Monetary hegemony
Encyclopedia
Monetary hegemony is an economic and political phenomenon in which a single state
has decisive influence over the functions of the international
monetary system
. The functions influenced by a monetary hegemon are:
The term Monetary Hegemony appeared in Michael Hudson's
Super Imperalism, which was first published in 1972. Monetary Hegemony describes not only the asymmetrical relationship that the US dollar has to the global economy
, but the strictures of this hegemonic edifice that support it, namely the International Monetary Fund
and the World Bank
. The US dollar continues to underpin the world economy and is the key currency for medium of international exchange, unit of account (e.g. pricing of oil), and unit of storage (e.g. treasury bills and bonds).
The international monetary system has borne witness to two monetary hegemons: Britain and the United States.
. During the gold standard of the late nineteenth century, Britain became the greatest exporter of financial capital. Its capital city, London, also became center of the world gold, money, and financial markets. This was a major reason for states adopting the gold standard. In order for Paris, Berlin, and other financial centers to attract the lucrative financial business from London, it was necessary to emulate Britain’s gold standard, for it reduced transaction costs, represented creditworthiness, and sound financial policy from government (Schwartz, 1996). The city of London was the leading supplier of both short term and long term credit, which was channeled abroad. Its extensive financial facilities provided cheap credit, which enhanced the strength of the pound through deepening its use for international payments. According to Walter (1991), during the decades of 1870-1913, “sterling bills and short-term credits financed perhaps 60 percent of world trade” (p. 88).
Britain’s foreign investment cultivated foreign economies for the use of sterling. In 1850, Britain’s net overseas assets grew from 7 percent of the stock of net national wealth to 14 percent in 1870, and to around 32 percent in 1913 (Edelstein, 1994). The world had never before seen one nation committing so much of its national income and savings to foreign investment. Britain’s foreign lending practices possessed two technical aspects that gave greater credence to the prominence of sterling as a unit of storage and medium of exchange: first, British loans to foreigners were made in sterling, which allowed the borrowing country to service the debt more conveniently with its sterling reserves, and second, Britain’s use of written instructions to pay or bill exchanges were drawn in London to finance international trade
More importantly, its unrivalled ability to run current account deficits through the issuance of its unquestioned currency and its discount rate endowed Britain with a special privilege. The effects of the discount rate had a “controlling influence on Britain’s balance of payments regardless of what other central banks were doing” (Cleveland, 1976, p. 17). When other central banks engaged in a tug of war over international capital flows, “the Bank of England could tug the hardest” (Eichengreen, 1985, p. 6). In this regard, British monetary hegemony was seldom threatened by crises of convertibility for its gold reserves were insulated by the discount rate and all foreign rates followed the British rate. The prominence of London’s credit drains led Keynes (1930) to write that the sway of London “on credit conditions throughout the world was so predominant that the Bank of England could almost have claimed to be the conductor of the international orchestra” (p. 306-307). Karl Polanyi in his renowned work the Great Transformation states “Pax Britannica held its sway sometimes by the ominous poise of heavy ship’s cannon, but more frequently it prevailed by the timely pull of a thread in the international monetary network” (Polanyi, 1944, p. 24).
Britain’s position waned due to inter-state competition, insufficient domestic investment, and World War I. Despite its economic weaknesses, British political sway continued after World War I, which led to the gold-exchange standard created under the Genoa Conference of 1922. This system failed, however, not only due to Britain’s incapability, but to the growing decentralization of the international monetary system with the rise of New York and Paris as financial centers that resulted in the collapse of the gold exchange standard in 1931. The Gold Exchange standard of the interwar period, as Kindleberger cogently stated, collapsed because "Britain couldn't and America wouldn't." In fact, Kindleberger provides a slightly different variation of monetary hegemony that possesses five functions rather than three defined here.
of 1945.
