Barry Eichengreen on Global Currencies

Barry Eichengreen's last book -- Money Beyond Borders: Global Currencies from Croesus to Crypto -- is great and worth reading, as almost anything he writes. This is specially the case, since it is his most ambitious work since Globalizing Capital: A History of the International Monetary System, first published in 1996. Other writings have been focused on much more narrow topics.

First, let me say two brief things before I even get to the book, that I just finished. This is NOT a thorough review, only just some impressions from reading without going into details. Second, Barry is incredibly generous intellectually and willing to discuss openly and to listen to people who he disagrees with, and that is not a minor matter in the current environment. He came to Kalamazoo College, and the University of Utah, when I invited him, and has a chapter in a book I edited two decades ago. He also debated with me on the cause of the collapse of Bretton Woods a few years back (video here; my paper here and his here in the same issue of ROPE, not ROKE). So, my critiques of the book are friendly critiques, mostly associated to the theoretical apparatus, since the book, like the earlier one, is incredibly rich in historical detail, and is a must read. 

My biggest issue with the book is that Barry treats the international monetary system, in analytical terms, as fundamentally a market equilibrium sustained by confidence, with states and geopolitics modifying that equilibrium. My view is that it is an institutionally constructed hierarchy sustained by state power, within which markets and confidence operate. For him, power largely follows successful international money. In my view, successful international money is to a considerable extent an expression of power. Barry gives too much causal priority to trade, confidence and network effects, and too little to the fiscal and military, I might say geopolitical, foundations of international money.

His historical sequence is, in an important sense, backwards. He tends to tell the story as one in which expanding commerce generates a demand for convenient, stable means of payment and particular currencies then emerge because traders converge on them. However, the monetary institutions that make those markets possible are already political constructions. The money of account, the enforceable debt contracts, the power to tax, and ultimately the hierarchy between different liabilities are constitutive of the monetary system rather than consequences of prior commercial development.

This is particularly important when it comes to the position of the dollar. Here the argument is somewhat circular.  The dollar is widely used because it is liquid and convenient, while it is liquid and convenient because it is widely used. My explanation puts considerably greater weight on the military, and geopolitical position of the United States. The dollar system was embedded in a political order organized by the United States after World War II, including alliances, security arrangements, international institutions, foreign lending and eventually the willingness of the United States to supply dollar liabilities to the rest of the world. Dollar hegemony cannot therefore be adequately separated from American hegemony.

His last chapter -- that is particularly gloomy -- emphasizes the importance of trade and confidence, and how these build network effects.  In a section titled "Trading Places," he gives considerable weight to the fall in the US share of global exports. But that historical fact that should cause trouble for his argument. The problem he describes, the fall in the US share of world trade and output has fallen enormously while the international position of the dollar has changed remarkably little. China is an even clearer counterexample. It is central to world trade and manufacturing but the renminbi remains a relatively minor international currency.

His invocation of the Triffin Dilemma is particularly problematic. The original Triffin dilemma was specific to Bretton Woods. The United States promised to convert official dollar holdings into gold at US$35 an ounce. International liquidity required supplying dollar liabilities to the rest of the world, but the accumulation of those liabilities relative to US gold reserves eventually undermined confidence in their convertibility. More importantly, the world does not even require a US current account deficit to obtain dollar liquidity. Dollars and dollar claims can be supplied through through many mechanisms. Banks and offshore or shadow banks can create dollar liquidity, as can capital outflows from the US, or the swap lines from the Fed discussed by Barry.

Perhaps, from my perspective, the weakest case is the notion that there will be a point at which the US fiscal position will become unsustainable. The United States can certainly default on Treasury obligations. Congress could refuse to raise the debt ceiling, or the executive could refuse payment. An institutional or constitutional crisis could prevent payment. But that would be a politically imposed default, not an inability to obtain dollars. That distinction is crucial.

A government promising to pay US$100 when it is the issuer of dollars is fundamentally different from one promising to pay US$100 worth of gold or 100 euros. In the first situation the government has a nominal payment capacity that it lacks in the other two. This means suggesting that rising debt ratios could ultimately make Treasury liabilities impossible to service, as Barry suggests, reproduces the conventional analogy between the federal government and a private borrower. Not that deficits and debt might not have consequences. But default and danger to the dollar position is not one. In fact, it is the ability to spend and borrow only in its own currency that is the foundation -- what Anthony Brewer called the Fiscal-Military State -- of the the international position of the dollar.

He concludes that the dangers of a less and less trustworthy American economy, and the fact that there is no alternative to the dollar, might lead to a collapse and de-globalization process akin to the 1930s. But one can take the exactly opposite conclusion. Key currency status is not simply a beauty contest in which investors periodically choose the currency inspiring the most confidence. If there is no alternative system capable of performing the same functions, these developments do not automatically culminate in abandonment of the dollar. Inertia should simply lead to the continuation of the status quo, even if Trump is erratic and creates unnecessary turbulence. In fact, the recurring phenomenon in crises has often been exactly the opposite as what he describes. Global instability increases demand for dollars, even when the crisis originates in the United States. 2008 is the obvious example.

