What The Failing Eurozone Can Learn From The Break Up Of The US Fiat Currency Unions Of 1933, 1861 And 1744

Tyler Durden's picture

Only the most drunk on hopium (and Absinthe) among us can harbor any doubt that the eurozone, and hence the common monetary union currency the zEURq.bb, can survive without a dramatic change in the current European monetary (and fiscal) structure and an unprecedented overhaul to the status quo. But it can be done: after all there are numerous case studies across history, when various fiat monetary unions either succeeded or failed. Ironically, according to a just released report by UBS' monetary expert Stephane Deo (which we will discuss more later), three of the better such examples ironically can be traced to none other than the good old United States, which, and this may come as a surprise to some of our readers, had several failed monetary union regimes in the past before it finally arrived on the current stable (relatively speaking) "dollar" solution. So here, courtesy of UBS, are the lessons that Europe can hopefully learn (once again) from America's bitter experience in this matter. Because the alternative to success is failure (more on that shortly), and as UBS notes, "The economic and political consequences of a monetary union break up are also so severe as to deter all but the most determined – or to deter all but those already suffering extraordinary economic distress (occasioned by war or by depression)." So without further ado...

The New England Colonies 1744

Before independence, the American colonies of New England had a limited monetary union. Specie payments (gold and silver) dominated, but colonies financed themselves with paper issue as well. Bills of credit were issued, and traded between the colonies at par (that is to say, a bill of credit from one colony would be accepted at face value as a payment in another colony).

This was clearly not a monetary union as we know it today. There was no central bank, no single issuing note authority, and the system was subject to abuse. Abuse was exactly what happened – Rhode Island started printing money aggressively (between 1710 and 1744 bills of credit from Rhode Island grew on average 14.4% per year, and most of them wound up in the other colonies). As a result the various states, starting with Massachusetts in 1749, passed laws prohibiting the circulation of other states bills of credit within their own borders.

There is little to be learned from this episode for modern analysis. This was a currency union of convenience – a temporarily fixed exchange rate system that broke down under the pressure of one economy printing too much of its own “currency”. It was never a monetary union in a proper sense.

The United States 1861

The onset of the US civil war saw the Confederacy issuing its own fiat currency (known as the Grayback, owing to the rather primitive printing process which produced a limited colour scheme). This was not an overwhelming success – despite the precaution of bearing a signature on every note, it was readily forged.

The Union issued its own fiat currency, the Greenback. California, meanwhile, while part of the Union also allowed contracts to specify that payment would have to be in specie. This “Goldback” currency was (in the view of the Union Treasury secretary) in defiance of the laws governing legal tender in the Union – because a creditor could refuse payment of a thousand dollars of Greenbacks (face value) and insist on payment of a thousand dollars of gold.

The breakup of the US monetary union is an interesting development, because essentially a specie based system was replaced by distinct fiat currency regimes (except in the West). The legal tender status was enforced by law (until such time as the Confederacy ceased to exist, when of course the Grayback lost any status). However, there is little to be learned for the Euro today. This was the introduction of a new fiat currency (or two fiat currencies) that was, theoretically, an extension of the existing specie based dollar. No fiat monetary union broke up as such, because no fiat currency union existed prior to the war (and indeed the creation of fiat currencies was highly controversial. The Union Treasury Secretary, Salmon P. Chase, who introduced the Greenback was also the man who as Chief Justice of the Supreme Court subsequently ruled the Greenback to be unconstitutional).

And the most interesting...

United States 1932 / 33

The break up of the US monetary union in 1932 / 1933 is in many ways an odd episode in the history of monetary unions. It was a break up without new currencies being issued (at least, not in a formal sense). It was also a break up that did not last – the union was reformed in 1933 under the new administration of President Roosevelt.

Although the dollar continued to be the single currency of the United States, and circulated as a fiat currency (albeit one backed by gold), in effect individual states legislated against the monetary union. The banking crises of 1931 saw over half the failures (weighted by deposits) take place in the Federal Reserve districts of Chicago and Cleveland. By the end of 1932, across the union companies were starting to transfer deposits out of local banks and into New York based banks. States began to declare bank holidays – effectively attempting to prevent the transfers – but this only accelerated the process of transfer in those states that kept their banks open. The Michigan bank holiday served as an accelerant. The New York Fed lowered bill purchase rates, but because it was return of capital rather that return on capital that mattered there was no noticeable effect on the pressure of inflows.

