The Euro and Its Imperial Ancestors

OXFORD – Twenty-five years ago, the euro was introduced, in virtual form, as the common currency of the eurozone, which consisted of 11 countries. Banknotes and coins came three years later, in 2002, and 20 countries now use them.

Despite being the youngest fiat currency in the Western world – the same age as “Gen Z” – the euro is undeniably powerful. It is the second most widely held reserve currency (accounting for 20% of official foreign reserves as of 2023), and the second most traded currency after the US dollar, which was introduced in 1792.

Given that the dollar did not challenge the British pound’s global dominance until the twentieth century, the rapidity of the euro’s adoption is striking, especially considering that several powerful European countries – the United Kingdom, Denmark, and Sweden – refrained from joining. Nor was the euro spared from growing pains. Its adolescence coincided with the 2008 global financial crisis and the (related) European debt crisis of the early 2010s. The future of the euro looked shaky, and many doubted its viability.

But then came the soundtrack that would save the struggling teenager from its downward spiral: European Central Bank President Mario Draghi’s vow in 2012 to do “whatever it takes” to save the euro. Despite major political and economic upheavals in the intervening years – including the 2015 refugee crisis, Brexit, the COVID-19 pandemic, and Russia’s invasion of Ukraine – the euro has never again been questioned in the same manner.

As a young adult, however, the euro has come of age at a time when European politics is tending toward fragmentation and a renewed emphasis on national sovereignty. Maintaining a common currency across disparate economies and political environments remains a tall order. But by examining the history of earlier common currencies, we may be able to venture some conclusions about the euro’s future.

Let a Thousand Coins Bloom

Creating a stable currency that unifies regions with different economic and political characteristics is a challenge that has tested governments and rulers for many centuries. Two recent books on the topic – one examining central Europe, the other imperial China – show that while the establishment of well-functioning currencies requires political skill and vision, their survival depends on institutions that are free from political influence.

In The Silver Empire: How Germany Created Its First Common Currency, Oliver Volckart, a historian at the London School of Economics, masterfully traces the political tug of war that unfolded in sixteenth-century “Germany” (what was then the core of the Holy Roman Empire), culminating in the successful creation of a common silver currency, the Reichsguldiner, in 1559.

The Reichsguldiner was a large silver coin that solved a major problem for the empire and its rulers: the trade in bad coinage. To understand the issue at stake, Volckart takes us back to the fifteenth century, when the Holy Roman Empire was ruled by the Habsburgs, whose hereditary lands spanned most of Austria, but who shared sovereignty over much of central Europe with the princes of the empire.

Unlike the French and English monarchies, which had centralized power to a greater degree, the Holy Roman Empire’s political system was complicated, and required a consensus between central and local authorities. Importantly, the emperor did not have the prerogative of minting coins, because over the centuries, this privilege had been given to princes and towns in exchange for their political support. As a result, upward of 70 distinct currencies circulated within the empire.

Fostering trade, however, was not the purpose of the Reichsguldiner. The apparent currency chaos was not a major problem for merchants, because they conducted their business in the more stable high-value coins and, increasingly, through bills of exchange. As Volckart points out, sources from the period include many complaints and pamphlets from local representatives and legal scholars advocating for more “order” in the Empire’s currency.

The voices of merchants, however, are largely absent. In those rare cases where merchants did comment on monetary diversity, their concern was not with the impact on trade, but with the consequences it had for the emperor’s finances.

But competitive debasing and the trade in bad coinage had become a growing problem. The empire faced the dilemma described by Gresham’s Law: “bad money drives out good.” To show how this happens, Volckart recounts the biggest monetary scandal in sixteenth-century Germany.  

Show Me the Bullion

The story begins in October 1543, in Augsburg, when Hans Appenfelder, mint master of the town of Kaufbeuren, and Balthasar Hundertpfund, mint master of Augsburg, were accused of breaking down coins to extract their precious metal, or bullion. Owing to the sheer multitude of coins of similar nominal value but differing metallic content, creating “bad money” (with less bullion than officially stated on the coin) had become easy and profitable.

