(KIRSHNER, Jonathan) Money Is Politcs.

Money Is Politics
Author(s): Jonathan Kirshner

Source: Review of International Political Economy, Vol. 10, No. 4, Tenth Anniversary Issue
(Nov., 2003), pp. 645-660
Published by: Taylor & Francis, Ltd.
Stable URL: http://www.jstor.org/stable/4177480
Accessed: 25-07-2016 19:58 UTC
REFERENCES
Linked references are available on JSTOR for this article:
http://www.jstor.org/stable/4177480?seq=1&cid=pdf-reference#references_tab_contents
You may need to log in to JSTOR to access the linked references.
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at
http://about.jstor.org/terms
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted
digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about
JSTOR, please contact support@jstor.org.
Taylor & Francis, Ltd. is collaborating with JSTOR to digitize, preserve and extend access to Review of
International Political Economy
This content downloaded from 150.135.239.97 on Mon, 25 Jul 2016 19:58:07 UTC
All use subject to http://about.jstor.org/terms
I) Routledge
Review of International Political Economy 10:4 November 2003: 645-660 i Taylor&FrancisGroup
Money is politics
Jonathan Kirshner
Cornell University
ABSTRACT
The management of money is always and everywhere political: for every

policy choice, there is an alternative that some actors would prefer. The
contemporary salience of enormous and influential financial markets has
obscured this immutable political reality, by leaving the impression that
market forces transcend politics, and render political conflicts moot. Since
market forces impose the 'best practice' on states, policies are chosen by the
force of economic logic rather than by politics and the winners and losers
must fall where they may. But this is an illusion, albeit a powerful illusion,
a consequence of the distinct and crucial role that ideas and beliefs play in
the monetary arena: what people think about money, right or wrong, can
create self-fulfilling prophecies. In fact, economic theory is indeterminate in
its ability to account for most monetary policy choices. Even in a world of
globalized finance, the difference between many plausible policies is of
ambiguous, or, at most, modest economic effect. Economic logic does limit
the range of policy choices to a plausible set. But the choice from that set is
inevitably determined by the inescapable politics of money.
KEYWORDS
Money; monetary policy; capital controls; Keynes; ideas; embedded

liberalism.
INTRODUCTION
Money is everything. Money is nothing. Money is what you think it is.

Money is power. Money is politics. Individually these statements under-
score why monetary phenomena have a formative influence on the nature
of contemporary politics. Collectively they reveal the dominance of
political forces in shaping the monetary landscape. Contrary to efforts
aimed at 'de-politicizing' the management of money, monetary
phenomena are always and everywhere political. This is of greater, not
diminished significance in an era of globalization.
Review of International Political Economy

ISSN 0969-2290 print/ISSN 1466-4526 online ? 2003 Taylor & Francis Ltd
http:/ /www.tandf.co.uk
DOI: 10.1080/09692290310001601911
REVIEW OF INTERNATIONAL POLITICAL ECONOMY
Money is Everything. As is well known, the past 30 years have witnessed

