Is globalization leading us toward a world of fewer and fewer currencies and, consequently, simplified monetary management? Many specialists believe this is the case, as the territorial monopolies national governments have long claimed over money appears to be eroding. In The Future of Money, Benjamin Cohen argues that this view--which he calls the "Contraction Contention"--is wrong. Rigorously argued, written with extraordinary clarity, and thoroughly up-to-date, this book demonstrates that the global population of currencies is set to expand greatly, not contract, making monetary governance more difficult, not less.
At the book's core is an innovative theoretical model for understanding the strategic preferences of states in monetary management. Should governments defend their traditional monetary sovereignty, or should they seek some kind of regional consolidation of currencies? The model offers two broad advances. First, whereas most scholarly work evaluates strategic options individually or in comparison to just one other alternative, this model emphasizes the three-dimensional nature of the decisions involved. Second, the model emphasizes degrees of currency regionalization as a central determinant of state preferences. Cohen also systematically explores the role of the private sector as an alternative source of money.
The book concludes with two key policy proposals. First, fiscal policy should be resurrected as a tool of macroeconomic management, to offset the present-day erosion in the effectiveness of monetary policy. Second, the International Monetary Fund should more actively help coordinate the decentralized strategic decision-making of governments. The future of money will be perilous. But, by mapping out the alternative policies countries can follow, The Future of Money shows it need not be chaotic.
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The Future of Money
By Benjamin J. Cohen
Princeton University PressBenjamin J. Cohen
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THE CHANGING GEOGRAPHY OF MONEY
THE GEOGRAPHY of money is changing. Once upon a time it was not inaccurate to think of monetary spaces in simple territorial terms. Many currencies existed, but for the most part each circulated separately within the political frontiers of a single nation-state. Each government was in charge of its own sanctioned money. Today, however, the world's monetary landscape is being rapidly transformed under the impact of accelerating competition among currencies across national borders. Money is becoming increasingly deterritorialized, no longer the instrument of an exclusive national sovereignty.
What will the geography of money look like tomorrow? The prospect, according to many popular predictions, is for a radical shrinkage in the number of currencies in circulation, greatly simplifying the management of money around the world. I call this the Contraction Contention. But the Contraction Contention, I contend, is utterly wrong. The central argument of this book is that the population of the world's monies is more likely to expand, not contract, both in number and diversity. The future of money will be one of persistently growing complexity, posing increasingly difficult challenges for state authorities.
Revival of Currency Competition
The geography of money refers to the spatial organization of currency relations-the functional domains within which each currency serves the three traditional functions of money: medium of exchange, unit of account, and store of value. As a medium of exchange, money is synonymous with the circulating means of payment. In this role, its key attribute is its general acceptability to satisfy contractual obligations. As a unit of account, money provides a common denominator, or numéraire, for the valuation of diverse goods, services, and assets. Here, its key attribute is its ability to convey pricing information both reliably and expeditiously. As a store of value, money offers a convenient means for holding wealth. In this role, its key attribute is its ability to store purchasing power, bridging the interval, however transitory, between receipts from sales and payments for purchases The overall configuration of currency domains comprises global monetary geography.
The invention of money was one of the most important steps in the evolution of human civilization-"comparable," as one source has suggested, "with the domestication of animals, the cultivation of the land, and the harnessing of power" (Morgan 1965, 11). Gertrude Stein said that "the thing that differentiates animals and man is money."1 Before money there was only barter, the archetypical economic transaction, which required an inverse double coincidence of wants for exchange to occur. Each of two parties had to desire what the other was prepared to offer-a manifestly inefficient system of trade, since much time had to be devoted to the necessary processes of searching and bargaining. With the introduction of money, the single transaction of barter split into two separate parts, sale and purchase, reducing transactions costs-the expenses associated with searching, bargaining, uncertainty, and the enforcement of contracts. Instead of goods or services for immediate delivery, a seller can accept money, hold it until needed for a purchase, and in the meantime use it to judge value in the marketplace. As a consequence, exchange is facilitated, promoting specialization in production and an increasingly efficient division of labor. Money, in effect, multilateralizes barter.
