A Global Credit Money Perspective on the State

The past decades have seen scholars move away from the intuitive assumption that states are the crucial building blocks of the international monetary system. Although it was always recognized that states impact each other, these interrelations were often conceptualized in terms of self-contained monetary systems, whose operation is assumed to be under the control of the state. Long after the Bretton Woods System ended, the international dimension of the monetary system was theorized in terms of cross-border money flows, primarily by managing the conversion of national moneys through exchange rate arrangements. This line of thought shaped the Mundell-Fleming model (Fleming Reference Fleming1962; Mundell Reference Mundell1963), which is the basis for influential analytical frameworks such as the macroeconomic trilemma (or “impossible trinity”) (Frieden Reference Frieden2015). According to the trilemma, states can only choose two of the following three policy objectives: fixed exchange rates, international capital mobility, and an autonomous monetary policy.

IPE scholars have done a lot to challenge the Mundell-Fleming perspective on the international monetary system. A first generation of IPE scholarship on international money has taken a step away from the Mundell-Fleming model by noting that the idea of “one nation, one currency” is an empirical chimera as national moneys are widely used in other countries (Cohen Reference Cohen1998; Helleiner Reference Helleiner1994). In their view, today’s global monetary system is shaped by currency competition (Cohen Reference Cohen1998, Reference Cohen2015; Strange Reference Strange1996). States compete internationally to foster widespread usage of instruments denominated in their national unit of account. Those states that succeed acquire a powerful tool of economic policy. For those states that fail, the money within their territory becomes subject to foreign rules. Key examples are the “dollarized” economies in the Global South, for instance in Latin America. This original critique of IPE stresses the cross-border usage of national currencies but still regards the creation of money as a national domain. Money creation is assumed to happen within the nation state, by the nation state, and still primarily for the nation state.

A new generation of IPE scholarship on international money—often operating in the context of “critical macro-finance” (Dutta et al. Reference Dutta, Kremers, Pape and Petry2020; Gabor Reference Gabor2020)—makes a second step away from the Mundell-Fleming world and emphasizes both the role of autonomous private money creation and of money creation that takes place offshore, outside of a state’s territory (Binder Reference Binder2019; Braun, Krampf, and Murau Reference Braun, Krampf and Murau2021; Gabor Reference Gabor2016; Gabor and Ban Reference Gabor and Ban2016; Gabor and Vestergaard Reference Gabor and Vestergaard2016; Mehrling Reference Mehrling2011, Reference Mehrling2015, Reference Mehrling2016; Murau Reference Murau2017a; Murau and Pforr Reference Murau and Pforr2020; Tooze Reference Tooze2018). In this literature, the monetary system is understood as a global payments system in which all money is credit money, whether physically printed or not. Money creation takes place when a private or public institution expands its balance sheet and issues a new monetary instrument, e.g., a deposit, against a loan or bond. Offshore money creation denotes that private institutions use a national unit of account, say the USD, to create USD-denominated money outside of the United States. Through these analytical moves, the recent scholarship acknowledges what the Bank for International Settlements has called the end of the “triple coincidence” when the monetary area, economic area, and decision-making area all coincided with a state’s territory (Avdjiev, McCauley, and Shin Reference Avdjiev, McCauley and Shin2015).

As we decouple the analysis of global money from nation-state centric categories, it is an open question what the remaining role of the state is vis-à-vis the global monetary system, and if and how it is possible to maintain ideas of states’ monetary sovereignty under such perspective. To explore this question, we present a conceptual framework that systematically introduces the key concepts used in current IPE scholarship on international money, explains how they are interrelated, and highlights four crucial features of the state in the global monetary system.