a revolutionary expansion in the size and rate of international financial
transactions. This is reflected not only in the breathless calculation of
trillions of dollars daily traded, but also in the more sober trajectory of the
academic literature. Compare for example two seminal works, the state-
centred Sterling and British Policy (Strange, 1971) and The Future of Sterling
as an International Currency (Cohen, 1971), with their globalized descend-
ants, Mad Money: When Markets Outgrow Governments (Strange, 1998) and
The Geography of Money (Cohen, 1998). Nowadays, money rules, and policy
must follow. Any state - any state - that steps out of line will be road-kill
on the financial-information superhighway.
Money is Nothing. At the same time, money has no inherent value. There
is no final demand for the little pieces of paper (or electronic data entries)
that are money. Money is not consumed. Rather, as Keynes (1936: 294)
famously put it, money is 'above all, a subtle device for linking the present
to the future'. A unit of account and a medium of exchange, to be sure, but
above all else a store of value. Or not. For as a store of value that has no
inherent value of its own, rather, it represents an (anticipated) command
of goods and services in the future. As such, expectations about the future
value of money are of paramount concern.
Money is What You Think it is. Another unique aspect of money is that it
has value solely because other people think it is valuable. Thus assessing
expectations about the future value of money depends on guessing other
people's assessments about the future value of money. This leads to some
interesting paradoxes. Even if all the passengers on an otherwise sound
plane don't think it will take off, it will. But if just enough of the holders
of a given currency don't think an otherwise sound monetary reform
makes sense, it won't fly. Ideas about money management, then, have a
distinct and profound influence in the world of money, regardless of
whether or not those ideas are right or wrong.
Money is Power. On the other hand, one way in which money is just like
almost everything else is that those who can influence it use that power to
advance their interests. Those who can hold, lend, and move money do so
for a purpose, typically a self-interested purpose. In this regard the interest
of large financial institutions in the setting of monetary policy is no
different than the interest of large auto companies in environmental and
trade legislation. This is even more apparent internationally, where it is
more commonly understood that states pursue their narrow interests.
States routinely try and shape the nature and extent of their interaction
with the international monetary system, either to enhance domestic policy
autonomy, advance foreign policy goals, or accommodate concerns for
national security.
Money is Politics. Finally, every choice about money reflects the outcome
of a political contest. That is, for every policy choice, there is an alternative
646
KIRSHNER: MONEY IS POLITICS
that some actors would prefer. The edge of this point has been dulled by
the perception that in the globalized financial system (where money is
everything) market forces impose the 'best practice' on states, and thus
policies are chosen by the force of economic logic rather than political
manipulation, and the winners and losers must fall where they may. But
this is an illusion, albeit a powerful illusion, derived from the fact that
money is nothing, money is what you think it is, and money is power. In
practice, economic theory is indeterminate in its ability to account for most
monetary policy choices. Because even in a world where money is every-
thing, the difference between many plausible policies is of ambiguous, or,
at most, modest economic effect. Economic logic limits the range of policy
choices to a plausible set. But the choice from that set is inevitably deter-
mined by the inescapable politics of money (Kirshner, 2003).
HOW DID WE GET HERE?
Before exploring this claim further, it is worth considering how the world
reached the point where it is now. Three stepping-stones guide the way.
First, I describe the basic monetary problem, balancing internal and
external monetary equilibria. This problem suggests the need for inter-
national monetary cooperation. I then review why monetary cooperation
is particularly problematic, compared, for example, to cooperation in
international trade. Finally I trace the contours of monetary cooperation
from the end of the World War II to the present.
MONEY, NATIONAL AND INTERNATIONAL
At bottom, there are two questions at the heart of all monetary matters,
plus one dilemma that derives from those two questions. The two ques-
tions are about 1) The price (and variability of the price) of money in the
home market (i.e. the inflation rate); 2) The price (and variability of the
price) of money outside the home market (the exchange rate). It is readily
understood that policy choices about the rate of inflation and the exchange
rate have political consequences - obviously, for example, exporters and
imports have opposing preferences with regard to the exchange rate.
Similarly, debtors and creditors have different preferences with regard to
inflation (Frieden, 1991,1997). But while the axes of these types of conflicts
are widely acknowledged, more important and somewhat less obvious is
the fact that the policies and regulations designed to achieve targeted
choices - policies and regulations designed to influence the rate of
inflation or the exchange rate - have even more profound political conse-
quences.
Even once preferences about inflation and exchange rates have been
established, all states still face a dilemma - targeting one rate requires
647
abdication of control over the other. In theory by maintaining comprehen-

sive and effective capital controls states can largely escape this dilemma,
but in practice, setting macroeconomic policies to assure domestic price
stability implies a loss of control over the exchange rate, and vice versa.
This problem was emphasized by Keynes (1930: 272), who wrote exten-
sively about the difficulty states faces in balancing their preferences for
internal and external price stability. Money links the national with the
international economy. This, is 'the dilemma of an international monetary
system': the difficulty in providing both stability in external monetary
relations while assuring 'at the same time an adequate local autonomy for
each member over its domestic rate of interest' and other macroeconomic
policies.
One possible way to reduce the intensity of this dilemma is through
international monetary cooperation. Such cooperation - essentially, efforts
in one form or another to coordinate exchange rate management - can help
states avoid pursuing unintentionally contradictory policies, and can
establish understandings, norms, procedures and mechanisms designed
to help ease the burdens of adjustment inherent in any international
payments system.
THE PROBLEM OF MONETARY COOPERATION
Unfortunately, although cooperation can reduce the intensity of Keynes'

monetary dilemma, sustained cooperation over exchange rates - in partic-
ular commitments to maintain the relative value of one's currency at a
specific rate or within an agreed upon range - is quite difficult. Macro-
economic phenomena have some distinct attributes, as compared to trade,
for example, which makes such cooperation particularly elusive. In partic-
ular, the complexity of international monetary arrangements, the distinct
nature of the salience of monetary commitments, and the public nature of
macroeconomic externalities, all raise formidable barriers to sustained
cooperation between states over exchange rates.
The complexity of international monetary arrangements poses unique
challenges to monetary cooperation. With trade, the essential bargaining
process is over protectionism, more or less, and once agreed upon, policy
is established by law. In money, even if states seek to cooperate, they may
still disagree over practical issues regarding the 'rules of the game'
(Cooper, 1975). And even if this hurdle is surmounted, there is always a
gap between agreement and execution. Given the existence of influential
private currency and financial markets, policies cannot in most circum-
stances be imposed by fiat, but instead may be undermined by counter-
vailing market pressures. And because everybody knows that state
intervention may therefore be ineffective it is difficult to assess whether
states are in fact living up to their obligations.
648
Worse still, even if states are able to establish monetary cooperation,

