4 - Hedging Bets in the Monetary System
Published online by Cambridge University Press: 05 June 2014
Summary
As important as trade and finance are for the global economy, neither is possible without some system of exchanging money for goods produced and services rendered. We have seen in earlier chapters that gold and silver, cast into coins of varying weights and sizes, played major roles as money for more than a millennium. Today, however, the international system is dominated by government-backed national currencies – with dollar notes, yen, euros, and pesos populating global markets. Unlike earlier forms of commodity money, which had some intrinsic value, these “fiat” currencies derive their purchasing power exclusively from the fact that they are declared legal tender in the country that backs them – and that people accept them. Nonetheless, they play an indispensable role in defining the value of goods and services, recording and invoicing commercial transactions, and facilitating business across borders – even though they are often fragile instruments of trade, and susceptible to bouts of strength and crushing decline.
Despite the importance of a sound and stable global monetary system, coordinating economic policies and their impact in a world of different national currencies is difficult. Countries use monetary tools – which include interest rate policy, central bank purchases of government debt, and various interventions in local and international capital markets – for plenty of things, including combating unemployment, rescuing financial institutions, and ensuring price stability. Thus placing limits on their ability to use these tools impacts their ability to manage their own domestic economies, and is not undertaken lightly, even in the name of international cooperation and potentially the greater good. There are circumstances in which coordinating international monetary policy can be in a nation’s best interest, but others in which a selfish approach might produce better economic outcomes from a strictly internal point of view.
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- Information
- MinilateralismHow Trade Alliances, Soft Law and Financial Engineering are Redefining Economic Statecraft, pp. 124 - 164Publisher: Cambridge University PressPrint publication year: 2014