The projection of military, economic and monetary power is a defining characteristic of hegemonic states, with each facet reinforcing the other. It is, therefore, no coincidence that for over the past two centuries, the country possessing the dominant currency also possessed paramount material force. While the days of inter-imperial rivalry have passed, military and currency power still remain an integral part of a hegemon’s arsenal.
The US, in possession of the world’s largest economy, has the unilateral ability to issue dollars, which allows it to have considerably lower borrowing costs, enabling it to afford a preponderant military force. This capacity to mobilize resources with a reserve currency ultimately depends on the creditworthiness of the issuing government – which the dollar has the advantage of having built up over the course of the last two centuries. Even in times of crisis, the attraction of the dollar has been unyielding and countries continue to actively participate in dollar regimes. But what exactly accounts for this persistent attraction? Where is it rooted and why does it endure? More notably, how does it complement US power projection capabilities?
Conceptualizing Money as Power
In theorizing power, perhaps the most common definition is as an instrument, or as a material resource. The canonical example is traced to the work of Robert Dahl, who defined power as the ability of A to get B to do something B would not otherwise do. Power in this sense is a form of coercion, linked to some set of resources used intentionally by one agent against another. Relevant resources might take any number of forms, from military power to propaganda. The key point is that they are wielded by one agent against another with the intention to force the second agent to do something against their will. On the other hand, an institutional definition of power might focus instead on the rules governing some particular social domain or issue, and then identify the ways in which those rules – or institutions, in a broad sense – determine outcomes.
For instance, in some international organizations the voting rules are one state one vote; in others, the voting rights are weighted in certain kinds of ways. It is not very illuminating to talk about the institution or the rule being used instrumentally – in a sense, no one controls the rules as a resource. But by their nature they determine who can do what, and the outcome of different kinds of disputes. For example, in the 1980s and 1990s, the US pushed for intellectual property negotiations to move from WIPO to the WTO, because of different voting rules in the two organizations. Those in the former favored smaller states – one state one vote – those in the latter favored larger states like the US.
To conceptualize power as a relational concept as David Baldwin does, rather than a possession, is to resist the money-power analogy as advocated by neorealist thinkers such as Stephen Waltz. Resulting from social exchange literature, such an approach treats power as a tangible resource to be exchanged in an interaction for influence. This analogical rejection is rooted in the three major elements of Baldwinʼs power analysis: the limited fungibility of power, the multidimensional character of power, and the relational analysis of time- bound policy-contingency frameworks. The question of the limited fungibility of power in juxtaposition to the high fungibility of money rests on two characteristics: high liquidity dependent upon functionality as a standard of value. Unlike money, power resources cannot be easily converted from one sector of the system to another, making it difficult to assess the overall power of an actor. As Baldwin observes:
The owner of a political power resource, such as the means to deter atomic attack, is likely to have difficulties converting this resource into another resource that would, for instance, allow his country to become the leader of the Third World. Whereas money facilitates the exchange of one economic resource for another, there is no standard measure of value that serves a medium of exchange for political power resources.
Thus, the multidimensional nature of power is apparent due to its low fungibility. An effective approach to power then dictates a prior contextual analysis, otherwise a (perceived) threatening action initiated by A towards B, where Bʼs value system does not correspond in accordance with the threat, renders the coercive capacity of the threat moot. By invoking the three faces of power by Steven Lukes, it would appear that the hegemony of the dollar is embedded in a triumvirate of power dimensions within which it manifests: the first (observable conflict), second (agenda setting) and third (ideological), making it hard to determine the exact nature of its power relation.
Soft Power and Attraction
As applied to power in the realm of international security, the metaphorical expression ʻsoftʼ is meant to convey an intangible quality that finds expression in a concrete manifestation. Joseph Nye, who coined the term “soft power” in a 1990 article published by Foreign Policy, defines it in the context of the changing nature of power in international affairs as the ability to achieve desired outcomes through attraction (cultural, ideological, institutional) rather than coercion by conventional ʻhard powerʼ resources. Persuasion, it is argued, is fundamental in constructing attraction. In order to sustain soft power, the role of credibility is augmented as a crucial power resource, and reputation becomes integral as “political struggles occur over the creation and destruction of credibility”. It is asserted that soft power works intrinsically by attraction, since convincing others to follow based on the appeal of oneʼs ideas is the aim. However, for example, accounts of soft power instruments such as foreign aid, cultural exchanges, and economic assistance as means to bring about desired ends are contentiously “soft” at best. The coercive implications of such policies go unnoticed because of the metaphor “soft”, relegating them to the margins when outcomes of such applications are further examined.
