Michael D. Bordo
Anna J. Schwartz
Working Paper No. 2345
NATIONAL BUREAU OF ECONOMIC RESEARCH
1050 Massachusetts Avenue; Cambridge, MA 02138; August 1987
"...ECUs are created on a temporary basis through 3-month revolving swaps with the European Monetary Cooperation Fund against the deposit of 20 percent of each central bank's gold and dollar reserves, The quantity of ECUs outstanding is variable since the market price of gold (valued at the average ECU price in the preceding six months or of the two fixings on the penultimate working day, whichever is lower) and the ECU value of the dollar (prevailing two working days before) have been highly volatile. Three—fourths of outstanding ECUs have been created against gold. Since shares of gold and dollars in reserves of central banks differ significantly, the distribution of ECU5 among them is strongly affected by change in the valuation of the two reserve assets. The volume of ECUs created by the revolving swaps amounted to ECU 23 billion at the start of EMS, reached just under 50 billion in April 1981, then fell back to 42 billion in December 1982, and increased to 51 billion in June 1985.
Neither debtor nor creditor central banks have found ECUs attractive since they are inconvertible into other reserve assets, and limits exist, though liberalized in 1985, on their usability within the EMS. Two-thirds of interventions were in U.S. dollars through June 1985 (Micossi 1985, 331—2). Most interventions were intramarginal, not at the compulsory intervention limits. The intramarginal ones were carried out in EC currencies.
To expand the international role of the official ECU, in 1985 EMS central banks were authorized to make a temporary exchange with the ECMF of ECUs for dollars or with other member central banks for EEC currencies. Holding of ECUs by non-EEC central banks and specified international monetary institutions was permitted. In addition, the interest rate calculation on official ECU holdings was raised from a weighted average of the official discount rate in member countries to the weighted average of money-market interest rates for the component currencies..."
"...An important development was the agreement the BIS signed with the ECU Banking Association in March 1986 to assume the functions of agent of the private ECU clearing and settlement arrangement. Sometime in 1987 the system is expected to begin operations. The BIS as agent of the clearing banks will open and operate clearing accounts in their names, each of a limited number of clearing banks having opened an ECU sight account at the BIS..."
"In this section we report historical antecedents based on three attributes of ECUs: a universal unit of account; a basket of currencies; a basis for monetary integration.
1. A Universal Unit of Account
The ECU serves as a numeraire or unit of account for the EMS. It provides a measuring rod into which the currencies and hence the price level in terms of different currencies of the member countries can be easily translated. Provision of a universal unit of account is indispensable in the creation of a common currency. The ECU, however, is not widely used as a means of payment, a second indispensable feature of a common currency.
A precedent for the separation of unit of account and medium of exchange is exemplified by the "imaginary" or "ghost" monies that were known in Europe between the ninth and the eighteenth centuries. From the reign of Charlemangne until the French revolution, across much of Europe a distinction was commonly made between actual coins in circulation and "imaginary" money -- the accounting system of pounds, shillings, and pence in which prices were stated. In the medieval monetary system, coins were minted in various weights and sizes, which had no value imprinted on them. The monarch gave the coins official value in terms of the unit of account.
This distinction between the unit of account and means of payment is not found in modern monetary systems where the two functions are embodied in the same vehicle. The modern system, originally based on the specie standard, defined the monetary unit as a fixed weight of some precious metal, either gold, silver, or both. All coins, which had their values imprinted on them, were multiples or fractions of this basic coin. Fractional currencies, bank notes and bank deposits were all defined in terms of the basic coin and were fully convertible into it. The present fiduciary monetary system derives from the specie standard. Though government-issued currency and bank deposits are no longer convertible -into specie, the public has grown to treat them as if they were.
In the middle ages conditions were very different. In each state many coins of different metals, of different weights and sizes, coined both at home and abroad, circulated in common use. The diverse character of medieval coinage reflected primarily the rudimentary nature of techniques of minting and fragmented political power.1 In these conditions an accounting system was necessary to translate values in terms of multiple currencies into a common denominator. The system used was based on the ancient Roman denominations of pounds, shillings, and pence. Hence arose the distinction between "real" and "imaginary" money."
"...(iii) Alfred Marshall (1923, 1926) proposed symmetallism to the Gold and Silver Commission in England in 1886 to solve the shortcomings of reliance on precious metals, either gold or silver alone or bimetallism.9 Under the scheme currency would be exchangeable for a combination of gold and silver bullion in fixed proportions. Marshall believed the scheme would provide a stable monetary standard because the value of legal tender money would vary with the mean of the values of both metals. The scheme was never adopted.10"
10Marshall (1923) also proposed a tabular scheme. Jevons (1875) earlier
proposed a similar scheme (Laidler 1982). Fisher proposed a scheme for a
compensated dollar (1922 , 498). Einaudi argued that the system of
imaginary money could be used in a similar manner. He proposed that the
ruler cry up the currency when the price level fell below some stated limit
and cry it down when prices rose above it."