Professional Documents
Culture Documents
2 - 2013
Series V: Economic Sciences
HISTORICAL RECORD OF
MONETARY UNIONS: LESSONS FOR
THE EUROPEAN ECONOMIC AND
MONETARY UNION
Ileana TACHE1
Key words: European Economic and Monetary Union, Gold Standard, USA
monetary union, monetary unification of Italy, German Zollverein, Latin
Monetary Union, Scandinavian Monetary Union.
implies an automatic change in the money Greece and other peripheral European
stock to achieve balance of payments countries have suffered much greater
equilibrium. Under metallic money, Europe economic harm than did Argentina in the
was actually a de facto monetary union. Baring Crisis of 1890.
This is the reason why understanding how
it worked helps understand how the present 3. USA monetary union after the Civil
union operates. War
The euro shares indeed the characteristic American monetary history is commonly
of permanently fixed exchange rates with used as a benchmark by economists when
the gold standard but there are also examining various issues of the process of
significant differences between the two European monetary unification (Bordo and
regimes. The euro is a monetary union with Jonung, 1999, p. 27).
the European Central Bank (ECB) at its Multiple versions of the dollar circulated
apex which sets policy for the entire euro widely throughout the US before the Civil
zone, whilst the gold standard had no such War of 1861-1865 and state-based banks
institution. It only linked sovereign states issued banknotes functioning as paper
and was ultimately undermined by conflicts money. There was no permanent national
between them. central bank and no federal mechanisms for
Some perturbing parallels between the controlling the monetary aspects. US of the
gold standard and the euro are set out by nineteenth century can be viewed as a loose
The Economist (6 July, 2013), which averts federal structure with central coordination
that the gold standard holds worrying limited to a few key areas.
lessons for the single currency and Currency consolidation was motivated by
emphasizes Bordo and James’ new study two main factors. The first one was war
(2013) about euro’s fragility. These authors itself, determining public officials’ need to
acknowledge some striking similarities rationalize the monetary system and collect
between the pre-1914 gold standard and bigger federal revenues in order to finance
EMU at present. Both arrangements are the American Civil War. The second factor
based of fixed exchange rates, monetary setting the stage for a single currency was
and fiscal orthodoxy. Each regime gave the achievement of a single American
easy access by financially underdeveloped market, spurred on by the federal courts,
peripheral countries to capital from the core which created increasing societal pressures
countries. But the gold standard was a for regulation of the monetary regime.
contingent rule – in the case of an As McNamara (2011) explains, single
emergency like a major war or a serious currencies have most commonly been
financial crisis – a country could created in times of war, as a way to
temporarily devalue its currency. The EMU consolidate the fiscal power of the state
has no such safety valve. Capital flows in rather than as a purely monetary exercise.
both regimes fueled asset price booms via Currencies have generally been introduced
the banking system ending in major crises by political actors who need to federalize
in the peripheral countries. Bordo and the raising of revenues and payments
James arrive at the conclusion that, not necessary for war-fighting.
having the escape clause, present day
164 Bulletin of the Transilvania University of Braşov • Vol. 6 (55) • No. 2 - 2013 • Series V
In antebellum USA, while the dollar was silver and gold certificates (McNamara,
the standard unit of account, state dollars 2011).
floated at different rates and the American In general lines, the major difference
states had independent fiscal policies with between the single European currency and
few interstate fiscal mechanisms to the American monetary unification is that,
encourage political solidarity. It was even while Europe wanted to integrate
possible for the different states to borrow (inclusively in monetary terms) in order to
directly from foreign capital markets in avoid new wars on the continent, in USA
pursuit of their own goals. the Civil War provided the immediate
The Civil War split the political union and reason and means for federalizing monetary
the monetary union in two parts. In the control and building fiscal capacity. Some
North, paper money circulated at a pessimistic authors, like Feldstein (1997)
significant discount relative to gold coins. considered instead that the euro might make
In the South, Confederate notes circulated Europe to fall again into conflict, creating
until the end of the war in 1865. The even confrontations with the USA.
national banking system, established in
1863, finally created a uniform national 4. Monetary unification of Italy
banknote system. The way for Italy’s political unification
According to some estimates (such as was paved by the defeat of Austria by the
Hepburn, 1924 and Timberlake, 1978), French and Piedmontese armies in 1859. In
before the Civil War, about 7000 different the early 1860s, the Italian Peninsula
banknotes were used in the USA and a good became one of Europe’s biggest sovereign
portion of them were counterfeit. For states. This urged the creation of a monetary
merchants there was a chaos to cope with, union and promoted market unification by
and they were forced to consult monthly investing in networking technology of that
banknote detectors informing them of the time: telegraph and railways.
relative value of each note. Only with the In Italy there was little market
onset of the Civil War a standardized convergence prior to the political
American currency became a reality by a unification. This is the reason why, in the
series of reforms which centralized the first months of its existence, the new
monetary system at the federal level and Parliament made a huge effort to create a
outlawed the local currencies. Large customs and monetary union.
quantities of “Greenbacks’ (US notes) were At the time of Italian political unification,
issued in 1861-1862 by the federal authority approximately 270 types of legal-tender
as fiat money, full “legal tender for all coins circulated in the Peninsula, all of
debts, public and private” (as written on the different weight and metal content. The
present US dollars). Between 1862-1864 decimal system did not prevail; paper note
the Congress authorized the issue of $450 circulation was limited. The tremendous
million Greenbacks. The Greenback was array of exchange rates blurred the meaning
the only currency with legal tender status, of prices: high information costs
although it continued to coexist with several discouraged arbitrage outside local
other forms of currency, namely newly commodity and financial markets (Toniolo,
standardized national banknotes, as well as Conte and Vecchi, 2003).
