Conflict Potentials in Monetary Unions

Published by EH.NET (April 2007)

Lars Jonung and J?rgen Nautz, editors, Conflict Potentials in Monetary Unions. Stuttgart: Franz Steiner, 2007. 181 pp. ?34 (paperback), ISBN: 978-3-515-09002-5.

Reviewed for EH.NET by Lawrence H. Officer, Department of Economics, University of Illinois at Chicago.

This relatively short book contains seven papers on monetary unions, most of which will be of interest to economic historians. The editors, writing individually, account for two of the seven papers. I use the term “papers” advisedly, because the papers are not enumerated as chapters. In fact, although the editors (Lars Jonung, Research Adviser at the European Commission, and J?rgen Nautz, a faculty member at the University of Vienna) are to be commended for assembling a group of interesting papers, some editorial decisions detract from the usefulness of the volume. In particular: (1) The papers are not organized into sections or parts of the overall work, so relationships among the papers are not emphasized. Jonung does some thematic discussion in his introduction to the volume; but most of that essay is a paper-by-paper summary of the individual-author contributions. Further, Jonung’s discussion is expositional rather than critical. (2) Although the acknowledgements state that “several of the chapters of this book have emerged from papers presented at the conference [with the same name as the book title],” the volume presents no comments on, or exchange of views about, the various papers. (3) There is no index ? a serious flaw for any scholarly book, in my view. (4) There is neither a common list of references nor individual-chapter lists of references. All bibliographical references are in footnotes. (5) In some “chapters,” tables and figures are placed at the end of the paper; in other chapters, they are embedded within the text. Such lack of uniformity can be confusing to the reader. (6) The contributors were allowed to be uneven in their methodology with respect to each other. For example, some authors adopt modern time-series analysis; others make less-sophisticated use of quantitative information. Also, some papers are heavily oriented to specific historical experiences; others make use of history only in passing. On the positive side, there is a paragraph-length bibliography of each of the contributors to the volume.

In fairness to Jonung, his summation of the lessons of the papers, although short, is perceptive. First, monetary unification and resulting adjustment are long-run processes. Second, monetary unification is an exercise in political economy, not just in economics: “Politics is commonly driving monetary marriages as well as monetary divorces. In short, money is an inherent political matter. This message emerges from every chapter of the book” (p. 17). Third, internal distribution issues are important in decisions regarding currency and monetary arrangements.

Something should be said about each paper; but the space devoted to each reflects the interest of this particular reviewer. The contribution of Farley Grubb (“The Constitutional Creation of a Common Currency in the U.S.: Monetary Stabilization versus Merchant Rent-Seeking”) is well-written, interesting and provocative. He writes: “This evidence indicates that the formation of the U.S. currency union had more to do with usurpation of state sovereignty for the personal gain of merchant-bankers than with solutions to monetary instability and transactions costs within the union” (p. 19). Grubb views the monetary policy of the colonies, and later, individual states, as credible and responsible, compared to that of the post-Constitution United States. His views have been vigorously attacked in the literature (Michener and Wright, 2005) and equally vigorously defended (Grubb, 2005); but Grubb’s contribution in the volume makes no mention of this particular literature. In fairness again, the reason might be lag in publication (the conference underlying the volume occurred in 2001 and 2002); but, given the long lag, the authors of contributions could have been given the opportunity to revise their essays in the light of recent literature. Grubb’s paper is also useful in its provision of excellent bibliographical references and a good, though short, summary of colonial monetary history.

