The Latin Union Experience and the Lolr: the French Position

Annual ESHET Conference Nicolas Barbaroux Antwerp - 2017- May 18-20 (First Draft- Do not quote)

The Latin Union experience and the LoLR: the French position

"These movements in the market for precious metals became the immediate cause, in 1865, of the so-called Latin Currency Union between France, Belgium, Switzerland and Italy (...) Other European countries had at that time, either a silver currency, as in Germany and Scandinavia or a depreciated paper currency, as in Austria and Russia. If those countries had gradually attached themselves to the Latin Union, with its free minting of silver and gold at a legally established ratio then the traditional ratio between gold and silver might possibly have been preserved. Adhesion to the Latin Union was, in fact, contemplated by Germany shortly before the outbreak of the war in 1870, but owing to the war the plan never came to fruition." (Wicksell, 1935 (1906): 38)

1. Introduction In the aftermath of the E.U sovereign debt crisis, a central bank's duties debate emerged among bankers and policymakers mostly in E.U. This fundamental debate started in 2013 when the Bundesbank appealed the European Central bank (ECB) to the European Court of Justice (ECJ) owing to the adoption of the 2012 Outright Monetary Transactions (OMT) program. Despite the 2015 June (16th) decision from ECJ, the German central bank saw this freedom of central bank's action as incompatible with the Maastricht Treaty, namely the no bailout rule (art.12). Beyond the ECJ's decision, the Germans (re)opened a structural controversy on the central bank's duty, among them the one of Lender of Last Resort (hereafter LoLR) when a monetary union is concerned. The concept of LoLR is a tricky one as it encompasses a double facet understanding. On one side, it can be seen as a safety measure or a liquidity constraint that whatever monetary union should adopt so as to limit the increasing systemic risk (particularly when the number of inter-related banks grows). And, on the other side, it can be seen counter efficient rule owing to the increasing risk of 'moral hazard' behaviour it encourages. The later argument has numerous supporters in Europe in the aftermath of the great financial crisis and the sovereign debt crisis. The European Monetary Union from the famous Maastricht Treaty in 1992 is not the first experiment of monetary union between national countries and currencies. The 19th century gives us a stimulating field to clarify our focus on LoLR. Central banking theory has a quite short history as regards to economic theory at large. Anyway, many of the up today structural issues that central banks have to face were already debated in the two preceding centuries. It is common ground to quote Walter Bagehot as a due father for central banking preoccupations, mainly with his proposed (eponymous) set of rules which encapsulated principles for successful lending of last resort in "The Lombard Street: A Description of the Money Market" (1873) book. Bagehot, a former editor of "the Economist", wrote at a time in which recurrent money market 1

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crisis threatened the British economy with on going financial collapses and dislocations. The 19th British school played a leading role in monetary theories. Among them, the "Currency school vs Banking school" divided the economists concerning the necessity (or not) to impose a gold ratio to the monetary mass into circulation. Even though the adoption of the Act of Peel (also known as the "bank act") in 1844 ended de juro this controversy, de facto, the debate kept on feeding central bankers' discussions even recently (Goodhart and Jensen, 2015).

The 19th century was the heyday of the central banking preoccupations, however, it still have strong reminiscences in the post 2008 great financial crisis. In fact, the 'currency vs banking' controversy raises a core issue for the banking system: the necessity to define precisely an institutional setup to secure the international banking (and financial) system. The same thing happened following the sovereign debt crisis in E.U. The creation of the European Stability Mechanism (ESM) in 2013 was an answer to the 'black swan' phenomenon which hit the interbank money market (Taylor and Williams, 2009).

