Strange, Susan (1971) The Politics of International Currencies. World Politics, Vol. 23, N

Trustees of Princeton University
The Politics of International Currencies

Author(s): Susan Strange
Source: World Politics, Vol. 23, No. 2 (Jan., 1971), pp. 215-231
Published by: Cambridge University Press
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THE POLITICS OF INTERNATIONAL
CURRENCIES
As
By SUSAN STRANGE
a directresultofgrowing economic interdependence and of the

acceleratingexpansion of theinternational economyand its in-
creasingimpactonnational economic life,itseemshighly probable that
diplomacy andinternational relations
amonggovernments willbe more
andmoreconcerned inthefuture withfinancial andmonetary matters.
Alreadyin thei960's thesematters had givena newstyleand con-
tentto foreign policy-making and to theconductofforeign relations.
In theUnitedStates, theNixonadministration is notthefirst to find
problems ofmonetary management demanding moretimeandtrouble
thanitexpected. The newBritish government, too,willsoonlearnthat
sterling's
troublesare not,afterall, quiteoverand donewith.Even
countrieslikeGermany andJapan(and in somerespects Italy),which
congratulatethemselves on theireconomic miracles, do notmanageto
escapetheproliferation ofproblems ofmonetary management and the
consequent needforan evermoreactiveand resourceful armoryof
monetary diplomacy. All therich,developedcountries, in short,are
finding themselvesbehaving towardeachothermoreand moreoften
as thedefenders and guardians notso muchof nationalterritory or
ofnationalgroupsof peopleas of nationalcurrencies and monetary
systems.
As RichardCooperandothers havepointedout,therearetwobroad
developments, stemming from economic interdependence, bothofwhich
leadin thisdirection.'One is theincreasing probability thatthemone-
tarymanagement of one nationalsystemwittingly or unwittingly
causesdamageandfrustration inthemonetary management ofanother
and thusaddsto thesourcesof conflict betweenstates.The otheris
thattheneedtotakeadvantage ofthebenefits oftheexpanding inter-
nationaleconomy and of theinterdependent it
system represents re-
quiresofgovernments thattheydevisemoreand morecomplexand
sophisticated
monetary and financialarrangements and formsof asso-
ciationamongthem.The negotiation oftheseassociative arrangements
and theresolution of thesemonetary conflictsare therefore likelyto
becomenota lessbuta moreimportant partofthestuff ofinternational
politicsin the i970's.
1Richard N. Cooper, Economics of Interdependence: Economic Policy in the At-
lantic Community (New York i968), 5-6 and 273-79.
216 WORLD POLITICS
Yetthepolitical scientistsin thefieldofinternationalrelationsshow

