Review Article The Study of Money By JONATHAN KIRSHNER* Benjamin J. Cohen. The Geography of Money. Ithaca, N.Y.: Cornell University Press, 1998, 229 pp. Susan Strange. Mad Money: When Markets Outgrow Governments. Ann Arbor: University of Michigan Press, 1998, 212 pp. ONETARY phenomena now define the contours of the con- Mtemporary global economy. This is new, and it has transformed the study of international political economy (IPE). By contrast, for most of the past two centuries, money, as John Stuart Mill argued (and like a good baseball umpire), was only noticeable when it failed. This was cer- tainly the case during the dramatic expansion of the international econ- omy following the Second World War, and it was reflected in the concurrent development of the subdiscipline of IPE. The real economy —trade, especially liberalization, integration, and strategy—dominated the agenda, while monetary politics tended to pop up when its more se- vere pathologies—sterling crises, the collapse of Bretton Woods, the dol- lar cycle—threatened to disrupt the smooth functioning of world trade. At the dawn of the twenty-first century, however, these roles have re- versed. Money leads and the real economy must follow. From an eco- nomic perspective, this has an Alice-in-Wonderland quality to it: money, once the handmaiden of the modern economy, has become its mistress. For students of IPE, this presents a fundamental and profound question: in what way are politics affected by this change? Two excellent books, The Geography of Money, by Benjamin Cohen, and Mad Money, by Susan Strange, will frame, support, and serve as the point of departure for scholars addressing this vital question. The vol- umes, by two of the most accomplished and distinguished experts on * I thank Rawi Abdelal, Eric Helleiner, Charles Kindleberger, Karl Mueller, two anonymous refer- ees, and the editors at World Politics for helpful comments and suggestions. World Politics 52 (April 2000), 407–36 408 WORLD POLITICS the IPE of money, also establish landmarks around which competing schools of thought will organize. Cohen, the thoughtful liberal, trusts markets but understands that monetary phenomena have inescapably political consequences. Strange, the skeptical Keynesian, recognizes the indispensable power and efficiency of markets but sees a monetary order reeling from political conflict and ubiquitous market failure. From these distinct perspectives, each author provides a new roadmap for navigating the international political space transformed by the ascendance of money. They also remind us why so many of the great economists, including Ricardo, Marx, Marshall, Keynes, Schum- peter, Myrdal, and Hayek, dedicated much of their efforts to the study of monetary phenomena. Deceptively theoretical debates about money—its definition, management, and idiosyncrasies—are typically rooted in fundamental conceptions of politics and society. Ultimately, however, and perhaps necessarily, these books raise more questions than they answer. But they do suggest a direction for the most promising avenues of investigation—toward the study of the unique interconnections between the ideas, material interests, and in- stitutions associated with the management of money. Those relation- ships are profoundly consequential for politics and demand the renewed attention of contemporary scholars of international relations and political economy. Cohen, and more explicitly Strange, clearly ac- knowledge the importance of ideas in monetary affairs. Cohen reminds the reader that money derives its very value from shared social conven- tions, indeed, “has no meaning at all except with reference to the mu- tual confidence that makes its use possible” (p. 11). Strange is even more pointed, asserting that the basic differences between competing economic theories are “not technical but political” (p. 190). But while the role of ideas is an important implicit foundation of these volumes, neither takes on the issue in a systematic way, largely be- cause each has a dominant theme. These themes, reflected in their re- spective titles, provide the nominal touchstone for their analyses. This article, therefore, proceeds in two parts. The first part considers Geog- raphy and Mad Money on their own terms, concentrating on the themes stressed by the authors. The second part of the article then explores what is left implicit by these volumes—the need for a renewed atten- tion to ideology and politics in explaining monetary phenomena. This latter part of the article first shows how ideas can play a unique role in shaping monetary phenomena. It then argues that this matters because those ideas can mask distributional conflicts. Fundamentally political struggles about money, that is, are routinely cloaked in eco- STUDY OF MONEY 409 nomic terms, often throwing students of politics off the scent. This dis- cussion then concludes with two illustrations of macroeconomic poli- cies—the pursuit of low inflation and the deregulation of capital flows—that have been shaped by ideas that are of greater political than economic consequence. THE NEW GEOGRAPHY As Cohen notes in his preface, he traces his interest in the geography of money to his first professional publication.1 Even more broadly, Geog- raphy can be seen as the most recent and arguably the culmination of a series of important books by Cohen, including The Future of Sterling as an International Currency, Organizing the World’s Money, and In Whose Interest? International Banking and American Foreign Policy. Each of these books negotiated the terrain between economics and politics as it also explored crucial issues relating to international money and finance. Thus Geography breaks new ground while also tying together argu- ments and analytical themes that have characterized Cohen’s writing throughout his career. Cohen’s premise is straightforward. While the global financial revo- lution is often characterized as undermining state authority in general and national control over money in particular, “the geography of money is far more complex than we generally assume” (p. 1). Cohen quickly establishes a clear thematic foil: the myth of one nation, one money, that is, the idea that within their own borders, states are their own monetary masters. This has never been true, he argues, and is less and decreasingly an approximation of reality now than at any other time in recent history. Cross-border currency competition is a fact of life and is continuously eroding the power of governments. And this matters, be- cause “international relations, political as well as economic, are being dramatically reshaped by the increasing interpenetration of national monetary spaces” (p. 3). To comprehend the meaning of these changes, Cohen argues, we must understand the geography of money. The most important factor driving change in that geography is the shift in power from states to markets. This shift, however, is not a transformation from state su- premacy to decentralized globalization. Rather, it is a change in the na- 1 Benjamin J. Cohen, “The Euro-Dollar, the Common Market, and Currency Unification,” Journal of Finance 17 (December 1963), esp. 613–15. 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. 410 WORLD POLITICS ture of state power. While at one time states could be considered the monopoly producers of currency within their borders, they have now been reduced to (still powerful) oligopolists. They retain the capacity to shape the market but also find themselves constrained by competitors. With his foil, the one nation, one money myth, and his question, the political and economic consequences of increased interpenetration of international monetary spaces, Cohen proceeds with his argument sys- tematically and effectively. First, looking back, Geography explores the old-fashioned world of territorial money from a historical perspective. While there was always sovereign coinage, Cohen notes, the conceptu- alization of money in territorial terms did not come about until the nineteenth century. Before then foreign coins circulated with little con- cern for national boundaries. But leaders overseeing the consolidation of the nation-state in the nineteenth century used money as in instru- ment of state building,2 and the establishment of national money as “legal tender” drove out foreign (currency) competition. In retrospect, then, the century from 1870 to 1970 was an atypical interlude in which states enjoyed a near monopoly in currency affairs. This monopoly gave states power vis-à-vis other societal actors in four ways. First, it provided a powerful political symbol, which is one reason why newly independent states today continue to establish distinct cur- rencies despite their reduced economic significance. Second is the op- portunity for seigniorage, which can be an important source of revenue for states and, importantly, the opportunity for which is inversely re- lated to the ability of subjects to substitute into another currency. States that control their money can also practice macroeconomic management by manipulating the money supply and the exchange rate—important policy tools, especially in the short run. Finally, by issuing their own currency, states gain power in a negative sense: they avoid dependence on some other source. For these reasons states continue to support the Westphalian conception of one nation, one money, even though