they will often face powerful incentives to abandon it. This is because
cooperation can reduce but does not eliminate Keynes' monetary dilemma
- a commitment to external price stability requires a loss of control over
domestic policy autonomy. Thus to maintain an agreed upon exchange
rate governments are often forced to engage in unpleasant acts: austerity
budgets, deflationary monetary policy, costly and compulsory interven-
tion in exchange markets, and a number of other initiatives such govern-
ments would otherwise not undertake. Such pressures often arise at the
worst possible time: a state may be in a recession, but to fulfil its commit-
ments to an international monetary agreement it might be forced to
engage in deflationary policies.
Finally, if monetary agreements fall apart, or if one state 'defects' from
a multilateral agreement or understanding, cooperation will be difficult to
restore. This is due to the public nature of macroeconomic externalities
(Oye, 1992). Externalities in international relations result from the fact that
states adopt policies that have 'spillover' effects: consequences that are felt
beyond a state's borders. If injured states punish the producers of the
negative spillovers, then those policies will be perceived as costly and
curtailed. But while states can be discriminatory in their trade policies, the
international economic effects of macroeconomic policies are almost inher-
ently uniform. Thus producers of macroeconomic 'bads' (such as globally
pernicious interest or exchange rate policies) will tend to go unpunished,
because injured states face a collective action dilemma: all will benefit
from the elimination of the public bad, no matter who bears the cost. Due
to the free rider problem (private costs and public benefits), negative
externalities in this case will not be significantly reduced.
In sum, there is good reason to believe that uncoordinated bargaining
between states will result in an inefficiently low level of international
cooperation. Some scholars have suggested that one way out of this
problem is through leadership, or hegemony - one powerful state acting
to overcome a variety of collective action problems (Gilpin, 1971, 1987;
Kindleberger, 1973). But once again, the monetary side of this fable is quite
murky, and the role of hegemony here is ambiguous (Rowland, 1976;
Eichengreen, 1989). Empirically, the record is quite thin - the classical gold
standard system may have been centred in London, but Britain was no
monetary hegemon, nor did it behave as such (Eichengreen, 1992; Gal-
larotti, 1995). Deductively, while benefits to hegemony can be derived, a
state at the centre of an international monetary system is also a likely
source of instability. States at the hub of an international monetary system,
especially if they provide the 'world's currency', are less constrained than
other states and may fall prey to temptation or even purposefully choose
to exploit their position (Walter, 1991). For all these reasons, many
observers, especially those who experienced the utter collapse of the
649
international monetary system in the inter-war period, reached the con-

clusion that institutions are necessary to help states achieve and maintain
exchange rate cooperation.
TURNING POINTS - EMBEDDING AND

DISEMBEDDING LIBERALISM
The international monetary system has always rested and depended upon
political foundations. There are times, especially during crises such as the
inter-war period where those politics are more obvious than at other times,
such as during the pre-World War I 'classical' gold standard system, but
it is always the case. In the post-World War II era, there have been three
important turning points with regard to international money, and each
was also associated with basic political change.
The International Monetary Fund (IMF) was established by the US and
UK after World War II in the hopes of avoiding the mistakes of the inter-
war period. First and foremost for the US was the commitment to post war
engagement rather than isolation, and, again in contrast to its strategy
after the Great War, to a more generous pursuit of a far-sighted self-interest
- all forged in the context of the emerging cold war with the Soviet Union
(Ikenberry, 2000).
The new institution, under US leadership, was designed to address
Keynes' dilemma. The monetary system would be open and designed to
encourage the expansion of the international economy, but would be
designed to afford states the autonomy to pursue varied national
economic policies and to cushion the burdens of international adjustment.
This was one element of what Ruggie (1982) termed the post-war 'compro-
mise of embedded liberalism', the combination of international market
forces and domestic economic intervention (see also Blyth, 2002). In
particular, the internationalist, market-oriented system would contain
mechanisms, safeguards, and escape clauses to assure that states would
not be forced to sacrifice domestic social policies in order to maintain
international equilibria.
For Keynes, who was not simply one of the principal architects of the
IMF but had an even greater intellectual influence on its formation (Iken-
berry, 1992), this compromise required the use of capital controls to
mediate and regulate short-term capital movements. As he put it, 'nothing
is more certain than that the movement of capital funds must be regulated'
(Keynes, 1942: 149), and the rules of the IMF were written to explicitly
accommodate capital controls. Such controls, which created the space for
variation across national economic policy while at the same time
integrated into a system of international monetary cooperation, were an
integral part of the embedded liberal vision (Kirshner, 1999).
The quarter century that followed is now known as the golden age of
650
capitalism, with remarkable rates of global economic growth. In the 1950s