themselves singularly ill-equipped as well as disinclinedto explain,
analyze,orilluminate whatarestill-despite theireconomic content-
essentiallypoliticalquestions. On theotherhand,theeconomists who
aremuchconcerned withthetechnical aspectsofthequestion, withthe
analysisof thefunctioning of monetary and othereconomicmecha-
nisms, unconsciously tendto ignoreor overlook thepoliticalelements
involved. Betweenthem,thereis whatI havedescribed elsewhere2as
a "middlevoid":a no man'sland,an empty quarterunwatered bythe
academic mainstreams, neglected bymostuniversities,andsubjectonly
tosporadic foraysbya fewfinancial and to isolatedexpedi-
journalists
tionsbya fewacademichybrids.
This articleis suchan expedition. Its purposeis to map out in a
roughand tentative waya politicaltheory of internationalcurrencies.
Thistheory may,I believe, helpa littletoexplaintonon-economists as
wellas toeconomists someofthedivergent attitudes
takenbygovern-
ments inmatters ofmonetary andindeedofbroadeconomic diplomacy.
For thereis littledoubtthatthepoliticalelement is themissingcom-
ponent inmuchcurrent discussion ofinternational
financialandmone-
taryissues.The debates overSpecialDrawingRightstwoorthreeyears
ago and morerecently overflexible exchangeratesare bothgood
examples. Andthoughthestudyofinternational relationshas always
acknowledged theexistence andthepowerofvariant national economic
it hasdonelittlesincethe1930's to developor elaborate
interests, this
concept andstilllesstobringitup todatewiththerealities ofthecon-
temporary international economy.
Honesty compels metoadmitthatthistheory wasfirstevolvedin the
of
courseofa recentstudy3 the interaction
betweenBritish policy(in-
cludingaid,defense, trade,monetary, and broadforeign policies)in
the ten yearsi958-68 and the positionof Britainas the guardian of
usedbothnationally
a currency
sterling, andinternationally. Thisstudy
revealedfirst useofsterling
ofall thattheinternational was ofseveral
in politicalas well as in economicterms,
kinds,distinguishable and
thatbecauseof thesemultiple roles,theeffect of sterlingon British
policyand on Britishforeignrelationswas likelyto havebeencom-
plexrather thansimple.The studyalsorevealedtheinability of econ-
omists,academic tothrowmuchhelpful
andofficial, lighton thepoliti-
thatmightbe expected
cal effects to followfrompossession of a cur-
2 Susan Strange, "International Economics and International Relations: A Case of
Mutual Neglect," InternationalAffairs,XLVI (April 1970).
3 Susan Strange, Sterling and British Policy: A Political Study of an International
in Decline (London I970).
Currency
INTERNATIONAL CURRENCIES 217
rency usedoutside theconfines ofthenation-state. But,although itwas
originallysuggested bythesterling question, I believethatthetheory
also has somerelevance to theproblems of thedollaras an interna-
tionalcurrency and to thepolicyoptionsthathavefaced-andwill
continue to face-successive governments oftheUnitedStates.
The theory is concerned withboththecausesand theeffects of the
statusofinternational currency: first,withthepoliticalas wellas the
economic conditions underwhichnationalcurrencies cometo be used
beyondnational frontiers;
andsecond, withthepolitical as wellas the
economic consequences thatfollowfortheissuingstatewhenthishap-
pens.And insteadof themechanistic taxonomy of international eco-
nomics(whichclassifies international currencies onlybyfunction, for
instance,as reserve, as vehicle,or as intervention currencies), I have
attempted a taxonomy thatis deliberately bothpoliticaland economic,
consciously regarding thetwoas inextricably intermixed. I havedis-
tinguished fourtypesofinternational currency-Top Currencies, Mas-
terCurrencies, Passiveor NeutralCurrencies, and Politicalor Nego-
tiatedCurrencies. Each roleis distinct butnoneis exclusive. A single
currency can playoneofthesefourroles,or two,or three;or,in the
caseof thedollar,all fourat once.Butthepoliticalconsequences of
thedifferent roleswillnotbe thesame.
Of thefour,theMasterCurrency is distinguished fromtheothers
becausethecausativefactoris primarily political, whereaswiththe
otherthreetypesthecausative factors areprimarily economic. It is the
domination
political ofthestateissuingthecurrency overotherareas,
whichmayinclude,besidesdirectand acknowledged dependencies,
as
areasthatoperate (and for other purposes -are treated as) sover-
eign and independent politicalunitsbut thateitherhave been or
perhapsstillaresubordinate to it.
As a resultprimarily of thispoliticaldomination, eitherthesubor-
dinatestateor territory uses the Master Currency or elseitsown cur-
rencybecomesa dependent oftheMasterCurrency, so thatitsmone-
tarypolicies,including theexchange ratewiththirdcurrencies (or the
volumeof tradeand capitaltransactions withthirdparties),interest
rates,and otherpoliciesgoverning theavailability of creditaredeter-
minedbytheexigencies affecting theMasterCurrency.
Obviousexamplesof MasterCurrencies are thefrancin thefranc
zone;sterling in thesterling area; and the dollar in the"inner"dollar
areaof statesso closelydependent politicallyon theUnitedStatesas
effectivelyto be itsprotectorates: SouthVietnam, SouthKorea,Thai-
the
land,Taiwan,and,probably, Philippine Republic, and mostofthe
218 WORLD POLITICS
smallstatesof CentralAmericaand the Caribbean-Mexicoand Cuba
excepted.A minorexampleis the escudo in PortugueseAfrica.
An arguable,borderlineexampleof a MasterCurrencyarea is the
Sovietbloc in EasternEurope.The Sovietroubleis not,it is true,used
forreserveor vehiclepurposesin the othercountriesof thebloc. Each
oftheircurrencies keepsitsindividualidentity and does not necessarily
maintaina fixedparitywiththeMasterCurrencyas the Indian rupee
used to do to sterling.
Yet thepoliticalrealityis verysimilarto thatof
theIndian situation.The currencyarea is run as a unit,inasmuchas
thesubordinate statesare not freeto decideforthemselves any matter
of monetaryor commercialpolicyconsideredin Moscow to be vital
tothecohesionofthebloc; thisappliesespeciallyto thosequestionsthat
mightaffectpoliticaland economicrelationswith thirdparties.This
limitationtheCzechs tragically discoveredin i968. The monetaryand
commercialreformscontemplated by the Dubcek government proved
less acceptableto Moscow than the seeminglymore provocativeeco-
nomic nationalismassertedby the Rumanians.More recently,it has
been the Hungarianswho have been tryingcautiouslyto extendthe
limitsof politicaldependencein monetarymatters,4 withwhat success
remainsto be seen.
In fact,althoughtheSovietbloc is possiblyan extremevariantof the
type,thereis seldommuchuniformity in the methodsused by Master
Currencystatesto keep theirsubordinates undercontrol.France,for
instance,managed to controlthe franczone afterthe Africanstates
becameindependentby a combinationof dependenceon Frenchaid,
preferentialaccessto theFrenchmarket,and a monetarysystemthat,
thoughapparentlyfreeinasmuchas it allowed membersto acquire
unrestricted amountsof French francs,yet gave ultimatemonetary
controlto confederalinstituts d'emissionthatremained(in practice)
undercloseFrenchsurveillance.
The Britishsystemwas quite different. In the days of the British
Empire the sterling area operated as a single free financialarea,
throughout whichfundscould be freelytransferred and withinwhich
interestratesrespondedto trendssetin London.Controloverthesubor-
dinates'commercialand financialrelationswith thirdpartieswas in-
directlyexercisedby a rough-and-ready but essentially
restrictive
check
on each territory's moneysupply.Beginningwith the West African
CurrencyBoard,setup in responseto therecommendations of theEm-
mottCommitteeof i9ii, each colonywas given a colonial Currency
4See AndrewShonfield,"Hungaryand Poland: The Politicsof EconomicReform"
The World Today,xxvi (March I970).
Boardthatwasstatutorily directed toholdsterling balancesin London
to thevalueof iio percent of thecolony'sfiduciary issue.In return,
however, theBritish government openedtheLondoncapitalmarket
tothecolony's authorities,
anddidsoonpreferential terms almostequal
toitsown.Trustees, forexample, whowerelegallybarredfrominvest-
ingfundsinrisk-bearing equities,wereallowedbyEnglishlaw tohold
colonial, orlaterCommonwealth, government stockinsteadof British
government stock,thusassuring thesecolonialgovernments privileged
accesstotheLondoncapitalmarket.
Thoughthissystem continued toworkafter thegranting ofpolitical
independence, itwasincreasingly weakened byit.Thisweakening was
lessnoticeable in thefirstpostwardecade,afterIndianindependence,
becauseIndiaand Pakistanhad bothstarted withlargeaccumulated
creditbalancesas a resultof beingmilitary basesin the war,and
thoughtheyrapidly begantodrawthesedowninsteadofmaintaining
theold iio-percent rule,thisdecreasecausedno perceptible strainon
Britainbecauseat thesametimetherestof the dependent sterling
areawas busilyand conversely increasingitsofficial sterling balance
holdings as a directresultofthatrule.In thesameperiod,fromI946
to i958, theothermostimportant preservative of Britain'spositionin
thesterling areaand ofsterling's positionas a viableMasterCurrency
wasundoubtedly thestrong support,bothpolitical andfinancial, ofthe
UnitedStates.Not onlywas Britaingenerously provided withAmeri-
canaid andloans,buttheUnitedStatesgavethewholesterling areaa
specialdispensation byallowingitstradepoliciestodiscriminate against
dollarimports. Bythismeans,thelifeofthesterling areaclubwassub-
stantiallyprolonged.
The pinchcameafteri958, whena number ofnewfactors all com-
binedto increase thebalance-of-payments costto Britainof trying to
maintain sterling as a MasterCurrency. As independence was givento
Malaysia, toGhana,Nigeria, andthentoa seriesofotherAfrican states,
thenumberof sterling area countrieswho werevisiblyfreeof the
restrictions of colonialcurrency boardsand theimposedrulesof the
sterling exchange standard drewtheattention ofprivate usersof ster-
lingtothenotorious "overhang" ofofficial
sterling balancesoverBritish
reserves of gold and foreignexchange.To guardsterling againsta
resulting lossofconfidence inthemarket, theBritish monetary authori-
tieshad to keepinterest ratesexceptionally high, and decided to sub-
sidizesterling holders witha cheapinsurance againstdevaluation. This
theydid,in effect, bysupporting themarket forforward sterling. As
highinterest ratesand competition fromBritish industry meantthat
220 WORLD POLITICS
littlecapitalwas leftforsterlingarea countriesfromtraditionalcapital
marketsources,the Britishgovernmentalteredits aid policiesfrom
i958 onwardto providethenew stateswithloans whosetermsit grad-
ually softenedand whose effectwas probablyto prolongtrade and
financialtieswithBritain.
Politicalindependencein the MasterCurrencyarea also changed
thefinancialimpacton Britainof hermilitaryand naval bases abroad,
whichcould no longerbe chargedeven in part (as the Indian Army
alwayswas in theheydayof theEmpire) to thelocal exchequer.They
becamea burdenon the Britishbalance of paymentsand, fromi958
on,one thatwas annuallymoreexpensive.For at thatdate,by another
unluckycoincidence,Britaindroppedits National Servicedraftlaw
and dependedon volunteers who couldbe inducedto signon forover-
seas serviceonly if theywere betterpaid and betterprovidedwith
amenitiesthanthoseservingat home,and if some at leastcould take
wivesand childrenwiththem.It was the capitalcostof the resulting
installationsand the consequentelaborationof the militaryadminis-
trativemachinethatexplainedwhyBritainspent?'io millionon de-
fenseforcesoverseasin 1957 and /257 millionin i967, when thenum-
ber of men abroad had actuallybeen cut by 50 percent.
By the end of the post-convertibilitydecade, the Master Currency
had slippedfromits earlierstatus,based largelyon Britishpolitical
power in the Empire,to the more expensivestatusof Political or
NegotiatedCurrency, so thatholdershad to be bribedwith a variety
of inducementsrangingfromthe financialones alreadymentioned
throughthepromiseof militaryprotection and supportand finallyto
the dollar-valueguaranteecontainedin the special agreementscon-
cluded firstwith Hong Kong and then with each memberof the
sterlingarea as a concomitantof the Basle FacilityAgreementof i968.
The moralofthetaleis simple.The MasterCurrency dependsheavily
on thestick.But ifthestickis weakenedor if the issuingstateforany
reasonbecomestoo embarrassed to use it,thenit mustbe replacedby
carrots.The inducements,political as well as financial,that have to be
offered,in otherwords,varyinverselywith the exerciseof coercive
power. Thus, in practice,thereis no clear dividing-linebetween a
MasterCurrencyand a NegotiatedCurrency.The taxonomyis fluid,
not rigid.And even the toughestMasterCurrencystateusuallyfinds
to offera fewsmallcarrots.The French,whosepowerand
it necessary
wealthmade the controlof the franczone afterthe i959 referendum
a verymucheasiertaskthanBritain'sin thesterlingarea,stillfoundit
necessaryto offersurprixforexportsof primaryproducts(at the ex-
penseofFrenchconsumers), tonegotiate-through theYaoundeCon-

