Currencies and Globalization: Lessons from History

This paper examines the role of currencies at moments of geopolitical shifts and in particular the “Thucydides dilemma” in which a strong state whose power is perceived as declining might have incentives to use financial power to strike against a weaker but rapidly growing rival. The paper examines in turn the use of seigniorage, the advantages for public sector borrowing, the creation of financial assets (a tool that is no longer exclusively – or indeed even principally – in the hands of governments), the role of currency manipulation in export promotion, and finally the direct security relevance of currencies. Using the experience of the early 20^th century as a test case, the paper examines two alternative strategies for would-be or rising powers: the more costly and destructive one of creating a completely alternative financial world or the system-reinforcing option of developing a complementary financial order.