The magnitude of the cost saving afforded by monetary exchange, in lieu of primitive bilateral barter, is directly related to the size of a given money's transactional network: the number of actors with sufficient confidence in the instrument's future value and reusability to accept its present validity for both payment and accounting purposes. The larger the size of a money's transactional network, the greater will be the economies of scale to be derived from its use-what theorists call money's "network externalities" (Dowd and Greenaway 1993). Transactional networks define the functional domains of individual currencies, encompassing the range of their effective use.
It is conventional to identify currency domains with the nation-state, the basic unit of world politics. Just as in political geography we have long been conditioned to see the world's surface in terms of fixed and mutually exclusive entities called states, so we are conditioned to think of monetary geography in terms of the separate sovereign jurisdictions in which currencies originate. With few exceptions, each state is assumed to have its own unique money. Inside the nation's frontiers, that currency alone is expected to circulate freely. Money, in short, is thought to be effectively territorial-One Nation/One Money-with monetary governance exercised monopolistically by each national government. Nothing could be simpler.
But neither could anything be more misleading. In fact the notion of exclusive national currencies is of very recent historical origin, dating, in actual practice, back no further than the nineteenth century. Monetary geography in earlier eras was far more complex, involving varying degrees of competition among currencies; and even in the last two centuries, the principle of One Nation/One Money was as frequently compromised as respected. Today currency competition is reviving, causing the functional domains of individual monies to diverge more and more sharply from the legal jurisdictions of issuing governments. As in the more distant past, currency is once again becoming deterritorialized and monetary geography is once again growing more complex, with implications for monetary governance that are only beginning to be understood.
The Distant Past
Modern money began with the practice of sovereign coinage, whose origins go back to the very dawn of civilization. In the Western world, coins first appeared in the Greek city-states of Asia Minor (in Western Turkey) during the eighth and seventh centuries B.C.E. and were to be found everywhere in the eastern Mediterranean by 500 B.C.E. In the Far East, the oldest known coins originated even earlier, during the Chou dynasty that commenced in 1022 B.C.E. Previously all kinds of commodities, from salt and rice to cattle and tobacco, had been used in one place or another for standard monetary purposes (Weatherford 1997, ch. 1). But once invented, coins quickly came to dominate all other available instruments.
Before the nineteenth century, however, the sovereign right of coinage was hardly ever interpreted in exclusively territorial terms. Few rulers expected-or even, in principle, claimed-a monopoly for their coins within their own frontiers. Quite the contrary, in fact. The accepted norm was that coins could circulate everywhere, regardless of borders. Foreign coins could be used interchangeably with local money, and restrictions were only rarely imposed on what could be offered or accepted in market transactions. Choice was virtually unlimited. Currencies were effectively deterritorialized, and cross-border competition was the rule, not the exception. The system was heterogeneous and multiform, a veritable mosaic of money.
Not every currency circulated everywhere, of course. Most coins were of the small, fractional variety-"petty" coins generated for use in strictly local transactions. Minted of base metals like copper or bronze alloy, with a metallic content of little intrinsic value, these tokens were not often accepted and so were rarely found outside the limited area where they were issued. Widespread circulation was mainly restricted to bigger "full-bodied" coins of silver or gold ("specie")-monies whose usefulness as a medium of exchange or store of value could be more readily assured.
Among these full-bodied monies competition for the allegiance of users was keen, for two reasons. On the one hand there was the possibility of debasement: depreciation of the intrinsic value of coinage, accidental or otherwise, through erosion of weight or fineness. On the other hand, there was also a possibility of a shift in the commodity price of gold or silver, which would alter the relative attractiveness of coins minted from either metal. From these contingencies arose the famous proposition known as Gresham's Law-"Bad money drives out good"-named after a sixteenth-century English businessman who, among other accomplishments, was a financial adviser to Queen Elizabeth I. Gresham's Law predicted that where the intrinsic values of individual monies, as determined by market forces, diverge from their nominal values, the money of higher intrinsic value will be withdrawn from circulation and hoarded in anticipation of a rise of price. No one wanted to give up a coin that was likely to be worth more in the future.