Barry is extraordinarily knowledgeable about the institutional and historical evolution and functioning of the international monetary system. He knows that geopolitics and military power matter. He DOES have a section in the last chapter on that. So he does not neglect the subject. But then he concludes that: "the fate of the dollar will rest on the willingness of America's leaders to uphold the rule of law, respect the separation of powers, and honor the country's commitments to its foreign partners." It is subsidiary and dependent on the institutions that create confidence on the dollar. In other words, he tends to absorb all of the political and geopolitical facts into an essentially conventional analytical structure rather than allowing them to generate a rival theoretical interpretation. In a sense, the historical narrative is richer than the theory used to organize it.

On the longevity of metal standards

In a recent post, I noted that in modern history -- in a long durée  sense -- there have been essentially three monetary standards. Repeating myself, a silver standard, dominated by the Spanish silver peso (which anchored global trade and is shown above),* and was mostly managed by Italian (Genoese) and then Dutch bankers (Bank of Amsterdam), a gold standard, dominated by British pound (that anchored the Industrial Revolution, 1st and 2nd), and was managed by the Bank of England, and a fiat standard, dominated by the dollar, and managed by the Federal Reserve and the multilateral organizations (IMF, World Bank, BIS, etc.). The transition to the gold standard was associated with the demonetization of silver (The Wizard of Oz effect, one might call it), and the rise of the dollar was associated to the demonetization of gold. I discussed both things in my paper (not paywalled paper) on the end of Bretton Woods a few years back.

However, I did not discuss why metal standards were so durable or why they were adopted in the first place. This is often interpreted in the mainstream literature as evidence of the correctness of the metallist interpretation of money origins, which does not have any basis on the archeological evidence of the development of money, I might add. Before I get to that, it is worth exploring why in the modern era, after the rise of modern nation states, silver, and gold remained the dominant standards for so long.

Metallic standards survived for a long time, but their historical function changed once a dominant state was able to impose its own liabilities as the international means of payment, reserve asset, and unit of account (this one is the central function, BTW). The rise of the pound did not simply mean that gold replaced silver because gold was technically superior. Rather, Britain’s industrial, financial, naval, and imperial power allowed the pound to become the true organizing currency of the system. Gold remained the formal standard, but the underlying system was increasingly a pound standard, as noted by Marcello de Cecco long ago. In that context, the demonetization of silver was part of the consolidation of British monetary hegemony. Silver, historically the dominant monetary metal, was displaced as the key international monetary anchor when the pound became the central currency of world trade and finance. As noted, the demonetization of silver took place with the rise of the pound as hegemonic currency and the late nineteenth-century establishment of the gold standard.

The same logic applies to gold and the dollar. Bretton Woods was formally a gold-dollar system, but in practice it was already predominantly a dollar system. The reality of a dollar-based order was already evident by the Second World War.  Just as the pound had been the de facto key currency before World War I, the dollar had become, for all practical purposes, the key currency by the war. The closing of the gold window in 1971 therefore did not create dollar hegemony from scratch. It removed the residual metallic constraint on a system already organized around the dollar.

The deeper explanation is state power and hierarchy, not metallism. Agents accepted pounds and later dollars not because these currencies were attached to gold or silver, but because Britain and then the United States had the military, financial, commercial, and institutional power to make their currencies the international unit of account and reserve asset. The willingness to use pounds and later dollars for trade, contracts, reserves, and calculations about the future was not due to their connection to gold, but to “raw military power” and the capacity to enforce rules globally (as I said in the paper linked above).

That also means that the demonetization of metals marks the transition from metal-mediated hegemony to increasingly explicit state-money hegemony. Silver was demonetized as pound hegemony became consolidated through the gold standard. Gold was demonetized as dollar hegemony became consolidated through the flexible dollar standard. In both cases, the metal was less the foundation of the system than a transitional institutional device through which a rising hegemon’s currency acquired and stabilized the international monetary system.

The contrast with a metallist view is important. A metallist account would say that silver and later gold lost because of their inadequacy as monetary anchors, changes in their relative scarcity, and so on. Instead that metals were demonetized when they became unnecessary, or worse restrictive, for the dominant state’s currency. The decisive factor was not the intrinsic property of the metal, but the ability of Britain and later the United States to make the world accept their state-backed monetary liabilities.

Of course this argument can be made compatible with the conventional metallist story, but only if the metallist argument is demoted from a theory of money’s essence to a theory of the historical conditions under which early monetary power could be exercised. The conventional metallist view says precious metals became money because they had useful physical properties, namely: durability, divisibility, portability, relative scarcity, and high value-to-weight ratios. One does not need to deny that. In fact, those characteristics help explain why, in early long-distance trade and pre-modern fiscal systems, metallic money was a practical instrument. Where states had limited administrative capacity, limited policing power, weak or nonexistent banking systems, and no modern anti-counterfeiting technology, precious metals made monetary claims more secure. It was in the state's interest to use the metals as monetary standards.

But those physical properties do not explain why a monetary standard becomes hegemonic. They explain why metals were useful vehicles of money, not why money has value or why one monetary system dominates another. The widespread view among monetarist bros that money needs to have some intrinsic value is nonsensical. The deeper issue is power. The capacity to define the unit of account, enforce contracts, tax, borrow, command resources, and control trade routes.

