Review: The Power of Currencies and Currencies of Power
On the relationship between finance and imperialism, or why China is funding BRICS and you can get a home mortgage.
Ed. Alan Wheatley, “The Power of Currencies and Currencies of Power” (Routledge, 2013 & International Institute for Strategic Studies, 2013)
How can the United States unilaterally impose sanctions onto other countries like Iran, Russia, and Venezuela?
What does it mean that the US dollar is the global reserve currency?
How do residents in the United States have access to cheap credit, financing everything from homes to Amazon orders?
Why would China finance BRICS?
These and other questions are addressed in the 2013 edited collection The Power of Currencies and Currencies of Power, making it a useful source for understanding how the capitalist world economy is structured and how imperialism functions within it.
The text states its purpose from the outset, “This book is about the power the dollar provides the United States and the geopolitical implications of other currencies challenging its dominance.” It begins, “Before US-led forces invaded Afghanistan in 2001, the CIA smoothed the path by buying the loyalty of warlords with suitcases and knapsacks full of crisp US$100 bills.” It is not just wealth that allows the US to use money to further its policy goals, it’s the US dollar’s status as a reserve currency and thus the perpetual demand for its circulation that underpin its power. As a result, “no other country… would have been able to use its currency to the same effect as the US did in Afghanistan. Could local tribesmen have been paid off in Swiss francs? They certainly would not have accepted the Chinese renminbi, which is not a convertible currency. But everyone takes dollars.”
From this provocative anecdote, the text goes on to dissect the mechanics of imperialism and the role of finance within the world system. For example, the dominant status of the US dollar has a series of advantages that come at a cost to the rest of the world:
First, its privileged position “enables the US government and households to accumulate debts on a scale that in other countries would risk a crisis of creditor confidence.” Tipping the scales in favor of the United States has two primary effects: providing the US with “tangibly lower borrowing costs, which… make it easier to pay for the world’s strongest military” and “enables the US to shift the onus of adjusting macroeconomic imbalances on to others, especially allies such as Japan for whom allegiance to the dollar is a tacit quid pro quo for US military protection.”
Second, the dominance of its currency also comes with ownership of the global payments system and infrastructure, which gives the US a sort of financial bully pulpit. The US Federal Reserve processes all US dollar payments in the world. If two countries want to conduct an international transaction, their banks have to route the payment through the US, thus “the US can threaten to cut off any financial institution dealing with a country that is the target of international sanctions.” Both Chapter Three by John Williamson and Chapter Four by Giri Rajendran deal with the coercive power that comes from the US control of the international banking payments system, with Chapter Four specifically providing a “comprehensive review of how the US has used the dollar-payments system as a choke point to bring Iran to heel.”
Finally, the book concerns itself with the durability of the US dominant position in the financial system, specifically the prospect of alternative currencies to reach reserve status. Chapter Two looks at the relative strengths of the euro and renminbi, evaluating their suitability as currency reserves. Rather than the US dollar being replaced by a single currency competitor, Chapter Five by Harsha Vardhana Signh emphasizes the possibility of a “multipolar currency world” made up of “the currencies of big regional trading nations” that have “become prominent at the regional and eventually international level” due to “shifting trade patterns and global supply chains.” Chapters Six and Seven deal with Asia, specifically China and how its development history has led up to the currency challenges it faces today.
Chapter Six, “The renminbi’s rise and Chinese politics” by Di Dongsheng, is the most insightful article in the book. One argument that bears understanding is the vulnerable domestic situation facing Chinese leadership, and the barely recognized fact that the Chinese masses have propped up cheap borrowing in the US at a massive cost to their domestic welfare.
Dongsheng describes the myriad ways in which “China opted to provide various subsidies to foreign direct investors… tax breaks, cheap land and infrastructure, tax rebates on exported goods, environmental-protection leniency and low wages assured by a trade union that is directly controlled by the CCP. However, the most valuable benefit… was the undervalued Chinese yuan.” The CCP kept the exchange rate favorable to export industries, of which over half were owned by foreign companies. Dongsheng concludes, “This intervention was tantamount to a tax on the people because the fruits of Chinese labour were not consumed domestically but transformed, via the resulting trade surplus, into increased national savings that were channeled mainly into US Treasury debt. The trade-off was lopsided. The US was in effect borrowing cheaply from China, recycling the money through the US financial system and ploughing it back into China… the return has been at best zero [for the Chinese masses]. Chinese citizens have been subsidising foreign investors.”
Chapter Six tells the tale of Chinese capitalist industrialization (socialism with Chinese characteristics) with remarkable clarity, and is worth capturing at length.
“The West was pleased with the ‘Great Moderation’, a combination of high growth and low inflation that China made possible by subsidising the cost of manufactured goods (at the expense of its own consumers, labour and environment) and exporting savings, which pushed down global interest rates. And the developing world was content because commodity prices boomed due to a rapidly industrialising China’s appetite for natural resources. China’s 1.3 billion citizens were less happy with their undervalued currency. Labourers were obliged to work long hours for extremely low wages. Spiraling house prices -- inflated, some said, by the domestic currency that the PBOC printed whenever it bought dollars -- added to their dissatisfaction… To sum up, China’s extensive industrialisation has come at the cost of the welfare of the majority of the Chinese people.”
Overall, the book offers an insightful introduction to the issues of 21st century imperialism, Chinese economics/development, and the privileges and vulnerabilities of US power within the existing world system.
Now ten years old, the text has seen its basic areas of concern tested by the war in Ukraine along with the China-financed BRICS project. Despite being somewhat dated, the arguments do help clarify current events by providing a good summary of the immediate financial precedents that led up to our present moment.