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How Long Did It Take the United States to Become an Optimal Currency Area?

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  • Hugh Rockoff

Abstract

The United States is often taken to be the exemplar of the benefits of a monetary union. Since 1788 Americans, with the exception of the Civil War years, have been able to buy and sell goods, travel, and invest within a vast area without ever having to be concerned about changes in exchange rates. But there was also a recurring cost. A shock, typically in financial or agricultural markets, would hit one region particularly hard. The banking system in that region would lose reserves producing a monetary contraction that would aggravate the effects of the initial disturbance. Plots of bank deposits by region show these patterns clearly. Often, an interregional debate over monetary institutions would follow. The uncertainty created by the debate would further aggravate the contraction. During these episodes the United States might well have been better off if each region had had its own currency: changes in exchange rates could have secured equilibrium in interregional payments while monetary policy was directed toward internal stability. It is far from clear, to put it differently, that the United States was an optimal currency area. This pattern held until the 1930s when institutional changes, such as increased federal fiscal transfers (which pumped high-powered money into regions that were losing reserves) and bank deposit insurance, addressed the problem of regional banking shocks. Political considerations, of course, ruled out separate regional currencies in the United States. But thinking about U.S. monetary history in this way clarifies the nature of the business cycle before World War II, and may suggest some lessons for other monetary unions.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Historical Working Papers with number 0124.

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Date of creation: Apr 2000
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Handle: RePEc:nbr:nberhi:0124

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Cited by:
  1. Lars Jonung, 2002. "EMU and the euro - the first 10 years. Challenges to the sustainability and price stability of the euro area - what does history tell us?," European Economy - Economic Papers 165, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  2. Barry Eichengreen, 2008. "Sui Generis EMU," NBER Working Papers 13740, National Bureau of Economic Research, Inc.
  3. Holger Wolf, 2012. "Eurozone entry criteria after the crisis," International Economics and Economic Policy, Springer, vol. 9(1), pages 1-6, March.
  4. Shambaugh, Jay C., 2006. "An experiment with multiple currencies: the American monetary system from 1838-60," Explorations in Economic History, Elsevier, vol. 43(4), pages 609-645, October.
  5. Tomasz Brodzicki, 2012. "On optimality or non-optimality of the eurozone," Working Papers 1201, Economics of European Integration Department, Faculty of Economics, University of Gdansk, Poland.
  6. Frankel, Jeffrey, 2004. "Real Convergence and Euro Adoption in Central and Eastern Europe: Trade and Business Cycle Correlations as Endogenous Criteria for Joining EMU," Working Paper Series rwp04-039, Harvard University, John F. Kennedy School of Government.
  7. Claudia M. Buch, 2000. "Financial Market Integration in the US: Lessons for Europe?," Kiel Working Papers 1004, Kiel Institute for the World Economy.
  8. Beckworth, David, 2010. "One nation under the fed? The asymmetric effects of US monetary policy and its implications for the United States as an optimal currency area," Journal of Macroeconomics, Elsevier, vol. 32(3), pages 732-746, September.
  9. Graham Bird & Ramkishen Rajan, 2002. "The Evolving Asian Financial Architecture," Centre for International Economic Studies Working Papers 2002-03, University of Adelaide, Centre for International Economic Studies.
  10. Drazen Derado, 2009. "Financial Integration and Financial Crisis: Croatia Approaching The EMU," Financial Theory and Practice, Institute of Public Finance, vol. 33(3), pages 299-328.

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