The International Monetary System: A Time of Turbulence

By Jacob S. Dreyer; American Enterprise Institute for Public Policy Research | Go to book overview

The Dollar and the ECU

Michele Fratianni

This paper deals with the decline of the dollar as the world dominant money and the prospects for the ECU, the European artificial currency, to replace this function of the dollar. For the time being, these prospects are considered dim. The European Monetary System (EMS), which elevated the ECU to official parallel currency in the European Economic Community (EEC), is not a significant innovation with respect to the objective of achieving monetary union in the Community. Without monetary union, Europe cannot seriously challenge the leading position in the world of the depreciating dollar; yet, international trade would benefit immensely from a new and stable dominant money. The publicgood nature of money suggests a tendency for underprovision of the good.

The ECU as a parallel currency suffers from inherent weaknesses, and the EMS added to these weaknesses by legislating explicit restrictive provisions. Because room for improvement is ample, I conclude this paper by offering in a programmatic fashion a menu of "do's" aimed at enhancing the acceptability of the ECU in the marketplace.


Dominant Money

History records a propensity for one currency to dominate others as the international medium of exchange. Cipolla recounts that the Byzantine nomisma was the unchallenged coin from the fifth century to the seventh.1 The nomisma was displaced by the Islamic dinar in the Low Middle Ages and by the Florentine fiorino and the Venetian ducato in the higher Middle Ages. These coins shared three attributes: large weight (high unitary value), high intrinsic (purchasing power) stability, and the feature that the coin issuer enjoyed a leading position in international trade. In more recent time, 1870-1914, the British

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1
Carlo M. Cipolla, Money, Prices, and Civilization in the Mediterranean World ( Princeton, N.J.: Princeton University Press, 1956).

-430-

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