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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.

Suggested Citation

  • Hugh Rockoff, 2000. "How Long Did It Take the United States to Become an Optimal Currency Area?," NBER Historical Working Papers 0124, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberhi:0124 Note: DAE IFM
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    Cited by:

    1. Tomasz Brodzicki, 2012. "On optimality or non-optimality of the eurozone," Working Papers of Economics of European Integration Division 1201, The Univeristy of Gdansk, Faculty of Economics, Economics of European Integration Division.
    2. 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 2008 - 2015 165, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    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. Barry Eichengreen, 2008. "Sui Generis EMU," NBER Working Papers 13740, National Bureau of Economic Research, Inc.
    5. 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.
    6. 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.
    7. repec:ejw:journl:v:7:y:2010:i:1:p:4-52 is not listed on IDEAS
    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, pages 732-746.
    9. Holger Wolf, 2012. "Eurozone entry criteria after the crisis," International Economics and Economic Policy, Springer, pages 1-6.
    10. Philip Haynes & Jonathan Haynes, 2016. "Convergence and Heterogeneity in Euro Based Economies: Stability and Dynamics," Economies, MDPI, Open Access Journal, vol. 4(3), pages 1-16, August.
    11. Duban F. Peña & Jaime Flórez Bolaños, 2006. "Integración Monetaria: Una Aproximación para Colombia, Ecuador, Perú y Venezuela," REVISTA DE ECONOMÍA Y ADMINISTRACIÓN, UNIVERSIDAD AUTÓNOMA DE OCCIDENTE, March.
    12. Elisabeth Christen, 2012. "Time zones matter: The impact of distance and time zones on services trade," Working Papers 2012-14, Faculty of Economics and Statistics, University of Innsbruck.
    13. Mulatu F. Zerihun & Marthinus C. Breitenbach & Francis Kemegue, 2014. "A Greek Wedding In SADC? Testing For Structural Symmetry Towards SADC Monetary Integration," The African Finance Journal, Africagrowth Institute, pages 16-33.
    14. Christian Rohe, 2016. "On shock symmetry in South America: New evidence from intra-Brazilian real exchange rates," CQE Working Papers 5316, Center for Quantitative Economics (CQE), University of Muenster.
    15. Buch, Claudia M., 2000. "Financial Market Integration in the US: Lessons for Europe?," Kiel Working Papers 1004, Kiel Institute for the World Economy (IfW).
    16. Zhao, Xueyan & Anderson, Kym & Wittwer, Glyn, 2002. "Who Gains from Australian Generic Wine R&D and Promotion?," 2002 Conference (46th), February 13-15, 2002, Canberra 125627, Australian Agricultural and Resource Economics Society.
    17. Heinz Handler, 2013. "The Eurozone: Piecemeal Approach to an Optimum Currency Area," WIFO Working Papers 446, WIFO.
    18. P. Butzen & S. Cheliout & H. Geeroms, 2014. "Lessons from the US for the institutional design of EMU," Economic Review, National Bank of Belgium, pages 82-101.

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    JEL classification:

    • N1 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations

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