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Lessons for the euro from early US monetary and financial history

The United States has a monetary union that many look to when considering the future of the EU. But how easy was it really to create such a union and



Professor Jeffry Frieden’s lecture highlighted that establishing a functioning monetary union in such a large and culturally-diverse country as the United States was a long, arduous, and crisis-laden process. The United States did not have a common currency until 1863, a modern central bank until 1913, or even a real fiscal union until the 1950’s.

Crafting a union which provided monetary, fiscal and financial stability was extremely hard in a country with massive macroeconomic divergences and banking fragmentation. In particular, the cultural differences between the economic centre of the country and its frontier, and their differing economic and political needs, created a lot of tension and disagreements on how to run monetary and fiscal policy: the frontier was expanding incredibly rapidly, which warranted easy credit and expansionary fiscal policy, while these policies were not seen as desirable by the creditors in the country’s more developed areas.

These differing economic situations, the balance of power between creditors and debtors, and the rise of economic populism ensured that the process towards the current financial and fiscal architecture of the United States was very slow and difficult, and are reminiscent of the current situation in Europe.

Professor Frieden drew a number of lessons for Europe from the American experience. Firstly, not everyone can be satisfied at all times: monetary policy is inherently political, and therefore it behoves us to think about the interests that are behind monetary policy. Fiscal and financial policy are also inherently political, especially during recoveries from debt crises.

Secondly, crafting a union is a long, hard road. The core difficulty in this process is the need to find a politically sustainable compromise between the legitimate concerns of the sub-units (states or nations), and the broader entity of the union. It took the United States an extremely long time and a civil war to resolve this issue.

Event summary by Álvaro Leandro, Research Assistant