Inside Story: The price of a dollar: Europe's fight for a single currency mirrors the long US struggle for monetary union. Lisa Vaughan and Gail Counsell look at the hard road of the greenback

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The Independent Online
THEY should have asked George III. Long before the ecu was even a twinkle in the eye of a Eurocrat, the old king was merrily overstamping foreign coins with his own imprimatur and putting them into circulation in Great Britain. No one fussed then about loss of monetary sovereignty or the dangers of an alien currency subverting national identity.

Realpolitik may yet render a single European currency an idea whose time has gone. But with the passing into law of the Maastricht treaty last week, almost all the member states of the new European Union are committed to ditching their marks, guilders, francs and lire, and replacing them with a single currency before the millennium is out.

Britain and Denmark may or may not be part of that process. But in theory at least, the majority are now on course for monetary union in 1999 if not 1997.

From the controversy that has surrounded it, observers could be forgiven for thinking such a move was unprecedented. Yet history is full of instances where a single currency has come to dominate a multi-currency zone.

Usually it has been an evolutionary process. It was not only King George who used foreign currency when local coins ran short. For centuries it was normal practice in many areas for a number of currencies to be in circulation at the same time.

Since the precious metal content of different coins would vary, some were more desirable and trustworthy than others.

Of all currencies, the development of the dollar, a process by which more than 50 independently minded American states and territories have submerged their differences in a single currency, stands out as one of the most fascinating. According to some advocates of a single European currency, it is a tale that provides hope for the new Union.

The story begins with the earliest settlers. From the beginning of the new nation, dozens of different currencies were in circulation.

Refugees landing on what is now the US east coast in 1607 came primarily from England, the Netherlands, France and Spain. With them they brought the coins of their mother countries. These they continued to use in their new home, attaching to them the relative values to which they had been accustomed.

But the initial supply of coins soon proved inadequate, and settlers were forced to turn to barter to effect transactions.

Tobacco, animal furs, fish, grain, gun shot and powder, cattle and farm produce were used to buy goods and services - even to pay taxes.

Wampum, Indian beads made of the inner whorl of seashells - probably the most famous of all these quasi-currencies - was adopted as legal tender in the state of Massachusetts in the 1600s and was widely used elsewhere in New England.

Virginia used tobacco, the source of the colony's early prosperity. Lonely settlers seeking a wife paid for their brides' passage from the Old World at the rate of 100-150 lbs of tobacco per bride. It became the most important commodity currency in the southern seaboard colonies until it was devalued by overproduction.

Even though goods were the method of payment, prices were still reckoned in home currencies. In New Amsterdam (now New York), for instance, the Dutch valued their goods in guilders and stivers. Swedes in Delaware used dalers and skillings; the English in New England counted in shillings and pence; and in the Gulf of Mexico, French settlers reckoned in livres, picaillons and sous.

Yet using perishables as money was awkward and impractical. So when growing international trade in the mid-1600s, especially the 'triangular trade' between New England, Africa and the West Indies, brought an influx of much- needed silver and gold coins into the colonies, they were eagerly seized on by merchants.

These coins gradually replaced the use of commodities as money, and most of the laws making commodities legal tender for paying debts and taxes were repealed by the turn of the century.

The most common coins arriving as a result of the triangular trade were Spanish silver pieces from the West Indies, known as pesos, piastres, or eight-real pieces - nicknamed 'pieces of eight' by the English. They were minted in Spain, Peru, and Mexico, and eventually became the main source of hard money in the nascent American states. It was these coins which were to become known as 'dollars'.

'Dollar' is a form of the German word thaler, a shortened version of Joachimsthaler. This was a silver coin - also known as a daler, dalder or talero - made from metal mined in a Bohemian valley called Joachimsthal, which circulated in Germany during the 17th century.

The original silver thaler, when used in the Americas, became known as the 'dollar', but dollar progressively came to refer simply to any silver coin of a certain size and weight - the commonest of which was the Spanish piece of eight.

By 1650, Virginia, Massachusetts and Connecticut had made Spanish coins legal tender. They were so influential in the century before independence that when Americans designed their own silver dollar in the late 1700s, they copied the Spanish coin's size and value. The similarities helped in the eventual acceptance of the US dollar as the official currency.

Not that the popularity of the Spanish coin was restricted to the US. Coinage was scarce at times in the European mother countries as well, and they used what was most plentiful. It was on top of a Spanish American eight-real piece or 'dollar' that George III famously stamped his own head when the British Treasury ran short of silver coins towards the end of the 18th century.