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Because good money was difficult to distinguish from bad, the empire’s pluralistic currency environment became a fertile breeding ground for debased coins. And soon enough, the lower bullion content of bad coins became evident, leading more people to dispose of them as payment, while hoarding good money to save or melt down for a profit.

Gresham’s Law became especially problematic in sixteenth-century Germany because minting prerogatives were widely dispersed among several dozen mints. Because princes and towns with no access to gold or silver mines relied on the trade in coinage to supply their mints, they had strong incentives to create bad money in order to attract those who were selling bullion. This meant that creating bad money was not a criminal offense, but rather more of a coordination problem among the different minting authorities.

The minting of Schillings in the rival duchies of Mecklenburg and Pomerania illustrates the problem perfectly. Because the duke of Pomerania’s Schillings contained more silver than the Mecklenburg Schillings, merchants in Pomerania would take them to the mint in Mecklenburg to be broken down and re-minted into Mecklenburg Schillings at the same face value, but with much lower silver content.

Both dukes had the authority to mint coins, and both currencies were legal tender. But the dukes recognized that they had a problem. Even though they might receive bad coins in the form of fees and taxes from their subjects, they were still expected to pay in good coins, such as when they contributed to the emperor’s war chest or the Imperial Chamber Court.

Commoners, who were less equipped to determine which coins were “good” and which were “bad,” had it worse. As Volckart shows, bad coinage had increasingly become a matter of public opinion, with many pamphlets using the stock image of evil merchants profiting from the trade. The problem was so widely recognized that when Charles V ascended to the imperial throne in 1519, he had to promise to solve the “defects and deficiencies in the coinage” to shore up the political consensus for his reign.

Politics, Politics, Politics

Within this kind of consensus-based system, politics becomes a true art, and procedural rules and ceremonial rituals acquire greater importance. Decisions were made at the Imperial Diet, where the emperor met with the princes. The establishment of the Reichsguldiner was not unlike the gathering of sovereign states that centuries later negotiated the euro’s creation. Since bad money represented a classic collective-action problem, a solution would require everyone to agree to follow the same rules.

Unsurprisingly, the results were limited at first, and no real progress was made in the 20 years following Charles’s election. Though the emperor, the electors, and the princes did pass a new coinage ordinance in 1524, which called for the creation of a new currency based on gold and silver, it was never widely adopted and implemented.

The most powerful princes continued to cling to outdated theories about debasement and silver prices, which forestalled any movement on the currency bill. Not until 1545, at the Imperial Diet in Worms, did experts resolve these disagreements by showing that the price of silver need not be determined in advance to create a common currency.

With this theoretical issue put to rest, monetary talks began to pick up speed. In 1549, a conference was held in Speyer for the express purpose of drafting and passing a currency bill. This marked a major change, as previously only Imperial Diets could pass bills. But that is how urgent the matter had become.

Nonetheless, the talks in Speyer initially broke down, owing to a disagreement over whether the new common silver currency would have to be accepted as legal tender in place of the Rhenish gold florin. Most princes were very much in favor, whereas the electors (a smaller cohort of the most powerful princes) and cities were very much opposed.

The reasons for the difference in opinion concerned debts and tolls. The cities were among the empire’s largest creditors, and many princes were heavily indebted to them. Given the instability of currencies, debts were denominated in gold coins, and interest and repayment would likewise have to be rendered in gold coins.

If silver coins became legal tender, princes would be able to pay back less simply by choosing whichever metal was cheaper than its official value at the time. Likewise, Rhenish electors collected their tolls along the Rhine in gold and did not want to see their revenues dwindle.

In classic European fashion, the electors erected procedural roadblocks to forestall further talks. The problem remained unresolved at Speyer, and the conference ended with a draft that left the issue for the emperor to decide. Two years later, Charles, at the height of his power, followed the advice of his delegates and decided in favor of a silver currency that would become legal tender throughout the empire.