The quotation in the introduction from Wicksell's "Lectures on Political Economy" is crystal clear concerning the context in which the Latin (monetary) Union started. It is also enlightening concerning the internal failure and difficulties to set up monetary unions at large. In fact, a few European countries decided to set up a monetary union in 1865 in order to solve the problems inherited from the bimetallism functioning. However, the way those laws and conventions had been adopted gave us some insights on the way economists saw and solve liquidity and systemic risks. Those later problems emerged in many monetary unions such as the Latin Union, Zollverein or Scandinavian Monetary union. It was for that reason an international conference on Bimetallism had been organized in London in may 1894 by the Bimetallic League. The works of Professor Hans-Michaël Trautwein were forerunning in this topic. At the ESHET annual conference in Rome in 2015, he demonstrated to what extent the 19th century German economists (Adolph Wagner, Erwin Nasse, Carl Knies, Karl Helfferich and Friedrich Bendixen) were more progressive rather than today when LoLR issue is questioned within a monetary union system. The present article is a modest contribution to the article written by Hans-Michael Trautwein in 2015. As he did on the German and Swedish sides, we will do the same but on the French side. The article concentrated itself on the contributions driven by two very little known French scholars: Henri Cernuschi (1821-1896) a former Parliament deputy; and Albert Aupetit (1876-1944), a former Walras' 1901 PhD student. In fact, the article focuses on the LoLR within monetary unions by inquiring in the Latin Union experience.. In fact, we will see to what extent the various arguments of current debate are reminiscence (or not) of the ones from the French economists during the Latin Union era. It is worth (re)considering how French economists at that time discussed banking crisis and LoLR by Bank of France. Those reflections may be of some interests for current ECB's issues, notably as regards to its role of LoLR.

The article will be structured as follows: section 2 provides a brief history of the Latin Union functioning and its failures. The section 3 will present some French comments and opinion on the Latin Union functioning and context, as they were made at the time 2

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the Latin Union was facing some internal disequilibrium. The contributions by Henri Cernuschi and Albert Aupetit will be exposed. Section 4 will conclude by providing some reflections for the current ECB issues. 2. The Latin Union: from a monetary integration de facto to a monetary integration de juro

The monetary integration process in France was not the result of enthusiastic men and politics but rather the outcome of the economic hazard. As mentioned by Wicksell in the introduction, the Latin monetary Union was the result of the market failures within the Bimetallic system which had forced a few European countries to speak the same currency. It was under the strong influence of the young Bank of France, not to say under the influence of Napoleon Bonaparte, that the monetary integration process started in the end of 19th century. In this part, we will not enter into the debate on the stabilty of Bimetallism as a monetary order, nor we will provide a thorough description of the Latin Union stages. For those interested, see the work done by Sédillot (1953), Schumpeter (1954) and Redish (1994).

Created by the Emperor Napoleon, the Bank of France was officially born in 1800 (January, 18th). More precisely, the creation of the Bank of France rooted back to 1796 when two bankers, Le Couteulx de Canteleu and Perregaux, decided to set up a private bank in Paris that could discount commercial papers and increase the circulation of money. Unfortunately, this project failed and it was only after the state strike by the first Consul Bonaparte that the Bank of France was officially born. Another financial institution, called ‘Caisse des Comptes Courants’ (which also provided quasi-central banking functions including notes’ issue) preceded the Bank of France. The 'Caisse des Comptes Courants' merged with the new Bank of France. The same scenario happened with the other French note issuing banks in that time, such as the 'Caisse d'Escompte de Commerce'. Due to this oligopolistic strategy and owing to the weight and size of the Bank of France's networks and branches, many others private banks were forced to closed during that time. The Bank of France was no more than a joint stock company with a share capital of 30 millions francs, part of which was subscribed by Napoleon Bonaparte himself and several members of his entourage1. The private ownership of the Bank of France was not particular to France, the same situation existed in Great Britain or in Sweden for instance2. The Bank of France received, in 1803, the privilege of issuing bank notes in

1 The ownership of the Bank of France was really diffuse: for instance, in 1911, the shareholders amounted to 30 000 people among them one third owning only one action. This situation remained until the nationalization of the bank on December, 2nd in 1945. 2 From its creation in 1694 until now, the Bank of England (BoE) has acted, and still does, as the Government's banker and debt manager. Throughout its history the BoE has always seen itself as a public institution, acting in the national interest. Although privately owned, for much of its life, the activities which it undertook were determined by it and by its relationship with the government. Nationalization of the BoE in 1946 did not greatly affect this; but it meant that the 3