especially, the US bore a disproportionate share of the burdens of adjust-
ment. But by the late 1960s, international politics - the easing of the cold
war, and the economic and political consequences Vietnam War - left the
US increasingly unwilling to shoulder those costs. Domestic politics
sealed the deal: faced with the choice of deflationary adjustment or
wrecking the Bretton Woods system, the US chose the latter (Odell, 1982;
Gowa, 1983). Monetary adjustments are painful, and as one scholar
observed, 'Nixon's political survival seemed in flat contradiction to the
requirements of the Bretton Woods monetary regime' (Calleo, 1982: 30).
And the US had the power to force other states to share the burdens of
adjustment.
The collapse of the fixed rate system, the oil shocks and the need for
petrodollar recycling, and higher and differential rates of inflation all
contributed to the expansion of international capital markets and encour-
aged states to liberalize their capital controls. These trends accelerated in
the 1980s and beyond. The debate remains open as to whether this general
trend toward deregulation was the inevitable result of technological
change and shifts in the balance of power between states and private
actors (Goodman and Pauly, 1993) or the conscious choice of leading states
assessing their interests (Helleiner, 1994).
The end of the cold war created the opportunity to accelerate the tran-
sition from an embedded to a disembedded international order. The
demise of the Soviet Union afforded the US the luxury of becoming more
assertive in the expression of its preferences, and the resurgence of the US
economy enhanced both its power and prestige. Victory in the cold war
and the American renaissance were both attributed to the triumph of the
free market. At century's end, the march of progress appeared to have
settled all questions about money - above all else, inflation must be kept
very low, and as soon as possible, any remaining capital controls should
be eliminated. Apolitical institutions - independent central banks at home
and the IMF worldwide - would assure that these best practices were
followed.
AMBIGUOUS ECONOMICS
In fact, however, the triumph of the unregulated free market and the end
of political history is a myth, at least where money is concerned. There is
little evidence that the primacy of the pursuit of very low inflation or the
embrace of complete capital deregulation are the most efficient practices.
At the very least, there are other policy choices which are plausible, and,
from the perspective of economic theory, sustainable. But because enough
actors, and in particular powerful actors such as states, institutions and
large investors believe that low inflation and capital deregulation are
651
unambiguously and singularly best practice, those beliefs create a self-

fulfilling prophesy.
THE DYNAMIC DUO: LOW INFLATION AND

CAPITAL MOBILITY
Vigilance against the threat of inflation is now considered to be the

primary if not the sole goal of domestic macroeconomic policy, and it is
understood that the cultivation of central bank independence (CBI) is the
standard mechanism by which this policy is assured. This conventional
wisdom is based on the belief that inflation is 'bad', that is, that inflation
imposes real economic costs on the economy. This is a reasonable suppo-
sition - there are a number of deductive reasons why inflation might
impose real economic costs (Fischer and Modigliani, 1986), and models
can be designed to simulate why inflation could be costly in practice
(Feldstein, 1999).
However, it could also be argued that some inflation might actually be
a good thing (that is, the inflation rate associated with the maximum
possible rate of economic growth is positive). In particular, if prices are
sluggish to adjust downward, some inflation would allow for essential
changes in relative prices to occur more quickly and efficiently, and
models can be designed to support this perspective as well (Akerlof et al.,
1996). Very low inflation also might undermine monetary policy, given a
nominal interest rate floor of 0 percent.
Ultimately, the question is an empirical one, and it turns out that the
costs of moderate inflation are extraordinarily difficult to establish, even
by scholars predisposed to find such costs (Barro, 1996). Almost all of the
negative relationships found between inflation and growth are dependent
on the consequences of very high levels of inflation (see e.g. Bruno, 1995),
and any real economic costs of inflation, especially inflation below 20
percent, and certainly below 10 percent, are almost impossible to find.
For those who study the politics of money, the puzzle is not about the
'optimal' rate of inflation. The evidence overwhelmingly supports the
view that the inflation rate - at low or moderate levels - will have very
little effect on the performance of the aggregate economy, and that net
economic effect of such inflation is modest, ambiguous, and contingent on
other factors (Romer and Romer, 1997; Temple, 2000). Attendantly, while
CBI is associated with lower rates of inflation, there is no evidence that
CBI is associated with any enhanced real economic performance. (Alesina
and Summers, 1993; Dabelle and Fischer, 1995; Berger et al., 2001). Thus
the political puzzle is why, given the evidence, the aggressive pursuit of
low inflation - and invoking intuitional arrangements such as inde-
pendent central banks - are the only policies perceived to be legitimate.
Similarly, while there are some plausible deductive arguments in favour
652
of capital mobility - such as investor confidence, economic efficiency, and

policy discipline - it is not clear that these arguments lead necessarily to
the support of completely unregulated capital. There are also good deduc-
tive reasons to believe that some positive level of capital control is optimal
from the perspective of economic efficiency. The free flow of capital differs
in important ways from the free flow of goods. To an important extent,
financial assets are worth what investors collectively think they are worth.
And contemporary technology allows investors to move huge amounts of
money almost instantaneously, at very little cost. These two factors
suggest that individually rational behaviour might lead to collectively
sub-optimal outcomes - crisis, conformity, and contraction.
Crisis. Hyper-mobility, combined with rational fears regarding what other

people are thinking can cause herding behaviour, unleashing financial
stampedes with economic consequences that veer far from the path
suggested by any reading of the economic 'fundamentals'. Given this, it
is not surprising that capital account liberalization is associated with an
increased likelihood of financial crisis and such crises may occur even
when the government is following 'sound' policies (Blyth, 2003). This
helps explain the increase in the frequency in financial crises that has
accompanied the recent drive for capital deregulation (Kindleberger 2000).
Worse, even in those instances when the market's response does reflect an
identifiable need for discipline, the evidence suggests that market correc-
tion is likely to be inefficient, that is - 'too much too late' (Willet, 2000).
Conformity. Investors scanning the globe for the best rates of return in a
world of perfectly mobile capital creates pressure for conformity across
countries' macroeconomic policies. But it is highly unlikely that at any
given moment, all states should be pursuing the same macroeconomic
policies. On the contrary, states face diverse economic conditions, and
need to tailor their economic policies accordingly. But without any restric-
tions on capital, governments that deviate from the international norm,
even when pursuing policies appropriate for local needs, are 'punished'
by capital flight, and often force such policies to be abandoned or even
reversed (Keynes, 1923: 140).
Contraction. An unregulated international financial system is likely not