The first feature is the state’s role as a provider of units of account. A unit of account is a metric for denominating contractual obligations, which both public and private institutions use to denominate monetary instruments. For instance, the USD is the United States’ unit of account, the British pound (GBP) that of the United Kingdom, and the euro (EUR) that of the European monetary union. In common parlance, the United States are said to issue “the U.S. dollar”. Such phrasing tends to overstate the case. First and foremost, the USD is nothing that would physically exist. As a unit of account, it is merely a benchmark that is required to denominate assets and liabilities. Hence, a more exact wording would be to speak of USD-denominated instruments, some of which are issued by banks and other private financial institutions, and say that the U.S. Federal Reserve issues “USD-denominated currency”. Alfred Mitchell-Innes (Reference Mitchell-Innes1914, 151) states this crucial fact in saying that “the eye has never seen and the hand has never touched a dollar. All that we can touch or see is a promise to pay or satisfy a debt due for an amount called a dollar.”

It is, however, by no means necessary that the units of account used in the global payment system are provided by states. Rather, this is an empirical fact of our age that emerged from a specific historical trajectory (Helleiner Reference Helleiner2003). Private units of accounts are competing with the state prerogative, even though they have not reached a systemic role. Among those are cryptocurrencies such as bitcoin or tether, which fluctuate against state-based units of account (Hayes Reference Hayes2021). The planned idea for a Facebook currency called libra would have been a similar case, based on the introduction of its own non-state unit of account (Libra Association Members 2018). Central bankers justify current initiatives for the introduction of central bank digital currencies (CBDCs) as defending the traditional monetary prerogative of the state (Brooks Reference Brooks2021).

The second role of states in our framework is that they take over various functions in relation to the issuance of money. Rather than simply creating money themselves as assumed in the Mundell-Fleming world, states provide a “monetary jurisdiction” (Awrey Reference Awrey2017) as a legal space within which different institutions create different types of money, denominated in the state’s unit of account. We distinguish three segments of the money supply, in relation to each of which the state’s role takes different shapes.

First, public money is money issued directly by an institution that represents the state. The main instruments that correspond to the category of public money are central bank notes (or currency) and central bank deposits (or reserves). Today, public money is typically issued by an independent central bank, which uses the issuance of new money to pursue macroeconomic objectives outlined in a legal mandate (Garriga Reference Garriga2016; Lastra Reference Lastra2015). The introduction of a CBDC would add an additional instrument to the public money supply.

Second, private-public money is created by private institutions but guaranteed via explicit or implicit backstops by public institutions such as the central bank, the treasury, or off-balance-sheet fiscal agencies (Guter-Sandu and Murau Reference Guter-Sandu and Murau2022). Even though the direct control of money creation is in private hands, issuance of private-public money forms takes place in the context of a strict regulatory framework provided by the state. Issuers will often need a banking license, but also receive access to last -resort credit from the central bank and to deposit insurance that protects the customers of the issuer against default. Together, the guarantees serve to make private-public moneys for most economic purposes identical to public money forms. Straightforward examples of private-public money are insured bank deposits but the category also includes instruments such as overnight repos and shares of government money market funds if they are subject to public guarantees (Pozsar Reference Pozsar2014).

Third, private money forms are issued by private institutions but do not have any public guarantees. These money forms need not be used as a means of payment themselves but are often merely convertible into means of payment instantly at face value. Monetary history has witnessed multiple shadow money instruments come and go, for example, country bank notes in the eighteenth and nineteenth centuries, trust deposits in the nineteenth and twentieth centuries, as well as money market fund (MMF) shares, repurchase agreements (repos), and asset-backed commercial papers (ABCPs) in the twentieth and twenty-first centuries (Kindleberger and Aliber Reference Kindleberger and Aliber2005). Definitions of what counts as private money or shadow money vary (Gabor and Vestergaard Reference Gabor and Vestergaard2016; Pozsar Reference Pozsar2014; Ricks Reference Ricks2016), which is hardly surprising as the opacity of those instruments is often part of their issuers’ business strategy. Currently, scholars widely discuss if cryptocurrencies, in particular stable coins, are money and belong to this category (Fama, Fumagalli, and Lucarelli Reference Fama, Fumagalli and Lucarelli2019).