This new vision of universal multilateralism was, however, forestalled by the new economic realities of a war-torn Europe, symbolized by Britain’s financial inability to maintain sterling
convertibility
. Combined with this new economic reality, was the political-military threat of the Soviet Union. On December 29, 1945, only two days before the expiration of Bretton Woods, Soviet Foreign Minister Vyacheslave Molotov notified George Kennan, “that for the amount [offered] the U.S.S.R. would not subscribe to the articles” (James et al., 1994, p. 617). Two months later, in February 1946, Kennan sent his famous telegram to Washington, which inquired into why the Soviet Union had not ratified the Bretton Woods Agreement. The telegram would later be regarded as the beginning of US Cold War policy (James et al., 1994).
The US thus altered its vision from universal multilateralism to regional multilateralism, which it would promote in Europe through the Marshall Plan
, the European Recovery Program (ERP), and the European Payments Union
(EPU). With the dissolution of the EPU came the prospect of a real multilateral world as the Bretton Woods monetary system
came into effect in 1958. The same year marked the beginning of a permanent US balance of payments deficits.
Throughout the 1960s, the Bretton Woods system had permitted the US to finance approximately 70 percent of its cumulative balance of payments deficits via dual processes of gold demonetization and liability financing. The liability financing enabled the US to undertake heavy overseas military expenditures and “foreign commitments, and to retain substantial flexibility in domestic economic policy” (Gowa, 1983, p. 63).
In 1970, the US was at the center of international instability that was a consequence of its rapid monetary growth (James, 1996). The US, however, had learned the fate of its predecessor’s key currency (e.g. Sterling). Britain’s experience as monetary hegemon demonstrated to the US the problems faced by a reserve currency when foreign monetary authorities, individuals, and investors chose to convert their reserves. In terms of monetary power defined by reserves, the US share of reserves had fallen from 50 percent in 1950 to 11 percent in August 1971 (Odell, 1982, p. 218). Although, the US had become considerably weak in defending convertibility, its rule-making power was second to none. Rather than being constrained by the system it created, the US moved to the conclusion that it “was better to attack the system than to work within it” (James, 1996, p. 203). This decision was based on the recognition of the inseparability between foreign policy and monetary policy. The termination of the Bretton Woods system signified the subordination of monetary policy to foreign policy. The closing of the gold window was a fix that was assigned to “free…foreign policy from constraints imposed by weaknesses in the financial system” (Gowa, 1983,p. 69).
In other words, monetary policy conformed to the needs of foreign policy; this conformation is denoted by the gradual demonetization of gold throughout the 1960s beginning with the London Gold Pool
of 1961 and culminating in the suspension of convertibility in 1971. It was to be a direct attack by the US upon the very system it espoused for the purpose of inverting the classical rules of international finance: debt had become a means of monetary power, rather than credit.
US Monetary Hegemony persists as does the Bretton Woods System, as Dooley, Folkerts-Landau, Garber (2003) contend in their work An Essay on The Revised Bretton Woods System. The rules of the Bretton Woods system have stayed the same but the players have changed. The Post Bretton Woods system or Bretton Woods II
has given rise to a new periphery for which the development strategy is export-led growth supported by undervalued exchange rates,capital controls and official capital outflows in the form of accumulation of reserve asset claims on the center country (e.g. US). In other words, Asia has replaced Europe vis-a-vis in financing US balance of payments deficits.
Sovereign state
A sovereign state, or simply, state, is a state with a defined territory on which it exercises internal and external sovereignty, a permanent population, a government, and the capacity to enter into relations with other sovereign states. It is also normally understood to be a state which is neither...
has decisive influence over the functions of the international
International
----International mostly means something that involves more than one country. The term international as a word means involvement of, interaction between or encompassing more than one nation, or generally beyond national boundaries...
monetary system
System
System is a set of interacting or interdependent components forming an integrated whole....
