The Power and International Politics of Money
Summary and Keywords
War, trade, and money synergistically developed over three millennia, each proving important to the emergence of nation-states. By the 19th century, fiduciary money—forms of money based on trust, such as paper money—catalyzed the development of national monetary and banking systems. As nexus of international finance and metropole of the world’s largest empire, the United Kingdom garnered political and economic power. But over the course of two world wars, power shifted to the United States. Small successes and great failures of the interwar period influenced creation of Bretton Woods institutions, completing a transformation from an international monetary system into an international financial system [IFS], which included not only monetary flows but also a formal, institutionalized system of governance. The dollar’s flows became the IFS’ lifeblood, engendering structural power for the United States, which has been held in place through reserve currency status, institutional stickiness through banking and currency trading, and ideational influence. Introduction of the Euro and attempts in Asia to dismantle the “Asian Bloc” have shaken, but not removed, American structural power. Money’s foundations have always rested on trust, trading, and risk taking; emergence of extensive credit and virtual money, and related security concerns, bring forth new topics resting on these old foundations.
The Study of Money
This article traces the development of four threads in the IPE and related literatures concerning the political economy of money. Creation of money initially occurred simply to measure and record transactions. Present-day money consists of complex instruments, virtual money, and derivatives of money. Modern banks create money through fractional banking when governed by a central bank. Creation of money requires trust in money’s forms, a prime example of which is paper money. Paper money is often termed fiduciary money, indicating the inherent trust in its existence. Creation and trust would not, could not exist without the institutions of money that intermediate, govern, regulate, and set the rules of the game. Monetization has led to the growth of the power of money as money became an instrument in and of itself. Power grew from the capacity to use money to capacity to engineer the rules of the money game. An important subtheme is the emergence of structural power—herein, the capacity to engineer the rules of the game through influencing the formal and informal institutions of money and finance.
Money has been defined through its usage and qualities, which have expanded over its long history. Fundamental qualities of modern money include the following (1) it is fungible, in that it can be exchanged for other goods; so (2) this leads economists to term it the numeraire good, that good by which other goods and services are measured in an economy; (3) paper money has no intrinsic value aside from a numismatic purpose; (4) money permeates through boundaries and borders: the more portable it becomes, the more easily its crosses these boundaries and borders; (5) but this permeability is conditioned in three important ways. That is, first, money must be widely accepted by counterparties in exchange for goods or services. In economic terms, the broader a money’s acceptance, the more liquid it becomes and the more it displaces bartering in economic transactions. Second, a transaction conduit or channel must exist between the payer and payee. Third, these conduits are all influenced, governed, or controlled by institutions. Institutions include not only governments but also multilateral organizations, private actors whether individual or corporate, and nonprofit institutions ranging from NGOs to terrorist networks.
Cohen (1998, pp. 27–31, 125–134), among others, has remarked that the stronger the government or institution backing the currency/money in question, the more extensive the geographic area in which that money has value, and this rough rule of thumb goes back some three thousand years (Guanzi, 4th-century B.C.). But Adebayo (1994), Cipolla (1967), and Wagoner (2014) indicate just how rough this rule may be, as money’s coinage and usage has been linked as much to wealth and trade as it has to political power and to waging war. And many scholars have noted that the nature of sovereign money, wherein political borders mandate usage of one currency while restricting other currencies, is a modern phenomenon (Cohen, 1998; Helleiner, 2002; Klein, 1974).
The above-noted qualities of money have also been conditioned by its portability, acceptance in trade, the fiduciary nature of paper money, the construction of political borders, and the distribution of power (Cipolla, 1967; Cohen, 1998; Helleiner, 2002; Horesh, 2013). Reflecting these conditioning factors, students of money have attached different names to money; commonly used names include currency, capital, financial assets, financial instruments, and, in a broad functional sense, precious commodities such as gold. The name assigned in a particular instance to money is partially dependent on the exact application for which money is being used and the property rights attached to that specific manifestation of money.
When Money Was Simple
Some date the origins of money to a set weight of grain in Assyria (c. 1700 bc) or representative chits used in India some 5000 years ago, but these origins are contended. Scholars have long linked the ties between money and political power; Horesh (2013) points to linkages between coinage and Chinese kingdoms’ power nearly three millennia ago, while Herodotus (440 B.C.) wrote that Croesus’ power in Anatolia was tied to his great wealth. Croesus’ and other early sovereigns’ capacity to coin required access to mines as well as sufficient wealth, enabled mass production of what Klein (1974) argues became one of the first brand name goods. Yet IPE scholars have seen money as vehicles of trade as well as war, and scholars have argued that money is essential to both. Thucydides wrote of the smallness of a Greek war flotilla “due not so much to scarcity of men as of money,” and explained that Corinthian ships, and therefore political power, was founded upon “her great money resources, as is shown by the epithet ‘wealthy’ bestowed by the old poets on the place” (1999, pp. 8, 9); scholars writing in Guanzi (4th-century B.C.) argued that money was one of the first institutionalized sources of power in China; Sihag (2004, p. 133) details that Kautilya advised 5th-century B.C. Indian kings to mint and account for money to strengthen their state economically and politically. Heckscher (1935) detailed that money hoarding in medieval and renaissance Europe was a type of monetary mercantilism that improved kingdoms’ status in power comparisons. Aizenman and Lee (2008) noted the return of monetary mercantilism as “financial mercantilism” as modern East Asian states competed for political influence.