ventions-additional aidfromherEEC partners, herselfand toprovide
notonlyeconomic aid on a lavishscalebutalso a military guarantee
thatis normally discreet and largelyinvisible but-as theForeignLe-
gion'sexpeditionary forcein Chadlastyearhas shown-isnonetheless
effective in caseofneed.AndeventheSovietUnion,thoughstillpre-
paredin thelastresort to use tanksand military mightto keepcon-
troloverEasternEurope,has beenunderincreasing pressure to offer
moreeffective credit thanComecon
facilities has yetprovided. Thus, if
necessary, theMasterCurrency statewill finditselfsubordinating the
short-term economic interestsof itsdomestic economy to thewelfare
and viability of thecurrency area as a whole.The conflict between
thetwois lessevident whentheunitsin thecurrency are smalland
weak,and theirdemandsare modest, or whentheMasterCurrency
stateitselfis large,wealthy, and powerful. This is thecasewiththe
in
dollar its limited role as a Master Currency. Moreover, thedollar
is also whatI have calledTop Currency. In thisrole the schizoid
character of policymaking processes is of a different kind.
The Top Currency maybe defined as thecurrency ofthestatethat
hasworldeconomic leadership, thecurrency ofthepredominant state
in the international economy, whatGuido Carli recently described
as theworld's"super-economy."5 It is theleadingcurrency-but itmay
notalwaysor necessarily be thebestcurrency or the safestto keep
moneyin.It maynotbe thepreferred choiceofthemarket whenthe
market hasan attackofthejitters. In short, itdoesnotceasetobe Top
Currency whenit leavessomething to be desiredas a storeof value,
so longas itspredominance as a means of exchangeis invulnerable.
CharlesKindleberger expressed thiswell someyearsago whenhe
explained theinternational useofthedollarin termsnotofpoweror
prestige so muchas ofutility. "Thepowerofthedollarandthepower
ofEnglishrepresent la forcedes chosesand notla forcedes hommes,
. . ." he said."It is notnationalism whichspreadtheuse of thedollar
andtheuseofEnglish;itis theordinary searchoftheworldforshort
cutsin getting thingsdone."6The strength of thedollaras a world
exchangestandard(or vehiclecurrency)Kindleberger attributed
mainlyto theinternational capitalmarketoperating in dollars.Al-
though he implied, he didnotspelloutfully, thatitoperated in dollars
becausetheworld'sbiggest capitalmarket wasin New York,andthat
5Guido Carli, Annual Report, Banca d'Italia (Rome i970).
6
Charles Kindleberger, The Politics of International Money and World Language
(Princeton i967).
222 WORLD POLITICS
itwasin New YorkbecausetheUnitedStateswas theworld'sleading
economy, hadnotbeentwicedisrupted byworldwars,andwas there-
foremuchbetter ablethanotherdeveloped economies to producethe
savingsto investabroadas well as at home.
Of course,it is highlyprobablethatanystateeconomically strong
to
enough possesstheinternational economy's Top Currency will also
exertsubstantialpowerand influence. The reallyrichusuallydo. But
theremaystillbe strictlimitsto the politicalpowerconferred by
wealth.The politicalinfluence of theTop Currency state,therefore,
maywell be geographically less extensive thanthe use of theTop
Currency. The contrast betweenunqualified economic preponderance
and leadership and strictlylimitedpoliticalinfluence will be most
apparent in theTop Currency state'srelationswiththosestatesthat
foronereasonor another arelessinvolved in,or bysomemeansare
insulatedfrom,theinternational economyoverwhichtheTop Cur-
rency presides.
In theheyday ofsterling,
whenitwasTop Currency before theFirst
WorldWar,British politicalinfluence was verygreatthroughout the
Empireand along the sea-routes linkingit together. It was most
markedly subjectto limitation in China,in LatinAmerica(by agree-
mentwiththeUnitedStates),and in backwardnon-British areasof
AsiaandAfrica. Today,theuseand monetary prestigeofthedollaris
moreextensive thanthepoweroftheUnitedStatesGovernment. China
again,theSovietbloc,and thedeveloping countriesleastinvolvedin
theinternational economy haveeachin itswayaccepted themonetary
leadershipofthedollarin theinternational economy whileremaining
fairlyfreefromthepoliticalinfluence of theUnitedStates.
Thereare,ofcourse, bigdifferences between thedollarand sterling
as Top Currency. One is thatsterling had theadvantageof a much
largerroleas MasterCurrency; theempirewithinwhichsterling was
usedas MasterCurrency was muchmoreextensive thanthe"inner"
dollarareapoliticallydominated bytheUnitedStatestoday.The larger
roleofsterlingas MasterCurrency confined itspoliticaleffects
as the
Top Currency mainlyto Europe,to thatpartof the international
economy overwhichtheBritish had verylimitedpoliticalinfluence.
Bycomparison, theareaswherethedollaris acknowledged Top Cur-
rency butwheretheUnitedStateshaslimited poweraremuch
political
larger.
On theotherhand,thedomestic economyof theUnitedStatesis
continentalandincomparably largerandmoreself-contained thanwas
thatofBritain,anditsleadthatmuchgreater overall otherdeveloped
nationaleconomies, bothbecauseoftheirsmallersizesand becauseof

