------------ EH.NET BOOK REVIEW --------------
Published by EH.NET (April 2007)

Lars Jonung and J???rgen Nautz, editors, _Conflict Potentials in 
Monetary Unions_. Stuttgart: Franz Steiner, 2007. 181 pp. ???34 
(paperback), ISBN: 978-3-515-09002-5.

Reviewed for EH.NET by Lawrence H. Officer, Department of Economics, 
University of Illinois at Chicago.


This relatively short book contains seven papers on monetary unions, 
most of which will be of interest to economic historians. The 
editors, writing individually, account for two of the seven papers. I 
use the term "papers" advisedly, because the papers are not 
enumerated as chapters. In fact, although the editors (Lars Jonung, 
Research Adviser at the European Commission, and J???rgen Nautz, a 
faculty member at the University of Vienna) are to be commended for 
assembling a group of interesting papers, some editorial decisions 
detract from the usefulness of the volume. In particular: (1) The 
papers are not organized into sections or parts of the overall work, 
so relationships among the papers are not emphasized. Jonung does 
some thematic discussion in his introduction to the volume; but most 
of that essay is a paper-by-paper summary of the individual-author 
contributions. Further, Jonung's discussion is expositional rather 
than critical. (2) Although the acknowledgements state that "several 
of the chapters of this book have emerged from papers presented at 
the conference [with the same name as the book title]," the volume 
presents no comments on, or exchange of views about, the various 
papers. (3) There is no index -- a serious flaw for any scholarly 
book, in my view. (4) There is neither a common list of references 
nor individual-chapter lists of references. All bibliographical 
references are in footnotes. (5) In some "chapters," tables and 
figures are placed at the end of the paper; in other chapters, they 
are embedded within the text. Such lack of uniformity can be 
confusing to the reader. (6) The contributors were allowed to be 
uneven in their methodology with respect to each other. For example, 
some authors adopt modern time-series analysis; others make 
less-sophisticated use of quantitative information. Also, some papers 
are heavily oriented to specific historical experiences; others make 
use of history only in passing. On the positive side, there is a 
paragraph-length bibliography of each of the contributors to the 
volume.

In fairness to Jonung, his summation of the lessons of the papers, 
although short, is perceptive. First, monetary unification and 
resulting adjustment are long-run processes. Second, monetary 
unification is an exercise in political economy, not just in 
economics: "Politics is commonly driving monetary marriages as well 
as monetary divorces. In short, money is an inherent political 
matter. This message emerges from every chapter of the book" (p. 17). 
Third, internal distribution issues are important in decisions 
regarding currency and monetary arrangements.

Something should be said about each paper; but the space devoted to 
each reflects the interest of this particular reviewer. The 
contribution of Farley Grubb ("The Constitutional Creation of a 
Common Currency in the U.S.: Monetary Stabilization versus Merchant 
Rent-Seeking") is well-written, interesting and provocative. He 
writes: "This evidence indicates that the formation of the U.S. 
currency union had more to do with usurpation of state sovereignty 
for the personal gain of merchant-bankers than with solutions to 
monetary instability and transactions costs within the union" (p. 
19). Grubb views the monetary policy of the colonies, and later, 
individual states, as credible and responsible, compared to that of 
the post-Constitution United States. His views have been vigorously 
attacked in the literature (Michener and Wright, 2005) and equally 
vigorously defended (Grubb, 2005); but Grubb's contribution in the 
volume makes no mention of this particular literature. In fairness 
again, the reason might be lag in publication (the conference 
underlying the volume occurred in 2001 and 2002); but, given the long 
lag, the authors of contributions could have been given the 
opportunity to revise their essays in the light of recent literature. 
Grubb's paper is also useful in its provision of excellent 
bibliographical references and a good, though short, summary of 
colonial monetary history.