Growing inter-state commerce in the colonies became increasingly complicated by their autonomous financial arrangements. For a long time accounts were kept in a variety of currencies, the most common being pounds, shillings and pence since the English by then far outnumbered other colonists. And barter trading, of furs and pelts for instance, still occurred in some colonies.

With no body to fix exchange rates, merchants bartering across borders had to decide for themselves whether they were using Philadelphia or New York currency and then come to an agreement on their relative values.

The situation was compounded by the fact that there were still not enough coins to go around. Until 1750 the European powers - England, the Netherlands, Spain and France - practised mercantilism, a system of closed markets and trade barriers that exploited their own colonies and shut out other colonial powers.

Their colonies were forbidden to trade with any country but the mother country. At that time, a nation's wealth was thought to depend on its stock of gold and silver. England, short of coins itself, nevertheless contrived to sell the American colonies more goods than they bought, gradually draining them of foreign coins.

Against this background, some states started minting their own coins, which contained varying amounts of precious metals and so were of varying desirability. When America declared independence from Britain in 1776, the United States was still using a wide variety of coins and money systems.

The war was to be the defining event in the development of a single currency. The coins in circulation were not enough to finance war expenses. So the Continental Congress, which directed the war, decided to issue paper money that would supposedly be repaid in Spanish silver dollars after the war.

The first bills issued, in 1775, were called Continentals. By 1779, dollars 241m-worth were in circulation. But they became worthless after the war because many more had been printed than could be redeemed by silver coins. Their devaluation gave rise to the saying, 'It's not worth a Continental.'

Rich and poor alike suffered ruinous financial losses from the Continental's devaluation, while speculators and fraudsters profited. Riots erupted, as in Philadelphia in 1779 in full view of the Congress in session.

Eventually, foreign coins given as war aid and loans by France, the Netherlands and Spain replaced the useless paper as money after the war.

The biggest problem in establishing a single currency was the lack of an appropriate federal authority to deal with monetary matters. The Continental Congress acted as a de facto government until 1779 when it was sanctioned by the Articles of Confederation. This document curbed the independence of individual states and empowered Congress to borrow money, issue paper money and fix the value of money issued by it or the states.

But the system still remained decentralised. Without the power to tax, Congress still had to ask the states for money. It tried to establish the dollar as currency, but did not have the authority to crack down on the states to stop foreign coins from being used.

In 1787, the Constitution still guiding the United States today was drafted, giving the government the authority it needed to rule over the states. It established a strong central government with the power to tax and to mint currency.

In 1791, a Bank of the United States was also set up, modelled on the Bank of England and given a 20-year charter. A year later the first mint was established in Philadelphia, the earliest capital of the US, and it was there in the following year that the first US silver and gold dollars were minted.

But the dollar was still on shaky ground. The number of freshly minted coins was inadequate, and Spanish coins were still circulating well into the 1800s.

Moreover, many of the states resented the powers given to the central bank and wanted to establish their own banks instead. Tensions were such that the bank's charter was not renewed when it expired in 1811 and it required a renewed period of chaos, in which there was profligate printing of paper money by competing banks, before the Bank of the United States was given a second chance in 1816.

The renewed central bank was still an object of suspicion, however, and in 1832 President Andrew Jackson broke it up into a number of state banks. The move sowed the seeds of the fragmented US banking system that continues to today.

America's economic and monetary development - including that of its currency - mirrored its constitutional formation. The original 13 colonies had originally agreed to unite for the war effort in the Continental Congress in the early 1770s. A common political and economic aim - to slip the mother country's noose and achieve economic independence - bound them together. As new states were added, they were obliged to honour the constitution and the federal government's rules.

With the outbreak of the Civil War in 1861, the northern and southern states began printing their own paper money. The Confederate money was valued in terms of cotton, the South's main cash crop at the time. The northern currency was called 'patriotic tokens' or 'trade tokens' and bore slogans such as 'Union Forever'.

At the same time, the federal government began its first issue of banknotes for widespread circulation. These original, elaborately printed greenbacks went out of circulation quickly as they were redeemable for gold. So in 1862, the government put out a new issue called 'legal tenders', which were not redeemable.

