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The Study of Money

Published online by Cambridge University Press:  13 June 2011

Jonathan Kirshner
Jonathan Kirshner
Affiliation:
Cornell University
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Monetary phenomena define the contours of the contemporary global economy. This is a recent development, and it will transform the study of international political economy (IPE). Two excellent new books, The Geography of Money, by Benjamin Cohen, and Mad Money, by Susan Strange, will frame, support, and provide the point of departure for scholars addressing this vital question. Ultimately, however, and perhaps necessarily, these books raise more questions than they answer. But they do suggest in which direction the most promising avenues of investigation point—toward the study of the unique interconnections between the ideas, material interests, and institutions associated with the management of money. Those relationships are profoundly consequential for politics and demand the renewed attention of contemporary scholars of international relations and political economy.

Type
Review Article
Information
World Politics , Volume 52 , Issue 3 , April 2000 , pp. 407 - 436
Copyright
Copyright © Trustees of Princeton University 2000

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References

1 Cohen, Benjamin J., “The Euro-Dollar, the Common Market, and Currency Unification” Journal of Finance 17 (December 1963), esp. 613–15Google Scholar. In this paper Cohen argued, among other things, that the existence of the euro-dollar market was an important reason why the members of the European Economic Community had not developed a common currency.

2 On this point, see Hetleiner, Eric, “Historicizing Territorial Currencies: Money Space and the Nation-State in North America,” Political Geography 18 (March 1999)Google Scholar.

3 Strange, Susan, “The Politics of International Currencies,” World Politics 23 (January 1971)CrossRefGoogle Scholar.

4 Cohen notes, for example, that the extent to which the yen is used as an international currency is essentially a policy choice and that both the Europeans and the Japanese manage their currencies with an eye toward avoiding confrontation with the United States (pp. 161,164). He also assesses monetary geography in its most basic form, sustaining monetary alliances, and finds that economic theory, such as the theory of optimal currency areas, has little explanatory power. Rather, political factors such as power and ideology explain which monetary unions succeed and which fail (pp. 82, 84–85, 87, 91). See also the cases discussed in Cohen, “Beyond EMU: The Problem of Sustainability,” Economics and Politics 5 (July 1993). He also traces the drive for EMU to political motives, but it should be noted that he reviewed the convergence criteria without a discussion of their possible distributional implications (Geography of Money, 74, 77).

5 Cohen recognizes this, explaining that autonomy is likely to erode even for the most powerful states and noting that public policy will have to conform increasingly with what markets want (pp. 130, 133). His faith in market efficiency masks the tension between these observations and his oligopoly analogy.

6 For an illustration of the potentially disastrous consequences of interest-rate competition, derived in part from a concern with market reputation, see Eichengreen, Barry, Golden Fetters: The Gold Standard and the Great Depression (Oxford: Oxford University Press, 1992)Google Scholar. See also Kirshner, Jonathan, “Disinflation, Structural Change, and Distribution,” Review of Radical Political Economics 30 (March 1998)CrossRefGoogle Scholar.

7 In a parallel argument to his oligopoly metaphor, Cohen argues, with an appeal to Alfred Marshall, that governance that emerges from the market reflects the outcome of both demand and supplyside forces. But, following Marshall, it is the shape of the curves that is determinant. If the demand curve takes the shape of a flat line (is infinitely elastic), then supply has no voice in determining the equilibrium price.

8 Waltz, , Theory of International Politics (New York: Random House, 1979)Google Scholar. Interestingly, an outstanding application of systemic theorizing that illustrates the consequences of anarchy can be found in Cohen, Benjamin, The Question of Imperialism (New York: Basic Books, 1973)CrossRefGoogle Scholar.

9 Smith, , The Wealth of Nations (1776; Chicago: University of Chicago Press, 1976), 379–80Google Scholar.

10 It should be noted that Strange does touch on some more recent developments, such as the increased concentration of savings in Japan's postal savings system and the shift in the composition of Japan's U.S. holdings from long-term securities to short-term Treasury bills (p. 50).

11 Strange also argues that protectionism and trade blocs are normally the result, not the cause, of economic distress, which can usually be traced to the financial system. As such, she contends, relatively too much attention has been given to the politics of trade (p. 58, see also pp. 87, 186).

