Monetary Power and Monetary Statecraft

International Monetary Power, edited by David Andrews, uses a state-centric approach to explore issues surrounding “international monetary power,” on the one hand, and “monetary statecraft,” on the other. International monetary power can best be understood as a relational property, in which the behavior of one state changes because of its monetary relations with another state. By contrast, international statecraft exists when one state consciously and deliberately manipulates monetary relations in order to influence the policies of a second state. Thus, an adjustment of balance of payments disequilibrium by state A, which causes state B to abandon preferred policies, is an example of monetary power. Efforts by a state to promote the external use of its currency generally or to manipulate its currency's external value are examples of monetary statecraft. An interesting point regarding monetary power is that political control over domestic policy is not always in the hands of the national government, which it is widely presumed to be. States may, for example, subordinate their domestic monetary policy to another state, as was the case for Austria during the 1970s when it decided to subordinate its monetary policy to the German Bundesbank (p. 203). Monetary power also explains the desire to create a currency area, like the European Monetary Union, in order to eliminate the “wedge-effect” by which fluctuations in a strong currency (the US dollar) affect weaker (European) currencies asymmetrically (p. 131). By creating a currency area, European financial assets and European trade can be denominated in euros rather than dollars (previously the only international currency). In addition, establishing a currency area may divert trade and strengthen private sector coalitions. With respect to monetary statecraft, the United States has been able to use the exchange rate as a weapon in the post-World War II era to force policy adjustments by its economic partners because they have been vulnerable to changes in their currencies' exchange rates vis-à-vis the dollar.