| The Euro feels like a novelty - but it is
| |
| | Union.Sweden (1873), Denmark (1873) and
|
| not. It was preceded by quite a few
| |
| | Norway (1875) formed the Scandinavian
|
| Monetary Unions in Europe and outside
| |
| | Monetary Union (SMU). The pattern was
|
| it.To start with, countries such as the
| |
| | familiar: they accepted each others' gold
|
| USA and the USSR are (or were in the
| |
| | coins as legal tender in their
|
| latter's case) monetary unions. A single
| |
| | territories. Token coins were also
|
| currency was or is used over enormous
| |
| | cross-boundary legal tender as were
|
| land masses incorporating previously
| |
| | banknotes (1900) recognized by the banks
|
| distinct political, social and economic
| |
| | of the member countries. It worked so
|
| entities. The American constitution, for
| |
| | perfectly that no one wanted to convert
|
| instance, did not provide for the
| |
| | the currencies and exchange rates were
|
| existence of a central bank. Founding
| |
| | not available from 1905 to 1924, when
|
| fathers, the likes of Madison and
| |
| | Sweden dismantled the Union following
|
| Jefferson, objected to its existence. A
| |
| | Norway's independence. Actually, the
|
| central monetary institution was
| |
| | countries involved created (though not
|
| established only in 1791 (modelled after
| |
| | officially) what amounted to a unified
|
| the Bank of England). But Madison (as
| |
| | central bank with unified reserves -
|
| President) let its concession expire in
| |
| | which extended monetary credit lines to
|
| 1811. It was revived in 1816 - only to
| |
| | each of the member countries.The
|
| die again. It took a civil war to lead to
| |
| | Scandinavian Kronor held well as long as
|
| a budding monetary union. Bank regulation
| |
| | gold supply was limited. World War I
|
| and supervision were instituted only in
| |
| | changed this situation as governments
|
| 1863 and a distinction was made between
| |
| | dumped gold and inflated their
|
| national and state-level banks.By that
| |
| | currencies, engaging in competitive
|
| time, 1562 private banks were printing
| |
| | devaluations. Central Banks used the
|
| and issuing notes, some of them not a
| |
| | depreciated currencies to buy gold at
|
| legal tender. In 1800 there were only 25.
| |
| | official (cheap) rates. Sweden saw
|
| The same thing happened in the
| |
| | through this ploy and refused to sell its
|
| principalities which were later to
| |
| | gold in the officially fixed price. The
|
| constitute Germany: 25 private banks were
| |
| | other members began to sell large
|
| established only between 1847 and 1857
| |
| | quantities of the token coins to Sweden
|
| with the express intention of printing
| |
| | and use the proceeds to buy the much
|
| banknotes to circulate as legal tender.
| |
| | Stronger Swedish "economy" (=currency) at
|
| In 1816 - 70 different types of currency
| |
| | an ever cheaper price (as the price of
|
| (mostly foreign) were being used in the
| |
| | gold collapsed). Sweden reacted by
|
| Rhineland alone.A tidal wave of banking
| |
| | prohibiting the import of other members'
|
| crises in 1908 led to the formation of
| |
| | tokens. Without a fixed price of gold and
|
| the Federal Reserve System and 52 years
| |
| | without coin convertibility, there was no
|
| were to elapse until the full monopoly of
| |
| | Union to talk of.The last big (and
|
| money issuance was retained by it.What is
| |
| | recent) experiment in monetary union was
|
| a monetary union? Is it sufficient to
| |
| | the East African Currency Area. An
|
| have a single currency with free and
| |
| | equivalent experiment is still going on
|
| guaranteed convertibility?Two additional
| |
| | in the Francophile part of Africa
|
| conditions apply: that the exchange rate
| |
| | involving the CFA currency.The parts of
|
| be effective (realistic and, thus, not
| |
| | East Africa ruled by the British (Kenya,
|
| susceptible to speculative attacks) and
| |
| | Uganda and Tanganyika and, in 1936,
|
| that the members of the union adhere to
| |
| | Zanzibar) adopted in 1922 a single common
|
| one monetary policy.Actually, history
| |
| | currency, the East African shilling.
