Steam Trains From Great Britain and Beyond

The history of previous monetary unions

I. The history of monetary unions

"Before long, all Europe, except England, has a price. "This was written by William Bagehot, the editor of The Economist, the famous magazine British 120 years ago when Great Britain, even then, was heatedly discussed the desirability of adopting a single European currency or not.

A century later, the euro is finally here (though without British participation). Having braved numerous doomsayers and Cassandra, currency – though much depreciated against the dollar and reviled in some circles (especially in the UK) – is now used in both the eurozone and in eastern and southern Europe (the Balkans). In most countries in transition, it has already replaced its much sought predecessor, the Deutschmark. The euro still feels like a novelty – but it is not. It was preceded by quite a few unions Currency in Europe and outside it.

What lessons history teaches us? What should we avoid the pitfalls and what elements should we adopt?

People felt the need to create a uniform medium of exchange as early as in ancient Greece and medieval Europe. Those proto-unions have a central monetary authority or monetary policy, but they worked surprisingly well in the uncomplicated economies of the time.

The first truly modern example would be the monetary union of the colonial New England.

The four paper currency printed by the New England (Connecticut, Massachusetts Bay, New Hampshire and Rhode Island) were legal tender in all four until 1750. The governments of the settlements, has accepted for tax payments. Massachusetts – by far the dominant economy of the quartet – sustained this arrangement for nearly a century. The other colonies became so envious that they began to print additional notes outside the Union. Massachusetts – Facing a threat of devaluation and inflation – redeemed for silver its share of paper money in 1751. He then retired from the Union, introduced its own standard silver (single metal), the currency and not looked back.

A far more important was the Union Latin Monetary (LMU). It was designed by the French, obsessed, as usual, by their declining geopolitical fortunes and monetary prowess. Belgium already adopted the French franc when it became independent in 1830. The EA is a natural extension of this franc zone and, as the two teamed with Switzerland in 1848, they have encouraged others to join. Italy followed suit in 1861. When Greece and Bulgaria acceded in 1867, members have formed a monetary union based on a bimetallic (gold and silver) standard.

The LMU was considered sufficiently serious to be able to flirt with Austria and Spain at its Foundation Treaty was officially signed in Paris in 1865. This despite the fact that its rules French style often seems to sacrifice the economic to the politically expedient, or grandiose.

The EA is a subset Official zone franc "unofficial" (monetary union based on the French franc). This is similar to using the U.S. dollar or the euro in many countries today. At its peak, eighteen countries adopted the gold franc as legal tender (or PEG). Four them (the founding members of the LMU: France, Belgium, Italy and Switzerland) have agreed to a gold medal at the conversion rate gold and silver minted and silver coins legal tender in each of them. They voluntarily limited their money supply by adopting a rule that forbids them to print parts of more than 6 francs per capita.

Europe (particularly Germany and the United Kingdom) was gradually switching to the time the gold standard. But members of the Latin Monetary Union paid no attention to its emergence. They printed pieces ever greater quantity of gold and silver, which was legal tender throughout the Union. Small cuts (token) silver coins minted limited quantity, were legal tender in the issuing country (because they had a lower silver content than the Union coins).

The LMU had no single currency (like the euro). The national currencies of member countries were at parity with the other. Cost conversion was limited to an exchange commission of 1.25%.

Government offices and municipalities are required to accept up 100 francs of non-convertible and low intrinsic value tokens per transaction. People lined convert low-grade silver coins metal (100 Francs per transaction each time) to buy more metal levels.

With the exception of the above per capita money restriction, the LMU had no uniform policy in the money or the management. The amount of money in circulation was determined by markets. Banks power of member countries are committed freely convert gold and silver for the rooms and, therefore, were forced to maintain an exchange rate fixed between the two metals (15-1) ignoring fluctuating market prices.

Even at its apex, the LMU was unable to move prices world of these metals. When money became overvalued, it has been exported (often illegally) within the Union, in violation of its rules. The Union had to suspend silver convertibility and thus accept a humiliating de facto standard gold. Silver coins and tokens remained legal, though. The unprecedented financing needs of members of the Union – after the First World War – delivered the coup de grace. The LMU was officially dismantled in 1926 – but he has long since expired.

The EA have a common currency, but this does not guarantee its survival. He lacked a common monetary policy monitored and enforced by a common Central Bank – and these deficiencies proved fatal.