12 See, e.g., pp. 16, 88, 90, 92, 120, 183. These themes were repeated in one of Strange's last works, where she addressed the “most amazing omission” in contemporary IPE scholarship, the work of Keynes. See Susan Strange, “Finance in Politics: An Epilogue to Mad Money” (Draft paper prepared for Power and Order: Change in World Politics—A Festschrift in Honor of Robert G. Gilpin, Princeton University, October 2–3, 1998), 7 and the discussion on 8–9. See also Kirshner, Jonathan, “Keynes, Capital Mobility, and the Crisis of Embedded Liberalism,” Review of International Political Economy 6 (Autumn 1999)CrossRefGoogle Scholar.

13 Obviously, the folly of capital deregulation is one of the main themes of Strange's book. See for example pp. 16–17; also idem (fn. 12), 6, 17–18.

14 John Maynard Keynes, “Letter to Roy Harrod,” April 19, 1942, reprinted in Moggridge, Donald and Johnson, Elizabeth, eds., The Collected Writings of John Maynard Keynes (London: Macmillan, 1971–89), 25:149Google Scholar.

15 See pp. 103–6, 109–11, 118–20, and note especially Strange's distinction between nominal recovery, “the restoration of confidence in financial markets” (p. 105), and the performance of the real economy.

16 See pp. 106, 112. Strange's perspective on the tendency for international financial instability and the need for international governance is similar to Kindleberger's, whom she also cites repeatedly and approvingly. See pp. 15, 55–56, 86; also Kindleberger, Charles, The World in Depression, rev. and expanded ed. (Berkeley: University of California Press, 1986)Google Scholar; and especially idem, Manias, Panics, and Crashes,3d ed. (New York: Wiley, 1996).

17 See, e.g., pp. 168, 190.

18 One exception is her repeated plea for the closure of tax havens, one measure at least that should be feasible. See pp. 131, 188–89. On Strange's caution about efforts to make specific predictions in IR, see pp. 19–20, 179.

19 See, for example, Goldstein, Judith, Ideas, Interests and American Trade Policy (Ithaca, N.Y.: Cornell University Press, 1993)Google Scholar; Goldstein, Judith and Keohane, Robert, eds., Ideas and Foreign Policy (Ithaca, N.Y.: Cornell University Press, 1993)Google Scholar; Haas, Peter, ed., “Knowledge, Power, and International Policy Coordination,” special issue of International Organization 46 (Winter 1992)Google Scholar; Odell, John S., U.S. International Monetary Policy (Princeton: Princeton University Press, 1982)CrossRefGoogle Scholar; Gowa, Joanne, Closing the Gold Window (Ithaca, N.Y.: Cornell University Press, 1983)Google Scholar; McNamara, Kathleen, The Currency of Ideas (Princeton: Princeton University Press, 1998)Google Scholar; Helleiner, Eric, “National Currencies and National Identities,” American Behavioral'Scientist 41 (August 1998)CrossRefGoogle Scholar.

20 Cohen refers here specifically to the reason why the currencies of large, internationally integrated economies are often attractive to others. But the point is general and inseparable from the issue of credibility, a ubiquitous theme that Cohen rejoins in the subsequent paragraph. Regarding acceptability, one cannot help but be reminded of Sidney Greenstreet's line in The Maltese Falcon:” I'll tell you right out, I'm a man who likes talking to a man who likes to talk.”

21 Strange (fn. 12), 15.

22 On perception versus reality, see, e.g., p. 107. For more on ideas, mood, and sentiment, see pp. 99, 108, 111, 121.

23 Friedman, Milton and Schwartz, Anna J., A Monetary History of the United States, 1857–1960 (Princeton: Princeton University Press, 1963), 111, 133Google Scholar; see also Grabel, Ilene, “Creating ‘Credible’ Economic Policy in Developing and Transitional Economies,” Review of Radical Political Economics 29, no. 3 (1997)CrossRefGoogle Scholar.

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25 This does not mean, it should be added immediately and emphatically, that any policy is just as good as another. Rather, the argument is solely that there is a plausible set of macroeconomic policies that would provide roughly similar aggregate economic performance and that should be sustainable based on their internal logic.

