…the real issue [with having different currencies in Brooklyn and Manhattan] isn’t so much that it would be too inconvenient as that it wouldn’t be inconvenient enough—getting US dollars and dollar-denominated financial assets would be so simple that US dollars would circulate widely in Brooklyn and Brooklyn Bucks would wind up being marginalized.
…I think modern information technology has tended to erode the practical benefits of large currency areas and that the more “cashless” we get the more this will be the case.
This still doesn’t address a crucial issue: how would monetary policy work if you split up the currency area, and how small would you like to make it? The libertarian answer would presumably be free banking, but somehow I doubt Yglesias would be fine with that. If the currency union gets small enough, there’s not too much room for large monetary action, which might increase uncertainty about the growth of the money supply. Moreover, the benefits of a currency union are not just the practical money switching ones, but also the stability inherent making long term contracts in the same currency. Still, as we move towards a cashless economy we will be confronting diminishing benefits on that front, and steady if not rising costs, in the form of transfer payments to the states.
Photo: my picture of the Brooklyn and Manhattan Bridges, available via CC licence