How have previous currency unions dissolved?

by on February 26, 2010 at 7:30 am in Economics, History, Political Science | Permalink

Marc Flandreau writes:

This paper examines the historical record of the Austro-Hungarian monetary union, focusing on its bargaining dimension. As a result of the 1867 Compromise, Austria and Hungary shared a common currency, although they were fiscally sovereign and independent entities. By using repeated threats to quit, Hungary succeeded in obtaining more than proportional control and forcing the common central bank into a policy that was very favourable to it. Using insights from public economics, this paper explains the reasons for this outcome. Because Hungary would have been able to secure quite good conditions for itself had it broken apart, Austria had to provide its counterpart with incentives to stay on board. I conclude that the eventual split of Hungary after WWI was therefore not written on the wall in 1914, since the Austro-Hungarian monetary union was quite profitable to Hungarians.

Other gated versions you'll find here.  The bottom line is that collapse of the currency union stemmed from political factors, not economics.  Contra the author, I would say it was written on the wall.

I found this 1920 Economic Journal article, "The Disintegration of the Austro-Hungarian Currency," useful on the details of the transition.  The different parts of the Austro-Hungarian empire moved to different currencies by imposing capital controls and by stamping domestic currency to make it worth less.  That limits the bank run problem since moving into currency has no advantage and funds cannot be easily transferred in an advantageous manner.  Once all the money is stamped the currency has in effect been devalued.

Here is a paper on the collapse of the ruble zone, though it doesn't have much on transition dynamics.  I suspect the transition is much easier in the absence of free capital movements.

There is a Peter Garber IMF Working Paper on the economics of the Austro-Hungarian dissolution – apparently not on-line — which I am still trying to get my hands on.  Do any of you have a pdf?  At that previous link you'll find other references and links as well.

Addendum: Matt Yglesias covers the former Czechslovakia.

NC February 26, 2010 at 8:00 am

Eichengreen already made the point some years ago that the EMU is unique in several aspects and argues that comparisons with other historical examples are likely to be misleading.

Here’s the paper:
http://www.nber.org/papers/w13740.pdf

Badger February 26, 2010 at 10:04 am

Will Texas leave the Union so it doesn’t have to save California?

charlie February 26, 2010 at 12:35 pm

bizzare. I also thought E. Barandiaran was a South Indian.

Maybe if Obama took over the banking system he could get banks to invest in infrastructure projects…

D. Houska February 27, 2010 at 7:23 am

It’s Czechoslovakia! Greetings from Czech Republic.

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