Grubb makes the following point (among others) regarding the source of U.S. monetary instability in the post-Constitution [pre-Federal-Reserve?] era: “The U.S … had no regulation of banking specie-reserve to bank-note-loan ratios” (p. 24). This reviewer (Officer, 2002) computed the “pyramiding ratio” monetary base to specie stock for, among other periods, 1792-1810 (First Bank of the United States, FBUS), 1817-1838 (Second Bank of the United States, SBUS), 1862-1878 (greenback) and 1879-1913 (gold standard). The mean ratio is, in order, 1.22, 1.27, 3.72, 2.17. The coefficient of variation of the ratio is, in order, 6.86, 11.45, 42.77, 14.80. From the standpoint of monetary discipline, the ideal ratio would have a “zero coefficient of variation around a unitary mean” (Officer, 2002, p. 136). So the FBUS and SBUS periods come closer to this ideal than the polar monetary standards of a free float and gold standard. The implication is that the problem with the Constitutional monetary system was lack of a central bank (ameliorated by the FBUS and SBUS acting in that role) rather than (as argued by Grubb) a fixed exchange rate.

In their “From Monetary Union to Financial Union in the United States,” John Landon Lane and Hugh Rockoff offer an excellent review of the literature on financial-market integration in U.S. history. Using regional interest rate data in conjunction with national interest rate and monetary data, they conclude that “the journey from monetary union to financial union was long and hard” (p. 65). This essay is clearly complementary to that of Grubb. It is unfortunate that neither essay comments on the other contribution.

Wearing his contributor’s hat, J?rgen Nautz’s topic is “Ethnic Conflicts and Monetary Unification in Austria-Hungary.” Much of the essay would be of interest only to the specialist; but one admires the attention to detail and the single-minded viewpoint centering on the interests of the various ethnic groups within Austria-Hungary and their influences on monetary arrangements and monetary policy. “Summing up, the monetary policy of the Austro-Hungarian Bank was very successful despite the lasting ethnical frictions in the political system” (p. 87).

Nuno Val?rio offers “The Escudo Zone: A Failed Attempt at a Colonial Monetary Union,” a history of the failure of a monetary union and free-trade area for Portugal and its colonies in 1960s. Well-considered tables help the reader appreciate the story. Notwithstanding the failed escudo-zone experiment, Portugal’s colonial empire did survive longer than the empires of other colonial powers. The author does not address the reasons for that accomplishment.

This reviewer did not learn much from the essay, “Trade, Money and Institutions for Conflict Resolution in Monetary Unions: The Gold Standard and European Integration Compared,” by C?dric Dupont and Carsten Hefeker. In contrast, Tal Sadeh’s contribution, “Managing a Common Currency: Political and Cultural Preferences,” is a useful survey article. There is much discussion of the functions of money; but implications of the survey for currency unions are drawn only in the concluding paragraphs and only in the form of generalizations.

The second editor, Lars Jonung, closes the volume with “The Political Economy of Monetary Unification: The Swedish Euro Referendum of 2003.” Via exit polls and official results for all of Sweden’s municipalities, Jonung shows that the theory of optimum currency areas is reflected in the voting patterns. “Yes” votes for the euro came from those employed in the tradable sector or private sector in general, and from high income people and well-educated individuals; “no” votes came from those employed in the non-tradable sector, low-educated people, and low-income individuals. Jonung also makes the excellent point that, with the world’s oldest central bank and a long history of good monetary management ? along with the stable forces of a monarchy combined with democracy ? Sweden (and the similarly situated countries Denmark and the United Kingdom) enjoys a profound internal respect for its national currency.

All in all, this volume merits praise for the solid research and readable exposition of the contributors.

References:

Grubb, Farley W. (2005). “State ‘Currencies’ and the Transition to the U.S. Dollar: Reply– Including a New View from Canada.” American Economic Review 95, pp. 1341-1348.

Michener, Ronald W., and Wright, Robert E. (2005). “State ‘Currencies’ and the Transition to the U.S. Dollar: Clarifying Some Conclusions.” American Economic Review 95, pp. 682-703.

Officer, Lawrence H. (2002). “The U.S. Specie Standard, 1792-1932: Some Monetarist Arithmetic.” Explorations in Economic History 39, pp. 113-153.

Lawrence H. Officer is Professor of Economics, University of Illinois at Chicago. He is Editor, Special Projects, EH.Net, and Director of Research, MeasuringWorth.com. His most recent book is Pricing Theory, Financing of International Organisations and Monetary History (Routledge, 2007).