Rethinking Monetary Sovereignty: The Global Credit Money System and the State

Even though monetary sovereignty remains an important reference point in both academic discourse and international politics, it has – throughout past decades – repeatedly been declared “over.” Creeping dollarization subjects states across the world to monetary and financial decisions made in the United States, while local financial systems depend increasingly on globally active mega-banks, asset managers and hedge funds. Governments face global bond markets and the realpolitik of the International Monetary Fund (IMF) and the World Bank.

Today, the concept of monetary sovereignty is typically used in a ‘Westphalian’ sense to denote the ability of states to issue and regulate their own currency. This understanding continues to be the default use of the term by central bankers, economists and beyond.

A new journal article in Perspectives on Politics by Steffen Murau and Jens van ‘t Klooster argues that the Westphalian concept of monetary sovereignty rests on an outdated understanding of the global monetary system and the position of states in it, making it unsuitable for the realities of financial globalization. Instead, they propose a new concept of monetary sovereignty that acknowledges the reality of today’s global credit money system.

This new concept focuses on what states are actually able to do in the era of financial globalization. This fits the hybridity of the modern credit money system by acknowledging the crucial role not only of central bank money but also of money issued by regulated banks and unregulated shadow banks. These institutions often operate “offshore”, outside of a state’s legal jurisdiction, which makes monetary governance more difficult. Monetary sovereignty consists in the ability of states to effectively govern these different segments of the monetary system and thereby achieve their economic policy objectives.