In other words, metals mattered because early states and merchant powers lacked the institutional and technical capacity to impose pure state fiat money across large geographical spaces. Precious metals were a solution to the limits of enforcement. They allowed payment and settlement beyond the immediate reach of political authority. In that sense, metallism captures something real about the constraints of early monetary systems. But once state capacity expanded and paper currency (Chinese invention), public debt and central banking were invented (both Western inventions), military reach and productive capacity were expanded, and anti-counterfeiting technology was developed, the metal standards became less foundational and more of a historical shell around state-fiat money.

That fits better what we know about money origins. Money does not originate naturally from barter or from the intrinsic scarcity of precious metals. Scarcity cannot explain international monetary hierarchy. Silver did not dominate merely because of its physical characteristics, nor did gold replace silver simply because it was technically superior, or more scarce. And the dollar did not replace gold because fiat money was naturally more efficient. These shifts reflected the rise of successive hegemonic powers. First the mercantile and imperial trading powers, then Britain, then the United States dominated the global economy. This requires a chartalist/classical-political-economy point of view to be fully understood. Metallic standards do not imply that money is not based on state power. Historically, it was often the form through which state (read military/coercive) and mercantile power could be projected before the institutional conditions for a global fiat standard existed.

* As I often tell kids in class, in many Romance languages the word for money itself is silver (e.g. argent, plata). 

Crisis of Neoliberalism or Continuity of a Transformed Global Order?

The starting point of my short intervention at the conference on The Economy for Life in Colombia, co-organized by the Progressive International and the government of Colombia, was to problematize the dominant diagnostic. Part of the contemporary discourse, particularly that framed around the idea of an economy for life, tends to sidestep a central issue, that neoliberalism has fundamentally been a regime favorable to capital. In that context, proposing an alternative in terms of “life” is excessively vague. If one aims to build a consistent critique, the focus should shift toward an economy explicitly organized around workers. Welfare, ultimately, is not a moral abstraction but the concrete improvement of the living conditions of the majority, who are, in fact, workers. It should counter the neoliberal narrative for whom workers are only consumers and/or entrepreneurs.

From this perspective, my first point is that neoliberalism is not in crisis, at least not in the strong sense often claimed. The dominant narrative suggests that the neoliberal order is broken, yet there is little solid structural evidence to support that claim. What we observe instead is a significant continuity in its core principles, combined with a capacity to adapt to new circumstances. This is, at most, a transformation within the same regime, not its collapse. In fact, as discussed at the conference, governments of the left have have difficulties in overcoming some institutional limitations imposed by neoliberalism. Neoliberalism is doing what it was supposed to do, creating conditions for the accumulation of capital, and making the lives of workers more difficult. Higher inequality does not reflect its failure, but its success.

The second point concerns the frequent comparison between the current moment and the crisis of the 1970s. This analogy is misleading. The crisis of the 1970s was indeed a crisis of the regulated capitalism of the postwar era, the so-called Keynesian consensus, and it was marked by intense distributive conflict. That conflict rested on two pillars. On the one hand, the bargaining power of organized labor, and on the other, the ability of oil-producing countries, grouped in OPEC, to influence international prices. In addition, the United States was then a net importer of energy. None of these conditions hold today. Workers’ bargaining power is much weaker, OPEC has lost relative influence, and the United States has become a net exporter of energy. In this sense, we are not facing a crisis of neoliberal capitalism, but rather tensions within a capitalism that has already disciplined both the labor force and part of the periphery. But exactly because it succeeded, it created important changes. Which brings the issue of the rise of China.

Third, it is important to address the question of China and the so-called new international order. In some respects, this new order already exists. The rise of China as a global productive center, what might be called China 2.0, is undeniable. This was, in part, the result of the opening of China, first by Nixon in the 1970s, and then by Clinton in the late 1990s, by grating Most Favored Nation status and access to the World Trade Organization (WTO).

However, this shift has not fully extended into the financial sphere. The hegemony of the dollar remains intact, indicating a fundamental continuity in the structure of the system. Moreover, this process is neither recent nor abrupt. It has a long gestation that can be traced back to the opening of China in the 1970s, promoted by US foreign policy, and to the demonetization of gold, that actually reinforced the hegemonic position of the dollar. It is therefore a prolonged transition rather than a rupture, and in monetary matters a great deal of continuity.

In this context, Latin America occupies a position of dual peripheral integration. Even progressive governments in the region have largely been forced to insert themselves into this new configuration. They have integrated commercially with China while remaining subordinate to the financial structure, and ultimately to the military power, of the United States. This significantly constrains their room for policy autonomy.

From the standpoint of economic policy, it is crucial to distinguish between what has worked in practice and what orthodoxy prescribes. The strategies that have shown some effectiveness are not fiscal austerity or strict central bank independence, but rather policies aimed at reducing external vulnerability and promoting domestic economic growth. These include avoiding debt in foreign currency, accumulating international reserves, maintaining a relatively stable nominal exchange rate (in a flexible regime), expanding real minimum wages, and sustaining transfer mechanisms to support the most vulnerable. Even tools such as capital controls have produced mixed and, in some cases, limited results (e.g. Argentina). Industrial policy is central to promote technological development at the national level, and that requires, high levels of public investment.

A problematic aspect of current debates is the optimism surrounding the integration of the so-called Global South. the Global South is NOT a synonym of Prebisch's periphery. There is a tendency to assume that deeper ties with China or other Southern countries automatically provide a path to development. However, there is no reason to assume that China has an intrinsic interest in the development of our economies. What we observe instead are national strategies driven by its own priorities. Any development project, therefore, must be conceived from the periphery and oriented explicitly toward the needs of workers.

