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

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  • Hugh Rockoff

    ()
    (Rutgers)

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. 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. The United States, to put it differently, was not an optimal currency area. This pattern held until the 1930s when institutional changes, such as increased federal fiscal transfers and bank deposit insurance, changed the game. Political considerations, of course, ruled out separate regional currencies. 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 Rutgers University, Department of Economics in its series Departmental Working Papers with number 199910.

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Date of creation: 02 Aug 1999
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Handle: RePEc:rut:rutres:199910

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  1. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867-1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1, July.
  2. Wallis, John Joseph, 1989. "Employment in the Great Depression: New data and hypotheses," Explorations in Economic History, Elsevier, vol. 26(1), pages 45-72, January.
  3. Charles W. Calomiris, 1992. "Greenback Resumption and Silver Risk: The Economics and Politics of Monetary Regime Change in the United States, 1862-1900," NBER Working Papers 4166, National Bureau of Economic Research, Inc.
  4. Thomas Willett & Edward Tower, 1970. "Currency areas and exchange-rate flexibility," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 105(1), pages 48-65, September.
  5. Sushka, Marie Elizabeth, 1976. "The Antebellum Money Market and the Economic Impact of the Bank War," The Journal of Economic History, Cambridge University Press, vol. 36(04), pages 809-835, December.
  6. Charles Calomiris & David Wheelock, 1998. "Was the Great Depression a Watershed for American Monetary Policy?," NBER Chapters, in: The Defining Moment: The Great Depression and the American Economy in the Twentieth Century, pages 23-66 National Bureau of Economic Research, Inc.
  7. Frieden, Jeffry A., 1997. "Monetary Populism in Nineteenth-Century America: An Open Economy Interpretation," The Journal of Economic History, Cambridge University Press, vol. 57(02), pages 367-395, June.
  8. Friedman, Milton, 1990. "Bimetallism Revisited," Journal of Economic Perspectives, American Economic Association, vol. 4(4), pages 85-104, Fall.
  9. Forrest Capie, 1998. "Monetary Unions in Historical Perspective: What Future for the Euro in the International Financial System," Open Economies Review, Springer, vol. 9(1), pages 447-466, January.
  10. Mundell, Robert A, 1997. "Currency Areas, Common Currencies, and EMU," American Economic Review, American Economic Association, vol. 87(2), pages 214-16, May.
  11. Wyplosz, Charles, 1997. "EMU: Why and How It Might Happen," CEPR Discussion Papers 1685, C.E.P.R. Discussion Papers.
  12. Arthur J. Rolnick & Bruce D. Smith & Warren E. Weber, 1993. "In order to form a more perfect monetary union," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 2-13.
  13. Schweitzer, Mary M., 1989. "State-Issued Currency and the Ratification of the U.S. Consitution," The Journal of Economic History, Cambridge University Press, vol. 49(02), pages 311-322, June.
  14. Howard Bodenhorn & Hugh Rockoff, 1992. "Regional Interest Rates in Antebellum America," NBER Chapters, in: Strategic Factors in Nineteenth Century American Economic History: A Volume to Honor Robert W. Fogel, pages 159-187 National Bureau of Economic Research, Inc.
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Cited by:
  1. Claudia M. Buch, 2000. "Financial Market Integration in the US: Lessons for Europe?," Kiel Working Papers 1004, Kiel Institute for the World Economy.
  2. 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.
  3. 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.
  4. Eichengreen, Barry, 2008. "Sui Generis EMU," CEPR Discussion Papers 6642, C.E.P.R. Discussion Papers.
  5. 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.
  6. Holger Wolf, 2012. "Eurozone entry criteria after the crisis," International Economics and Economic Policy, Springer, vol. 9(1), pages 1-6, March.
  7. 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.
  8. 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.
  9. 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.
  10. 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.

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