The Latin Monetary Union (1865-1920) is often dubbed the ill-fated predecessor of the European Monetary Union. However, the principles the two worked on are quite different, and the LMU is really better viewed as a subset of (and predecessor to) the gold standard.

The story began when Belgium adopted the French franc in 1830. Switzerland harmonized its currency to the franc in 1848 and Italy joined in 1861, both retaining the names of their national currencies but adjusting their values to match the franc. In 1865, this arrangement was formalized as the Latin Monetary Union. Greece and Bulgaria joined in 1867, and a number of states (Spain, Romania, Austria, Finland, Venezuela, Serbia, Montenegro, San Marino and the Vatican) issued currency following the conventions without officially joining the Union.

The basic idea was that each member country would have identical coinage made from gold and silver. While the names of the individual currencies were kept, the weights were identical, so 5 French francs were worth exactly the same as 5 Italian lire and could be used through the Union like national currency (minus a 1.25% handling charge). Each country could mint as many coins as it wanted, there being no risk of inflation due to the intrinsic worth of the metal. The following coins were issued throughout the Union:

 Unit  Weight     % Au/Ag       ASW/AGW      USD*
  0.5  2.5000 g.  0.835 silver  0.0671 oz    0.32
  1    5.0000 g.  0.835 silver  0.1342 oz    0.63
  2   10.0000 g.  0.835 silver  0.2685 oz    1.27 
  5   25.0000 g.  0.900 silver  0.7234 oz    3.42
 10    3.2258 g.  0.900 gold    0.0933 oz   26.72
 20    6.4516 g.  0.900 gold    0.1867 oz   53.47
 50   16.1290 g.  0.900 gold    0.4667 oz  133.66
100   32.2580 g.  0.900 gold    0.9334 oz  267.32
* Based on gold and silver prices from the New York commodity market on January 16, 2002.

Seems like a great idea and it did work for over half a century, but in hindsight, the system had two crucial flaws that led to its downfall. First, the exchange rate of gold to silver was fixed at 1:15.5, which soon turned out to overvalue silver significantly. (At time of writing the exchange rate is 1:60, as you can see from the leap in real value between the 5 and 10 unit coins!) The Union countries tried to unload their silver coins into other countries, so they could profit by turning them into gold -- this led to the suspension of silver convertibility and the move to a pure gold standard.

However, the second, larger problem was that there was also a second set of so-called subsidiary silver coins for smaller amounts, issued by each country on its own and not fully convertible elsewhere. While these coins had a lower silver content than the primary coins, public offices of Union members were by law required to accept up to 100 units of them at face value per transaction, very much a loss-making proposition for the receiving side. Also, while the ending of silver convertibility stopped the minting of new silver coins, outstanding ones remained legal tender. With the advent of World War I and the massive financing strains involved, not to mention war between members of the Union, the system collapsed totally, although it remained in legal fiction until the end of the 1920s.

Since the euro has only one effective exchange rate, eliminating problem 1, and a single monetary policy set by the European Central Bank, eliminating problem 2, it seems unlikely to share the fate of the LMU. It will be more interesting to see if monetary union can survive without political union...


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