At the same time, it is important to challenge certain myths about advanced economies. In particular, the idea that the West, and especially the United States, abandoned industrial policy and have now rediscovered it. This is largely incorrect. In practice, state intervention in strategic sectors has been a constant, even if it is often denied at the level of discourse. In many ways it was free markets for the periphery (or part of it), and industrial policy for the center.

In sum, it is possible to agree with many of the goals present in contemporary debates, particularly the need to improve living conditions, while strongly disagreeing with the dominant diagnosis. We are not facing a crisis of neoliberalism in a strict sense, nor a repetition of the crisis of the 1970s, nor a complete transformation of the global order. South-South integration is no panacea. More importantly, without an adequate diagnosis, alternative proposals risk becoming vague or ineffective. For that reason, it is essential to reintroduce the analysis of distributive conflict and the central role of workers into contemporary political economy, and the role of military power in the understanding of the geopolitics of money.

Development by invitation: a short digression on the concept

 

Development? Be my guest 

The concept of development by invitation, as far as I know, and most of my knowledge comes from Esteban Pérez's paper in a book we co-edited long ago,  originates with Arthur Lewis and refers to a development strategy in which small developing economies attract foreign capital to initiate industrialization. For Lewis, the problem of many small developing economies, particularly in the Caribbean, was that they lacked several key elements required for industrialization, namely: domestic capital, entrepreneurial skills and large domestic markets. Because of these constraints, industrialization could not easily emerge through domestic investment alone. Lewis therefore proposed industrialization by invitation, meaning that governments should invite foreign firms to establish manufacturing activities in the country.

Immanuel Wallerstein refers to a path of development in which a peripheral country advances economically because the multinational corporations from central countries actively expand into the world economy. This development occurred not through autonomous national transformation, but through external investment resulting from political and economic cooperation with central countries. For Wallerstein, the concept referred to a structural process within the capitalist world-system. In his framework, central countries allowed limited industrialization in some peripheral areas as multinational firms relocated production. That was, in fact, to some extent the phenomenon in a good part of the Latin American periphery, In other words, development by invitation was not a development policy, but a mechanism of global capitalism that reorganized production.

In the work of Carlos Medeiros (published with Franklin Serrano; he is pictured above), the notion of development by invitation refers to a historical process in which peripheral or late-industrializing countries accelerate their development because the leading powers of the international system actively support or tolerate their industrialization for geopolitical reasons. The concept is embedded in their analysis of international monetary regimes and growth dynamics. Growth is demand-led, and based on the supermultiplier, if that wasn't clear.

For Medeiros, the starting point is that capitalism naturally generates divergence between countries due to structural asymmetries in military power, technological capabilities, and monetary hegemony. All three are interrelated. Because of these asymmetries, most peripheral countries face a balance-of-payments constraint that limits growth. However, in certain historical periods, some countries can overcome these constraints when the dominant power facilitates their development.

For Medeiros,  development is not simply the relocation of production associated to multinational or transnational firms, be that as a policy strategy or an endogenous process of integration within the capitalist system. It involves state-led industrialization and strategic geopolitical support from the hegemonic power. Hence, development by invitation can produce successful industrial catch-up, not merely integration into the world economy.

Note that Esteban's discussion implicitly highlights a critique of the early concept from a structuralist perspective. Even though Lewis viewed the strategy as a path to development, in practice it often led to enclave industrialization and persistent dependence on multinational firms. The outcome sometimes resembled the type of dependent integration emphasized by Wallerstein. In a sense, Medeiros version is a further critique, suggesting that the interaction of political coalitions, behind the developmental state, and the geopolitical context matter.

Note that one might be correctly skeptical  of the notion that a country develops simply because the hegemonic power invites it to do so. Even acknowledging that favorable geopolitical contexts existed, such as those of Japan, South Korea, or several European countries in the postwar period, one might argue that development was ultimately the result of internal strategies, that is, strong states pursuing active industrial policies of technological catch up. In this view, the invitation may have constituted a favorable external framework, but it was never the decisive factor.

However, this critique appears to address a somewhat simplified interpretation of Medeiros’ concept. In his framework, development by invitation was never presented as a purely external process or as a microeconomic explanation based on private decisions. The concept was formulated in macroeconomic and geopolitical terms, placing emphasis precisely on the role of the state. The question was not whether Japan or Korea developed simply because the United States invited them, but rather why certain developmental states were able to industrialize so rapidly through manufactured exports. The answer highlights that these states benefited from exceptional external conditions. First, the unilateral opening of the US market, financial transfers,  very often facilitated technological transfers, beyond tolerance toward aggressive industrial policies, and strategic support within the context of the Cold War. This was not diplomatic magic, but rather a combination of an internal developmental state and a relaxation of the external constraint facilitated by American hegemony.

In other words, Medeiros’ concept does not attempt to explain development exclusively through external factors, but rather to illuminate why certain developmental states faced fewer external constraints, had greater access to financing, and enjoyed broader access to strategic markets than others. This allowed for a particular mix of export promotion and import substitution and helps explain why several Asian countries not only avoided the lost decade that followed the debt crisis of the 1980s, but also managed to accelerate their process of industrialization as a good part of the center, and other peripheral regions deindustrialized.

