CURRENCY AND STATE
POWER
Benjamin J. Cohen
University of California, Santa
Barbara
SUMMARY
 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
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
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
THE 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 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 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 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 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 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
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
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
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