Does Money Make the state? Political Development, the Greenback, and the Euro November 2003

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The Causes and Consequences of the Single American Currency

What were the dynamics that produced these changes towards a more centralized monetary system and single currency in the antebellum United States, and what were their effects on governance? As outlined in the theoretical discussion of currency and political development above, two factors were important in motivating actors to seek currency consolidation. The most immediate and proximate cause was war, specifically public officials need to rationalize the monetary system and increase federal revenues to prosecute the American civil war. The second factor setting the stage for a single currency was the creation of a single American market, spurred on by the federal courts, which created rising societal pressures for regulation of the monetary regime. The political processes set in motion by these factors impacted not only the creation of the American single currency, but rather governance structures and political authority more broadly as well. I treat each factor in turn.

The creation of the American Greenback well illustrates the relationship between war fighting, the development of national currencies, and statebuilding. Even prior to the civil war, some political elites had linked monetary control to security concerns. The Second National Bank's founding was spearheaded by Congressional members concerned with strengthening the union and national capacities in the wake of the War of 1812 (Hammond, 1957). As the pressures of war faded, Congressional mistrust at the centralization of power within the executive reasserted itself “reflecting the general antipathy in Congress to discretionary executive control” (Timberlake, 1978, 48), and ending debates over granting legal tender status to Treasury notes (Hurst, 284, note 221).
The role of war in federalizing currency control reappeared with a vengeance in the 1860s with the secession of the South from the union and the fragmenting of the American political union to the West and Midwest. President Lincoln and the congressional Republicans pushed through a series of critical monetary reforms in 1962-63 that significantly strengthened the ability of the North to wage its military campaign (Bensel 1990, 14; Hurst, 1973, 64, 176-181). 12
First, Congress created a single currency by conferring legal tender status on Greenbacks, the new dollar paper currency issued in the winter of 1861-2, and abandoning the domestic specie standard. As the Greenback was fiat money that did not need to be matched by gold or silver reserves, it gave greater leeway to the government to print money to raise revenues, as long as authorities could maintain credibility over the worth of the paper currency.13 This significantly increased the Union government's policy flexibility in financing of the war. Between 1862—64 Congress authorized the issue of $450 million in Greenbacks. The Greenback was the only currency with legal tender status, although it continued to coexist with several other forms of currency, namely newly standardized national bank notes, as well as silver and gold certificates.14 Nonetheless, the new federal paper dollar heralded a simplified and standardized monetary order ruled over by the US Treasury and the US Congress instead of the US states.
Second, the reforms created a national bank system that abolished locally chartered banks and replaced them with federal chartered banks. The national bank notes issued by these banks now had to be uniform in design and accepted at par throughout the US. This centralization of monetary power was matched by a comprehensive effort in on the part of the federal authorities to remove foreign currencies from circulation, begun in 1857 and largely completed by 1861. In addition, federal initiatives in the 1860s cracked down on counterfeiting, with new policing mechanisms that further enhanced the control of the national government over money. Since the collapse of the second Bank of the US, the government had conducted its operations in coins and specie, a logistical nightmare. These currency reforms facilitated the collection of tax revenues and payment of government bills, one of its chief advantages in the eyes of government officials such Treasury Secretary Salmon P. Chase.15
Finally, as part of these reforms, the Union permanently placed a large part of the national debt with finance capitalists through the newly nationalized banking system. The federal government did this by forcing private banks which issued the newly standardized 'national bank' notes to hold government bonds and "thus created an instant market for these bonds which could finance its spending requirements" (Helleiner 1999, 325). Essentially, the state banks became fiscal agents of the Treasury, extending the capacity and reach of the federal government.
In sum, the need for an effective state apparatus to prosecute and finance the civil war was a key spur for currency consolidation by Lincoln and his party. The war was also instrumental in enabling the Republicans to achieve this goal, in part because of the departure of southern Congressmen who had been traditionally hostile to centralization of monetary authority. This shifted the balance of power towards the federalist Whig-Republican party and a national money. The impact on statebuilding was significant as currency consolidation carried with it a series of new administrative and organizational powers based in Washington. The reforms enabled the expansion of fiscal authority while co-opting new social groups into a national level financial system, part of the gradual transformation to a consolidated federal political system.

