was a considerable incentive to keep one’s savings in foreign currencies.

The recent history of Cyprus is contested, and used as a weapon by both Greek and Turkish Cypriots to justify their own positions. A vast literature exists on the causes and cures of the “Cyprus Problem”. Which, of course, was not as beneficial as the black market rate? David Matthews (The Cyprus Tapes London and Nicosia, Rüstem, 1987) recounts the surreal experience of trying to obtain TL for sterling at a branch of Barclay’s Bank: the teller is prepared only to exchange the sterling into Cyprus Pounds, as that is the official currency of Cyprus. He does, however, suggest that Mr. Matthews just visit one of the exchange bureau to obtain TL for the Cyprus pounds. Unlike their compatriots in Turkey, the Turkish Cypriots were more likely to use foreign currency rather than gold for their savings.

In addition, by the late 1980’s, an inflow of foreign currency from the arrival of expatriate Turks from Germany on holiday, of students from third countries (higher education was seen as an engine of economic growth), British expatriates and an Austrian United Nations contingent, plus a flow of Cyprus pounds from Turkish Cypriots employed by the Dhekelia British Sovereign Base Area administration, meant that it was expedient for businesses to accept foreign currencies for transactions. Everyday transactions for groceries and the like took place in TRL (which was still a reasonable medium of exchange, as Turkey avoided the excesses of hyperinflation), but prices for expensive goods were more often quoted in foreign currency. Jewelry was generally priced in Deutschmarks (DEM, as German Turks were a major market), rents in United States dollars (USD – a major market being University students), houses and land in pounds sterling (GBP, as a substitute for Cyprus Pounds, and because of the large number of repatriating London Cypriots). Any of the above-mentioned currencies were accepted; businesses displayed their exchange rates, kept a calculator handy, and, during the periodic Turkish Lira crises, one ear to the radio to hear of any significant exchange rate movements. Banks offered both current and deposit accounts in TRL, GBP, USD, and DEM, providing a natural experiment to examine the relative attractiveness of the currencies to account holders.

Over time, the constant-price value of both Turkish Lira and foreign currency deposits has increased. The proportion of deposits in foreign currency has fluctuated (measured in current TRL terms), but this fluctuation comprises two separate effects. Firstly, the current TRL value of foreign currency deposits will change as the TRL exchange rate changes. During the 1980’s and 1990’s the TRL suffered from periods of crisis and rapid depreciation, interspersed with periods of near-stability. For example, in February 1994 inflation peaked at around 125%; but after the TRL collapsed early in the year, the Turkish Central Bank raised interest rates on one-year TRL-denominated bonds to 200%, ensuring that the currency remained stable for the rest of the year. Appropriate switching between currencies to take advantage of high real interest rates (or by anticipating the Turkish Central Bank’s reaction to a plummeting currency) opened up profit opportunities for speculators with a high risk tolerance. Given that the TRL value of foreign deposits increased rapidly, it seems that few bank depositors in North Cyprus took advantage of this opportunity, being instead happy to sit on the gains they had made. The table below shows the proportions of deposits in TRL and foreign currency, valued in current values at market exchange rates; the index figures show how the proportions of deposits in TRL and foreign exchange have changed since 1987. The large increase in the relative size of foreign exchange deposits in 1994 is largely explained by the rapid decline in the TRL’s exchange value; the recovery since 1998 at least partial by the relatively high rates of interest paid on Turkish Lira deposits, and the considerable real appreciation of the TRL in recent years, especially following the successful stabilization plan of the Justice and Development Party government, elected in 2002.
Given the high rates of inflation of TRL prices in Turkey, this means that the real exchange rate of the TRL went through cycles of steady rises, followed by large corrections.

