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The euro has parents in history - it is far from being the first monetary integration attempt that Europe has seen. Others have been tried and have failed before. The euro’s predecessors can be found in the time of the first globalisation, from the second half of the 19th century on. The Latin and the Scandinavian Monetary Unions are two of them. If any conclusions can be derived from history, the prospects for the Euro seem fatal.

Euros_parents_n
Photo: joexx / photocase.com
If monetary unions were human beings, this is what the euro's parents from history might look like today.

Scandinavian Monetary Union (1873-1920)

In 1873, Denmark, Norway and Sweden founded the Scandinavian Monetary Union, agreeing to bind their currencies to gold at a certain rate. In effect, as all currencies had the same base, you could exchange your Swedish Riksdaler, your Danish Rigsdaler, or your Norwegian Speciadaler at a fixed rate to the newly-created common currency krona. However, there was no common gold coin: every country minted their own krona. In that regard, it is just like the euro.

The monetary union tied the countries closer together, not only because of the shared fixed exchange rates but also because the central banks accepted each other's drafts at the same value as if it was handed in at the bank that originally issued it. At that time, drafts were the way to transfer money between two people or two businesses, with the help of a bank in the middle. So the three central banks acted as one bank.

A union based on gold

These close ties, the gold standard and mutual acceptance of the drafts were the hallmarks of the Scandinavian Monetary Union. With the outbreak of World War I, however, the gold standard was abandoned. The states ceased to guarantee that they would back their currency with a certain amount of gold in their banks, and the limit on money in circulation was removed. The states could now issue more notes than they had gold in exchange for them. In the 1970s this led to the collapse of the post-World War II Bretton-Woods global monetary system; in the 1920s this led to the end of the Scandinavian Monetary Union.

Sticking to the status quo, the states were reluctant to change the official exchange rates.

Money trafficking for arbitrage

Danish 2 rigsdaler reverse
Photo: Recent coinage in the world / wikimedia
The reverse of a Danish two Rigsdaler coin from 1868. In the Scandinavian Currency Union it was worth 4 krona.

The idea behind abandoning the gold standard was to give the governments more leeway in their spending. Denmark and Norway borrowed money by heavily increasing the amount of krona in circulation compared to prudent Sweden. Due to these diverging monetary policies, the national krona currencies were not considered to be equally valuable any more. So for one Swedish krona you could in fact buy more than for one Norwegian krona. However, sticking to the status quo, the states were reluctant to change the official exchange rates. So clever people took their less valuable Norwegian and Danish gold coins and brought them over the border to the Swedish central bank to convert them into Swedish notes. The Swedish bank, however, had to buy the foreign coins according to the official conversion rate, and the Norwegian and Danish Krona were officially still at par with the Swedish. Hence the Swedish central bank constantly lost money. There were two possibilities: either avoiding this trading by limiting the free flow of gold coins over the borders or by abandoning the officially equal currency rates.

The ineffective gold embargo

In several meetings with the other central banks, the Swedish nagged their colleagues to restrict the trading of minted gold. Otherwise they threatened to quit the Union unilaterally. They succeeded and such a gold embargo was established. However, clever smugglers still systematically and illegally imported foreign gold coins to Sweden to convert them. Eventually, in the early 1920s, the fixed exchange rates between the countries were abandoned. Hence, due to pressure from Sweden, who regularly had to pay for the lax monetary policies of its partners, the common currency ceased to exist.

Next page: Why France is jealous of the UK and how they created a union that was doomed to fail.

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