the setbacks experienced duringand afterthe SecondWorldWar.
Thus,although theUnitedStatesis better equippedto managea Top
Currency, itsproblems areat thesametimemadegreater by thetre-
mendous expansion oftheinternational economy. The collectiveneed
foran accepted internationalmonetary mediumhas increased perhaps
a hundredfold in realtermssinceI9I4, as has thesizeand complexity
ofthecreditstructure financing international tradeand payments. As
a result,anytendency in thisinternational economy to disequilibrium
willnowsurely be greater andlesseasilyovercome orcounterbalanced.
This growthcreatestheparadoxpuzzlingto manyAmericans: that
forall theirpowerand wealththeyare so constrained by theirin-
tractablepayments deficit.
And here,in theperceived needto tryto overcome it,is another
wayin whichthedollar'ssituation is moredifficult. "Ah,thelucky
British,"American economists havebeenheardtosigh,"whensterling
wastheleadingkeycurrency, theirstatistics wereso bad theydid not
evenknowwhentheyhad a balance-of-payments problem."("And
whatis moretothepoint,"somewilladd belowtheirbreath, "no one
elsekneweither!")Moreover, theBritish government in Victorianand
Edwardiandaysacknowledged limitedresponsibility forthevalueof
thecurrency and thereputation of Britishfinancial institutions
and
didnotaccept,as doestheUnitedStatesgovernment today,theaddi-
tionalresponsibilities ofa modern welfare-conscious administration for
thelevelofdomestic employment, and therateofdomestic economic
growth. Keepingthebalanceof payments as well as,all theseother
balls in the air requiresa muchmorehighly- developedeconomic
dexterity.
BecausetheAmericans areso wealthy, andmilitarily andtechnologi-
callyso powerful, theperverse andobstinate ofthedollar
intractability
problem has notceased-orso it seemsfromacrosstheAtlantic-to
trouble andbewilder them.Theydo notseemtobe abletounderstand
whyit is that,outof all thenumerous dodgesand devicestheyhave
triedoutoverthelastdecadeor so,nonehas workedthetrick.Why
shoulditbe so difficult? Whyis it thatsuccesseludesthem?Theyare
puzzledbytheapparent lack of sympathy, and evenindifference, of
othercountries to theirplight, and seemto feelvaguelyresentful that
othersdo notstepbriskly forward to lenda handin sharingthisas
as
well other burdens. The situation is all themoregallingbecause
something likeninety outofeveryhundred professional
economists in
theworldareAmerican, andthepreeminence ofAmerican universities
224 WORLD POLITICS
in thedevelopment ofeconomics as an academicdiscipline is unchal-
lengedandundeniable. If theycannotsolvetheriddle,is it likelythat
anyoneelsecan?
I wouldargue-andthisisthepointofthepresent andindeed
article,
oftrying consciously todevisea political andnotjustanother economic
theory ofinternational currencies-that others can perhapshelp.Half
thetrouble sofarmayhavebeenprecisely becausetheproblem hasbeen
leftso exclusivelyto theeconomists to thinkaboutand pontificate on.
Theydo not,mostly-astheyareso fondoftellingtherestofus-lack
intellectualrigor.Buttheydo,toooften, lackrealism andpolitical com-
monsense.By mechanistic studiestheyhave soughtformechanical
panaceasto theproblemof theAmerican balanceof payments, and
have been surprised wheneach new-found mechanism has broken
or provedinadequate. The history of the i960's has seemed,to the
outsideobserver ofthisphenomenon, to consistofa seriesofattempts
bytheUnitedStatesto findtheperfect economic gimmick.
Now,a basicdifference between politicalscientistsandeconomists is
thatthe studyof politics-whether local,national,or international,
whetherancient,Renaissance, revolutionary, or contemporary-im-
presses thestudent withthe unlikeness of theactors involved, withthe
variety of thegenerative ideasby whichtheyare influenced, by the
quirksandoddities ofthesystems withinwhichtheyact.The studyof
economics impresses thestudent rather withthelikeness tooneanother
of consumers, or of producers, or of markets and mechanisms from
Toledoto Timbuctoo. The unitsalongtheeconomicscalesare essen-
tiallyequivalent and undifferentiated.
Smallwonder itis so hardtopersuade
that economists ofthesimple
and commonsensical factthatstatesoperating together in an interna-
tionaleconomic as wellas an international politicalsystem think,be-
have,and reactdifferently, and playessentially differentroles.So, of
course,do individual humanbeingsin a nationaleconomicsystem.
The limitations oftheconceptofeconomic manhavebeenwidelyac-
knowledged forsometimenow.Yettheconcept neverthelesscontinues
to be used and to influence the thought processesof theeconomists be-
cause,provided thesystem is largeenough,theindividual variations
quicklybecomestatistically unimportant. As in actuarialcalculations,
theeccentric accidentis lostin thepredictable mass.The resulting
habitsof mind,however, become much more dangerously unrealistic
wheninsteadof millionsof individual unitsin an economicsystem,
each takingitsidiosyncratic decisions withina statisticalscatter,the
economist dealswith only a handful of individual states.(For though
politicalsystemnumbersover one hundredand

