Lessons for the Euro We Could Learn from the US HistoryAuthor: Kathryn Gaw
Ever since it was launched on 1 January 1999, the Euro has been under constant scrutiny. As the replacement currency for (then) 11 European economies (now 19), it instantly became one of the most influential currencies in the world. In fact, by 2008, the International Monetary Fund (IMF) had declared the Eurozone to be the second largest economy in the world, after the United States.
As the two most popular – and most traded – currencies, the Euro and the US Dollar are frequently feted for their similarities. Most recently, the relationship between the Euro and the Dollar has been up for analysis amid predictions of parity between the tumbling Euro and the Dollar.
The falling price of the Euro only goes to show just how volatile ‘new’ currencies can be, even in the Western world. And as the Eurozone continues to expand (Lithuania became the 19th country to adopt the currency in January 2015), its success becomes more and more important. More than 335 million Europeans use the Euro on a day to day basis, while hundreds of millions of others use currencies which are pegged to the Euro, and indirectly dependent on its stability. Therefore it is worth taking a look back to the early days of the Dollar in order to seek out a few lessons for the Euro as it grows and thrives.
A brief history of US monetary and financial history
The first US dollar was issued in 1775, with a valuation based on another European currency – the Spanish dollar. In its early days, one US dollar was worth one Spanish dollar, or eight reales. In fact, the Spanish dollar remained in legal use across the US for almost 80 years after the introduction of the new currency – until the Coinage Act of 1857 that the US dollar became the single currency. By contrast, following the introduction of the Euro, European countries had just two months to get rid of all their old currencies, and convert to the new system. Modern technology and the EU’ advanced financial systems certainly negate any need for a lengthy transfer period, but some countries (e.g. Portugal and Germany) were able to negotiate longer changeover periods for their banknotes, while others (e.g. Ireland) continued to accept the former currencies within their own economies long after the transferal deadline.
During the American Civil War (1861-1865), a series of banking laws were introduced in an effort to unify the economy amid one of the greatest political conflicts ever seen in the US. Between 1863 and 1866, the government created a system of national banks to replace the network of state banks. These banks were authorized to issue paper money, which was printed by the office of the Comptroller of the Currency – an early version of the Federal Reserve, or central bank. Around the same time, treasury notes were introduced so that banks could increase their liquidity during the war.
The Eurozone is also underwritten by a series of treasury notes, bonds and gilts but unlike the US dollar, it has remained more or less constant since it was founded in 1999. The dollar was forced to evolve along with the political developments of the New World, whereas the Euro has been able to take advantage of peace in Europe and a (largely) thriving economy over the past 17 years.
What can the Euro learn from the history of the Dollar?
Despite their similarities, the creation of the Euro was very different to the creation of the Dollar. While it was establishing its own currency, the US was also establishing itself as a nation, and an economic power distinct from the colonial powers of Europe. By contrast, the countries of the Eurozone were already economically (and politically) distinct before the arrival of their new currency.
Remember, while the dollar was in its infancy, the North American landmass was still being discovered. The frontier was expanding, and new sources of wealth were springing up across the country, as European explorers discovered gold mines, oil wells and millions of acres of arable land. This created a demand for credit and loans, as well as an easy to use monetary system whereby Americans could exchange their goods for cash. And that’s before the Civil War began, bringing with it a whole new set of economic problems.
In a lecture on this topic, Professor Jeffry Frieden noted that “fiscal and financial policy are…inherently political, especially during recoveries from debt crises,” and he warned that any monetary union is bound to be a long and arduous process .
With this in mind, the countries of the Eurozone should prioritize peaceful relations and avoid ‘quick fix’ solutions such as quantitate easing in times of economic difficulty. The Eurozone has already weathered the 2008 financial crisis, and faces a new challenge in the form of the Brexit. In order to protect the value of the Euro, these countries simply need to stick together through good times and bad.