In January 2002 the Irish pound was replaced by the euro as the legal tender and currency of the Republic, and its notes and coin are now only collectors' items. Three years earlier, management of monetary affairs passed to the European Central Bank, and legally speaking the Irish pound was already a denomination of the euro, the currency of the European Monetary Union (EMU).
Using the currency of others is not a new experience for the Irish. Indeed, for most of the past two centuries, the Irish pound has had a shadowy existence, sheltering behind the pound sterling. Just twice did the currency emerge as a truly autonomous entity—first during the Napoleonic wars and more recently for the last two decades of the twentieth century, when it fluctuated as a member of the European Monetary System (EMS). Both periods of fluctuation were uneasy ones.
All through the eighteenth century the value of the Irish pound had been fixed at thirteen Irish to twelve sterling. There was an Irish copper coinage, but before the establishment under statute of the Bank of Ireland in 1783, larger payments were mainly made in foreign silver and gold coin and in the banknotes of the small and often short-lived private banks. At first, the Bank of Ireland's notes were convertible into gold or Bank of England notes at the fixed rate, but when convertibility of both banks' notes was suspended in 1797, the Irish notes began to depreciate more quickly, puzzling many contemporaries and prompting the establishment of a parliamentary select committee. The committee's 1804 report broke new intellectual ground in pinpointing the excessive issue of bank notes in Ireland as the source of the problem. By 1821, with the dust of the wars settled, convertibility was restored at the old fixed rate; five years later, the Irish pound was effectively merged with sterling. Irish banks continued to issue sterling banknotes (a privilege which they retain to the present day in respect of their operations in Northern Ireland).
The Sterling Link
The foundation of the new state a century later called for the creation of a new currency. First on the agenda was the preparation of a national coinage, admirably accomplished with the beautiful 1926 design showing Brian Boru's harp (still to be found on the euro coins) on the obverse. The reverse shows animal representations—a woodcock on the farthing, a horse on the half-crown, and a hare, wolfhound, bull, sow, and hen on other denominations.
The financial conservatism of the early administrations of the Irish Free State is clearly exemplified by the decision to establish a currency commission, on the long-established model of British colonies, rather than a full-fledged central bank. From 1928 the commission issued Irish banknotes in exchange for sterling notes. It undertook to buy back these notes on a one-for-one basis and held a full and liquid reserve of sterling and other foreign assets. The Irish banks were also allowed to continue issuing notes, but on a consolidated basis, jointly guaranteed by the banks and the commission, rather than bank by bank (these consolidated notes began to be phased out in 1943). Bank of England notes also circulated freely, as did British coin. By 1942, attracted by the international vogue for central banking, a more activist administration had established the Central Bank of Ireland with extensive powers. However, these were at first little used, and the one-for-one sterling parity of the Irish pound never came under threat. Indeed, such calls that were made for a revision in the parity were generally for an appreciation—for example, at the time of the 1949 sterling devaluation and again when inflation was being imported as a result of sterling weakness in the mid-1970s.
It has been suggested that the one-for-one link may have served as a blinker to Irish exporters, inhibiting firms from breaking into more dynamic markets in Europe and elsewhere. By 1978 the United Kingdom still accounted for 47 percent of Irish exports, though this was less than half the share recorded in 1926. But the sterling link also provided a worthwhile discipline to government policy. Only twice did governments attempt to break away from this discipline. The first was in 1955, when an attempt to hold Irish interest rates down when London rates were rising was followed by a payments crisis that precipitated a deep recession and a surge of emigration. The second was in the late 1970s, when expansionary loan-financed government fiscal policy overheated the economy. This episode could ultimately have threatened the parity, but as it happened, it was suddenly abandoned for essentially political reasons.
It was only in 1978, when beckoned to join the EMS, a Franco-German project for a new zone of monetary stability in Europe, that the Irish government decided to make the change. At first there was some hope that it would prove possible to hold the Irish pound's value at one pound sterling while still respecting the fluctuation limits in the EMS, despite the fact that Britain had not joined the new exchange-rate mechanism. But the strength of sterling in the early months of the EMS, buoyed up as it was by North Sea oil revenues and by the tight monetary policy of the Thatcher administration, put paid to that hope. It is arguable that a continuation of the sterling link into the early 1980s would have proved politically unsupportable, considering the loss of competitiveness that it might have entailed at a time of rapidly growing unemployment associated with the fiscal adjustment of those years.
During the twenty years of the EMS the Irish pound fluctuated widely against sterling, going below 74 pence (February 1981) and as high as 110 pence (November 1992). Nor was it stable against EMS partner currencies. Realignments in the EMS were fairly frequent, averaging about one a year in the 1980s, and the Irish pound depreciated steadily against the Deutsche Mark (DM), anchor of the system, reaching a cumulative depreciation of 34 percent at its low point in 1993. These depreciations both reflected wider weaknesses in the Irish economy in those years and served to prevent a loss of competitiveness from compounding those weaknesses. Thus, contrary to the fears of many observers, linking the currency with the DM did not impose an unsupportable discipline, largely because the option of depreciation was readily availed of. By the same token EMS membership did not help to stamp out Irish inflation; though inflation did come down in the 1980s, the reduction lagged behind that of Britain.
Overall, Ireland's experience with an independent currency in the years of the EMS was not a very happy one. Interest rates were high, giving depositors a return of about 2.5 percent per annum more than would have been available in DM-denominated assets. Implicit in the interest differentials were exaggerated fears of devaluation, especially at times of sterling weakness. High Irish interest rates in the 1980s hampered fiscal adjustment and slowed economic growth.
Perhaps reflecting the checkered experiences of currency independence in Ireland, a sizable 69 percent majority voted in favor of the euro in a constitutional referendum in 1992, though many voters surely had their eyes mainly on the other tangible benefits which economic integration into Europe had brought the country. Specialists were more narrowly divided on the issue: Though a majority favored joining the EMU, few thought that the net advantages of abandoning the national currency and adopting the euro would be substantial.
SEE ALSO Banking and Finance to 1921; Celtic Tiger; Economic Relations between Independent Ireland and Britain; Economic Relations between North and South since 1922; Economies of Ireland, North and South, since 1920
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Honohan, Patrick. An Examination of Irish Currency Policy. 1993.
Honohan, Patrick. "Currency Board or Central Bank? Lessons from the Irish Pound's Link with Sterling, 1928–79." Banca Nazionale del Lavoro Quarterly Review 50 (1997): 39–67.
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