But problems much larger than the currency issue soon took center stage. Martin Luther’s renunciation of Catholic doctrine was still reverberating throughout the empire, and Charles had already quashed an uprising of Protestant princes in the 1546-47 First Schmalkaldic War. By 1552, tensions were running high again as Charles attempted to centralize imperial power and suppress Protestantism. This resulted in the Second Schmalkaldic War, wherein the elector Maurice of Saxony’s army surprised Charles and drove him out of Innsbruck.

This was a huge embarrassment for Charles, and it paved the way for the substantially renegotiated religious peace that was signed in Augsburg in 1555. Charles never fully recovered politically and abdicated in 1556, spending his final days in a monastery in Spain. When the crown passed to his younger brother, Ferdinand I, the common currency bill of 1551 was still hanging in the balance.

Long-Awaited, Short-Lived

Ferdinand, a better negotiator than Charles, launched a new conference in Speyer in 1557 to discuss the mistakes made in 1549 and 1551. He also recognized that Charles had erred in bypassing the Imperial Diet when he made his final decision.

Several rulers, believing that their interests had not been adequately protected, did not feel obliged to commit to the final currency bill. So, Ferdinand pursued a compromise whereby the common silver currency would not have to be accepted as legal tender for debt and ancient customs denominated in gold. The new agreement eventually passed at the Imperial Diet in Augsburg in 1559. Following a final 1566 amendment to bring the Saxon elector along, the Holy Roman Empire finally had a common currency.

All in all, the new currency proved to be a success. A host of new institutions ensured that no individual ruler would deviate or secretly undermine the currency by producing bad coinage. These included so-called probation diets, where batches of newly minted coins were tested for their silver content. Since this mechanism operated supra-territorially, with both minting and non-minting estates in attendance, it was effective in forestalling collusion between mint masters, assayers, and rulers.

While smaller regional currencies were still allowed to vary in silver content, the currency reforms remade the empire’s financial landscape. By the 1590s, the rampant trade in bad coinage was largely contained, even if the border regions (particularly those adjacent to the Netherlands, which never joined the currency bill) still suffered from it.

The success of the new common currency lay in continued cooperation and institutional support for the probation diets. When cooperation broke down, so did the currency. The Thirty Years’ War began in 1618, and already by 1619, irregular debasement and bad coinage returned, leading to a period of hyperinflation. Even though the currency was somewhat restored after this early collapse, it never regained its previous position. By 1667, Saxony and Brandenburg had openly abandoned it. Germany would have to wait until 1873 for its next successful common currency, the mark.

The Great Divergence

The importance of institutions in creating a stable currency also emerges as a central theme of Empire of Silver: A New Monetary History of China by Jin Xu of the Financial Times Chinese. While the Chinese Empire was far more centralized than the Holy Roman Empire, it also struggled to create a stable, long-lasting currency.

Contrary to what Xu’s title suggests, China relied on low-value bronze coins throughout much of its history, and it was one of the earliest civilizations to introduce paper scrip, first during the medieval Song Dynasty (ca. 960-1279) and again under the Yuan Dynasty (ca. 1279-1368). Uncoined silver served as the main medium of exchange only from the Ming Dynasty (1368-1644) onwards, when it became clear that the paper currencies had failed.

Xu’s book is certainly ambitious, spanning more than a thousand years of Chinese history. But it lacks a thread to guide the reader through the myriad details of a disjointed timeline. The book suggests that before Europe and China experienced a “Great Divergence” in terms of per capita GDP in the eighteenth century, a financial divergence was already underway. Although Xu stresses throughout the book that China lacked both the economic institutions – such as banks – and the political vision to create a stable currency, she does not give a coherent account of the connections between finance, politics, and economic performance.

One reason why China found itself on the losing side of the Great Divergence, she suggests, is that Chinese rulers saw money primarily as a political instrument – to finance warfare and courtly expenses – rather than as an economic tool. As a result, merchants did not attain any political power, and property rights did not develop as they did in the West. But as Volckart shows, this feature was hardly limited to China; merchants did not play a consequential role in Germany’s monetary policy, either.

Still, Xu does touch on one of the biggest debates in Chinese monetary history: Was monetization driven by state-mandated taxes in silver, or by an expansion of commerce? In fact, the answer might be: “both.” Current academic scholarship emphasizes that developments like the Single Whip Reform (1580) shifted tax payments from being payable in-kind to being payable in silver, but also that the expansion of commerce, beginning under the Song Dynasty, advanced the use of silver as a currency.

