Historical monetary unions

Rudimentary monetary unions existed in ancient Greece and in medieval Europe. More recent attempts at monetary unions are :

- A - Monetary unions that failed

1. Colonial New England

Until around 1750, a monetary union existed in the New England colonies. The paper money of each of the four colonies (Connecticut, Massachusetts Bay, New Hampshire and Rhode Island) was accepted as legal tender by the others, even for tax payments. The union lasted nearly a century and relied on the economic dominance of Massachusetts. The three smaller colonies eventually grew to challenge Massachusetts' economic primacy and began to over-issue currency in the 1730s and 1740s. Regional monetary cooperation deteriorated and, in 1751, Massachusetts redeemed its paper money, resumed a silver standard, and ceased accepting the other colonies' paper money.

2. Latin Monetary Union

Starting with the adoption of the French Franc standard by Belgium upon independence in 1830, France, Belgium, Switzerland (1848), Italy (1861) and latterly Greece and Bulgaria (1867) formed the Latin Monetary Union (initially a bimetallic currency union), considered by some to be the first serious international effort to regulate exchange rates. The Union was officially established in 1865 (indeed, since many other countries had gold coins of similar value, there was almost a de facto currency union, based on gold, which included Germany and the United Kingdom). In the Latin Monetary Union, member countries could mint unlimited quantities of certain gold and silver Union coins, all of which were legal tender across the Union. Each country could also mint limited quantities of smaller-denomination (subsidiary) silver coins, but these were legal tender only in the individual issuing country. Each country issued its own coins, but these (e.g. French Franc, Swiss Franc, Italian Lira, etc.) were at parity with each other, albeit subject to an exchange commission of 1.25 %. Subsidiary coins had a lower silver content than the Union coins. Despite these coins' lower intrinsic value, public offices in one country were required, however, to accept up to 100 Francs in the other countries' subsidiary coins on individual transactions. This was a loophole that helped destroy the Union.

The Union's money supply was to be determined by the market. The central banks promised to freely exchange gold and silver for coins. This bimetallic standard soon began to strain the Union by forcing the central banks to guarantee that the ratio of gold to silver prices (15.5 : 1) would remain fixed. The relative values of gold and silver, however, were determined in the world markets, and the Latin Union was too small to influence world prices. The Union overvalued silver, which the members attempted to force on each other, eventually forcing the suspension of silver convertibility and a move to a de facto gold standard. Outstanding silver coins remained, however, legal tender, and subsidiary coins were treated virtually as such. It was at this point that the subsidiary coins became the Union's principal problem. World War I created enormous financing needs and strains and thereafter, the Latin Union ceased to exist as a practical matter, although it continued in name until the late 1920s. The Latin Union was said to have decreed one common currency without setting up a common monetary policy. Alternatively, the Latin Union can be said to have decreed a common monetary policy but left each national central bank to police its own compliance.

3. Scandinavian Monetary Union

In the 1870s, Sweden, Denmark and Norway formed the Scandinavian Monetary Union under which, as in the Latin Union, gold coins of each country circulated freely as legal tender in all three countries. Subsidiary coins also circulated across borders as legal tender, and by 1900, banks in all these countries also accepted each member country's banknotes at par. By 1905, the Union was considered so complete that exchange rates ceased being quoted.

As long as limited stocks of gold restrained the production of money, the Union worked well. In the end, however, World War I financing needs led many countries to inflate their currencies and dump gold at the same time that Scandinavia was maintaining a fixed kronor gold price. The depreciated currencies were then used to purchase gold at official (cheap) rates.

The Scandinavian Monetary Union eventually collapsed once Sweden refused to purchase gold at fixed prices. The problem of gold convertibility played a major role in this collapse. In addition, all member countries' subsidiary coins were still legal tender across the Union, so Denmark and Norway began shipping large quantities of these small coins to Sweden, just as the Latin Union members had shipped to whichever member had the strongest currency at a given time. Finally, in 1924, shipment of subsidiary coins was prohibited, effectively terminating the Union.

