CURRENCY AND STATE POWER Benjamin J. Cohen University of California, Santa Barbara
SUMMARY o o Question: What is the effect of an int’l currency (IC) on state power? Analytical strategy: Disaggregate the roles of an IC –> 3 questions: n n n o What is the effect of each role alone? Are there interdependencies among roles? What are their relative or cumulative impacts? Conclusion: Three roles are paramount – in financial markets, trade, and central-bank reserves
CONTEXT Conventional wisdom: an IC increases state power. But what are the specific causal pathways? To answer, we must understand – n n Meaning(s) of state power Implications of separate roles
STATE POWER o o Monetary power: a complex phenomenon. Two issues n n Autonomy vs. influence o Autonomy = capacity to delay or deflect costs of balance-of-payments adjustment o Influence derives from autonomy o Influence may be passive or active Relations as a source of power o Relevance of asymmetries, dependencies o Influence as a function of centrality of position
THE AGENDA o o What is the effect of an IC on an issuing state’s network position? What is the effect on the state’s monetary autonomy? What is the effect on the state’s capacity for influence? What is the likelihood that influence will be actualized?
MONEY AND POWER o Conventional wisdom: an IC yields benefits to the issuing country n n o o Seigniorage Macroeconomic flexibility Reputation Leverage Problem: What are the specific causal pathways? Answer: need to disaggregate the separate roles of an IC
ROLES OF AN INT’L CURRENCY o Private level (markets) n n n o Forex trading (medium of exchange) Trade invoicing (m/e, unit of account) Investment (store of value) Official level (policy) n n n Intervention currency (m/e) Exchange-rate anchor (u/a) Reserve currency (s/v)
THE CURRENCY PYRAMID o “Top” currency (US dollar) n n o “Patrician” currencies (euro, yen) n n o Universal in scope (all six roles) Universal in domain (the globe) Limited number of roles Mostly regional “Elite” currencies (sterling, Swiss franc, Canadian dollar, etc. ) n Limited scope and domain
PRIVATE LEVEL o Foreign-exchange trading n o Trade invoicing and settlement n o Centrality yields economic benefits but no political gain – autonomy unaffected Similar: economic benefits but autonomy unaffected Financial markets (investment role) n n Autonomy is enhanced (greater macroeconomic flexibility) But difficult to translate directly into influence
OFFICIAL LEVEL o Intervention currency n o Exchange-rate anchor n o Centrality yields economic benefits but no political gain – autonomy unaffected Similar: economic benefits but autonomy unaffected Reserve currency (reserve role) n n Autonomy is enhanced (greater macroeconomic flexibility) May be possible to translate directly into influence
INFERENCES o o o All six roles generate economic benefits Political benefits derive only from the store-of-value roles (investment, reserve) But this does not mean that only the s/v roles matter. Why? Because of interdependencies among roles
INTERDEPENDENCIES o o Is either s/v role (investment, reserve) dependent on any of the m/e or u/a roles? Private level: No n o Official level: Yes n o Appeal as s/v depends on financial markets, not use forex trading or trade invoicing Politics apart, choice of reserve currency tends to reflect patterns of currency choice in trade relationships Inference: Three roles matter critically – trade, financial, and reserve
RELATIVE, CUMULATIVE IMPACTS o o o Of the three (trade, financial, reserve), the investment role (alone) contributes least to state power But the investment role is critical in paving the way for a reserve role The link between the two? The trade role
CONCLUSIONS o Three roles are critical: trade, investment, and reserve roles n n o The two s/v roles enhance autonomy, creating a capacity for influence Alone, the investment role has little impact But a reserve role is unlikely without, first, an investment role The link between the two is the trade role Practical lesson: For a government that wants to enhance its monetary power (autonomy, influence), there are two critical imperatives: n n Commitment to broad financial-market development Commitment to wider use of the national currency in trade invoicing and settlement
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