|
| shows that the condition of a single
| |
| | Independence in East Africa had no
|
| currency, though preferable, is not a
| |
| | monetary aspect because it remained part
|
| sine qua non. A union could incorporate
| |
| | of the Sterling Area. This guaranteed the
|
| "several currencies, fully and
| |
| | convertibility of the local currencies
|
| permanently convertible into one another
| |
| | into British Pounds. Regarding this a
|
| at irrevocably fixed exchange rates"
| |
| | matter of national pride (and strategic
|
| which is really like having a single
| |
| | importance) the British poured inordinate
|
| currency with various denominations, each
| |
| | amounts of money into these emerging
|
| printed by another member of the Union.
| |
| | economies. This monetary union was not
|
| What seems to be more important is the
| |
| | disturbed by the introduction (1966) of
|
| relationship (as expressed through the
| |
| | local currencies in Kenya, Uganda and
|
| exchange rate) between the Union and
| |
| | Tanzania. The three currencies were legal
|
| other economic players. The currency of
| |
| | tender in each of these countries and
|
| the Union must be convertible to other
| |
| | were all convertible to Pounds.It was the
|
| currencies at a given (could be
| |
| | Pound which gave way by strongly
|
| fluctuating - but always one) exchange
| |
| | depreciating in the late 60s and early
|
| rate determined by a uniform exchange
| |
| | 70s. The Sterling Area was dismantled in
|
| rate policy. This must apply all over the
| |
| | 1972 and with it the strict monetary
|
| territory of the single currency -
| |
| | discipline which it imposed - explicitly
|
| otherwise, arbitrageurs will buy it in
| |
| | and through the free convertibility - on
|
| one place and sell it in another and
| |
| | its members. A divergence in the value of
|
| exchange controls would have to be
| |
| | the currencies (due to different
|
| imposed, eliminating free convertibility
| |
| | inflation targets and resulting interest
|
| and inducing panic.This is not a
| |
| | rates) was inevitable. In 1977 the East
|
| theoretical - and thus unnecessary -
| |
| | African Currency Area ended.Not all
|
| debate. ALL monetary unions in the past
| |
| | monetary unions met the same gloomy end,
|
| failed because they allowed their
| |
| | however. Arguably, the most famous of the
|
| currency or currencies to to be exchanged
| |
| | successful ones is the Zollverein (German
|
| (against outside currencies) at varying
| |
| | Customs Union).At the beginning of the
|
| rates, depending on where it was
| |
| | 19th century, there were 39 independent
|
| converted (in which part of the monetary
| |
| | political units which made up the German
|
| union)."Before long, all Europe, save
| |
| | Federation in what is today's Germany.
|
| England, will have one money". This was
| |
| | They all minted coins (gold, silver) and
|
| written by William Bagehot, the Editor of
| |
| | had their own standards for weights and
|
| The Economist, the renowned British
| |
| | measures. Labour mobility in Europe was
|
| magazine. Yet, it was written 120 years
| |
| | greatly enhanced by the decisions of the
|
| ago when Britain, even then, was debating
| |
| | Congress of Vienna in 1815 but trade was
|
| whether to adopt a single European
| |
| | still ineffective because of the number
|
| Currency.Joining a monetary union means
| |
| | of different currencies.The German
|
| giving up independent monetary policy
| |
| | statelets formed a customs union as early
|
| and, with it, a sizeable slice of
| |
| | as 1818. This was followed by the
|
| national sovereignty. The member country
| |
| | formation of three regional groupings
|
| can no longer control its the money
| |
| | (the Northern, Central and Southern)
|
| supply, its inflation or interest rates,
| |
| | which were united in 1833. In 1828,
|
| or its foreign exchange rates. Monetary
| |
| | Prussia harmonized and unified its
|
| policy is transferred to a central
| |
| | tariffs with the other members of the
|
| monetary authority (European Central
| |
| | Federation. Debts related to customs
|
| Bank). A common currency is a
| |
| | could be paid in gold or silver. Several
|
| transmission mechanism of economic
| |
| | currencies were developed and linked to
|
| signals (information) and expectations,
| |
| | each other through fixed exchange rates.