Cohen (1998, pp. 28–31) and von Glahn (2005) noted that early Greek and Chinese coins were used in Mediterranean and East/Southeast Asian international trade, respectively, commenting that such early projection of money without regard to political borders also brought power. African “money-objects” were produced in high volumes and used in extensive trading networks across the Sahel more than a millennium ago (Garenne-Marot, 2009). But “monetary sovereignty is a very recent thing” wrote Cipolla (1967, p.14) even if different coins were used extensively in regional and international trade as well as domestically for more than two millennia (Cohen, 1998, pp. 26–32; Frank, 1998, pp. 111–117; Horesh, 2013). Foreign and domestically minted coins (and later paper money) have circulated together even until today through habit (Porter & Judson, 1996), design, or both (Calvo & Végh, 1993). “As late as 1830 … [Mexican silver] pesos accounted for some 22 percent of the value of all coins in use in the United States” (Cohen, 1998, p. 31).
Scholars have argued that monetary sovereignty is a slippery concept requiring a difficult balancing of policies and interest groups. Early Chinese monetary history provides an example in an essay honoring Guan Zhong: “The Ruler mints coinage to establish [sovereign] currency, for the transactions of the common people.” (人君鑄錢立幣，民庶之通施也, Guanzi, 4th-century B.C., my translation. Also see Horesh, 2013, pp. 25–28). Modelski and Thompson (1996) posited that China’s ability to create the world’s first truly national economy around 11th century A.D. was founded partly upon a common currency, and von Glahn (2005) and Horesh (2013, pp. 49–64) explain that not only paper money was first introduced but also early forms of bankers’ acceptances and letters of credit. Coleman (1970) and Hart and Ortiz (2014) argue that paper money is a fiduciary form of currency, in that it requires trust if any exchange for tangible goods is to be transacted. Bankers’ acceptances and letters of credit require intermediaries to extend, for a short period, capital (Fratianni & Spinelli, 2006; Morrison & Wilhelm, 2004). Such new financial institutions not only intermediated between those who had money and those who needed it, but also gradually became intermediaries between those who held political power and those who lived under them.
Money and the Development of Financial Intermediation Through Trade and War
Financial intermediaries—institutions and individuals who channel money from those who have it to those who require it—came well before widespread, successful use of fiduciary money. Pomeranz (2000), Frank (1998), and Abu-Lughod (1989) have traced the ways in which the pooling of capital led to development of financial intermediaries in Song China, in the Caliphate, and in medieval Europe between 1000 and 1600 A.D. Abu-Lughod (1989) and Mauro (1990) found that European trade fairs developed trade networks that provided a path of monetary development, as local and foreign merchants and buyers attending the fair would require money changing. Money changing meant taking in precious metals, gems, perhaps valuable tradable goods, as well as other currencies. It was a short step from changing money to extending credit at the fair, then extending credit in distance trade. Phillips (1990, pp. 76–80) notes that fairs such as these were transplanted to other parts of the world, while Frank (1998, pp. 78–83), Horesh (2013), and Pearson (1988) examine the paths by which other money changers developed into financial intermediaries across Asia.
It was another short, but risk-laden, step for money changers to extend credit to European monarchs. Heckscher (1935) and Tilly (1992) argue that, as war grew from a pillaging venture toward capture and control of territory, monarchs required money for offense and defense. Waging war and defending against invasion grew in costs for medieval European monarchs, who could not survive without accumulating ever-larger amounts of money (Bell, Brooks, & Moore, 2009; Tilly, 1992, pp. 154–155). Hanson (2001, p. 270) argued that money was “the key to war making on any large scale … without which an army cannot muster, be fed, or fight.” These costs grew in part because of the need for ships to project power and to engage in trade; merchant shipping had long been tied to capital raising (Abu-Lughod, 1989; Fratianni & Spinelli, 2006) and Chapman (1984), Frank (1998), and others argue that merchant bankers became established through extension of credit to other merchants. Significant growth in banks, banking networks, and new forms of financial instruments took off toward the end of the 14th century in Italy and Northern France (Tilly, 1992, pp. 143–151), and these developments were the midwives to capital expansion (Fratianni & Spinelli, 2006).
Kennedy (1987, pp.76–79, xxiv–xxvi) noted that the costs of waging European wars grew at a furious pace: 16th-century wars required millions of English pounds, late 17th-century wars required tens of million pounds, and by the Napoleonic Wars the cost had rocketed to hundreds of million pounds per year (see also Tilly, 1992, pp. 84–87). Money in the form of capital had to be raised or the monarchs would lose wars and might then fall from power. The monarchs could take money, receive it in the form of taxes or tribute (through building empires), or raise it through financial intermediaries (Tilly, 1992). Buchinsky and Polak (1993), Rasler and Thompson (2000), and Tilly (1992, pp. 109–117) have examined how wars’ increasing costs also served to mobilize national economies. Demand for timber and food, equipping of armies, building of ships, and development of and investment in new machinery all led to a “two-way system of raising and simultaneously spending vast sums of money [which] acted like a bellows, fanning the development of western capitalism and of the nation-state itself” (Kennedy, 1987, p. 77). Scholars found further effects on institutionalization of money through war. Capie, Goodhart, and Schnadt (1994, pp. 3–7) noted the European wars of the latter 17th century helped to seed central bank establishment in Sweden and England (see also Sobel, 2012, pp. 72–84 on quasi-central bank functions of Bank of Amsterdam); Chapman (1984, chap. 1) found that the Napoleonic Wars not only provided more fertilizer for central banking development but also for expansion of merchant banking; Buchinsky and Polak (1993) showed wars and the development of banking catalyzed the development of capital markets.
