The Evolution of Money

by David Orrell

  Beijing has already encouraged domestic exporters and foreign exporters to China to price in yuans, University of California professor Barry Eichengreen notes. But to become truly internationalized, the Chinese currency needs to enjoy a stable and transparent institutional arrangement that international investors will trust, Eichengreen continues, adding that the final step will be to encourage—or convince—central banks to hold reserves in yuans. It is the second step, having the Chinese currency adhere to the code of conduct of global markets, including for it to float, that many experts believe may prove difficult for Beijing to accept.

  The Chinese had long resisted U.S. pressure to revalue their currency—or more generally to allow the market to determine its value—letting everybody know that they would deal with it on their own terms. Besides having a rather symbolic dimension, this stance also reflects the long-held conviction, reminiscent of the mercantilist era in Europe, that an economy driven by exporters needs the institution of an undervalued currency. And while the crisis of 2007 and beyond pointed out the flip side of this model, a weaker yuan still yields a clear short-term benefit given the ongoing turbulences on the global stage and the jump-started reform of the Chinese economy. Moreover, in the battle between those who advocate fast internationalization of the currency and those who oppose it, political clout is evident within the former group that consists, among others, of state-owned banks and politically connected borrowers and exporters.31

  China “is leading the charge toward the next monetary order,” as global strategist Parag Khanna suggests, but this next arrangement is not expected to revolve around the yuan or any other national currency.32 Instead, Beijing seems to be aiming for a multilateral arrangement that would prove more stable than the current dollar-centered world—and that may serve as a transitory period on the way to the next monetary order. This is why China brought back the idea of the SDRs, and why it has been slowly divesting away from the dollar and has been buying gold as well as euros during the time when the eurozone crisis was far from over. While seemingly not in concert, these moves, in the short term, allow China to keep all doors open, to lessen the power Washington exercises vis-à-vis Beijing, and to utilize every opportunity to extend the reach of its own currency, all at the same time.

  One complicating factor in this strategy is that any shift in policy, such as cutting back on U.S. Treasury purchases, could have destabilizing effects on the U.S. dollar and other currencies (the yuan is China’s currency, but it could become America’s problem). Another is China’s need to dismantle its own debt bomb, a task that, as in other countries, may be for future generations. As a Chinese proverb puts it: “Father’s debt, son to give back.”

  Euro Gold

  The idea for a common European currency was first proposed at the League of Nations in 1929. After the long process of cultural and economic integration and convergence that followed World War II, it finally came to fruition on January 1, 1999, when eleven European countries, after appearing to satisfy convergence criteria on things such as inflation, interest rates, and government borrowing, officially adopted the euro. At first, exchange rates between currencies were fixed in terms of euros, which were purely virtual and existed only as digital assets in bank accounts. The first coins and notes were issued in 2002, replacing the legacy currencies, which were removed from circulation.

  One of the architects of the euro was the Columbia economist Robert Mundell, who was awarded the Nobel Prize in Economics in 1999 for his work on the idea of an “optimal currency area.” It wasn’t clear that the new European Union met the optimality conditions, which related to things like high labor mobility and shared economic drivers, but to Mundell and other economists the euro’s main attraction was that—like the gold standard—monetary constraints would impose fiscal discipline on politicians.33

  Monetary unification also offered many advantages, such as elimination of the need for currency exchange and a strengthening of European identity. Society aligns itself with the field lines of money, so unifying the money is a way to promote political union as well. Germans did not like the idea of giving up their “flag … the fundament of our post-war reconstruction” as Chancellor Helmut Kohl called the D-mark, but representatives of other continental powers were more concerned with political goals such as “Europeanizing” Germany.34 Europe’s aim to enhance its might via economic and political unification acquired further momentum in the noughties when long-dormant developing powers made their impressive entrée onto the global stage. More countries lined up to join the union, with the latest entry being Lithuania in 2015.

  The European Union has been described by political scientist John Ruggie as the world’s “first truly postmodern international political form” because of the way in which, like a postmodern architect jumbling design elements and references, it reinvents classical concepts such as sovereignty and territoriality.35 The designers of euro notes also took a postmodern approach. The front of the bills feature idealized representations of windows, doors, and archways in various historical styles. The reverse side shows structures such as bridges and viaducts. There are no human figures at all, perhaps to avoid offending anyone.

  In spite of the theories describing hybridity—that is, the ability to extend multiple loyalties—as being common to (post-)modern women and men, it became clear with time that it would be hard to find something with which the mosaic of European nationals could identify.36 This is even more true if the unifying object is as sensitive a subject matter as money—the ultimate measurement of one’s well-being in our society. This partially explains the depth of the euro crisis that unfolded in the aftermath of the GFC, when the scale of the Greek, Irish, Spanish, Portuguese, and Italian problems—and the drawbacks of the euro itself—became clear.

