05/25/2012 04:51 pm ET Updated Jul 25, 2012

Euro at Risk of Falling to Bits Just Like Pieces of Eight

Money really is funny stuff. There it sits, in the bank, waiting patiently to be turned into just about anything you need, from a loaf of bread to a Lamborghini. It will always be there for you until, of course, it isn't.

Hard currency is nothing more than a promise, a notion that one day the economic carousel will turn full circle so that the producer of some goods or the performer of some services will receive what the marketplace collectively agrees is fair compensation for said goods and services. But the fact is that day never actually comes. We are instead quite content to keep the currency dream alive and get by on these promissory notes as if they were tangible stuff.

To maintain this fiction, for that is what it is, those who rely upon currency must have faith that the institution that prints it has the wherewithal to meet all those promises.

It is amazing, then, that the euro hasn't entirely evaporated.

Speculation that Greece will leave the euro intensifies every day but the question to ask is not whether the country is fit to stay in the currency but whether the currency can exist with such a fundamental flaw. That is, if a country as weak as Greece was allowed to be part of the euro, was the euro ever really worth what those who produce it said it was worth? And will we ever be able to trust it again?

The euro is not Europe's first attempt at a single currency. It has tried, and failed, before.
Back in the 16th century, the Spanish minted "pesos de ocho reales" from thousands of tons of plundered South American silver. They were what every student of piracy knows as "pieces of eight."

The currency quickly caught on, and by the 1570s became a global standard of exchange for everyone from pirates to Phillip II. The conquistadors found so much silver in Aztec Mexico and Inca Peru that they were able to mint billions of pure silver coins to fund the expansion of their empire for decades.

So ubiquitous was the peso de ocho that it could be found in the pockets of traders from China all the way along the silk and spice routes of the Middle East and central Asia to Europe.
But it was this rapid and expansive adoption of the peso de ocho that was the currency's undoing.

As the Spanish empire expanded further and the peso de ocho was produced in greater and greater numbers to fuel trade in more and more countries, inflation took hold and faith in the peso's strength diminished.

Chinese traders, in particular, were sceptical of the value of this large silver coin that came from a mine in South America and was stamped with the head of a king they had never seen. How could it be worth the same as a bolt of silk, they wondered?

At the end of the 16th century, meanwhile, Spain was bankrupt thanks to endless wars with England and France further undermining faith in the empire and its currency. Not long after Phillip II's death in 1598, the peso de ocho ceased to be a true global currency.

This lesson from history shows that political cohesion is paramount to a currency's success. Look at the dollar. The United States has done little more than print billions of dollars of currency to drag its economy out of the Great Recession. This, coupled with its huge debt mountain, should have sparked rampant inflation and pushed the country further into the morass.

But it didn't, because the world clings to the belief that the U.S. is a strong federal union in which we have faith.

The euro zone is a polar opposite. It has no federal core, none of its members can be trusted to act in the best interest of the bloc or even to follow the instructions of its almost powerless central bank to maintain faith in the economy.

If Europe does not undertake wholesale political reform to create a strong central core to enforce its economic rules, the euro risks going the same way as the peso de ocho which, you will recall, ended up as little more than three words repeated by a parrot in a children's story.

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