the international
twenty states, system
monetary
theinternational numbers fewmore
thanthefamousGroupofTen.)
and crudely,is thatthe economists
All I am saying,to put it briefly
areusedto treating equivalent units,thattheirstudyexaggerates the
interchangeability andunderrates theeccentricity ofgovernments when
it dealswithmatters-such as international monetary policyand in-
stitutions-in whicha fewunlikegovernments, whichhaveunlikepre-
occupations and divergent interests as well as coincidental preoccupa-
tionsandinterests, arethemostimportant protagonists. If thepolitical
(whosofarhavemostly
scientists ignored it) weretogiveevenhalfthe
attentionandthought theeconomists havegiventothismajorproblem
of our international politicaleconomy, perhapstheproblems of the
dollarwouldnotseemquiteso bewildering andfrustrating.
To bemorespecific, itseemstomethatAmerican economists in their
discussionsand writings havebeen assuming all along that because
thedollaris theworld'sleadingreserve and vehiclecurrency, and the
world'smostwidelyacceptedstandardof value,it is therefore like
othercurrencies butmorepowerful and moreprivileged. My political
theory ofinternational currencies, however, suggests almosttheoppo-
siteto be true.The dollar,becauseit is Top Currency, certainly has
status.Butpolitically itis subjecttopeculiar disabilitiesandconstraints
thatdifferentiate it sharply fromtheotherleadingstatesin theinter-
nationalmonetary system.
Let mesuggest briefly threesuchdifferentiations, all relevant to the
current choiceofoptions beforetheUnitedStates.
The first distinction is thatthedomestic economy of theTop Cur-
rencystateis notlessbutmorevulnerable thanthoseof othersto the
economic stresses and pressures of an accelerating international econ-
omy. After I929, itbecame widely and firmly believed that ifthe United
Statessniffled,therestoftheworldsneezed-ifit did notactually col-
lapsewithpneumonia. So muchso,thattheidea oftheUnitedStates
beingthesourceofeconomic trouble andtherestoftheworlditsvictim
diesveryhard,as we have seen onlylastsummer fromthereactions
oftheLondon,Paris,andFrankfurt stockexchanges totheWall Street
slide.Politicalscientists shouldperhaps consider thepossibility thatthe
bootis on theotherfoot;and that,as Top Currency state,it is the
UnitedStatesthatismoreliablethanothernational economies tosuffer
financialscaresand crisesjustbecauseitsfinancial markets arelarger
andmoredeveloped thanthoseofothercountries.
Thiswas certainly theBritish experience in thenineteenth century.
226 WORLD POLITICS
JuddPolk remarked, in a perceptive studyof sterling written some

