International Monetary Power

8. The Limits of Monetary Power: Statecraft within Currency Areas

Despite the abundant literature on individual currency areas such as the franc zone and the sterling bloc, there has been a dearth of comparative political analysis of how these areas work. One important exception is Jonathan Kirshner ’s analysis of how monetary power is exploited by leading powers within currency areas. He explains the mechanisms of dependence and analyzes the various ways a currency area’s leader is able to gain power at the expense of follower states. He also uses detailed empirical examples to show how leaders have exploited the monetary dependence of followers.1 Although Kirshner’s analysis and evidence are generally persuasive, it is striking how often modern currency areas seem to magnify the leader’s weaknesses rather than enhancing its strengths. For example, the sterling area may have been a source of British power in the 1930s and 1940s, but by the 1960s sterling was more of a             The Limits of Monetary Power: Statecraft within Currency Areas Scott Cooper I thank David Andrews, Michael Artis, Jeff Chwieroth, Benjamin Cohen, Eric Helleiner, Randall Henning, Matthias Kaelberer, and Jonathan Kirshner for helpful comments; Brooke Richards for research assistance; and Brigham Young University and the European University Institute for research funding. 1. Jonathan Kirshner, Currency and Coercion: The Political Economy of International Monetary Power (Princeton: Princeton University Press, 1995). Benjamin J. Cohen’s work in part reinforces Kirshner’s by emphasizing the importance of a dominant state as a key factor in sustaining a currency area, but it also goes beyond Kirshner’s in pointing out that a dense network of institutional ties may sustain a currency area in the absence of a leading state. In effect, Cohen reminds us that some currency areas have relatively symmetrical control mechanisms. See Benjamin J. Cohen, “Beyond EMU: The Problem of Sustainability,” Economics and Politics 5, no. 2 (1993): 187–203; The Geography of Money (Ithaca: Cornell University Press, 1998), 68–91; The Future of Money (Princeton: Princeton University Press, 2004), 51–61, 123–78. Other important comparative work on currency areas includes Andrew Walter, World Power and World Money: The Role of Hegemony and International Monetary Order (New York: St. Martin ’s Press, 1991); Carsten Hefeker, “Interest Groups, Coalitions, and Monetary Integration in the XIXth Century,” Journal of European Economic History 24, no. 3 (1995): 489–536; Walter Mattli, The Logic of Regional Integration: Europe and Beyond (Cambridge, UK: Cambridge University Press, 1999). 162 problem for the United Kingdom than it was a solution.2 The U.S.-led Bretton Woods system went through a similar period of decline in the 1960s, with mounting costs for the center state.3 The Communauté financière d’Afrique (CFA) franc zone has not declined in the same way, but, on the other hand, it has not brought any appreciable new resources to France other than the intangible prestige of its existence.4 Maintaining the post-Soviet ruble zone was such a drain on Russia that the Russian government essentially abandoned the attempt within two years.5 U.S. reluctance to endorse a formal dollar area in Latin America seems similarly to be based on fears that codification of existing practices would be more of a burden than a benefit.6 Certainly Kirshner fulfills his goal of demonstrating the existence of currency coercion within these zones of what he calls “monetary dependence.” But a more complete picture of currency areas, which includes both regional currencies (e.g., the euro or the franc zone) and the use of a leading currency internationally (e.g., the dollar area), must flesh out exactly who is coercing whom and under what circumstances . The central theme of this chapter is that, at least under some conditions, great-power currency areas may constitute a greater liability than an asset to their leaders. In other words, monetary statecraft is a reciprocal process: the creation and maintenance of currency areas creates influence opportunities for both followers and leaders. Why are currency areas potentially problematic?The basic economic idea behind the politics is clear enough—currency issue is an asset when others are buying but a liability when they start selling. Although the issuer gains real resources in return for its currency, it does so at the cost of increasing potential future claims against itself ; getting others to accept your IOU is a benefit that can become a burden if too many IOUs come due at the same time. Depending on institutional arrangements and on market conditions, currency...