Great powers have great currencies
Review: Money Beyond Borders by Barry Eichengreen
Money Beyond Borders: Global Currencies from Croesus to Crypto
by Barry Eichengreen (Released today!)A 2,500-year history of international currencies that reveals new insights about the future of the U.S. dollar—as well as crypto and central bank digital currencies
The risk of any historical accounting of international currencies is that it reads like the Book of Genesis:
And unto Athens was born the silver owl; and the owl begat the Alexander; and the Alexander begat the denarius; and the denarius begat the solidus; and the solidus begat the dinar; and the dinar begat the florin; and the florin begat the piece of eight; and the piece of eight begat the guilder; and the guilder begat the pound sterling; and the pound sterling begat the dollar.
And the dollar reigns supreme over the earth. Amen!
Money Beyond Borders avoids any such tedious recitations. Barry Eichengreen, a professor of economics at U.C. Berkeley and one of our nation’s foremost macroeconomists and economic historians on the dollar, writes with a strong narrative and humor sorely lacking in economic history. He generously provided Hegemoney with an advance copy of his new book for review.
Jess is an economist. I am not. As a rule I am suspicious of any book with “crypto” in the title. I have only served as a lowly government or tech staffer, but I read Bloomberg every morning and get a queasy feeling whenever I see a new headline about the death of the dollar, the currency in which I am paid my wages and buy bread. I know a bit but not enough about international currencies — which makes me the perfect audience for this book. Eichengreen has written a very good primer for economists and non-economists alike.
International, strong emphasis on the national
Much of Money Beyond Borders is about the tension in the international use of a national currency. A nation mints a currency to encourage domestic trade and pay the troops, but either vigorous traders or vigorous troops eventually lead that national currency to start playing a major role in international trade and financial services. The tension is between a world that wants a nation’s currency to be one thing, and a domestic audience who wants the currency to be another thing. Nations cannot be divorced from the international circulation of their currencies (despite John Maynard Keynes’ best efforts with the bancor).
There may be no better illustration of this than CNN’s recent reporting that Iran is considering letting container ships through the Strait of Hormuz provided the oil cargo is traded in Chinese yuan. In other words, Iran has a standing policy to blow up any vessel carrying oil traded in U.S. dollars. Almost all of the world’s oil is traded in U.S. dollars — now, neutral nations shipping oil traded in American currency for commercial convenience risk being fired upon by an IRGC missile fusillade. It is no wonder that shipwrecks bearing chests of once-invincible currencies now litter the ocean floor. Whether it makes any sense to Americans at the pump is a different matter.
Return of the strong states
Eichengreen by his own admission is no numismatist, but by studying the fall and rise of coins across history — the denarius (Rome), the solidus (Byzantium), or the piece of eight (the Spanish Empire) — we come to see how great international currencies “must be issued by strong states.”
A sort of recipe emerges. Strong states are those with the:
Political structures to provide checks and balances (creditors represented in governing bodies, barriers to unilateral debasement)
Administrative and regulatory capacity to mint and coin with high uniformity (quality assurance, regulated provision, liquidity)
Military capability to defend their borders and institutions (geopolitical security, safe-haven effects)
Currencies were created both to encourage trade and commercial activity, but also to ensure the sovereignty of a nation. Among empires, an obvious function of currencies was to pay soldiers out on the frontiers (“soldiers” coming literally from those paid in Byzantium’s “solidus” coin, as Eichengreen notes) who also act as a distribution channel for spreading that currency in and beyond occupied territories.
The seeds of destruction
Alas! Per Eichengreen, “International currency status is not forever.” A consistent theme of his survey of ancient currencies is that “widespread international use of a national currency may itself be a factor in economic and geopolitical decline.” This is very interesting.
Eichengreen shows how an evolutionary pattern emerged in the late Middle Ages: a currency begins in trade, then adapts into trade finance, and finally specializes in pure financialization (trading financial instruments often without underlying physical goods or services). Florence and the Netherlands, for example, took a path of “starting out as a merchant, moving into merchant banking, and then becoming bankers pure and simple.”