simply to foster convergence, but convergence with a deflationary bias. In
general, pressure for adjustment of prices, wages and economic activity is
always more acutely felt by the debtor than the creditor (Keynes, 1941),
which is an important source of this bias. Such problems were visible more
generally with the inter-war gold standard, which arguably served as a
conductor of deflationary impulses throughout the system (Eichengreen,
1992). Even in the absence of the gold standard, the combination of
653
uninhibited capital mobility, information technology and normative

consensus can recreate those same pressures (Kirshner, 1998).
As with very low inflation, the conventional wisdom in favour of
completely unregulated capital is both widespread - and of dubious
empirical pedigree. Once again, there is little evidence to support the view
that unregulated capital is associated with improved real economic
performance (Bhagwati, 1998; Rodrick, 1998; see also Cooper, 1999).
Indeed, even those who have been passionate supporters of unregulated
capital have acknowledged this (Dorrnbusch, 2001: 3). And once again, for
the student of politics, the headline remains that regardless of the resolu-
tion of this technical debate, the aggregate economic consequences of
different choices about capital regulatory regimes will be modest and
ambiguous.
THE SELF-REINFORCING CONVENTIONAL WISDOM
While there is no reason to believe that very low inflation or complete

capital mobility are the only plausible options available to states, once
enough people share that belief, it becomes a self-fulfilling prophecy.
Other policies become unsustainable, solely because of the belief that they
are unsustainable. Take for example a state that wished to pursue more
expansionary macroeconomic policies than the global average, with one
consequence that its inflation rate was also somewhat higher than the
global average (say, by 4 percent). In theory, such policy disparities should
be mediated at the border - its currency would generally depreciate by
about 4 percent and that would be that. But if capital mobility is accom-
panied by a consensus with regard to what is a 'correct' monetary policy,
then the depreciation will not stop there. Capital flight in this case will
punish the state for pursuing a deviant policy. Failure to reverse that
policy in the wake of a sustained depreciation will stimulate even further
capital flight and depreciation, and so on. Thus a state that preferred to
pursue a more expansionist monetary policy than average, even one that
was willing to tolerate the depreciation necessary to restore equilibrium
in international prices, may be unable to chart such a course in the face of
punishing (as opposed to equilibrating) capital flows.
In this illustration, the policy choice was sound in the abstract but
unsustainable in practice due to the unique features of money: first, that
expectations are not determined in isolation but by actors' expectations
about the expectations of others (Keynes, 1936: 156; 1937). Second, that this
creates a convergence toward a 'singular' policy that is credible. The
Credible Policy is that policy which 'the market' (market actors collec-
tively) thinks is right. Policies that are not credible cannot be sustained,
because of the responses of market actors to such policies.
This in turn provides the illusion that legitimate policies thrive because
654
they are the most efficient and those that deviate lose out in a Darwinian
struggle - they fail because they are unable to deliver the goods. And then
each illustration of a policy reversal forced by the march of market senti-
ment can be interpreted as evidence in favour of the conventional wisdom,
rather than a tautology. As a result, some policies, perhaps even the best
policies, may be unsustainable solely because people (erroneously) think
they are inefficient. Thus 'legitimacy' is not the inevitable revelation of
optimality, but a path-dependent self-fulfilling prophecy (Grabel, 2000,
2003). (Note importantly that this does not imply a macroeconomic carte
blanche - there are, of course, policies that are inherently unsustainable and
thus not plausible.)
UBIQUITOUS POLITICS
At bottom, the economic logic applied to monetary questions is impres-

sive and sound - but such theories are indeterminate in their ability to
account for most of the policy choices about money are observable in the
world today. While contemporary market forces are extraordinarily
powerful, the difference between many plausible policies is of ambiguous,
or, at most, modest economic effect. Thus, while economic logic limits the
range of policy choices to a plausible set, the outcomes observed are
largely attributable to politics - ideas, interest group conflict, and inter-
national relations.
IDEAS AND THE CONFLICT OF INTERESTS
Few would contest that ideas about money (or, for that matter, about other
issue areas) can affect policy choice (McNamara, 1998). But it should be
clear that there is something special about the role of ideas in money - the
power of ideas does more than just shape the possible. It defines the
feasible. Ideas about money can profoundly shape policy in ways divorced
from the economic logic or merits of those ideas.
Beliefs, especially when they harden into an ideology (beliefs that are
held as articles of faith and thus resistant to change even in the light of
evidence) can skew the ways in which policymakers understand and react
to problems. Ideas can also contribute to normative understandings about
'appropriate' behaviour - and create artificial yet powerful constraints on
policy. For example, few dispute Kindleberger's observation (1970: 198)
'A country's exchange rate is more than a number. It is an emblem of its
importance to the world, a sort of international status symbol'. Such
concerns for prestige shape choices about money even by those who know
full well that from an economic calculus there is little at stake (Kindle-
berger, 1967).
Finally, ideas about money matter profoundly because they can mask
655
sharp distributional conflicts. Self-confirming ideas about money bestow

