Published by EH.NET (November 2009)

Benn Steil and Manuel Hinds, Money, Markets, and Sovereignty. New Haven: Yale University Press, 2009. xi + 304 pp. $30 (hardcover), ISBN: 978-0-300-14924-1.

Reviewed for EH.NET by George Selgin, Professor of Economics, University of Georgia.

Economists generally take for granted, if only tacitly, a teleological view of money?s historical development, according to which it first takes the ?primitive? form of mundane commodities such as cowrie shells and cacao seeds, and then advances through various stages, culminating in the national fiat monies most economies rely upon today.

Money, Markets, and Sovereignty offers a spirited rebuttal to this naively ?whiggish? perspective. Instead, its authors ? Benn Steil and Manuel Hinds, senior and former fellows, respectively, of the Council on Foreign Relations ? argue that the principal effect of national monies consists, not in their contribution to economic prosperity, but in their capacity to assist national governments in their efforts ?to extract wealth from their population and to exercise political control over them.? The combination of national fiat monies and global markets results, moreover, in ?a deadly brew of currency crises and geopolitical tension? that in turn supply ?ready pretexts for damaging protectionism.? Steil and Hinds thus see national fiat monies, not as an essential basis for economic progress, but as an imposing barrier to such progress ? one which threatens to ?throw globalization into reverse.?

Recognizing that globalization has itself been under fire, Steil and Hinds preface their critique of monetary nationalism with a defense of globalization against critics, including Joseph Stiglitz and Naomi Klein, who regard it as an encroachment upon national sovereignty. Steil and Hinds observe, for starters, that contemporary arguments against globalization are mere rehashes of old and threadbare arguments against markets generally. They then proceed to uphold globalization as a practical manifestation of Enlightenment thought concerning ?the law of nations,? the roots of which they trace to Stoic philosophy. Arguments against globalization are thus found wanting both for being old and for not being quite old enough. But the real strength of Steil and Hind?s response to critics of globalization (and of free markets generally) resides in their convincing elaboration and defense of the Enlightenment idea, succinctly expressed by Hume, that ?commerce itself … gives rise to notions of justice between peoples,? with its implied rejection of the ?Westphalian? identification of sovereignty with State omnipotence.

Turning to wrestle with the more specific notion of monetary sovereignty, Steil and Hinds are gratifyingly blunt. The monopolization by national governments, first of coin and then of paper money, is itself, according to them, a violation of the ius gentium ? and one that has ?wreaked far more damage on people?s livelihoods than any private behavior.? That monopolization has a history almost as old as that of coined money itself, having been initiated by the tyrants in Asia Minor and having ever since been upheld as one of governments? most sacred ?prerogatives.? However, as Steil and Hinds document, this prerogative has almost always been treated, not as a means for facilitating commerce, but as one for securing resources and enhancing government power.

The era of the classical gold standard marked a rare and all-too-brief interval during which Western governments placed their sovereign right of monetary manipulation into abeyance, deferring instead to commerce?s demand for a more-or-less apolitical and self-regulating monetary mechanism that required nothing more from them save that they commit themselves to not abusing those portions of the mechanism that they had taken over. World War I put a dramatic end to this arrangement, so unusually conducive to world trade and investment, while the gold exchange standard that followed was (as Jacques Rueff put it) but an ?absurdity? that, perhaps inevitably, gave way to the present era of largely independent national fiat monies. Scientific pretentions of their issuing authorities notwithstanding, the last have had more in common with their medieval than with their late-nineteenth century precursors, to the detriment of international exchange. For Steil and Hinds, the prospects for continuing global economic development depend crucially on the possibility of a renewed abandonment of monetary nationalism in favor of some new form of international money.

The details of the story, including some very cogent refutations of arguments concerning supposedly destabilizing features of the classical gold standard, make for exhilarating and, in this reviewer?s opinion at least, generally satisfying reading. Unfortunately, Steil and Hinds mingle some cheap alloy with the precious stuff that makes up most of their book, devaluing its argument to that extent. The debasement isn?t always serious. Numismatists, for instance, are no longer convinced that Lydia?s first coins were privately struck; while monetary historians will note that the United States? first, and most severe, peacetime inflation occurred not during the 1970s but in the wake of World War I. Banking theorists are bound to take exception to Steil and Hind?s claim that the presence of fractional reserves can itself account for a growth rate of bank deposits different from that of the stock of bank reserves. Finally, I myself wish that Steil and Hinds had taken account of my attempt to refute Thomas Sargent and Fran?ois Velde?s claim that steam-power played an essential part in the switch from bimetallism to the gold standard.[1]