Over time, however, as everyone sought the same "good" money, market favorites tended to develop, creating a hierarchy among full-bodied currencies-a kind of Gresham's-Law-in-reverse. "Good" money would drive out "bad" coins whose intrinsic value could not be maintained. Typically just one coin would eventually emerge as the dominant international money, the winner in a demand-driven process of natural selection. This Darwinian favorite would be used widely beyond the formal jurisdiction of the entity that issued it. Other monies would then offer the ultimate flattery-imitation-patterning themselves on the principal features of the dominant coin. Examples of dominant international coins down through the ages included the silver drachma of ancient Athens, the Byzantine gold solidus (later known, under Italian influence, as the bezant), the florin of Florence, the ducat of Venice, the Spanish-Mexican silver peso (later called the Mexican silver dollar), and the Dutch guilder.
Still, whatever money happened to dominate at any particular time, and however faithful its imitation by others, many other coins remained in circulation with diverse features and uncertain rates of exchange. In principle, this motley mosaic should have caused confusion-not to say chaos-in commercial and financial markets. How could one judge the meaning of prices with so many currencies in circulation? In practice, however, many difficulties, though by no means all, were resolved by the more or less spontaneous emergence of so-called imaginary or ghost monies-abstract units of account that could be used to compare the values of real currencies in actual use. Most popular in Europe were diverse variations on the silver pound unit, such as the livre (French), lire (Italian), peso (Spanish), and pfund (German) as well as of course the British pound sterling. In effect, a distinction was created between two of the functions of money: the medium of exchange and the unit of account. Any number of coins could pass from hand to hand in daily transactions. Ghost monies simplified transactions in a world of competing currencies.
The Era of Territorial Money
Truly fundamental changes in the geography of money did not occur until well into the nineteenth century, as national governments, eager to consolidate their emerging powers, started to assert greater control over the creation and management of money. For the first time in history, the goal of an exclusive national currency-One Nation/One Money-came to seem both legitimate and attainable. Once begun, the transformation of currency space took hold quickly and spread rapidly. Even before the century's end it was clear that a new age, the era of territorial money, had arrived.2 Monopoly over monetary powers was a natural corollary of broader trends in global politics at the time. The nineteenth century was a period of rising nationalism and a general centralization of political authority within state borders, greatly inspired by the Peace of Westphalia of 1648. Westphalia has long been recognized as a major watershed event in world politics, for the first time establishing the principle of absolute sovereignty based on exclusive territoriality. The treaty's ostensible purpose was to end the Thirty Years War. Its provisions addressed a number of contentious issues, including various dynastic claims, divisions of territory, religious practice, and the constitution of the Holy Roman Empire. But the Peace is most remembered for its assertion of the norm of sovereignty for each state within its own geographical frontiers, in effect formally establishing territoriality as the sole basis for Europe's-and, by extension, the world's-political map. Henceforth power was to be embodied in the independent, autonomous state, and global politics was to be conceived in terms of the now familiar state system.
Over the course of the nineteenth century the norm of sovereignty achieved a new level of tangible expression as governments undertook systematically to suppress all threats to their rule, whether from powers abroad or rivals at home. Their goal was to build up the nation, as far as possible, as a unified economic and political community led by a strong central authority. Monopolization of control over money was simply a logical part of the process. The territorial state came to be generally accepted as the basic unit of monetary authority as well-what in The Geography of Money I called the Westphalian Model of monetary geography.
Creating new territorial currencies was not easy. In fact, an enormous and sustained governmental effort was required to overcome market forces and centuries of monetary tradition. Control was implemented in two principal ways-first, by promoting the development of a robust national money; and second, by limiting the role of rival foreign currencies.
On the one hand, governments sought to consolidate and unify the domestic monetary order. Standardization was promoted, not only in coinage, but also in the new paper banknotes that were then just coming onto the scene. In addition, all forms of internal money were now fixed in relation to one another and tied to a uniform metallic standard, eliminating the need for ghost monies. The national unit of account now corresponded directly to tangible money in circulation. And ultimate authority over the supply of money was firmly lodged in a government-sponsored central bank, newly created or empowered to sustain both currency convertibility and the well being of the banking system.