|
| often through the monetary policy. In a
| |
| | There was an over-riding single currency:
|
| monetary union, fiscal profligacy of a
| |
| | the Vereinsmunze. The Zollverein (Customs
|
| few members, for example, often leads to
| |
| | Union) was established in 1834 to
|
| the need to raise interest rates in order
| |
| | facilitate trade and reduce its costs.
|
| to pre-empt inflationary pressures. This
| |
| | Most of the political units agreed to
|
| need arises precisely because these
| |
| | choose between one of two monetary
|
| countries share a common currency. In
| |
| | standards (the Thaler and the Gulden) in
|
| other words, the effects of one member's
| |
| | 1838 and nine years later, the central
|
| fiscal decisions are communicated to
| |
| | bank of Prussia (which comprised 70% of
|
| other members (through the monetary
| |
| | the population and land mass of the
|
| policy) because they share one currency.
| |
| | future Germany) became the effective
|
| The currency is the medium of exchange of
| |
| | Central Bank of the Federation. The North
|
| information regarding the present and
| |
| | German Thaler was fixed at 1.75 to the
|
| future health of the economies
| |
| | South German Gulden and, in 1856 (when
|
| involved.Monetary unions which did not
| |
| | Austria became associated with the
|
| follow this course are no longer with
| |
| | Union), at 1.5 Austrian Florins (this was
|
| us.Monetary unions, as we said, are no
| |
| | to be a short lived affair, because
|
| novelty. People felt the need to create a
| |
| | Prussia and Austria declared war on each
|
| uniform medium of exchange as early as
| |
| | other in 1866).Germany was united by
|
| the times of Ancient Greece and Medieval
| |
| | Bismarck in 1871 and a Reichsbank was
|
| Europe. However, those early monetary
| |
| | founded 4 years later. It issued the
|
| unions did not bear the hallmarks of
| |
| | Reichsmark which became the legal and
|
| modern day unions: they did not have a
| |
| | only tender of the whole German Reich.
|
| central monetary authority or monetary
| |
| | The currency Union survived two world
|
| policy, for instance.The first truly
| |
| | wars, a devastating bout of inflation in
|
| modern example would be the monetary
| |
| | 1923 and a collapse of the currency after
|
| union of Colonial New England.The New
| |
| | the Second World War. The Reichsmark
|
| England colonies (Connecticut,
| |
| | became the solid and reliable Bundesbank.
|
| Massachusetts Bay, New Hampshire and
| |
| | The Union still survives in the
|
| Rhode Island) accepted each other's paper
| |
| | Deutschmark.This is the only case of a
|
| money as legal tender until 1750. These
| |
| | monetary union which succeeded without
|
| notes were even accepted as tax payments
| |
| | being preceded by a political
|
| by the governments of the colonies.
| |
| | arrangement. It survived because Prussia
|
| Massachusetts was a dominant economy and
| |
| | was sizeable and had enough real power
|
| sustained this arrangement for almost a
| |
| | and perceived clout to enforce compliance
|
| century. It was envy that ended this very
| |
| | on the other members of the Federation.
|
| successful arrangement: the other
| |
| | Prussia wanted to have a stable currency
|
| colonies began to print their own notes
| |
| | and introduced consistent metallic
|
| outside the realm of the union.
| |
| | standards. The other states could not
|
| Massachusetts bought back (redeemed) all
| |
| | deprive their currencies of their
|
| its paper money in 1751, paying for it in
| |
| | intrinsic values. For the first time in
|
| silver. It instituted a mono-metalic
| |
| | history, coinage became a professional
|
| (silver) standard and ceased to accept
| |
| | economic decision, totally
|
| the paper money of the other three
| |
| | depoliticized.In this context, we must
|
| colonies.The second, more important,
| |
| | mention another successful (on-going)
|
| experiment was the Latin Monetary Union.
| |
| | union - the CFA Franc Zone.The CFA
|
| It was a purely French contraption,
| |
| | (French African Community) is a currency
|
| intended to further, cement, and augment
| |
| | used in the former French colonies of
|
| its political prowess and monetary clout.