Secondly, changes in the relative size of TL and foreign currency deposits would be due to depositors’ switching between currencies. To isolate this latter effect, I examine the growth of relative shares of currency deposits in each of the four currencies in which bank accounts were generally available.
The table shows the proportion of total foreign exchange deposits by currency, relative to the proportion in the base period (December 1987). Thus a number greater than 100 shows that a relatively greater proportion of foreign exchange deposits were held in that currency, a number of less than 100 indicates a smaller proportion. The volatility of the CYP index is probably due to the relatively small size of the deposits – generally around one per cent of the total foreign currency deposits in the North Cyprus banking system, plus enduring fears that CYP deposits might once again be seized and compulsorily converted to TRL13.
There are a few clear trends to be seen: the proportion of foreign deposits in USD fluctuates, but seems to return to the same relative size. The relative attractiveness of DEM deposits declined prior to 2002: the introduction of the Euro has no doubt caused EUR deposits to exceed the old DEM proportions. To say very much more based on the data would be to speculate. If one makes the assumption that the choice of currency in which to keep one’s savings is made on a rational basis, then it would seem that there is considerable inertia, or perhaps satisficing behavior. There is no strong evidence of currency-switching to take account of interest rate differentials. There may, of course, be speculation based on the expected future trends in the relative value of the different currencies, but the effects of the actions of different speculators would then largely cancel each other out. One might predict that foreign exchange deposits will fall as a proportion of total deposits over time, as the stability of the TRL has increased dramatically since 2002, with inflation down to below 10%. But the failure to squeeze inflation further, the political uncertainty in Turkey which might cause a run on the TRL, and the use of the Euro in South Cyprus from next year makes it prudent to keep deposits in Euros, at least.

Scrip and Community Currencies: The Great Depression and Beyond

The downside of using foreign currency when your own government’s currency is defective is that the seigniorage obtained from producing the currency flows to a foreign country. Using one’s own government’s money means that the seigniorage remains within the country, but may not be used for the benefit of the region where I live. The people of Hillsdale don’t get their statue this way. One complaint in the United States between the Civil War and 1913 concerned the flow of funds to New York, as the National Bank Act of 1863 allowed banks to deposit some of their reserve requirements with banks in major cities, while still being able to list those deposits as reserves. In New York, higher rates of return could be earned on the reserves. Local currencies are an attempt to keep purchasing power within a community or region, and/or to keep the seigniorage for good works within the community, as our mythical student friends were discussing. Unlike North Cyprus, there is no history of the significant use of foreign currency; foreign notes were not readily available.
The Great Depression in the United States was probably made worse by inappropriate monetary policy. Loss of output, rising unemployment and deflation were compounded by a lack of cash. Banks folded at a worrying rate, encouraging depositors to remove funds from banks in anticipation of potential trouble, and to keep cash at home under a mattress. As prices were falling, cash produced a positive return, and spending was discouraged. Cash shortages meant that more attention was given to the production and use of substitutes for cash.

In various places across the country, scrip schemes – the issue of local currencies – sprang up with the aim of financing work for the unemployed, and/or of stimulating business. The use of scrip wasn’t new: scrip had long been issued by mining and lumber companies and by banks and clearing house associations during financial panics (such as that in 1907). During the Bank Holidays just prior to and after President Roosevelt’s inauguration, clearing house and merchant-issued scrip once again appeared. But local communities also issued scrip, perhaps the most interesting of these experiments being the self-redeeming stamp scrips. These mirrored the ideas of Silvio Gesell, but with a rather different motivation. Gesellian currencies depreciate in value over time, which Gesell saw as removing a perceived unfairness that allows money-holders to force holders of goods to lower prices by refusing to buy. To maintain their purchasing power, a stamp must be affixed to the money every week or so. Stamps would be sold by the issuing authority, producing a de facto tax on hoarding money and encouraging the rate of circulation. While the idea has never been popular, Keynes saw that Gesell had part of the answer to the problem of a liquidity trap that rendered monetary policy impotent, but abolishing the zero per cent lower bound on nominal interest rates. Interestingly, perhaps, it seems that a Gesellian type policy was not seriously considered during the long deflation in Japan during the 1990’s, despite its promise in eliminating the lower limit of zero on nominal interest rates.

Instead, the main purpose of the stamped monies of the 1930’s was to generate financial resources for the relief of the unemployed: as money ran short, property taxes remained unpaid and unemployment rose, local governments found the burden of providing for the poor increasingly difficult. Although stamp scrip schemes were used in California in early 1932, it was the scheme in Hawarden, Iowa, that captured the national imagination, being featured in newspaper articles across the country, in a Pathé newsreel report, and in at least one book. A visit from the Yale economist Irving Fisher, who was advocating for a national stamp scrip scheme at the time, suggested that this was more than just a local solution. The originator of the Hawarden Plan, Charles J. Zylstra, was elected to the Iowa legislature on the strength of his idea, and was also invited to address organizations such as the Russell Sage foundation.