If the discussion is brought to the current Argentine case (I wrote a short note on this in Spanish), the most important point may not be to deny the relevance of the concept but to recognize that Argentina today lacks a developmental state capable of taking advantage of any potential invitation. If the government dismantles industrial, technological, and financial policy instruments, then whether a country is invited or not becomes almost irrelevant. The issue is not whether Washington extends a diplomatic invitation, but whether there exists a national strategy capable of transforming a favorable geopolitical context into productive accumulation.

Ultimately, the debate should not revolve around whether development arrives mechanically by invitation, but rather around the interaction between internal state strategy and external conditions. Development has never been automatic or purely external, but neither has it been independent of the geopolitical order and the decisions of the hegemonic power.

Central Bank Independence and the Role of the Dollar

The attack on the Fed's chairman, Jerome Powell, has correctly led to a rebuke of Donald Trump's behavior. That does not mean that the notion of central bank independence cannot be questioned, or that is necessary for either price stability or the international position of the dollar. These are just a few things that seem exaggerations that have been discussed recently. As I noted before, the return of central bank independence (rule based monetary policy), and the return of austerity, together with the critiques of tariffs (and the resurgence of free trade) have brought back the Victorian Consensus to the center of policy discussions. A terrible mistake.

But on the issue at hand, for example, Justin Wolfers suggested that inflation will accelerate as a result of the attack on Powell (and Lisa Cook, one might add). I discussed inflation here several times. There is no risk of anything even close to this kind of inflation, simply because what caused the increase in prices was, for the most part, the depreciation of the Turkish lira, and the pass-through in the US is very limited.

 

The graph below shows that there is a clear correlation between the two variables. Inflation in the US remains subdued (see today's BLS report, with inflation at about 2.7%, which is not that much above the target of 2%; also I still have to find someone that shows that 2% is much better than say 3% for any particular reason.)

 

Today, Barry Eichengreen suggested in his Financial Times column that:

 

Besides the issue that it is highly controversial that reducing interest rates would be highly inflationary, or that 2.7% is some sort of a problem, there is the issue of why would investors run from the dollar and cause a crash. In his view, ultimately a question of confidence. The conventional view is that a reserve currency must be backed by trust. Trust in the legal system, in the persistence of political stability, and the protection of property rights, and sound macroeconomic management. According to this perspective, actions like U.S. actions regarding Venezuela, tax cuts that increase the burden of public debt, threats to the independence of the Federal Reserve, or the rise of authoritarian politics under the Trump administration might undermine confidence in the dollar.

 

However, there's another view, one that I explore in a this paper, arguing that power, rather than trust, underpins reserve currency status. John Maynard Keynes famously compared money to language: the dominant currency is like the dictionary, and the one that writes the dictionary controls the language. From this standpoint, the dollar’s dominance is reinforced by U.S. geopolitical and military strength.

 

Barry correctly notes that the main argument against the demise of the dollar is that there is no alternative (not that TINA). He suggests that agents could run to gold, but essentially notes that gold is a bubble and that is very risky.

 

Neither the attack on the Fed, nor the intervention in Venezuela, to mention the two things that have been discussed the most in this eventful new year so far, would lead to inflation or a demise of the dollar. As Keynes said about Lloyd George, the leader of the Liberals, that he disliked (to put it mildly): "The difference between me and some other people, is that I oppose Mr Lloyd George when he is wrong and support him when he is right." Trump might be wrong about how he is going about changing the way we the US runs monetary policy. But on the need to reduce the rates, and the notion that central bank independence is not necessary for price stability, he might not be wrong.

 

PS: The rise of the dollar to hegemonic position between the collapse of the pound, the Tripartite Agreement in 1936 and Bretton Woods, occurred before the Treasury-Fed Accord of 1951 that made the Fed independent of the Treasury.

 

The United States’ Unchallenged Hegemony in the World-System

 

By David Fields

A prevalent assumption concerning the United States’ global position posits precipitous hegemonic decline. Conventional wisdom, predominant since the 1970s, suggests that the U.S. has been on the verge of losing its preeminent status, as evidenced by the collapse of the Bretton Woods system and the subsequent emergence of the Eurozone, BRICS, and the spectacular rise of China. Proponents of this view tend to interpret U.S. current account deficits as an unsustainable imbalance, predicting a hard landing scenario resulting from resoundingly widespread divestment from dollar-denominated assets. Similarly, academic and political anxieties regarding a more disorderly international system, often linked to a perceived weakening of U.S. influence, are further amplified by recent fascist political rhetoric of “America First”.

To construct an effective critique of U.S. imperialism, it is pertinent to ascertain that the United States is not experiencing a significant hegemonic decline; its structural power within the capitalist world-system persists without substantial challenge.

Read rest here. 

Challenges and Perspectives of International Monetary Policy

 

Carlos Pinkusfeld interviews Ramaa Vausdevan (Colorado State University) and Franklin Serrano (Federal University of Rio de Janeiro) to discuss the complex challenges of monetary policy in the international arena. Exploring issues such as financial globalization, the influence of large economies on the global monetary system, and the implications for developing countries, the experts offer important perspectives on the role of central banks and the effectiveness of monetary policies in the globalized economy. This is an essential debate for those who want to understand the direction of the world economy in a context of dynamic changes and growing uncertainty.

