The Monetary Geography of Africa

Chapter 2. African Currency Regimes since World War II

Providing historical context for the current constellation of currency areas throws light on the potential success of initiatives toward greater monetary integration. Indeed the proposals to create monetary unions encompassing the countries of ECOWAS in West Africa and of EAC and of COMESA in East and southern Africa, to reinforce or enlarge the CFA franc zone, or to extend the rand area to SADC, to say nothing of the plan to create a single currency for Africa, need to be evaluated in light of past experiences with monetary integration. However, this is not the place for an exhaustive survey of the use of money since the dawn of recorded time. Instead, the experience in the postwar period, both before and after decolonization, seems most relevant to the extent that economies had already acquired some of the structural features that characterize them today. A look at the immediate preindependence experience shows that much of the continent had currencies that were tightly linked to the currency issued by the European colonizer. Moreover, neighboring colonies often shared the same African currency. This could be used in support of the argument that reestablishing those monetary unions is both feasible and, more speculatively, desirable. However, subsequent history suggests reasons to doubt that assessment, since in most cases those monetary or exchange rate unions were dissolved shortly after independence and each African country now typically has its own currency and independent monetary policy. The two major exceptions are the CFA 12 African Currency Regimes since World War II 2 2284-02_CH02.qxd 11/10/04 2:02 PM Page 12 african currency regimes since world war ii 13 franc zones in West and Central Africa, which consist mainly of former French countries, and the CMA centered around South Africa and the rand (though the smaller CMA countries do have their own currencies). These cases provide interesting insights into why monetary and exchange rate unions get dissolved and the institutional development needed for their success. Thus the prospects for the continued existence of these zones and the creation of new monetary unions are illuminated by the historical experience. Precolonial Period At various times in the world’s monetary history, Africa has held an important role, in particular, supplying precious metals that served as money. During the medieval period, the continent was a major source of gold, most of which reached Europe via trans-Saharan trade routes from West Africa to North Africa. From the ninth to the sixteenth century, Africa was a prime supplier of gold to the world economy until it was eclipsed by the gold discoveries in the new world. During the earlier period, “West African gold was absolutely vital for the monetization of the medieval Mediterranean economy and the maintenance of its balance of payments with South Asia.”1 With the exception of the Asante kingdom in West Africa, gold played a small role for Africa’s own monetary use. Instead, a variety of goods served as units of account, including palm oil, cotton cloths, cowrie shells, copper ingots, brass or iron bars, and brass horseshoe-shaped manillas.2 The case of cowries in West Africa has received considerable attention. The shells were imported from the Indian Ocean, so that transport costs limited the expansion of the money supply. However, improved shipping technology in the late nineteenth century led to rampant inflation.3 The limitations on their usefulness as a form of money, including their weight when carried over long distances, were a reason for the introduction of colonial coinage by the British.4 However, cowries continued to maintain their role to some extent under British rule, and they still had some exchange value in markets of northwestern Ghana as late as the 1960s.5 Despite being overshadowed by other sources of bullion, Africa continued to be a notable supplier of precious metals. The British guinea coin was named after the area in West Africa where the silver was mined, which had unusually 1. Austen (1987, p. 36). 2. Austen (1987, p. 92). 3. Austen (1987, p. 134). 4. Helleiner (2003, p. 170). 5. Johnson (1970). 2284-02_CH02.qxd 11/10/04 2:02 PM Page 13 14 african currency regimes since world war ii rich deposits. In the late nineteenth and early twentieth century, South Africa became an important enough source of gold that an interruption of its supply to the London market, when the world economy was on the gold...