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