Does Money Make the state? Political Development, the Greenback, and the Euro November 2003



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Does Money MaKE the state?

Political Development, the Greenback, and the Euro
November 2003


Kathleen R. McNamara

Associate Professor of Government

Department of Government and

School of Foreign Service

Georgetown University

Washington, DC 20057

Krm32@georgetown.edu

For helpful comments on earlier versions of this project, I thank Sheri Berman, Jerry Cohen, Frank Dobbin, Aaron L. Friedberg, Eric Helleiner, Jeffrey Herbst, Jacques Hymans, Nicolas Jabko, Jeffrey Kopstein, Michael Mastanduno, Jonathon Moses, Kirsten Rodine, James Savage, Steven Teles, Keith E. Whittington, Bill Wohlforth, seminar participants at University of California at Berkeley, Princeton University, Georgetown University, Brandeis University, Dartmouth College, Rutgers University, University of Toronto, and Johns Hopkins University. The Woodrow Wilson School at Princeton provided financial support for this research.



ABSTRACT
The recent creation of Economic and Monetary Union (EMU) in Europe challenges much of what we have come to take for granted about states and the components of sovereignty. What does the willingness of twelve European Union (EU) members to abandon their own currencies mean for the nation-states of Europe? Does the Euro automatically imply further political development at the EU level? To address these questions, this paper draws on the literature of comparative political development to parse out the role that national currencies play in statebuilding, and develops this approach with reference to the creation of a national currency in nineteenth century America. I argue that just as US federal authorities engaged in a political project to wrest control over money from subnational authorities to the center and unify the currency, so has European currency unification involved important changes in the location of legitimate authority. In particular, I highlight the role of war and market integration in prompting currency consolidation, and the importance of linkages between money and fiscal capacity for statebuilding, and apply the analytical lessons learned from the US experience to the case of the Euro and the future of European political development.

INTRODUCTION

The recent establishment of Economic and Monetary Union (EMU) in Europe seems to challenge much of what we have come to take for granted about states and the components of sovereignty. What does the abandonment of their national currencies by twelve European Union (EU) members mean for the political future of the nation-state in Europe? Does the Euro automatically imply further political development at the EU level—and should we therefore view the EU as a state in the making? Or is the relationship between currency and the structure of political authority weaker and more tenuous?


EMU has typically been studied from perspectives that make it difficult to answer these questions. Scholars have understood EMU either as a technical solution to an economic problem, or as an example of an intergovernmental cooperative regime, remaining silent on questions of political authority. This essay moves beyond these perspectives to examine the creation of the Euro through the lens of comparative political development.1 National currencies were largely created in the nineteenth century in tandem with the modern state, a contentious process of monetary consolidation involving power struggles over the rightful locus of authority and the nature of governance (Tilly, 1975; Poggi, 1978; Cohen, 1998; Helleiner, 2003). Studying these historical processes of currency creation and statebuilding may help us understand the implications of the Euro today.
One historical case of currency consolidation in particular, the antebellum United States (US), provides a striking analogy from which we might draw lessons for contemporary Europe. The Greenback we carry in our wallets did not appear with the initial founding of the US, but rather its creation during the civil war was part of a broader monetary consolidation that coincided with a gradual political transformation towards a more centralized and unified sovereign state. Just as US federal authorities engaged in a political project to wrest control over money from subnational authorities and unify the currency, so have the dynamics of currency unification in the EU involved important conflicts over the location of the legitimate exercise of control and rule. If indeed the Euro’s creation has historical precedent in the US case, we may learn something from an analysis of the parallels, and differences, between the two cases.
In this essay, I argue that just as political authority was consolidated in tandem with a single money at the US national level in the nineteenth century, so are similar processes of polity creation generating federal governance structures, albeit very unevenly, in the EU alongside the Euro. I draw out two lessons from the US case about the specific causal relationship between currency consolidation and statebuilding, and its value for understanding Europe today. First, the US-EU comparison highlights the importance of currency for statebuilding, as a successful national money strengthens the policy capacity and authority of the central state. But it also demonstrates the greater importance of fiscal policy linkages in furthering political development. While the federal takeover of currency creation in the US promoted statebuilding in a variety of ways, it was the role of a national currency in stimulating fiscal policy capacity and revenue extraction that locked-in political authority at the federal level. Because one of the key factors that prompted US leaders to create a national currency and expand fiscal capacity, namely, the demands of war fighting, is missing in the EU case, however, it less likely that fiscal policy developments, and thus political change, in Brussels will mirror that of the US.
The second, and more general, lesson this comparison between the US and the EU highlights is the broader relationship between market building and polity building, and the critical role played by political and social institutions in this process (Ruggie, 1982; North 1990; Dobbin, 1990; Fligstein and Stone Sweet, 2002). The integration of Europe’s single market seems to closely parallel the experience of US market integration, providing a similar impetus for the development of a single currency. In both cases, societal pressures for authoritative rules to govern market integration interacted with the desires of some political actors to move policy capacity to the federal level, producing new forms of legitimate political control at a higher level of governance. In particular, in the antebellum US as well as today’s Europe, an activist federal court has played a pivotal role in constructing the single market thorough the creation of rules governing exchange, setting the stage for currency consolidation. Both of these lessons, the limited nature of fiscal policy capacity and the strong links between market construction and political development in the EU, have implications for the nature and extent of political development at the European level today.
The rest of this article details these claims as follows. I begin by briefly outlining why conventional scholarship on European monetary integration cannot address the question of how a single currency impacts political development. I then explain why an comparison of the antebellum US case and today's EU as cases of political development is a plausible exercise. The next section outlines my alternative perspective on currency consolidation, drawn from the American political development and European state formation literature, and lays out a template for understanding the links between currency and statebuilding. I then offer a brief history of the drive towards a single currency in the US, highlighting the role of war and market integration in shaping actors' interests in pushing forward monetary consolidation, and demonstrating the importance of linkages between currency and fiscal policy capacity in transforming political authority. I apply the analytical lessons learned to the case of the Euro, and conclude.