fifteenyearsago,on the"economic and financialcriseswhichrocked
Britainat roughly tenyearintervals throughout thecentury."7 Until
now,thesusceptibility oftheUnitedStatesto suchattacksmayhave
beendisguised firstby theSecondWorldWar,thenby theKorean
War and latterly, to someextent, bythegreater of ster-
vulnerability
ling-the"front lineof thedollar,"as it was knownbeforethe i967
It mayhavebeenmitigated
devaluation. somewhat, too,bytheexistence
oftheinternational capitalmarket inEurodollars,whichisan expatriate
market.
In thelongerrun,however, theUnitedStatesmaywellbe obligedto
lookfornewsafety measures toprotect itsdomestic economic stability
fromtheserecurrent shocks.It is striking thatbothBritain beforeI9I4
and Switzerland in thei960's developeda habitat timesof stressof
sheddinglabor-an important productive resource-from the econ-
omy.Britishwavesof emigration, largelyto theUnitedStates,fol-
lowedthepattern ofeconomic recession shownbyslowdowns in con-
structioninvestment.8 And Switzerland, thoughit is nota Top Cur-
rencystate,is thepossessor of a Passiveor Neutralinternational Cur-
rency,whichshareswithTop Currencies thispeculiarsusceptibility
to financial
crisesandtocyclical variationsin financial In the
activity.
i960's it has, however,been able to cope rathersuccessfully
with this
disability
byrapidly shedding bysending
resources, homesomeofthe
foreignlaborthathasmadeup a thirdoftheSwisslaborforce;bymain-
taininga veryhighratioofnational toliabilities
reserves anda national
reputation forpoliticalstability
andeconomic conservatism;and,lastly,
byinsulating to someextent
itself withmeasures thatmakeit difficult
forforeigners to holdSwissfrancbalancesyetthatallowSwissbanks
to actas theirintermediaries and agentsin accepting and reinvesting
foreignfundsdenominated in othercurrencies.
By contrast, theUnitedStateshas leftitselflittleroomto use this
safetyvalve.It has becomeinuredto whatin mostotherdeveloped
countries is regardedas fartoo higha levelof domestic unemploy-
ment;andithasallowedthemostvulnerable positionson themargin
ofthelaborforceto be occupiedalmostexclusively byan underprivi-
legedandracially distinct
minoritybutonethat-unlikeSwitzerland's
poorGreekand Spanishhelots-ispolitically potentand dangerous.
This is thefamiliar centraldilemmaof domestic politics.Fromthe
7JuddPolk, Sterling: Its Meaning in World Finance (New York I956).
8Thomas Brinley,Migration and Economic Growth: A Study of Great Britain and
the Atlantic Economy (Cambridge I954); also The Economics of international Migra-
tion (London 1958).
outside,it seemsas iftheUnitedStateswillnothavean effective bal-