 

Dollar dominance and the international monetary hierarchy

Our panel at the UNICAMP conference last Thursday, with Mark Schwartz, and Andrés Arauz.

Dollar Hegemony and Argentina

First part of a two part interview with Anita Fuentes at Security in Context. The discussion on Argentina and Milei is in the next part. I'll post it as soon as it is up.

Dollar Hegemony, coming soon

The dollar's hegemony rests on the economic, military, and international political power of the USA. There have been two eras of dollar hegemony which were characterized by different models. Dollar hegemony 1.0 corresponded to the Bretton Woods era (1946-1971). Dollar hegemony 2.0 corresponds to the Neoliberal era (1980-today). The deep foundation of both models is USA power, but the two models have different economic operating systems. The articles in this book explore this and consider two further questions: what is the future of dollar hegemony? And: is there a better way of organizing the world monetary order? There has been considerable speculation of a drift to currency multipolarity but, so far, there is little evidence of that. The Chinese renminbi might join or displace the dollar as the world's hegemonic currency, but that will require China making significant changes to its financial markets and monetary policy. Dollar hegemony imposes significant costs on developing and emerging market economies, but the international political economy of systemic reform is fraught, making reform unlikely.

The End of Bretton Woods

  

End of Bretton Woods with Barry Eichengreen, myself and Lilia Costabile, organized by L-P. Rochon and the Review of Political Economy.

The Consolidation of Dollar Hegemony after the Collapse of Bretton Woods: Bringing power back in

Collapse, ma non troppo!

New IDEAS Working Paper on the alternative views of the collapse of Bretton Woods. From the abstract:

Contrary to conventional views which suggest that the collapse of Bretton Woods represented the beginning of the end of the global hegemonic position of the dollar, the collapse of the system liberated American policy from convertibility to gold, and imposed a global fiat system still dominated by the floating dollar. The end of Bretton Woods and the set of regulations that imposed capital controls were part of the agenda of many powerful groups within the US, and led to the creation of a more dollarized world. The challenge to the dollar might arise, eventually, from the decline in the United States’power to determine the pricing of key commodities in global markets; but it is premature to think about the demise of the dollar. The limitations of the dominant views about Bretton Woods are ultimately tied to mainstream economics.

Read it here.

Paul Volcker's legacy

Paul Adolph Volcker (1927-2019)

Paul Volcker has passed away, and many obits (NYTimes here) and blog posts will be published in the next couple of days. Most likely, the majority will suggest how Carter appointed him to bring down inflation, a courageous decision, that might have costed him the election, and how Volcker went on to stabilize the so-called Great Inflation. Volcker was the head of the New York Fed from 1975 to 1979, before he was appointed chairman of the Fed in that year. He can be seen as the anti-Marriner Eccles, the first chairman properly speaking, and Roosevelt's central banker. Volcker was the quintessential Monetarist central banker, and his tenure is symbolic of the rise of Neoliberalism,* as much as Eccles' tenure was the symbol of the New Deal social democratic values.

It is important to remember that Volcker actually imposed Milton Friedman's monetary growth targets as the Fed policy, for the first time, since central banks, the Fed included, had traditionally acted by managing the interest rate, rather than trying to control the monetary aggregates. That policy was a failure and was short lived, being abandoned still during his tenure as chairman. Charles Goodhart noted that every time a central bank tried to control a monetary aggregate, the previously stable relationship between that monetary aggregate and economic activity broke down. This became know as Goodhart's Law.

But the Volcker interest rate shock was part of the set of policies that brought inflation down, even if the effects were not necessarily the ones anticipated, and the mechanism not the one assumed by Monetarist theories. It was NOT the result of lower monetary emissions, as much as the fact that higher interest rates, significantly higher, and the recession that followed, together with the opening of the American economy to foreign competition led a large increase in unemployment. The worst recession since the Great Depression, and that reduced the bargaining power of workers.

The other consequence of the interest rate shock, and the more profound globally, was the appreciation of the dollar, which showed that the dollar was still the key currency globally,** and the collapse of the Mexican economy after a default, which led to the so-called Debt Crisis of the 1980s, which not only hit the Latin American periphery, but many countries in Eastern Europe, helping also in the eventual collapse of real socialism. Asian economies, and their Japanese creditors, were hit by the crisis, but managed better the problems of debt overhang, being able to continue to borrow and avoiding the collapse in growth known as the Lost Decade.

Volcker left the Fed in 1987, followed by Alan Greenspan, who was responsible for the deregulation of financial markets (e.g. the end of Glass-Steagall) more than any other person, perhaps. The legacy of financial deregulation is well-known, with a succession of bubbles, and rescues by the Fed of "too-big-to-fail" institutions. Volcker was a critic of financial deregulation after the crisis, suggesting famously that only the ATM was a useful financial innovation. The Volcker Rule, introduced with the Dodd-Frank legislation, forbade banks of using their own accounts for making some investments in derivatives and other financial instruments. In many ways, this was too little, too late.

If you read the regular obits and pieces in the media, I am sure his legacy will be defined fundamentally for achieving low inflation. He would be the father of what Ben Bernanke called the Great Moderation. But his policies are also co-responsible for lower growth rates, on average, wage stagnation, and increasing financial instability, in the center and the periphery.

