History of Previous European Currency Unions

The euro looks like something new, but it is not. It was preceded by numerous monetary unions in Europe and beyond.

First, countries such as the United States and the USSR are (or, in the latter case, were) currency unions. The single currency has been used or used in vast territories with previously different political, social and economic actors. For example, the U.S. Constitution did not provide for the existence of a central bank. The Founding Fathers, such as Madison and Jefferson, opposed its existence. The Central Monetary Institution (modeled after the Bank of England) was not established until 1791. But Madison (as president) expired his grant in 1811. It was revived in 1816 – to die in a new way. It took a civil war to form a monetary union. It was not until 1863 that regulation and supervision of banks was established, and a distinction was made between state and state banks.

At that time, 1,562 private banks printed and issued banknotes, some of which were not legal tender. In 1800 there were only 25 of them. The same thing happened in the principalities that later formed Germany: 25 private banks were established only between 1847 and 1857 with the clear intention of printing banknotes that would circulate as a legal means of payment. In 1816, 70 different (mostly foreign) currencies were used in the Rhine region alone.

The tidal wave of banking crises in 1908 led to the formation of the Federal Reserve, and it took 52 years before the full monopoly of the money emission system was maintained.

What is a monetary union? Is it enough to have a common currency with free and guaranteed convertibility?

Two additional conditions apply: that the exchange rate is effective (realistic and therefore not subject to speculative attacks) and that the members of the Union are pursuing monetary policy.

In fact, history shows that the state of the common currency, although preferable, is not a prerequisite.

In fact, history shows that the state of the common currency, although preferable, is not a prerequisite. The Union may contain “several currencies that can be fully and permanently converted into each other at irrevocably fixed exchange rates,” which essentially means the existence of a common currency of different denominations, each of which is printed by another member of the Union. What seems more important is the relationship (expressed by the exchange rate) between the Union and other economic actors. The currency of the Union should be converted to other currencies at a certain exchange rate (may fluctuate, but always one), determined by a single exchange rate policy. This should apply to the entire territory of the single currency – otherwise the arbitrators will buy it in one place and sell it in another, and will have to introduce currency controls that eliminate free convertibility and cause panic.

This is not a theoretical dispute – and therefore there is no need for it. In the past, ALL monetary unions failed because they allowed them to exchange their currency (currency) (for foreign currency) at different rates depending on where they were converted (to what part of the currency union).

“Soon the whole of Europe, except England, will have only money.” William Badget, editor of the famous British magazine The Economist, wrote about it. However, it was written 120 years ago, when the UK was already discussing the introduction of a single European currency.

Joining a monetary union means abandoning independent monetary policy and, consequently, a significant part of national sovereignty. The Member State no longer controls its money supply, inflation, interest rates or exchange rates. Monetary policy is transferred to the Central Monetary Authority (European Central Bank). The common currency is a mechanism for transmitting economic signals (information) and expectations, often through monetary policy. For example, in a monetary union, the fiscal debauchery of several members often leads to the need to raise interest rates to avoid inflationary pressures. This need arises precisely because these countries share a common currency.

There are no more monetary unions that have not gone down this path.

Currency unions, as we have already said, are not news. Since the days of ancient Greece and medieval Europe, people have felt the need to create a single means of exchange. However, these first monetary unions did not have the characteristics of modern alliances: for example, they had neither a central monetary authority nor monetary policy.

The first truly modern example could be the New England Colonial Monetary Union.

Colonies of New England (Connecticut, Massachusetts, New Hampshire and Rhode Island) accepted each other’s paper money as a legal means of payment until 1750. These banknotes were even accepted as tax payments by the governments of the colonies. Massachusetts has been the dominant economy and has maintained this position for almost a century. It was the envy that put an end to this very successful settlement: other colonies began to print their own records outside the union kingdom. Massachusetts bought out all of its paper money in 1751 and paid for it in cash. It established a monometallic (silver) standard and no longer accepted paper money from the other three colonies.

The second and most important experiment was the Latin Monetary Union. It was a purely French apparatus designed to promote, strengthen and increase its political power and monetary influence. Belgium adopted the French franc when it gained independence in 1830. It was natural that France and Belgium (with Switzerland) pushed others to join them in 1848. Italy followed in 1861, and the last were Greece and Bulgaria (!) in 1867. they formed a bimetallic currency union known as the Latin Monetary Union (UML).

LMU seriously flirts with Austria and Spain. The founding treaty was not officially signed until December 23, 1865 in Paris.

The rules of this Union were somewhat peculiar and in a sense contradicted generally accepted economic ideas.

Unofficially, French influence extended to the 18 countries that took the gold franc as their monetary base. Four of them agreed on the rate of converting gold into silver and minted gold coins, which were legal tender in all cases.

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