While the wars ended, the economic and technology development that the wars had set in motion continued. Increasing amounts of capital were required for trade and to stimulate European industrial development. Initial capital requirements for British industrialization in the 18th century were smaller, and could be obtained through friends, family and merchant contacts. Buchinsky and Polak (1993) and Chapman (1984, pp. 3–14), argued that development of new machinery—such as the power loom, cotton gin, and steam engine—drove demand for capital. Helleiner (2002, pp. 46–50) pointed out that an outcome of this development was steam engine-driven coin presses enabling high-speed, accurate, inexpensive coinage, which rapidly monetized European economies through use and spread of small denomination coinage. The political influence of a common, uniform, nationally sanctioned currency would become more apparent in the latter 19th century.
World systems scholars (Abu-Lughod, 1989; Frank, 1998; Modelski & Thompson, 1996; see World System History) argue for the emergence of earlier trading networks. But the density, pervasiveness, institutionalization, and political impacts of emerging monetary networks profoundly changed money and the global economy during the 19th century. Post-Napoleonic War trade and industry catalyzed interdependent systems of banking to manage global flows of money and capital. Scholars have teased out the development during the 19th century of four tightly linked networks that served to develop national and global economies: banking (Buchinsky & Polak, 1993; Chapman, 1984; Hidy, 1941); fiduciary money and its manifestations (Chapman, 1984; Coleman, 1970); national monetary systems; and international monetary systems (Eichengreen, 1996; Feis, 1930; Pitruzzello, 2004; Sobel, 2012). Interlinkages between these networks have since grown broader and deeper, and the interplay between them provides fertile ground for future study.
Banking activity began a millennia ago, but Chapman (1984), Hidy (1941), Morrison and Wilhelm (2004), and others argue the foundations of modern banking arose through the cross-Atlantic trading between the New World and Europe. As this trade developed some merchants employed their capital to finance other merchants’ trading operations, some growing into merchant banks, and some of those later developed into commercial or investment banks. Checkland (1953) and Pomeranz (2000, pp. 174–181) note that Asian trading networks generally did not develop merchants into bankers, and Jones (2000) explains that Asia-based banks generally developed later in the century and remained separate from merchants. These developments influenced modern money, and scholars are divided regarding why Anglo-American banking became the model for today’s global banking. For instance, Kuroda (2013) provides a fascinating analysis of how development of currency along different paths affected credit trajectories in China, Japan, and England. But an IPE scholar may look to politics for answers as well. By 1000 A.D., geographically dispersed monetary trading had developed across the Sahara and the Sahel (Curtin, 1983; Garenne-Marot, 2009); extensive monetary systems with complex ownership and risk sharing developed across the Caliphate (Khan, 1929; Kuran, 2005) and in Northern India (Pearson, 1988; Wagoner, 2014); Song Dynasty China had complex banking arrangements and high-quality coinage volumes that were not matched in Europe until the 19th century (von Glahn, 2005; Horesh, 2013, pp. 49–64). Adebayo (1994), Frank (1998, pp. 237–241), Pearson (1988), and others point out that the rise of European colonial power disrupted monetary arrangements in other parts of the world (International Political Sociology of Empire).
Hidy (1941) and Morrison and Wilhelm (2004) point out that the emerging network of merchant bankers, attorneys, shippers, and forwarders engaged in the high-risk, high-return Atlantic Trade required larger and longer-term capital deployment by the mid-19th century. Tomz (2007) points to increasing capital needs over the last three centuries required honoring debts, and that honor came to be seen through institutional capacity and credible commitment.
Money and the Development of National and International Monetary Systems
The latter third of the 19th century witnessed development of national monetary systems based on financial intermediation networks and national money, and of the slow emergence of an international monetary system. Jevons (1907 ) provided an early argument as to why national governments experienced great difficulty creating development policies, governing economies, and lowering transaction costs without a common currency. Helleiner (2002) points out four more important, and political, uses of national currencies, all of which impelled governments toward imposing standardized money: first, the imagery on currencies created a strong sense of national identity, which an Italian minister characterized in 1862 as “… the most popular, most constant and most universal monument that can represent the unity of the nation” (2002, pp. 101–110, quote 108). Second, as the most circulated good within a country, currency served as a communication medium (110–113; cf. Hart & Ortiz, 2014; Simmel, 1900, pp. 77–82). Three, trust was not only required to use and hold paper currencies, but trust was also enhanced when responsibility underlying that trust was embraced and managed by the government (13–115; see Desan, 2010, as indicative of how trust was not part of medieval currencies). And fourth, national sovereignty (115–118; but see von Hayek, 1976) was strengthened through all these uses and through the establishment of currency-hardened borders (Cohen, 1998, pp. 35–46; Porter & Judson, 1996). Cohen (1998, p. 64) adds a national currency’s capacity as “revenue of last resort,” which is the ability to issue currency to settle governments’ bills and debts. Seignorage—issuing notes or government bonds at cost to government lower than a private issuer would pay—was not an important factor until later (Helleiner, 2002, pp. 91–96).
