Currency and Coercion

The Political Economy of International Monetary Power

Jonathan Kirshner

• Publisher: Princeton University Press
• Year: 2020
• Print ISBN: 9780691016269, 9780691037684
• eBook ISBN: 9780691222226
• Topic: Politics & International Relations
• Subtopic: International Relations
• Index: Politics & International Relations

Jonathan Kirshner here examines how states can and have used international currency relationships and arrangements as instruments of coercive power for the advancement of state security. Kirshner lays the groundwork for the study of what he calls monetary power by providing a taxonomy of the forms that such power can take and of the conditions under which it can have effect. He then establishes the actual existence of monetary power by showing how the taxonomy is supported by the historical record, including cases from nations from all over the globe and throughout the twentieth century. He uncovers how monetary power is affected by different monetary regimes, the sources of its success and failure, and the factors that lead states to turn to its use.


Kirshner thus succeeds in developing a generalized framework for the analysis of an important yet neglected form of state power that is likely to be of increasing importance in the post-Cold War era. Although some distinguished scholars have touched on the issue of monetary power, there has been until now no standard text on the subject. Integrating security studies and international political economy, this book is a timely synthesis that will be important to the entire discipline of international relations.

Part I

THE THEORY OF MONETARY POWER

1

The Nature of Monetary Power

Money Doesn’t Talk, It Swears.

—Bob Dylan

Introduction

States and their leaders are very sensitive about the sanctity of their money. In England in 1350, counterfeiting the king’s gold or silver coinage was declared a crime of high treason punishable by death. In seventh-century China, not only were counterfeiters subject to the death penalty, but their families and neighbors faced a similar fate. In the 1960s, balance-of-payments problems “remained a constant worry” to John F. Kennedy, then president of the largest and wealthiest economy the world had ever known. “What really matters . . . is the strength of the currency,” he once said, in a lighthearted putdown of the importance of nuclear weapons. “Britain has nuclear weapons, but the pound is weak, so everyone pushes it around.”¹

This book is about the international political consequences of these concerns. It examines how states can and have used international monetary relations as an instrument of coercive power. “International monetary relations” refers to arrangements and actions that affect the value, uses, stability, and other attributes of national currencies issued by states. “Coercive power” refers to the manipulation of these relations by states in order to influence the preferences or behavior of other states. One example of this was the ability of the United States to exploit the weakness of the pound in order to force British withdrawal during the Suez crisis of 1956.²

International monetary diplomacy (which will also be called “monetary diplomacy,” “monetary power,” and “currency power”) is a neglected area of study. Scholars of international monetary relations have focused principally on questions of efficiency, cooperation, and distribution. Students of economic statecraft have emphasized trade, aid, and financial relations. This work explores the intersection between these two fields of study.

The general goal of this book is to isolate and examine monetary power. This is not to deny (or ignore) the interrelationships between monetary and other forms of economic diplomacy. Additionally, this study will focus exclusively on the use of monetary power to advance security-related or other non-economic goals. This specifically excludes those attempts to deploy monetary power taken by states that are dominated by concerns for increases in relative or absolute wealth. Once again, there are overlaps here, most obviously in the fact that in the long run it becomes increasingly difficult to distinguish between the pursuit of wealth and the pursuit of power.³ However, this focus on noneconomic goals does not require that explicit lines of demarcation be identified, or even that they exist. It simply emphasizes one end of the spectrum, where noneconomic goals are dominant. In most cases, the principal concern is clear. For example, in international trade, the same type of economic sanction can be used to advance either primarily security or primarily economic goals. In the first case, an export embargo might be aimed at destabilizing or overthrowing a government, while in the second, it might be used in an attempt to force open foreign markets.

The point of restricting the analysis to cases involving noneconomic goals is to help isolate monetary power. With the focus on security, the variable of interest has a distinctness that would be lost in a tangle of interdependent variables under the more complex settings of international economic bargaining. The emphasis on security also serves the author’s view that issues of power and security should be more explicitly integrated into the study of international political economy.

The specific goals of this book are to demonstrate the existence of monetary power and to understand how it works. This involves three major tasks. First is understanding the theory of monetary power: what forms it can take, and how and why it could be effective. Following the establishment of a theoretical framework for analysis, the second task is to establish the existence of monetary power by examining cases where it was employed. These cases will be drawn from episodes involving states from all parts of the world, throughout the twentieth century.⁴ Finally, having established the theoretical viability of monetary power and demonstrated its existence, the third task is to understand the nature of monetary power. This inquiry will be pursued along a number of lines, including the ways various forms of monetary power are affected by different international monetary environments (such as fixed versus flexible exchange rates), the sources of the “success” and “failure” of the implementation of monetary power, and the factors that lead states to attempt these techniques.

