Cohen, Benjamin J. "Currency and State Power". In Back to Basics: State Power in a Contemporary World, edited by Martha Finnemore and Judith Goldstein, 159-176. Oxford: Oxford University Press, 2010.

Cohen, Benjamin J. "Currency and State Power". In Back to Basics: State Power in a Contemporary World, edited by Martha Finnemore and Judith Goldstein, 159-176. Oxford: Oxford University Press, 2010.

• State power is enhanced by the role of their currency in financial markets, as well as by the amount and denomination of currency reserves. International trade levels indirectly affect this power by determining currency reserves. Having access to large financial markets in your own currency and having large currency reserves both allow states to delay or deflect adjustment costs, increasing their autonomy (160).
• In terms of monetary policy, state power is defined by the ability to influence the behavior of other states and on financial autonomy, the ability of your state to resist influence by other state's monetary policies (160).
• Autonomy and influence are really the same thing: power. Autonomy is passive power through being able to ignore others, whereas this power is called influence when it is actively used by states with the goal of pressuring others (160-161).
• The simplest expression of both kinds of monetary power is the ability of states to deal with balance of payments imbalances, as states must exercise autonomy against the pressure of trade partners and influence those trade partners to avoid paying the costs of adjustment (160).
• Throughout history, there was been an international hierarchy of coinage known as the 'currency pyramid', where some currencies are favored over others. All currency at the top of the currency pyramid is always that issued by a major economic and political power (162).
• Being the issuer of the dominant currency has a number of benefits:
• Seignorage, which occurs whenever foreigners hold assets in your currency. These foreigner-held assets function as interest-free foreign loans to the domestic economy, which also drives down domestic interest rates (162-163).
• Macroeconomic flexibility because of the ability of the state to avoid balance of payments crises by paying for trade in their own currency. This ability to spend and buy abroad without increasing the balance of payments deficit further enhances the economic policy options available to a country (163).
• Reputation, as having a major currency serves as a form of soft power in international relations (163).
• Leverage, as issuing a major international currency means that you can limit the access of other states to this currency. Limiting or ending access to an important international currency can be used to influence other states (163).
• Most of the benefits of being the issuer of an international currency are likely to develop as soon as it becomes international, whereas there are downsides that develop over time. These mainly involve the accumulation of excessive international liabilities, a situation enabled by their position as a major international currency. This is expressed through increased doubts in the ability of debts to be repaid or for the currency to remain useful, threatening a massive abandonment of the currency (163).
• Switches to another international currency are slow to occur, however, due to inertia in the international currency system. This is shown through the continued use of the British pound several decades after the UK stopped being a major economic power (163-164).
• Money serves three functions -- means of exchange, units of account, and store of value -- in both private markets and in state policy. These roles and functions are expressed differently in private and public accounts in international analyses (164):