Since the money supply in a monetary jurisdiction is a mix of different types of money, the state has a different role in relation to each. Figure 2 represents this public-private hybridity of the monetary system as a hierarchical three-layered pyramid structure.

Figure 2 Public, private-public, and private money segments

From the conceptual perspective that we outline here, the defining feature that makes these instruments “money”—in contrast to other instruments denominated in the national unit of account such as stocks or bonds—is that they maintain a one-to-one exchange rate with each other (i.e., they trade at par). You can easily transfer one USD note (public money) into a bank deposit (private-public money) by paying it into your bank account and then shifting it into an uninsured money market fund (private money), or vice versa. This often conceals important differences between these instruments (Gabor and Vestergaard Reference Gabor and Vestergaard2016).

The public and private-public money forms we use today often originated as private money. They became systemically relevant over time, were subject to a bank run in a systemic financial crisis, and had to be turned into private-public money to prevent the monetary system from collapsing—a recurring process that Murau (Reference Murau2017b) calls “private credit money accommodation” (see figure 3). Today’s central bank notes, or currency, originated as private credit money in the seventeenth and eighteenth centuries, were “accommodated” in 1797 when the English Bank Restriction Act stopped gold convertibility and introduced a public guarantee for par clearance. The 1844 Bank Charter Act made them public money. Bank deposits are even older instruments that were turned into private credit money after the 1844 Act. In the United States, bank deposits were accommodated in 1933 when Franklin D. Roosevelt announced a 100% guarantee to end the Great Depression. MMF shares and overnight repos developed as “shadow money” in the 1970s and were accommodated in the 2007–2009 Financial Crisis through the emergency interventions of the Federal Reserve and the U.S. Treasury (Murau Reference Murau2017b; Wullweber Reference Wullweber2020). Accordingly, a money form is not firmly tied to one segment. Instead, private initiative can lead to the emergence of new money forms and state interventions can shift money forms around between the segments. Hence, states are not in the position to fully determine the structural setup of the money supply in their monetary jurisdiction but do have means to influence it.

Figure 3 Mobility of money forms between segments

The third feature of states in our framework is that they have some discretion over the degree of financial openness of their monetary jurisdiction. This is the underlying prerequisite for financial globalization, which not only pertains to capital account liberalization but crucially to the permission of offshore money creation (Braun, Krampf, and Murau Reference Braun, Krampf and Murau2021). The depiction of figures 2 and 3 assume that the public, private-public, and private forms of money are created in the monetary jurisdiction of a state, using that state’s unit of account as measure for denomination. This is the assumption that money creation occurs onshore. By contrast, offshore money creation takes place if institutions legally located in the monetary jurisdiction of one state issue monetary instruments denominated in another state’s unit of account.

For example, a French bank in London can make a USD loan to a Chinese borrower and—in the course of this—create USD-denominated deposits outside of the United States. This form of offshore money creation began in the 1950s on the Euro-currency markets (Helleiner Reference Helleiner1994), with the strong endorsement of the nexus between the City of London, the UK Treasury, and the Bank of England (Burn Reference Burn1999, Reference Burn2006). With the end of the state-centric Bretton Woods System, the private Euro-currency markets attained an increasingly important role. From 1974, the Eurodollar market—the Euro-currency markets’ core component—went global and became the backbone of the privatized international monetary system, centered around offshore USD creation (Braun, Krampf, and Murau Reference Braun, Krampf and Murau2021).

