Countries do not control their own currencies

In 1956, the Italian medieval scholar Carlo Cipolla gave five short lectures entitled Currencies, prices and civilizations in the Mediterranean world.

Even if you don’t happen to like medieval money, they’re fun. For example, Cipolla dedicates a chapter to what he calls the medieval dollar, the high-value gold florins and gold coins of Italian city-states, accepted and copied from Constantinople to the Rhineland.

Cipolla points out that kingdoms and cities do not have what we now think of as monetary sovereignty — a monopoly over the issuance and control of money within their borders. Coins, especially the most valuable coins, are scrambled from private mints to whatever market they like, and the best a king or governor can hope for is to regulate the mint and manage the flow of coins. money, prices and civilization Accidentally is the single best explanation for how money works in today’s economy.

With the dollar approaching all-time highs against the pound and euro, we should reissue Cipolla’s book and give it to every fiscal and monetary policymaker in the G20. We should attach in a binder a printout of a paper published in August by two political economists — Rethinking Monetary Sovereignty: Global Credit Monetary Systems and States. Like Cipolla’s medieval Europe, the paper argues that it is unhelpful to convince states that they issue and control their own currency.

The paper’s authors, Steffen Murau of Boston University and Jens Van ‘t Klooster of the University of Amsterdam, argue that the main definition of monetary sovereignty is Westphalia – the nation-state creating and controlling its own currency. But like Carlo Cipolla’s medieval rulers, governments now actually issue very little of their own money. They have some effect on the rest of the system. But it’s limited, even in a more closed financial system like China’s.

This article divides currencies into three categories. Public funds exist on the central bank’s balance sheet as paper money or reserves. Public and private currencies include deposits in commercial banks, which are generated every time a bank makes a loan. Deposits are a private decision of private actors, but the state can regulate banks or block new lending by raising interest rates. Traditional monetary theory sees central banks as creators of money, but they are actually more like money shepherds, pushing banks back and forth. The last category — truly private money — either sits on the balance sheets of poorly regulated shadow banks or is completely offshore and out of state control.

Murau and Van ‘t Klooster use these categories to suggest a more useful way of thinking about sovereignty: What is a country trying to do with monetary policy? Does it work? If we apply this criterion to the U.S. dollar, we first have to be clear about what we mean by dollar — as the authors point out, there is no such thing as a dollar, only dollar-denominated credit assets. Then we asked what the U.S. wanted to accomplish with those dollars and whether it worked.

Starting with real private money, we find Eurodollars – dollar-denominated deposits in offshore banks outside US regulatory control. But as political economist Eric Helleiner has pointed out, the actual U.S. policy in the financial crisis was to offer currency swaps to foreign central banks, lending them dollars, which in turn could be borrowed to their own commercial bank. If the goal is to support the creation of offshore private dollars by acting as a global lender of last resort for dollars, then it’s working.

For public and private funds, U.S. dollars are deposited as deposits in regulated U.S. commercial banks with clear policy goals: full employment and low inflation. But the Fed and Treasury do not have a working theory of what bank loans create jobs or how effectively they can be encouraged. Even if they do release bank money, they can’t get bank money into the hands of every American — getting a bank account isn’t seen as an important policy goal.

This leaves public funds, bills and reserves on the Fed’s balance sheet. Here, by traditional definition, the United States has unquestionable sovereignty. The Fed’s cash office operates a warehouse system that can exchange Federal Reserve notes for deposits anywhere in the country as needed. Cash is valid. However, as reserves are built, what are the goals? The Fed can trade U.S. Treasuries for reserves and ease or tighten quantitatively. But it even debates internally whether and how this works.

If we define monetary sovereignty as effectiveness, it seems unlikely that even the mighty United States has full sovereignty over its almighty dollar. We are no better than kings and governors, pushing the mint with laws and incentives, imperfectly trying to make money work.

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