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Currency Power: Understanding Monetary Rivalry
Why the dollar will remain the world's most powerful currencyMonetary rivalry is a fact of life in the world economy. Intense competition between international currencies like the US dollar, Europe's euro, and the Chinese yuan is profoundly political, going to the heart of the global balance of power. But what exactly is the relationship between currency and power, and what does it portend for the geopolitical standing of the United States, Europe, and China? Popular opinion holds that the days of the dollar, long the world’s dominant currency, are numbered. By contrast, Currency Power argues that the current monetary rivalry still greatly favors America’s greenback. Benjamin Cohen shows why neither the euro nor the yuan will supplant the dollar at the top of the global currency hierarchy.Cohen presents an innovative analysis of currency power and emphasizes the importance of separating out the various roles that international money might have. After systematically exploring the links between currency internationalization and state power, Cohen turns to the state of play among today’s top currencies. The greenback, he contends, is the "indispensable currency"—the one that the world can’t do without. Only the dollar is backed by all the economic and political resources that make a currency powerful. Meanwhile, the euro is severely handicapped by structural defects in the design of its governance mechanisms, and the yuan suffers from various practical limitations in both finance and politics.Contrary to today’s growing opinion, Currency Power demonstrates that the dollar will continue to be the leading global currency for some time to come.
296 pages, Kindle Edition
First published September 1, 2015
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November 24, 2024
When you read this book from the right point of view, this is essentially a theoretical introduction into the dynamics of hegemony on the capitalist global market. More than industrial (war) machines, trade power, geopolitical blocs, or military presence, although all related to, the central locus of defining hegemony in political economy is in currency. This book gives a solid introduction to what makes a currency go ‘international’ on global markets, how it is caused by governmental power, and how issuing a hegemonic currency both enables “exorbitant privileges” as well as forces “exorbitant duties” on domestic policies. Cohen delineates the main connections and transmission mechanisms between political power, economic power, and currency in the geopolitical sphere, indicating the characteristics of relative autonomy of politics and economy on the global stage. It adds up to an essential reading to understand hegemony through a monetary prism. In this way, the book gives a necessary introduction to monetary politics that will allow you to actually understand essays that have published on platforms like Phenomenal World.
The first five chapters deal with a theoretical outline of what power is and how currency and politics co-determine each other on the global stage. He starts with an outline of “international currency”, aka the hegemon’s money. He uses the three fundamental roles of money to construct a concept of “international currency”. These three roles are medium of exchange, unit of account, and store of value. His approach is quite simple for those who are familiar with classical economy and Marxist economy particularly. Just like money performs these three roles to smoothen allocation of market transactions (or more precisely in a Marxist sense: money necessarily arises from an economy ruled by market exchange), the “international currency” performs exactly the same roles to smoothen the allocation of goods and services globally given the fact that there are over 200 different currencies. Importantly, it is its role as store of value that gives the international currency, aka the hegemon’s money its character as dominant currency. Private and public actors want to hold the money because it is the safest store of value for them. This is necessary, because while domestically governments can coerce their subjects to use their currency, this kind of political coercion is absent on the global stage. People have to be persuaded to keep certain currencies in pocket, and they use the dollar because it’s the safest. Of course, it is the safest because it is also the most used money as medium of exchange and unit of account. The three roles are interdependent. At this point, it is basically Marx section on ‘world money’, through an interpretation of Suzanne de Brunhoff’s book.
According to Cohen, hegemonic currencies shift over time. There is a “virtuous cycle” followed by a “vicious cycle” of issuing an international currency. The virtuous cycle occurs when the benefits are larger than the costs for issuing it. Those benefits are threefold: transaction costs, seignorage, and macreconomic flexibility. Transaction costs group all the benefits for local finance and industry. For finance, since domestic banks have a privileged access to the source of world’s money, they can have “denomination rents” as a global demand for the cash comes in. Domestic industry needs to borrow the hegemon’s money, for which the capital markets are now extremely deep. Seigniorage is probably more important: since foreigners acquire your money to hold as store of value, the hegemon’s ‘export product’ now becomes cash and credit in dollar denominated bills. For every dollar held outside of the USA, an implicit transfer was constituted of goods and services entering the USA “for free”. Macroeconomic flexibility, at last, implies that there is less external market discipline for the hegemon: the rules of the game do not apply as strictly to the hegemon as for the rest.
After a while, however, the costs of having the hegemon’s currency outstrip the benefits, and it starts the “vicious cycle”. The first cost is appreciation: since the demand for your money is now global, your currency appreciates and damages competitiveness of domestic industry. On the flip side, it raises the purchasing power of the public, but this is purchasing power “beyond” normal market discipline. Another cost is that of external constraint: after a while, there is an “overhang” of highly mobile debt beyond the hegemon’s borders. A new power interferes with your monetary or domestic policies: that of maintaining trust in your currency. The aspiring hegemon does not only have to persuade foreign actors to acquire their currency, it also needs to constantly persuade them to hold on to their reserves and not dump them. This has not fundamentally changed since the end of the Gold Standard: Before the 1970s, this meant persuading them not to change pounds/dollars for gold, nowadays it is persuading them not to change dollars for other currencies. We might have been freed from the shackles of gold, only to realise that gold was only the material expression of market discipline, which still reigns today. The third cost is that of policy responsibility: it needs to manage the global monetary system, not only domestically. It is also harder for the hegemon to pursue a domestic monetary policy: if all other currencies are pegged to yours, you cannot really devalue your own currency without explicitly asking other countries to allow for appreciation, which was essentially the kind of policy issues Nixon was having in the 1970s.
