When money brought us together
The euro may be struggling, but history shows that a currency union really can thrive. The evidence? We’re living in it.
As the American economy reckons with the fallout of the debt-limit crisis, it’s easy to forget about the far bigger train wreck underway in Europe, where the continent’s grand experiment with a common currency is becoming more imperiled by the day. The euro, the powerful currency unveiled to great fanfare a little over a decade ago as a symbol of a new, united continent, is quickly becoming a victim of the very nationalist infighting that prompted its creation in the first place.
While the weaker economies on the periphery of Europe move ever closer to the brink of insolvency, tensions among the members of the eurozone have escalated. In the past couple of weeks, former Italian prime minister Romano Prodi has spoken darkly about German “egoism,” while representatives of Germany and France have increasingly complained about the spendthrift ways of their less fortunate neighbors - never mind the prohibitive cost of bailing them out to preserve the euro.
All of this threatens to deliver a crippling blow to Europe, with grave repercussions for the broader global economy. But the more immediate casualty of the ongoing crisis is the optimism at the root of the euro itself - the belief that the nations of Europe might move beyond their history of internecine strife by uniting under the banner of a common currency.
That belief now seems naive to many people. And the very notion that disparate nations might be brought together by a single currency looks increasingly absurd. But currency unions have a deeper history then just the euro, and a look at their record over time suggests that currency unions have, indeed, worked. In fact, we’re living in one: The dollar is itself the product of a long struggle to unite America’s states and businesses under a single currency.
America’s road to the unified dollar was not easy, and its early struggle, never mind the long history of failed attempts to stretch other currency unions beyond national borders, offers a sobering lesson for euro-optimists. This is not to suggest that the euro project is doomed. It is, however, a problematic idea. It is one thing to create a currency union within national borders; it is a very different matter to argue that a shared currency can unite people across them.
Officially speaking, the American dollar was born even before the Constitution was signed. But the actual money supply of the young United States was far from uniform. Anyone doing business here in America’s first few decades would have encountered thousands of different notes issued by private banks. These were usually redeemed not in dollars issued by the United States mint, but in silver coins from places like Mexico and Bolivia. Travelers also found that merchants and storekeepers often reckoned prices not in dollars and cents, but in local versions of pounds and shillings that varied in value from place to place. European visitors to the United States frequently commented on the heterogeneity of the new nation’s money. In 1841, British traveler George Coombe would observe, “it has become a science nearly as extensive and difficult as Entomology . . . to know the value of the currency of this great country.”
This was not the monetary system that the Founders had envisioned. To break with the British pound, Congress had formally adopted the new currency of the dollar as early as 1786. The Constitution subsequently forbid individual states from issuing their own currency, and gave the new federal government the sole authority “to coin Money [and] regulate the Value thereof.” This new monetary union was intended to go hand in hand with a fiscal union: The national government would have the power to tax, spend, and borrow money.
The first secretary of the treasury, Alexander Hamilton, ushered legislation through Congress in 1792 that established the United States Mint, which would now begin to issue new national coins emblazoned with symbols of the United States. “A nation,” Hamilton observed, “ought not to suffer the value of the property of its citizens to fluctuate with the fluctuations of a foreign mint, and to change with the changes in the regulation of a foreign sovereign.”
Hamilton’s vision failed to materialize. For the first few decades of its existence, numerous members of Congress, fearful of centralized power, attempted to abolish the US Mint, claiming that it was symbolic of “executive influence” and “trappings of royalty.” Underfunded, the mint produced but a tiny trickle of coins. In the resulting vacuum, Americans made do with foreign silver coins, many of which enjoyed legal tender status as late as 1857.
To add to the confusion, banks chartered by individual state governments issued their own paper money in dollars. By the mid-19th century, thousands of different bank notes circulated in the United States - and how much a “dollar” was worth depended on, say, whether it was a dollar issued by the
Complicating the situation, many Americans still reckoned prices and kept their own accounts in the Colonial systems of pounds and shillings. The federal government formally adopted the dollar in its own account books in 1792, but the individual states were slow to follow. As late as 1839, the economist George Tucker complained that the “former money of account, of pounds, shillings, and pence, is not yet laid aside, but, in almost all the states, still obtains the ascendency in popular use.”
It took a national bloodletting to bring the country together under a single currency. During the Civil War, the drive to preserve the Union spurred legislators such as Senator John Sherman (brother of William Tecumseh) to push for greater nationalization of America’s institutions and governance. Not surprisingly, he saw the patchwork system of state-printed bank notes as a reminder of “the accursed heresy of State Sovereignty . . . laying at the foundation of the slaveholders’ rebellion.”
