CURRENCY AND STATE POWER

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CURRENCY AND STATE POWER

• Benjamin J. Cohen
• University of California, Santa Barbara

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SUMMARY

• Question What is the effect of an intl currency
  (IC) on state power?
• Analytical strategy Disaggregate the roles of an
  IC gt 3 questions
• 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

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CONTEXT

• Conventional wisdom an IC increases state
  power.
• But what are the specific causal pathways? To
  answer, we must understand
• Meaning(s) of state power
• Implications of separate roles

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STATE POWER

• Monetary power a complex phenomenon.
• Two issues
• Autonomy vs. influence
• Autonomy capacity to delay or deflect costs of
  balance-of-payments adjustment
• Influence derives from autonomy
• Influence may be passive or active
• Relations as a source of power
• Relevance of asymmetries, dependencies
• Influence as a function of centrality of position

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THE AGENDA

• What is the effect of an IC on an issuing states
  network position?
• What is the effect on the states monetary
  autonomy?
• What is the effect on the states capacity for
  influence?
• What is the likelihood that influence will be
  actualized?

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MONEY AND POWER

• Conventional wisdom an IC yields benefits to the
  issuing country
• Seigniorage
• Macroeconomic flexibility
• Reputation
• Leverage
• Problem What are the specific causal pathways?
• Answer need to disaggregate the separate roles
  of an IC

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ROLES OF AN INTL CURRENCY

• Private level (markets)
• Forex trading (medium of exchange)
• Trade invoicing (m/e, unit of account)
• Investment (store of value)
• Official level (policy)
• Intervention currency (m/e)
• Exchange-rate anchor (u/a)
• Reserve currency (s/v)

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THE CURRENCY PYRAMID

• Top currency (US dollar)
• Universal in scope (all six roles)
• Universal in domain (the globe)
• Patrician currencies (euro, yen)
• Limited number of roles
• Mostly regional
• Elite currencies (sterling, Swiss franc,
  Canadian dollar, etc.)
• Limited scope and domain

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PRIVATE LEVEL

• Foreign-exchange trading
• Centrality yields economic benefits but no
  political gain autonomy unaffected
• Trade invoicing and settlement
• Similar economic benefits but autonomy
  unaffected
• Financial markets (investment role)
• Autonomy is enhanced (greater macroeconomic
  flexibility)
• But difficult to translate directly into influence

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OFFICIAL LEVEL

• Intervention currency
• Centrality yields economic benefits but no
  political gain autonomy unaffected
• Exchange-rate anchor
• Similar economic benefits but autonomy
  unaffected
• Reserve currency (reserve role)
• Autonomy is enhanced (greater macroeconomic
  flexibility)
• May be possible to translate directly into
  influence

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INFERENCES

• 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

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INTERDEPENDENCIES

• Is either s/v role (investment, reserve)
  dependent on any of the m/e or u/a roles?
• Private level No
• Appeal as s/v depends on financial markets, not
  use for forex trading or trade invoicing
• Official level Yes
• 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

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RELATIVE, CUMULATIVE IMPACTS

• 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

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CONCLUSIONS

• Three roles are critical trade, investment, and
  reserve roles
• 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
• Commitment to broad financial-market development
• Commitment to wider use of the national currency
  in trade invoicing and settlement