. The functions influenced by a monetary hegemon are:
- accessibility to international creditCredit (finance)Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...
s, - foreign exchangeTradeTrade is the transfer of ownership of goods and services from one person or entity to another. Trade is sometimes loosely called commerce or financial transaction or barter. A network that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and...
marketMarketA market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
s - the management of balanceBalance (accounting)In banking and accountancy, the outstanding balance is the amount of money owed, , that remains in a deposit account at a given date, after all past remittances, payments and withdrawal have been accounted for. It can be positive or negative ....
of payments problems in which the hegemon operates under no balance of payments constraint. - the direct (and absolute) power to enforce a unit of account in which economic calculations are made in the world economy.
The term Monetary Hegemony appeared in Michael Hudson's
Michael Hudson (economist)
Michael Hudson is research professor of economics at University of Missouri, Kansas City and a research associate at the Levy Economics Institute of Bard College...
Super Imperalism, which was first published in 1972. Monetary Hegemony describes not only the asymmetrical relationship that the US dollar has to the global economy
International finance
International finance is the branch of economics that studies the dynamics of exchange rates, foreign investment, global financial system, and how these affect international trade. It also studies international projects, international investments and capital flows, and trade deficits. It includes...
, but the strictures of this hegemonic edifice that support it, namely the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
and the World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
. The US dollar continues to underpin the world economy and is the key currency for medium of international exchange, unit of account (e.g. pricing of oil), and unit of storage (e.g. treasury bills and bonds).
The international monetary system has borne witness to two monetary hegemons: Britain and the United States.
British monetary hegemony
Great Britain rose to the status of monetary hegemon in 1871 with widespread adoption of the gold standardGold standard
The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard...
. During the gold standard of the late nineteenth century, Britain became the greatest exporter of financial capital. Its capital city, London, also became center of the world gold, money, and financial markets. This was a major reason for states adopting the gold standard. In order for Paris, Berlin, and other financial centers to attract the lucrative financial business from London, it was necessary to emulate Britain’s gold standard, for it reduced transaction costs, represented creditworthiness, and sound financial policy from government (Schwartz, 1996). The city of London was the leading supplier of both short term and long term credit, which was channeled abroad. Its extensive financial facilities provided cheap credit, which enhanced the strength of the pound through deepening its use for international payments. According to Walter (1991), during the decades of 1870-1913, “sterling bills and short-term credits financed perhaps 60 percent of world trade” (p. 88).
Britain’s foreign investment cultivated foreign economies for the use of sterling. In 1850, Britain’s net overseas assets grew from 7 percent of the stock of net national wealth to 14 percent in 1870, and to around 32 percent in 1913 (Edelstein, 1994). The world had never before seen one nation committing so much of its national income and savings to foreign investment. Britain’s foreign lending practices possessed two technical aspects that gave greater credence to the prominence of sterling as a unit of storage and medium of exchange: first, British loans to foreigners were made in sterling, which allowed the borrowing country to service the debt more conveniently with its sterling reserves, and second, Britain’s use of written instructions to pay or bill exchanges were drawn in London to finance international trade
More importantly, its unrivalled ability to run current account deficits through the issuance of its unquestioned currency and its discount rate endowed Britain with a special privilege. The effects of the discount rate had a “controlling influence on Britain’s balance of payments regardless of what other central banks were doing” (Cleveland, 1976, p. 17). When other central banks engaged in a tug of war over international capital flows, “the Bank of England could tug the hardest” (Eichengreen, 1985, p. 6). In this regard, British monetary hegemony was seldom threatened by crises of convertibility for its gold reserves were insulated by the discount rate and all foreign rates followed the British rate. The prominence of London’s credit drains led Keynes (1930) to write that the sway of London “on credit conditions throughout the world was so predominant that the Bank of England could almost have claimed to be the conductor of the international orchestra” (p. 306-307). Karl Polanyi in his renowned work the Great Transformation states “Pax Britannica held its sway sometimes by the ominous poise of heavy ship’s cannon, but more frequently it prevailed by the timely pull of a thread in the international monetary network” (Polanyi, 1944, p. 24).