a legitimacy to some choices that convinces the winners they are right
while muting the protests of the losers. But many of these policies, justified
and sustained principally upon claims of their theoretical soundness (and
superiority to other options), are of predominantly political origin and
effect. The aggregate economic consequences of this choice are not likely
to be large. But political consequences - which groups, sectors, regions,
etc., are better off with one policy as opposed to another - may be
considerable.
Attention to the composition, rather than the rate of economic growth,
calls attention to the political stakes on the table when choosing between
macroeconomic policies (Kirshner, 2001). The perception of the 'correct'
macroeconomic policy might be quite different across individuals, sectors,
and regions within a country, given their distinct economic circumstances.
Those experiencing rapid growth of their own incomes might favour a
cautious macroeconomic policy, while others, doing less well, could urge
expansion. The 'optimal' economic policy from a national perspective is
not obvious, and will be shaped by the conflict of these interests.
Additionally, and more pointedly, it is not just that the distribution of
growth affects macroeconomic policy choice, but the converse is also true:
macroeconomic policies shape the distribution of growth. Some groups might
counsel for cautious monetary policies and vigilance against inflation not
simply because they are satisfied with business conditions in their sector,
but because tight money and low inflation might in fact enhance the
prospects for greater growth of their own sector. 'Risking' policies that
might slow the aggregate economy is not risky for such actors.
The crucial political support for CBI by the financial sector (Posen, 1995)
is but one illustration of how a focus on the real, differential effects of
monetary phenomena clarifies the sharp politics, as opposed to the
ambiguous economics, that is driving macroeconomic policy. These
politics are even more transparent in International Relations, where it is
evident that conflicts about money occur not only between interest
groups, but also between sovereign states. Even though states have lost
considerable power and autonomy to market forces in the past few years,
the world is still a world of states, actors with strong preferences and the
power to advance their interests. (Kindleberger, 1985; Kirshner, 1995;
Spiro, 1999; Gilpin, 2000).
Even in the esoteric realm of money, international relations still reflect,
to some extent, the interests of powerful states. States shape the inter-
national system in efforts to enhance their relative autonomy, address
concerns for national security, pursue unrelated political goals, or to
advance the interests of the financial sector within their own economy. As
a result, the most basic choices about money - what money is used where,
the behaviour of international financial institutions, and efforts at
656
cooperation - can only be understood as the outcome of a political contest

between states with motivations other than the pursuit of global economic
efficiency.
LIVING IN A POLITICAL WORLD
Domestic or international, policy target or regulatory framework, there are

