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). 

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.

 

New Book By Eric Helleiner - Forgotten Foundations of Bretton Woods, Int. Dev. & Making of Postwar Order

Professor Helleiner is an astounding international political economist and economic historian. His archival research is impressive, and his explications and understandings of international finance are not only lucid and prolific, but extensively articulate & eloquent. His new book on Bretton Woods, like many of his other works, is certainly a tour de force.

Eric Helleiner's new book provides a powerful corrective to conventional accounts of the negotiations at Bretton Woods, New Hampshire, in 1944. These negotiations resulted in the creation of the International Monetary Fund and the World Bank—the key international financial institutions of the postwar global economic order. Critics of Bretton Woods have argued that its architects devoted little attention to international development issues or the concerns of poorer countries. On the basis of extensive historical research and access to new archival sources, Helleiner challenges these assumptions, providing a major reinterpretation that will interest all those concerned with the politics and history of the global economy, North-South relations, and international development. The Bretton Woods architects—who included many officials and analysts from poorer regions of the world—discussed innovative proposals that anticipated more contemporary debates about how to reconcile the existing liberal global economic order with the development aspirations of emerging powers such as India, China, and Brazil. Alongside the much-studied Anglo-American relationship was an overlooked but pioneering North-South dialogue. Helleiner’s unconventional history brings to light not only these forgotten foundations of the Bretton Woods system but also their subsequent neglect after World War II.

See rest here.

Amato and Fantacci on reforming international money

New Cambridge Journal of Economics paper by Massimo Amato and Luca Fantacci.

From the abstract:

In the face of the current crisis, there is growing demand for regulation, often invoked in terms of a ‘return to Bretton Woods’. The Bretton Woods Conference of 1944 was indeed the last explicit attempt to define a rule for international settlements. In fact, post-World War II currency negotiations gave place to a confrontation between two alternative visions of the international monetary system. The two plans set forth by the U.S. and by the U.K. embody two alternative principles: the first aims at producing international liquidity on the basis of a reserve currency (White’s plan for an International Stabilization Fund); the second aims at providing a pure means and measure for the multilateral clearing of current accounts in the form of a currency unit (Keynes’s plan for an International Clearing Union). The former has undoubtedly prevailed. However, it is questionable whether it is the most appropriate way to manage global imbalances. Indeed, the principle eventually embodied in the Bretton Woods system, and persisting even after its demise, tends to identify money with a reserve asset, making possible, and even necessary, the accumulation of global imbalances, despite original intentions to reabsorb them. On the contrary, the principle that inspired the alternative plan was intended to deprive money of the character of a reserve asset, thus making it the rule for international exchanges, rather than an object of regulation among others. This paper outlines the two principles both in historical perspective and in the perspective of future reforms, particularly in relation to the recent proposal by the governor of the People’s Bank of China to go back to the principles of the Keynes plan.

Read rest here (subscription required).