EXPLAINING THE SOURCES AND CONSEQUENCES OF

MONETARY UNION IN EUROPE
Why do we need a new scholarly approach to understand the politics of the Euro? Although valuable in providing explanations of the sources of a single currency, conventional analyses of EMU cannot readily address the question of how money relates to political authority. One of the prominent approaches to currency consolidation, optimum currency area (OCA) theory, was developed to determine when a single currency would be economically efficient (Mundell, 1961; McKinnon, 1963; Kenen, 1969). Although valuable as a policy guide, the OCA predictions bear little resemblance to the real world of currency areas: economists have concluded that both the US and the EU are not optimum currency areas (Cohen, 1993; Bini-Smaghi and Vori, 1992; Eichengreen, 1990, 1992). Others have focused instead on the distributional consequences of currency unification to explain the drive to EMU. Frieden (1991) argues that the push for monetary union in Europe came from particular sectoral interests in society, such as multinational exporters, which might gain from reduced currency instability and lowered transaction costs. This approach would seem to be strengthened by recent empirical work showing strong effects of currency union on trade (Rose, 2001). Yet although this sectoral interests approach may help predict the political sources of currency consolidation, it is silent on the broader political and institutional consequences of the move to a unified currency.
Alternatively, some international relations scholars have assessed the Euro in terms of theories of international cooperation and international regimes (Sandholtz, 1993; McNamara, 1998; Moravcsik, 1998). In this view, states will enter into monetary regimes, be they ad hoc as in the G-7, or formalized and binding arrangements such as the Euro, in order to achieve goals not reachable unilaterally. States thus retain their essential sovereignty and power as governance does not meaningfully shift with currency consolidation. Instead, certain functions are merely delegated as they can be more effectively executed at the supranational level (Moravcsik, 1998). Again, although they may offer convincingly explanations on how EMU was created, because their analyses are squarely within the international relations sovereign state paradigm, this perspective rules out the question of what sort of political development may flow from a common money.
The literature on EMU, therefore, can be drawn upon to understand the sources of the Euro, but to assess the potential for political authority to be transformed in tandem with the Euro we must look elsewhere. Instead of strict economic analyses or the international relations literature, it is to the perspective of comparative political development and to the historical record of other cases of currency consolidation that we now turn.
Comparing Antebellum America and today's EU
How is such historical comparison possible, given the claims of certain scholars that the EU is a sui generis phenomenon?2 I argue that the American nineteenth century move from multiple currencies to a single currency and nationalized monetary system, and the EU’s transformation from multiple currencies to one single currency and monetary union, can both be coded as cases of currency consolidation. 3 As is described in detail in the case study section, below, before the American Civil War, foreign currencies as well as multiple versions of the dollar circulated widely throughout the US, and state-based banks issued notes which functioned locally as paper money. There was no permanent national central bank and little in the way of federal mechanisms for control. While the dollar was the standard unit of account, state dollars floated at different rates within the antebellum US, similar to the floating of European national currencies prior to EMU. Just as in the EU today, the American states followed independent fiscal policies with few interstate fiscal mechanisms to promote redistribution or encourage political solidarity across the union. The antebellum states could even borrow directly from foreign capital markets in pursuit of their own goals.4
The American Greenback was created, national money consolidated and competing paper currencies abolished, at the same time as the US states vehemently resisted further forays into other aspects of their sovereignty. Likewise, today multiple national European currencies previously circulating across Europe have been unified, through an exercise of immense political will, into a single currency, while other components of governance, such as social policy and taxation, remain at the EU member state level. Thus, I contend that the US and the EU cases may be viewed as examples of currency consolidation in situations of contested political authority. If this is so, the earlier US case provides an opportunity to investigate the causal processes linking money and political structures so as to understand the contours of political change in Europe today.
Inferences must be carefully drawn, however, given the particular differences across the two cases. Most centrally, the Euro replaced twelve national currencies and is issued by a European Central Bank, whereas the US change involved a move from a chaotic situation of thousands of private and public currencies to a single legal tender currency, the United States dollar or Greenback, but several other forms of currency continued to circulate and there was no national bank for many decades. Although the dollar was the functioning unit of account in the US from 1790s onwards (Hurst, 1973, 32-34), before the Euro, the EU states used their national currencies as distinct unit of accounts within their territories, despite the efforts of some to make the ECU (European Currency Unit) play this role.