no 'neutral' choices about money. Rather, every macroeconomic phenom-
enon and monetary policy has significant, inevitable differential and
political implications. Within the plausible set, the difference between the
aggregate economic consequences of one choice over another will typi-
cally be ambiguous, or so modest as to be dwarfed by its considerable
differential and political consequences. Money Rules - now more than
ever - but those rules serve political masters. The contemporary salience
and excitement of huge, influential financial markets has obscured this
underlying, formative and consequential political reality. In their dis-
parate inquiries, students of money in general and political scientists most
particularly must return to that basic starting point - money is politics.
ACKNOWLEDGEMENTS
I thank Rawi Abdelal, Mark Blyth, Eric Helleiner, Peter Katzenstein, and
Hendrik Spruyt for comments and suggestions.
REFERENCES
Akerlof, George, Dickens, William and Perry, George (1996) 'The Macroeconomics
of Low Inflation', Brookings Papers on Economic Activity 1, Washington, D.C.:
Brookings Institution.
Alesina, Alberto and Summers, Lawrence H. (1993) 'Central Bank Independence
and Macroeconomic Performance: Some Comparative Evidence', Journal of
Money, Credit, and Banking, 25(2): 151-262.
Barro, Robert J. (1996) 'Inflation and Growth', Federal Reserve Bank of St. Louis
Review, 78(3): 139-46.
Berger, Helge, de Haan, Jakob and Eijffinger, Sylvester (2001) 'Central Bank Inde-
pendence: An Update of Theory and Evidence', Journal of Economic Surveys,
15(1): 3-40.
Bhagwati, Jagdish (1998) 'The Capital Myth', Foreign Affairs, 77(3): 7-12.
Blyth, Mark (2002) Great Transformations: Economic Ideas and Institutional Change in
the Twentieth Century, Cambridge: Cambridge University Press.
Blyth, Mark (2003) 'The Political Power of Financial Ideas: Transparency, Risk and
Distribution in Global Finance', in Kirshner (ed.) Monetary Orders.
Bruno, Michael (1995) 'Does Inflation Really Lower Growth?', Finance and Devel-
opment, 32(3).
Calleo, David P. (1982) The Imperious Economy, Cambridge: Harvard University
Press.
Cohen, Benjamin (1971) The Future of Sterling as an International Currency, London:
Macmillan.
657
Cohen, Benjamin (1998) The Geography of Money, Ithaca, N.Y.: Cornell University
Press.
Cooper, Richard N. (1975) 'Prolegomena to the Choice of an International
Monetary System', International Organization, 29(1): 63-98.
Cooper, Richard N. (1999) 'Should Capital Controls Be Banished?', Brookings Papers
on Economic Activity 1, Brookings Institution, Washington, D.C.
Dabelle, Guy and Fischer, Stanley (1995) 'How Independent Should a Central Bank
Be', in Goals, Guidelines and Constraints Facing Monetary Policymakers, edited by
Jeffrey C. Fuhrer. Boston: Federal Reserve Bank of Boston.
Dornbusch, Rudiger (2001) 'Malaysia, Was it Differernt?', NBER Working Paper
8325 (June), National Bureau for Economic Research, Cambridge, Mass.
Eichengreen, Barry (1987) 'Conducting the International Orchestra: Bank of
England Leadership under the Classical Gold Standard, 1880-1913', Journal of
International Money and Finance 6.
Eichengreen, Barry (1989) 'Hegemonic Stability Theories of the International
Monetary System', in Can Nations Agree?, edited by Richard N. Cooper et al.
Washington, D.C.: Brookings Institution.
Eichengreen, Barry (1992) Golden Fetters: The Gold Standard and the Great Depression,
Oxford: Oxford University Press.
Feldstein, Martin (ed.) (1999) The Costs and Benefits of Price Stability, Chicago:
University of Chicago Press.
Fischer, Stanley and Modigliani, Franco (1986) 'Toward and Understanding of the
Real Effects and Costs of Inflation' in Stanley Fischer (ed.) Indexing, Inflation,
and Economic Policy, Cambridge, Mass.: MIT Press.
Frieden, Jeffry (1991) 'Invested Interests: The Politics of National Economic Policies
in a World of Global Finance', International Organization, 45(4): 425-51.
Frieden, Jeffry (1997) 'Monetary Populism in Nineteenth Century America: An
Open Economy Interpretation', Journal of Economic History, 57(2): 367-95.
Gallarotti, Giulio M. (1995) The Anatomy of an International Monetary Regime: The
Classical Gold Standard, 1880-1914,New York: Oxford University Press.
Gilpin, Robert (1971) 'The Politics of Transnational Economic Relations', in Robert
Keohane and Joseph Nye (eds) Transnational Relations and World Politics,
Canbridge: Harvard Unversity Press.
Gilpin, Robert (1987) Political Economy of International Relations, Princeton, N.J.:
Princeton University Press.
Gilpin, Robert (2000) The Challenge of Global Capitalism: The World Economy in the
21st Century, Princeton, N.J.: Princeton University Press.
Goodman, John and Pauly, Louis (1993) 'The obsolescence of capital controls?
Economic management in the age of global markets', World Politics, 46(1):
50-82.
Gowa, Joanne (1983) Closing the Gold Window, Princeton, N.J.: Princeton University
Press.
Grabel, Ilene (2000) 'The Political Economy of 'Policy Credibility': The New-
Classical Economics and the Remaking of Emerging Economies', Cambridge
Journal of Economics, 24(1): 1-19.
Grabel, Ilene (2003) 'Ideology, Power, and the Rise of Independent Monetary
Institutions in Emerging Economies', in Kirshner (ed.) Monetary Orders.
Helleiner, Eric (1994) States and the Reemergence of Global Finance, Ithaca, N.Y.:
Cornell University Press.
Ikenberry, G. John (1992) 'A World Restored: Expert Consensus and the Anglo-
American Postwar Settlement', International Organization, 46(1): 289-323.
Ikenberry, G. John (2000) After Victory, Princeton, N.J.: Princeton University Press.
658
Keynes, John Maynard (1923) A Tract on Monetary Reform, reprinted in The Collected
Writings of John Maynard Keynes, [CWM edited by Donald Moggridge and
Elizabeth Johnson [1971-1989], London: Macmillan.
Keynes, John Maynard (1930) A Treatise on Money II: The Applied Theory of Money.
CW: VI.
Keynes, John Maynard 1936. The General Theory of Employment, Interest and Money.
CW: VII.
Keynes, John Maynard (1937) 'The General Theory of Employment', Quarterly
Journal of Economics, 51. CW: XIV, 109-23.
Keynes, John Maynard (1941) 'Post-War Currency Policy', 8 September CW: XXVI,
256-60.
Keynes, John Maynard (1942) 'Letter to Roy Harrod', 19 April CW: XXV, 146-51.
Kindleberger, Charles P. (1967) 'The Politics of Money and World Language',
Princeton Essays in International Finance, 61. Princeton, N.J.: Princeton University.
Kindleberger, Charles P. (1970) Power and Money: The Economics of International
Politics and the Politics of International Economics, New York: Basic Books.
Kindleberger, Charles P. (1973) The World In Depression, 1929-1939, Berkeley:
University of California Press.
Kindleberger, Charles P. (1985) 'The International Monetary Politics of a Near-
Great Power: Two French Episodes, 1926-1936 and 1960-1970', in Keynesianism
vs. Monetarism, London: George Allen and Unwin.
Kindleberger, Charles P. (2000) Manias, Panics and Crashes: A History of Financial
Crises (4th ed.), New York: Wiley.
Kirshner, Jonathan (1995) Currency and Coercion: The Political Economy of Inter-
national Monetary Power, Princeton, N.J.: Princeton University Press.
Kirshner, Jonathan (1998) 'Disinflation, Structural Change, and Distribution.'
Review of Radical Political Economics, 30 (1/March): 53-89.
Kirshner, Jonathan (1999) 'Keynes, Capital Mobility and the Crisis of Embedded
Liberalism', Review of International Political Economy, 6(3).
Kirshner, Jonathan (2001) 'The Political Economy of Low Inflation', Journal of
Economic Surveys, 15(1): 41-70.
Kirshner, Jonathan (ed.) (2003) Monetary Orders: Ambiguous Economics, Ubiquitous
Politics, Ithaca: Cornell University Press.
McNamara, Kathleen R. (1998) The Currency of Ideas, Ithaca, N.Y.: Cornell Univer-
sity Press.
Odell, John S. (1982) U.S. International Monetary Policy, Princeton, N.J.: Princeton
University Press.
Oye, Kenneth (1992) Economic Discrimination and Political Exchange, Princeton:
Princeton University Press.
Posen, Adam (1995) 'Declarations Are Not Enough: Financial Sector Sources of
Central Bank Independence', NBER Macroeconomics Annual 10, National
Bureau of Economic Research, Cambridge, Mass.
Rodrik, Dani (1998) 'Who Needs Capital Account Convertibility?', in Peter B.
Kenen (ed.) Should the IMF Pursue Capital Account Convertibility? Essays in
International Finance 207 (May), N.J.: Princeton University, Princeton.
Romer, Christina D. and Romer, David H. (eds) (1997) Reducing Inflation: Motivation
and Strategy, Chicago: University of Chicago Press.
Rowland, Benjamin M. (ed.) (1976) Balance of Power or Hegemony: The Inter-war
Monetary System, New York: Lehrman Institute.
Ruggie, John Gerard (1982) 'International Regimes, Transactions, and Change:
Embedded Liberalism in the Postwar Economic Order', International Organiza-
tion, 36(2): 379-415.
659
Spiro, David E. (1999) The Hidden Hand of American Hegemony: Petrodollar Recycling
and International Markets, Ithaca, N.Y.: Cornell University Press.
Strange, Susan (1971) Sterling and British Policy, London: Oxford University Press.
Strange, Susan (1998) Mad Money: When Markets Outgrow Governments, Ann Arbor,
Mich.: University of Michigan Press.
Temple, J. (2000) 'Inflation and Growth: Stories Short and Tall,', Journal of Economic
Surveys, 14(4): 395-426.
Walter, Andrew (1991) World Power and World Money: The Role of Hegemony and
International Monetary Order, New York: St. Martin's Press.
Willett, Thomas D. (2000) 'International Financial Markets as Sources of Crisis or
Discipline: The Too Much Too Late Hypothesis', Princeton Essays in Inter-
national Finance 218, Princeton University, Princeton, N.J.
660