What are the determinants behind these virtuous and vicious cycles? They are fundamentally economic. Cohen keeps reasserting that acquiring the position of a hegemon’s money requires building up industrial and merchant power first. Only when you sell a lot of stuff, actors will want your currency and your currency will start to internationalise. People will use it as a means of exchange and a unit of account. Only then will central banks notice and start acquiring the currency for reserve purposes. It is in their best interest to hold reserves that match the country’s trading patterns. The basis for a hegemon’s currency is forged. However, economic growth does not necessarily makes your currency bound to become the new hegemon: more factors like political will, good capitalist governance, geopolitical circumstances, and military power to back up your trustworthiness is equally important. For example, the Deutsche Mark and euro have never acquired hegemon’s status, in part because the German (and later European) government feared global hegemony would cost too much. But a necessary condition is domestic industrial and trade power, money cannot be “managed” into an international currency from nothing.
However, the monetary system is way more sticky than the economic fundamentals beneath it. Once a certain store of value is chosen, private actors will hold on to it. Currency dynamics are interlocking, and as a store of value the hegemon’s currency materialises the most important capitalist social relation: that of value. It will not move that easily. So, although the hegemon’s economic dominance might fade, and other currencies might be increasingly used on the global level, the reserve currency is way more stubborn. It explains why we are living in a multipolar world in which new currencies are competing the dollar away, while simultaneously the dollar is still the unmatched global currency.
The last five chapters use the theoretical outline to comment on currency dynamics today. Cohen focuses on three important case-studies to summarise 21st century monetary politics: the dollar, the euro, and the yuan. For the dollar, Cohen posits that its hegemony remains questioned but unrivalled as it has been since the 1960s. Since its hegemonic dollar has allowed for structural current account deficits, external liabilities have challenged trustworthiness of the dollar, first to be exchangeable into gold, later not to be inflated away/defaulted. Simultaneously, it is still unrivalled, as no other currency has wanted/been able to really challenge dollar hegemony. Here, Cohen’s analysis of the yuan is really enlightening. He argues that Chinese rise to economic dominance is now coming at a point where its “economic” power is leaning into “political” power. Chinese authorities have put effort in making the yuan more fit for international use as means of exchange, instead of dollar-trading. However, its elites are internally split over the question whether they should challenge American hegemony. If it wants to bid for this “political” power, it would need to push the yuan as reserve currency, but it would mean that the costs of hegemonic currency would inflict competitiveness of Chinese industry. Framed in the broader discussion which path of development China is pursuing (either stubbornly clinging on to its export-orientated model which could crash like the German economy right now or stimulating domestic demand), the yuan is one of those policy tools the Chinese government is hesitantly using in both ways. Internationally strengthening the yuan, and benefitting from that privilege would be a way of transitioning from an export model, but it looks like the Chinese are trying to delay that as much as possible. Either way, looking at the currency model in this way, it questions Bartel’s notion that the Chinese will soon have to “break the promises” too. Instead, it looks like the Communist Party still has some options to transition to more domestic growth.
The first five chapters deal with a theoretical outline of what power is and how currency and politics co-determine each other on the global stage. He starts with an outline of “international currency”, aka the hegemon’s money. He uses the three fundamental roles of money to construct a concept of “international currency”. These three roles are medium of exchange, unit of account, and store of value. His approach is quite simple for those who are familiar with classical economy and Marxist economy particularly. Just like money performs these three roles to smoothen allocation of market transactions (or more precisely in a Marxist sense: money necessarily arises from an economy ruled by market exchange), the “international currency” performs exactly the same roles to smoothen the allocation of goods and services globally given the fact that there are over 200 different currencies. Importantly, it is its role as store of value that gives the international currency, aka the hegemon’s money its character as dominant currency. Private and public actors want to hold the money because it is the safest store of value for them. This is necessary, because while domestically governments can coerce their subjects to use their currency, this kind of political coercion is absent on the global stage. People have to be persuaded to keep certain currencies in pocket, and they use the dollar because it’s the safest. Of course, it is the safest because it is also the most used money as medium of exchange and unit of account. The three roles are interdependent. At this point, it is basically Marx section on ‘world money’, through an interpretation of Suzanne de Brunhoff’s book.