  There is a sense that, like an unconvincing example of a postmodern building, the whole euro project has been patched together from old currencies and gold standard–inspired ideas, retaining some parts but dispensing with others. And like the design of its notes, it leaves out the messy dynamics of people and democracy. The European Central Bank (ECB), for example, is unique in that it has no fiscal branch and no sovereign or powerful central government to back it up. Instead, these functions are handled at the national level. As economists, including L. Randall Wray, warned, this effectively means that member countries “operate fiscal policy in a foreign currency; deficit spending will require borrowing in that foreign currency.”37

  The euro is more flexible than the gold standard, because the central bank can adapt the money supply to tackle inflation or deflation. However, the gold standard had a safety valve in that countries could temporarily exit during emergencies. This is not easy with the euro, because the national currencies no longer exist, and resurrecting one would take several months. Perhaps the biggest difference between the two systems is that, as discussed in chapter 4, the gold standard had a stabilization mechanism—gold would tend to flow out of countries running a trade deficit, driving down wages and prices, while countries outside the core borrowed only at a premium. But in a financial world driven by private credit rather than finite stocks of metal, the dynamics are a little different—credit growth prior to the crisis in Greece, which was viewed as safe because it was in the eurozone, was considerably higher than in Germany.38

  In 2012, it was widely assumed that the eurozone was on the brink of collapse, with Harvard professor Martin Feldstein proclaiming the euro to be “an experiment that failed.”39 The shock and awe that forced the market to backtrack on its skepticism has been epitomized by the now famous “whatever it takes” speech by ECB president Mario Draghi. Draghi reminded the world that there is a difference between an “optimal currency area” and what politicians and bureaucrats deem to be an area that should share a currency. While there might be a discrepancy between the two, the aim to construct and preserve the latter could prevail, at least momentarily, thanks to ECB ammunition. “Believe me, it will be enough,” Draghi said. The
power of money was in naked display during the 2015 negotiations between the European Union and Greece, when the European Union—in the face of its refusal to write off unpayable Greek debts—was accused of everything from attempted regime change to financial war on the Syriza government.40 Most of the bailout money went to bailing out European banks, who needed to hold government bonds for regulatory purposes and had chosen Greek ones because of their higher yield.

  Despite the euro’s problems, it seems clear that it is not (just) Washington that will be calling the shots; and that it is not (just) the dollar that is going to be the lingua franca of global finance and trade. The rules of the game are being rewritten and none of the European countries alone are relevant enough to participate. And since the choices are either to be at the table or to be on the menu, the political will to hold the European Union together is expected to be strong.41 The project of a common Europe—and the euro by an extension—shall therefore remain at the edge of the politician’s sword for some time to come. Whether it will last as long as the gold standard is another question.

  Us Versus Them, Our Money Versus Theirs

  While on a reportage in Estonia in 2011, it became apparent to one of the authors of this book, Chlupatý, that the idea of belonging is as important as a common monetary arrangement with the major trading partner. Top politicians, foreign diplomats, and ordinary people considered accession to the eurozone to be yet another symbolic as well as strategic step to integrate the country deeper into Western structures and thus lessen the influence Russia, the former occupying power, extends over it. A shared currency, in other words, enables an emphasis of the “we” versus “them” distinction, indirectly confirming the premise of Benedict Anderson’s “imagined communities” constructed around symbols people (more or less voluntarily) embrace.42 Money is as much about soft power as about hard power.

  The symbolic dimension of the euro was only reconfirmed in the course of the Ukrainian crisis. “It is very important for countries to stick together and with the European Union. We will be more integrated and protected in case of troubles, and we can see what is happening in Ukraine today … That is one reason why the Baltics and Finland were so eager to go to all institutions including NATO. It’s not easy for small countries to deal with these issues; we need help,” is how Latvian finance minister Andris Vilks explained why the monetary demarcation line is so important.43 It then only follows that the Russians briskly made the ruble the only official currency in Crimea shortly after they gained control over it, labeling the Ukrainian hryvnia “a foreign tender.”44

  The Europeans and Russians thus mirrored what has become the norm on the ever-shifting stage of cross-border politics: in the same way Roman emperors used coins to communicate their victories and policies from the British Isles to Turkey, Brussels, and Moscow let their influence be known via legal tender. Historically, this could be as much an exercise of a power by a center as a matter of expediency for the periphery.

  Both the West African CFA and the Central African CFA franc, for instance, are relics of colonialism (CFA stands for Communauté financière d’Afrique [African Financial Community]). Both were introduced mainly to facilitate trade with the colonies and had a fixed exchange rate to the French franc; once France joined the eurozone, the African francs became fixed to the euro. Such an arrangement, critics say, deprives fourteen countries with a combined population of 147.5 million inhabitants and a GDP of $166.6 billion of economic planning, since their monetary policies are effectively constructed in Frankfurt.45 However, its proponents point out that the CFA (also) “helps stabilize national currencies of Franc Zone member-countries and greatly facilitates the flow of exports and imports between France and the member countries.”46

  It is this conundrum of sovereignty loss versus the promise of stability that comes with numbers that is at the core of common monetary arrangements. This is why in the early stages of the global crisis of 2007 and beyond the appetite to join the eurozone spiked even in the Czech Republic, Denmark, Iceland, and other countries where European structures—or the euro as such—were traditionally shown the cold shoulder. The feeling that a robust institution consisting of many economies can function as a shield was suddenly stronger than the sympathy for a national currency and what it represents. And while subsequent eurozone troubles resulted in a retreat into the national(istic) shell, it was an episode the world watched very carefully.

