Tom Luxsox Coins

Banknote Currency

A history of money in the world

I. The history of monetary unions

"Before long, all Europe, except England, will have a price. "This was written by William Bagehot, the editor of The Economist, the renowned British magazine, 120 years ago when Great Britain, even then, was hotly discussing the appropriateness 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 Cassandras, the currency - although that much depreciated against the dollar and reviled in some circles (especially in Great Britain) - is now used in both area euro and in Eastern and Southern Europe (the Balkans). In most transition countries, it has already replaced its much sought predecessor, the deutsche mark. The euro still feels like a novelty - but it is not. It was preceded by a good bit of monetary unions in Europe and outside it.

What lessons history teaches us? What should we avoid the pitfalls 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 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 types of 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 colonies even accepted them for tax payments. Massachusetts - by far the dominant economy of the quartet - sustained this arrangement for almost a century. 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, has introduced its own money standard (mono-metallic) money and never looked back.

A far more important was the Latin Monetary Union (LMU). It was thought by the French, obsessed, as usual, by their bad geopolitical fortunes and monetary prowess. Belgium has 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 encouraged others to join them. Italy followed suit in 1861. When Greece and Bulgaria acceded in 1867, members have created 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 is despite the fact that its French-inspired rules seemed often to sacrifice economics to political expediency, or grandiose.

The EA is a subset of an 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 of them (The founding members of the LMU: France, Belgium, Italy and Switzerland) agreed on a gold medal at the conversion rate minted gold and silver and silver coins legal tender in each. They voluntarily limited their money supply by adopting a rule that forbids them to print more than 6 franc coins per capita.

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

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

Government offices and municipalities are required to accept up to 100 Francs of non-convertible and low value intrinsic 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 currency restriction, the LMU had no uniform policy of money or management. The amount of money in circulation was determined by markets. The central banks of member countries committed themselves freely convert gold and silver coins and, therefore, were forced to maintain a fixed exchange rate between the two metals (15 to 1) reflect market price fluctuations.

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

The LMU has a common currency, but this does not guarantee its survival. It lacked a common monetary policy monitored and enforced by a common central bank - and these deficiencies proved fatal.

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

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

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

The SMU had a central bank official with no reserves set in common. It extended credit lines for each of the three member countries. As the gold supply was limited, the Scandinavian crowns held his land. Then governments started to finance their deficits by dumping gold during World War (and thus erode their debts by fostering inflation through a series of inane devaluations). In an unprecedented act of arbitration, central banks and made turned around and used the depreciated currencies to scoop up gold at the official site (cheap) rates.

When Sweden refused continue to sell its gold at a price fixed officially - the other members declared effective economic war. They forced Sweden to purchase enormous quantities of parts in chips. The product was used to buy the much stronger Swedish currency at a price still cheaper (as the price of gold collapsed). Sweden found itself subsidizing an arbitrage against its own economy. It inevitably reacted by ending the import tokens of other members. The Union thus ended. The gold price is more fixed and coins have been more symbolic convertible.

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

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

Ironically, the book has sold. Its relentless depreciation in the 60s and early 70s, led the disintegration of the Sterling Area in 1972. Strict monetary discipline which characterized the Union - evaporated. The currencies diverged - a result a divergence of inflation targets and interest rates. The East African monetary zone officially ended in 1977.

Not all monetary unions ended tragically. Without doubt, the most famous of those 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 - weights and measures - separate. The decisions of the leased Congress of Vienna (1815) did wonders for the Disabled Workers in Europe, but not so for trade. The confusing number (mostly non-convertible) currency did not help.

The German principalities formed a customs union by 1818. The three regional groups (North, Central and Southern) were 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 timidly experimenting with new currency exchange rate fixed bed. But in practice, the union already had a single currency, the Vereinsmunze.

The Zollverein (Union Customs) was established in 1834 to facilitate trade by reducing its costs. This was done by the most convincing members to choose between two monetary standards (the Thaler and 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 mass of the population and land of the future of Germany.

The North German Thaler was fixed at 1.75 in the South German Gulden and, in 1856 (when Austria became informally associated with the Union) to 1.5 guilders Austria. This last collaboration was to be a case short, Prussia and Austria having declared war on each 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 in the first German Reich. Germany's new single currency was in effect a monetary union. It survived two world wars, a devastating battle with inflation in 1923 and a currency collapse after the Second World War. The phlegmatic and trustworthy Bundesbank succeeded the Reichsmark and the Union was finally defeated by the bureaucracy of Brussels and its euro.

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

Another, perhaps as success, and ongoing union - is the CFA franc zone.

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

The CFA franc zone is remarkably diverse ethnic, lingual, culturally, politically and economically. The currency has survived the devaluation (as large as 100% vis-à-vis the French Franc), changes of regimes (then 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 on trade and capital flows - not to mention a multitude of natural disasters and man made.