Accordingly, he and other like-minded legislators overhauled the nation’s currency, for the first time introducing federally issued paper notes backed by nothing more than faith in the imperiled national government; their distinctive green ink swiftly earned them the name “greenback.” These were soon joined by uniform notes issued by a system of freshly chartered national banks. At the same time, nationalists moved to exterminate the bank notes issued by private, state-chartered banks by levying a prohibitive tax on their circulation. This new unified currency gained credibility because it rested on a effective system of revenue collection - that is, new federal taxes - as well as borrowing via government bonds.
European nations, too, had begun pushing to unify their own currencies by this time. Earlier that century, a mix of private tokens, foreign coins, and private bank notes circulated alongside the official coinage of the nation states throughout most of Europe. But as the century progressed, national governments began asserting control over the currencies within their borders by issuing a steady supply of small-denomination coins. At the same time, they began to ban private coins and tokens, and in some countries, privately issued paper money. In Great Britain, the Bank of England obtained an effective monopoly over the issue of bank notes beginning in 1844.
Though these standardized currencies grew out of a nationalist impulse, they led many to ask a simple question: Why stop there? Having swept away the vestiges of the chaotic, pre-modern monetary system, cosmopolitan reformers saw it as a natural step to build a currency union that transcended national borders. Such an idea seemed enlightened, modern, and above all, rational. (The same impulse drove the campaign to adopt a standard system of weights and measures throughout the world - i.e. the metric system.)
The first foray in this direction was a now forgotten agreement forged between France, Italy, Belgium, and Switzerland in 1865. Dubbed the “Latin Monetary Union” in the British press, it was at best a halting step toward a common currency. Under the terms of the agreement, the countries agreed to standardize the amount of gold and silver in its coins, with all new coins modeled on the existing French franc. Though these coins would still bear the emblems of the nations that issued them, they contained a uniform quantity of gold and silver, and each member nation agreed to accept other nations’ coins as equivalent to their own.
The Latin Monetary Union soon attracted plenty of other applicants, including Greece, Spain, Romania, Serbia, and other countries on the periphery of Europe. (Ironically, only Greece was deemed worthy of admission). The motives of these countries seem eerily familiar. As the historian Luca Einaudi has argued, the poorer states saw it as a quick route to financial credibility and lucrative international markets.
The architects of the union, most prominently French economist Félix Esquirou de Parieu, argued that a vastly expanded version of the union would help foster international trade, ease travel, and - according to its most visionary proponents - soothe the political tensions between nations. In 1867, representatives from many nations gathered in Paris for the International Monetary Conference, and agreed that they should create a international gold coin of 25 francs that would be equivalent to 1 British pound, 5 American dollars, and 10 Austrian florins. They departed the conference predicting a new era of peace and prosperity, and even began to win support in the US government. John Sherman backed the plan, claiming that it would “lead to a vast extension of the objects of international law common to all Christian and civilized nations, thus binding the whole family of man....”
But the plan required that Britain alter the gold content of its currency so as to conform to the French franc. The British balked, as did the Americans. The various German states, which Bismarck was in the process of unifying at this time, eventually rejected the French-centered plan (the outbreak of the Franco-Prussian war in 1870 didn’t help matters). The original Latin Monetary Union limped along in truncated form for several more decades, but the dream of a common currency spanning all of Europe was dead.
The architects of the euro succeeded where their 19th-century forebears failed, bringing a disparate collection of states together under a common currency. Unfortunately, they seem to have missed a key lesson from the history of American money: A currency union without a corresponding fiscal union may be less a union than an economic suicide pact.
In Europe, nations sharing a common currency - and a common set of rules governing fiscal health - nonetheless operate under totally independent governments, each of which is responding to very different political and economic pressures. Where Greece might once have escaped its predicament in the pre-euro age by devaluing its national currency, it is now trapped in a monetary system with more powerful economies that allows for no such thing. In the eurozone, one size currency now fits all the nations, despite their real - and increasingly apparent - differences. As the peripheral countries slide toward insolvency, they threaten to take the bigger, healthier countries with them - or at the very least, burden them with onerous amounts of debt.
If today’s Europeans are looking for examples of a successful currency union without a political union, they are unlikely to find the historical record reassuring. The closest parallel to the European Union - in which individual states share a significant amount of sovereignty with a larger, overarching government - is the United States itself. But even here, it was not until the United States came of age as a strong political union - decades after the signing of the Constitution, at the cost of well over a half million lives - that the currency was corralled.
The dream that a common currency can foster harmony has a long history. But if the past is any guide, proponents of the euro may have it backward: Where money is concerned, harmony has to come first. You can’t create a currency to unite people; you must unite people in order to have a currency. Given the growing tensions between the members of the eurozone, that unity, like de Parieu’s dream of “pacific federations of the future,” seems more distant by the day.
Stephen Mihm, a professor of history at the University of Georgia, is the coauthor (with Nouriel Roubini) of “Crisis Economics: A Crash Course in the Future of Finance” (Penguin, 2010).