The
Latin Monetary Union (1865-1920) is often dubbed the
ill-fated predecessor of the
European Monetary Union. However, the
principles the two worked on are quite different, and the LMU is really
better viewed as a subset of (and predecessor to) the
gold standard.
The story began when Belgium adopted the French franc in 1830.
Switzerland harmonized its currency to the franc in 1848 and Italy
joined in 1861, both retaining the names of their national currencies
but adjusting their values to match the franc. In 1865, this arrangement
was formalized as the Latin Monetary Union.
Greece and Bulgaria joined in 1867, and a number of states
(Spain, Romania, Austria, Finland, Venezuela, Serbia, Montenegro,
San Marino and the Vatican) issued currency following the conventions
without officially joining the Union.
The basic idea was that each
member country would have identical coinage made from gold and
silver. While the names of the individual currencies were kept, the
weights were identical, so 5 French francs were worth exactly the same
as 5 Italian lire and could be used through the Union like national currency (minus a 1.25% handling charge). Each country could
mint as many coins as it wanted, there being no risk of inflation due to the
intrinsic worth of the metal. The following coins were issued
throughout the Union:
Unit Weight % Au/Ag ASW/AGW USD*
0.5 2.5000 g. 0.835 silver 0.0671 oz 0.32
1 5.0000 g. 0.835 silver 0.1342 oz 0.63
2 10.0000 g. 0.835 silver 0.2685 oz 1.27
5 25.0000 g. 0.900 silver 0.7234 oz 3.42
10 3.2258 g. 0.900 gold 0.0933 oz 26.72
20 6.4516 g. 0.900 gold 0.1867 oz 53.47
50 16.1290 g. 0.900 gold 0.4667 oz 133.66
100 32.2580 g. 0.900 gold 0.9334 oz 267.32
* Based on gold and silver prices from the New York commodity market on January 16, 2002.
Seems like a great idea and it did work for over half
a century, but
in hindsight, the system had two crucial flaws that led to its downfall.
First, the exchange rate of gold to silver was fixed at 1:15.5,
which soon turned out to overvalue silver significantly.
(At time of writing the exchange
rate is 1:60, as you can see from the leap in real value between the 5 and 10 unit coins!)
The Union countries tried to unload their silver coins into other countries,
so they could profit by turning them into gold -- this led to the
suspension of silver convertibility and the move to a pure
gold standard.
However, the second, larger problem was that there was also a second set
of so-called subsidiary silver coins for smaller amounts, issued by
each country on its own and not fully convertible elsewhere. While
these coins had a lower silver content than the primary coins,
public offices of Union members were by law required to accept up to
100 units of them at face value per transaction, very much a loss-making
proposition for the receiving side. Also, while the ending of silver
convertibility stopped the minting of new silver coins, outstanding ones
remained legal tender. With the advent of World War I and the
massive financing strains involved, not to mention war between members
of the Union, the system collapsed totally, although it remained in legal
fiction until the end of the 1920s.
Since the euro has only one effective exchange rate, eliminating
problem 1, and a single monetary policy set by the
European Central Bank, eliminating problem 2,
it seems unlikely to share the fate of the LMU. It will be more
interesting to see if monetary union can survive without
political union...
References
http://digilander.iol.it/maggioref/latin%20monetary%20union.html
http://euro.pearl-online.com/English/union.html