In 1867, twenty countries debated the establishment of a global currency in the International Monetary Conference. They decided to adopt the gold standard (already used by Great Britain and the United States) after a period of transition. They came with an ingenious plan. They selected three "hard" currencies, with equal gold content so as to make them interchangeable, as their legal tender. Unfortunately for students of the dismal science, the plan came to nothing.

Another failed experiment was the Scandinavian Monetary Union (SMU), formed by Sweden (1873), Denmark (1873) and Norway (1875). It was a plan by now well-known. The three known gold coin from each other and coins as a symbolic legal tender. The daring innovation was to accept the tickets of its members (1900) as well.

As Scandinavian schemes go, it worked too well. Nobody wanted to convert one currency to another. Between 1905 and 1924, no rate of exchange between the three currencies were available. When Norway became independent, angry Swedes dismantled the moribund Union in an act of monetary policy tit-for-tat.

The SMU had an unofficial central bank with pooled reserves. It extended credit lines to each of the three member countries. As long as the supply Gold has been limited, the Scandinavian crowns held its ground. Second, governments have begun to finance their deficits by dumping gold during the First World War (and thus erode their debts by fostering inflation through a series of inane devaluations). In an unprecedented act arbitration, the central banks, then turned around and used the depreciated currencies to pick up gold at official (cheap) of rates.

When Sweden refused to continue to sell its gold at officially fixed prices – the other members declared effective economic war. They have forced Sweden to purchase enormous quantities of their token coins. The product was used to buy a lot of money highest price ever for a Swedish cheaper (than the price of gold collapsed). Sweden found itself subsidizing an arbitrage against its own economy. It inevitably reacted by ending the import of chips from other members. The Union thus ended. The gold price is more fixed and currencies booster are no more convertible.

The East African monetary zone is a fairly recent debacle. Equivalent experience involving the CFA franc, is still ongoing in the Francophile part of Africa.

The parts of East Africa led by the British (Kenya, Uganda and Tanganyika, and in 1936, Zanzibar) adopted in 1922 a common currency, the East African shilling. The newly independent countries of Africa East continues to be part of the sterling area (ie, local currencies were fully and freely convertible into sterling). Misplaced imperial pride associated with strategic thinking led the British to outdated infuse these emerging economies with inordinate amounts of money. Despite all this, the resulting monetary union was surprisingly resilient. It easily absorbed the new currencies of Kenya, Uganda and Tanzania in 1966, making them legal tender in all three and converted into pounds.

Ironically, this is the book that has sold. Its depreciation tirelessly in the 60s and early 70s, has led to the disintegration of the Sterling Area in 1972. The strict monetary discipline which characterized Union – evaporated. The currencies diverged – a result of a divergence of inflation targets and interest rates. Africa Eastern currency area officially ended in 1977.

Not all monetary unions ended tragically. Without doubt, the most famous of who have succeeded is the Zollverein (German Customs Union).

The nascent German Federation was composed, in the early 19th century, 39 independent political units. They are all busy knocking coins (gold, silver) and had their own – separate – weights and measures. Decisions the leased Congress of Vienna (1815) did wonders for the mobility of workers in Europe, but not So, for the trade. The confusing number (mostly non-convertible) different currencies did not help.

The German principalities formed a customs union in 1818. Three regional groups (North, Central and Southern) have been united in 1833. In 1828, Prussia harmonized its customs tariffs with the other members of the Federation, which allows to pay duties in gold or silver. Some members hesitantly experimented with new fixed exchange rate convertible currencies. But in practice, the union had already a single currency, the Vereinsmunze.

The Zollverein (Customs Union) was created in 1834 to facilitate trade by reducing its costs. This was done by the most imperious of members to choose between two monetary standards (the Thaler and the Gulden) in 1838. Like the Bundesbank was to Europe in the second half of the twentieth century, the central bank became Prussia effective Central Bank of the Federation from 1847. Prussia was by far the dominant member of the Union, because it comprises 70% of the population and land mass of the future of Germany.

The Thaler Germany North was set at 1.75 in the South German Gulden and, in 1856 (when Austria became informally associated with the Union), 1.5 Fl Austria. This collaboration should be a matter of short duration, Prussia and Austria having declared war on the other in 1866.

Bismarck (Prussia) united Germany (Bavarian objections notwithstanding) in 1871. He founded the Reichsbank in 1875 and was responsible for issuing the crisp new Reichsmark. Bismarck forced the Germans to accept the new currency as the sole legal tender throughout the first German Reich. Germany the new single currency was in effect a monetary union. It has survived two world wars, a devastating battle with inflation in 1923, and of a currency collapse after the Second World War. The stolid and trustworthy Bundesbank succeeded the Reichsmark and Union was finally defeated by the bureaucracy of Brussels and its euro.