4. East African Currency Area

In 1922, British East Africa (Kenya, Uganda and Tanganyika, plus Zanzibar in 1936) adopted a common currency, the East African shilling. After independence, East Africa remained part of the Sterling Area which guaranteed local currency convertibility into pounds. Explicit and implicit British subsidies to the emerging nations were sufficient to offset their desires for independent monetary policies. In 1966, Kenya, Uganda and Tanzania (the merger of Tanganyika and Zanzibar) thus each adopted its own local shilling, but all three remained legal tender across the region, and all remained convertible into pounds. Depreciation of the pound in the late 1960s and early 1970s led to the dismantling of the Sterling Area in 1972. Without the constraints of the Sterling Area on national monetary policies, the three East African national monetary authorities were free to pursue increasingly independent policies. In 1977, the East African Currency Area ended as each country pursued a different rate of inflation and the values of the currencies diverged.

- B - Monetary unions which endure

1. Zollverein (German Customs Union)

Despite efforts at political unification, in 1815 the German Federation was composed of 39 separate independent states, each with its own standards for coinage (some gold, some silver), as well as for weights and measures. The Congress of Vienna in 1815 removed restrictions on labour mobility, but the myriad coins made trade both difficult and expensive.

In 1834, the Zollverein (Customs Union) was founded with the intention of reducing cross-border transaction costs. In 1838, most of the states agreed on two monetary standards (the Thaler and the Gulden), leaving states free to choose one or the other. In 1847, the central bank of the Kingdom of Prussia (with two-thirds of the German population and territory) was given primary central banking responsibility for most of the states of the Federation. The North German Thaler (incidentally the origin of the name Dollar) was ultimately fixed at a rate of 1.75 to the South German Gulden. Later, the Thaler was also fixed at a rate of 1.5 Austrian Florins, but Austria rescinded this agreement after the Austro-Prussian war of 1866.

Prussia's stewardship of the monetary Union held the arrangement together until German unification in 1871. In 1875 the Reichsbank was established and the Reichsmark became the currency of the whole German Reich. In spite of the catastrophic inflation of 1923 and the collapse of the Reichsmark after World War II, the currency Union survived and has been supplanted by the institutions which grew into today's Bundesbank. Thus, a vestige of this Union still survives in the Deutschmark. Two factors are responsible for the Union's durability prior to political unification : Prussia had the size, power and will to enforce compliance with the agreement on the smaller states, and the enactment of consistent metallic standards depoliticized the currency by removing the princes' ability to debase their coinage.

2. CFA Franc Zone

The CFA (Communauté Financière Africaine) encompasses most of the former French colonies of West and Central Africa, plus one former Spanish colony. The CFA Zone is one of the most successful modern monetary unions, having held a large number of geographically, politically, ethnically and economically disparate nations together for over 30 years.

The common currency, the CFA Franc (for many years equal to 1/50th of a French Franc and now recently devalued to 1/100th of a French Franc) circulates across the region and has endured the departure of colonial administrations. There are two central banks, responsible for monetary policy in two different groups of countries. Member nations of each central bank pool their reserves in the French Treasury. There are few exchange controls on converting CFA Francs into French Francs, though there are some trade and capital controls. Convertibility is guaranteed by an overdraft privilege at the French Treasury.

France, being the dominant partner, is crucial to the Union, still exercising considerable authority over policies and playing a large role in the individual countries' economies through direct assistance.

3. Belgium / Luxembourg

Belgium and Luxembourg maintain separate currencies (Belgian Francs and Luxembourg Francs), which have been linked at par and have been legal tender in both countries since 1921. Monetary policy is effectively under the control of the Belgian monetary authorities, although a joint agency manages exchange regulations. In spite of strains in 1982 and 1993, the union has survived to the present day.