| |
| | West and Central Africa (and, curiously,
|
| Belgium adopted the French Franc when it
| |
| | in one formerly Spanish colony). The
|
| attained independence in 1830. It was
| |
| | currency zone has been in existence for
|
| only natural that France and Belgium
| |
| | well over three decades and comprises
|
| (together with Switzerland) should
| |
| | diverse ethnic, lingual, cultural,
|
| encourage others to join them in 1848.
| |
| | political and economic units. The
|
| Italy followed in 1861 and the last ones
| |
| | currency withstood devaluations (the
|
| were Greece and Bulgaria (!) in 1867.
| |
| | latest one of 100% vis a vis the French
|
| Together they formed the bimetallic
| |
| | Franc), changes of regimes (from colonial
|
| currency union known as the Latin
| |
| | to independent), the existence of two
|
| Monetary Union (LMU).The LMU seriously
| |
| | groups of members, each with its own
|
| flirted with Austria and Spain. The
| |
| | central bank, controls of trade and
|
| Foundation Treaty was officially signed
| |
| | capital flows - not to mention a host of
|
| only on 23/12/1865 in Paris.The rules of
| |
| | natural and man made catastrophes. What
|
| this Union were somewhat peculiar and, in
| |
| | makes it so successful is maybe the fact
|
| some respects, seemed to defy
| |
| | that the reserves of the member states
|
| conventional economic
| |
| | are hoarded in the safes of the French
|
| wisdom.Unofficially, the French influence
| |
| | Central Bank and that the currency is
|
| extended to 18 countries which adopted
| |
| | almost absolutely convertible to the
|
| the Gold Franc as their monetary basis.
| |
| | French Franc. Convertibility is
|
| Four of them agreed on a gold to silver
| |
| | guaranteed by the French Treasury
|
| conversion rate and minted gold coins
| |
| | itself.France imposes monetary discipline
|
| which were legal tender in all of them.
| |
| | (that it sometimes lacks at home!)
|
| They voluntarily accepted a money supply
| |
| | directly and through its generous
|
| limitation which forbade them to print
| |
| | financial assistance.Europe has had more
|
| more than 6 Franc coins per capita (the
| |
| | than its share of botched (the Snake, the
|
| four were: France, Belgium, Italy and
| |
| | EMS, the ERM) and of successful (ECU, the
|
| Switzerland).Officially (and really) a
| |
| | United Kingdom and Ireland) currency
|
| gold standard developed throughout Europe
| |
| | unifications.A neglected one is between
|
| and included coin issuers such as Germany
| |
| | Belgium and Luxembourg (BENELUX is the
|
| and the United Kingdom). Still, in the
| |
| | political alignment which includes the
|
| Latin Monetary Union, the quantities of
| |
| | Netherlands).There is no real currency
|
| gold and silver Union coins that member
| |
| | union here. Both maintain separate
|
| countries could mint was unlimited.
| |
| | currencies. But their currencies are at
|
| Regardless of the quantities minted, the
| |
| | parity and serve as legal tender in both
|
| coins were legal tender across the Union.