Not all credit money created offshore falls into the category of private money without public backstops. Through so-called swap lines, some central banks provide de facto backstops for credit money denominated in their unit of account in other monetary jurisdictions. The Federal Reserve and the ECB allow other central banks to provide USD and EUR-denominated credit money to their domestic banking sectors. In this way, both central banks have effectively put other central banks in the position to create public money in a foreign unit of account. This enables them to provide liquidity backstops to banks creating offshore bank deposits in their respective monetary jurisdictions, which then makes these deposits part of the private-public money segment. Other arrangements for backstopping banks are central banks’ foreign exchange reserves, regional financing arrangements, and IMF credit lines. In these different ways, states are able to provide support to offshore money creation in units of account for which they do not issue public money (Denbee, Jung, and Paternò Reference Denbee, Jung and Paternò2016; Mehrling Reference Mehrling2015; Murau Reference Murau2018).

Figure 4 integrates the onshore-offshore antagonism in our visualizations. The left part of the pyramid (dark blue) indicates the monetary jurisdiction, which is connected to the state’s unit of account. The right part (light blue) summarizes all other monetary jurisdictions, within which the unit of account is used for offshore money creation. Taken together, the whole pyramid visualizes the monetary area of the given unit of account.

Figure 4 Three segments and the onshore-offshore antagonism

The fourth and final feature of states in our conceptual framework is their hierarchical positioning towards each other in the international system. States occupy different positions in the international hierarchy of money, which gives them greater policy space, and strive to improve their relative positions. This approach draws on an understanding of the international monetary system as the entirety of monetary areas based on states’ units of account (Ito and McCauley Reference Ito and McCauley2018). Where the Mundell-Fleming model adopts a bottom-up view according to which all states are essentially equal building blocks, the recent IPE scholarship shows that states have a hierarchical relationship to each other that largely depends on the status of “their” unit of account in the international hierarchy of money.

The notion that the international monetary system is hierarchical is not new to scholars of IPE. In fact, notions of hierarchy have famously been used by first-generation IPE scholars on international money such as Strange (Reference Strange1971) and Cohen (Reference Cohen1998) who attribute a different status to different currencies, for instance top currency, patrician currency, elite currency, plebeian currency, permeated currency, quasi-currency, and pseudo-currency. These scholars, however, remain to a certain extent in the framework of the Mundell-Fleming model and assume that within the group of principally equal states, some issue a more important currency than others. In our framework, the international hierarchy is mainly a hierarchy of units of account, depending on the volume of their onshore and offshore usage. This determines the hierarchical position of the monetary area, which in turn shapes the position of the state in the international hierarchy, which again has substantial political implications for that state’s policy space.

On all accounts, the unit of account at the apex of the international hierarchy is the USD. It has the most sizeable offshore component, which extends the scope of its monetary area far beyond the U.S. monetary jurisdiction. Granting a paramount global role to the U.S. state and its institutions, it pushes all other monetary jurisdictions into a peripheral position to the US (McCauley Reference McCauley2020). However, a point of contestation is how the international hierarchy takes shape below the apex. Traditional measures include the volume of currencies held in central banks’ FX reserves (Eichengreen, Mehl, and Chiţu Reference Eichengreen, Mehl and Chiţu2017) or the shares of turnover in FX transactions (Fritz, de Paula, and Prates Reference Fritz, de Paula and Prates2018).

To depict the international hierarchy, figure 5 presents an idealized, incomplete sketch of the international hierarchy of monetary areas, using a variety of different units of account as examples. Following Murau, Pape and Pforr (Reference Murau, Pape and Pforr2021), it orders jurisdictions with the international hierarchy in terms of access to the key currency in today’s Offshore USD System. The highest layer is occupied by the USD. In the second layer, we find the euro area, which has the second largest offshore component after the USD, as well as Japan and the United Kingdom. Central banks in these monetary jurisdictions do not issue USD-denominated instruments themselves, but have access to the permanent unlimited USD swap lines of the Federal Reserve. On the level below, we find monetary jurisdictions such as Denmark, Australia, Brazil and South Korea, which have temporary limited USD swap lines. Most jurisdictions lack any access to swap lines and are situated in the lowest layer of this hierarchy.