A Single American Market

While war provided the immediate motive and means for federalizing monetary control, less dramatic but equally consequential societal changes brought on by market integration also provided ripe ground for currency consolidation. The construction of an American single market in the mid-nineteenth century, crucially aided by the federal courts, had been steadily transforming societal and public interests in national governance, and more specifically, monetary control. Political leaders faced new pressures to develop the American political infrastructure to stabilize and regulate the growing national market and its increasingly industrial nature. Secretary of the Treasury Chase, whose “stubborn persistence” was key to the passage of monetary reform legislation, was keenly supportive of the need to facilitate market exchange through currency uniformity, although the more public justifications centered on the civil war imperative and reasons of state (Hurst, 1973, 79).

The American single market's sources were economic, technological, and political. Trade across the U.S. states had begun to rapidly increase in the first part of the nineteenth century, with an integrated national market emerging in the 1840s and 1850s.16 Increasing revenues from Southern cotton exports financed the demand for western foodstuffs and Northeastern services and manufactures in the latter years of the antebellum period (North, 1966, 68). Technological advances in transportation, both waterways and rail, further promoted the expansion and integration of the US economy.
However, government intervention and the exercise of political authority also shaped the new market. A key role in this increase of interregional trade was played by the US federal courts, who promoted an integrated market through their interpretation of the Interstate Commerce Clause (ICC), which barred state discrimination in commerce with other states. Although the ICC did not expressly implicate money, the integrating national market made more salient the need for the reorganization of the chaotic monetary system of thousands of currencies, and the courts upheld the view that federal currency regulation was linked to successful commerce across state borders, and therefore appropriate (Hurst, 1973, 72). Federal judges used their independence and authority to create laws that reduced the uncertainty of interstate business by more clearly specifying the rights and obligations of parties to contracts, particularly regarding the negotiability of bills of credit (Freyer, 1979).
The law was also important more directly in questions of how to stabilize expectations and confidence in the monetary regime. After all, "legal tender" is made such by law, and the US courts actively concerned themselves with the question of the authenticity of the paper currency's source and form. A central practical concern was how the law could promote the day to day acceptability of a national system of money, and the Supreme Court sided with the federal government on the question of monetary authority, stating that "promoting popular acceptance of the currency was one proper purpose for congressional action.” (Hurst 1973, 44). Significantly, when Congress imposed a severe tax on the notes of the state banks as part of its civil war era reforms this tax was upheld by the courts, who “accepted this claim of authority, apparently as a ‘necessary and proper” incident to the [constitutionally] granted power to coin money.” (Hurst, 1973, 37) .
The courts were able to shape the path of the national monetary system in part because societal dissent was relatively muted on these issues. Hurst argues that the rulings did not bring into play a wide variety of battling interest groups but rather were commonly perceived as being functionally necessary to the fundamental goal of market exchange (1973, 39). The courts also drew on common custom and prevailing business invention and practice, allowing for more acceptance of its support of currency consolidation. For example, “recognition of the utility of legal tender requirements generated substantial banker support" for currency reforms as bankers worried about enforcing contracts with appropriate payments (Hurst 1973, 45).
In sum, the courts promotion of a single market, the confluence of interests on the part of commercial coalitions in society who wanted to simplify and stabilize the currency system, and the Lincoln administration's desire to exert its authority and policy capacity in wartime created the right conditions for the single currency, despite the historically strong antagonism to federal control over money throughout the antebellum years. The immediate monetary reforms of 1862-63 may have been accomplished by virtually by edict, but societal ground was prepared because of the growing single market and its political repercussions.
Currency and US Political Development
Because the civil war moved policymaking to the federal level along a variety of policy areas, it is viewed by some scholars as "the true foundational moment in American political development." (Bensel, 1990, 10; McPherson, 1991). The long term political consequences of the creation of a nationalized monetary system bear this out, evolving from a Madisonian ideal of local control over the levers of governance towards a Hamiltonian vision of a strong centralized government with the potential to raise revenues and float debt. 17 However, just as the American state continued to develop in fits and starts even after the critical moment of the war, monetary reform was far from complete. Several forms of currency continued to circulate and a national central bank or Federal Reserve was not established until 1913. Nonetheless, the centralization of state power and the development of a differentiated bureaucracy outlined in the statebuilding literature were certainly found in the process by which the American currency was consolidated.
The centralization of money also had more subtle institutional effects, as it forged important new links between the state and powerful societal actors in ways that shaped subsequent American political development. Substituting Greenbacks for gold redeemable bank notes "effectively nationalized the payment clauses of private and public contracts in the northern economy and tied these agreements to the future financial policy of the central state." (Bensel 1990, 162). In other words, the explosion of government bonds served to create a client group and social base of support for the federal government by establishing an enduring interest in the health of the state on the part of certain private actors. The creation of federal level policy capacity meant the gradual organization of societal interests at the national level, transforming the American polity towards new set of authority structures.18
Comparing the Causes and Consequences of the Euro19
Armed with the theoretical insights from the comparative political development literature and the specific insights on currency's role in American development, we can now assess the political causes and consequences of the Euro. I analyze the similarities and differences between the two cases, focusing on the role of war and the role of market integration and the ways in which differences in the sources of currency consolidation may shape political development in the EU.