| |
| | countries since 1921. The Belgian Central
|
| Smaller denomination (token) silver
| |
| | Bank controls the monetary policies of
|
| coins, minted in limited quantity, were
| |
| | both countries, with the exception of
|
| legal tender only in the issuing
| |
| | exchange regulations which are overseen
|
| country.There was no single currency like
| |
| | by a joint agency. In both 1982 and 1993
|
| the Euro. Countries maintained their
| |
| | the two countries considered dismantling
|
| national currencies (coins), but these
| |
| | the union - but this was not serious
|
| were at parity with each other. An
| |
| | talk, the advantages being so numerous
|
| exchange commission of 1.25 % was charged
| |
| | (especially to the smaller partner).These
|
| to convert them. The tokens had a lower
| |
| | three currency unions have all survived
|
| silver content than the Union
| |
| | due mainly to the fact that one monetary
|
| coins.Governmental and municipal offices
| |
| | authority has been responsible, at least
|
| were required to accept up to 100 Francs
| |
| | de facto, for managing the currency.What
|
| of tokens (even though they were not
| |
| | can we learn from all this (not
|
| convertible and had a lower intrinsic
| |
| | insubstantial) cumulative experience?(A)
|
| value) in a single transaction. This
| |
| | A dominant country is required for a
|
| loophole led to mass arbitrage:
| |
| | Union to succeed. It must have a strong
|
| converting low metal content coins to buy
| |
| | geopolitical drive and maintain political
|
| high metal content ones.The Union had no
| |
| | solidarity with some of the other
|
| money supply policy or management. It was
| |
| | members. It must be big, influential, and
|
| left to the market to determine how much
| |
| | its economy must be intermeshed with the
|
| money will be in circulation. The central
| |
| | economies of the others.(B) Central
|
| banks pledged the free conversion of gold
| |
| | institutions must be set up to monitor
|
| and silver to coins. But, this pledge
| |
| | and enforce fiscal and other policies, to
|
| meant that the Central Banks of the
| |
| | coordinate activities of the member
|
| participating countries were forced to
| |
| | states, to implement political and
|
| maintain a fixed ratio of exchange
| |
| | technical decisions, to control the money
|
| between the two metals (15 to 1, at the
| |
| | aggregates and seniorage (=money
|
| time) ignoring the prices fixed daily in
| |
| | printing), to determine the legal tender
|
| the world markets.The LMU was too
| |
| | and the rules governing the issuance of
|
| negligible to influence the world prices
| |
| | money.(C) It is better if a monetary
|
| of these two metals. The result was
| |
| | union is preceded by a political one.
|
| overvalued silver, export of silver from
| |
| | Even so, it might prove tricky (consider
|
| one member to another using ingenious and
| |
| | the examples of the USA and of
|
| ever more devious ways of circumventing
| |
| | Germany).(D) Wage and price flexibility
|
| the rules of the Union. There was no
| |
| | are sine qua non. Their absence is a
|
| choice but to suspend silver
| |
| | threat to the continued existence of any
|
| convertibility and thus acknowledge a de
| |
| | union. Fiscal policy (money transfers
|
| facto gold standard. Silver coins and
| |
| | from rich areas to poor) are a partial
|
| tokens remained legal tender.This became
| |
| | remedy. They can mitigate and ameliorate
|
| a major problem for the Union and the
| |
| | problems - but not solve them. Transfers
|
| coup de grace was delivered by the
| |
| | also call for a clear and consistent
|
| unprecedented financing needs brought on
| |
| | fiscal policy regarding taxation and
|
| by the First World War. The LMU was
| |
| | expenditures. Problems like unemployment
|
| officially dismantled in 1926 - but died
| |
| | plague a rigid, sedimented union. The
|
| long before that. The lesson: a common
| |
| | works of Mundell and McKinnon (optimal
|
| currency is not enough - a common
| |
| | currency areas) prove it decisively (and
|
| monetary policy monitored and enforced by
| |
| | separately).(E) The last prerequisite is
|
| a common Central Bank is required in
| |
| | clear convergence criteria and monetary
|
| order to sustain a monetary union.As the
| |
| | convergence targets.Judging by these
|
| LMU was being formed, in 1867, an
| |
| | requirements, the current European
|
| International Monetary Conference was
| |
| | monetary union did not sufficiently
|
| convened. Twenty countries participated
| |
| | assimilate the lessons of its ill
|
| and discussed the introduction of a
| |
| | begotten predecessors. It is set in a
|
| global currency. They decided to adopt
| |
| | Europe more rigid in its labour and
|
| the gold (British, USA) standard and to
| |
| | pricing practices than 150 years ago, it
|
| allow for a transition period. They
| |
| | was not preceded by serious political
|
| agreed to use three major "hard"
| |
| | amalgamation, it relies too heavily on
|
| currencies but to equate their gold
| |
| | transfers without having in place either
|
| content so as to render them completely
| |
| | a coherent monetary or a consistent
|
| interchangeable. Nothing came out of it -
| |
| | fiscal policy.This monetary union is,
|
| but this plan was a lot more sensible
| |
| | therefore, likely to join its forefathers
|
| than the LMU.One wrong path seemed to
| |
| | and remain a footnote in the annals of
|
| have been the Scandinavian Monetary
| |
| | economic history.
|
