In 1968 the first alarm bell rang — the Bretton Woods system was significantly modified: the participating states abandoned gold transactions on the free market, turning the system into a closed “inner circle”. It became clear that Bretton Woods was doomed. The Europeans, who suffered from the surplus of “Eurodollars”, had every incentive to think about their “own” currency system, which was proposed at The Hague in 1969. Let us note here the contradictory nature of the desires of the political-economic elites. On the one hand, after the collapse of Bretton Woods, the temptation to finally get full control of the lever labeled “money”, previously limited by gold, was too great. On the other hand, political forces and economists advocating for hard currencies still remained in Europe. The desire to “break away from gold” while simultaneously having hard money — this is the key to understanding the process that led to the emergence of the euro and which, in fact, is still ongoing. As we will see, this was essentially an experiment designed to answer the question — whether political edicts (fiat money) can replace the laws of nature (gold or, more broadly, commodity money).
In 1971, Bretton Woods collapsed. It was followed by an attempt to create a system based on fixed rates, which also failed, and by 1973 the world entered the era of non-convertible money and floating exchange rates. These changes were marked by the famous inflation of the 1970s.
The world found itself in a situation strikingly reminiscent of the 1930s, when Roosevelt effectively paralyzed the already meager gold standard of that time. This was a time of trade wars, currency blocs, and competitive devaluations. Everyone remembered where that led.
Therefore, by 1979, pressure groups interested in stopping inflation and halting exchange rate volatility took shape in Europe. These were diverse groups, but, as one might expect, they were primarily composed of traders, bankers, and investors. The efforts of these groups led to the creation of the European Monetary System (EMS) and the emergence of the ECU accounting unit within this system. Interestingly, in the more financially conservative Europe, before the establishment of the EMS and the ECU, ideas of “pegging” this accounting unit to gold (that is, essentially, ideas of creating a new full-fledged currency) circulated, however, they never received support.
The EMS actually represented a system of fixed exchange rates (with a 2% band), and the ECU, based on a basket of currencies of the participating countries, which existed only in non-cash form, was an instrument of this system.
A characteristic feature of the EMS was that it was not a fixed-rate system, so to speak, in its classical sense, in which central banks undertake to support each other’s currencies (which in practice means, for example, an obligation to buy a neighbor’s falling currency). The EMS was based on the commitments of central banks to maintain the stability of only their own currency, and the “basket” ECU played the role of “system integrator”.
Strictly speaking, the EMS was supposed to reconcile things that are poorly reconcilable in practice — maintaining national inflation alongside a stable currency exchange rate. On the one hand, states wanted to continue the practice of redistribution through inflation; on the other — to enjoy the benefits of a stable exchange rate. Theoretically, this would have been possible if all central banks had managed to coordinate the rates of money emission. However, this proved to be very difficult. From 1979 to 1983, the “fixed” rates were revised 9 times. From 1987 to 1992 (after the French central bank ceased its overly inflationary policy), there was relative stability, after which followed devaluations of the currencies of Spain and Ireland, and in 1993, the effective devaluation of the pound (and then the franc) and Britain’s withdrawal from the EMS.