The Hawarden scheme worked like this: unemployed men were put to work on projects of municipal improvement and paid $1.60 for an eight-hour day, 60c in cash, and a $1 scrip certificate, issued by the City Council. They could use the certificate to buy a dollar’s worth of goods at any of the participating local businesses, paying 3c for a redemption stamp (issued by, and purchased from the City Council) to affix to the certificate. The certificate could then be used by the business for further local purchases of $1, with another stamp being affixed each time the scrip changed hands. When a total of 36 stamps had been affixed, the scrip could then be redeemed at par at the City offices. The proceeds from the stamp sales meant that there was always enough money in the kitty to redeem the incoming scrip. The initial $300 issue of scrip would have done $10,800 worth of business by the time it was redeemed, business, argued Zylstra and his fellow scrip evangelists, that otherwise would not have been done. The poor were helped, the hungry fed, community cohesion fostered as people could Do Something together to fight a great national problem, and business stimulated all at no cost to the municipal finances. All this for a three-cent surcharge, a de facto sales tax, on each scrip transaction! Zylstra’s instructions on how to use the scrip (displayed in all businesses accepting it) ended with the declaration: The 3 cent redemption stamp represents a 3% discount on that part of our transactions done with coupons. This coupon would not have been here except through the hands of an unemployed member of our community. All new business so created also directs 36 times this amount of business to be done in our city and 3% is therefore a reasonable amount spent for advertising. And on the back of each scrip certificate was written: BY USING THIS COUPON IN YOUR TRANSACTIONS YOU PROMOTE EMPLOYMENT AND AN EARLY RETURN TO PROSPERITY. YOUR 3 CENT STAMP MAKES THIS POSSIBLE. The idea of stamped scrip looks good for our students’ plan as well. If they could pay for the statue with scrip, then the sale of stamps would raise enough money to redeem the certificates as they came in, meaning that the statue could be built at no cost to them.

After seeing Hawarden’s example, other towns in Iowa and further afield adopted similar schemes, albeit with local variations. Fisher advocated a system whereby a stamp had to be affixed every two weeks (in Gesellian fashion), which was tried in communities such as Red Oak, Iowa. Certificates of lower face value (50c rather than a dollar) seemed to work better, as there was less of a demand for change. Schemes where a stamp had to be affixed at each transaction, or on a certain date if the scrip were not used, tended to work better than ones that required a stamp only for each transaction. If real money were available, why not use it, rather than having to pay 3c (or whatever) for the privilege of spending it? Thus the Chamber of Commerce of Pella (Iowa), which issued scrip in early 1933, based on the Hawarden model, was still debating how to get the remaining certificates out of circulation as late as the middle of 1937; conversely, South Haven, Michigan, which required stamps twice a week, or Rock Rapids, Iowa, which required a stamp every five days, worked much more effectively and quickly.

Attempts to extend stamped scrip more broadly did not fare well. In early 1933 Zylstra pushed a bill through the Iowa state legislature permitting counties to issue scrip (one dollar certificates, requiring fifty 2c stamps for redemption), but only three (of 99) counties did so. So unsuccessful was the largest issue, in Polk County (which includes Des Moines) that it produced a law suit from an aggrieved citizen, and further legislation to allow redemption of the scrip notes a year earlier than had been initially mandated. By May 1934 the New York Times reported that scrip was rapidly losing its attractiveness, as “real cash from Federal CWA [Civil Works Administration] and PWA [Public Works Administration] sources and improving business indices apparently have lessened desire for the paper certificates.” The Social Credit government in Alberta tried a large Province-wide issue of scrip in 1936 (a dollar certificate requiring a 1c stamp a week for 104 weeks), but this was abandoned after only eight months.

Scrip quickly lost its allure when “real” money became available. There was some thought at the beginning of the Roosevelt Bank Holiday that a nation-wide scrip scheme might be the answer, but this idea was scotched within a week of Roosevelt’s inauguration. Instead, new Federal Reserve notes began to flow through the system, making stamp scrip unattractive, although there were attempts to revive scrip through the Townsend Plan and the California Ham and Eggs campaign. This sought to provide pensions (allowing the Old Folk to breakfast on ham and eggs each week when the new scrip certificate arrived).