In January 1933 the Federal Reserve in Chicago refused to discount the bills of (i.e. lend money to) the Federal Reserve in New York. At this point the monetary union had effectively ceased to operate with any degree of coherence – and banking system regulations were de facto imposing capital controls at state boundaries. By the Roosevelt inauguration in March 1933 thirty five states had bank holidays, and most of the rest had limited withdrawals from their banking systems. The dollar still existed, and was still legal tender, but it was practically impossible to move it across a state boundary except in physical form (and it was increasingly difficult to obtain in physical form). Barter began to replace currency as a medium of exchange.

The situation was remedied with a federal bank holiday in March 1933 – which effectively shut down the entire monetary union for a period of two weeks. Banks then reopened gradually, and interstate transfers where once again possible.

The US example is of interest to the Euro area not because it succeeded, but because the monetary union held together. A combination of labour mobility, banking reform and recapitalisation, and a more complete fiscal union allowed the monetary union to be reconstituted on a more workable footing.

In terms of lessons for a breakup, the process of effectively shutting banking systems at a state level (or limiting deposit withdrawals in some cases) allowed a de facto breakup of the union to occur by imposing what were to all intents capital controls on state borders. Any attempt to secede from the Euro would, inevitably, involve some similar operation. The lessons of 1932/3 may also be instructive as a guide to handling a Greek default. With the fear of contagion focusing on the banking system within the Euro area, declaring a bank holiday or limiting withdrawals from banks across the Euro zone while politicians finalise a more effective solution may be a successful interim measure. It is not a solution, of course (no more than it was a solution with the Federal holiday in 1933), but it gives additional time in which a solution may be found.

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SheepDog-One's picture

OH right....Europe should look to OUR history of 'monetary unions' in the U.S. past (since the present is running so smoothly) and take a lesson from our past foulups and start flying right.

Eat the bankers.

idea_hamster's picture


The New England Colonies 1744

There is little to be learned from this ... rate system that broke down under the pressure of one economy printing too much of its own “currency”.

I think this shortchanges the example -- the whole point is that multiple colonies all accepted each other's bills and each colony had the independent ability to inflate.

Although Greece couldn't overtly print more Euros like Rhode Island did, Greece was able to commit itself -- and by extension, the entire no-one-can-ever-default Eurozone -- to pay enormous amounts in the future, i.e., issue endless bills of credit.

At first glance, this seems exactly like what happened with Rhode Island....

falak pema's picture

except that greek women are hot... I wonder if Rhode Islanders were pickled or tickled to Pocahonta heat?

Spitzer's picture

This article is dumb.

the Euro cant survive without a dramatic change in the current European monetary (and fiscal) structure and an unprecedented overhaul to the status quo.

Why ? They all have seperate bond markets.


trav7777's picture

Will germany care at this point if the EUR system causes every deposit to flow out of a bankrupt member state and into their nation?

BigJim's picture

I'm sure they'll express their deepest concern.

Ghordius's picture

I find this article strange, with no logic at all


at the moment, it goes like this: "all humans are mortal, you are mortal, therefore you will DIE NOW" - unless you start to bleed, of course...

fact is, nearly all writings about the EUR go like this: "the Euro is an abomination, it will never work unless the ECB prints, prints, prints, so PRINT MORE, ECB!" conclusion: the ECB has not printed enough for the writers, has not taken enough burdens, is simply refusing to QE at the required levels - because face it, attached to nearly every "ECB is abomination story" there is the "unless it bails everybody out" part, I now have a collection of dozen FT articles that are built according to this template.

I note: no comparisons, no gold holdings charts, no mention of comparable CBs, NO RESERVES, only pure faith in the evil of the Euro

who profits? and who takes the time to write articles that take convoluted history lessons to the conclusion that ALL MONETARY UNIONS failed (without noticing the fact that they might take two lifetimes to die?)? Of course, the 1933 example (which I have to look up) would mean that the US Dollar is now a de facto successful "currency union", eh? I start to think Tyler is pulling some legs here...

