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This chapter examines the effect of an international currency on state power. Emphasis is placed on disaggregating the concept of currency internationalization into the separate roles that an international money may play. Analysis then focuses on three specific questions: What is the effect on state power of each specific role, considered on its own? Are there interdependencies among the various roles? And what are their relative or cumulative impacts? In the end, three roles appear to be of paramount importance: a money’s role in financial markets, trade, and central-bank reserves. Other roles have little or no effect on the distribution of state power.

The imbalance in massive foreign currency reserves held by East Asian countries combined with a record US current account deficit has the potential to throw the global economy into financial turmoil or recession. Different views on this imbalance are explored, along with policy options and intra-regional cooperation.

This chapter investigates whether the dollar might eventually follow the precedent of the pound and cede its status as leading international reserve currency. The link between currency shares and their determinants is nonlinear, but changes are felt only with a long lag. The sustainability of the U.S. current account deficit may depend on the continued willingness of foreign central banks to collect ever-greater quantities of U.S. assets. The euro soon after its debut came into wide use to denominate bonds. The euro is the number two international currency, and has rapidly gained acceptance. Euro enthusiasts endured some serious setbacks in 2005. Data indicate that dollar depreciation would be no free lunch: it could have consequences for the functioning of the international monetary system as profound as the loss of the dollar's preeminent international currency position, and along with it the exorbitant privilege of easily financing U.S. deficits.

The global dynamics of complexity and tight coupling unfold at the level of bilateral relationships, creating different levels of risk. The U.S./China relationship is crucial because it involves the world’s two largest economies, and has become increasingly complex in terms of trade, direct investment, and information flows, although it is not as tightly coupled because the U.S. and China are also closely connected to other economies in the world in terms of trade imbalances, portfolio investment, currency trading, and cross-border banking. The greatest concern has to do with the continuing role played by the U.S. and China as the consumer of last resort and the lender of last resort, respectively. The future of the dollar as the most important international and reserve currency hangs in the balance, while the Chinese currency is years away from playing an international role, and digital currencies are still at the experimental stage.

This chapter contends that the variations in Britain's war financing during World War II and the Crimean War were due to the source of war inputs and a state's ability to cope with low currency reserves. When a state needs to procure inputs for the war effort from outside its borders and does not have the currency to pay for those goods, it will be forced to borrow from abroad to meet its war finance needs. In contrast, external extraction is not necessary if the state does not need to purchase goods from abroad or if it has the currency to pay for them.

Keynesian proposals for reforming international monetary relations aim at establishing a world central bank that, in order to enhance stability and growth, imposes ceilings for current account balances and allows a distribution of reserves according to political priorities. For various mainly political reasons, it is highly improbable that such an institution will ever be founded. Moreover, analysing the reasons for the downfall of historical fixed-exchange-rate systems shows that, e.g., a deflationary effect of export-surplus policies or excessive reserve-keeping was a specific feature of the gold standard, but not necessarily of other paper standard systems. Often, a realignment would have removed key causes of instability. In the future, a system with two or even three key currencies might give better results, if accompanied by regulations on scope and structure of reserve keeping.

This chapter provides an analytical foundation for a discussion of currency concepts. It describes terms such as capital account convertibility, exchange rate flexibility, and purchasing power parity. It also explains the differences between an international currency, one that is used widely in international trade and finance transactions, and a reserve currency, one that is used by foreign central banks to store their foreign exchange reserves.

The rise of the RMB has been impressive by any standard although the currency still has a long way to go before it becomes a major reserve currency that accounts for a substantial portion of global foreign exchange reserves. This chapter concludes the book with the prognosis that, so long as the Chinese government plays its cards right with further reforms and so long as the economic risks are managed, the RMB could become a significant reserve currency over the next one to two decades. At the same time, the Chinese government’s repudiation of broader political, legal, and institutional reforms implies that the RMB will not ascend to the status of a safe haven currency.

The U.S. was in a position of economic and military hegemony after World War II. However, by the early 1970s, the U.S. dollar depreciated following President Richard Nixon’s abandonment of the gold standard. To fight this problem, Nixon offered indefinite military protection from all of their enemies to all oil-producing states, if those states agreed to denominate their oil sales exclusively in U.S. dollars. This agreement reestablished the U.S. as the world’s sole superpower. At the turn of the millennium, U.S. dominance faced challenges from al Qaeda and Saddam Hussein’s decision to abandon the dollar in favor of the euro in oil sales. The war on terror began as an effort to eliminate each of these threats. Following the Iraq war, the U.S. seemed to establish control and alliances with all of the world’s key suppliers of energy, along with the states serving as transit routes.

New York, the epicentre of the 2007–9 Global Financial Crisis, during the ensuing decade regained much of its pre-Crisis stature as a pre-eminent international financial centre. Its advantages going forwards include the huge US Treasury debt market, the dollar as the leading reserve currency, the Federal Reserve System as a de facto world central bank, a stronger US banking system, and the world’s largest securities markets which list and trade leading US-based companies and many corporations based in other countries. Congress’s 2010 Dodd–Frank Act reduced systemic financial risks, but also contained regulatory overkill that is gradually being modified; attempts to repeal or replace Dodd–Frank appear unlikely to succeed. Fintech represents both an opportunity—more efficient financial services—and a threat—reduced profits—for New York financial firms, which will most probably incorporate fintech innovations into their business models. For New York, Brexit is more of an opportunity than a threat.

This chapter examines the future of American global leadership through the lens of its domestic political institutions. It finds that the United States faces growing troubles at home. At the same time, its vibrant economy, strong alliances relationships, and its unmatched military, all reflections of the U.S. domestic political system, will continue to provide a significant source of strategic advantage for the United States over its autocratic competitors in the years to come. The international security environment is becoming more competitive, and the United States does not exercise the unchallenged primacy it enjoyed in the 1990s. We have returned to an era of great power rivalry. But, there is no doubt that the United States remains the world’s leading power.