Tache, I.: Historical record of monetary unions … 165
commission of 1.25%. Also, except the per There were provided fixed exchange rates
capita coinage restriction, the Latin and stability in monetary terms, but the
Monetary Union had no uniform money member countries continued to issue their
supply policies (the amount of money in separate currencies. Although not initially
circulation being determined by the anticipated, the perceived security led to a
markets) and it lacked a common central situation in which the formally separate
bank. All these deficiencies, along with the currencies were accepted on a basis of “as
fact that member states were cheating on the good as” the legal tender virtually
gold and silver content of their coins, throughout the whole monetary zone. By
contributed to the official dismantling of the the end of the nineteenth century, the
union in 1926 (but it expired long before Scandinavian Monetary Union was very
that). The coup de grace was given by the successful – gold coins, banknotes and
World War I, with its huge financing subsidiary coins circulated in the member
pressures. states and were accepted at par.
The lesson offered by the temporary Latin The dissolution of political union between
Monetary Union is that monetary unions of Sweden and Norway in 1905 did not affect
large sovereign states which do not have the basis for cooperation in the
political union eventually disintegrate. Scandinavian Monetary Union. The end
This is of great importance for the was brought instead by the outbreak of
European monetary unification, even if World War I in 1914. The Scandinavian
politics has been the driving force behind Monetary Union is a perfect example of a
EMU. More than a century ago, Europe was monetary union with multiple national
also dominated by the goal of currency central banks. It collapsed when these
stability and the experience of those times independent central banks tried to follow
suggests that the success of the EMU is not their own monetary policy.
guaranteed. The Scandinavian Monetary Union can
provide useful lessons for the European
7. The Scandinavian Monetary Union economic and monetary union. The most
The Scandinavian Monetary Union important is that cooperation between
(1873-1921) was formed by the Northern central banks and the economic similarity
states of Denmark, Norway and Sweden between countries may be necessary
(that share a geographic proximity and conditions for a successful and lasting
some linguistic similarity), just the moment monetary union. But they not seem to be
when these countries adopted the gold sufficient conditions. When the World War
standard. The union was thus contemporary I appeared, the lack of a supra-national
with the Latin and German monetary regulatory institution for monetary policy
unions. Actually, it was inspired by the led each country to try its own non-
Latin Monetary Union established in 1866. cooperative path. As Vanssay (1999)
But in contrast to the German monetary remarks, this is a classic case of the
union, the Scandinavian one was neither Prisoner’s Dilemma, where cooperation is
part of a great political project to unite these the optimal solution only if every player
three countries, nor was it a part of a great perceives that there will be more games of
plan for an economic union. the same nature over time. In any other
168 Bulletin of the Transilvania University of Braşov • Vol. 6 (55) • No. 2 - 2013 • Series V
8. Frankel, J.A. and Rose, A.K., “The 14. Timberlake, R., The Origins of Central
Endogeneity of the Optimum Currency Banking in the United States,
Area Criteria”, The Economic Journal, Cambridge: Harvard University Press,
July 1998. 1978.
9. Goodhart, C.A.E., “The Political 15. Toniolo, G., Conte, L. and Vecchi, G.,
Economy of Monetary Union”, Chapter “Monetary Union, Institutions and
12 in P. Kenen, ed., Understanding Financial Market Integration: Italy,
Interdependence. The Macroeconomics 1862-1905”, Explorations in Economic
of the Open Economy, Princeton History, Vol. 40, No. 4, 2003, pp. 443-
University Press, Princeton, 1995. 461.
10. Hepburn, B., A History of Currency in 16. De Vanssay, X., “Monetary Unions in
the United States, New York: Historical and Comparative
MacMillan Company, 1924. Perspective”, paper presented at the
11. Hume, D., Political Discourses, Third International Conference
Edinburgh: A. Kincaid & A. “Institutions in Transition”, organized
Donaldson, 1752. by the Institute of Macroeconomic
12. McNamara, K., Historicizing the Analysis and Development, Maribor,
Unique: Why the EMU Has No Fiscal Slovenia, October 8-9, 1999, available
Authority and Why it Matters”, Mortara at
Working Paper 2011-12, September, www.umar.gov.si/fileadmin/user_uplo
Mortara Center for International ad/konference/08/08_xvl.pdf, last
Studies, Edmund A. Walsh School of accessed December 2013.
Foreign Services, Georgetown 17. World Gold Council, How the Gold
University, 2011. Standard Worked, 2013, available at
13. Romer, C., “Great Depression”, www.gold.org/government_affairs/gol
Encyclopedia Britannica, December d_as_a_monetary_asset/role_in_intern
20, 2003. ational_monetary_system/how_the_go
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