The Role of War
War clearly has played a very different role in the creation of the Euro than it did in the US case. It was the shadow of war, not in its crucible, that brought forth the Euro, and therefore the consequences for European political development through monetary reform has been fainter and more attenuated than in the US case. In Europe, the desire to minimize the potential for a revival of hostilities among the great powers was a critical original motivation for European integration more generally, expressed in the European Coal and Steel Community (ECSC) in 1952 and the signing of the Treaty of Rome in 1957 (Dinan, 1994, 9-38). The continued deepening of the EU project over the following decades has been understood by many as an attempt to solve the 'German problem' by binding Germany tightly together with its former enemies in a quasi-federal union. To further this end of stabilizing political relations, a single money was promoted by various political actors and agreed to as a goal by European leaders as early as 1969 (Tsoukalis, 1977).
The decision to finally go forward with the Euro in 1992 at Maastricht was influenced by similar concerns, but there was little security imperative to the single currency. The fall of the Berlin wall in 1989 and the reunification of Germany have been argued to have prompted French President Mitterrand and German Chancellor Helmut Kohl to seek the binding of European nation-states to Germany through the Maastricht Treaty and the single currency (Sandholtz, 1993; Dyson and Featherstone, 1999).20 Thus, while EU leaders sought to lock-in cooperation in the EU and the Euro was seen by some as potentially making secession from the EU less likely, the level and immediacy of threat was not the same as in the American case. Europe faced the end of an external cold war in partnership with a reformed Germany, not the mobilization for a bloody civil war. While the Greenback was imposed on the South in an exercise of power by the winning Northern states, in Europe, EMU was agreed to, not coerced, among states of legally equal status.
The difference in the levels of threat between the two cases may account for the differential effects of monetary consolidation on statebuilding. Most importantly, the pragmatic and pressing need to finance war fighting expenditures is missing from the contemporary European context. The Greenback had decisive impacts on statebuilding in part because it was intimately linked to the need for public financing of the civil war and the development of new revenue extraction capacities on the part of the federal state. In contrast, the low level of threat has prompted as yet very little in the way of fiscal capacity at the EU level. Thus, the end of the cold war can be argued to be a catalyzing event for a longstanding interest in monetary integration in Europe, but in a much less immediate and salient way than the civil war was for the US, and with therefore very different consequences for the development of fiscal linkages and further economic policy capacity at the European level, as will be discussed further below.
The Single European Market
Market integration in the EU may be the causal factor that more closely parallels the US Greenback case. A key goal of the EU's founding constitution, the Treaty of Rome, was the creation of a single European market with the protection of the 'four freedoms' -- free flows of people, goods, capital and services. The 1985 Single European Act, which strove to remove all barriers to commerce across the EU by 1992, was a milestone in the achievement of this goal (Sandholtz and Zysman, 1989; Moravcsik, 1998). While certain private commercial interests actively promoted the European single market (Green Cowles, 1995), the European Court of Justice was also critical in the creation of the European wide market through its interpretation of the EU's treaties. Decisions such as the 1979 Cassis de Dijon judgment, which reinforced the principle of mutual recognition of national product standards across the EU member states, gave political ammunition to supporters of integration, rejuvenating EC harmonization policy and spurring the development of the