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Paris. As a counterpart to this exclusive privilege, the Bank of France also had had to pay royalties and super-dividends to the French government. According to the legal status of the Bank of France (completed with a decree in 1808), it aimed at serving the needs of commerce by providing liquidity for the development of the entire country. Discounting activities were the numerous and more profitable for the banks. The official conditions that prevailed for discounting a paper were quite demanding at that time: firstly, the term could not exceed three months, secondly, the paper should come from dealers or solvent people; thirdly, the paper should be signed by three different people, and fourthly, the commercial paper had to have been created for an economical operation that could serve the economy. In practice, the Bank of France had to set steady discount rate due to the necessity to boost economic recovery. The words pronounced by Bonaparte himself were crystal clear in this respect: `I have created the Bank in order to allow discount at 4 per cent.' (Patron 1911: 31-32). The French economists at that time shared the same opinion regarding the Bank of France 's duties. The French Liberal economist Jean Gustave Courcelle-Seneuil- and supporter of free banking principles- was a representative of the French opinion. He wrote as follows: `While it is not possible to reach absolutely fixed and uniform rates of discount and credit conditions the nearer they are approached the nearer we are to perfection.' (Patron 1911: 31-32)3. The National Convention- the First French Republic system following the French Revolution in 1792- defined in 1795 the franc as the new monetary unit for France. At that time, one French franc was valued by 5 grams of silver (9/10 fine silver). The first French franc coins appeared in 1796. Later on, in 1803, the Consulat -the new (autoritary) political system inherited from the First Consul Napoleon Bonaparte- decided a wider monetary reform in the 7th germinal an XI (meaning, 1803, March 28th). The reform gave to the Franc its new name the "Germinal franc" as a reference to its birthdate4. The French Germinal franc was only valued by its silver weight: one franc for one franc for 5 grams of silver (9/10 fine silver). However, de facto, a Bimetallic monetary system was also established owing to the terms defining the conditions of coin's issuing. According to the Bonaparte monetary reform (7th germinal an XI), the franc's coins took the form of both silver and gold coins, notably concerning the coins of 20 French francs. Thus, we can deduce, de facto, a fixed silver-gold ratio amounted to 15.5 between the two precious metals. The Napoleonic reform officially set the Bank of France as the monetary issuing authority for the whole country, notably concerning the first French banknotes.

Bank was owned by the Government, rather than by private stockholders, and gave the power to appoint the Governors and Directors to the Crown. 3 Courcelle Seneuil was a 19th French liberal economist and a supporter of free banking principles. He was the chief editor of the French economic journal `Journal des économistes' and a member of the famous Moral and Political Sciences Academy in 1882. Most of his books dealt with banking and free trade. 4 The weight definition of the French currency is one part of a broader metrics' list reform (1795, April, 7th) which set a new official metrics nationwide: meter, are, cubic metre, litre and gram. 4

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Concerning the French banking sector, it remained under-developed and locally concentrated in Paris for a long time owing to the strong competition of the Bank of France. In spite of its specific status as the official bank of issue, the Bank of France kept for a considerable time a commercial activity at the expense of its central bank activity. Goodhart (1988) described the French banking sector as the one in which 'competition' and 'hostility' prevailed. The lack of cooperation and the hostile competition within the French banking sector is a leitmotiv shared by many commentators on the French banking system at that time. The economic historian Kenneth Mouré quoted Sir R.G Conolly in his book "The Germinal Franc" regarding the French banks' behaviour during the 1931 Sterling crisis. He described the French banking sector as follows: "the Parisian banks would have preferred to slit their own throats rather than cooperate on the market." (Mouré, 1998: 222). The Bank of France was the epicentre of the private banking sector with increasing shares of the market. In fact, as the banker's profits came mainly from the discounting of commercial papers (i.e the bills of exchange), the Bank of France was pushed to expand its discounting activities -at the expense of the local bank already in place- thanks to its `comparative' advantage by way of the size of its network of branches. However, by so doing, the "Bank of France created a conflict between its financial interests and its role as a leader in the money market because it was in a situation of direct competition with the commercial banks' (Mouré, 1998: 214). Most of the newspapers of that period and the French public opinion at large, considered the Bank of France as a commercial bank rather than a central one. In 1848 the French government expanded nationwide the privilege for issuing notes to the Bank of France which pushed the Bank of France to run more and more after profits so as to offset the increasing costs inherited from the opening of new branches in the whole country. Thus, banking competition diminished once more.

