Ousmène Jacques Mandeng: The Geography of Money

2018-05-18 IMI

This article first appeared in The Bulletin published by OMFIF in May 2018. A longer version of this article was presented at the LSE-Reinventing Bretton Woods Committee Conference: Innovations in global financial governance and the role of emerging economies, in Buenos Aires on 18 March. Ousmène Jacques Mandeng, Visiting Fellow at the Institute of Global Affairs at the London School of Economics. The quest for international currencies is not new. The 18th-century Maria Theresa thaler was one of the first international currencies and may be considered something of a model for bitcoin. The denationalised properties of the cryptocurrency have highlighted the advantages of such currencies. The case for international currencies is based on the premise that national currencies are ill suited to serve as international ones. The dollar is widely used, but the Federal Reserve pursues national policy objectives and is accountable only to the US Congress. There is or may be a fundamental conflict of interest between the monetary needs of the US and the rest of the world, and the Fed will always address the former. The Maria Theresa thaler was one of the main silver coins in Austria from 1741. It became a truly international currency from the middle of the 19th through the 20th century, long after it lost its legal tender status in 1852 and was withdrawn from circulation in Austria in 1892. The coin fuelled trade in Europe, the Middle East and Africa. Mints in Austria, but also Birmingham, Bombay, Brussels, London, Paris, Rome and Utrecht issued the coin and it circulated widely, from Sudan, Ethiopia, the northwest coast of Africa and Madagascar, to Turkey, Oman and as far as China. It served as legal tender in Saudi Arabia, Ethiopia, Nigeria, Yemen and Oman. The coin was popular because of its familiarity, high standard of quality and ornate design that made counterfeiting difficult. Bitcoin emerged in 2009. It represents a private, unreserved and convertible medium based on a pre-determined issuance algorithm. Its classification as currency remains disputed, and adoption and circulation continue to be marginal. Bitcoin aims to substitute existing monetary arrangements. It advocates strict peer-to-peer exchanges, eliminating dependence on banks, governments or other trusted centralised parties to conduct financial transactions irrespective of location. The bitcoin network is highly decentralised. It has more than 11,500 participants, or nodes, in 105 countries that validate and record transactions in a decentralised ledger, or blockchain. Many cryptocurrencies have emerged with similar or differentiated aims. The Maria Theresa thaler and bitcoin are private, deterritorialised currencies with decentralised issuance. The advantages of international currencies lie in internalising the transaction costs and valuation changes inherent in dealing in different national currencies. International currencies need to adapt only to changes in the international economy. Network effects As with the Maria Theresa thaler, network effects are critical for success. The thaler achieved adoption not by political power, as in the case of colonial currencies or treaties; the coin became a pure trading currency, in particular during the 20th century, because issuance and circulation happened outside sovereign interference. International currencies have a natural role to play in the global economy. The supply and demand of currencies to conduct international transactions should not be constrained by national monetary policy considerations. There is also no reason why currency areas should be congruent with national borders. Currencies can fulfil different functions, and while some may be best suited to conduct national transactions and serve common functions of money, others may take on more specialised roles. The Maria Theresa thaler was popular because it was minted to serve international trade and not a particular geography. The new cryptocurrencies seem, in principle though not yet in practice, the better currencies to take over that old idea.

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Ousmène Jacques Mandeng: The Geography of Money

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