On the other hand, increasingly prohibitive restrictions were imposed on the free circulation of foreign currencies. Most prominent were new legal-tender laws and public-receivability provisions. Legal tender is any money that a creditor is obligated to accept in payment of a debt. Public receivability refers to what currency may be used for remittance of taxes or to satisfy other contractual obligations to the state. As the nineteenth century progressed, coins that previously had been permitted, or even specifically authorized, to serve as legal tender had that privilege gradually withdrawn.
Excerpted from The Future of Money by Benjamin J. Cohen Excerpted by permission.
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Table of Contents
List of Illustrations ix
One: The Changing Geography of Money 1
Two: Four Directions 33
Appendix: Tables 62
Three: Life at the Peak 67
Four: The Art of Surviva l99
Five: Follow the Leader 123
Six: Hanging Together 153
Seven: New Frontiers 179
Eight: Governing the New Geography 203
What People are Saying About This
Cohen knows both economics and political science intimately and fuses them skillfully. "The Future of Money" is both a definitive analytical survey of the money question today and a judicious synthesis of the increasingly complex challenges facing policymakers in a globalizing world. Whether dealing with the fashion for dollarization, real world examples of how governments-from the leading currency countries to the most powerless-have tried to cope, or the growing impact of private market actors, electronic currencies, and the like, Cohen demonstrates a mastery of both empirical detail and theoretical analysis. And the book is full of common sense, too.
Philip Cerny, University of Manchester
Jerry Cohen is without peer as a scholar working at the crossroads of international economics and international relations. Here is the definitive book on the contemporary and likely future politics of global money. Well researched and well written, it provides a comprehensive overview of the theory and practice of international monetary relations. Specialists will discover original and iconoclastic insights. Undergraduate and graduate students will find an exceptionally clear and accessible presentation of an important and multifaceted subject. Practitioners will benefit from provocative and convincing forecasts. Highly recommended.
Louis W. Pauly, Canada Research Chair and Director, Centre for International Studies, University of Toronto
Benjamin Cohen has written an important book about a compelling question of modern political economics: how many currencies will there be, and what arrangement will govern them? Unusually well written, this is a book I will assign to my students.
Dennis Quinn, Georgetown University
This book is an outstanding addition to the literature. It uses a neat analytical framework to synthesize and analyze a vast, disparate body of research, including work in both economics and political science, and raises important questions about the evolution of money and monetary arrangements.
Peter B. Kenen, Princeton University, author of "The International Financial Architecture"
"Benjamin J. Cohen's third major work on the political economy of international monetary affairs addresses another major issue confronting the international community: how to stabilize and govern an international monetary system composed of several competing national currencies. Professor Cohen presents and analyzes a number of mechanisms available to the international community to prevent monetary collapse and anarchy. However, as he emphasizes, the choice of a stabilizing mechanism rests on the political as well as economic interests of the major economic powers. Cohen's knowledge, insights, and wisdom will be of immense value to the creators of a more stable and efficient international monetary system. This book should also be of interest to scholars, government officials, and others interested in the future of international monetary affairs."Robert Gilpin, Princeton University
"Cohen knows both economics and political science intimately and fuses them skillfully. "The Future of Money" is both a definitive analytical survey of the money question today and a judicious synthesis of the increasingly complex challenges facing policymakers in a globalizing world. Whether dealing with the fashion for dollarization, real world examples of how governments-from the leading currency countries to the most powerless-have tried to cope, or the growing impact of private market actors, electronic currencies, and the like, Cohen demonstrates a mastery of both empirical detail and theoretical analysis. And the book is full of common sense, too."Philip Cerny, University of Manchester
Benjamin J. Cohen's third major work on the political economy of international monetary affairs addresses another major issue confronting the international community: how to stabilize and govern an international monetary system composed of several competing national currencies. Professor Cohen presents and analyzes a number of mechanisms available to the international community to prevent monetary collapse and anarchy. However, as he emphasizes, the choice of a stabilizing mechanism rests on the political as well as economic interests of the major economic powers. Cohen's knowledge, insights, and wisdom will be of immense value to the creators of a more stable and efficient international monetary system. This book should also be of interest to scholars, government officials, and others interested in the future of international monetary affairs.
Robert Gilpin, Princeton University