The French monetary history was strongly influenced by the dark banking episodes from the past. In fact, the hard lessons of John Law's bankruptcy under the 'Ancien Regime', and particularly, the failure of the 'Assignats' had modelled the French banking sector. The `Assignats' were paper-money issued by the National Constitutional Assembly in France during the French Revolution in the 18th century. Those were issued after the confiscation of church properties in 1790 following the government's bankruptcy. The government thought that printing certificates -representing the value of church properties- could solve the financial problems. Assignats were, thus, used as a successful mean to absorb a significant portion of the national debt as they were accepted as legitimate payment by domestic and international creditors. However, their excessive reissuing and the confusion with general currency in circulation caused hyper- inflation. Originally meant as bonds, Assignats quickly became a currency as if they hold legal tender property. As there was no control over the amount to be printed, the value of the Assignats exceeded that of the confiscated properties. The overissue caused massive hyper-inflation and at the beginning of 1792 year, the Assignats had lost most of their nominal value. In 1796, the Assignats were substituted by the issue of another

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paper money -called the `Mandats'- which was a currency in the form of land warrants. This paper money quickly failed too. For all those reasons, the widespread French opinion was the one of a general mistrust on paper money at large and a strong confidence on metallic currency. Bank notes and paper money could only be accepted if the distribution of this type of money were entrusted to an institution and if the institution remained independent from the Government. The liquidity risk from over-issue policy was straightforward of the French monetary history. It had had structural consequences on the way Bank of France functioned hereafter. The Bank of France was used to keep a wide opened eye (not to say two policy eyes) on its gold cash balance level and its gold covering ratio in the following decades. Thanks to that increasing gold reserves strategy, Bank of France was able to face a liquidity crisis while maintaining fixed discount rate. Vuillaume (2004) explained this behaviour as a legacy of the 'Caisse des Comptes courants' -the former Bank of France's seniors- which was featured by a 'schizophrenia" for the stability of the discount rate as well as the practice of strict selection of the bills of exchange. Bank of France was, thus, able to played the role of international lender in the last resort during the 18th and alter on in the early 20th. It did so in 1890 with the Baring's crisis in Great Britain and it also helped major central banks such as the Bank of Reserve in New York or the Reichbank, respectively in 1907 and 1931.

The monetary union process started officially in 1865 (December, 23rd) with the Latin Union convention between France, Belgium, Italy and Switzerland. However, this convention was not the result of a natural willingness to 'speak with a same currency' but rather the consequences of a market failure, as Wicksell exposed in his Lectures in the above lines' quotation (introduction part). The discovery of gold mines in California (1847) and Australia (1851) changed the story. The production of gold quadrupled which diminished the gold value, and, then, the (steady) silver-gold ratio changed as well. From that time, it was profitable to speculate by way of the silver coins. On the commercial markets one kilo of gold amounted to 15 kilo of silver while the (official) rate of exchange between the two at the central bank of issue was 1 for 15.5. This speculative opportunity strongly affected France as many French francs circulated in Europe and Bank of France faced a risk of large drain on its metallic reserves. In fact, owing to the strong stability of the Germinal franc, the Bank of France succeeded to impose its currency outside the European boundaries while exporting the main rules of issue for the Germinal franc. De facto, the French francs circulated in Italy and Switzerland, to name a few, mainly due to the result of the Napoleonic conquests. When the Napoleonic Empire collapsed, the French francs kept on circulating in Europe. When speculation became profitable, Bank of France received an outstanding amount of Italian and Swiss coins even if Italy, Switzerland reacted by devaluating the silver weight of its coins. France refused to do the same as the French were schizophrenics to the stability of the Germinal franc. A monetary devaluation could have been seen as a sign of weakness which was not compatible with the ideas supported by the political power at that time (The Second Empire).

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The monetary union process was the outcome of the Belgium initiative, as it was the first country to ask for the organization of a monetary conference. The idea was to substitute a monetary union de facto into a monetary union de juro. Thus, France organised a monetary conference in Paris, in 1865 (November 20th) which was the first step towards the Latin Union. The first monetary convention that gave birth to the Latin Union had been signed in Paris on December 23rd in 1865 between France, Belgium, Italy and Switzerland. Broadly speaking, the Convention stated the technical conditions on monetary (coins) issuing while guaranteeing the inner-circulation of metallic coins between the countries which were signatories. The convention stated the conditions to issue gold coins of 100 FF., 20 FF., 10 FF., and 5 FF. (art.2) and silver coins of 5 FF. (art.3). As long as the countries respected those two rules, then, the gold and silver coins were free to circulate among the union (the fractional currencies have only a limited legal tender)5. According to article 8, each country, by way of their national Treasury offices, agreed to accept every gold and silver coins -wherever they were from- and to exchange it against an equivalent amount of gold coins or silver (coins of 5 FF). This rule remained two years after the suspension of the convention. The issue of banknotes was not concerned by the Convention, it remains the full privilege of the national states.