(KIRSHNER, Jonathan) Money Is Politcs.

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

(KIRSHNER, Jonathan) Money Is Politcs.

Uploaded by

Copyright:

Available Formats

Money Is Politics

Author(s): Jonathan Kirshner

The management of money is always and everywhere political: for every

Money; monetary policy; capital controls; Keynes; ideas; embedded

Money is everything. Money is nothing. Money is what you think it is.

Review of International Political Economy

Money is Everything. As is well known, the past 30 years have witnessed

HOW DID WE GET HERE?

MONEY, NATIONAL AND INTERNATIONAL

abdication of control over the other. In theory by maintaining comprehen-

THE PROBLEM OF MONETARY COOPERATION

Unfortunately, although cooperation can reduce the intensity of Keynes'

Worse still, even if states are able to establish monetary cooperation,

international monetary system in the inter-war period, reached the con-

TURNING POINTS - EMBEDDING AND

capitalism, with remarkable rates of global economic growth. In the 1950s

unambiguously and singularly best practice, those beliefs create a self-

THE DYNAMIC DUO: LOW INFLATION AND

Vigilance against the threat of inflation is now considered to be the

of capital mobility - such as investor confidence, economic efficiency, and

Crisis. Hyper-mobility, combined with rational fears regarding what other

Contraction. An unregulated international financial system is likely not

uninhibited capital mobility, information technology and normative

THE SELF-REINFORCING CONVENTIONAL WISDOM

While there is no reason to believe that very low inflation or complete

At bottom, the economic logic applied to monetary questions is impres-

IDEAS AND THE CONFLICT OF INTERESTS

sharp distributional conflicts. Self-confirming ideas about money bestow

cooperation - can only be understood as the outcome of a political contest

LIVING IN A POLITICAL WORLD

Domestic or international, policy target or regulatory framework, there are

You might also like