The Currency of Politics: The Political Theory of Money from Aristotle to Keynes

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In the use of case studies and the inclusion of historical and contextual factors, Currency Politics introduces a meaningful narrative to the analysis. Pure economic analysis is typically deterministic and struggles to account for contingent factors. By considering social, institutional and historical aspects, the text succeeds in treating the economy for what it really is: a complex and interdependent phenomenon. It’s been a wild week in Westminster and it’s starting to look like the Tories are losing their grip. Ed and George chew over the Supreme Court’s judgment on Rwanda and what it means for Sunak. Could his new Foreign Secretary slam the brakes on some Tories’ hopes to leave the ECHR? Currency Politics: The Political Economy of Exchange Rate Policy. Jeffry A. Frieden. Princeton University Press. 2016. H1: New negative policy information via a tweet from Trump will lead to a decrease in the value of the peso. Meanwhile, Keir Starmer faced a huge rebellion of his MPs over the SNP’s ceasefire amendment. Ed explains why this isn’t as big a threat to the Labour leader as it first appears...

Identifying the motivations for currency policy preferences on the part of industries seeking to influence politicians, Jeffry Frieden shows how each industry's characteristics—including its exposure to currency risk and the price effects of exchange rate movements—determine those preferences. Frieden evaluates the accuracy of his theoretical arguments in a variety of historical and geographical settings: he looks at the politics of the gold standard, particularly in the United States, and he examines the political economy of European monetary integration. He also analyzes the politics of Latin American currency policy over the past forty years, and focuses on the daunting currency crises that have frequently debilitated Latin American nations, including Mexico, Argentina, and Brazil. Frieden undertakes careful examination of currency politics. . . . [M]eticulous [and] well-informed. . . . Recommended."— Choice Agustín Carstens, the head of Mexico's central bank (Banxico) from 2010 to 2017, was charged with maintaining the stability and purchasing power of the peso. Carstens faced enormous challenges in his role as the head of Mexican monetary policy, not only because of domestic economic and political forces, but also because of elections in the country's northern neighbor. Carstens vividly described the impact of the US election on his ability to exercise domestic monetary policy: expressing frustration over his loss of power over the peso, he called President Trump's election, and the concomitant economic threats against Mexico, a “horror movie” and a “hurricane.” 1 He also said that Trump was able to completely disrupt his plans to stabilize the currency—which cost more than 2 billion dollars in hard reserves—with only two tweets, both focusing on investment by the auto industry in Mexico. 2 Carstens’ direct style of speaking further reveals his awareness of the effects: in comments to the Mexican Senate, he explained that “I'm going to say it like it is, in a very simple way: with two tweets from we know who, the effect faded away,” referring to the impact of his currency interventions relative to the influence of Trump's tweets. 3 My theory relies on insights from financial economists and the financial markets literature, notably the semi-strong version of the efficient markets hypothesis (EMH). The EMH states that financial markets incorporate all known information about an asset (in this case, currencies) and create a present value based on future expectations of the asset value ( Fama 1970). Thus, a decline in the value of a currency reflects shifting expectations about its value, driven by new information that causes those active in currency markets to expect the future value to be lower. However, markets incorporate information from a variety of global sources, including via foreign elections; there is no reason to think that only domestic drivers should affect currency values. In addition, the timing of the election and the probability of Trump being elected affected how markets interpret tweets. Currency traders not only weighed the severity of Trump's proposed policies, but also his electoral prospects, which formed a proxy for the probability that Trump's policies would be implemented. In some parts of the election cycle, Hillary Clinton was assumed to have essentially won the election, and in other times Trump had a reasonable chance of capturing the presidency. His invective became a more serious threat to the Mexican economy when there was an increased risk of him using the power of the presidency to implement an anti-Mexico agenda. If Trump had a small chance of winning the presidency, then the tweet should have a smaller impact. If Trump had a larger chance of winning—or indeed, once he secured the presidency—the tweet can be treated as likely to be put forth as policy. In summary, the peso will be weakest when Trump has a higher probability of winning, strongest when he has a lower chance of winning, given that there is a greater expected chance that he will implement his policies.

