A Latin lesson for the European Monetary Union

coinsDiary date: 13th October, 1985

Before I returned to university for my second year of French and Swedish, my friend Adrian and I decided we had time to spend a month seeing the sights of Europe courtesy of an InterRail card. There’s enough material in my diary for those four weeks alone to keep followthehumming going for years – from the quaint way we tried to communicate with friends and family while we travelled, through to the miles we walked just trying to find a map. One very concrete souvenir of the trip was a small bag of leftover foreign coins and notes which has spent the intervening years living with my diaries in the bottom of my wardrobe – and which these days contains the cash remnants of just about every country I’ve ever visited.

It’s all a far cry from today’s European Monetary Union and its near-ubiquitous Euro. Holidays and business trips are now devoid of the complications and local colour once provided by Francs, Deutschmarks, Schillings, Guilders, Markka, Drachma, Lira, Pesetas and the rest.

But it turns out that monetary union in Europe isn’t a new idea. The most recent attempt at something similar was in the mid-1860’s, when France, Belgium, Italy and Switzerland formed the Latin Monetary Union and agreed that their various currencies could be exchanged at a fixed rate. Silver and gold coins were minted according to strict regulations governing weight, fineness and denomination that made them interchangeable.

The club became larger a couple of years later when Spain and Greece joined in, and bigger still when Serbia, San Marino, Romania, Bulgaria, and (curiously) Venezuela were admitted in 1889.

It all sounds fine in principle, but as ever it wasn’t plain sailing. Arbitrageurs were needed to manipulate the market as the price of silver or gold fluctuated – a process which involved things like driving up the value of silver by removing coins from circulation or bringing additional gold to the mint to be turned into more coins.

The Union’s signatories didn’t help themselves either. Some members (mentioning no names, Greece and the Papal Treasury) started minting coins with less than the requisite quantity of silver, and then exchanging them for coins from other countries that had been minted in accordance with the regulations – all in the interests of a quick profit.  The tension between the changing price of silver relative to gold and the fixed exchange rate that operated within the Union eventually meant that it made sense to have silver minted into coins which could then be used to buy gold at a discounted rate. By then, the writing was well and truly on the wall.

By around 1878, the value of silver had declined so much that the minting of large silver coins was stopped altogether, meaning that the Union was, to all intents and purposes, on a Gold Standard.

In practical terms, the LMU lasted until 1914 and the chaos of the First World War, although it remained a legal entity until it was formally abandoned as late as 1927.

Just 28 years after my first European odyssey, my bag of coins feels genuinely anachronistic. Yet the lessons of the LMU certainly remain relevant in today’s turbulent financial markets. Questions of political and monetary union and the subsidisation of weaker economies are just as important today as they were at the tail-end of the nineteenth century.

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