Rule 1 Harmonization of the monetary issuing conditions (size, weight, degree of variation for the mass...etc...) between the countries. Rule 2 The countries adopt both silver (5 FF) and gold coins (20 FF, 10 FF and 5FF) as official monetary unit. Both metal have legal tender Rule 3 The silver value of the 5 FF coins is maintained at 900/1000 of fine silver Rule 4 The fractional (token) silver currencies are devaluated from 900/1000 to 835/1000 of fine silver so as to prevent the speculation and outflow of silver coins among the country. Rule 5 the legal tender of fractional currencies is limited to the amount of 50 FF for evry payments among people and 100 FF for all the payments to the State; Table 1: Box of the rules of the games in the Latin Union

All along the Latin Union era, the countries (France, Belgium, Italy, Switzerland and later on Greece) had signed many monetary conventions and additional texts (See Table 2 below). Many of them did not change the basic foundations of the monetary union unless concerning the issue of silver coins. The new set of rules were the result of the vagaries of the exchange rates between gold and silver which threaten the monetary stability and the everlasting existence of the monetary union.

The major difficulties of the Latin Union were linked with the Gresham law or principles. When the supply of gold or silver increased, the commercial value between the two metals changed and it became profitable to exchange the gold (or silver) coins at the official rate granted by the 1865 convention (1 for 15.5). In Italy, most of the gold coins

5 The fractional currencies refers to the coins of 2 FF., 1 FF., 0.5 FF. et 0.2 FF. Their legal tender was limited to 9 FF. per inhabitants (art.9, Convention 1865). 7

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were saved so as to be exported in France and converted at the official pair. Bank of France got huge amount of Italian coins in its reserves. These speculative opportunities quickly came to reality in 1870. As a consequence, the 1874 additional convention quantitatively limited the (free) coinage of silver coins (approximately one fifth of the previous amount of issue) so as to maintain de facto the Bimetallic system even if many commentators such as Henri Cernuschi labelled the Latin Union as "Lame Bimetallic". As the risk of liquidation remained, the countries decided in 1878 to stop the issue of silver coins in the Latin Union. From that time, most of the discussions will turn on the liquidation rules and process (as we will see in the next part with the analysis of Henri Cernuschi). However, this resolution did not stop the decreasing value of silver, worst than that, it quickened the fall of the silver (commercial) value.

Date of Convention / Rules and main terms Conferences 1865 (December 23rd) First Monetary Convention -Birth of the Monetary Union between France, Belgium, Switzerland and Italy for a renewable period of 15 years. -Definition of the foreign currencies (only coins) which have legal tender within the union. 1867 (July) International Monetary conference on Bimetallism (22 countries) Bimetallism is into question. Many countries asked for a monometallic system as many other countries did. 1868 Greek membership 1874 (January 31st) (Additional Convention): limit the issue of silver coins to the amount of 120 millions of FF. 1878 (November 5th) (Additional Convention): -Renewal of the monetary union for a renewal period of 6 years -End of the issue of silver coins 1885 (November 5th+ Second Monetary Convention: December 12th) -Renewal of the monetary union for a new period of 5 years with specific rules depending on the country considered. -Additional convention (December 12th): limit the reimbursement in gold of the foreign currencies (from Belgium and Italy) in case of liquidation/dissolution of the monetary union. 1891 -The members decide the renewal of the monetary union by yearly basis tacit agreement. -Discussion on a 'universal currency 'among the countries Table 2: Dates of the Latin Union Era

