The Deja Vu of EMU: Considerations for Europe from Nineteenth Century America
Sheridan, Jerome W., Journal of Economic Issues
If achieved, the creation of an Economic and Monetary Union (EMU) in the European Union (EU) would certainly be historic, but it would not be without precedent. The histories of both nineteenth century Germany and Italy provide examples of independent states with independent economic policies merging into larger economic institutions with common economic policies. Scholars have studied these nineteenth century examples of EMU to determine if they hold "lessons of history" for the EU of today.(1) Similarly, others have examined the Federal Reserve System's twentieth century history to find lessons for the EU.(2) This paper follows in that tradition by looking for messages for modern Europe in America's nineteenth century monetary history.
Obviously, significant differences do exist between the European Union of today and the United States of the nineteenth century. The EU is a collection of largely industrialized sovereign states with numerous lingual, cultural, and political differences. The antebellum United States was a collection of largely agrarian, economically developing states with a common language, a common political tradition, and a federal governing structure with a weak central government.
However, the antebellum United States and the modern EU also share some interesting institutional similarities. Both possess states that are at different levels of economic development. Both are customs unions, and both are single markets. However, important barriers to the free movement of goods, services, labor, and capital existed in the antebellum United States, just as such barriers continue to exist in the European Union. Like the EU member states of today, antebellum American states enjoyed wide latitude to engage in independent fiscal policies, and there were few interstate fiscal transfer mechanisms. Moreover, as this paper will argue, the antebellum United States did not possess a common national currency, and the structure of its monetary system had features in common with the modern European Monetary System. Because of these similarities, the American experience in creating a common national currency has important implications for the project to create a common currency in the European Union.
The Antebellum American Monetary System
Prior to its Civil War, the United States did not possess a common national currency. It did possess a common unit of account, the dollar, but this dollar served principally as the "outside money" of the financial system. The term "outside money" refers to forms of money that originate by fiat outside of the banking and financial system. In the modern era, it consists of both coins and fiat paper currency issued by sovereign governments. However, the antebellum federal government did not issue fiat paper money. The country's outside money consisted solely of specie, or in other words, gold and silver coins.
The entire paper money circulation consisted of "inside money." Inside money originates within the banking and financial system. Legally, inside money represents only a promise by a financial institution to pay outside money. However, forms of inside money, like bank checks, are far more convenient and safe to use in transactions than forms of outside money like coins. For this reason, inside money is nor-really the preferred means of payment, and it constitutes the overwhelming bulk of the money supply in modern economies.(3)
In the antebellum United States, the most common form of inside money was the bank note.(4) Bank notes were paper promises by banks to pay a stated amount of coin dollars to the bearer on demand. They were issued in denominations and sizes that made them convenient for circulation. Since the federal government issued no fiat paper money in the antebellum period, bank notes served as the principal form of paper money in circulation.(5)
Banks issued this paper money according to the institutional rules established by their charters of incorporation or by subsequent banking legislation. …