Figure 5 The hierarchy of the Offshore USD-System

The international hierarchy of money is not static; the relative importance of units of account and states is in permanent flux. The United States attained its dominant role in the interwar years when the British Empire lost its monetary hegemony (Harris Reference Harris2021). The euro started as an attempt to establish a monetary counterweight to the USD, aiming to improve Europe’s position in the international hierarchy (COM 1990). Its introduction has indeed had a major effect on the composition of the international hierarchy. Our figure also depicts Chinese efforts to further increase the offshore use of the renminbi (“RMB internationalization”) as the political attempt of the government in Beijing to promote China’s role in the world (Eichengreen and Kawai Reference Eichengreen and Kawai2015) and eventually position itself as a competing monetary bloc outside of the U.S.-dominated Offshore USD System (Murau, Rini, and Haas Reference Murau, Rini and Haas2020).

In sum, we conceptualize the international monetary system as a doubly hierarchical construct in which states provide the major units of account that are used to create different types of public, private-public, and private money—both onshore and offshore, and embedded in a multi-layered international hierarchical structure. This raises the question whether and how states can still have monetary sovereignty, which is the topic to which we now turn.

Beyond Westphalian Monetary Sovereignty

Today, the concept of monetary sovereignty is predominantly used following a conception that we refer to as Westphalian. According to the Westphalian conception, monetary sovereignty consists in the ability of states to issue and regulate their own currency. Using the conceptual framework developed earlier, we raise four objections to the Westphalian conception. This allows us to then propose an alternative understanding of sovereignty.

The concept of monetary sovereignty is closely connected with the broader notion of state sovereignty. Although the concept has historically been used in a wide range of divergent senses (Loick Reference Loick2019; Philpott Reference Philpott and Klosko2011), it has often been taken to involve issuing a national currency (Proctor Reference Proctor2012). The sixteenth-century thinker Jean Bodin, who introduced the concept, explicitly names the ability to coin money as one of the defining aspects of sovereignty (Bodin Reference Bodin and McRae1961). The concept of sovereignty that today informs international law is a conception of state sovereignty that focuses on the right of states to exercise power over a territory without interference from other states. Originating in the nineteenth century it is widely referred to as “Westphalian” after the seventeenth century treaty that ended the Thirty Years’ War.

In the monetary realm, international law defines monetary sovereignty as the right of states to make decisions with regard to their national currency. The legal principle of monetary sovereignty originates in a 1929 ruling of the Permanent Court of International Justice. In the so-called Serbian Loans Case, the court stated that “it is indeed a generally accepted principle that a state is entitled to regulate its own currency.” Theorists of sovereignty have explored this principle by distinguishing an internal and an external dimension (Proctor Reference Proctor2012, para. 19.02-8; Zimmermann Reference Zimmermann2013). Internally, monetary sovereignty refers to the right of a state to issue a national currency, regulate its use within the territory, and use monetary policy to achieve domestic policy objectives; externally, it refers to the ability to set the exchange rates. Used in this way, the Westphalian conception is informed by a vision of money closely connected to territory. It envisages a world where three features of states coincide: authority over the issuance of money, jurisdiction over a territory, and the use of money within that territory.

Outside a narrow legal context, the concept of monetary sovereignty typically denotes that a state issues a national currency that is widely used within its territory (De Grauwe Reference De Grauwe2012; King Reference King2016; Lastra Reference Lastra2015; Mabbett and Schelkle Reference Mabbett and Schelkle2015; Mitchell, Wray, and Watts Reference Mitchell, Wray and Watts2019; Proctor Reference Proctor2012; Zimmermann Reference Zimmermann2013). Despite its widespread use, we argue that the Westphalian conception is not a particularly useful way to think about monetary sovereignty. We raise four objections.