ance-of-payments policyuntilit has acquiredan effective full-employ-
mentpolicy.Butwhenandifitweretodo so,itcouldconceivably kill
twoelusivebirdswithone stone.It couldfindan economic regulator
thatwouldhelp it to adjustthebalanceof payments, and it could
discovera newwayofgivingdevelopment aid without raisingtaxes.
The needsof developing countriesforskilledand mobileworkers,
and of theUnitedStatesforan adjustable economicregulator, could
bothbe metbya newpolicythatallowedimmigrant workers to enter
on short-term contract visas.As withtheItaliansand Portuguese in
Switzerland, theirvisaswouldnotbe renewable whenever it became
necessary todeflate theeconomy in ordertocorrect a payments deficit.
The secondmajoreffect of Top Currency statuson itspossessor's
politicaleconomyis whatI wouldcharacterize as a hypertrophy of
foreigninvestment. For as wellas theadvantages ofeconomic leader-
ship,thenationals who are possessors of theTop Currency have an
addedadvantage in thattheirnationalcurrency is so widelyaccepted
byothers. Itthusbecomes particularlyeasyforthemtolauncheconomic
enterprises abroad;theyareneverslowtoexploitwhatever technologi-
cal and otheradvantages theymaypossess.The investments are dis-
tributedhaphazardly, atrandom throughout theinternational economy,
wherever opportunities occurforprofit or capitalappreciation-even,
sometimes, forsimpleexpansion in thesizeoftheindividual business
enterprise regardless ofrational prospectsofprofit.
Production ofUnitedStates-owned enterprisesoverseasis now esti-
matedatsome$200 billionannually, overa fifthoftheentire GNP ofthe
UnitedStates. The bookvalueoftheircapitalassetsin i966 was putat
$55billion,and theinvestment incomeof theUnitedStatesnow far
outdistances thatofall othercountries. Significantly,thenexthighest
investment income9 is Britain's-alegacyoftheexaggerated habitsof
overseas investment developed duringBritish tenureofTop Currency
roleand of herformer MasterCurrency positionin theold sterling
in
area.And though i968 private financial flowsto developing coun-
triesfromGermany roserapidly tonearly$i.i billion,makingherthe
secondlargestsourceof privatecapitalforforeigninvestment after
theUnitedStates($2.2 billion),it is theaccumulated stock,theresult
ofpastinvestments, thatengenders politicalconcernand is thepoint
here.Investment incomeis a rough-and-ready indicatorofthis.10
9I.e.,all earningsfromdirectoverseasinvestments netof losses,plus interest
accruing
on government loans and to the portfolioand otherinvestments of individuals.See
definition of "item6" in IMF, Balance of PaymentsManual,3rd edition(Washington
i96i).
10See OECD/DAC Development Assistance, 1969 Review (Paris I970).
228 WORLD POLITICS
INVESTMENT INCOME CREDITS IN i966
($ million)
UnitedStates 796i
United Kingdom 2632
Netherlands 555
France 462
Canada 454
Germany 389
Belgium-Lux. 304
Italy 275
Japan 243
The Britishcase also indicateshow,in thisrespect, theTop Currency