What about the comparability of the two cases along a range of other potentially important variables? Even if both cases can be categorized as a move to a single currency, if they vary too widely in other ways, it is hard to imagine that lessons learned from the US case might be transferable to the EU. Yet along a variety of dimensions, particularly culture and political structure, there may be enough similarities to make such a comparison fruitful--with appropriate caveats. First, in terms of political culture, we might assume that the high degree of cultural heterogeneity in the EU would present more of a barrier to political development in the EU case than in the relatively homogenous antebellum US. While the American states began with a shared language and national political tradition, Europe today is composed of states with longstanding and diverse cultures, languages, and political histories. This assumption may overstate the differences in the two cases, however. Although the American colonies had a shared political history in the war of independence, and largely (but not completely) a shared common language, the bonds across the colonies and with the new states of the union had by no means assumed inevitability in the period before the civil war.5 Instead, the antebellum US was marked by deep cultural and political divides, violently expressed in the civil war but felt long before and afterwards. These divides extended beyond the North-South cleavages to secessionist movements in the mid-West region and Western expansion states.6
Language of the time reflected this felt sense of separateness: the US was referred to in the plural, as in 'the United States are' and usage only changed to 'the United States is' after the civil war (McPherson, 1991, viii). The views of prominent observers at the time express this sentiment clearly. For example, after visiting America, Chateaubriand wrote: "It is immensely difficult to create a country out of states without any community of religion and interests...how many centuries will be needed to make these elements homogenous?" Likewise, others, such as De Tocqueville in Democracy in America, and Madison in the Federalist Papers, spoke of the "distinct nations" formed by the states of the US. It can be argued that American cultural and political identity, and their links to nationhood were constructed over a long time period, not fixed by the nineteenth century. If this is true, the US case before the civil war might not be as dissimilar from the EU in terms of political culture as we might initially assume.
Second, in terms of their formal political structures and institutions, prior to the creation of the single currency, both today's EU and the US of the nineteenth century can be described as loose federal structures with central control limited to a few key areas.7 At the founding of the US and the EU, the political structure of both was based on a unified customs union with a rapidly integrating single market. The constitutional hierarchy of political authority was fiercely contested in the antebellum US; recently, compliance with European level (European Court of Justice) law has been higher than antebellum compliance was with federal US law (Goldstein, 1997, 2001). Of course, important differences in the concentration of federal power obviously remain: the foreign policy capacity of the US was much greater than it is in today’s EU. Political parties were also more organized at the federal US level than they are in the EU, where parties have yet to have a European identity. Nonetheless, we should be careful not to overstate the degree of societal, political or legal consensus on the hierarchy of political authority in nineteenth century America.
Third, any comparison of these two cases should also take into account the similarities and differences in the overall economic environment of the period. Here we may find the starkest differences between the two eras. While both the antebellum US and the EU were integrating single markets with states at varying levels of economic development, today’s EU is highly industrialized, whereas the nineteenth century US was industrializing but still significantly agrarian. Finally, the meaning of government control over money differs today, with higher expectations about macroeconomic management over the economy, in contrast to the more limited expectations of the nineteenth century. These differences may influence the move to a single currency and its subsequent impact on political development.
Despite the differences, there are enough parallels between today’s EU and the antebellum US to make a comparison potentially useful. As Europe today is a collection of divergent polities and economies seeking some balance between collective governance and local sovereignty, and so was the antebellum US. The act of consolidating monetary authority over a single paper currency may be consequential for this precarious balance of power in both cases. Understood in this way, comparisons of political processes across these two cases might be helpful for understanding the implications of the Euro for political development in Europe.

