Britain and European Monetary Union

What are the prospects for European Monetary Union and why, when other countries were clamouring to be in at the start of the Euro, is Britain so reluctant to participate? Perhaps the best way to judge is to study the lessons of history and how the British experience differs from that of most other countries in Europe since, for good or ill, a nation's past inevitably influences its attitude to the present and the future.

The Long History of the Pound Sterling
Whereas France had a single national currency for a brief period during the reigns of Pepin and Charlemagne, England has enjoyed a relatively stable single national currency with an unbroken history of over 900 years, and the origins of the pound Sterling go back even further still.

The Viking invasions and the need to pay Danegeld or to pay for defence caused an enormous increase in the production of coins in England. Athelstan had no fewer than 30 mints in operation and in order to keep control of them all the Statute of Greatley was passed in 928, stating that there was to be only one single type of money or currency in England, and ever since there has been just one. This was many centuries before the history of the currencies now used in other major European countries started.

"...England became the first of the major countries of Europe to attain a single national currency in post-Roman times. However the renewed incursions of the Danes postponed the uninterrupted establishment of this principle until 1066. Even so the achievement of a uniform national currency in England preceded that of France by more than 600 years, and of Germany and Italy by nearly 900 years: a factor perhaps in Britain's instinctive reluctance to embrace a single European currency today."
The quotation is from page 130 of the book by Glyn Davies that is used as the source of the information in this essay.
Davies, Glyn. A history of money from ancient times to the present day, 3rd ed. Cardiff: University of Wales Press, 2002. 720 pages. ISBN 0-7083-1717-0 (paperback), ISBN 0-7083-1773-1 (hardback).
As the author explains on page 444:
"Most European countries, large or small, have repeatedly had to carry out changes which have drastically altered their internal currencies... However, the pound as a unit of account has never had to be replaced by a "new pound" or any other designation in 1,300 years, in contrast to the French franc or the various German currencies such as the Reichsmark, Rentenmark, Ostmark and Deutschemark, to mention merely some of the more modern changes."

The Pound Sterling as an International Currency
"A second basic difference between sterling and continental currencies springs from the fact that the pound had been paramount in international trade for two hundred years but remained (except for Scandinavia and Portugal) relatively unimportant in intra-European trade."

On page 445 the author continues:

"Throughout the long era of sterling supremacy it was the other countries that had in the main to adapt their currency arrangements to fit in with sterling. From 1945 to 1972 Britain, like other countries, had to fit its currency to the exigencies of the dollar. From the time that Britain belatedly entered the EEC on 1 January 1973 she too had to undergo the difficult transition involved in adapting sterling to the currency arrangements of her EEC partners, a change in attitude greater than that required from these other participants."

History of Previous European Currency Unions
"Continental Europeans have long been accustomed to currency unions: for Britain before 1990 they have been either unnecessary or peripheral. Thus in 1861, under French initiative, a Latin Monetary Union was formed comprising France, Italy, Belgium, Switzerland and Greece. The primary gold and silver coins of each country were made legal tender and circulated throughout the Union, though subsidiary, token coins were legal only within their own country. The Union lasted until the 1920s, by which time the strains of wars and the widening differences between the value of gold and silver caused its gradual demise. A rather similar pattern was seen in the Scandinavian Monetary Union formed in the 1870s, until, under similar pressures it was effectively dissolved by Sweden in 1924. By far the most successful of all such currency unions, but embracing much more than just the currency, was the Zollverein of 1834, whereby the separate currencies, weights and measures of the previously independent German states were gradually combined leading to the unification of Germany in 1871, with the chief Prussian bank becoming the Reichsbank." (Page 445).

Destruction and Reform of European Currencies
On pages 445 and 446 Glyn Davies writes:

"During and immediately after ... [the Second World War] almost every country on the European continent experienced the destruction and reform of their currencies. Germany reformed her currency in 1948 (on which her subsequent success was based) after having suffered two hyperinflations in a generation. The former German-occupied countries, from France to Norway, got rid of their wartime inflation by means of overnight currency reforms whereby their grossly inflated wartime currencies were reduced by up to a hundredfold or more, thus not only providing the basis for a sound new currency but also penalizing collaborators, profiteers, tax-evaders and similar unworthy holders of swollen money balances. At the same time, it provided the grandest and most perfect example of the effectiveness of the quantity theory of money administered at a stroke and, most unusually, in a price reducing manner. Thus in glaring contrast to the British, most continental families or their parents have personally experienced drastic currency reform, followed by unprecedented growth in their living standards. For them EMU was just another logical step, not the leap in the dark it seemed to a considerable section of British opinion, especially among the older more influential generation."

The Strength of the Deutschemark
The recent history of their country also explains why the Germans attach such importance to maintaining a strong currency.

"Because Germans for two periods within living memory have suffered the devastating economic, social and political effects that followed from the complete breakdown of their monetary system, the people in general have become highly sensitive to the dangers of inflation and have therefore accepted, not with evasion or reluctance, but with ready co-operation, the disciplines imposed by their central bank to ensure the stability of the currency." (page 567).

Longer-Term Changes in Currencies
With Britain's head start in the Industrial Revolution, developments in banking, her victory over her most powerful rival in the Napoleonic Wars, and the spread of the British Empire during the 19th century, the pound sterling became the world's most important currency. Other countries belatedly followed the British example of basing their currency on gold, instead of silver or on both metals, making the gold standard an international one. Globalisation is not a modern phenomenon but one that has strong parallels with the situation prevailing at the height of the Victorian era.

With the outbreak of the First World War Britain was forced off the gold standard and the attempt to return to it in 1925 had disastrous results for the economy. Despite victory the war had greatly weakened Britain's power and influence but the United States, which was hit much harder than Britain, which itself suffered considerably, by the Great Depression of the 1930s, was not ready to take its place. Towards the end of the Second World War, Britain, and Keynes in particularly, helped to shape the institutions of the world economy, as agreed at Bretton Woods but as the United States was by that time clearly the world's richest and most powerful nation the US dollar became the lynchpin of the financial system. Other currencies, including the pound sterling, fixed their values against the US dollar which had a value fixed in terms of gold. Most of the world experienced over two decades of brisk economic growth, in glaring contrast to the situation in the inter-war period.
The breakdown of the Bretton Woods system in 1971, the abandonment of the gold standard and a period of relatively high inflation and slower economic growth during the 70s and 80s did not undermine the dollar's pre-eminence and the US entered the new millennium in a position of apparently unprecedented strength. However the start of the new millennium also heralded the birth of a currency that could possibly challenge the global supremacy of the US dollar.

In the shorter term the Euro poses a much more significant challenge to Britain which declined the chance to participate in its birth. Should the pound sterling, and the advantages of being able to pursue a monetary policy based on British interests be abandoned for those of being part of a much wider currency area?

If the Euro is a success it might signal the end of the pound sterling, a currency with one thousand years of continuous history. But first the Euro will have to survive its own challenges ...

See the Psychology of Risk, Speculation and Fraud, the text of a speech by the novelist and former banker Linda Davies for one view of the challenges to the Euro.