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The appeal of this text to economists and political scientists alike is obvious; however, it also explains monetary economics with such clarity that it is unusually accessible – at least for the field of economics – to a more general audience. Think of it as occupying the middle ground between pop economics titles, like Freakonomics, and more formidable volumes, such as Thomas Piketty’s Capital in the Twenty-First Century. This excellent book is for anyone who has ever wondered about the origins of the Eurozone, the causes of the currency crises, and the importance of the classical gold standard. Frieden combines lively historical narratives with statistical analyses to show that currency politics are pretty much the same across time and space. No other author could bring out the common threads running through the book's cases so clearly." —J. Lawrence Broz, University of San Diego The results of tweets are positive but small and not statistically distinguishable from zero before Trump was named as the Republican candidate. This would align with expectations, as Trump was considered a “long-shot” candidate at the time and thus the risk of him becoming president was perceived as low. During the campaign, when Trump was the presumptive Republican nominee, the effect of a tweet is approximately an increase of 0.05 pesos to the dollar (an approximately 0.25 percent change in percent terms). The effects also appear to persist in the window after the tweet. Again, this would align with expectations, as securing the nomination increased the probability of Trump being elected as president and thus should impact the effect of his tweets. Further, the tweets appear to have an effect regardless of whether they contain new or repeated policy information, providing support for both H1 and H2. Este artículo examina los efectos de los impactos electorales extranjeros en los mercados de divisas. Presenta una teoría de la señalización y la incertidumbre para explicar por qué las elecciones en países con vínculos económicos estrechos deberían afectar las tasas de cambio. Metodológicamente, este artículo se centra en varios estudios de caso, con las elecciones de 2016 en Estados Unidos como caso central: se utiliza un marco de análisis de eventos para medir el impacto de las elecciones en el peso mexicano mediante la explotación de la exogeneidad plausible de los tuits de Donald Trump. También se miden los cambios en el peso utilizando la probabilidad prevista de que Trump gane las elecciones para demostrar que el peso es más débil cuando dicho candidato tiene la mayor probabilidad de ganar las elecciones. Además, se incluye una serie de análisis y comprobaciones de solidez de otros casos recientes notables en los que la incertidumbre electoral afectó las monedas de otros países, incluida la elección brasileña de 2018. Los resultados cuantifican el efecto de las elecciones extranjeras sobre los tipos de cambio, con base en la bibliografía existente que se centra en cómo las elecciones nacionales dan forma a los mercados de divisas. A modo de conclusión, se incluye un debate de la validez externa del fenómeno demostrado por los casos en el artículo, trazando futuras investigaciones sobre el tema y delineando formas de extender los hallazgos. A deep ex­amination of the theoretical and political foundations of money that rescues the money discus­sion from economists."—Pratap Bhanu Mehta, Open Magazine