  What some have dubbed the great European monetary experiment, while criticized, is considered a testing ground for the next step being mulled by many other regions.47 Europe has its problems, but there is simply no other model to follow, as Tatiana Valovaya of the Euroasian Economic Commission (Putin’s attempt to revive the Soviet Union) put it bluntly at the annual meeting of the European Bank for Reconstruction and Development (EBRD) in 2012. As the panel went on, the discussion only reconfirmed that the issues of any union are twofold: on the one hand, there is the theory of an optimal currency area that seems to explain the troubles being experienced by the heterogeneous economies of the eurozone; on the other hand, there is the political will and intent that could lead to the structural shift necessary for such an area to be created or at least approximated. The latter might have to do more with politics and strategic goals than with short- to mid-term economic realities.

  In a world where the monetary order seems to be collapsing, efforts at stability are ever more pressing. This is why there are many plans to construct common monetary arrangements all around the world. “I think that the GCC [Gulf Cooperation Council] countries should benefit from the euro experience and continue with the GCC monetary union project without delay,” Khalid Alkhater, director of research and monetary policy at the Qatar central bank, told Reuters in 2012.48 And while the idea of a pan-Arab currency still seems far-fetched, it is being considered by the powers in the region. “A monetary union is a strategic long-term project for these countries, not only economically, but it should be also politically,” explained Alkhater, adding that “the costs of not establishing it could be very high for the GCC countries … in the future.”

  It is the very same strategic concern, rooted in the uncertainty of what might come next on the global stage and the desire to deepen regional ties (which is related but not exclusive to the former), that is pushing or sustaining common monetary arrangements in many parts of the world. These are being discussed in Latin America (the Bolivarian Alternative for the Americas seems to be the furthest developed), in East Africa (shilling) and West Africa (the newly minted currency area should merge with the West African CFA), and even by some members of the Association of Southeast Asian Nations—Indonesia, Malaysia, the Philippines, Singapore, and Thailand—that perceive it as a possible hedge against a repetition of the 1997/1998 currency crisis. However, these are not the only regional—or pan-regional—monetary arrangements that are in motion today and that will influence how and with what people will be paying tomorrow.

  Moneys Within, Moneys Without

  Many economies formally or informally accept the moneys of established powers for the sake of stability and predictability for domestic households and businesses as well as for international trade and finance partners. The American dollar is thus used not only in insular areas such as Puerto Rico but also in Ecuador, El Salvador, and other Latin American states, where it has either replaced a fallen currency or created a parallel monetary universe that coexists with the official one. A great degree of dollarization can also be found in Asia and Africa, where the greenback is widely accepted by Michelin-starred restaurants and street vendors alike.

  The same then goes for currencies of other first- and second-tier powers. The euro, for instance, seamlessly circulates through the veins of those EU economies that have yet to adopt it, such as the Czech Republic, and is in use in many non-EU countries in the region such as Serbia; the Chinese yuan is readily accepted by Nepalese or Cambodian vendors, while many North Koreans consider it a hedge against the permanent ins
tability of their own won;49 the Indian rupee is widely used in Nepal; and the South African rand is one of the eight official currencies of Zimbabwe, which resembles a monetary laboratory after abandoning its own hyperinflated dollar in 2009.

  The Zimbabwean case shows the elasticity of people and business when it comes to monetary arrangements. If Zimbabwe can deal with the U.S. dollar, yuan, euro, and rand, among other legal tenders, other countries can surely deal with multiple currencies, should this benefit their individual agents and the economy as a whole. The question remains whether there is the will to democratize the monetary regime(s) in an orderly manner, meaning before the implosion demands it, such as in Zimbabwe. We discuss the case for multiple currencies in chapter 8.

  Clearly, the demand for new moneys and a regime that would safeguard them is growing. First, this came as a direct response to the economic crisis of 2007 and beyond, when both finance and politics lost the trust of people and businesspeople alike. Second, this came as deepening regional integration, erosion of the late global order, and modern technologies, among other issues and trends, began to compromise the existing order and codes of conduct. This is why both preexisting and new alternatives are being discussed so passionately. The magnetic lines of the money force are reconfiguring into new patterns, and, as will be seen in chapters 8 and 9, the possibilities are not limited by the constraints of traditional currencies. The results, as always, will both shape and be shaped by the global power structure. In its role as a medium of exchange, money is a means of communication that builds ties and fosters collaboration. But its reliance on hard-edged number makes it both a formidable weapon and a potentially destructive and self-destructive force. Far from being passive, money has the power to reshape the world.