It is the only case in history of a successful monetary union not preceded a political decision. But it is hardly representative. Prussia was the regional aggressor and never hesitated to enforce compliance strict on other members of the Federation. He understood the importance of a stable currency and sought to preserve it by introducing various consistent standards of metal. The Politically motivated inflation and devaluation were ruled out, for the first time. Modern monetary management born.

Another, perhaps as successful, and always the current union – is the CFA franc zone.

The CFA (for the French is African Community in French francs) has been used in the French colonies in West and Central Africa (and, curiously, in a former colony Spanish) since 1945. It is attached to the French franc. The French Treasury explicitly guarantees its conversion to the French franc (65% of State reservations members are kept in the vaults of the central French bank). France often openly imposes monetary discipline (that it sometimes lacks at home!) Directly and through its generous financial support. Foreign exchange reserves must always equal to 20% of short-term deposits in commercial banks. All this has made the CFA an attractive option in the colonies, even after they gained independence.

The Franc Zone CFA is remarkably diverse ethnically, lingually, culturally, politically and economically. The currency survived devaluations (as large as 100% vis-à-vis the French Franc), changes of regimes (from colonial to independent), the existence of two groups of members, each with its own central bank (West African Economic and Monetary Union and the Central African Economic and Monetary Community), controls of trade and capital flows – not to mention a multitude of natural hazards and disasters.

The euro has indirectly and the CFA. The Economist recently reported a shortage of low denomination notes of the CFA franc. "Recently the printer (CFA) has been too busy producing euros for the market at home "- complained that the Central Bank of West Africa in Dakar. But it's the minor problem. The CFA franc is at risk because domestic imbalances between the economies of the area. Their growth rates differ markedly. There are pressures on some members to devalue the common currency. Others sternly resist it.

The Economist suggests that the Economic Community of African States West (ECOWAS) – eight CFA countries over Nigeria, Ghana, Guinea, Gambia, Cape Verde, Sierra Leone and Liberia – is considering its own monetary union. Many potential members of this fantasy of the Union of the CFA franc even less than the EU economies and capricious whims of corruption by conflict. But an ECOWAS monetary union could be a serious – and more economically coherent – alternative to the CFA franc zone.

A monetary union is neglected one between Belgium and Luxembourg. Both maintain their idiosyncratic currencies – but they are at parity and serve as legal tender in two countries since 1921. The monetary policy of both countries is dictated by the Belgian central bank and foreign exchange regulations are overseen by a joint body. Both were near collapse of the Union at least twice (1982 and 1993) – but relented.

II. Lessons

Europe had more than its share of flaws and successful currency unions. The Snake, the EMS, the ERM, on the one hand – and the pound sterling, the mark, and the ECU, other.

Currency unions that survived because they all relied on a single monetary authority for managing the currency.

Cons-intuitively, single currencies are often associated with complex political entities which occupy vast tracts of land and large integrated previously distinct and often politically, socially and economically units disparate -. The United States is a monetary union, as was the late USSR.

All single currency against the opposition of both ideological and pragmatic grounds when they were introduced.

Constitution American, for example, does not provide for a central bank. Several of the Founding Fathers (eg, Madison and Jefferson) refused one. He took nascent United States two decades to bring a semblance of a central monetary institution in 1791. This model of the success of the Bank of England. When Madison became president, he deliberately leaves his concession expires in 1811. In the next half century, it revived (for example, 1816) and expired few times.

The United States became a monetary union as a result of the trauma of civil war. Similarly, monetary union Europe is the result of two late European civil wars (the two world wars). America set up banking regulation and supervision in 1863 and that for the first time, banks were classified as national or state level.

This classification was necessary because that by the end of the Civil War, notes – legal and illegal – were issued by no less than 1562 private banks – against only 25 in 1800. A similar process occurred in the principalities which were later to constitute Germany. In the decade between 1847 and 1857, twenty-five private banks were created ago for the express purpose of printing banknotes to circulate as legal tender. Seventy (!) Different types of currency (mostly foreign) were used in the Rhineland alone in 1816.

The Federal Reserve was created only after a wave of banking crises in 1908. Not until 1960 did he obtain a complete monopoly of printing money at the national level. The monetary union to United States – the U.S. dollar as legal tender one printed exclusively by a central monetary authority – is, therefore, a fairly recent thing, not much older than the euro.

