I. The History of Monetary Unions
"Before long, all Europe, save England, will have one money". This was written by William Bagehot, the Editor of "The Economist", the renowned British magazine, 120 years ago when Britain, even then, was heatedly debating whether to adopt a single European Currency or not.
A century later, the euro is finally here (though without British participation). Having braved numerous doomsayers and Cassandras, the currency - though much depreciated against the dollar and reviled in certain quarters (especially in Britain) - is now in use in both the eurozone and in eastern and southeastern Europe (the Balkan). In most countries in transition, it has already replaced its much sought-after predecessor, the Deutschmark. The euro still feels like a novelty - but it is not. It was preceded by quite a few monetary unions in both Europe and outside it.
What lessons does history teach us? What pitfalls should we avoid and what features should we embrace?
People felt the need to create a uniform medium of exchange as early as in Ancient Greece and Medieval Europe. Those proto-unions did not have a central monetary authority or monetary policy, yet they functioned surprisingly well in the uncomplicated economies of the time.
The first truly modern example would be the monetary union of Colonial
New England.
The four kinds of paper money printed by the New England colonies (Connecticut, Massachusetts Bay, New Hampshire and Rhode Island) were legal tender in all four until 1750. The governments of the colonies even accepted them for tax payments. Massachusetts - by far the dominant economy of the quartet - sustained this arrangement for almost 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 the paper money in 1751. It then retired from the union, instituted its own, silver-standard (mono-metallic), currency and never looked back.
A far more important attempt was the Latin Monetary Union (LMU). It was dreamt up 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 LMU was a natural extension of this franc zone and, as the two teamed up with Switzerland in 1848, they encouraged others to join them. Italy followed suit in 1861. When Greece and Bulgaria acceded in 1867, the members established a currency union based on a bimetallic (silver and gold) standard.
The LMU was considered sufficiently serious to be able to flirt with Austria and Spain when its Foundation Treaty was officially signed in 1865 in Paris. This despite the fact that its French-inspired rules seemed often to sacrifice the economic to the politically expedient, or to the grandiose.
The LMU was an official subset of an unofficial "franc area" (monetary union based on the French franc). This is similar to the use of the US dollar or the euro in many countries today. At its peak, eighteen countries adopted the Gold franc as their legal tender (or peg). Four of them (the founding members of the LMU: France, Belgium, Italy and Switzerland) agreed on a gold to silver conversion rate and minted gold and silver coins which were legal tender in all of them. They voluntarily limited their money supply by adopting a rule which forbade them to print more than 6 franc coins per capita .