How Long Did It Take the United States to Become an Optimal Currency Area?
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.
|Date of creation:||Apr 2000|
|Date of revision:|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Charles Wyplosz, 1997.
"EMU: Why and How It Might Happen,"
Journal of Economic Perspectives,
American Economic Association, vol. 11(4), pages 3-21, Fall.
- 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.
- Charles W. Calomiris & David C. Wheelock, 1997.
"Was the Great Depression a Watershed for American Monetary Policy?,"
NBER Working Papers
5963, National Bureau of Economic Research, Inc.
- 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.
- Penelope Hartland, 1949. "Interregional Payments Compared with International Payments," The Quarterly Journal of Economics, Oxford University Press, vol. 63(3), pages 392-407.
- 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.
- Mundell, Robert A, 1997. "Currency Areas, Common Currencies, and EMU," American Economic Review, American Economic Association, vol. 87(2), pages 214-16, May.
- 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.
- 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.
- Thomas Willett & Edward Tower, 1970. "Currency areas and exchange-rate flexibility," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 105(1), pages 48-65, September.
- 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.
- 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.
- 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.
- Friedman, Milton, 1990. "Bimetallism Revisited," Journal of Economic Perspectives, American Economic Association, vol. 4(4), pages 85-104, Fall.
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberhi:0124. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.