Would the Euro DIE in a maximum default scenario? NO. Because it's NOT a national currency. It's NOT like the Dollar and the British Pound. In fact, an international currency is exacty what you would want in a maximum default scenario. Unless, of course, the ECB prints.

No, there is another story behind it - there is a category of people for which a catastrophic failure of the banking system would spell the end of their world - unless, of course, the ECB PRINTS MORE

PRINT, ECB, you are not following enough the footprints of the FED and of the Bank of England!

Minoan's picture

Every European must read this.

But in which language?

Ghordius's picture

how about the european language called English? which is taught in every bloody secondary school (i.e. from the sixth school year on)

Hedgetard55's picture

All the political and accounting games in the world cannot change the fact that Europe has incurred debt that must be either paid off or defaulted on. They cannot pay it off, so the only question is how does the default play out? Direct haircuts to debt owners, or a general haircut for all holders of Euros through printing.


Same for the US.

SheepDog-One's picture

Who says the debt has to be paid off? Paid off to whom? By whom?

Same here in the US, YOURE the one expected to pay off the FED bankers debt and bailouts, now up to $150,000 or so for every american...well Im not paying it!

Hedgetard55's picture



     You are ALREADY paying it through monetization and consequent inflation. Do you hold cash or cash equivalents? Then you are paying it. Do you purchase any goods at all, even through barter or using PMs? You are still paying it through higher prices.


    That's the beauty of monetization by the FED. Everyone pays and most don't even know it, and you can't escape it unless you move to another country that is not printing (good luck there).

SheepDog-One's picture

You can claim what you want asshole Im not paying SHIT!

Hedgetard55's picture



     I understand your anger but don't kill the messenger.

Internet Tough Guy's picture

Of course you can escape it. You buy gold.

s2man's picture

yeah, but you are buying gold with the already inflated, i.e. they stole some of its value, FRNs.  They still win. 

But when you barter with the gold, then you win, as you retained your wealth and they are stiffed on the sales/income taxes.

CapitalistRock's picture

If you've saved with PMs then you have been paying lower retail prices, not higher.

GeneMarchbanks's picture

You can read all the historic examples you want it's too late. The dye has been cast. Much of this is simply not applicable to the Euro Project.

Short of world-wide debt jubilee we all know the next phase.


SheepDog-One's picture

Right, the idea that they can print now to infinity, and YOU will pay it back in the future is insanity...this leads to collapse and revolutions and world war.

CapitalistRock's picture

Not always. That is why printing is politically feasible. Remember, they only need to confiscate 30% to 40% of personal wealth. You can get most of that by running 10% inflation for a few years. Most sheeple won't realize they've been robbed. This happened in the US after WW II and in the 1970s. Wars did not break out. There was simply a wealth transfer from the stupid dollar holders to those intelligent enough to hold wealth in other ways.

falak pema's picture

Hey the EU has enough history of its own. Its not history that EU lacks. Its vision, will and also suffers  too much from rampant corruption. Nationalise 'de facto' the banks and repair the financial system world wide. Then we'll talk once the books have been clearly cleaned/profile identified of risky debt. 

Right now its the blind leading the blind, into the wall.

GOSPLAN HERO's picture

"Lincoln's Banking Legislation -- As soon as Lincoln took office the old Whig coalition finally controlled the entire government. It immediately tripled the average tariff rate, began subsidizing the building of a transcontinental railroad in California even though a desperate war was being waged, and on February 25, 1862, the Legal Tender Act empowered the Secretary of the Treasury to issue paper money ("greenbacks") that were not immediately redeemable in gold or silver. The National Currency Acts of 1863 and 1864 created a system of nationally chartered banks that could issue bank notes supplied to them by the new Comptroller of the Currency, and a 10 percent tax was placed on state bank notes to drive them out of business and establish a federal monetary monopoly. The government's paper money flooded the banks so that by July 1864 greenback dollars were worth a mere 35 cents in gold. Ever since the days of Andrew Jackson American presidents had opposed a fiat money system. The Jacksonian opposition to central banking was ended, literally, at gunpoint. Lincoln's main role was to avoid doing what presidents had done for the previous three decades: veto central banking legislation. There was no chance of that since Lincoln, unlike Jackson and President John Tyler, was a career-long advocate of central banking and fiat money." -- Thomas DiLorenzo

spanish inquisition's picture

So Lincoln freed the slaves by making everyone a slave....

