Rethinking Monetary Sovereignty: The Global Credit Money System and the State

Abstract

We propose a new conception of monetary sovereignty that acknowledges the reality of today’s global credit money system. Today, the concept is predominantly used to denote states that issue and regulate their own currency. We reject that Westphalian understanding of monetary sovereignty. Instead, we propose a conception of effective monetary sovereignty that focuses on what states are actually able to do in the era of financial globalization. The conception fits the hybridity of the modern credit money system by acknowledging the crucial role not only of central bank money but also of money issued by regulated banks and unregulated shadow banks. These institutions often operate “offshore”, outside of a state’s legal jurisdiction, which makes monetary governance more difficult. Monetary sovereignty consists in the ability of states to effectively govern these different segments of the monetary system and thereby achieve their economic policy objectives.

Digital currencies, monetary sovereignty, and U.S.–China power competition

“…They include governing a complete credit money system with public, private-public, and private money segments that operates onshore and offshore in the case of global currencies (cf. Murau & Klooster, 2020). Second, the dynamics and pace by which financial, institutional, and infrastructural power competition over digital currencies reshape international monetary relations are not fully conceptualized here.…”

“…Scholars in this school of thought conceptualize money as a unit of account backed by a state but essentially shaped by market actors. Private actors create most money in a regulated environment instead of central banks (Murau & Klooster, 2020). For instance, Chinese commercial banks are money multipliers that can issue banking money 10 times the amount China's central bank issues fiat money based on a "fractional reserves" model (W. Shen & Hou, 2021).…”

“…The concept of monetary sovereignty, therefore, cannot privilege the exclusive rights of jurisdiction "to issue currency," "to determine and change the value of that currency," and "to regulate the use of that currency, or any other currency, within its territory" (Gianviti, 2005, p. 4). Instead, internally effective monetary sovereignty can be described as the ability of states to control public money, regulate private-public money, and manage private money to achieve their economic policy objectives (Murau & Klooster, 2020). 2 Regarding the external components of monetary sovereignty, the position of the unit of account linked to a state within the global monetary hierarchy shapes this state's currency regime.…”

Dollar Liquidity, Financial Vulnerability and Monetary Sovereignty

“…These issues have led to criticisms of attempts to apply the MMT‐derived monetary sovereignty concept to LMICs (Aboobaker and Ugurlu, 2023; Bonizzi et al., 2019; Vergnhanini and Conti, 2018; Vernengo and Caldentey, 2020). They have also led both critics and proponents to consider the relationships between monetary sovereignty and currency hierarchies (Murau and van ’t Klooster, 2022; Patrício Ferreira Lima, 2022; Prates, 2021). The latter concept derives from the observation that the capacity of currencies to perform the functions of money internationally varies substantially.…”

International monetary hierarchy through emergency US-dollar liquidity: A key currency approach

“…Multiple fields of research have come to describe the international monetary system as hierarchical. International monetary hierarchy is a theoretical position that stands in contradiction to the world of the Mundell Fleming model (Mundell, 1960; Fleming, 1962), which implicitly assumes that the international monetary system is “non-hierarchical.” This traditional approach perceives the international monetary system as comprised of hierarchically equal autonomous states as building blocks (Avdjiev et al, 2015) which issue their own money, co-exist next to each other, and have “monetary sovereignty” in a Westphalian sense (Murau and van ’t Klooster, 2022). Contrary to this notion, ideas of international monetary hierarchy can be found in various fields such as International Political Economy (IPE), for instance in Strange (1971), Cohen (1977, 1998) and Kindleberger (1970, 1974), post-Keynesian literature (Andrade and Prates, 2013; Bonizzi et al, 2012; Kaltenbrunner, 2015; Terzi, 2006), development economics (Alami et al 2022; Arauz 2021; Fritz et al, 2018), scholarship in a Marxist tradition (Alami, 2018; Koddenbrock, 2019, 2020), the Money View (Mehrling, 2012, 2015; Pozsar, 2014), critical macro-finance (Gabor and Vestergaard, 2018; Gabor, 2020; Murau et al, 2020), legal scholarship on money (Pistor, 2013), or recent publications of the Bank for International Settlements (BIS) (Aldasoro and Ehlers, 2018; McCauley and Schenk, 2020).…”