The Mandate of Silver

Still, silver was not used in the form of coins until the eighteenth century. Instead, silver ingots known as sycee were used. This, too, is attributable to weak institutions. Imperial China was precocious in many ways, the source of inventions and discoveries (printing, gunpowder, iron smelting) that Europeans would adopt only much later. While its paper currency was initially tied to a silver standard, it later became a purely fiat currency, serving the needs of the people well enough, and retaining a stable enough value, to enable commerce.

But when new wars loomed large and government expenditures rose, over-issuance of paper currency led to severe inflation. The paper currency eventually failed as people reverted to bronze or copper coins and uncoined silver. For a while, China, too, experienced a period of free coinage, with private mints issuing their own currencies.

China’s crucial weakness lay in its lack of checks on government. Unlike in the Holy Roman Empire, where the challenge was to solve a collective-action problem among relative equals, the Chinese Empire suffered from the opposite problem: a lack of independent institutional oversight for government finance, including the issuance of money.

This shortcoming is the reason why efforts to establish a functioning imperial paper currency, and then to ban silver, proved unsuccessful in the long run. By the sixteenth century, silver was used for large transactions everywhere, and the state largely treated coinage as a source of revenue, though not as an instrument to steer the economy. Given the situation in Germany at the same time, this is not an unfamiliar political outlook. But while Europe soon benefited from the emergence of nascent central banks – such as the Bank of Amsterdam, established in 1609 – China did not.

When the Ming Dynasty fell and was replaced by the Qing Dynasty in 1644, the monetary system was largely carried over: copper and bronze coins were used for everyday purchases, whereas silver was usually reserved for larger transactions. Even though governments collected taxes and recorded their spending in silver, there was no uniform standard for weighing silver monies.

In fact, as in sixteenth-century Germany, there were many silver units and local currencies, and this “currency chaos” persisted, Xu argues, because of corruption: complicated exchange rates left room for bureaucrats to siphon off profits for themselves. Thus, while Western government budgets slowly coalesced into an orderly system, China’s state budgeting remained muddled.

As Xu sees it, the large influx of silver that came in the eighteenth century proved to be a double-edged sword. Following the consensus in the academic literature, she suggests that the widespread use of silver boosted the Qing economy, but also made the empire susceptible to fluctuations in international silver supplies and trade networks. The opium trade continued to grow and eventually reversed the flow of silver, resulting in the Opium Wars of the nineteenth century, which delivered a near fatal blow to the Chinese Empire.

Xu concludes with a chapter outlining China’s move to a modern currency system following the civil warfare of the early twentieth century. Here, too, she broadly follows the academic consensus, leaving one to wonder why the title advertises a “new history.” Worse, the book includes multiple factual mistakes, such as the claim that, “With the emergence of the silver standard, banks emerged in Europe.” In fact, as Xu herself acknowledges, early medieval banks emerged in Italy long before European countries adopted a silver standard.

Stylistically, the book suffers from metaphors that are more confusing than they are illuminating. “In history,” she writes, “between the flesh and bones of politics, taxation is always a principal artery of historical change, and money its network.” Perhaps this works better in the original Chinese, but in English, such passages are more punishing than enlightening.

A Careful Balance

Both books highlight the importance of visionary political leadership and independent institutions to support the maintenance of a stable common currency over time. Neither economic growth nor the increase in trade spurred by the opening of the Atlantic economy was sufficient to establish such a currency, nor were regional economic disparities ultimately responsible for the eventual failures of the Reichsguldiner or Imperial China’s paper money.

These histories highlight the importance of involving all political actors in the decision-making process, and ensuring a role for independent institutions to support the common currency. Whatever its initial problems, the euro, at least, has both these key features.

• Oliver Volckart, The Silver Empire: How Germany Created Its First Common Currency, Oxford University Press, 2024.
  Jin Xu, Empire of Silver: A New Monetary History of China, Yale University Press, 2021.