Von Glahn (1996), Helleiner (2002), and Kuroda (2013), among others have argued that fiduciary money—paper money in its many forms—required honor, trust, and promises in order for it to be accepted or even produced. Competitive supply of money is a completely promised-based system in which script and coin of banks, merchants, and foreign governments circulate freely, and Fischer (1986) and von Hayek (1976) note that contention between the advocates of competitive money and imposition of national currencies characterized debates over money in the latter half of the 19th century. The degree of acceptance of competitive money in transactions is based on the recipients’ belief in its underlying value, which Klein (1974) termed its “brand name.”
In the 1870s, two British economic thinkers were foundational in designing national and international monetary systems. Jevons (1876, pp. 13–16) codified the four functions of money as (1) a medium of exchange; (2) a common measure of value; (3) a standard of value; and (4) a store of value. He warned that people do not differentiate between these functions and so “become confused together in thought” (p. 17), arguing that “money requires different properties as regards different functions” (Jevons, 1876, p. 33). Cohen (1998) and Helleiner (2002) point out that his codification has since remained serviceable with small adjustments to account for internationalization (Krugman, 1984; Strange, 1971) and development of new financial products (Allen & Santomero, 1997; Rajan, 2006). The second British economic thinker, Bagehot (1873, pp. 56–57), is commonly credited with developing the Lender of Last Resort concept in central banking (Capie et al., 1994, pp. 84–85): “holders—one or more—of the final Bank reserve must lend freely … at very high rates” to higher quality firms in the financial network. He noted the inherent network fragility of London, where there are “very many more persons under greater liabilities than there are, or ever were, anywhere else” (Bagehot, 1873, p. 57) the nature of which creates financial risk that can only be addressed by “the Bank of England [which] keeps our ultimate bank reserve, and therefore it must use it in this manner” as quoted above (Bagehot, 1873, p. 64).
Chapman (1984) and Feis (1930) document that, by the mid-19th century, London sat at the center of the most developed, sophisticated financial market in the world. Recognizing the growing link between money and international political power, other countries sought to catch up; in France the development of joint-stock banks led to the founding of Crédit Mobilier, a very large publicly traded bank that concentrated significant capital (Chapman, 1984, pp. 132–135; Landes, 1956). This large-scale joint-stock bank model was adopted in Germany, and then developed into the universal bank prevalent today. Tilly (1989, pp. 195–196) notes that the near-concurrent founding of private Deutschebank with the new central bank, the Reichsbank, and implementation of a pan-German currency, the Mark, meant that the “powerful support mixed banks gave German industry and trade rested in part on the payments network and liquidity guarantee it [a national bank with a gold-backed national currency] provided.”
Bagehot’s appreciation of monetary networks extended to financial panics, money flows, and trust. For financial panics “we must look first to the foreign drain (of money), and raise the rate of interest as high as may be necessary” (Bagehot, 1873, pp. 56, 45–47), thereby protecting the national monetary system against international panics. Eichengreen (1996) and Gallarotti (1995) note that balancing cross-border money supply and demand still required gold transfers between central banks in the late-19th century. And the United States, by 1900 the world’s largest economy, still lacked a central bank. By the time the “Fed” [the Federal Reserve Bank] was established in 1913, the United States was not only the world’s largest economy, but perhaps the major cause of global financial instability (Einzig, 1935)—conditions that some authors contend remain in contemporary times (Bhidé, 2009; Strange, 1987, pp. 569–572).
Alexander Hamilton wrote in 1787, “money is with propriety considered as the vital principle of the body politic” (1787b; in Cooke, 1975, p. 188), and strongly advocated for a central bank to issue paper currency, borrow and repay debts, and lend to industry and agriculture. Yet this required 120 years of domestic political contention to come into permanent being (Broz, 1997). Moen and Tallman (1999) suggest American bankers backed central bank establishment because the Panic of 1907 frightened them into realizing bank reserves must be better managed, regulated, and backed. Broz (1997) argued that an important factor behind Fed establishment was to back the U.S. dollar as an international currency for use in trade and finance; Wicker (2005) counters that a debate over an asset-backed currency was an early motivating factor, but the final decision for Fed establishment was governance related.
Two critical shifts came with Fed establishment: First, American banks’ reserves would now be backed and reserve levels set, enabling these banks to create credit—more credit than before the establishment of the Fed—through fractional banking. Fractional banking in addition to direct deposit of Fed money into American banks would increase money supply. And the second was that a strong, stable dollar with international acceptance would be created. An international currency would require powerful international private banks as well. President Wilson presciently linked private banks with the structural power of money by enthusing in a 1916 speech: “… those who finance the world must understand it and rule it with their spirits and with their minds” (quoted in Frieden, 1988, p. 71). All of these factors would empower the new Federal Reserve Note—the Dollar—to a level unparalleled in the history of money and finance.
Money’s Cause and Effect: Transition From an International Monetary System to an International Financial System
As World War I came to an end, Chapman (1984) notes that the interpersonal, almost intimate money market network described by Bagehot a half-century earlier was disappearing. Now, American bankers “competed with each other and with the banking houses of other [international financial] centres for every loan transaction” (Einzig, 1935, p. 129). Despite the competitive vigor originating from the United States, Ahamed (2009) notes that some interpersonal relationships built around lending and managing money, such as that between Bank of England Governor Montagu Norman and New York Fed Governor Benjamin Strong, remained important.
