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

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Eich’s book is ultimately a call to revive democratic debate about money…this excellent book…does not tell us what to do, but he does show us something can be done."—Geoff Mann, New Statesman A pathbreaking new intellectual history of monetary policy. In examining how key thinkers approached the economic crises of their respective times, Eich offers a map for navigating the politics of money today."—Daniel Steinmetz-Jenkins, The Nation Eich’s contribution demarcates a new space for political thought on money, and brings together key theorists on the structuration of money both to show that political thought often has a direct effect on the type of monetary system that is maintained, and to show that democratic agency vis-a-vis money is often wilfully ignored."—Dominic Burbidge, Politics and Poetics In addition, I also score the tweets using a sentiment analysis technique. This technique adds value by allowing me to relax the assumption that all tweets have the same negative effect on the peso. Given that the text of the tweets are different and thus contain different information, it seems plausible that some may have a stronger effect than others. Scoring the tweets using a sentiment analysis technique allowed me to measure these differences. Further, Trump's method of speech makes it challenging to reliably score according to a sentiment analysis. Traditionally positive words are used in negative ways, meaning that rules to score tweets according to an affective dictionary can be ineffective. For example, “a beautiful wall” would be a positive tweet according to the dictionary, yet would entail negative economic policy toward Mexico. However, Trump uses other negative words in their traditional negative sense. It is not clear, on net, how well the sentiment analysis captures the negative or positive content of the tweets, given Trump's unusual use of language and unique style of speech.

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. A very good book. . . . Eich takes us on a fascinating journey."—Paul Sagar, Perspectives on Politics The first chapters introduce basic policy choices for managing the monetary system: exchange rate regimes, either fixed, floating or pegged to another currency, and a currency’s price level. The choice of regime depends on competing demands for stability and flexibility, while the price level is held in tension between supporting price competitiveness for exporters and the purchasing power of consumers. Jeffry A. Frieden, Professor of Government at Harvard University, has written a fine book on the determinants of decision-making regarding exchange-rate regime and, to some extent, exchange-rate level within the selected regime. 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 Officer, EH.net.

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Eich’s work is sure to be a landmark in political science. His argument is bold and ambitious; his writing clear and engaging; and his message timely, persuasive and imperative."—Erik Jones, Survival This figure shows the effect of the 2016 election on the Mexico peso. The event analysis around the 2016 election shows a strong effect, with the peso weakening more than 5 percent. However, the effect seems to become smaller as the size of the window increases, perhaps as investors correct overreaction to the initial news. Note that the figure presents net change in the peso/dollar exchange rate. As the peso exchange rate increased from under 19 pesos/USD to more than 20 pesos/USD, this is equivalent to a more than 5 percent change.

H3: An increased probability of Trump being elected will lead to a decrease in the value of the peso. Empirical ApproachSummarizing the information above, I run four different event analyses on four different time periods (the corresponding number of tweets is listed in parentheses): 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. 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).

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. 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 DiegoAgustín 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 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.” While the fragility of exchange rate commitments has been known since the publication of a 1995 paper by Obstfeld and Rogoff, the question of why some central banks fix the value of their currencies and others do not is less well understood. Jeffry Frieden’s Currency Politics provides a thoughtful guide to the political economy of exchange rate policy. ...