Greg Mankiw points out another reason American makes a better currency union than Europe: high labor mobility, thanks to our cultural homogeneity. Indeed; that’s Mundell’s original optimum currency area argument. (It was actually in my first draft of today’s column, but length was a problem — I needed to cut another 200 characters — and it also doesn’t bear too directly on the current European issues.)But Greg raises another interesting point: why did 19th-century America, with a small central government, also work as a currency area? One answer, which David Beckworth points out, is that it didn’t necessarily work all that well. When William Jennings Bryan declared that “you shall not crucify this country on a cross of gold,” he was in effect saying that the monetary policy dictated by the Bundesbank gold standard wasn’t appropriate for the farm states.I’d add another point: the 19th-century economy had much more flexible prices and wages than later came to be the case — not, primarily, because of different institutions, but because it was still largely an economy of small, self-employed farmers. More than half of US workers were in agriculture up until the 1880s. Peter Temin has told me — I can’t find it in a quick search — that the United States didn’t start having modern recessions, with large declines in real GDP, until the Panic of 1873; Britain started having them much earlier, because it became an industrial economy earlier.
Is there a case for U.S.E ie. a United States of Europe?