We might consider at this juncture what is implied in the difference in terms between an international monetary system and the broader conceptual framework of an international financial system [IFS], which includes not only monetary relations, the interlinkage of money between levels, and financial contracting and financial market operations. but also an actual governance system. While some have called the pre-World War I Gold Standard an IFS, Gallarotti (1995) calls it an international monetary regime, and points out the weak ad hoc nature of intervention and system management. Eichengreen (1992) and Gallarotti (1995) explain that settlement of bilateral trade deficits required exports of gold as countries attempted to maintain fixed exchange rates pegged through gold under the Gold Standard. This reactionary adjustment mechanism sometimes caused sudden, painful domestic economic swings due to the fact that national currency issuance was limited to domestic gold supply so, when gold flowed out to balance a trade deficit the money supply shrank suddenly. But the adjustment system did work some of the time (Eichengreen, 1996; Gallarotti, 1995; Keynes, 1923). With World War I’s onset the Gold Standard ended. But Ahamed (2009), Capie et al. (1994), and Gallarotti (1995) discuss how, with the horrors of World War I so recent, a naive optimism about the good old pre-War days took hold about which Keynes (1923; also see Best, 2005, pp. 39–43) duly cautioned policy makers to no avail.
Interwar attempts to resurrect the Gold Standard failed (Eichengreen, 1992; Frieden, 1988; Keynes, 1923). Ruggie (1982, p. 391) cautions us against “counterfactual historiography” where “an outcome is as overdetermined as institutional failure in the international economy between the wars.” But failure is a better teacher than success in IPE scholarship, and a century of superb scholarship has laid blame for institutional failure at many doors: of the central bankers (Ahamed, 2009; Friedman & Schwartz, 1963); of internecine American political battles (Einzig, 1935; Frieden, 1988); with the French obsession for accumulating gold reserves and insistence on returning to “Gold Standard II” even after it had failed in the later 1920s (Mouré, 2002); with the incapacity at an international systemic level to construct a workable postwar settlement with Germany (Keynes, 1919) or grasp that a new gold standard was neither rational nor achievable (Eichengreen, 1996; Keynes, 1923); and the failure of the United States to assume its hegemonic mantle (Kindleberger, 1973; cf Sobel, 2012). While the consternation and contention around whether to return to new Gold Standard or not produced great heat but little light, there were important institutional developments. First, Simmons argues that the establishment of the Bank for International Settlements [BIS] provided a basis for future monetary cooperation. BIS creation was driven by concerns around German reparations, but “not a single government actively supported the establishment of an international bank; they had to be convinced by central and private bankers that their reparations interests would actually be furthered if such a bank were established” (Simmons, 1993, p. 398). Second, Helleiner (2002, pp. 140–157) and Capie et al. (1994) point out that many central banks were established around the world in the image of the Bank of England, in the image of the Fed or an amalgam of the two, under the firm, nurturing hand of one of these central banks. Third, a highly structured regulatory system established in the 1930s in the United States influenced financial and monetary governance elsewhere as a sequence of legislative bills and executive orders placed stricter limits on the entire range of financial industry activities, separating banking functions and mandating stricter laws and regulations governing investments (see Alessandri & Haldane, 2009; Bhidé, 2009, p. 227; van Cleveland & Huertas, 1985, chaps. 7, 10).
Small success and great failures in the interwar period set terms of the debate for a post-World War II system that is still contested by scholars (Andrews, 2006; Best, 2005; Eichengreen, 2015). Skidelsky (2001, pp. 202–252) argues that the complex motivations and pressures behind the main negotiators at Bretton Woods—Dexter White for the United States and Keynes for the United Kingdom—produced a compromise that was ultimately unstable: The British side saw fixed exchange rates demanded by a gold standard as the prime cause of the volatile 1920s and painful 1930s, while the American side saw a prosperous 1920s swept away by the collapse of the gold standard. After World War II the United States was then the world’s largest creditor, the United Kingdom as a large debtor; and Keynes wanted to preserve the Commonwealth economic system that benefited U.K. manufacturers and supported the pound, while the United States wanted an end to colonial empires (Kennedy, 1987, pp. 357–366; Skidelsky, 2001, pp. 181–188, 202–252). The new system incorporated aspects of a quasi-Gold Standard in that the U.S. dollar would be tied to gold’s price, then other currencies linked to the dollar. But an adjustment mechanism sufficiently robust to rejigger currency exchange rates when crises struck was lacking. Keynes wanted a more robust mechanism—and Bretton Woods institutions with teeth—but got neither (Skidelsky, 2001, pp. 345–358).
Ikenberry (2001) posits that the United States wanted to provide institutional foundations for hegemonic stability after World War II. Hegemonic Stability Theory has been proposed by Kindleberger (1973) as a comprehensive framework as to why the interwar System failed. Sobel (2012) has employed the framework to explain what is required for stability, although Snidal (1985) points out that the theory did not provide a list of necessary conditions for stability. Following Snidal’s argument, this meant that Bretton Wood designers only knew what did not work, and the institutional framework required to achieve hegemonic stability would have been unclear to them. Best (2005) argues that ambiguity, not only an aspect but an asset in financial markets, has slowly but surely been designed out of the IFS. Or, rather, an attempt has been made to dampen volatility, minimize risk, and remove uncertainty. The outcome was that the Bretton Woods institutions’ design lacked teeth, and the institutions would be forced to rely on moral suasion alone. Only much later would Pauly (2001, p. 469) characterize their modern roles as “enforcers in a resurgent system of global capitalism.”