Our first objection of the Westphalian conception is the narrow conception of the monetary system that informs it—it is focused on the public onshore segment of the monetary system. Today’s international monetary system is hierarchical and dominated by private money forms. The most important and hierarchically highest currencies also have a sizable offshore component and more prolific private-public and private money segments at the expense of the public money segment. Monetary jurisdictions that have high volumes of onshore public money forms exist at the very periphery of the global system. Bangladesh, for instance, has a proportionally large public money segment (Bangladesh Bank 2021). At the same time, there is no or very limited offshore Taka creation. The focus on public money is least accurate exactly when it comes to the world’s key currency. Within the United States’ monetary jurisdiction, the public money segment is relatively small compared to the private-public and the private segments. Within the private-public and private segments, moreover, the volume of USD issued offshore is larger than the volume of onshore USDs (Aldasoro and Ehlers Reference Aldasoro and Ehlers2018). No adequate conception of monetary sovereignty can omit these key segments of the money supply.

Second, the Westphalian conception obscures the very different positions of states within the global credit money system (Alami et al. Reference Alami, Alves, Bonizzi, Kaltenbrunner, Koddenbrock, Kvangraven and Powell2021; Cohen Reference Cohen2015; Fritz, de Paula, and Prates Reference Fritz, de Paula and Prates2018; Jones Reference Jones2020; Pistor Reference Pistor2017). Although both the United States and Bangladesh issue a national currency for use within the state’s territory—i.e., are equally sovereign in the Westphalian sense—they take up very different positions in the international hierarchy of money. Since Bangladesh is highly reliant on the USD for trade and finance, it seeks to stabilize market fluctuations of its exchange rate (a so-called “managed float”). Its monetary policy is constrained by this objective, but monetary policy is only part of the story. As its domestic firms borrow in USD, its economy is structurally dependent on foreign lenders (Iqbal Reference Iqbal2019). The key role of the USD in the global credit money system gives the U.S. banking system a key edge over competitors and the Fed a powerful voice in shaping global banking regulation at the Basel Committee and other global regulatory fora. Bangladesh finds crucial parts of its banking system outside of its jurisdiction and is unrepresented in deliberation on global banking regulation. To stabilize its currency, Bangladesh holds a record of 46.4 billion USD in low-yielding currency reserves, while paying over 8% interest on its sovereign bonds (Bangladesh Bank 2019, 2021). The currency reserves are largely held in USD-denominated sovereign bonds. The functional role of U.S. government debt as currency reserves and private sector collateral allows the United States to fund historically unprecedented debt levels at much lower rates. Where the existing monetary system allows the United States to achieve a range of economic policy objectives, the same is not true for Bangladesh. However, from a Westphalian perspective, both states are equally sovereign.

Third, as a consequence of its neglect of private and offshore money, the Westphalian conception overstates the importance of the ability of states to issue a national currency. This becomes clear if we look at one of the most important developments in the international monetary system in recent decades, namely the introduction of the European monetary union. According to the Westphalian conception, all countries that have joined the euro have given up their monetary sovereignty. To see that this is too simplistic, compare a euro area country such as the Netherlands with an opt-out country such as Denmark. In joining the euro, the Netherlands gave up its national currency, the guilder, and no longer sets its own monetary policy. Instead, monetary policy is made by the Governing Council of the European Central Bank (ECB), where Dutch interests are represented by its central bank governor. Membership in the European monetary union clearly affects how states pursue their domestic economic policy objectives, but that does not mean that they are more constrained than countries whose currency is pegged to the euro. The Danish krone is pegged to the euro at a fixed exchange rate, which precludes its use for pursuing an independent monetary policy (Wood Reference Wood2018). The Dutch banking system benefits from membership in the monetary union and Dutch banks continue to be important players in the global credit money system. There is of course a longstanding debate over whether a monetary union is actually the right choice for any given state (Gadha et al. Reference Gadha, Kaboub, Koddenbrock, Mahmoud and Sylla2021; Mody Reference Mody2018; Pigeaud and Sylla Reference Pigeaud and Sylla2021). However, despite lacking Westphalian monetary sovereignty, it is far from clear that the Netherlands is placed less favourably in the global monetary system than Denmark (Verdun Reference Verdun2022).