* And yes Neoliberalism started with Carter, not Reagan, even if the latter was considerably more radical in his pursue of conservative policies.

** It is worth noticing that Volcker was the under secretary for international affairs during the Nixon Administration when the system of Bretton Woods collapsed, and the dollar was allowed to float. In a sense, he was there for the depreciation and then appreciation of the dollar, and the imposition of what has been termed the dollar diplomacy. In other words, he proved that abandonment of Bretton Woods was NOT the abandonment of a dollar based international monetary regime.

Handbook of the History of Money and Currency

The Handbook (subscription required) has been edited by Stefano Battilossi, Youssef Cassis and Kazuhiko Yago. It has many interesting chapters. Barry Eichengreen writes on what determines that a currency is used as an international currency (or even as the predominant currency). While he follows conventional views in suggesting that role of money as a means of exchange and the importance of the country in international transactions, he does also explore the role of power (military power) behind the key currency. My take on that topic in this paper with David Fields here.

There is also a very readable paper on the history of central banks by Stefano Ugolini here. It follows the evolutionary approach of Roberds and Velde, and in my view also suffers from conventional views on monetary theory that emphasize the exchange role of currencies, rather than the unit of account function. As a result, it downplays the role of fiscal agent of the state, that in my view was key in the early experiences with public banks. I would emphasize the importance of the development of public debt for the subsequent evolution of public banks, and the relevance of early central banks in the management of the Fiscal-Military State. On this see this and this.

There are interesting papers on paper money experiences, by François Velde (here) or on deflation, by  Richard Burdekin (here), to cite a couple.  There is, also, our entry (with Esteban Pérez) on the history of Central Banking in Latin America (here).

Foreign Exchange Trading and the Dollar

The new Bank for International Settlements (BIS) Triennial Central Bank Survey was published last month. The Foreign exchange turnover is down for the first time since they started in 1996. As the press release says: "Trading in FX markets averaged $5.1 trillion per day in April 2016. This is down from $5.4 trillion in April 2013." The figure below shows the main results.

Not surprisingly the dollar remained the key vehicle currency, being on one side of around 88% of all trades, while the euro has continued to slide down approximately from 39% in 2010 to 31% now. Also, while the yuan or renminbi is now the most actively traded developing country currency, the rise in the share in global foreign exchange turnover is from 2.2% to 4%.

PS: For those interested here there is an old paper, but I think still relevant, on the dollar after the crisis, and why there should be no fear about its dominant position.

New Book: The Encyclopedia of Central Banking

New book on central banking, edited by L-P Rochon & Sergio Rossi, has recently been published. I have two chapters: 1. on Classical Dichotomy, & 2. on Dollar Hegemony.

See here.

PS: Posted here with an entry on Bretton Woods by Omar Hamouda.

New Book: "The Euro, The Dollar and the Global Financial Crisis" By Miguel Otero-Iglesias

Editorial Reviews:

Many scholars have contributed to ongoing debates about the competition between the dollar and the euro for global monetary dominance. Few have added as much value as Miguel Otero-Iglesias with his systematic and original survey of the views of financial elites in major emerging market economies. Where conventional interpretations emphasize material "reality," Otero-Iglesias's ideational analysis clearly demonstrates how important it is to consider as well how "reality" is perceived and framed by key actors. The euro may be structurally weak, limiting its "hard" power. But at the cognitive level of "soft" power, Otero-Iglesias suggests, Europe's money poses a significant challenge to America's greenback. This is an argument to be taken seriously.

Benjamin J. Cohen, Louis G. Lancaster Professor of International Political Economy University of California, Santa Barbara, USA.

This is a book I’ve been waiting for: a detailed analysis of what financial elites in the large reserve-holding countries are thinking about the future of the international monetary system. Drawing on extensive research, Miguel Otero-Iglesias argues persuasively that the views of authorities in China, Brazil, and the Gulf states matter enormously for the future of the global roles of dollar and the euro. An engaging and innovative book that makes a major contribution to our understanding of the world’s money."

Eric Helleiner, Faculty of Arts Chair in International Political Economy and Professor in the Department of Political Science of the University of Waterloo

In this original, well written and carefully researched book, Otero-Iglesias suspends motion in this fast moving story of currency rivalry to give the reader a view into the deeper logic of global monetary change. The author has synthesized skilfully across a wide spectrum of perspectives, from various systemically important emerging countries, and for which he has accessed key financial elites, and policy shapers, in China and Brazil, as well as the Gulf States. This book is truly a must read for scholars of the politics of the international monetary system, especially those with an eye to systemic change.

Gregory T. Chin, Associate Professor, York University, Canada and Co-Editor, Review of International Political Economy'

About the Author:
Miguel Otero-Iglesias is Senior Analyst on the European Economy and the Emerging Markets at the Elcano Royal Institute in Spain and Research Fellow in International Political Economy at the EU-Asia Institute at ESSCA School of Management in France.

For more info go here.

***My RIPE paper with Matias Vernengo, "Hegemonic Currencies During The Crisis, The Dollar Versus The Euro In a Cartalist Perspective" (see here), is cited.