It is common to confuse the logistics of a monetary union with its underpinnings. European bigwigs forward to the smooth introduction of the physical notes and coins of their new currency. But having a single currency with free convertibility and no warranty the event of a monetary union – not one of its economic pillars.

History teaches us that for a monetary union to succeed, the exchange rate of the single currency must be realistic (for example, reflect the purchasing power parity) and, therefore, not susceptible to attacks speculative. In addition, members of the Union must comply with monetary policy.

Surprisingly, history shows that the union Money is not necessarily predicated on the existence of a single currency. A monetary union could incorporate multi-currency, fully and permanently convertible into one another at irrevocably fixed exchange rates. It would be like having a single currency with denominations different, each printed by another member of the Union.

What really matters are the economic inter-relationships and power games between members Union and between the Union and the areas of other currencies and currencies (as expressed through the exchange rate).

Usually the single currency of the Union is convertible to give (if variable) exchange rates subject to exchange rate policy consistent. This applies to the entire territory of the currency. It is intended to prevent arbitrage (buying the single currency in one place and sell it in another). Rampant arbitrage – ask anyone Asia – often leads to the need to impose exchange controls, thus eliminating convertibility and inducing panic.

Unions currency in the past failed because they allowed variable exchange rates, (often depending on location – in which part of the EU monetary policy – The conversion took place).

A uniform exchange rate policy is only one of the concessions members of a monetary union must make. Rejoin always means abandoning an independent monetary policy and with it a significant portion of national sovereignty. Members relegate the regulator their money supply, inflation, interest rates and currency exchange rate to a central authority (eg, the European Central Bank in the euro area).

The need for a central monetary management arises because, in economic theory, a currency is never only one currency. It is regarded as a transmission mechanism of economic signals (information) and expectations (often through the monetary policy and its results).

It is often argued that one year the policy is not only unnecessary but potentially dangerous. Monetary union means the surrender of sovereign monetary policy instruments. It may be desirable to allow the members of the Union shall apply the fiscal instruments policy independently to counter the economic cycle, or cope with asymmetric shocks, goes the argument. So there is no warranty, implied or explicit throughout the Union for the indebtedness of its members – profligate individual states are likely to be punished by the market, with discrimination.

But in a monetary union with mutual guarantees among the members (even if it is implicit as is the case in the eurozone), fiscal profligacy, even one or two major players, may force the central monetary authority to raise interest rates to anticipate inflationary pressures.

Interest rates must be addressed because the effects of financial decisions of a member shall be communicated to other members through the common currency. The currency is the medium of exchange information on current and future health of the economies concerned. Hence the famous "Pact of Stability in the EU, has recently so flagrantly abandoned in the face of German budget deficits.

The currency unions that have not followed the path of rectitude budget are no longer with us.

In an article I published in 1997 ("History of the previous currency unions European "), I identified five paramount lessons from the short, brutal life of previous – now defunct always – monetary unions:

To prevail, a monetary union must be founded by one or two economically dominant countries ("economic Locomotives"). These driving forces must be geopolitically important, maintain political solidarity with other members, be willing to exercise their influence, and be economically involved in (or even need) the economies of other members.
central institutions should be established to monitor and enforce monetary, fiscal and other economic policies, coordinating the activities of Member States to implement the policy and technical decisions for controlling monetary aggregates and seigniorage (Ie rents accruing to print money) to determine the availability of legal and rules governing the issuance of currency.
It is better if a monetary union is preceded by a policy (Consider examples of the United States, the USSR, the United Kingdom and Germany).
Flexible wages and prices are the sine qua non. Their absence is a threat to the existence a union. Unilateral transfers from rich areas to poor are a partial remedy and short. Transfers also call for a policy clear and consistent regarding the exercise of taxation and spending. Problems like unemployment and collapses in demand often plague rigid monetary unions. The works of Mundell and McKinnon (optimal currency areas) prove it decisively (and separately).
Clear criteria convergence and monetary convergence targets.
The current European Monetary Union is far to pay attention to the lessons of his predecessors worse fate. European labor and capital markets, although slightly recently liberalized, are more rigid than 150 years ago. Euro was not preceded by an "ever closer (political or constitutional) of the Union". It relies too heavily on the redistribution tax without the benefit of either a coherent monetary policy and a coherent policy for the exercise area as a whole. The euro is not be built to cope with asymmetric shocks (concerning only certain members but not others), or with the vicissitudes of the economy.

This does not bode well. This union might well become a new benchmark in the annals of economic history.

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