MODELS OF POLITICAL DEVELOPMENT
In arguing that the broad lines of the American historical case and today's European experience may be comparable despite important differences, I am making the case for analyzing the EU through the perspective of comparative political development. Fortunately, such an exercise can draw on an extensive statebuilding literature from comparative and American politics. Below, I sketch out the basic premises of this approach and develop a template to understand the potential causal linkages between the sources of currency consolidation and a single money's consequences for political development.
The statebuilding literature examines the process by which power is consolidated and institutionalized through policymaking capacity at the center of a bounded geographical territory and population.8 For most theorists, the modern Western state is characterized as having a unique, distinct, independent power of rule with a unity of state territory, bounded by geographically defensible borders. Components of modern states generally (but not always) include a unified fiscal system; a single, often imposed, national language; a unified legal system; and, critical for our purposes here, a single currency (Poggi, 1978, 93). Statebuilding is related to but distinct from nation building: the latter implies the creation of a political community and common identity. Nation building can be a critical enabling foundation for state power and capacity, however.
How does the process of statebuilding unfold, and, most importantly for understanding the experience of the EU today, how might we know it when we see it? Scholars have attempted to offer a generalized trajectory of political development which identifies the sequence and timing of the stages of statebuilding. The fact that this process is always historically contingent has prompted divergent models, making it easier to identify a process of political development than to predict its likely end result. From the European experience, Huntington proposed a three stage stylized description of statebuilding: it begins with the centralization of state power, continues with the development of specialized bureaucracies, and finally spreads to increased political participation at the new level of government (Huntington, 1968). Political development in the US case is generally agreed to have evolved differently: the broadening of political participation came first, not last, in the American case, before the development of a consolidated central state, and the creation of an extended and highly differentiated bureaucracy lagged behind. In addition, the role of the courts is different across the historical European and American cases: in the nineteenth century European statebuilding, the state itself was the fundamental source of political authority, whereas in America, the law was the ultimate authority and arbitrator.
What causes statebuilding? A central cause is war, as summed up in Tilly's succinct phrase, "War made the state and the state made war" (Tilly, 1975, 42). Political leaders’ desire to win at war have historically prompted them to centralize and strengthen the state. Effective mobilization for war may require an expanded state bureaucracy, a deepening of revenue extraction, and government involvement in a wide array of activities within the economy (Porter, 1994). Just as important, the perception of crisis and a security imperative has often been crucial in overriding the objections of societal groups and local officials to such statebuilding.
In addition to war, theorists have emphasized the linkages between statebuilding and the development of capitalist markets (Poggi, 1978; Skowronek 1991). As economic activity becomes more integrated and complex, societal actors make claims on the state to stabilize and regulate markets against the volatility inherent in their growth. Rules are generated, often by federal level courts, to enable markets to function. The creation of a market system, accompanied by the establishment of legal institutions and an administrative bureaucracy, centralizes authority over time as a newly deepened polity is constructed in tandem with the newly enlarged market. A single currency can be seen as part of this market and polity construction, as a single money reduces uncertainty and transactions costs and bolsters market integration at the same time as it creates a new authoritative political institution to regulate money. This reciprocal relationship between market construction and polity construction has been identified by authors emphasizing the necessity of authoritative governance structures to sustain markets (Polanyi, 1947; Ruggie, 1983; Fligstein and Stone Sweet, 2002).
Figure 2 provides a heuristic illustration of the potential relationship between statebuilding, war and market integration. In this conceptualization, statebuilding is most likely when both factors pushing statebuilding, war and market integration, are present and least likely when they are not. When one but not both factors are present, statebuilding is likely to occur only unevenly.
Figure 2: The Causes of Political Development







Threat of War










Low



High


Market Integration


Low


No

Statebuilding


Uneven Statebuilding





High


Uneven Statebuilding



Statebuilding
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