you strawman talking's picture

No just citizens of the corporation known as the UNITED STATES OF AMERICA




Salt cures all things whether by sweat, tears, or going to sea

SheepDog-One's picture

The cacophony of the war sabres rattling is what really has me troubled, currency 'bills' passed against China, accusing Iran of wild plots for mass mayhem and bombings and murder...I think the clock is ticking down fast theyre grasping for diversions.

trav7777's picture

yeah...the notion that Iran was going to hire a fucking Mexican drug cartel to assassinate a Saudi diplomat in DC and blow up both theirs and the Israeli embassy?  This is the most absurd thing I've ever heard.  You couldn't get NEAR the Israeli embassy in DC without getting shot driving anything big enough to blow it up.

This is insanity...and Place Holder was ALL OVER IT, probably cracked the motherfuckin case hisself.

XitSam's picture

Interesting the that the embassy of Israel and Pakistan are right across the street from each other.

narnia's picture

sure would be nice to see a case study in competing currencies.  i'm sure the market can produce a medium of exchange preferable to promises of arbitrarily defined governments on worthless pieces of paper enforced by the barrel of a gun. 

apberusdisvet's picture

There is an interesting piece on GATA; a talk Chris Powell gave in London about the historic central bank suppression of gold.  One of the takeaways from this is that, quite probably, there is a finite amount of gold that is constantly lent, swapped among the CBs and that this physical amount may only a fraction of the promises extant.  Now add the belief that Fort Knox is empty, and you have the perfect storm of eventual price discovery should a significant currency implosion occur.

It will be interesting to see if Hugo's gold ever really makes it to Venezuela.  Naval blockade, anyone?

CrazyCooter's picture

Just my two cents but I think all the gold is in Ft Knox/West Point. These are military installations and I trust the base commanders aren't playing for another team.

That said, the gold has been leased, levered, swapped, and god knows what else. I have no doubt the contractual claims grossly outweight the actual physical. But these claims are paper claims on metal still sitting in base vaults.

When the system goes tits up, the contacts are going to be voided, per the clauses in the contracts. The gold will still go no where.

We will come around to a gold standard, the question is what road do we take to get there?



trav7777's picture

are you fucking kidding me?  They do whatever they're ordered to do.

If that's hiding evidence on Pat Tillman or lighting up reporters w/ a 20mm chain gun then hiding that, soldiers do what they're told.  If one breaks ranks, they Bradley Manning him.

CrazyCooter's picture

I am cynical, but I am not that cynical.

I believe the US has the gold, it never went anywhere, and that it is leased 100:1 paper to physical.

The money system will reset.

And when that happens, the US is going to have the best seat in the house to continue previous policies under a new money regime.

Oh, and war, lots of that will go around.



spanish inquisition's picture


Here is a link on the gold, no gold in Ft Knox from 1981 http://www.rumormillnews.com/cgi-bin/archive.cgi/noframes/read/126553

And don't get me started on how hard it is to count stuff and not create inventory drift. So if you don't count the gold, there wont be a discrepancy. We all just need to have faith it is there, just like we have faith the dollar is worth something.

The point of the great finance game is to make money. Gold is money or, as I like to call it with its characteristics, the most consistent barter exchange intermediary over time. I am guessing Ft Knox has tons of titanium surrounded by a thin plate of gold and the NY Fed is holding a lot as collateral for the US.


BigJim's picture

...It will be interesting to see if Hugo's gold ever really makes it to Venezuela.  Naval blockade, anyone?

I wouldn't be at all surprised if they 'discover' Hugo helped the evil Ahmedinnerjacket in his nefarious (and ever so clever!) scheme to blow up a.... Saudi diplomat.

When I first heard this story, I just laughed, thinking no one could take it seriously. And then, over at the WSJ, I saw hundreds of comments doing just that, with maybe 5% expressing some doubt.

Most people here in the West really will believe anything their governments tell them. It's amazing.

Medea's picture

Are you fucking kidding me with this post?

andthensome's picture



i always crack up at your stupid movies..



tarsubil's picture

Does anyone have a recommended resource for more details on the consequences of the Rhode Island printing of 1710-1744? I'd like to read more about that.