This brings us to our final objection to the Westphalian conception, which is that it is too restrictive in its vision of what constitutes good economic policy. An adequate conception of monetary sovereignty should be compatible with a range of broader empirical and normative background assumptions. Similar to concepts such as “freedom” and “well-being”, the question of what constitutes “sovereignty” is itself a legitimate topic of political disagreement. Using it almost synonymously with specific policy prescriptions obfuscates the difference between monetary sovereignty and particular policies that contribute to it. Proponents of modern monetary theory, for example, have claimed that states only have monetary sovereignty if they meet all of three conditions: First, they issue a national currency in which they collect taxes, whose exchange rate is, second, floating and non-convertible, and, third, they have no foreign-currency denominated debt (Mitchell, Wray, and Watts Reference Mitchell, Wray and Watts2019). To define it in this way reduces monetary sovereignty to a set of contested policy prescriptions, thereby seemingly resolving genuine political disagreement on a conceptual level (Bonizzi, Kaltenbrunner, and Michell Reference Bonizzi, Kaltenbrunner and Michell2019). A less prescriptive conception invites more sustained debate over what actually improves the position of states in relation to money.

Together, these four objections demonstrate that the Westphalian conception is simply inadequate. It is not a useful way to think about how the global monetary system helps or hinders states. As it does not track any weighty interests, it is of little help in exploring the rights and duties of states in the global monetary order. Consider the assertion that states should protect their own and respect other state’s monetary sovereignty. Relying on the Westphalian conception, that claim may require too much from states. Sometimes states have to take measures to regulate the economy that are required as a matter of justice but limit their autonomy with regard to their national currencies. Respecting Westphalian sovereignty may also require too little. Westphalian monetary sovereignty may fail to provide states with the actual ability to govern money within their territory. Since it does not refer to something that should matter much to states, the Westphalian conception easily leads moral reflection astray and is to be abandoned.

Should that observation lead us to declare the death of monetary sovereignty altogether, as Strange (Reference Strange1996) and Cohen (Reference Cohen1998) have suggested? We think that its widespread use in academic discourse and international politics should lead us to rethink rather than abandon the concept. In fact, turning to the literature on political sovereignty, it is clear that the Westphalian conception is not the only way of defining monetary sovereignty. Political theorists have long challenged Westphalian conceptions of state sovereignty as a normative benchmark for international relations (Dietsch Reference Dietsch2011, Reference Dietsch2015; Jackson Reference Jackson1992; Ronzoni Reference Ronzoni2009, Reference Ronzoni2012). These authors, too, have raised the worry that a narrow focus on non-interference is both too demanding and not demanding enough. It is too demanding in that it sees treaties in which states give up selected legal competences as reducing sovereignty, even where these treaties improve the capacities and resources available to states to achieve their domestic policy objectives (Ronzoni Reference Ronzoni2012). It is not demanding enough since it requires little more from other states than the absence of interference (Jackson Reference Jackson1992, 40–47). States can retain the legal competences to issue and enforce regulation while lacking the capacities and resources to achieve their domestic policy objectives. A thoroughly unjust order of weak states can respect national borders.

