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5 Franc coin Napoleon III 1868 front5 Franc coin Napoleon III 1868 back
Photo: wikipedia (CC-SA)
The French 5 franc coin from 1868, featuring the main creator of the Latin Monetary Union, Napoleon III, on the front.

Latin Monetary Union (1865 - 1926)

An even larger and earlier monetary Union was the Latin Monetary Union. The key country behind it was politically dominant but economically weak France, which was governed as the Second French Empire since 1852 by Napoleon III. While the industrial revolution roared in the net-exporters Switzerland and Belgium, the French economy looked rather weak, with their imports for years regularly outnumbering their exports, according to the German economist Theresia Theurl.

Economic integration as the remedy for French jealousy

Hence, the French peered over the channel to England with fascination and jealousy. They regarded the City of London as financially dominating the world by lending money to Chile, Peru, Austria, Spain, Turkey and Portugal. France hoped to imitate this libéralisme d’argent (monetary freedom) at the Paris Bourse. But besides all these French power aspirations, the creation of the Latin Union was a result of trade integration, the free trade movement prevalent at that time, and France's large capital supplies. It was founded in 1865 by France, Belgium, Italy and Switzerland. In 1868, Greece joined the Union, together with Spain, three years after it was founded. Just like with the euro, which Greece joined in 2002 instead of 1999.

When the states faced a dilemma between Union or national interest, they pursued their national interest.

Denying the Pope accession

The Union was regulated by a treaty. It provided strict ‘criteria’ according to which the states were only allowed to mint a certain number of coins. This amount had to correspond to the reserves of gold and silver possessed by the central banks. Every participating state had informational duties to report the activities of its national mint. And especially during the admission of new members, these criteria were carefully monitored. The Papal States, predecessors of the Vatican, were ejected from the Union, because they minted six times as many coins as they were allowed to.

Doomed to fail

The Union never really worked, however; it disintegrated over time. When the states faced a dilemma between the Union and national interest, they pursued their national interest. Sanction or control mechanisms were not present, the treaty was incomplete and the provisions were subject to unilateral interpretation. Each read the treaty to their own advantage.

Trading on Europe markets
Photo: Max Strohmeier
Lubricating trade, or lowering transaction costs, as economists put it, was the intention behind the Latin Monetary Union, as it was for most currency unions.

Already in the late 1860s, when Italy was engaged in a costly war with Austria, it took up a credit from its Banca Nazionale, freeing her in return from her obligation to back the currency with gold. This led to a similar result as in the Scandinavian Monetary Union: the value of the Italian money in the Union dropped. Also, at other occasions, the countries showed diverging monetary policies at the expense of more prudent participants. The treaty left it open as to whether this was forbidden or not. France followed with similar behaviour during the war against Germany from 1870 on. The Union's continued existence seemed doomed to fail. In practical terms it ended much earlier, before World War I, and was only shut down on paper in 1926.

Next page: Why the euro is different in important aspects.

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