According to Cohen, hegemonic currencies shift over time. There is a “virtuous cycle” followed by a “vicious cycle” of issuing an international currency. The virtuous cycle occurs when the benefits are larger than the costs for issuing it. Those benefits are threefold: transaction costs, seignorage, and macreconomic flexibility. Transaction costs group all the benefits for local finance and industry. For finance, since domestic banks have a privileged access to the source of world’s money, they can have “denomination rents” as a global demand for the cash comes in. Domestic industry needs to borrow the hegemon’s money, for which the capital markets are now extremely deep. Seigniorage is probably more important: since foreigners acquire your money to hold as store of value, the hegemon’s ‘export product’ now becomes cash and credit in dollar denominated bills. For every dollar held outside of the USA, an implicit transfer was constituted of goods and services entering the USA “for free”. Macroeconomic flexibility, at last, implies that there is less external market discipline for the hegemon: the rules of the game do not apply as strictly to the hegemon as for the rest.
After a while, however, the costs of having the hegemon’s currency outstrip the benefits, and it starts the “vicious cycle”. The first cost is appreciation: since the demand for your money is now global, your currency appreciates and damages competitiveness of domestic industry. On the flip side, it raises the purchasing power of the public, but this is purchasing power “beyond” normal market discipline. Another cost is that of external constraint: after a while, there is an “overhang” of highly mobile debt beyond the hegemon’s borders. A new power interferes with your monetary or domestic policies: that of maintaining trust in your currency. The aspiring hegemon does not only have to persuade foreign actors to acquire their currency, it also needs to constantly persuade them to hold on to their reserves and not dump them. This has not fundamentally changed since the end of the Gold Standard: Before the 1970s, this meant persuading them not to change pounds/dollars for gold, nowadays it is persuading them not to change dollars for other currencies. We might have been freed from the shackles of gold, only to realise that gold was only the material expression of market discipline, which still reigns today. The third cost is that of policy responsibility: it needs to manage the global monetary system, not only domestically. It is also harder for the hegemon to pursue a domestic monetary policy: if all other currencies are pegged to yours, you cannot really devalue your own currency without explicitly asking other countries to allow for appreciation, which was essentially the kind of policy issues Nixon was having in the 1970s.
What are the determinants behind these virtuous and vicious cycles? They are fundamentally economic. Cohen keeps reasserting that acquiring the position of a hegemon’s money requires building up industrial and merchant power first. Only when you sell a lot of stuff, actors will want your currency and your currency will start to internationalise. People will use it as a means of exchange and a unit of account. Only then will central banks notice and start acquiring the currency for reserve purposes. It is in their best interest to hold reserves that match the country’s trading patterns. The basis for a hegemon’s currency is forged. However, economic growth does not necessarily makes your currency bound to become the new hegemon: more factors like political will, good capitalist governance, geopolitical circumstances, and military power to back up your trustworthiness is equally important. For example, the Deutsche Mark and euro have never acquired hegemon’s status, in part because the German (and later European) government feared global hegemony would cost too much. But a necessary condition is domestic industrial and trade power, money cannot be “managed” into an international currency from nothing.
However, the monetary system is way more sticky than the economic fundamentals beneath it. Once a certain store of value is chosen, private actors will hold on to it. Currency dynamics are interlocking, and as a store of value the hegemon’s currency materialises the most important capitalist social relation: that of value. It will not move that easily. So, although the hegemon’s economic dominance might fade, and other currencies might be increasingly used on the global level, the reserve currency is way more stubborn. It explains why we are living in a multipolar world in which new currencies are competing the dollar away, while simultaneously the dollar is still the unmatched global currency.
The last five chapters use the theoretical outline to comment on currency dynamics today. Cohen focuses on three important case-studies to summarise 21st century monetary politics: the dollar, the euro, and the yuan. For the dollar, Cohen posits that its hegemony remains questioned but unrivalled as it has been since the 1960s. Since its hegemonic dollar has allowed for structural current account deficits, external liabilities have challenged trustworthiness of the dollar, first to be exchangeable into gold, later not to be inflated away/defaulted. Simultaneously, it is still unrivalled, as no other currency has wanted/been able to really challenge dollar hegemony. Here, Cohen’s analysis of the yuan is really enlightening. He argues that Chinese rise to economic dominance is now coming at a point where its “economic” power is leaning into “political” power. Chinese authorities have put effort in making the yuan more fit for international use as means of exchange, instead of dollar-trading. However, its elites are internally split over the question whether they should challenge American hegemony. If it wants to bid for this “political” power, it would need to push the yuan as reserve currency, but it would mean that the costs of hegemonic currency would inflict competitiveness of Chinese industry. Framed in the broader discussion which path of development China is pursuing (either stubbornly clinging on to its export-orientated model which could crash like the German economy right now or stimulating domestic demand), the yuan is one of those policy tools the Chinese government is hesitantly using in both ways. Internationally strengthening the yuan, and benefitting from that privilege would be a way of transitioning from an export model, but it looks like the Chinese are trying to delay that as much as possible. Either way, looking at the currency model in this way, it questions Bartel’s notion that the Chinese will soon have to “break the promises” too. Instead, it looks like the Communist Party still has some options to transition to more domestic growth.
September 20, 2018
Relevant and important information.
July 16, 2025
Informative. Great framework for thinking about currencies. But the editing could have been better.
Displaying 1 - 3 of 3 reviews