Britain’s position waned due to inter-state competition, insufficient domestic investment, and World War I. Despite its economic weaknesses, British political sway continued after World War I, which led to the gold-exchange standard created under the Genoa Conference of 1922. This system failed, however, not only due to Britain’s incapability, but to the growing decentralization of the international monetary system with the rise of New York and Paris as financial centers that resulted in the collapse of the gold exchange standard in 1931. The Gold Exchange standard of the interwar period, as Kindleberger cogently stated, collapsed because "Britain couldn't and America wouldn't." In fact, Kindleberger provides a slightly different variation of monetary hegemony that possesses five functions rather than three defined here.
American monetary hegemony
The end of World War II witnessed the recentralization of monetary power in the hands of a United States that had become willing to carry the burden of postwar reconstruction. The United States had emerged from World War II with the ideals of economic interdependence, accountability, and altruism, expressed in the vision of universal multilateralism (above all, multilateralism simply meant nondiscrimination via the elimination or reduction of barriers and obstacles to trade, but more importantly was the maintenance of barriers “that were difficult to apply in a nondiscriminatory manner” (Ruggie, 1982, p. 213)). In essence, the term multilateralism differs today, compared to what it meant after World War II. US interests in a multilateral, liberal world economy would not only be grounded entirely in idealistic internationalism. There was the cold, calculating necessity of generating a US export surplus. This would obviate government spending, stimulate the domestic economy, substitute for domestic investment, and avert reorganization for certain industries in the economy that were overbuilt during the war effort. For these reasons the “idea of an export surplus took on a special importance” (Block, 1977, p.35) for the US. The production of an export surplus was therefore intimately connected with establishing a world economy that was free of imperial systems, as well as bilateral payments and trading systems. The US would therefore aim to open its predecessor’s empire to American trade and to garner British compliance to create its postwar monetary system through financial leverage, namely the Anglo-American Financial AgreementAnglo-American loan
The Anglo-American Loan Agreement was a post World War II loan made to the United Kingdom by the United States on 15 July 1946, and paid off 29 December 2006...
of 1945.
This new vision of universal multilateralism was, however, forestalled by the new economic realities of a war-torn Europe, symbolized by Britain’s financial inability to maintain sterling
Pound sterling
The pound sterling , commonly called the pound, is the official currency of the United Kingdom, its Crown Dependencies and the British Overseas Territories of South Georgia and the South Sandwich Islands, British Antarctic Territory and Tristan da Cunha. It is subdivided into 100 pence...
convertibility
Convertibility
Convertibility is the quality that allows money or other financial instruments to be converted into other liquid stores of value. Convertibility is an important factor in international trade, where instruments valued in different currencies must be exchanged....
. Combined with this new economic reality, was the political-military threat of the Soviet Union. On December 29, 1945, only two days before the expiration of Bretton Woods, Soviet Foreign Minister Vyacheslave Molotov notified George Kennan, “that for the amount [offered] the U.S.S.R. would not subscribe to the articles” (James et al., 1994, p. 617). Two months later, in February 1946, Kennan sent his famous telegram to Washington, which inquired into why the Soviet Union had not ratified the Bretton Woods Agreement. The telegram would later be regarded as the beginning of US Cold War policy (James et al., 1994).
The US thus altered its vision from universal multilateralism to regional multilateralism, which it would promote in Europe through the Marshall Plan
Marshall Plan
The Marshall Plan was the large-scale American program to aid Europe where the United States gave monetary support to help rebuild European economies after the end of World War II in order to combat the spread of Soviet communism. The plan was in operation for four years beginning in April 1948...
, the European Recovery Program (ERP), and the European Payments Union
European Payments Union
The European Payments Union was an organization in existence from July 1950, until December 1958, when it was replaced by the European Monetary Agreement.With the end of World War II, economic depression struck Europe...
(EPU). With the dissolution of the EPU came the prospect of a real multilateral world as the Bretton Woods monetary system
Bretton Woods system
The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century...
came into effect in 1958. The same year marked the beginning of a permanent US balance of payments deficits.