26 As Cohen notes, economic efficiency does not explain the most basic contours of the geography of money. While there are theories of “optimal currency areas,” it is clear that the use of money is defined by political concerns. Externally the politics of monetary integration cannot be divorced from international politics. Internally the aggregate benefits of such measures, such as the reduction in transaction costs are surely dwarfed by the differential effect that they will have on various groups. See Cohen, Geography, 83–84; also Eichengreen, Barry and Frieden, Jeffry, “The Political Economy of European Monetary Unification,” Economics and Politics 5, no. 2 (1993)CrossRefGoogle Scholar. Similarly, it should also be noted that the choice of the adjustment mechanism is made from a range of options with minor differences in their relative efficiency but profound variation in their political consequence. See, for example, Simmons, Beth, Who Adjusts? (Princeton: Princeton University Press, 1994)Google Scholar.

27 On monetary neutrality, see Lucas, Robert, “Nobel Lecture: Monetary Neutrality,” Journal of Political Economy 104 (August 1996)CrossRefGoogle Scholar; Milton Friedman, “The Quantity Theory of Money,” and Don Patinkin, “Neutrality of Money,” both in Eatwell, John, Milgate, Murry, and Newman, Peter, eds., The New Palgrave: Money (New York: Macmillan, 1989)Google Scholar; Hahn, Frank, Money and Inflation (Cambridge: MIT Press, 1983), esp. 38–42Google Scholar, 61; Gale, Douglas, Money: In Equilibrium (Cambridge: Cambridge University Press, 1982), esp. 13–15, 53Google Scholar.

28 Fisher, Irving, The Purchasing Power of Money, rev. ed. (New York: Macmillan, 1920), vii, 196Google Scholar, 197.

29 See, for example, Blanchard, Olivier and Fischer, Stanley, Lectures on Macroeconomics (Cambridge: MIT Press, 1989)Google Scholar.

30 Laider, David, The Golden Age of the Quantity Theory of Money (Princeton: Princeton University Press, 1991), 17Google Scholar. Malthus, for example, argued that it “must always be recollected” that real effects of monetary expansion are the result not of “the quantity of the circulating medium ... but the different distribution of it.” Malthus, T. R., “Depreciation of Paper Money,” Edinburgh Review 17, no. 34 (February 1811)Google Scholar, in Semmel, Bernard, ed., Occasional Papers of T. R. Malthus (New York: Burt Franklin, 1963), 96Google Scholar.

31 Bordo, Michael, “Some Aspects of the Monetary Economics of Richard Cantillon,” Journal of Monetary Economics 12 (August 1983), esp. 242–43CrossRefGoogle Scholar; Vickers, Douglas, Studies in the Theory of Money, 1690–1776 (Philadelphia: Chilton Company, 1959), esp. 189Google Scholar, 206, 208. For more on Cantillon, see Murphy, Antoin E., Richard Cantillon: Entrepreneur and Economist (Oxford: Clarendon Press, 1986)Google Scholar; Higgs, Henry, “Richard Cantillon,” Economic Journal 1 (June 1891)CrossRefGoogle Scholar; and also Spengler, Joseph, “Richard Cantillon: First of the Moderns,” Journal of Political Economy 62 (August 1954) and 62 (October 1954)Google Scholar.

32 Cantillon, Richard, Essai sur la nature du commerce en général, ed. and trans. Henry Higgs (1931; New York: Augustus Kelley, 1964), 161, 179, 177Google Scholar. For practical illustrations of distribution effects, see pp. 163, 165. W. Stanley Jevons characterized Cantillon's tracing of monetary disturbances as “marvelous.” See Jevons, , “Richard Cantillon and the Nationality of Political Economy,” Contemporary Review 39 (January 1881), 72Google Scholar. It is important to note that Cantillon was no monetary crank; in fact, he was quite orthodox. He did not believe that a monetary expansion would increase economic activity in the long run. Rather, he was an opponent of inflation who believed that the inflationary process would have self-reversing effects with attendant real economic costs. And he was sensitive to the danger that macroeconomic policy might be manipulated by politicians for their own benefit. See Cantillon, p. 323; also Vickers (fn. 31), 212, 216; Bordo (fn. 31), 237, 251; Murphy (fn. 31), 263, 277.