The dollar was the heart of the new IFS and the dollar’s flows became its lifeblood, engendering considerable structural power as Gill and Law (1989) note. The dollar’s privileged position as the preferred reserve currency brought significant direct gains to the U.S. government through seignorage as noted by Cohen (1998, pp. 122–123), but many indirect gains as well. Rothschild (1976), Krugman (1984), Strange (1987), and others have pointed out that U.S. financial institutions accrued advantages through international commodities’ and manufactures’ trade priced in dollars, and through direct and portfolio investment denominated in dollars. Dollar-denominated trade and investment increased American banks’ attractiveness to existing and potential clients and spurred their global expansion (van Cleveland & Huertas, 1985). Monetary arrangements were critical in the collapsing colonial empires, in the emerging contention between the USSR and the United States, and resulting postwar reconstruction schemes like the Marshall Plan in Europe and the rebuilding of East Asia. Other countries, particularly France, grew frustrated with the asymmetric benefits culled by the United States and by American firms. Watching their own colonial empire fall apart, French leaders termed this emerging dollar-based system “l’impérialisme américain.”
An example of this political influence and structural power accruing to both the United States and to its financial institutions came through the East Asian Dollar Bloc, which Calder (2004) argues may be seen as marrying postwar U.S.-East Asian security arrangements to the financial and monetary architecture of Bretton Woods. Fundamentally, U.S. dollars had to be accumulated by Asian nations in order to develop, which led to capital flows, investments, and goods generally priced in dollars and often moving through U.S. financial institutions. “America accorded Japan unusually favorable (and highly asymmetrical) trading and investment arrangements” after World War II (Calder, 2004, p. 144), and Maehara (1993) points out that Japan reciprocated in part by supporting the U.S. dollar and assumed “costs of adjustment” at key periods over the next 60 years. Increasing levels of U.S. government and private debt have been bought and held by East Asian countries since the 1980s (Aizenman & Lee, 2008; McKinnon & Schnabl, 2004).
As the U.S. national budget trended toward deficit beginning in the late 1960s, more U.S. Treasury debt was issued. Eichengreen (1996) notes that internationalization of the dollar progressed partly through design, and partly through happenstance. Offshore dollar accounts had grown since implementation of the Interest Equalization Tax in 1963 to tax overseas interest earned by American corporations and individuals. To escape taxes, American corporations began to leave dollar balances in overseas accounts. The accumulated U.S. dollars were convenient to use in less-regulated loans, and an overseas market for dollars and dollar-denominated bonds developed. Demand for these “Eurodollars” indirectly led to rapid growth in international banking services: “[American] banks’ expansion has been most luxuriant where it is most free of government restrictions: above all, in the Eurocurrency business. Of all the flora of the boom, Eurobanking has been the most fecund,” Rothschild wrote in 1976.
Triffin (1960) argued that the IFS was inherently unstable: excess demand for U.S. dollar-based reserves also increased overseas dollar balances, leading to worries about whether the United States could honor convertibility of dollars into gold (cf. Cohen, 1998, pp. 117–119). Succumbing to this “Triffin dilemma,” the Nixon administration ended gold convertibility for the dollar in 1971 then allowed the dollar to devalue in 1973. Frasher (2013) and Eichengreen (1996) argue the Nixon administration merely sought policy latitude and cared little for commitments, “play[ing] bull in a china shop” (Eichengreen, 1996, p. 130). We can see in the Bretton Woods negotiations, the construction of postwar reconstruction, the deconstruction of colonial empires, and the benefits accruing to U.S. banks through dollar hegemony how the roots of structural power grew: “Power in the system accrues to the government which controls the dominant currency as the rest of the global economy organizes itself with that economy at the core. This allows the core economy to ‘resolve’ the [Triffin] dilemma by pushing the costs of adjustment onto others” as Winecoff put it (2014, p. 90). This structural power flows directly into money power: Kirshner (1995, p. 20) types such power into three sets of policy instruments, all of which the United States perfected: manipulating currencies, creating and enforcing monetary dependence, and through purposefully disrupting the IFS (also Andrews, 2006, pp. 18–19; but see Armijo & Katada, 2015).
“In the absence of a [currency] adjustment mechanism, the collapse of the Bretton Woods international financial system became inevitable. The marvel is that it survived for so long” (Eichengreen, 1996, pp. 95–96). Aliber (2005), Capie et al. (1994, pp. 29–34), and Frasher (2013) see the slow train wreck of the Bretton Woods Agreement over 1971–1973 ushering in an unstable time characterized by currency volatility, higher inflation, and collapses of banks and national banking systems. Overseas the U.S. dollar flowing through trade and investment stimulated demand for more dollars, which trading and investing “country-pairs” then use in bilateral transactions (Goldberg & Tillec, 2008). This demand for dollars in the post-Bretton Woods era gave rise to currency trading desks in which “cross-trading” between many currencies were more efficiently transacted through trading first into dollars, then into the target currency, further privileging the dollar.
Henning (1998) argues that European nations felt a need to respond to the dollar hegemony and volatility, and the response materialized as a common European currency. Briefly, a common currency union is the most integrated state of a political economy save an actual nation-state, as currency union requires considerable legal, regulatory, legislative, infrastructural, industrial, and security coordination and commonality (James, 2012; Marsh, 2009; Viner, 1950). Three foundational concepts underlay the introduction of the Euro: That a customs union could represent the first step, requiring a political solution as “economic planning has made trade barriers protective of more than allocation of resources and has thus made their removal a much more delicate and economically debatable matter” (Viner, 1950, p. 138); the expectation that currency adoption would improve economic outcomes, and that “the existence of more than one (optimum) currency area in the world implies variable exchange rates” and so policy flexibility (Mundell, 1961, p. 511); and that a politically integrated Europe would be the way to end European war, but that “Europe will not be made all at once, or according to a single plan. It [would] be built through concrete achievements which first create a de facto solidarity” (Schumann, 1950).
