B ACKGROUND

Princeton Economist Edwin Kemmerer became known as the “Money Doctor” as he advised numerous countries around the world on how to ensure a stable money system, including the roles of central banks. In 1916, he proposed the creation of a monetary union for all the Americas, with the unit to be called the “oro,” the Spanish word for gold.7

where each accepted the currency of the other, with monetary policy set by the Belgian Central Bank and “exchange regula- tions overseen by a joint agency.”8 _{This union was superseded}

by the European Monetary Union and the euro.

In 1930, a fundamental innovation was proposed for mone- tary unions: that the common currency be managed by a supra- national central bank. This was the contribution of German banker Hans Furstenberg at the Congress of the Pan-European League in 1932.9

Henceforth, the money of most monetary unions was issued and managed by their central banks.

In 1950, the British Caribbean Currency Board was estab- lished among islands in the Caribbean. There have been subse- quent inclusions and departures, and the successor Eastern Caribbean Currency Authority was formed in 1965. In 1981, the Treaty of Basseterre established the Organization of Eastern Caribbean States and in 1983, the Eastern Caribbean Central Bank and Monetary Authority was formed.10 _{It now includes}

Anguilla, Antigua and Barbuda, Commonwealth of Dominica, Grenada, Montserrat, St Kitts and Nevis, St Lucia, and St Vin- cent and the Grenadines. The authority’s central bank is located in Basseterre, St. Kitts, and its currency, the Eastern Caribbean dollar, is pegged at 2.7 to the US dollar, or at the value of $.37.11

Other monetary union options are now being considered in the larger Caribbean area.

In 1957, J. E. Meade wrote approvingly of a common cur- rency for areas where there was significant labor mobility, where workers could move freely to find work.12

In 1958, economist Tibor Scitovsky13 _{published Economic}

Theory and Western European Integration, where he discussed

monetary union and presented the view that countries within a monetary union tended to grow more alike.14 _{Thus, monetary}

cause of increased commonality. Both Meade and Scitovsky were cited by Robert Mundell in “A Theory of Optimum Cur- rency Areas.” He wrote, “In terms of the language of this paper, Meade favors national currency areas whereas Scitovsky gives qualified approval to the idea of a single currency area in West- ern Europe.”15

Robert Mundell is called the “godfather of the euro,” as the idea for a European Common Currency received a major boost with his 1961 article, “A Theory of Optimum Currency Areas.” As he noted there, the idea of a European common currency had been “much discussed” before his article,16 _{but he gave it}

the necessary theoretical backbone with that article and others over the next twelve years, including the 1973, “A Plan for a European Currency.”17

Mundell’s thinking came in the context of the drive toward Western European peace and unity after the devastation of World War II and the draping of the Iron Curtain. The move- ment toward openness in trade and finance was led by Jean Monnet. In 1952, six countries moved dramatically toward the elimination of trade barriers, first for coal and steel with the establishment of the European Coal and Steel Community. It was expanded to include all goods and services with the 1957 establishment of the European Economic Community, known as the Common Market. That grouping led, in turn, to the for- mation of the European Union with the 1993 adoption of the Maastricht Treaty.

In his 1961 “Optimum Currency Areas,” Mundell wrote, “Or, supposing that the Common Market countries proceed with their plans for economic union, should these countries allow each national currency to fluctuate, or would a single cur- rency area be preferable? The problem can be posed in a general and more revealing way by defining a currency area as a domain within which exchange rates are fixed and asking:

‘What is the appropriate domain of a currency area?’”18 _That,

perhaps, is the twenty-first century’s $64 trillion question.19

In 1967, and echoing the Belgium-Luxembourg union, Brunei, Malaysia, and Singapore formed a monetary union, but Malaysia exited soon afterwards on 12 June 1967. Brunei, now known as Brunei Darussalam, and Singapore have 1:1 currency parity, meaning that the Brunei dollar and the Singapore dollar have the same value throughout the monetary union. They manage their exchange rate regime with a currency board which is required to have foreign exchange reserves equivalent to 70 percent of the outstanding internal currency, and internal liquidity reserves of 30 percent.20

Postwar independence for countries in French West Africa led to the transformation of the colonial currency arrangements to a loose monetary union linked to the French franc. The union split into two monetary unions in 1994: the West African Eco- nomic and Monetary Union (WAEMU) and the Central African Economic and Monetary Community (CAEMC). They both use what they call the CFA franc, but with slightly different values and names; it stands for the Communaute Financiere Africaine in the WAEMU and Cooperation Financiere en Afrique Centrale in the CAEMC.

The WAEMU has eight member countries: Benin, Burkima Faso, Ivory Coast, Guinea-Bissau (joined 1997), Mali (left in 1962 but rejoined in 1984), Niger, Senegal, and Togo. The CAEMC has six countries: Cameroon, the Central African Republic (C.A.R.), Chad, the Republic of Congo, Equatorial Guinea (joined in 1985 and is the only non-former-French colony), and Gabon. The WAEMU and CAEMC are also pursu- ing further trade integration through tariff reduction and other means.21

A list of existing monetary unions can be seen in the list of prices for this book, inside the back cover.