CURRENCY AND STATE POWERCURRENCY AND STATE POWER

Benjamin J. CohenUniversity of California, Santa Barbara

SUMMARYSUMMARY Question: What is the effect of an int’l

currency (IC) on state power? Analytical strategy: Disaggregate the roles

of an IC –> 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

CONTEXTCONTEXT

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

STATE POWERSTATE 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

THE AGENDATHE AGENDA

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 POWERMONEY 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

ROLES OF AN INT’L CURRENCYROLES OF AN INT’L 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)

THE CURRENCY PYRAMIDTHE 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

PRIVATE LEVELPRIVATE 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

OFFICIAL LEVELOFFICIAL 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

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

INTERDEPENDENCIESINTERDEPENDENCIES 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

RELATIVE, CUMULATIVE IMPACTSRELATIVE, 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

CONCLUSIONSCONCLUSIONS 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