The gradual accumulation of “concrete achievements” culminated, in unified currency terms, in the launch of the Euro in 1999. Marsh (2009) and Mundell and Clesse (2000) see a series of currency and financial crises—before and since launch—which served to impel the European Union forward: European currency linkage in the 1970s after the collapse of Bretton Woods, banking crises in the 1980s, the ERM drama of 1992, the effects of the late 1990s’ Asian and Russian financial crises, and the continued policy debates as to how to address the lingering effects of the 2007–2008 global financial crisis. But James (2012) and Moravcsik (1998) also note that motivating policy makers was a growing sense of economic and political interdependence and a realization that to compete with the United States required common purpose and a common currency.
Modern Money: Networks, Influence, and Information
Strange (1987, p. 565) made a powerful argument for ongoing U.S. hegemony based on four measures of structural power: influence over “other people’s security from violence”; “ab[ility] to control the system of production of goods and services”; capacity “to determine the structure of finance and credit”; the “most influence over knowledge.” Given that money and capital are required for first and fourth and fundamental to second and third, the linkage between structural power and money is direct and unequivocal (Cohen, 2000; Gill & Law, 1989; Sobel, 2012).
Strange titled her 1987 work “The Persistent Myth of Lost Hegemony,” and consistent American capacity to manage the IFS provides a foundation for this persistence. Cerny (1994), Gill and Law (1989), and Poon (2003) see the U.S. dollar’s continued position at the center of trade and investment demonstrates its central network node nature in the IFS, held in place by reserve currency status (Cohen, 1998; Krugman, 1984, p. 274); institutional stickiness through banking, currency trading, and other forms of financial intermediation (Oatley, Winecoff, Pennock, & Danzman, 2013; Pauly, 2001; Winecoff, 2015); and ideational influence, including the persistence of neoliberalism (Chwieroth, 2010; Konings, 2007; Pauly, 1997). Importantly, the American “node” is not one node, but multiple nodes implanted throughout all levels of the IFS. And Cerny (1994) and Strange (1990) argue that dominance comes not only from capital flows, but also from information flows. Dooley, Folkerts-Landau, and Garber (2003), among others, have claimed this American centrism is clearly still evident and even increasing in a resurgence of the Bretton Woods System, which they term called Bretton Woods II, wherein countries with capital surplus obtained through international trade invest into dollar-denominated debt instruments, thereby supporting the dollar, underpinning the U.S. trade deficit, and financing the U.S. budget deficit.
Many scholars have argued, however, that the institutional channels and ideational foundations of the present version of the IFS not only empower the United States but also constrains it as well. Both capital and information flows are conditioned through rules by which the IFS is managed. Capacity to change the rules in this complex system is heavily dependent on power over rule making (Pauly, 2001; Porter, 1993; Underhill & Zhang, 2008); the legacy of previous rules and capital flows (Oatley et al., 2013; Sobel, 2012; Tomz, 2007); the interplay between national interests and IFS management (Abdelal, 2007; Frieden, 1991; Pérez, 1997); and the power of existing private financial institutions and financial centers (Pauly, 2001; Underhill & Zhang, 2008; Young, 2013). Poon (2003) and Tschoegl (2000) argue the outcome is still dollar-centric and U.S.-centric through physical financial center clustering and the flows of capital (Oatley et al., 2013) and information (Knorr Cetina, 2005).
Money Strategies for the Rest-of-World
A dollar-centric world benefits those who call the dollar “home” at each level of international political economy: systemic, national, market, corporate. and individual (Cerny, 1994; Sobel, 2012; Strange, 1990). Strange (1971) drew a hierarchy of currencies, roughly correspondent to status in the “world power structure,” categorized as Top, Master, Negotiated, and Neutral (see also Andrews, 2006; Cohen, 1998, 2000). How a nation pursues money policy depends in part on where it finds itself in the currency hierarchy, but only in part. Calvo and Végh (1993) examine one possible national response to dollar hegemony through dollarizing an economy. The range of options in dollar-linked national monetary policy softens toward currency boards, hard pegging, and various loosely dollar-linked currency arrangements (Andrews, 2006; Cohen, 1998). There are alternative strategies of developing money strategies within the IFS, and scholars have identified them at each level.
Developing an alternative to the dollar, as exemplified in the launch of the Euro, is the most dramatic systemic level response, but there are others. France presents another response. Kindleberger (1972) argued the conundrums that France faced in the 1920s and 1960s were ones in which a “near-great power finds itself in a cleft stick. If it cooperates in international monetary matters … , it perpetuates the domination of one or more great powers; if it attacks the system a l’outrance, it threatens to bring it down around its ears” (1972, p. 41). But the present-day IFS empowers veto players who might influence the course and structure of international financial governance. Abdelal (2007) shows how later French economic diplomats learned to work together to exert considerable influence in IFS construction and rule making in the 1980s and 1990s through pursuing a policy strategy of “managed globalization”—modialisation maîtrisée. Pérez (1997) details the creative way in which Spanish technocrats within the central bank and finance ministry engineered a mixed response incorporating systemic, national, and market strategies, working with Spanish banks to enable competition and growth within Spain, then outside its borders, after 1976. Initially tiny in relative terms, Spanish banks, and the Spanish economy, lagged woefully behind the rest of Europe in the run-up to Euro launch in 1992. Yet two Spanish banks survived domestic consolidation, grew to become national champions and now rank among the top 30 banks in the world (Global Finance, 2012).