33 Cairnes, John E., Essays in Political Economy: Theoretical and Applied (1873; New York: Augustus Kelley, 1965), esp. 9, 10Google Scholar; also Bordo, Michael, “John E. Cairnes on the Effects of the Australian Gold Discoveries, 1851–73,” History of Political Economy 7 (Fall 1975)CrossRefGoogle Scholar.

34 Keynes, A Treatise on Money I: The Pure Theory of Money (1930), in Moggridge and Johnson (fn. 14), 5:81, 83–84.

35 See Mehrling, Perry G., The Money Interest and the Public Interest: American Monetary Thought, 1920–1970 (Cambridge: Harvard University Press, 1997)Google Scholar; and Rist, Charles, History of Monetary and Credit Theory: From John Law to the Present Day, trans. Jane Degras (1940; New York: Augustus M. Kelley, 1966), esp. 148, 375Google Scholar.

36 For a summary of possible costs, see Fischer, Stanley and Modigliani, Franco, “Toward Understanding of the Real Effects and Costs of Inflation,” in Fischer, Indexing, Inflation, and Economic Policy (Cambridge: MIT Press, 1986)Google Scholar. On information, see Ackley, Gardner, “The Costs of Inflation,” American Economic Review 68 (May 1978)Google Scholar. On variability, see Parks, Richard W., “Inflation and Relative Price Variability,” Journal of Political Economy 86 (February 1978)CrossRefGoogle Scholar. On cash-balance effects, see Bailey, Martin J., “The Welfare Cost of Inflationary Finance,” Journal of Political Economy 64 (April 1956)CrossRefGoogle Scholar. Deductive models that can yield high costs of inflation include Dotsey, Michel and Richmond, Peter, “The Welfare Cost of Inflation in General Equilibrium,” Journal of Monetary Economics 37 (February 1996)CrossRefGoogle Scholar; and Feldstein, Martin, “The Welfare Cost of Permanent Inflation and Optimal Short-Run Economic Policy,” Journal of Political Economy 87, no. 4 (1979)CrossRefGoogle Scholar.

37 Duesenberry, James, “Inflation and Income Distribution,” in Lundberg, Eric, ed., Inflation Theory and Anti-Inflation Policy (Boulder, Colo.: Westview Press, 1977), 265CrossRefGoogle Scholar (first quote); George Akerlof, William Dickens, and George Perry, The Macroeconomics of Low Inflation, Brookings Papers on Economic Activity, no. 1 (1996), 2 (second quote). Very low inflation also might undermine monetary policy, given a nominal interest-rate floor of 0 percent.

38 Barro, Robert J. and Gordon, David B., “Rules, Discretion, and Reputation in a Model of Monetary Policy,” Journal of Monetary Economics 12 (February 1983), 104CrossRefGoogle Scholar.

39 Barro, Robert J., “Inflation and Economic Growth,” Bank of England Quarterly Bulletin 35 (May 1995), 1, 9Google Scholar; and idem, “Inflation and Growth,” Federal Reserve Bank of St. Louis Review 78 (May—June 1996), 159. Critics of these papers have challenged Barro's policy prescriptions. W. Stanners argues that even the “weak conclusion” of the first paper “cannot be sustained.” Stanners, “Inflation and Growth,” Cambridge Journal of Economics 20 (July 1996), 511, also 512. In commentary following the second paper, Kocherlakota Narayana argues that “I would recommend that policymakers not view lower long run growth as a penalty of inflationary monetary policy” (p. 172).

40 Two prominent examples of this would be Fischer, Stanley, “The Role of Macroeconomic Factors in Growth,” Journal of Monetary Economics 32 (December 1993)CrossRefGoogle Scholar; and Bruno, Michael, “Does Inflation Really Lower Growth?” Finance and Development 32 (September 1995), 35Google Scholar, 38. Yet Bruno and Fischer each support policies designed to keep inflation very low. See Fischer, , “Maintaining Price Stability,” Finance and Development 33 (December 1996), 34—37Google Scholar; Bruno, Michael and Easterly, William, “Inflation and Growth: In Search of a Stable Relationship,” Federal Reserve Bank of St. Louis Review 78 (May-June 1996), 145Google Scholar.