The theory of political sovereignty has therefore undergone a substantial change, moving beyond the Westphalian conceptions of state sovereignty to a conception of effective sovereignty. Political theorists have argued for a renewed focus on the policy options that are available to states and the outcomes that they can achieve (Dietsch Reference Dietsch2011, Reference Dietsch2015; Jackson Reference Jackson1992; Ronzoni Reference Ronzoni2009, Reference Ronzoni2012). Invoking the classic distinction of Isaiah Berlin between negative and positive liberty (Berlin Reference Berlin1969; Jackson Reference Jackson1992), they reject the legal conception’s focus on non-interference and instead highlight the importance of normatively valuable outcomes that states can achieve. Understood in a “positive” or “effective” sense, sovereignty is then taken to refer to “the substantive problem-solving capacity of states and to their ability to make meaningful and genuinely discretionary choices on a range of issues” (Ronzoni Reference Ronzoni2012, 574). A similar turn, however, has not taken place regarding the concept of monetary sovereignty, which reflects the modest size of the existing normative literature on the state in relation to the global monetary system (Bruin et al. Reference Bruin, Herzog, O’Neill, Sandberg and Zalta2018; Dietsch Reference Dietsch2021; Herzog Reference Herzog2019; A. James Reference James2012; Reddy Reference Reddy2003; Viehoff Reference Viehoff2018). We therefore propose to make this overdue turn in our understanding of monetary sovereignty and move from the Westphalian conception to a conception of effective monetary sovereignty.

Effective Monetary Sovereignty

Rather than focusing on the issuance of national currencies and the absence of foreign interference, effective monetary sovereignty concerns what states are able to achieve within the confines of the global credit money system. We define effective monetary sovereignty as the state’s ability to use its tools for monetary governance to achieve its economic policy objectives.

Since we propose a conception of monetary sovereignty and not an empirical benchmark or policy prescription, our account does not imply any particular vision of how states should govern their monetary systems. What objectives states pursue is their decision to make. In the postwar era of “embedded liberalism,” states often subordinated their economic policy to full employment, while post-1980s monetary orthodoxy emphasized price stability and economic growth as overriding concerns (Blyth Reference Blyth2002; COM 1990; Monnet Reference Monnet2018). Today, policymakers are increasingly concerned about financial stability, climate change, and biodiversity loss (Paterson Reference Paterson2021; Smoleńska and van ’t Klooster Reference Smoleńska and van ’t Klooster2022). Effective monetary sovereignty concerns the state’s ability to set its economic policy objectives and govern money accordingly.

How the state governs money takes different shapes in relation to the three segments of money within its monetary jurisdiction (see figure 6). The Westphalian conception of monetary sovereignty is focused on public money forms, which are indeed directly issued by public institutions. In this sphere, monetary governance involves direct control over the issuance of money. The private-public segment consists in money issued by banks and other private institutions within a strict public legal framework. Bank deposits and other means of payment benefit from public guarantees but are subject to strict regulation. A distinct private segment escapes the strict regulatory regime for banks but is still subject to its own regulatory framework. Here, effective monetary sovereignty is limited to efforts to manage the money supply.

Figure 6 Monetary governance and the three segments of the money supply

Effective monetary sovereignty fits the existing hybrid monetary system, in which central banks issue public money as a low-risk instrument, while more risky lending is left to private institutions. Such a hybrid monetary system, if it functions well, combines the advantages of various public and private arrangements (Hockett and Omarova Reference Hockett and Omarova2017). Full reserve banking and sovereign money proposals reject hybridity in favor of a purely public monetary system (Jackson and Dyson Reference Jackson and Dyson2012; Weber Reference Weber2018), while free bankers favor an entirely privatized system (Hayek Reference Hayek1976). Among those who support a hybrid system, there remains a broad range of options from financial systems subject to strict credit controls (Bezemer et al. Reference Bezemer, Ryan-Collins, van Lerven and Zhang2021; Monnet Reference Monnet2018) to the laissez-faire approaches associated with pre-crisis Basel II regulation (Tarullo Reference Tarullo2008). Our conception of monetary sovereignty is compatible with these different approaches to monetary governance.

Although there is no a priori connection between our conception and any particular segment, monetary sovereignty manifests itself in very distinct ways in the individual segments of the credit money system. To flesh out what it means for states to make their own economic policy within the constraints set by the global credit money system, we will now analyze the different ways in which states can govern money.