The euro has indirectly affected the CFA as well. The Economist recently reported a shortage of small denomination CFA. "Recently the printer (CFA) was too busy producing euros for a return to the home market" - have complained Central Bank of West Africa in Dakar, but it's the minor problem The CFA franc is at risk because of imbalances between domestic savings Their area ... growth rates differ substantially. There is pressure from some members to devalue the currency. Others are severely resist.

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

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

II. Lessons

Europe has 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, on the other.

Monetary unions which it is all survived because they relied on a single monetary authority for managing the currency.

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

All single currencies against the opposition for reasons both ideological and pragmatic when they were introduced.

The U.S. Constitution, for example, does not provide a central bank. Many Fathers founders (eg, Madison and Jefferson) refused one. It took the fledgling United States two decades to bring a semblance of an institution Money Central in 1791. It was modeled after the success of the Bank of England. When Madison became president, he leaves voluntarily its concession expires in 1811. In the next half century, it revived (for example, in 1816) and expired a few times.

The United States is become a monetary union only after the trauma of civil war. Similarly, the European monetary union is a belated outcome of two European civil war (both 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 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, 25 private banks were established there 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 nationally. Monetary union in the U.S. - the U.S. dollar as legal tender one printed exclusively by an authority Money Central - 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 rejoiced in the smooth introduction of the physical notes and coins of their new currency. But having a single currency with free and guaranteed convertibility is the manifestation 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, are not susceptible to speculative attacks. In addition, members of the Union must comply with monetary policy.

Surprisingly, history demonstrates that monetary union is not necessarily predicated on the existence of a single currency. A monetary union could incorporate "several currencies, fully and permanently convertible into one another to exchange rate irrevocably fixed. "This is like having a single currency with various denominations, each printed by another member of the Union.

What really economic issues are inter-relationships and power games between union members and between the union and other currency zones and currencies (as expressed the exchange rate).

Usually the single currency of the Union is convertible at a given exchange rate (if floating) object of a policy rate uniform exchange. This applies to the entire territory of the single currency. It is intended to prevent arbitrage (buying the single currency in one place and sell it in another). Rampant arbitrage - ask anyone in Asia - often leads to the need to impose exchange controls and eliminating convertibility and inducing panic.

Monetary unions 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 policy of exchange rate portion is only one of concessions members of a monetary union should do. Joining always means giving up independent monetary policy and with it a significant portion national sovereignty. Members relegate the regulation of money supply, inflation, interest rates and currency exchange rate to central authority (for example, the European Central Bank in the euro area).

The need for a central monetary management arises because, in economic theory, a currency is never just a currency. He 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 fiscal policy is unique not only unnecessary but potentially dangerous. A monetary union means the surrender of sovereign monetary policy instruments. It may be advisable to let members the Union shall apply fiscal policy instruments autonomously in order to counter the economic cycle, or cope with asymmetric shocks, goes the argument. As there is no guarantee, implicit or explicit nature of the whole union for the indebtedness of its members - debauched States are likely be punished by the market, discriminatory.

But in a monetary union with mutual guarantees among the members (even if only 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 raised because effects of financial decisions of a member shall be communicated to other members through the common currency. The currency is the medium of exchange of information regarding current and future health of the economies concerned. Hence the famous' Stability Pact of the EU ", recently abandoned so flagrantly in the face of German budget deficits.

Currency unions that have not followed the path of fiscal rectitude are no longer with us.

In an article I published in 1997 ("The history of monetary unions in previous 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"). driving forces must be geopolitically important, maintain political solidarity with other members, be prepared to exercise their influence, and be economically involved in (or dependent) the economies of other members.
central institutions should be established to monitor and enforce monetary, fiscal and other economic policies, coordinate the activities of Member States to implement the policy and technical decisions, to control monetary aggregates and seigniorage (Ie, rents accruing due to money printing) to determine the legal offer and the rules governing the issue money.
It is better if a monetary union is preceded by a policy (consider the examples of the United States, the USSR, the United Kingdom and Germany).
Flexibility of wages and prices are the sine qua non. Their absence is a threat to the existence of a union. Unilateral transfers from rich areas to poor are a partial remedy and short duration. Transfers also call for a clear and consistent policy with regard to the exercise taxation and spending. Problems like unemployment and collapses in demand often plague rigid monetary unions. The works of Mundell and McKinnon (areas optimum currency) to prove it decisively (and separately).
Clear convergence criteria and monetary convergence targets.
The current European Monetary Union is far from worrying about the lessons of its predecessors bad fate. European labor markets and capital, although recently marginally liberalized, are even more rigid than 150 years ago. The euro was not preceded by an "always closer (political or constitutional) union ". It relies too heavily on fiscal redistribution without the benefit of either a coherent monetary policy and a coherent fiscal policy at the regional level. The euro is not built to cope either with economic shocks asymmetric (affecting only some members but not others), or the vicissitudes of the economy.

This does not bode well. This union could well become another benchmark in the annals of economic history.

About the Author

Information on anthurium plants can be found at the Anthurium Flowers site.

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