After the war-time experience, people disliked paper money and preferred carrying gold coins well into the 20th century. Until the Great Depression in 1929, legal tenders also competed with the banknotes issued by thousands of state and private banks (many of which failed in the 1930s), federal reserve notes printed by the US Federal Reserve system created in 1913, and gold and silver certificates. But the banks established under state laws were obliged to back their notes with precious metals.

The US Federal Reserve System was set up by Congress to control the burgeoning money supply. The new central bank issued its own paper money, federal reserve notes, to assert its authority over the state banks, though they still competed with legal tenders for several decades.

Robert Hoge, curator of the American Numismatic Association, says it was not until the 1960s that the Fed established an effective monopoly in the issue of notes and coins.

Given the dollar's turbulent history, American views on Europe's chances of moving successfully to a single currency are generally sceptical. Despite the evolutionary nature of the dollar's development, Professor Edward Cook of the University of Chicago points out that a single currency only began to take off in the 1790s, when a strong central government was established.

'Its effectiveness varied in proportion to the power of the government. As long as Europe has numerous sovereign states with their own economic policies, a single currency is going to be very difficult.'

But there are some parallels between the early US history of competing currencies and the present evolution in Europe. Indeed, some people argue that competing currencies are the right way forward - look at the 'hard ecu' proposal developed by John Major, the Prime Minister.

That envisaged an ecu whose value would be maintained at the level of the strongest EU currency. As the most reliable currency, he argued, it could in due course come to dominate the others.

Yet that is not the way that has been chosen by the EU, in part because economic history suggests that the conditions in which a new currency replaces another well-established one are very rare.

It has happened for short periods in Israel and in Latin American countries, but only when there has been raging hyper-inflation and the local currency has become inconvenient. Since most EU countries (though not the British government) want a single currency to replace their own they opted for a different, more reliable route.

There is also a big difference between competing currencies in an era when most of them can be exchanged for gold - in effect, they are just credit notes for gold - and currencies backed only by the reputation and credibility of their governments and central banks.

The German mark is perceived to be a good store of value not because it can be exchanged for a fixed amount of gold, but because the Bundesbank keeps its value stable in terms of a selection of goods and services.

There are also historical roots to the European preference for a politically determined move to a single currency. The dominant economic force within the Union is Germany, and the history of the development of Germany's own currency is a story of a predominantly revolutionary approach.

Successive monetary reforms of the Reichsmark after the Weimar inflation and of the Deutschmark after the Second World War have bequeathed the Germans a currency they trust.

The mark was a compromise. Unlike the US, where a single currency had its origins in competing currencies, the establishment of the mark as the currency for Germany was primarily an act of political will.

In the middle of the 19th century, Germany was a bewildering collection of fiefdoms, the larger, most notably, dominated by the state of Prussia.

But in currency terms, two zones had evolved by the time the state of Germany came into being in 1871 - the northern states, which used the renowned 'thaler' and the southern states, which subscribed to the 'guilder'.

The act of unification, agreed on by the German states, was accompanied by a determination to have a single currency for the new united Germany. But which? Rivalry between the north and the south was strong, and neither would agree to accept the other's currency.

So they settled on the mark, a choice which signified more than simply a name. For the mark was not a currency but a weight measure of gold and silver, and the 19th century was also the period when gold came to dominate monetary systems.

The Franco-Prussian war in 1870-71 led to the payment of war reparations by France. It paid in gold: at the same time the amount of gold in circulation expanded massively thanks to gold discoveries in California and Australia. As a result there was suddenly enough gold to back currency in circulation. The mark was hence an obvious choice.

And in a move eerily reminiscent of another German reunification, more than a century later, the thaler and the guilder were given the same value - roughly 31 3 to the mark.

Admittedly, that parity was the product of an earlier political decision. From the 1840s onwards the German states and Austria had formed a trade and currency bloc - a bloc which stemmed from their growing cross-border trade. Internal trade barriers were abolished and exchange rates between the different currencies were fixed.

To that extent, the German experience may provide a model for the way in which European currency union is likely to happen. In the wake of the departure of so many EU currencies from the exchange rate mechanism, the old route march laid down in the Maastricht treaty - steadily more closely fixed parities culminating in the ultimate fixed parity of monetary union - is looking a lot less credible.

But that does not rule out a rapid monetary union even on the Maastricht time-scale. There are several EU economies whose economic - and particularly inflation - performance is very similar, such as Germany, France and the Benelux countries.

They would have little difficulty even now in adopting the same currency and interest rates if they decided to do so.-

(Photograph omitted)

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