The euro did not mark the first time countries came together to create a monetary union. In fact, the Greeks had started the ball rolling over 2,500 years ago when a number of city-states banded together to create a common currency. This made sense to a region dominated by quite small countries if they wanted to trade among themselves.
The first such monetary union can be traced back to roughly 400 BC, when Phoaia and Mytilene adopted a common currency. Coins of this period had the symbol of the city minted on one side and a common symbol of the monetary union on the other. From such humble beginnings, other Greek city-states followed. One of the largest examples involved forty-three city-states, including Corinth, Argos, and Lacedaemon, whose coins were widely circulated in the Peloponnese from 280 BC to 146 BC, only ending when Rome successfully invaded the Peloponnesian peninsula.
Fast forward 2,000 years, and we see the birth of the first modern monetary union in August 1866. Called the Latin Monetary Union, it unified several European countries. Rather than issuing a new unit of currency, members agreed to mint coins with standardized quantities of gold and silver, thus making them interchangeable as legal tender in one another’s countries. This idea proved so popular that its initial members—France, Belgium, Italy, and Switzerland—were joined two years later by Spain and Greece. In 1889, it underwent a growth spurt when the union admitted Romania, Venezuela, Bulgaria, Serbia, and San Marino.
By the latter half of the nineteenth century, the Latin Monetary Union started to challenge the pound sterling as the world’s reserve currency, and, at one point, even the United Kingdom considered joining the union. The union depended on all members honoring the agreement to mint their own money with the requisite quantities of gold and silver. All did so, with one exception: Greece.
Greece has been an economic basket case since it gained its hard-fought independence from the Ottoman Empire in 1832. Plagued by recurrent budget crises and frequent state defaults, the Greek government joined the union in 1867 in hopes that it would benefit from being part of a more stable monetary system and be given access to capital markets. But almost immediately Greece started to devalue its currency by fiddling with the drachma’s gold content, which it reduced on a large scale. Like today, the dysfunctional Greek government pursued economically irresponsible policies, and its parliamentarians were often corrupt. After union members tried to reason with the Greek government, Greece was thrown out of the Union in 1908.
While the Latin Monetary Union enjoyed some successes, it barely survived the First World War and officially dissolved in 1927. Sadly, those who created the Eurozone have learnt little from this earlier experiment in running a monetary union. Unlike the euro, each country kept its own currency with a fixed rate established between them. Unfortunately, no easy mechanism existed for countries to devalue their currency against those of other members. The other problem was that there was no common monetary policy within the union, exactly the same problem that created the seemingly intractable problems facing the Eurozone. At least the Latin Monetary Union had the ability to throw out members who broke its rules, and anyone looking back on this failed experiment could not help but wonder why Greece was ever allowed into the Eurozone considering its appalling track record, and why it hasn’t been expelled for its past (and present) sins.