IT IS really hard to see where the euro is going. Spanish yields are up again today, meaning Madrid’s debt looks less and less sustainable. Yet there is still no clear plan for the euro, new ideas seem to have run out, and there is a lack of progress on old ideas. What is going to happen?

One way to think about the euro’s future is to look at its past, and to go back to the origins of money. There are two leading schools of thought about this. The first was set out 120 years ago in a paper* by Austrian economist Karl Menger. In Menger’s theory buyers and sellers agree on a common commodity to use as the medium of exchange. Something small, valuable and divisible is best. It helps if it doesn’t rot. Gold, spices and shells are all good examples. This money is highly “saleable” so everyone accepts it, and this means that traders don’t face the costs associated with barter (the time spent having to scout around looking for the rare person that both wants what you have, and has what you want).

There is no role for government here. The Mengerian theory describes a market-led response to the high transaction costs of barter, in which the private sector defines and uses money as a solution.

The second theory places great emphasis on the role of government, as Charles Goodhart explains in a 1998 paper. This group—the Cartalists, who Mr Goodhart refers to as the “C team”—argue that currencies become money due to the active involvement of the state. Examples include setting up a mint to produce coins, demanding taxes are paid in state money, and stamping notes with the head of state’s image. And while the M-theory is backed by history’s superstar economists (Locke, Jevons) the C-theory has much stronger evidence based in anthropology and history.

Why is this relevant for the euro? Here is Mr Goodhart writing in 1998, on the eve of the euro project.

The key relationship in the C team model is the centrality of the link between political sovereignty and fiscal authority on the one hand and money creation, the mint and the central bank on the other. A key fact in the proposed Euro system is that the link is to be weakened to a degree rarely, if ever, known before. … There is to be an unprecedented divorce between the main monetary and fiscal authorities … the C team analysts worry whether the divorce may not have some unforeseen side effects.

The logical conclusion from this is not a new idea: the euro area needs greater fiscal integration. But the reason is different. It is not because Greece and Spain spoiled a perfect plan with their profligacy. It is because the euro enshrines the divorce of fiscal and monetary power. If you are a member of Mr Goodhart’s C team this never made sense in the first place.

* Karl Menger, “On the Origin of Money”, The Economic Journal, Vol. 2, No. 6 (Jun., 1892), pp. 239-255. (Paywall, free)

Charles Goodhart, “The two concepts of money: implications for the analysis of optimal currency areas” European Journal of Political Economy ,Volume 14, Issue 3, August 1998, Pages 407–432. (Paywall, free)