A decade and a half later, they have a podcast. It’s called Political Currency, and it follows the stunningly successful format of The Rest Is Politics, where Blairite spin doctor Alastair Campbell and erstwhile Tory heavyweight Rory Stewart “disagree agreeably” about politics to millions of eager listeners. To distinguish themselves, Osborne and Balls are focusing specifically on economics (“currency” – get it?). Apparently they “have the knowledge and experience to explain how good politics follows the economics”. A look at how their careers ended – with Balls losing his seat in 2015 and Osborne’s ascendance cut short by the 2016 EU referendum – suggests this is up for debate. Currency Politics is an ambitious book on an important topic. Frieden is one of the best political economists and one of the best scholars writing on this subject."—Sebastian Edwards, University of California, Los Angeles and author of Toxic Aid The field of currency policy is increasingly important as the global economy becomes ever more integrated; however, it is poorly understood by the general public and often forgotten until a crisis arises. The influence of contingent political factors on the ability of governments to change their monetary policy is shown to be profound. Frieden makes his research accessible to a broader audience through Currency Politics; it is a challenging read in parts, but worth the effort to understand how national politics shape currency policy and the possible future of international currency regimes.The chapters on currency policy in nineteenth-century USA are particularly illustrative: large-scale infrastructure investment acted as a catalyst for economic growth and geographical expansion across the new continent, leading to the emergence of two competing political blocs in the agricultural hinterland and urban centres of industry and finance. Railroad magnates funded new railways using foreign-denominated debt and had strong interest in moving away from gold to a floating exchange rate. Farmers and mining firms shared this interest and voted for lower price levels along with a floating exchange rate to guarantee competitiveness in export markets. Manufacturers went against expected behaviour for two reasons: import tariffs were relatively high, particularly after the Civil War, and the US was geographically distant from potential competitors. With high transport costs protecting firms from competition with European counterparts, they could easily pass-through the costs of currency fluctuations to consumers. The Latin American analysis conversely brings to light a tendency for currencies to appreciate in the lead-up to an election, boosting the purchasing power of consumers to support re-election for the incumbent government, but in some cases creating unsustainable price levels and precipitating a currency crisis. As the campaign continued and the information uncertainty about potential policy toward Mexico diminished, one would expect that the effect of tweets on the peso would diminish. However, as Benton et al. note, even when tweets did not contain any new information (indeed, they often contained similar or even identical language to older tweets), they shifted prices in financial markets ( Benton and Philips 2020). That is, even though tweets should no longer have an effect if they did not contain new information, the effect of tweets on the peso continued. The explanation, again drawing on Benton et al., is that the frequency of tweets signaled a commitment to implementing those policies. Indeed, the size of that effect depends on both the frequency of his tweets against Mexico—a proxy for his willingness to target Mexico with harmful economic policies—and the severity of his rhetoric, including whether he mentions new specific proposals that would harm the Mexican economy. Thus, a repeated tweet signals a higher probability that the proposal is likely to be implemented and is not simply noise or “cheap talk.” Currency Politics is an ambitious book on an important topic. Frieden is one of the best political economists and one of the best scholars writing on this subject." —Sebastian Edwards, University of California, Los Angeles and author of Toxic Aid

In Currency Politics, Frieden not only draws together beautifully the strands of his previous work, but he advances a new and entirely persuasive explanation of the euro project as an essential bulwark against competitive devaluations. Above all, he argues convincingly for the centrality of exchange rate policy to domestic politics, international relations, and macroeconomics in open economies." —Ronald Rogowski, University of California, Los Angeles The book is readable for both economists and political scientists. I recommend Currency Politics to both sets of scholars. Economists will learn about the political aspects of exchange-regime choice and political scientists about the economic aspects."—Lawrence H. Officer, EH.Net Summarizing the information above, I run four different event analyses on four different time periods (the corresponding number of tweets is listed in parentheses):

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Alexander Slaski, Ph.D., is a postdoctoral fellow at Leiden University. His research focuses on the political economy of foreign direct investment, investment incentives, and currency flows in the developing world, particularly Latin America. His current book project examines how multinational firms shape regulatory policy in developing economies. His work has been published or is forthcoming in outlets including The Review of International Organizations, The Review of International Political Economy, and International Studies Quarterly. Notes In addition to the event analysis, I simply regress the probability of Trump winning on the Mexican peso. I use Nate Silver's 538 blog (the aggregate “chance of winning” polls-plus measure) for Trump's electoral probability. 16 Nate Silver's probability calculations are a widely used and respected aggregator of available public opinion polls. I also use the Iowa Betting Markets, given that it involves more than simply cheap talk, as bettors have a financial stake in the outcome and thus an incentive to gather accurate information about the electoral probabilities. 17 Thus, tweets signal two kinds of information that affect the Mexican peso: future US policy and the probability that those policies will be implemented, which are mediated by the perceived likelihood of Trump winning the election. On the latter point, the largest move in the peso came after Trump won the election—during which time no additional policy information was released, yet when new information about the probability of Trump being elected changed (from a relatively low probability to 100 percent, in a “surprise” outcome). For librarians and administrators, your personal account also provides access to institutional account management. Here you will find options to view and activate subscriptions, manage institutional settings and access options, access usage statistics, and more. Jeffry A. Frieden, Currency Politics: The Political Economy of Exchange Rate Policy (Princeton: Princeton University Press, 2015).