CrazyCooter's picture

Ralph Foster's "Fiat Paper Money" might pique your interest. There is a whole chapter on the early American economies and how fiat played out before and after the revolution.



New American Revolution's picture

Yes, try Murray N. Rothbard, "A History of Money and Banking in the United States", but it will take you awhile to be able to read it without falling asleep.  But once you get over that hump, it is fascinating reading.

tarsubil's picture

Thank you both Crazy Cooter and NAR for recommendations.

lookma's picture

No shiz!?!  The euro was built to try to survive the ineivitable fallout from the end of the dollar system without a major hyperinflation.  That's what all the gold's for, ya know, the first asset on the consolidated statenment?  You couldn't possibly miss it. See its right here - > http://www.ecb.int/press/pr/wfs/2011/html/fs111005.en.html.

Over the past twelve-year lifespan of the Eurosystem, when coupling gold’s rise from the January 1, 1999 euro-launch price at €246/oz along with MTM revaluation accounting methods, the gold reserves of the Eurosystem have elevated from €99.6 billion...

This growth in gold reserves makes a stark contrast when compared to the initial net position in foreign currency held in 1999 (€227.4 billion) that has undergone a significant shrinking ...

Within this positional admixture*, gold’s role has gained musculature from a mere 30.5% proportion to it’s current dominance...

Meanwhile, due to the woefully outdated paradigm established by the U.S. Congress for gold held by the Treasury Department, the gold reserves of the United States are effectively anemic and bedridden upon the books of The Federal Reserve System, where they exist only in certificate form — valued at a static $42.22/oz., forming a paltry $11 billion stake.



Silly kids and their cute little playground tiffs over "fiat money," this kinda intellectual jibberish was called out a deacade ago:

Mind you, this is all happening while Western style "Hard Money Socialists" are defending their stance by saying the Euro is just another fiat. Ha!



Internet Tough Guy's picture

If Tyler read FOFOA he wouldn't post such nonsense. The euro is fine; it was made to devalue. The dollar, not so much. Euro will win.

CrazyCooter's picture

The US has 8k tons, mostly at West Point and Ft. Knox. The European countries collectively have about 10k tons.China has about 1k tons.

I don't follow your argument.



Internet Tough Guy's picture

It's the structure of the euro that matters; gold floats on the ECB balance sheet. The euro can depreciate against that one thing, gold, so no hyperinflation in real goods prices.

The dollar can only depreciate against real goods; hyperinflation.

The euro can be depreciated and live. The dollar can't.


trav7777's picture

are you stoned?

You think if it depreciates against gold that it WON'T depreciate against oil?

Oil is substantially more important than gold.

Internet Tough Guy's picture

You are a fool, but why confirm it?

Someone much smarter figures it out years ago. See if you can understand this quote.

Few do grasp what is happening and why! They think the holding of gold reserves by the Euro is of a little point, as to what good are gold reserves? One cannot use gold as Marks or Yen to intervene in currency market to support the Euro. My friend, the BIS has played the, as you say, "big poker hand"! The holding of large reserves by the ECB and the withholding of sales from the market will not only bring the end of the London paper gold market, it will, thru a high USD gold price, "make the dollar weak in gold"! From this position, the dollar will lose the "oil backing" from the Middle East! At first, all oil for Europe will be in Euro's, then all producers want "strong currency"!


Internet Tough Guy's picture

There is more: Many say, how to defend Euro without much currency reserves? If gold go to many thousands US, what will be used to bid for Euro as defense? I say, these persons will find a problem on their computer screens! You see, the Euro will start as "nothing", no holdings of size, anywhere! The dollar is held as reserves as "the stars in heaven"! It is to say, "the dollar will bid for the Euro", not "the Euro will bid for the dollar"! All currencies will "flow into the Euro for trade". But, if the Euro becomes so strong, how to compete in world trade? It will be the price of oil that will make the "trading field" level! The soaring US$ price of gold will make even a 10% Euro reserve be as 100% today, in USD! Oil will become, very, very cheap in Euros and allow that economy to do well! Many other countries will see this and also want to join the new "world reserve currency" that has become"the new world oil currency"!

Not For Reuse's picture

LOL right, who cares about physical reality; the only thing that matters is how numerical abstractions behave on government balance sheets.

What a load of steaming ivory tower horseshit