The US Net International Investment Position (IIP)

The graph below shows the Net International Investment Position (IIP) as a share of GDP for the US, since 1976. The last report by the Bureau of Economic Analysis (BEA) is available here. Note that by the first quarter of the year the IIP corresponded to US$ 5.5 trillion, or slightly more than 30% of GDP.

The IIP position has been negative since the late 1980s, which is the reason why economists argue that the US is a debtor country. The negative position follows as a result of the persistent current account (CA) deficits, which imply that foreigners accumulate dollars and dollar denominated assets. A negative IIP means that foreigners have more financial claims on residents than vice versa, and is seen often as a problem for most countries.

The conventional view also suggests that CA deficits are not dangerous if they finance domestic investment, which leads to growth, and presumably higher exports, even though this is often not explained by mainstream authors that tend to forget that most countries borrow in foreign currency. In this case, in which the CA deficits allow for higher exports in the future, a negative IIP is seen as sustainable. On the other hand, if the CA is used to finance consumption, then the negative IIP would be unsustainable. Many analysts think that the US IIP is not sustainable and from time to time someone suggests that a run of the dollar is possible. For example, Paul Krugman famously predicted that a run on the dollar would eventually occur, what he termed a 'Wile E. Coyote moment,' in which agents holding dollars would finally get that the floor was gone, and the dollar would depreciate sharply (this was before the Lehman's collapse and the run for dollar denominated assets, and the appreciation of the dollar; subsequently the gradual depreciation of the dollar returned, but so far no Wile E. Coyote moment).

Some mainstream authors are also puzzled by the fact the US, in spite of having persistent CA deficits and a large and negative IIP, has consistently had a positive net investment income position. In other words, interest and profits resulting from holding foreign assets has exceeded the payments of income to owners of US assets. Hausmann and Sturzenegger argued creatively (let's call it that) that the reason for this 'paradox' is that the CA does not measure well the net international investment position, since insurance and liquidity services go unaccounted. Their adjusted measure to add those invisible services, which they refer to as 'dark matter'* would explain the paradox, and why the US IIP is sustainable after all.

Note, however, that once one takes into account that the US holds the reserve/vehicle currency much of the discussion about the dangers of the CA deficits, the sustainability of IIP and the paradox of the positive net investment income position sort of vanishes. US debts are in dollars, which implies that there is no possibility of default in a fiat system. Chartalism holds in the open economy too.

The US does not need to export to obtain dollars, and how it uses the accumulation of financial claims on the US by foreigners is not crucial for sustainability. Holding the key currency does NOT come without consequences, but those are not the ones often suggested by the mainstream. Certainly given US policy choices there has been a loss of industrial jobs in the Rust Belt, yet as noted in another post, not with a significant loss in terms of technological advantage for US corporations. The consequence, thus, of the hegemonic position of the dollar, together with other policy choices (e.g. financial deregulation, lower taxes for the wealthy, deregulation of labor markets, etc.) has been one that affected the balance between labor and capital domestically.

Also, there is no need for dark matter, or other neologisms, to understand why the US has positive net investment income flows. By definition, the key currency is the risk free asset, and hence investments denominated in other currencies must pay a risk premium. Yes, sure BOP accounts are imperfect, like NIPA or any other measure of the economy. But there is no need to revamp the BOP accounts to get that the US CA deficit and the negative IIP are not really unsustainable.

* Hausmann has a flair for coining terms for ideas or problems that were well known by heterodox authors, and to incorporate them inconspicuously in the mainstream discourse. He refers to the notion that developing countries cannot borrow long term in their own currency as "the original sin." Note that the original sin is exactly the notion suggested by Prebisch, Kaldor, Thirlwall and others, that argue that since these countries cannot borrow internationally, and must pay with exports in the long run, then the CA becomes a constraint for economic growth.

Kevin P. Gallagher On The Fed, Emerging Markets, & Role of The Dollar

By Kevin P. Gallagher

From Foreign Policy Magazine

Emerging-market and developing countries resented U.S. Federal Reserve Chair Ben Bernanke during his spell in office. In 2012, Brazilian President Dilma Rousseff scolded Bernanke and the Fed's loose monetary policy for creating a "tsunami" of financial flows to emerging markets that was appreciating currencies, causing asset bubbles, and exporting financial instability to the developing world. It may just turn out that they dislike Janet Yellen even more.Although it was Bernanke who started tapering the Fed's loose policy, Yellen will be the one to end quantitative easing and, eventually, raise short-term interest rates. And those could be an even bigger problem for emerging markets than the initial tsunami.Yellen's recent confirmation that quantitative easing (QE) will cease in October 2014 is the latest and firmest signal that U.S. monetary policy is reversing direction. The Fed began the year talking about the "tapering" of loose monetary policy, relaxing QE's bond-buying program and potentially raising interest rates. Now a concrete end to QE is on the horizon. The big question that emerging markets are now asking is how quickly and how suddenly interest rates will go up. Following the latest numbers that the United States' GDP grew by 4 percent during the second quarter, some monetary policy hawks are calling for interest-rate hikes soon to cool the economy. That's exactly what emerging markets are worried about....

Read rest here.

And for more on the role of the dollar in the world economy see here, here, and here

Bretton Woods Conference transcripts now available

The transcripts of 1944 Bretton Woods Conference were recently found at the Treasury, and have been published (a sample is available here). More info here. As noted by the NYTimes do NOT expect any major surprises though.