page 165	Medium of exchange	Unit of account	Store of value
Private	Foreign exchange trading In most currency trading, a 'vehicle currency' is used to facilitate exchange between largely unrelated currencies. In current trading, the US dollar is the vehicle in 86% of all transactions, with the euro and yen trailing behind. Being a vehicle currency can reduce transaction costs for national businesses, but has no larger impact on the power states can wield (166).	Trade invoicing Any international trade must select a single currency to pay wages and price goods. For ease, most invoices are given in a major currency, with over half in US dollars and another 20% in euros. The US dollar's centrality is due to the prominence of the USA as an exporter and importer, as well as the fact that many goods and commodities markets already run in US dollars. Being an invoicing currency eliminates the risk of changes in exchange rates for businesses and increases the market for finance in that currency, but has no larger impact on state power (167).	Investment in financial markets Financial portfolio managers typically invest in multiple currencies to reduce risk. Around 45% of these investments are held in US dollars, with perhaps a third held in euros, and the remainder in yen and some elite currencies. Being a major currency in financial markets increases a currency's seignorage, provides more business for national banks, and enhances autonomy regarding balance of payments since there is a large market for debt in that currency. In certain cases where there are few stable markets for investment, controlling the dominant currency can be used to influence other countries as well, although this could generate fear of future coercion and limit the appeal of that currency (167-168).
State	Intervention currency This is the currency chosen by the government to be bought or sold in order to align the exchange rate. Since this currency has to have a large market, it needs to be a major currency, with the US dollar being used over 80% of the time, followed by the euro and yen. This does not directly affect state power, but it means that the currency policies of the two issuing state and the other state now impact each other by changing the exchange rate (169-170).	Exchange rate anchor Those states that choose to anchor their currency value to others either select a major currency or a basket weighted with major currencies. Over 60 countries, including China, anchor their currency value to the US dollar, while around 40 anchor to the euro. These anchors generally improve the stability, and thus size, of trade relations between the anchor country and the central country. Being the central country increases soft power for being at the center of a bloc, but may reduce autonomy versus those attached countries (169).	Reserve Except for a minority held in gold or Special Drawing Rights, most reserves are held in liquid currency, usually a small number of major currencies. Over half of global reserves are in US dollars, with euros constituting around another 25%. Being a reserve currency increases seignorage and also provides business opportunities for banks of the issuing country to manage those reserves. Autonomy is increased by being a reserve currency because foreign banks are more willing to buy debt to accumulate reserves, but actualizing this power can frighten investors and potentially harm the economy (170-171).

• Although the use of a currency in all six roles has an economic impact, only the use of a currency in its international store of value function enhances the autonomy and power of the issuing country (171). If the logic behind the selection of reserve currencies are taken into account, then the three roles that affect state power are trade invoicing, financial market investment, and reserves (173).
• Currencies can be used in their international store of value function by private actors without being common in foreign exchange trading or trade invoicing because currencies in financial market investment are used to diversify and limit risk, as well as open access to capital markets in that currency. So, these functions are not interlinked for private actors (171-172).
• States also prefer currencies with stable values and strong liquidity and convertibility, but are choose different currencies for these functions. Reserve currencies are determined somewhat by whether currencies are anchored, but also by commercial relationships, as countries will tend to hold reserves in currencies that they use in imports, exports, or commodity markets (172).
• Combined dominance of all three powerful roles -- reserves, financial markets, and trade -- grants the issuing country "exorbitant privilege", as stated by Charles de Gaulle (174).
• Of these roles, the prominence of a currency in global reserves has the greatest impact on power since it allows a state to directly pressure other governments, as opposed to indirectly applying pressure through markets; additionally, countries have greater choice in currencies for investment than they do in reserve currencies, meaning that there are fewer opportunities to evade pressure from a dominant issuing country (173).
• This is reflected in historical development, in that major reserve currencies were used solely in financial investment before being used as reserves. Many countries today are used in financial markets, but not in reserves (174).
• The American dollar is currently at the top of the global currency pyramid, although there are other 'top currencies' that can perform multiple functions at the international level. These other 'patrician currencies' are the euro and the Japanese yen, potentially joined by the Chinese yuan in future years. Below the patrician currencies are 'elite currencies' with limited international usage, like the British pound, Swiss franc, or Canadian dollars (164-165). 
• Some have predicted that the euro will replace the US dollar as the leading international currency, but this seems increasingly unlikely as the 2008 financial crisis left the US dollar as the leading currency but the 2010 sovereign debt crisis devastated the Eurozone and limited the use of the Euro to Europe and some parts of Africa (164-165).
• For those countries, like Brazil, Russia, India, and China, that wish to have their currencies play a greater role internationally, the analysis produced by the author suggests they should try to enhance the role of their currencies in reserves. This, in turn, can be done by developing their financial markets, increasing capital supplies, and making access to these markets convenient, as well as promoting a wider use of their currency in their commercial relationships and trade invoicing (174).