International Monetary Relations and Economic Diplomacy

As noted above, international monetary power lies at the intersection of international monetary relations and economic diplomacy. While it is a distinct issue area, monetary diplomacy draws substantially from both of these fields. With regard to the former, monetary power draws indirectly from the lessons associated with the study of efficiency, cooperation, and distribution. It remains quite distinct from issues of efficiency or cooperation. Efficiency issues have primarily been examined by economists. Here, the main issue is which type of international monetary system is superior by the standards of economists: which maximizes global welfare, has the lowest dead weight loss, interferes least in the smooth functioning of trading markets, and so on.⁵ While the monetary regime will affect the practice of monetary power, the issue of efficiency itself is blind to the concept of power. Similarly, the question of cooperation in monetary relations often involves issues of power, but deals primarily with how the distribution of power can affect the monetary system, and does not consider the converse.⁶

Distribution effects, on the other hand, do overlap with monetary power. Different monetary regimes have distinct distributional consequences. To the extent that states can use the wealth provided by a given monetary system to advance security-related goals, the consequences of distribution are relevant to the study of monetary power. In practice, this issue has been principally associated with gold-exchange standard systems.⁷ In both of the modern gold-exchange standard systems, the issuer of the key currency did take advantage of its ability to create wealth by printing currency, which accumulated, basically inconvertible, in the reserves of member countries. During World War II, Egypt and India accumulated substantial sterling balances, and in the mid-to late 1960s, several European countries, especially Germany, accumulated dollars.⁸ For this to be of concern for students of monetary power, it must be clear that the wealth was being used to finance security operations and, importantly, that power flowed from the monetary system to the dominant state.⁹

Thus, while studies of international monetary relations have not systematically considered monetary power, it can be noted that any consideration of such power necessarily draws on this field. Additionally, the choice of regime, the robustness of cooperation, and the distributional consequences of those interactions will shape the practice of monetary diplomacy.

The exercise of currency power takes place in the space of international monetary relations. This is the source of the relationship between the two. Currency power is also an instrument of economic statecraft: this in turn is the source of the relationship between monetary diplomacy and that broader field of study. However, this particular instrument of coercion has been largely ignored. David Baldwin, for example, in his excellent book, Economic Statecraft, gives examples of seventeen negative and eleven positive types of sanctions, none of which have anything to do with monetary relations or affairs.¹⁰ The influential study of Gary Clyde Hufbauer and Jeffrey J. Schott, Economic Sanctions Reconsidered, provides an in-depth analysis of 106 cases, of which 74 involve what the authors categorize as “financial” (as opposed to trade) sanctions. The bulk of these involve the suspension of aid and the freezing of assets; in fact, only three episodes involve any reference to monetary power, and in each case, the importance of monetary power is qualified. Little attention is paid to how monetary power is exercised or how important a contributing factor it was in these or other episodes.¹¹

Occasional exceptions can be found to the silence of the economic statecraft literature on monetary power. Klaus Knorr, in The Power of Nations, observes that economic coercion can occur if “A acts to put B’s international currency position under pressure.” He also notes that “a weak reserve position will curtail a government’s capacity to engage in warfare at home or abroad.” He does not consider, though, how other governments could act to manipulate reserve positions in order to affect power capabilities.¹² Yuan-Li Wu’s Economic Warfare offers an early and more focused discussion of monetary power. Wu’s emphasis is principally on wartime operations, but the techniques he discusses are relevant during nominal peace as well. In a section entitled “Methods of Stimulating Price Inflation and the Dissipation of Enemy Reserves,” Wu argues that “deliberately selling the enemy’s currency on such unofficial markets or free exchange markets maintained in adjacent neutral countries at increasingly lower rates” will promote those goals, as well as stimulating capital flight from the target.¹³ Wu’s analysis points toward a more systematic integration of monetary diplomacy into overall national strategy, but even his more detailed attention to monetary power only begins to draw attention to the existence and potential of this instrument. A detailed and systematic analysis of such power is needed.

International Monetary Power

International monetary power can be exercised in three ways: through the practice of currency manipulation, the fostering and exploitation of monetary dependence, and the exercise of systemic disruption. “Currency manipulation” refers to actions taken to affect the stability and value of target currencies. This can be used, for example, to punish or coerce: the sanctioning (or “home”) country can fail to support the target currency, or attack it outright. Monetary dependence can create a sphere of influence: a bloc of countries that use the home currency as their own, are pegged to it, or use it in international transactions provide the home country with power. With regard to the target countries, the home country gains an important degree of control over their economic destiny. With regard to third parties, the home country can gain trading advantages, which can insulate it from the policies of those outsiders, and may be able to exploit its sphere of influence to mobilize resources for war. “Systemic disruption” refers to attempts to exercise monetary power that are directed at specific international monetary systems or subsystems, as opposed to particular currencies.

Currency Manipulation

Currency manipulation is the simplest instrument of monetary power, and has the widest number of applicatio...

Table of contents

• Cover
• Title Page
• Copyright Page
• Dedication Page
• List of Figures
• List of Tables
• Acknowledgments
• Part I: The Theory of Monetary Power
• Part II: The Practice of Monetary Power
• Part III: The Potential of Monetary Power
• Index