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The Latin Union had been successful over a long period of time (1865-1927) owing to the number of countries that will join the union by way of bilateral agreements (such as Hungary-Austria, Sweden, Russia, Finland, Romania, Spain, Vatican, Liechtenstein, Monaco, Crete) or by way of the countries that decided to adopt the same issuing rules as the Latin Union (such as Serbia, Bulgaria, Venezuela, Perou, Dominican Republic, Haiti, Occidental Indies, Danish Indies, Argentina, Brazil, Chile and Luxembourg). In the end, 32 countries were signatories of the Latin Union agreement6. Contrary to the German (Zollverein) or Scandinavian monetary union, the Latin monetary union was no a binding agreement. It was no more than a very flexible and minimum set of rules on monetary (coins) issuing. People and private banks were free to accept or refuse the foreign coins contrary to the State Treasury which was forced to accept them. Furthermore, the countries never discussed on the possibility to set a supranational institution to regulate the monetary union; nor they stated de juro the free circulation of the currencies among them7. The later was just the result of the reciprocity rule (art. 8) according to which they have to accept the coins issued by the foreign partners of the union. More importantly, the inner-monetary circulation was limited to the silver coins and not to all the means of payments. By contrast with the success of the Scandinavian monetary union (Jonung 2001), one of the major weakness of the Latin monetary union was to have restricted the free circulation to the silver coins only and neither to all the means of payments. By so doing, speculation had been encouraged which drove excessive fluctuations of the exchange rates between the two precious metals- and between countries- as predicted by the Gresham Law. The functioning of the Latin union had been commented by many economists and also parliamentarian in France and outside. At that time, the writings of the parliamentarian were as good as those of economists. Thus, the study of Henri Cernuschi can be enlightening for our purpose.

6 The total number includes the colonial states of the signatories countries. 7 The Convention decided to publish yearly statistics on the monetary mass. 9

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3. The French Economists views on LoLR

Contrary to the Swedish economists (Wicksell, Lindahl or Myrdal to name a few) who were well known for their intensive involvement in the writing for periodicals, newspapers or public conference (Carlson & Jonung, 2005), the French ones were the opposite. As mentioned by Fontana (2000), French economists were not really popular in the early twentieth century and even before. They suffered from a lack of international recognition due to their (over) involvement in political and institutional issues. For instance, the French economists of the late eighteenth century were given abroad the negative label the `Parisian group' as a reference to their (over)influence in the restrictive area of Paris' institutions. The same opinion was shared by Schumpeter (1954) when he wrote in his survey of the French economic tradition: ``their main interest was not the `purely scientific aspect of economy' but business and political practice'' (in Fontana, 2000: 236). However, the work of a few political men and parliamentarian can be enlightening. This is the case of Henri Cernuschi who wrote a few books on monetary and banking issues while he was not an (academics) economist per se.

Henri Cernuschi

Henri Cernuschi (1821-1896) was an Italian patriot who took part in the liberation of Milan during the Austrian occupation in 1848. He became a former deputy during the short Roman Republic (1848-49) which was led by the triumvirate composed by Carlo Armellini, Giuseppe Mazzini, and Aurelio Saffi. Following this political collapse in Italy, he moved to France as a political refugee. He became a French naturalized citizen with the help of the French minister Emmanuel Arago (1812-1896) around the end of the 1870 year when the Third Republic had been declared in Paris in September, 4th. Cernuschi became a well reputed banker economist within the 'Parisian circle' of economists and businessmen. He wrote a few books, mainly "Mécanique de l'échange" (1865), "Contre le Billet de Banque" (1866) and "Le Grand Procès de l'Union Latine" (1884). He was the French representative at the International Conference organized in London by the Bimetallic League in 1894 (May 2-3).Anyway, he was mainly known as a political involved journalist, not to say pamphleteer. He mostly published his opinion and positions in the French Republic newspaper "Le Siecle" which he bought in April 1870 with the help of his magistrate friend Gustave Chaudey. He quickly became a successful businessman by way of various participations he took in companies and by way of investment advises he sold to his friends. In the end of the Second Empire, Henri Cernuschi wealth was valued at two millions of gold francs. During 1871 and 1873, he went to a world tour with a young art critic, Théodore Duret (1838-1927), who helped him to gather an impressive 4, 000 art collections of drawings and various sculptures. Meanwhile, he bought to Pereire's brothers (Emile and the last available plot of land on Velazques avenue in Paris where the architect William Bouwens van der Boijen built his town house residence. When he died in 1896, Cernuschi bequeathed his town residence to the Paris city hall which transformed it into an Asian art museum.