There are still advocates of Gesellian money today, particularly in Germany, where most of the current regional currencies are Schwundgeld (depreciating money). As Gerhard Rősl demonstrates, such currencies lead to net welfare losses, when an alternative is available. The prediction, therefore, is that their usage will not expand beyond a core group of enthusiasts, for whom the psychological benefits of making and using their own money exceeds the costs. Not good news for our students, for whose project stamped money would be a great way of raising funds.

Other regional currencies that do not rely on stamps also exist. The motivation for establishing them is often to keep business within a defined geographic area, and to prevent the flow of seigniorage to the center. Also, as some of the notes and coins produced are attractive to collectors, there is (real) money to be made from issuing nice-looking currency. For example, Salt Spring Island, a 70 square-mile island off Vancouver, does well from the large number of tourists who visit each year, and take away Salt Spring dollars as souvenirs. If Hillsdale had a thriving tourist trade, our students might be able to emulate this.

More prosaically, the modern Chamber of Commerce scrip (HAPP scrip) in Hawarden can be purchased by businesses as a way of rewarding their employees (or customers), while ensuring that the scrip is spent locally. At Christmas, in some recent years the Chamber of Commerce will sell scrip at a discount to consumers, to encourage spending at home. Similarly, in Sioux Center, Iowa, a Charity Scrip scheme is in operation to raise money for the local Christian school, a type of scrip that might work for the would-be statue-builders. Merchants take the school-issued scrip at par, but pay a proportion of the receipt (usually 5%) back to the school. But this type of scrip requires that people see the benefit of the scrip before they will use it. The main users of the Sioux Center scrip are the parents (or grandparents) of Christian School children, as the proceeds go to named accounts for that child’s school fees. Perhaps this is a possibility for the students, but only if there is sufficient local support for the statue. Otherwise, why would anyone want the scrip?


In general, people are happy to use government-issued currency, unless there is something defective about it, or there are financial (or other) advantages to be gained from using a substitute. In most cases, the first choice of a substitute will be a foreign currency, that is, money issued by another government. It is only when this avenue is unavailable that thoughts will turn to scrip, which, in general, is less generally acceptable than a “real” currency. Despite predictions to the contrary, the Euro has not achieved the status of general acceptability in Britain; people are happy to stick with the GBP. Regional currencies in Germany (despite the argument concerning keeping seigniorage local) have not been run away successes. High transactions costs tend to outweigh the benefits of these local currencies. Even if there are no stamping costs, the costs of using such currencies are greater than those of using the country’s legal tender, if only in terms of inconvenience in not being able to use it other than at a specified set of local businesses.. .
Therefore, a government monopoly on the issue of money is not likely to be challenged, unless the money is defective as a store of value or a medium of exchange. This means that the government probably has no need to enforce a currency monopoly, unless it plans to abuse that monopoly power. In the absence of any legal restrictions on competitors, currency-issuing becomes a contestable market, with relatively low entry costs. As these entry costs fall (through electronic trading of real and new electronic currencies), people gain more choice in the money they chose to use, thus making the exploitation of a monopoly on currency issuance more difficult. More bad news for our students, it seems: they could face competition in their attempt to create a local currency. Perhaps a car wash is necessary, after all.


The attempt to calculate change in allocation of bank balances between different currencies in North Cyprus presents a methodological problem. To convert deposits into a .common unit using current exchange rates means that the effects of exchange rate movements will be captured, along with any change in the own-currency balances of each currency. To strip out (most) of the effects of exchange rate movements, I indexed the number of units of the currency, as a proportion of the total units of foreign currency, to the proportionate amount in 1987. (This produces the same results as converting all currencies to a common unit, using 1987 exchange rates.) There seems to be no strong correlations between currency choice, as expressed as proportions of bank deposits, and the exchange rates and interest rate differentials between the currencies. Inertia rather than speculation seems to be the main motivation. Data, unfortunately, are incomplete: the TRNC Central Bank stopped publishing detailed data in 1998, and has data only from 2002 on its website ( The data from which the second table in the text is derived are below. A re-working of the figures to include only term deposits accounts (both 6-month and one-year accounts are reported) does not lead to any substantial differences. The proportion of deposits (sight and term) in external accounts declined substantially during the 1990’s.