Financialization appears to have domestic side effects including a decline of industry and the rise of speculation. An in-demand international currency is an over-valued currency, which makes exports less competitive and hollows out a country’s industrial capacity. Meanwhile, financial instruments become a more attractive investment than factories, so everyone piles into speculative financial products instead of building things. Perhaps this all sounds familiar? It is jarring to read how hard nations with international currencies tried to stave off speculation throughout history — given how fantastically speculative the American economy feels now (uh oh!).
And so a nation with an international currency becomes a global financial power ”at the expense of the industrial and commercial activities that are the fundamental sources of economic and military prowess.” Imperial overreach or war (victories and defeats can be equally as expensive) often finish a currency off. Eichengreen doesn’t dwell on the parallels to modern America: he is positive on the benefits of globalization and exorbitant privilege granted to America by the dollar, but his analysis on the downfall of currencies would fit neatly into a manifesto by a new torpedo company in El Segundo — America as a nation that has neglected its infrastructure, captured by rampant speculation, and rife with self-dealing by elites. A world where, as in London during the reign of the pound sterling, “the best minds were being drawn into finance rather than industry . . .”
Still on top
A third of Money Beyond Borders is dedicated to the rise of the dollar. The last third is dedicated to what comes next. Eichengreen is relatively measured: ticking through the top threats to the dollar, he finds them all coming up short, at least for now. China is a great commercial power, but doesn’t appear to want the exorbitant responsibility of a truly international currency so much as it resents America’s exorbitant privilege. Absent a commercial revolution elsewhere in the world combined with an implosion of the American economy, there are no worthy challengers. Still, our friends in Europe and enemies abroad beef up their monetary infrastructure and wait for a crisis (you will have to read the book for Eichengreen’s theories on a potential future of international currencies bifurcated between China and the U.S.).
It would have to be a mighty crisis. For now, acute chaos, even chaos that the United States stirs up, benefits us: ”Not for the last time, the dollar, its safe-haven status intact, benefited from macroeconomic volatility and geopolitical uncertainty, even volatility and uncertainty to which the United States itself contributed.” See also, the recent hard rally of the dollar post-Iran strikes.
A greater challenge, not explicitly addressed by Eichengreen, may be domestic support for an international dollar. The benefits of an international dollar are tangible (lower borrowing costs, insurance against financial shocks, leverage with sanctions) but could be relatively abstract to an Iowa primary voter. The costs hit closer to home (empty factories rusting! rampant speculation!). Bankers like an international dollar, but workers whose exports are being depressed understandably may not. During the rise of the dollar, America put up with a lot of unfair trade practices post-WWII as the cost of getting the rest of the world on their feet, dollars in hand. This has obviously been of benefit to the United States in the long run, but going forward an international dollar will need a better PR strategy — a stronger narrative for the well-established case for dollar dominance and why it requires us providing a global public good.
Pax dollara
“International currency status is not forever,” again, per Eichengreen.
Why not? The United States checks all the boxes for Eichengreen’s recipe of strong states and strong currencies: a strong military, a democratic republic with checks and balances, deep and liquid markets open to foreigners, price stability, an enormous and dynamic economy, broad international alliances, and a central bank that steps in to stabilize financial markets.
Eichengreen frames the rise and fall of currencies as inevitable, with the caveat that strong currencies sometimes outlive strong states. Francis Fukuyama famously saw Western liberal democracy as the ideological “end of history” — the “end-point of mankind’s ideological evolution” and the “final form of human government.” Perhaps the U.S. dollar can be an “end of international currency.” It would only require a stable and well-defended commercial republic that can resist the worst temptations of financial speculation and imperial overreach…
But Eichengreen doesn’t take his book this far afield. I’ll be curious to see what staffers in Washington or engineers in San Francisco take away from his book as lessons for actively securing the role of the dollar. At the very least, anyone in Silicon Valley hoping to build the future of currencies would benefit from Eichengreen’s study of the past.
Yes, the dollar has its wobbles. The standard concerns are addressed: fiscal insolvency, attacks on the Federal Reserve, and so on. But put in perspective against the rocky history of international currencies that lurch from strength to strength despite outright failures or defeats — they feel relatively minor. Eichengreen, for his part, advises prudence, coherence, a commitment to the rule of law and the separation of powers, and the honoring of commitments to foreign powers. A lot to hope for in human affairs.