The Currency of Politics: The Political Theory of Money from Aristotle to Keynes

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Currency Politics: The Political Economy of Exchange Rate Policy. Jeffry A. Frieden. Princeton University Press. 2016. Agustín Carstens, the head of Mexico's central bank (Banxico) from 2010 to 2017, was charged with maintaining the stability and purchasing power of the peso. Carstens faced enormous challenges in his role as the head of Mexican monetary policy, not only because of domestic economic and political forces, but also because of elections in the country's northern neighbor. Carstens vividly described the impact of the US election on his ability to exercise domestic monetary policy: expressing frustration over his loss of power over the peso, he called President Trump's election, and the concomitant economic threats against Mexico, a “horror movie” and a “hurricane.” 1 He also said that Trump was able to completely disrupt his plans to stabilize the currency—which cost more than 2 billion dollars in hard reserves—with only two tweets, both focusing on investment by the auto industry in Mexico. 2 Carstens’ direct style of speaking further reveals his awareness of the effects: in comments to the Mexican Senate, he explained that “I'm going to say it like it is, in a very simple way: with two tweets from we know who, the effect faded away,” referring to the impact of his currency interventions relative to the influence of Trump's tweets. 3 Jeffry A. Frieden, Professor of Government at Harvard University, has written a fine book on the determinants of decision-making regarding exchange-rate regime and, to some extent, exchange-rate level within the selected regime. The book is readable for both economists and political scientists. I recommend Currency Politics to both sets of scholars. Economists will learn about the political aspects of exchange-regime choice and political scientists about the economic aspects." -- Lawrence Officer, EH.net.

Identifying the motivations for currency policy preferences on the part of industries seeking to influence politicians, Jeffry Frieden shows how each industry's characteristics—including its exposure to currency risk and the price effects of exchange rate movements—determine those preferences. Frieden evaluates the accuracy of his theoretical arguments in a variety of historical and geographical settings: he looks at the politics of the gold standard, particularly in the United States, and he examines the political economy of European monetary integration. He also analyzes the politics of Latin American currency policy over the past forty years, and focuses on the daunting currency crises that have frequently debilitated Latin American nations, including Mexico, Argentina, and Brazil. H1: New negative policy information via a tweet from Trump will lead to a decrease in the value of the peso. An intellectual history of money that theoretically grounds the works of others working on democratizing money. The Currency of Politics is a great addition to the philosophy of money."—Valerie Schreur, Oeconomia

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The moment when you start to wonder what money is feels like pitching through a trapdoor into the void. This book is a marvelous aid to stabilizing that awful sense of cognitive vertigo. By examining several periods in the history of money, and showing how it has been used in each period to constitute power and the state, Eich brings us to the present with a much clearer sense of where we are, how we got here, and how we might seize money itself and use it as a creative political force for good.”—Kim Stanley Robinson, author of Ministry for the Future The results of tweets are positive but small and not statistically distinguishable from zero before Trump was named as the Republican candidate. This would align with expectations, as Trump was considered a “long-shot” candidate at the time and thus the risk of him becoming president was perceived as low. During the campaign, when Trump was the presumptive Republican nominee, the effect of a tweet is approximately an increase of 0.05 pesos to the dollar (an approximately 0.25 percent change in percent terms). The effects also appear to persist in the window after the tweet. Again, this would align with expectations, as securing the nomination increased the probability of Trump being elected as president and thus should impact the effect of his tweets. Further, the tweets appear to have an effect regardless of whether they contain new or repeated policy information, providing support for both H1 and H2.

Eich’s work is sure to be a landmark in political science. His argument is bold and ambitious; his writing clear and engaging; and his message timely, persuasive and imperative."—Erik Jones, SurvivalIn the wake of the 2008 financial crisis, critical attention has shifted from the economy to the most fundamental feature of all market economies—money. Yet despite the centrality of political struggles over money, it remains difficult to articulate its democratic possibilities and limits. The Currency of Politicstakes readers from ancient Greece to today to provide an intellectual history of money, drawing on the insights of key political philosophers to show how money is not just a medium of exchange but also a central institution of political rule. A deep ex­amination of the theoretical and political foundations of money that rescues the money discus­sion from economists."—Pratap Bhanu Mehta, Open Magazine Alexander Slaski, Ph.D., is a postdoctoral fellow at Leiden University. His research focuses on the political economy of foreign direct investment, investment incentives, and currency flows in the developing world, particularly Latin America. His current book project examines how multinational firms shape regulatory policy in developing economies. His work has been published or is forthcoming in outlets including The Review of International Organizations, The Review of International Political Economy, and International Studies Quarterly. Notes Identifying the motivations for currency policy preferences on the part of industries seeking to influence politicians, Jeffry Frieden shows how each industry’s characteristics—including its exposure to currency risk and the price effects of exchange rate movements—determine those preferences. Frieden evaluates the accuracy of his theoretical arguments in a variety of historical and geographical settings: he looks at the politics of the gold standard, particularly in the United States, and he examines the political economy of European monetary integration. He also analyzes the politics of Latin American currency policy over the past forty years, and focuses on the daunting currency crises that have frequently debilitated Latin American nations, including Mexico, Argentina, and Brazil. H3: An increased probability of Trump being elected will lead to a decrease in the value of the peso. Empirical Approach