41 Sarel, Michael, “Non-linear Effects of Inflation on Economic Growth,” IMF Staff Papers 43 (March 1996)Google Scholar; Bullard, James and Keating, John W., “The Long-Run Relationship between Inflation and Output in Postwar Economies,” Journal of Monetary Economics 36 (December 1995), 495CrossRefGoogle Scholar. Bullard and Keating also note some positive effects: “To the extent that we do find statistically significant estimates, they tend to be positive, with a permanent increase in inflation being associated with a permanent increase in the level of output” (p. 494).

42 First, the findings of studies showing relationships between inflation (and other macroeconomic variables) and growth are quite fragile. See Levine, Ross and Renelt, David, “A Sensitivity Analysis of Cross-Country Growth Regressions,” American Economic Review 82 (September 1992)Google Scholar. Second, inflation, especially high inflation, might be associated with lower economic performance because high inflation might be a symptom of government incompetence. In this case, the inflation could be a symptom of government-inhibited growth rather than a cause. This is recognized by Fischer (fn. 40, 1993), 487. Third, as Bruno notes (fn. 40), an association of inflation with growth could be the result of other factors, such as supply shocks, that would affect both factors simultaneously (p. 35).

43 Few would dispute the notion, for example, that unanticipated inflation benefits debtors at the expense of creditors or that governments often use inflation as a means of increasing their resources relative to society. In fact, inflation affects distribution through a multitude of channels, with differential effects on various individuals, classes, sectors, and regions.

Empirical investigations into the effects of inflation include Wolff, Edward, “The Distributional Effects of the 1969–75 Inflation on Holdings of Household Wealth in the United States,” Review of Income and Wealth 25 (June 1979)CrossRefGoogle Scholar; Bach, G. L. and Stephenson, James, “Inflation and the Redistribution of Wealth,” Review of Economics and Statistics 61 (February 1974)Google Scholar; Nordhaus, William D., “The Effects of Inflation on the Distribution of Economic Welfare,” Journal of Money, Credit, and Banking 5 (February 1973)CrossRefGoogle Scholar; Budd, Edward C. and Seiders, David F., “The Impact of Inflation on the Distribution of Income and Wealth,” American Economic Review 61 (May 1971)Google Scholar; Alchian, Armen A. and Kessel, Reuben A., “Redistribution of Wealth through Inflation,” Science 130 (September 4, 1959)Google Scholar; Bach, G. L. and Ando, Albert, “The Redistributional Effects of Inflation,” Review of Economics and Statistics 39 (February 1957)Google Scholar; Kessel, Reuben A., “Inflation Caused Wealth Redistribution: A Test of a Hypothesis,” American Economic Review 46 (March 1956)Google Scholar; Hyman Sardy, “The Economic Impact of Inflation in Urban Areas,” and Landau, Zbignew, “Inflation in Poland after World War I,” both in Schumukler, Neil and Marcus, Edward, eds., Inflation through the Ages (New York: Columbia University Press, 1983)Google Scholar.

44 Rist(fn.35),375.

45 See Alesina, Alberto and Summers, Lawrence H., “Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence,” Journal of Money, Credit, and Banking 25, no. 2 (1993)CrossRefGoogle Scholar; and Cuckierman, Alex, “Central Bank Independence and Monetary Control,” Economic Journal 104 (1994), 1440Google Scholar. For a good survey of this large literature, see Eijffinger, Sylvester and Haan, Jakob De, The Political Economy of Central-Bank Independence, Special Papers in International Economics 19 (Princeton: International Finance Section, Princeton University, 1996)Google Scholar.

46 Posen, Adam, “Central Bank Independence and Disinflationary Credibility: A Missing Link?” Federal Reserve Bank of New York Staff Reports 1 (May 1995), 3Google Scholar, 13 (first quotes); Dabelle, Guy and Fischer, Stanley, “How Independent Should a Central Bank Be,” in Fuhrer, Jeffrey C., ed., Goals, Guidelines and Constraints Facing Monetary Policymakers (Boston: Federal Reserve Bank of Boston, 1995), 205Google Scholar (last quote); see also Eijffinger and De Haan (fn. 45), esp. 36, 38, 64.

47 It bears repeating that the ultimate resolution of the economic debate over optimal inflation policy is of small concern to students of politics, given the modest stakes. The purpose of this discussion is not to champion one policy over another but rather to illustrate that more than one policy is theoretically plausible, that the perception of legitimacy can be a crucial factor in determining which policy is chosen, and that the differential effects of each easily outweigh the difference in their aggregate economic consequences.