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As mentioned by Silvant (2013), the French economists in the mid 19th century were divided concerning the Latin Union. Two clan emerged: on one side (the most numerous) the monometallists, led by Michel Chevalier and including Emile Levasseur, Felix Esquirou de Parieu and Gustave du Puynode; and on the other side the supporters of Bimetallism in which Henri Cernuschi was one of the leader with Louis Wolowski and Emile de Laveleye. Those two clans were fundamentally opposed on the viability of Bimetallism.

Henri Cernuschi was a peculiar man in this group, he did not share the same ideas of the French bimetallists. For instance, he was a strong supporter of Bimetallism whereas he was not supporter of the monopoly of issue given to the Bank of France8. He was particularly involved in the international Bimetallism owing to the necessity to expand the benefits of this monetary system. As a businessman, he was also interested to expand the monetary mass which could create inflation or, at least, limit the deflation, particularly after 1875.

Cernuschi wrote many books and articles, mostly in banking and monetary field: "Mécanique de l'échange" in 1865; "Contre le Billet de Banque" in 1866; and "Le Grand Procès de l'Union Latine; " in 1884 and "Les Assignats Metalliques" in 1885 (to name a few). Faithful with the metallist dogma, Cernuschi was against the issuing of banknotes by the Bank of France. He considered this operation as a sort of magic trick, or to be more precise, a sort of words (magical) trick. In his 1866 book, he explained that the issue of banknotes is based on 'supposed gold' reserves and neither on gold reserves (Cernuschi, 1866: 199) as the Bank of France did not hold the exact amount of gold banknotes are supposed to contain. Shortly speaking, the banknotes are no more than a bearer bond which is hedged by a 'supposed gold' reserve. The mechanism -or the magic trick- lasts as long as people do not ask for reimbursement. In other words, as long as people keep on thinking that Bank of France holds the gold attached to the banknotes, thus, the system functions. By contrast, every metallic currency embodies the exact amount of precious metal it contained or it supposed to pay. However, Henri Cernuschi became strongly critical on the Latin Union when the internal weakness appeared, and particularly following the end of the free coinage of silver in 1878. He condemned 'the political economy teachers' that supported the resolution (Cernuschi 1885: 12). Behind this group, Cernuschi blamed the French Liberal schools and particularly Felix de Parieu, without naming him, as he took part of the Latin Union construction and resolutions9. By adopting this resolution, the Latin union became no more than a "Metallic Assignats" system (Cernuschi 1885: 13) to paraphrase the title of his 1885 book. In fact, the Latin Union faced difficult times from 1870 due to the decreasing (commercial) value of silver and the resulting speculative opportunities that

8 Many of the supporter of Bimetallism were enthusiasts with the monopoly granted tio Bank of France. The idea was that monetary integrity could only be guaranteed by a monopoly of (mettalic or fiduciary) issue as money is an important basement of the 'order' within the country (Wolowski, 1864: 12) 9 Felix De Parieu was the Vice-Président of the Council of State at that time. He represented France during the monetary conventions that created the Latin Union in 1865. 11

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happened. Owing to this speculative strategies and the internal disequilibrium in the balance of payment among them, many countries hold important reserves of foreign (gold) coins. In case of the collapse of the monetary union, the loss could have been important. Thus, Switzerland and particularly France were strongly involved in pushing the other countries to adopt a currency return agreement.

Moreover, Cernuschi strongly reacted to the second convention on the Latin monetary union (1885, November 5th and December 12th) that France signed by way of its representatives10. The French officials were supporters of a pragmatic and realistic opinion on that liquidation problem. The French understood that no country would be favourable to reimburse quickly and 100% of their currencies into gold. Moreover, the French did not believe, as well, in the natural forces (owing to the needs of commerce) which would have pushed the foreign currencies back to their respective country. Thus, France supported the wisdom idea that every country should recover its own currencies (which circulated abroad) by way of trade exchanges. By so doing, France -and the Bank of France- reached their personal goal: extending the monetary union lifetime so as to reduced the potential losses. The more the union lasted, the more time the countries got to recover their own currencies. All of that benefited to France and the Bank of France balance sheet. In his book "Metallic Assignats" Cernuschi dealt, in chapter II, with the "liquidation rules of the Metallic Assignats among the States" (Cernsuchi, 1885: 9-13). In this chapter, three main topics appeared: When criticizing the Italian behaviour, he developed his own interpretation of the liquidation rules embodied in the Latin Union Convention (the one from 1865)11. In fact, Italy was reluctant to accept a reimbursement of its own (silver) currencies as no binding rules forced it to do so in the 1865 convention. To Cernuschi, this position is insane as the liquidation rule or clause are de juro included in the first article of the Convention. When the countries decided to state a monetary union (art.1), they accepted at the same time an "inherent liquidation" rule even if nothing was written in that sense. To Cernuschi, such interpretation was the only relevant one which can be deduced by a logical reasoning:

"A les entendre (en référence aux Italiens), comme il n'est point parlé de liquidation dans la Convention, cette liquidation n'est pas de droit. Il est vrai que la Convention n'a pas parlé de liquidation, mais il n'en était pas besoin qu'elle en parlât; le droit de liquidation est inhérent à la Convention elle même" (Cernuschi, 1885: 10).

10 The name of the official representatives for each countries can be found in the website: http://www.numisbel.be/PV1885.htm 11 Italy declared, at that time, it has no onbligation to reimbursed the foreign silver currencies that circulated outside Italy as no binding rules forced it to do so in the 1865 convention. 12

Annual ESHET Conference Nicolas Barbaroux Antwerp - 2017- May 18-20 (First Draft- Do not quote)

When the risk of liquidation is concerned, Cernuschi (re)called for the full responsibility of each country to assume its own (nationally issued) currency while rejecting any form of solidarity between the countries:

"La convention latine n'a été ni un contrat aléatoire, où les parties spéculent entre elles sur des chances, ni un contrat cumulatif, où les parties échangent des choses qu'elles regardent comme équivalentes, ni un contrat de bienfaisance, où l'une des parties procurent un avantage gratuit; la Convention latine a eu pour objet unique de faire circuler d'un Etat à l'autre le numéraire des Etats concordataires pour un nombre déterminé d'années. Aucune des parties n'a pu songer à bénéficier sur les autres ni à rejeter sur les autres la réduction de valeur que la monnaie de sa fabrication pourrait subir " (ibid) To Cernuschi, the idea of LoLR was not a natural component of the monetary union functioning. the unique goal of a monetary union relied on a free circulating agreement on currencies, but in any case, it embodied a LoLR clause. In other case, it would mean that each country benefited from the others; or it would have meant that monetary union allow each countries to reject -not to say liquidating- their full responsibility (to guarantee the steady value of its monetary unit).

The position developed by Cernuschi was not so far from a moral hazard argument as commonly admitted nowadays. In fact, when referring -and criticizing- the Italian behaviour, Cernuschi denounced the risks of seeing an increasing number of countries to deleverage their duties on the Latin Union owing to presupposed rules they agreed.

2. Albert Aupetit (still to be elaborated)

4. Conclusion

There was an upsurge interest towards monetary union, and especially the Latin Union, when the idea of common currency appeared following the Maastricht Treaty in 1992. Quite recently, the Bundesbank started a court action against the ECB owing to its OMT policy actions. This later episode in the E.U revealed an increasing divergence of opinion concerning the central bank duties, and namely its binding rule (or not) to be a lender in last resort in Europe.

However, no articles dealt with the Latin Union functioning throughout the lender in last resort.

The idea of LoLR was linked with the risk of liquidation within the Latin union. From the early days of the Latin union, in 1865, the four countries anticipated this risk and solved 13

Annual ESHET Conference Nicolas Barbaroux Antwerp - 2017- May 18-20 (First Draft- Do not quote)

it by way of the article 8. It was not a LoLR clause but a statutory rule according to which each country, were forced to accept each gold and silver coins -wherever they were from- and to exchange it against an equivalent amount of gold coins or silver (coins of 5 FF) even after the suspension of the Convention and for an extra period of two years. However, the rule only applied for the fractional currencies and not for the silver coins of 5 FF. The problem became tricky when it concerned the 5 FF silver coins under the Italian pressure. The interpretation given by Henri Cernuschi was interesting in this concern. He considered the liquidation clause as inherent of the 1865 Convention while denouncing the end of free minting of silver coins decided in 1878. From that interpretation, we deduced

Work to be done:

To compare Cernuschi position with the German and Scandinavian economists' position as exposed by Trautwein (2015)

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