Centre for History and Economics

Coins of the month - september 2014

The Latin Monetary Union (LMU) Part Three: Decline, neutralization and dissolution of the LMU (1870-1926)

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The failed expansion of the LMU in the 1860's was the consequence not only of the Prussian and British resistance seen in the previous episode, but also of the immediate problems of managing a common currency in the face of diverging national military and financial conditions.

The LMU rapidly faced several crises because its rules were incomplete, limited to a coinage union which excluded several forms of monetary issue that were left, unregulated, to total national sovereignty. When Italy, Greece and the Pontifical State faced financial imbalances linked to the wars of national unification, they all made use of increased amounts of unregulated forms of monetary issue to face some of the consequences of the crises (issue of banknotes inconvertible in gold and silver, as well as of copper coinage). This in turn pushed their silver coinage towards the other members of the Union, France, Switzerland and Belgium. Inconvertibility meant that the paper currency of these countries depreciated temporarily in comparison to gold and silver coinage, up to 40% in the case of Greece and up to 20% in case of Italy, and then re-appreciated to the par after a few years, when convertibility was re-established. In fact there was a system of multiple currencies within each country (paper currency and metallic currency), allowing temporary and partial devaluations of paper, followed by re-appreciation to the starting point when the value of paper and metal currencies coincided again.

The stronger members of the Union from a financial point of view (France and Switzerland) tried to rein in such moves and were partially successful in extending restrictions on silver coinage over time. They imposed on Italy the withdrawal of small denomination banknotes, and forced French control over Greek silver monetary issue (minted in Paris and transported to Athens under the supervision of French civil servants). France expelled Pontifical coinage from its territory when it discovered a fraud in 1870: the Pontifical government had issued ten times more depreciated silver coins than was allowed by the LMU, used to pay for French goods and French troops protecting Rome from Garibaldi. France had accepted Pontifical coins in its circulation in 1867, on a temporary basis, pending the conclusion of negotiations for the accession to the LMU by the Papal State.

The LMU intervened when in the 1870s the price of silver began to fall in relation to gold, and private silver started flowing to government mints for speculative purposes, to be transformed into coins with a higher legal value in gold than its commercial market value. Quotas were introduced in late 1873 to limit monetary creation (through inflationary 5 francs/lire silver coins, the only full fineness silver piece left in the LMU). From 1878 new issues were prohibited, creating a de facto gold standard (old silver coins retained their monetary role but declined in importance). Later on, not only was the Monetary convention between the five member states never extended to paper money, but Italian and Greek silver divisionary coins were also renationalized in 1893 and 1908, limiting the application of monetary union to gold coins and 5 francs/lire silver coins. The ambition and width of the Union was declining, while the monetary role of gold and silver coinage was reduced with the rise of paper money and banking facilities.

The combined effect of all those limitations amounted to a more restrictive monetary policy and corresponded to a period of repeated financial crises and depression in Europe and the US from 1873 to 1898. Restrictions on silver mintage also damaged Italy in partocular, which needed to remint a large stock of demonetized silver piastre withdrawn from the former Bourbons' kingdom in Southern Italy.

Despite all those shortcomings and periodical press campaigns against the Union, however, the LMU lasted over sixty years. One of the reasons for its survival was the high cost of its eventual liquidation (due to large holdings of depreciated silver that issuing countries would have to buy back in gold with losses around 50% by the end of the nineteenth century). The other was that the Union provided some advantages to international transactions in the age of the "first globalization," contributing to the working of the international gold standard. The poster here illustrated shows how the public was periodically informed about which foreign coins were admissible in domestic circulation thanks to the Monetary convention (the term "Latin Monetary Union" was never officially adopted). This version, from the late 1880s, also includes a limited range of Austro-Hungarian and Russian gold coins admitted in France despite not being part of the LMU.

WWI destroyed the existing economic system and the LMU was swept away with it, despite a nominal survival until 1926. The outbreak of the war caused massive hoarding of coins in precious metals and the reintroduction of inconvertible paper money. The financing of the war rapidly took an inflationary turn in most member states, with the exception of Switzerland which stayed out of the conflict and kept its gold parity unchanged until the beginning of the twenty-first century. Emergency measures were taken separately by each nation during and after the war to replace the missing coinage and follow the demand for money caused by inflation. Hoarding and migration of gold and silver took place for speculative purposes towards Switzerland from the rest of the Union. France authorized various forms of emergency subsidiary private money outside the rules of the LMU (here illustrated): private paper notes, metallic tokens, cardboard tokens and post stamps enclosed in aluminium capsules (with a commercial advertisement in the back). These were issued mainly by Chambers of Commerce, banks and municipalities, but also by other bodies. Some of those are illustrated here. In 1920-27 the French government replaced vanishing silver pieces with metallic "bons" in francs (not formally a coin which had to follow the Union's rules), bearing the name of Chambers of Commerce. The Italian government also in the early 1920's issued nickel coins of 1 and 2 lire with the term "buono", instead of using the classic silver pieces of the Union, by now incompatible with the new increased price level.

After long negotiations on repatriation of foreign coins and payment arrangements, the various member countries finally decided to stabilize their currencies after the wide postwar swings and crises, returning to a gold exchange standard in the mid 1920's. However each county stabilized at a different level in relation to their prewar gold parity, and therefore at a different exchange rate, destroying the fixed 1 to 1 exchange rate which had been the basis of the LMU. Therefore Belgium announced in 1925 that it would leave the Union and after additional negotiations and an exchange of formal notes the union was disbanded on 31 December 1926. It took until 1932 to complete exchanges of currency and liquidation payments.

Luca Einaudi, Centre for History and Economics