Creating the U.S. Dollar Currency Union, 1748–1811: A Quest for Monetary Stability or a Usurpation of State Sovereignty for Personal Gain?

Abstract

The desirability of politically creating currency unions among otherwise sovereign states is an ongoing debate. A key backdrop in this debate is the supposed empirical success of the U.S. dollar currency union. The fact that otherwise sovereign states within the United States are not constitutionally allowed to issue their own currency, thus creating a single currency for the whole United States—the U.S. dollar— is the archetype that underlies many policy choices and recommendations, such as the creation of the European currency union and the condemnation of the separate currencies issued by individual states within Argentina during their recent crisis. The benefits of the U.S. currency union and, by analogy, the benefits of other politically manufactured currency unions are assumed to be obvious, namely a reduction in monetary instability and exchange rate transaction costs within the union thereby stimulating long-run economic growth. These alleged benefits for the United States, however, are not derived from market evidence, but from simple theoretical assertions and from a literature that takes as fact the rhetoric of the winning side at the U.S. Constitutional Convention. Independent of theory and rhetoric, little is known about how and why the U.S. currency union was created, or about whether it improved macro performance. These deficiencies are addressed here. Prices indices, exchange rates, and market-generated transaction data from 1748 through 1811 are used to determine when the market moved from state currencies to the U.S. dollar and to assess the nonwartime performance of prices, exchange rates, and purchasing power parity before versus after this transition. This evidence suggests that the U.S. currency union had more to do with usurpation of state sovereignty by rent-seeking bankers than with solutions to monetary instability and transactions costs.