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The Latin Monetary Union and Trade: A Closer Look

Jacopo Timini

TL;DR

This study reassesses the impact of the 19th-century Latin Monetary Union on trade using a modern gravity-model framework with a carefully defined control group that reflects the diverse currency regimes of the era. Employing Poisson Pseudo Maximum Likelihood estimation and exporter/importer fixed effects, the author finds that the LMU increased trade among member states by roughly 30 percent in its early years (1865–1873) when bimetallism was viable, with effects fading to zero by the end of the 1870s. The analysis is robust to alternative data sources, confounders, and methodological choices, and extends to a core-periphery decomposition showing heterogeneous gains across members, with Italy and Switzerland experiencing the largest proportional increases. A universal gravity model-based counterfactual suggests the LMU contributed meaningfully to trade, albeit unevenly, and only temporarily, offering insights into how historical exchange-rate arrangements influenced cross-border commerce. The findings contribute to the understanding of historical currency unions and the conditions under which they raise trade, informing comparisons with other fixed-exchange arrangements and policy design.

Abstract

This paper reexamines the effects of the Latin Monetary Union (LMU) - a 19th century agreement among several European countries to standardize their currencies through a bimetallic system based on fixed gold and silver content - on trade. Unlike previous studies, this paper adopts the latest advances in gravity modeling and a more rigorous approach to defining the control group by accounting for the diversity of currency regimes during the early years of the LMU. My findings suggest that the LMU had a positive effect on trade between its members until the early 1870s, when bimetallism was still considered a viable monetary system. These effects then faded, converging to zero. Results are robust to the inclusion of additional potential confounders, the use of various samples spanning different countries and trade data sources, and alternative methodological choices.

The Latin Monetary Union and Trade: A Closer Look

TL;DR

This study reassesses the impact of the 19th-century Latin Monetary Union on trade using a modern gravity-model framework with a carefully defined control group that reflects the diverse currency regimes of the era. Employing Poisson Pseudo Maximum Likelihood estimation and exporter/importer fixed effects, the author finds that the LMU increased trade among member states by roughly 30 percent in its early years (1865–1873) when bimetallism was viable, with effects fading to zero by the end of the 1870s. The analysis is robust to alternative data sources, confounders, and methodological choices, and extends to a core-periphery decomposition showing heterogeneous gains across members, with Italy and Switzerland experiencing the largest proportional increases. A universal gravity model-based counterfactual suggests the LMU contributed meaningfully to trade, albeit unevenly, and only temporarily, offering insights into how historical exchange-rate arrangements influenced cross-border commerce. The findings contribute to the understanding of historical currency unions and the conditions under which they raise trade, informing comparisons with other fixed-exchange arrangements and policy design.

Abstract

This paper reexamines the effects of the Latin Monetary Union (LMU) - a 19th century agreement among several European countries to standardize their currencies through a bimetallic system based on fixed gold and silver content - on trade. Unlike previous studies, this paper adopts the latest advances in gravity modeling and a more rigorous approach to defining the control group by accounting for the diversity of currency regimes during the early years of the LMU. My findings suggest that the LMU had a positive effect on trade between its members until the early 1870s, when bimetallism was still considered a viable monetary system. These effects then faded, converging to zero. Results are robust to the inclusion of additional potential confounders, the use of various samples spanning different countries and trade data sources, and alternative methodological choices.

Paper Structure

This paper contains 17 sections, 18 equations, 5 figures, 1 table.

Table of Contents

  1. Introduction
  2. Historical context
  3. Methodology and Data
  4. Methodology
  5. Data
  6. Results
  7. Main results
  8. Robustness tests
  9. Extension: Core - Periphery (or the LMU's heterogeneous trade effects)
  10. Conclusions
  11. Summary statistics
  12. Theoretical Appendix
  13. Hat algebra.
  14. Model structure and the share sufficient statistic.
  15. Market clearing and the wage fixed point.
  16. ...and 2 more sections

Figures (5)

  • Figure 1: LMU trade effects with different control groups
  • Figure 2: The Latin Monetary Union trade effects
  • Figure 3: Robustness tests
  • Figure 4: Robustness tests (LMU effect over time)
  • Figure 5: LMU-driven trade increase by country