Grubb makes the following point (among others) regarding the source 
of U.S. monetary instability in the post-Constitution 
[pre-Federal-Reserve?] era: "The U.S ... had no regulation of banking 
specie-reserve to bank-note-loan ratios" (p. 24). This reviewer 
(Officer, 2002) computed the "pyramiding ratio" monetary base to 
specie stock for, among other periods, 1792-1810 (First Bank of the 
United States, FBUS), 1817-1838 (Second Bank of the United States, 
SBUS), 1862-1878 (greenback) and 1879-1913 (gold standard). The mean 
ratio is, in order, 1.22, 1.27, 3.72, 2.17. The coefficient of 
variation of the ratio is, in order, 6.86, 11.45, 42.77, 14.80. From 
the standpoint of monetary discipline, the ideal ratio would have a 
"zero coefficient of variation around a unitary mean" (Officer, 2002, 
p. 136). So the FBUS and SBUS periods come closer to this ideal than 
the polar monetary standards of a free float and gold standard. The 
implication is that the problem with the Constitutional monetary 
system was lack of a central bank (ameliorated by the FBUS and SBUS 
acting in that role) rather than (as argued by Grubb) a fixed 
exchange rate.

In their "From Monetary Union to Financial Union in the United 
States," John Landon Lane and Hugh Rockoff offer an excellent review 
of the literature on financial-market integration in U.S. history. 
Using regional interest rate data in conjunction with national 
interest rate and monetary data, they conclude that "the journey from 
monetary union to financial union was long and hard" (p. 65). This 
essay is clearly complementary to that of Grubb. It is unfortunate 
that neither essay comments on the other contribution.

Wearing his contributor's hat, J???rgen Nautz's topic is "Ethnic 
Conflicts and Monetary Unification in Austria-Hungary." Much of the 
essay would be of interest only to the specialist; but one admires 
the attention to detail and the single-minded viewpoint centering on 
the interests of the various ethnic groups within Austria-Hungary and 
their influences on monetary arrangements and monetary policy. 
"Summing up, the monetary policy of the Austro-Hungarian Bank was 
very successful despite the lasting ethnical frictions in the 
political system" (p. 87).

Nuno Val???rio offers "The Escudo Zone: A Failed Attempt at a Colonial 
Monetary Union," a history of the failure of a monetary union and 
free-trade area for Portugal and its colonies in 1960s. 
Well-considered tables help the reader appreciate the story. 
Notwithstanding the failed escudo-zone experiment, Portugal's 
colonial empire did survive longer than the empires of other colonial 
powers. The author does not address the reasons for that 
accomplishment.

This reviewer did not learn much from the essay, "Trade, Money and 
Institutions for Conflict Resolution in Monetary Unions: The Gold 
Standard and European Integration Compared," by C???dric Dupont and 
Carsten Hefeker. In contrast, Tal Sadeh's contribution, "Managing a 
Common Currency: Political and Cultural Preferences," is a useful 
survey article. There is much discussion of the functions of money; 
but implications of the survey for currency unions are drawn only in 
the concluding paragraphs and only in the form of generalizations.

The second editor, Lars Jonung, closes the volume with "The Political 
Economy of Monetary Unification: The Swedish Euro Referendum of 
2003." Via exit polls and official results for all of Sweden's 
municipalities, Jonung shows that the theory of optimum currency 
areas is reflected in the voting patterns. "Yes" votes for the euro 
came from those employed in the tradable sector or private sector in 
general, and from high income people and well-educated individuals; 
"no" votes came from those employed in the non-tradable sector, 
low-educated people, and low-income individuals. Jonung also makes 
the excellent point that, with the world's oldest central bank and a 
long history of good monetary management -- along with the stable 
forces of a monarchy combined with democracy -- Sweden (and the 
similarly situated countries Denmark and the United Kingdom) enjoys a 
profound internal respect for its national currency.

All in all, this volume merits praise for the solid research and 
readable exposition of the contributors.

References:

Grubb, Farley W. (2005). "State 'Currencies' and the Transition to 
the U.S. Dollar: Reply-- Including a New View from Canada." _American 
Economic Review_ 95, pp. 1341-1348.

Michener, Ronald W., and Wright, Robert E. (2005). "State 
'Currencies' and the Transition to the U.S. Dollar: Clarifying Some 
Conclusions." _American Economic Review_ 95, pp. 682-703.

Officer, Lawrence H. (2002). "The U.S. Specie Standard, 1792-1932: 
Some Monetarist Arithmetic." _Explorations in Economic History_ 39, 
pp. 113-153.


Lawrence H. Officer is Professor of Economics, University of Illinois 
at Chicago. He is Editor, Special Projects, EH.Net, and Director of 
Research, MeasuringWorth.com. His most recent book is _Pricing 
Theory, Financing of International Organisations and Monetary 
History_ (Routledge, 2007).

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