Single European Act (Alter and Meunier-Aitsahalia, 1994). The ECJ did not, however, create the single market whole handedly, rather, as with the American case, the court's decisions sparked political responses on the part of the European Commission to move forward integration and triggered the mobilization of various interests groups, for and against the further federalization of economic activity and governance. The ECJ has also used a broad interpretation of the legal reach of the 'four freedoms' of market integration to create a constitutional framework for a European level legal order that has promoted deeper integration at the European level, even in areas not directly under the Treaty of Rome (Ball, 1996). In this way, the political dynamics of the single market seem to parallel that of the political and legal uses of the Interstate Commerce Clause in the creation of the American single market.
The ECJ has not, however, promoted monetary integration directly through legal rulings as the American supreme court did. Rather, EU and national officials made the linkage politically, as the single market was widely cited as a key reason for the drive to a single currency in the run up to EMU. The European Commission actively promoted this policy linkage between market integration and monetary integration, as codified in an influential report, One Market, One Money (Emerson and Gros, 1992). National political elites often remarked on the need for a single currency to complete the project of market integration. Similar dynamics had been in play for some time: the difficulties of having a single market for agriculture combined with a federal subsidy system in the Common Agricultural Policy (CAP) prompted interest on the part of policymakers fixed exchange rates in the 1970s and 1980s (McNamara, 1993) similar to the antebellum American Treasury’s interest in rationalizing receipts and payments. As more widespread market integration gathered steam in the 1980s and 1990s, the idea of a single currency gained a certain political logic.
However, EU market integration alone did not necessitate the creation of the Euro. Rather, we need to understand the EU single market creation and the Euro as political responses in a situation where different societal, legal and governmental actors varied in their preferences for monetary union and for a more federalized market and governance structure. The single market-Euro linkage was created in part as a political strategy by those in the Commission and national capitals interested in the goal of further integration (Jabko, 1999), just as in the American case linking the single market to the Greenback represented a chance at state and nation building. But others rejected this perspective and viewed the single money as an end in itself, for example, to lock in price stability policies (Moravcsik, 1998; McNamara, 1998). Both factors, war and market integration, present opportunities for political actors to move forward with currency and statebuilding, but such an impetus needs to be filtered through specific private and public actors for these outcomes to be realized.
Generalizing from our comparison across the US and EU cases allows us to propose a simple potential relationship between market integration, the threat of war, and currency consolidation. As shown below, high levels of both market integration pressures and the threat of war may produce the most likely scenario for the creation of a single currency and fiscal authority at the federal level, as in the US, whereas low levels on both are likely not to produce such effects. The EU case illustrates the ways in which high levels of market integration without a pressing threat of war may produce currency without fiscal power. The final cell is left indeterminate until further research can determine what a high threat of war alone produces, absent market integration.

Figure 3: Comparing Historical Outcomes of Currency Consolidation

Threat of War



Market Integration


(Multiple Currencies,

Multiple Fiscal Authorities)




Currency Authority &

Multiple fiscal authorities


Currency &

Fiscal authority
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