Posted by: clholoman | September 16, 2011

Money makes the world go around

Back when I was a researching scholar, my area was international cooperation in monetary relations. After a rather quiet period, it’s now again a hot topic, due to both the troubles of the euro and the role of the dollar. A lot of people seem to think international money is hopelessly mysterious. One of my dissertation advisors said money was the hardest of the three basic areas of International Political Economy (money, trade, capital) to grasp. That may be right, but that doesn’t mean it’s impenetrable. (Yeah, I hear you under your breath: “If you get it, how hard can it be?”)

Anyway, in hopes of my interest rubbing off on you, here’s a special section from Foreign Policy on the current state of play. Taken as a whole, it really is a very good primer on international money, monetary history (which is a heck of a lot more interesting than it sounds) and the nature and importance of a reserve currency. The Keating piece on Bitcoin seems like a throwaway, and the Pettis article is contrarian, but not wildly different from some of the things that were being said at the end of the Bretton Woods era in the late ’60s-early 70s (about which Bosco nicely describes one of the key aspects–the vanishing “Triffin dilemma.”) But the rest are really good, and very readable.

A couple of notes that might help:

  • “Seigniorage” is an important concept (and fun to be able to throw around at parties.) In its narrow, technical meaning, it is the “profit” that the issuing entity reaps from minting money. If if only costs 2 cents to make a nickel, the mint has made seigniorage of 3 cents. More generally, it refers to the benefits of being the issuer of money, especially, in the international context, the money that countries hold as “savings”–their reserve.
  • Sometimes, the Chinese currency is referred to, sloppily, as both the renminbi (or RMB) and the yuan. More accurately, the RMB refers to the overall Chinese monetary system and the yuan is the main unit of currency. It’s confusing since in the US, we use “dollar” for both. The analogue would be in Britain, where the system is sterling and the unit of currency is the pound (but even that may add to the confusion, since that’s all based, historically on the metal.)

There are some very important forces at play here that directly influence our economy. The amount of “hot money” that flows around the world in currency trading dwarfs the amount of international trade. So I hope you find this interesting and informative.

And I’ll try to break the recent habit of including musical selections.

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