48 Posen also shows a correlation between the strength of the financial sector and the degree of central bank independence. See Posen, Adam, “Declarations Are Not Enough: Financial Sector Sources of Central Bank Independence,” NBER Macroeconomics Annual 10 (1995), 254CrossRefGoogle Scholar, 256, 264; idem, “Why Central Bank Independence Does Not Cause Low Inflation: There Is No Institutional Fix For Politics,” in Richard O'Brien, ed., Finance and the International Economy 7 (1993), esp. 48.

49 Studies that have explored the differential effects of low inflation and tight monetary policies include G. J. Santoni, “The Effects of Inflation on Commercial Banks,” Federal Reserve Bank of St. Louis Review (March 1986); Cargill, T. F. and Hutchison, M. M., “The Federal Reserve and the Bank of Japan,” in Mayer, Thomas, ed., The Political Economy of American Monetary Policy (Cambridge: Cambridge University Press, 1990), 172–73Google Scholar; Gerald Epstein and Juliet Schor, “Corporate Profitability as a Determinant of Restrictive Monetary Policy: Estimates for the Postwar United States,” in Mayer; Frieden, Jeffry, “Monetary Populism in Nineteenth Century America: An Open Economy Interpretation,” Journal of Economic History 57 (June 1997)CrossRefGoogle Scholar.

50 “IMF Wins Mandate to Cover Capital Accounts,” IMF Survey (May 12,1997), 131–32.

51 “Forces of Globalization Must Be Embraced,” IMF Survey (May 26, 1997), 131; Darren Mcdermott and Leslie Lopez, “Malaysia Imposes Sweeping Currency Controls: Such Capital Restrictions Win Credence in Wake of Financial Turmoil,” Wall Street Journal, September 2, 1998; G. Pierre Goad, “Acceptance of Capital Controls Is Spreading,” Asian Wall Street Journal, September 2, 1998, “condition of membership” quotes.

52 Once again, it is important to note the qualified nature of this argument. The competing argument is not that capital flows are bad but rather that completely deregulated capital would lead to a suboptimally high level of flows.

53 Bhagwati, Jagdish, “The Capital Myth,” Foreign Affairs 77 (May-June 1998), 9Google Scholar, 12. For further skepticism and qualifications, see Cooper, Richard N., “Should Capital Controls Be Banished?” Brookings Papers on Economic Activity 99:1 (1999)Google Scholar.

54 Dani Rodrik, “Who Needs Capital Account Convertibility?” in Should the IMF Pursue Capital Account Convertibility? Essays in International Finance, no. 207 (Princeton: International Finance Section, Princeton University, May 1998), 61.

55 IMF Survey (September 23, 1996), 294. Under the headline “International Capital Markets Charting a Steadier Course,” the fund also noted that “although the scale of financial activity continues to grow, market participants—including high-risk high-return investment funds—are more disciplined, cautious, and sensitive to market fundamentals” (p. 293).

56 IMF Survey (May 12,1997), 129–30.

57 International Monetary Fund, International Capital Markets: Developments, Prospects, and Key Policy Issues (Washington, D.C.: IMF, September 1998), esp. 6Google Scholar, 11, 57, 63, 73, 148–50; see also International Monetary Fund, World Economic Outlook: Financial Turbulence and the World Economy (Washington, D.C.: IMF, October 1998), esp. 6–18Google Scholar, 101–2. It should be noted, however, that in the wake of the crisis the World Bank has been willing at least to address the issue of the possible benefits of some control over short-term capital flows. See World Bank, Global Economic Prospects and the Developing Countries, 1998–99: Beyond Financial Crisis (Washington, D.C.: World Bank, 1999), esp. xixiiGoogle Scholar, xxi, 4, 123–24, 128, 142–52; see also World Bank, East Asia: The Road to Recovery (Washington, D.C.: World Bank, 1998), esp. 9–10, 16, 34Google Scholar.

58 See Helleiner, Eric, States and the Reemergence of Global Finance (Ithaca, N.Y.: Cornell University Press, 1994)Google Scholar.

59 David E. Sanger, “Gaining Currency: The Invisible Hand's New Strong Arm,” Nezu York Times, September 9,1998.