Furthermore, it also raises some questions about the subjective nature of attraction and what makes something alluring in the first place. In her seminal piece on representational force, Janice Mattern bemoans the lacunae in International Relations (IR) scholarship concerning the concept of attraction in world politics, suggesting that the logic of soft power articulated by Nye is incomplete and ultimately recursive since the dynamic of influence within soft power – attraction – is layered with internal contradiction. Mattern argues that the modus operandi of attraction in soft power discourse is premised upon unexamined assumptions about either its inherent naturalness or a Habermasian form of communicative action whereby attraction is actively constructed through the act of argumentation. This leads her to the conclusion that soft power is ironically rooted in hard power, where attraction rests upon coercion the logic of a distinction between soft and hard forms of power becomes unsustainable. Certainly the form of coercion (and ʻhardʼ power) to which attraction (and ʻsoftʼ power) is indebted is sociolinguistic rather than physical, but it is coercive nevertheless. In this way, soft power is not so soft after all.
Magnetism of the Dollar
In Power of Currencies and Currencies of Power, Wheatley remarks that the “US markets for bonds, shares and derivatives are unrivaled in their depth and liquidity. Central banks and big investment institutions know they can sell billions of dollars of US treasury bonds and bills without the prices flinching”. Underpinning this is a trust by investors in US dollar markets. Trust, as Wheatley mentions, “is a fundamental, if intangible, characteristic of a reserve currency, built up over decades as rules and institutions develop to ensure markets are not manipulated, contracts are enforced by impartial courts and ownership rights are respected”. Whether such trust is warranted is another matter of course.
Apart from engendering geopolitical clout, “the dollar both reflects and magnifies US soft power”. This can be thought of in a sense that an attractive image projection of a currency in broad circulation becomes a something like a status symbol – “a visible sign of elevated rank in the community of nations” – that shapes the preferences of others. The significance of this cannot be downplayed, especially in a fiat money system, where without the tangible backing of a commodity or resource, a currencyʼs value depends on whether people think it is valuable. As Wheatley contends, “a myriad of non- economic influences reinforce the dollarʼs hard power, and vice versa, making it the worldʼs ʻmoneta francaʼ in the same way English is the lingua franca”. The greater the number of people who speak English the greater the incentive there is to learn it, and the same principle applies to the dollar here. Besides, it can be costly and inconvenient to sever the link altogether, particularly with no viable alternatives or mature competitors on the near horizon.
There are advantages to incumbency; using one currency internationally comes naturally and is seen as more efficient than the alternatives. Moreover, it cannot be denied that the dollarʼs leading role in foreign exchange transactions also is fortified by its widespread use in the invoicing of international trade. Oil markets are a special case-in-point here. OPEC switched to trade in dollars in 1975 and continues to. Today all major crude oil futures contracts, vital for hedging, are dollar denominated. Oil, an indispensable commodity that the global economy needs in order to run, being a trade that is entirely dollarized, inserts enormous incentive for nations to continue participating in the dollar regime. As a result, every nation has to purchase huge amounts of dollars for its national reserves in order to maintain its ability to purchase required energy supplies. This also applies to any number of other international traded commodities, and the ease by which dollars can be bought and sold from banks worldwide makes the currency the ubiquitous choice in global trade and undeniably appealing.
Albert Hirschman emphasizes how the configuration of economic relations between nations can transform the calculus of political interest. States, as well as private actors that use the dollar (and those holding dollar reserves), invariably develop a vested interest in defending the currency’s value and stability. For once pumped globally, it becomes more than just the USʼs problem; it becomes the problem of all dollar holders. Even those pegging their currency to the dollar have an interest in the future of the dollar without being sizeable stakeholders, as they inevitably accumulate dollar denominated assets. The testimony by former US Treasury Secretary John Connally, “Itʼs our currency but itʼs your problem” encapsulates this fact.
As long as the dollar retains its attractiveness abroad, it continues to receive explicit benefits that the US enjoys in its sustained ability to run deficits on international accounts, take risks, and adopt economic policies that would otherwise elicit strong disciplinary response from international markets. Hence, a key currency role that the dollar provides to the US is not only the overt power through enhanced autonomy and discretion but increased political influence and capacity through structural power. Simply by sheer size, a dominant state creates the context which political interactions can take place, without even being actively aware of it. Thus, any discussion of the dollar’s hegemonic status must take cognizance of the context of US structural dominance through agenda setting – which Susan Strange defines as “the power to decide how things shall be done, the power to shape frameworks within which states relate to each other”.
The source of dollar hegemony has largely been due to the construction of an international order by the US, using its unassailable hard power post-WII to become the driving force behind a construction of a rules-based liberal institutionalism with it placed at the center. By virtue of its material power capabilities, the US has been able to persuasively influence all other players on the geopolitical chessboard by rewarding or punishing accordingly, thus accounting for much of its political and diplomatic power as well as its power projection abilities. For this reason, the dominant position of US hegemony rests ultimately upon the pillars of military superiority and its control of the global economic system through the unique role of the dollar as the reserve currency. Factors such as prestige, credibility and trust add to the allure of the dollar and deepen its intransigence.
While the recent financial crisis triggered uncertainty about the future of the dollar as the reserve currency, the structural power that the US still possesses allows it to not only decide the agenda, but also the framework within which all actors end up relating to one another. It is no wonder then that French President Charles De Gaulle famously denounced the “exorbitant privilege” conferred to the dollar.