This book is answering such questions as: 1) How and why governments issue currencies; 2) The advantages and disadvantages of various monetary policies, particularly for less powerful countries; 3) Why the dollar, euro and yen may end up as the world?s only currencies. At this book the author explore monetary economics in admirably lucid detail, amply documented reflection on the future of currency. The dollar, euro and yen dominate the global monetary order, with the dollar now unrivaled at the top and unlikely to be threatened in the future. The countries that issue lesser currencies face a trade-off between monetary sovereignty and international acceptability. Author Benjamin J. Cohen argues that these countries are likely to reject dollarization because the emotional and political advantages of issuing one?s own currency are simply too strong.

Issuing Money: Currency and Territory
A currency gives political advantages to its issuer. Even it the past when currency was gold or silver coins, the mint retained a piece of the ingot for the king. Nowadays, the issuer of a currency receives valuable, real benefits ? including liquidity, low transaction costs and reliable value ? in exchange for mere paper. A widely accepted currency becomes a badge of national status, because the respect users give the currency is largely a function of the awe inspired by issuing country.

In the nineteenth century, national border began to circumscribe the area of a currency?s legitimacy and acceptance. This was an innovation. In antiquity, a few monies were widely accepted. Roman and Greek coins traded far from Rome and Athens. Spanish coins bought fur and whiskey on the North American frontier. Money was not a function of territory.

Nowadays, money is again deterritorializing, as instantaneous global communication, trade and frequent travel shrink the currency world. Although many national currencies still exist, the international monetary structure seems to resemble a ?Currency Pyramid? with a narrow top and a brad base. The scant few currencies at the top compete among themselves for acceptance in and dominion over trade and finance. These currencies are:
- The U.S. dollar ? Clearly pre-eminent, the dollar is on one side or the other of 90% of the world?s currency trades.
- The Japanese yen ? This currency?s influence probably peaked with the Japanese economy and market during the 1980s, only to fall with them during 1990s.
- The European euro ? This new currency could increase its share of the market the dollar?s expense, but it? fate depends on the resolution of some troubling doubts.
Different hypothesis exists regarding the future of the money. Most popular is a further contraction of the number of currencies. But this hypothesis ignores some important facts of monetary life. First, countries derive distinct advantages from issuing currencies, and will not easily abandon minting. Second, the private sector has begun to create currencies, which thrive when they meet a real need. Examples include airline frequent flyer miles, scrip and e-money.

Nations can select among four distinct strategic options:
1. Leadership ? a state seeking to lead the market will compete aggressively to expand the market share of its currency.
2. Preservation ? A state seeking to preserve and defend the status of its currency may adopt measures to persuade other to use it. Japan may be engaged in such a strategy with respect to the yen.
3. Followership ? A state facing the unpleasant fact tha it lacks the attributes necessary to support a strong , widely accepted currency can adopt one of several strategies for subordinating itself to another, stronger issuer. Examples include dollarization and currency boards.
4. Alliance ? States may opt to pool their sovereignty through a currency alliance, a strategy most successful in Europe that had adherents in Africa and elsewhere.

For most states, leadership is not an option. Their size and influence prevent their currency from becoming a world leader no matter what economic or monetary measures they implement. They may have no choice but to surrender monetary sovereignty either vertically, by subordination to a currency such as the dollar or euro, or horizontally, through a regional currency arrangement with other states.

The Currency Pyramid and Monetary Geography.
Money has been around a long time. Coins started to circulate in Greek city-states as early as 500 BCE. By then, China?s Chou dynasty, dating from 1022 BCE, had been minting for half a millennium. At the time, rulers demanded that their subjects use their currency exclusively. A county?s coin might be accepted far from its borders.

Monetary territoriality came only after the 1648 Pease of Westphalia established the sovereignty of each European state within its borders. Sovereignty came to include currency, so each state undertook to make its own money the exclusive legal tender in its dominions. When the Great Powers withdrew from their colonial empires after WWII, each post-colonial nation-state established a national currency among its first, fundamental measures of independence.

Yet currencies are not equal. The fittest ones achieve international acceptance and all the political and economic advantages of monetary dominance. Three factors determine fitness:

1. Confidence ? Users have confidence in currencies whose value is reliable. In practice, this means an established record for low and unvarying inflation rates.
2. Liquidity ? Users must be able to move in and out of the currency without paying high transaction costs, and must be able to predict its value with reasonable assurance.
3. Network economies ? The more people use a currency, the more people are likely to use it. No currency had ever achieved dominance without the backing of a major trading economy. For example, the U.S. dollar is now involved in 90% of all currency trades and more than half of the world?s export transactions.

Symbolically, a currency represents national identity and can have deep emotional connotations.
Monetary sovereignty lets a state increase or decrease its money supply to guide its economic activity. Seignorage, the gap between a currency?s value and its cost of production, can be an important source of revenue and allows a state to mobilize real resources quite inexpensively.

Deterritorialization means that many countries which now enjoy the benefits of monetary sovereignty will have to live without those advantages. A few dominant currencies will inevitably erode local monetary monopolies. The Contraction Contention suggest that economic pressure will force almost all countries to abandon their won currencies.

What Is to Be Done
Countries can no longer enjoy the monetary autonomy and monopoly that seemed rightfully and inevitably theirs in the early decades of the twentieth century. To secure trustworthy values, liquidity and contained transaction costs, most nations can be reasonably expected to adopt some mechanism to link their currencies with a dominant global currency, be it the dollar, the euro or the yen. But this approach, called vertical integration, has both political and economic disadvantages. The most extreme form of vertical integration is dollarization, whereby the subordinate country simply adopts the dominant currency and gets out of the money business or retains only a token national currency. Another approach ? currency board ? commits a country to issue only as much currency as it can back with its holdings of the dominant currency.

Vertical integration has unquestionable advantages only for countries with such poor records of managing their own currencies that anything would be better. The political disadvantages include a strange but real sense that a country loses something of its essential nationhood when it no longer has its own currency.

Horizontal integration, achieved by pooling sovereignty with other countries and creating a currency union, may be appealing. It involves sacrificing sovereignty, but sacrifice is not as absolute as with vertical integration. When the advantages are clear to all participants, as with the euro, such currency unions can be successful.

The situation is clear and obviously difficult. Although demand-side economic factors favor the contraction and convergence of currencies into one or at most the scant trio now at the top, supply side factors will keep the world on a multi-currency footing for the foreseeable future. Yet this means the world will continue to face the risk of currency crises and contagions.
Ensuring stability and effective governance of a fractious, centripetal currency world requires monetary cooperation and fiscal discipline among all participants, but especially among the major actors.

by Benjamin J. Cohen
Princeton University Press 2003
294 pages