Throughout the 1960s, the Bretton Woods system had permitted the US to finance approximately 70 percent of its cumulative balance of payments deficits via dual processes of gold demonetization and liability financing. The liability financing enabled the US to undertake heavy overseas military expenditures and “foreign commitments, and to retain substantial flexibility in domestic economic policy” (Gowa, 1983, p. 63).
In 1970, the US was at the center of international instability that was a consequence of its rapid monetary growth (James, 1996). The US, however, had learned the fate of its predecessor’s key currency (e.g. Sterling). Britain’s experience as monetary hegemon demonstrated to the US the problems faced by a reserve currency when foreign monetary authorities, individuals, and investors chose to convert their reserves. In terms of monetary power defined by reserves, the US share of reserves had fallen from 50 percent in 1950 to 11 percent in August 1971 (Odell, 1982, p. 218). Although, the US had become considerably weak in defending convertibility, its rule-making power was second to none. Rather than being constrained by the system it created, the US moved to the conclusion that it “was better to attack the system than to work within it” (James, 1996, p. 203). This decision was based on the recognition of the inseparability between foreign policy and monetary policy. The termination of the Bretton Woods system signified the subordination of monetary policy to foreign policy. The closing of the gold window was a fix that was assigned to “free…foreign policy from constraints imposed by weaknesses in the financial system” (Gowa, 1983,p. 69).
In other words, monetary policy conformed to the needs of foreign policy; this conformation is denoted by the gradual demonetization of gold throughout the 1960s beginning with the London Gold Pool
London Gold Pool
The London Gold Pool was the pooling of gold reserves by a group of eight central banks in the United States and seven European countries that agreed on 1 November 1961 to cooperate in maintaining the Bretton Woods System of fixed-rate convertible currencies and defending a gold price of US$35 per...
of 1961 and culminating in the suspension of convertibility in 1971. It was to be a direct attack by the US upon the very system it espoused for the purpose of inverting the classical rules of international finance: debt had become a means of monetary power, rather than credit.
US Monetary Hegemony persists as does the Bretton Woods System, as Dooley, Folkerts-Landau, Garber (2003) contend in their work An Essay on The Revised Bretton Woods System. The rules of the Bretton Woods system have stayed the same but the players have changed. The Post Bretton Woods system or Bretton Woods II
Bretton Woods II
The 2008 G-20 Washington Summit on Financial Markets and the World Economy took place on November 14–15, 2008, in Washington, D.C., United States. It achieved general agreement amongst the G-20 on how to cooperate in key areas so as to strengthen economic growth, deal with the financial...
has given rise to a new periphery for which the development strategy is export-led growth supported by undervalued exchange rates,capital controls and official capital outflows in the form of accumulation of reserve asset claims on the center country (e.g. US). In other words, Asia has replaced Europe vis-a-vis in financing US balance of payments deficits.
See also
- MoneyMoneyMoney is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...
- Monetary policyMonetary policyMonetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...
- NumismaticsNumismaticsNumismatics is the study or collection of currency, including coins, tokens, paper money, and related objects. While numismatists are often characterized as students or collectors of coins, the discipline also includes the broader study of money and other payment media used to resolve debts and the...
- Petrodollar recyclingPetrodollar recyclingPetrodollar recycling refers to the phenomenon of major oil-producing states mainly from OPEC earning more money from the export of oil than they could usefully invest in their own economies...
- Petrodollar warfarePetrodollar warfareThe phrase petrodollar warfare refers to a hypothesis that one of the unknown, driving forces of United States foreign policy over recent decades has been the status of the United States dollar as the world's dominant reserve currency and as the currency in which oil is priced. The term was coined...
- Petroeuro
- Seignorage
- World currencyWorld currencyIn the foreign exchange market and international finance, a world currency, supranational currency, or global currency refers to a currency in which the vast majority of international transactions take place and which serves as the world's primary reserve currency...