Thursday, 7 March 2013

stella! or fiat means of payment

The EU monetary union and its currency, the euro, has deeper roots, reaching back to the nineteenth century with attendant problems and complications, and was directly inspired by a earlier coalition by the name of the Latin Monetary Union. Founding members Switzerland, Italy, France and Belgium decided in 1865 to tether their respective national coinage to a certain ratio of silver redeemable in gold, which was legal tender among all members.

Later Venezuela, Spain, Greece, the Austro-Hungarian Empire, Romania, Bulgaria and the Holy Sea joined—with even the United States of America seriously considering taking part in the grand experiment. I never realized that the national pride of the franc, peso, drachma and mark was not so long-lived and had been sublimed before. H told me about this earlier attempt but I never knew what the union was called. The currency, however, had barely overcome many structural challenges before its dissolution during the inter-bellum years. The ultimate failure was due, in the main, to an institutionalized practice of and market for debasing. Though the coin’s face value was honoured universally, some mints were debasing their coins (some of the usual suspects were the greatest offenders), using less precious-metal content than prescribed. Other opportunists, notably the Germans, took advantage of this differential in specie, exchanging coins from countries out of compliance for more valuable bullion. By the same reasoning contemporarily if one could have all of one’s wealth expressed with pennies and had a buyer for the zinc and copper, one could see the value almost double. Despite all its failures at conception, the Latin Monetary Union had a long run and I wonder what lessons are applicable to the current situation.