Eich’s book is ultimately a call to revive democratic debate about money…this excellent book…does not tell us what to do, but he does show us something can be done."—Geoff Mann, New Statesman While the fragility of exchange rate commitments has been known since the publication of a 1995 paper by Obstfeld and Rogoff, the question of why some central banks fix the value of their currencies and others do not is less well understood. Jeffry Frieden’s Currency Politics provides a thoughtful guide to the political economy of exchange rate policy. ... In Currency Politics, Frieden not only draws together beautifully the strands of his previous work, but he advances a new and entirely persuasive explanation of the euro project as an essential bulwark against competitive devaluations. Above all, he argues convincingly for the centrality of exchange rate policy to domestic politics, international relations, and macroeconomics in open economies." —Ronald Rogowski, University of California, Los Angeles Regression analysis of voting data and proxy variables for political interests largely substantiate Frieden’s theories in the selected cases, particularly the preference of manufacturers and exporters for a flexible regime and lower price level. International financial intermediaries, who have historically lobbied for a more stable regime, contest these policy settings. There is also evidence that populist politicians may inflate the price level to boost the purchasing power of consumers, particularly in the Latin American context.The book is readable for both economists and political scientists. I recommend Currency Politics to both sets of scholars. Economists will learn about the political aspects of exchange-regime choice and political scientists about the economic aspects."—Lawrence H. Officer, EH.Net

This excellent book is for anyone who has ever wondered about the origins of the Eurozone, the causes of the currency crises, and the importance of the classical gold standard. Frieden combines lively historical narratives with statistical analyses to show that currency politics are pretty much the same across time and space. No other author could bring out the common threads running through the book's cases so clearly." —J. Lawrence Broz, University of San Diego The remainder of the paper outlines my theory about how foreign elections, and the policy risk they entail, should affect currencies, then tests the theory using data from currency markets. In the case of Mexico, I measure the average change in the value of the peso for tweets and find that the effect is strongest when Trump has the highest chance of winning (and thus when currency traders anticipated the highest probability that economic policy that would be harmful to Mexico would be implemented), as shown in figure 1. The causal mechanisms behind that effect are explained by both a signaling effect—the anticipated impact of economic policy on the value of the peso—and by the uncertainty regarding that policy becoming reality. Generalizing from the case examined in detail in this paper, one should expect other foreign electoral shifts to affect currency markets in close economic neighbors. It is important to note that the goal of this paper is not to measure and test the full universe of cases, but to highlight a previously overlooked phenomenon in the literature that reshapes our understanding of the determinants of currency markets, to rigorously test and measure that effect in one case in detail, and provide short case studies to supplement that core case. The theory and scope conditions discussed in the following section provide a framework for creating a set of testable hypotheses to examine this understudied phenomenon in other contexts beyond the cases highlighted in this paper. Theory and Causal Mechanisms With this framework in place, a set of case studies is used to test the relevance of political economy to currency policy at various stages in history: namely, the United States during the transition to the gold standard (1862-96); European monetary integration between 1973-94; and Latin American policy between 1970-2010. The individual elements of Frieden’s theories are tested empirically to understand how important the political economy of currency policy is to explain voting patterns and government policy choices. In the use of case studies and the inclusion of historical and contextual factors, Currency Politics introduces a meaningful narrative to the analysis. Pure economic analysis is typically deterministic and struggles to account for contingent factors. By considering social, institutional and historical aspects, the text succeeds in treating the economy for what it really is: a complex and interdependent phenomenon.Some societies use Oxford Academic personal accounts to provide access to their members. See below. The chapters on currency policy in nineteenth-century USA are particularly illustrative: large-scale infrastructure investment acted as a catalyst for economic growth and geographical expansion across the new continent, leading to the emergence of two competing political blocs in the agricultural hinterland and urban centres of industry and finance. Railroad magnates funded new railways using foreign-denominated debt and had strong interest in moving away from gold to a floating exchange rate. Farmers and mining firms shared this interest and voted for lower price levels along with a floating exchange rate to guarantee competitiveness in export markets. Manufacturers went against expected behaviour for two reasons: import tariffs were relatively high, particularly after the Civil War, and the US was geographically distant from potential competitors. With high transport costs protecting firms from competition with European counterparts, they could easily pass-through the costs of currency fluctuations to consumers. The Latin American analysis conversely brings to light a tendency for currencies to appreciate in the lead-up to an election, boosting the purchasing power of consumers to support re-election for the incumbent government, but in some cases creating unsustainable price levels and precipitating a currency crisis. A very good book. . . . Eich takes us on a fascinating journey."—Paul Sagar, Perspectives on Politics