The United States as a monetary union and the euro: a historical perspective.

• Author: Bordo, Michael D.

The creation of the euro in January 1999 was a milestone in monetary history. One currency supplanted the centuries old currencies of 12 sovereign nations, and the European Central Bank began conducting monetary policy for the new European Monetary Union. Moreover, major legal hurdles to the free movement of goods, financial instruments, and labor have been removed along with some steps taken toward fiscal harmonization. These are preliminaries for the formation of an integrated European Union economy. Finally, economic and monetary integration is also a key component of political integration. The ultimate aim is a United States of Europe.

Despite all these institutional changes the question still arises: Will it all work out to fulfill the dreams of the postwar visionaries for a United States of Europe? Will it collapse? Or will it just muddle along with no definite political structure?

In several recent articles, Lars Jonung and I examined the success of monetary unions in historical perspective (Bordo and Jonung 1997, 2000, 2003). We found that there was a key difference between the success rates of national monetary unions like the United States, Canada, Germany, and Italy compared with international monetary unions like the Scandinavian Monetary Union and the Latin Monetary Union. The key reasons for this outcome were the force of political will and greater economic integration. In the case of national monetary unions, monetary integration was an integral part of the process of creating a nation state. In the case of the historic pre-1914 international monetary unions, the union basically involved adoption of a specie coin of similar weight and quality by the members. These international monetary unions effectively dissolved in the financial turmoil of World War I. We thus concluded that the future success of the EMU depended on the extent to which it is closer to a national than an international monetary union.

Given the extensive institutional changes that have already been made, if the EMU is closer to a national rather than an international monetary union, then we need to consider its long-run prospects within the historical frame of reference of successful monetary unions. In this vein, I follow the approach of Barry Eichengreen and Hugh Rockoff and compare the EMU with the most successful monetary union, the United States. The choice of the United States rather than other successful monetary unions is dictated in part because the United States is about the same size in population and GDP as the EMU. A reexamination of the history of U.S. monetary and economic integration should give some perspective on the hurdles that Europe still needs to jump. I focus on three sets of hurdles: monetary integration, real integration, and political will.

Monetary Integration

I define a monetary union as one in which a common currency (high powered or outside money) and bank money (inside money) are accepted at par across the geographical area of the union. In the modern context it also refers to having a common monetary authority or central bank. According to Rockoff (2003), it took the United States close to 150 years to achieve a full-fledged monetary union. (1) However, a successful currency union was attained with the Constitution of 1789 that gave the Congress (not the states) the power "to coin money and regulate the value thereof." It took the next century and a half to create a unified monetary union (with both outside and inside money) and a viable monetary authority.

The story of antebellum state bank notes circulating at varying rates of discount from par is well known, as is that of the attempts by the First and Second Banks of the United States to create a uniform national currency (Fraas 1974, Rockoff 2003). The Civil War split the political union and the monetary union in two. In the North, paper money (greenbacks) circulated at a considerable discount relative to gold coins. (2) In the South, Confederate notes circulated until war's end in 1865. The national banking system, established in 1863, finally created a uniform national bank note system. Several different types of high-powered money: gold coins, silver coins, gold and silver certificates, and U.S. notes (greenbacks) circulated at par for the next half century until the establishment of the Federal Reserve in 1914, which issued Federal Reserve notes. Although bank notes now circulated across the country at par, demand deposits did not...