role differsin its effectsfroma MasterCurrencyrole.The latterwill
also lead to some hypertrophy of overseasinvestments relativeto the
normfordevelopedeconomieswithpurelynationalcurrencies. But as
in the case of the Dutch,or the Belgians,or even the French,the in-
vestments will be highlyconcentrated in the MasterCurrencyarea.
When sterlingwas Top Currency,by contrast,Britishoverseasin-
vestments in theUnitedStatesand in Argentinawerequite as impor-
tantas thosein itsown dependenciesof Australiaor South Africa.In
the Britishcase, the MasterCurrencyrole was clearlyresponsiblefor
a hypertrophy of tradeas well as of investment, so thatBritainbecame
evenmoreeccentric in herdependenceon importedfoodand raw ma-
terialsthan her geographyand economiccharacteralone dictated.A
recentcomparativestudyof Britishagricultural policyconcludedthat
the United Kingdom has had a veryhigh level of food imports,in
relationto GNP and per capitaproduction, but thatthisis the result
primarilyof an exceptionaltradingpolicy ratherthan of anything
inherentin thecountry's soil or itseconomicor geographicalposition.
From a policy-making point of view, an eccentricallylarge involve-
mentin economicenterprisein othercountries-someof which are
politicallyassociatedor dependentand some of which are not-will
tendto be reflected in an eccentrically tenderconcernforthe stability,
order,and "good government" ofareasfarfromhome.Anyideological
motivationtheremay be (e.g., preservingdemocracy,opposingcom-
munism)is reinforced by an economicconcernthatis not simplymer-
cenaryand money-grubbing, but is ratherbroaderand less narrowly
self-regarding thanMarxistmythology would have us believe.
The point here is reallya verysimple one. It is that this tender
concernfeltalmostwilly-nilly by the UnitedStatesis not likelyto be
atleasttothesamedegree,
shared, byothers.
It willtherefore
be futile
fortheUnitedStatesto expecttheEuropeans
and theJapanese
to feel
a concernequal to its own or a matchingcommitment
to maintain
politicaland economic stabilityin thosepartsofAsia,LatinAmerica,
theCaribbean, Australasia, theMiddleEast,and increasingly evenof
Africa, withwhichtheyhaveno specialstrategic or historiclinks.
It also followsthatit wouldbe vainfortheUnitedStatesto pre-
tendthatitcanchoosehowmuchfinancial assistance(official
aid plus
private investment) it willprovideto thethirdworld.Becauseof its
generous investments, publicandprivate, in thepast,itis notmorebut
lessfreethanothers tocutoffthesupplyofnewcapital, without which
thedeveloping economywouldwitherand shrivelup. As a major
creditor, its politicalpositiontowardall the manydebtorcountries
in theworldis one ofcomparative weaknessas muchas one of com-
parative strength.1" The finaldistinction ofTop Currency statusis an
ambivalence thatmaybe seenas thedirect outcome ofthedualconcern
of theTop Currency state'spolicy-makers withdomesticeconomic
welfareand withthe welfareand indivisibility of the international
economy. In boththeBritish andtheAmerican experiences,this(essen-
tiallypolitical)ambivalence has been resolved in thesameway.Rather
thanfaceup to theinherent conflicts
apt to arisebetweenthesetwo
interests,theTop Currency stateseemsinclinedto developa strong
political/economic ideology thatasserts(a) thatthedomestic and in-
ternational interestsare coincident if not identical, and (b) thata
primeaimofthestateshouldbe topersuade othersthattheirnational
economic interestsalsocoincidewiththemaximum development and
extension oftheinternational The
economy. Top Currency statechar-
acteristically doesall it can to propagate thisideologyand to use it
to enlistthesupport of othersforwhatever measures of international
cooperation and support it thinksare neededto protect, defend,and
stabilizethe international economicsystem. The incidental damage
donebyfinancial crisesto itsowndomestic economy are overlooked,
andtheopinions offoreigners whoputnationaleconomic interestbe-
forethegeneralwelfare areregarded as simplyunregenerate and per-
verse.Indeed,a highmoraltonequicklycreepsin,and whatI would
describe as theTop Currency syndrome is distinguished byan obstinate,
andtoothers inevitablyan objectionable,tendency toself-righteousness.
This is wheretheinseparability of politicsand economics in the
11 See Susan Strange, "The Meaning of Multilateral Surveillance" in Robert W. Cox,
ed., International Organization: World Politics, Studies in Economic and Social Agen-
cies (London i969).
230 WORLD POLITICS
realworldaddstothedifficulties oftheTop Currency state.Itsmone-
tarypartners in the internationaleconomyare less sensitivethan
theTop Currency stateto anydangerthatmaythreaten thisinter-
nationaleconomy, and aretherefore lessstrongly
convinced thatthey
shouldshoulder short-termcostsforlong-termcollectivebenefits.And
whatis more,theyare also acutelyawareof theimpossibility of dis-
tinguishing betweensupporting theeconomicaimsof theTop Cur-
rencystateand supporting, aiding,and abettingwhatever morepat-
entlypolitical
aimsit mayelecttopursue.Withthese,as notably with
UnitedStatesmethodsand objectives in Vietnamas with British
methods and objectives
in theBoerWar someseventy yearsago,they
mayoftenfindthemselves outofsympathy. Forno monetary system-
andthisis thepointtheeconomists so oftenforget-isa riderless
horse.
Anymonetary is at oncetheservant
system andthepartner ofa politi-
cal system.Thisis whatthelateHenryAubrey, whowrestled so stub-
bornly andcourageously withthisproblem, wasgetting atinhisBehind
the Veil of International of the current
Money."2"The shortcoming
balanceofpayments thinking," he concluded, "is thatwe seekan eco-
nomicsolution towhatis,in largepart,a politicalproblem."
I wouldtaketheargument a stagefurther thanAubreydid.Because
ofthepeculiarities of itsTop Currency statusand theeconomicrole
thatthisimplies, theUnitedStatesmustcontemplate thepossibilitythat
itwillhaveto makepolitical concessions notequaltobutgreater than
thoseofothers ifitis tomakeanysignificant progress towards interna-
tionalmonetary order.The principle of reciprocity and of theequal
rightsanddutiesofstates, so familiar thatitis takenforgranted, is no
longerenough.The eaglewillhavetostoop- as lowas theotherbirdsif
itaspirestoleadthemwhereitthinks theyoughttogo.
This politicaltruthlies rightin the economists' blindspot.And
because,as I havesaidalready, theUnitedStatesso dominates thestudy
of economicsthroughout the globe-as, indeed,Britaindid from
Ricardoto Keynes-there is nowno professionally respectable dissent,
no significantschoolofeconomic thought thatis notAmerican-influ-
enced.It is therefore particularly hardforeconomists to be awareof
thisblindspot.The ideological convictions oftheTop Currency state-
andAmerican economic ideology oftenseemsa lotmorecoherent and
consistentthanAmericanpoliticalideology-arethemselves a prime
causeofpolitical astigmatism. It is theseTop Currency convictionsthat
obscurethe politicalrealityand encouragethe illusionin America
12Princeton Essay in International Finance (Princeton i969).
thatthemonetary goalssoughtby theUnitedStatesfortheinterna-
tionaleconomy arealsosoughtwithequalurgencybyall menofgood
will; thatanywhodo notseekthemmustbe ignorant or misled-or
justwilfullysubversive.Expoundand preachthepromisedland of
orderly international
monetarymanagement forlongenough,Ameri-
can economists seemto think,and the doubterswill be converted.
Butthisis an illusionthatcouldprovedangerousand expensive.

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Strange, Susan (1971) The Politics of International Currencies. World Politics, Vol. 23, N

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Trustees of Princeton University

The Politics of International Currencies

a directresultofgrowing economic interdependence and of the

Yetthepolitical scientistsin thefieldofinternationalrelationsshow

penseofFrenchconsumers), tonegotiate-through theYaoundeCon-

nationaleconomies, bothbecauseoftheirsmallersizesand becauseof

politicalsystemnumbersover one hundredand

JuddPolk remarked, in a perceptive studyof sterling written some

outside,it seemsas iftheUnitedStateswillnothavean effective bal-

The Britishcase also indicateshow,in thisrespect, theTop Currency

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