Armijo & Katada (2015) explicate a full range of “offensive” and “defensive” financial statecraft strategies directed toward bilateral and systemic targets. China has employed many of these strategies. Echoing French backing for special drawing rights (SDR), Vice Chairman of the People’s Bank of China Xiaolian Hu (2009) commented that “The international community should not overlook the risks arising from the international monetary system and pay adequate attention to surveillance over the countries that issue the world’s major currencies … The role of SDR should be enhanced.” Subramanian (2011) notes Chinese technocrats’ desire to promote the yuan as an international currency, and this has resulted in the establishment of multilateral banks like the Asian Infrastructure Investment Bank as well as a BRICS Development Bank (Economist, 2015), liberalized capital controls and extended loans, and a yuan-denominated bond market. Armijo and Katada (2015, pp. 50, 53) point out that Argentina has used deployed offensive and defensive financial statecraft as well, including nationalization, sovereign bond default, jointly issued bonds and bilateral investment agreements, to gain degrees of freedom from dollar hegemony.
At a corporate level, some financial institutions have taken advantage of dollar hegemony while also seeking escape when it suits their purposes. Banking economics is predicated on the fragility of banking institutions (Aliber, 2005; Diamond & Dybvig, 1983) and financial markets are complex networks in which risk is shared and transmitted (Aliber, 2005; Reinhart & Rogoff, 2009) without actors always being fully cognizant of these risks (Rajan, 2006) or wishing to accept the risk (Bhidé, 2009). So banks have attempted to increase robustness of their respective nodes in order to survive in part by becoming too big to fail (Alessandri & Haldane, 2009; Brewer & Jagtiani, 2007) and in part by diversifying outside dollar-based economies. Skidelsky (2001) and other scholars have remarked that Bretton Woods negotiators had thought that money and the institutions handling it would remain “faithful handmaid[s] of labor and industry” in Hamilton’s terms (1787a). While Alessandri and Haldane (2009) and Bhidé (2009) warn of banks gaining too great a political advantage, Pauly (1997) cautioned nearly 20 years ago that the legitimacy of financial globalization may have its limits and a backlash could weaken banks. Emmenegger points out that banks’ capacity to escape is indeed limited, in that the United States can use its structural power to compel international banks to comply because those banks are dependent on the structural power of the dollar and dollar-linked financial markets.
Virtual Money, Derivatives of Money, and Financial Information Asymmetry
Cohen (1998, p. 26) argues that “… the Westphalian model (of a national currency), enforced solely by governments, can be seen for what it really is—a limiting case at one extreme. At the opposite extreme is a world of unrestricted currency competition.” Modern development of derivative forms of money—including consumer credit, central bank-supported fractional banking, and phone-based transactions such as those carried over the M-Pesa network in Kenya—lend support to Cohen’s assertion. Bitcoin’s rise as a virtual currency provides additional support.
Vigna and Casey (2015) argue that Bitcoin also provides a strategy for individuals to transact outside the dollar-centric world, in that anonymity enables transactions to occur untraced. The nature of bitcoin “mining,” wherein firms race to solve a new transaction-issued algorithm and the fastest is rewarded with newly issued bitcoin, enables a monetary supply-demand balancing without a central bank. But because Bitcoin is not linked to a nation-state, the currency and its “exchanges” lack lender of last resort backing, which a central bank provides. Kobrin (1997) argues that such currencies also bring security risks, as non-traceable trails of untethered money may be used for anything, including terrorist and criminal activity. Governments and financial institutions are presently incapable of collecting financial data on bitcoin transactions.
Financial institutions are committed to data collection, investing more than any other industry and more that all governments combined (Gartner Group, reported in Economist, 2009). Allen and Santomero (1997), Cerny (1994), and Rajan (2006) discuss whether, through this investment, their asymmetric informational advantages are increasing. Selmier and Frasher (2013) counter that government attempts to trace and to use financial data of any sort may be considered as a form of financial statecraft, and the United States is especially skilled, powerful, and geographically situated to access these informational sources whether institutional (Oatley et al., 2013; Strange, 1990) or individual (Kierkegaard, 2011; Selmier & Frasher, 2013). Kierkegaard (2011) points out that the U.S. government has been diligently pursuing financial data encoded in many transactions, including subpoenaing SWIFT for financial transaction data even though the main server cluster was located in Belgium and so supposedly protected under European law. Europe, which has stricter personal data privacy laws, requires financial intermediaries to “anonymize” some personal financial data (Kierkegaard, 2011; Selmier & Frasher, 2013). But a recent paper by de Montjoye, Radelli, Singh, & Pentland (2015) shows that even anonymized financial data can be analyzed to reveal the transactor’s identity.
Money’s trajectory began with set weights of commodities, then later precious metals shaped into similar-sized bits and branded. The widening distance from metalist coinage to the present day can be seen through money’s 5000-year history of institution building and lengthening financial intermediation chains. Development of new currencies like Bitcoin, capacity of banks to create fractional money through central banking systems, and new forms of financial instruments that affect money supply and usage mean that monetary systems have become more complex. Money may never be exhausted as a topic for IPE, as money constantly develops into new forms. The growth, power, and reach of financial intermediaries suggest IPE scholars shift their conceptual framework from international monetary systems toward the study of international financial systems.
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