Such quibbles have no bearing on Steil and Hinds? general argument against monetary sovereignty. That argument is, however, seriously undermined by the authors? having fallen victim to crucial elements of the very same ?mythology of money? they seek to debunk. They repeat, for example, the hoary fiction that fiat money, which has to be monopolistically supplied, ?is far less wasteful? than fiduciary money, ignoring both what Milton Friedman refers to (in a famous article of the same name) as ?The resource cost of irredeemable paper money?[2] and the fact that a well-ordered banking system (like Scotland?s back in the early nineteenth century) can thrive on a very slim cushion of commodity-money reserves. They do so, moreover, despite having noticed as they wrote (sometime in 2007) that gold was selling at $833.50 per ounce, or many times its corresponding relative price during the ?wasteful? era of ?fiduciary? money.[3]

More seriously still, Steil and Hinds fail to appreciate the crucial role central banks have played in paving the way to national fiat monies. Instead they argue as if fiat money were a direct outgrowth of redeemable bank monies, even positing a supposed ?conundrum? of any fiduciary regime, to wit, that ?the better it works, the more compelling the logic for letting it slide toward a fiat regime.? But nations don?t ?slide? into fiat money. They usually get it in one fell swoop, consisting of the decision, by a previously erected monopoly bank of issue, to suspend the convertibility of its IOUs, which it does with impunity thanks to favors it has rendered or plans to render to its sponsoring government.

Far from recognizing monopolies of ?fiduciary? paper currency as stepping stones to fiat money (and hence to national monetary autarky) Stein and Hinds portray such monopolies as essential components of the classical gold standard, which according to them consisted of ?a set of implied commitments from governments and central banks.? Steil and Hinds thus swallow hook, line, and sinker one of the most nefarious monetary myths of all. For in truth a gold standard, while it does indeed depend on paper money issuers? ?commitment? to redeem their liabilities in gold, doesn?t require any direct government involvement: it suffices that private recipients of gold coin deposits make good on their promises to pay, or suffer harsh penalties for not doing so. In its essence such a standard is, no less than free trade itself (to paraphrase Steil and Hinds on that subject), ?fundamentally a private or spontaneous development.? Indeed, when commitments to convert paper IOUs into gold take the form, not of private contractual obligations, but of mere government ?policies,? they are that much more likely to be systematically repudiated.

Thus, in claiming that Peel?s Act of 1844 (which eventually awarded the Bank of England a monopoly of paper money in England and Wales) ?perfected the gold standard,? Steil and Hinds imply that a gold standard cannot work properly unless administered on the very same monopolistic basis that is most likely to result in its abandonment! Besides inadvertently undermining their own defense of the gold standard, this view gets the contribution of monopoly to the gold standard?s operation all wrong. The right view is that found in Bagehot?s Lombard Street, namely, that the Bank of England?s monopoly was destabilizing, and that England would have been far better off sticking to a more decentralized and ?natural? system, like Scotland?s (before Peel?s Act was thoughtlessly extended to it), in which many equally-privileged note-issuing banks manage their own reserves. Like all too many other writers, Steil and Hinds refer to Bagehot?s dictum for last-resort lending, while ignoring his argument that a sound (that is, decentralized) currency system doesn?t need a last-resort lender. They also overlook more recent work reinforcing Bagehot?s opinion, including Lawrence White?s very important study of the Scottish system.[4]

Indeed, Steil and Hinds make hardly any mention at all of the literature on free banking and competing currencies, apart from a passing reference (in a footnote) to Hayek?s path-breaking Denationalisation of Money (1976). This omission, in a work devoted to combating the notion of monetary sovereignty and to suggesting alternatives to national fiat monies, is as puzzling as it is disappointing, and especially so in light of the authors? belief that a revival of the classical gold standard, based on commitments by national monetary authorities, would be both ?politically infeasible? and, if accomplished somehow, short-lived. Equally puzzling in this connection is the authors? failure to draw on extensive work by Eric Helleiner and his associates, addressing the very same theme as their own.[5]

What then, one is bound to wonder, do the authors propose as a way out of monetary nationalism? Having rejected both a restoration of the ?classical? gold standard and (perhaps by oversight) free banking and other forms of private currency, they have no choice but to stake their hopes on dollarization, understood figuratively as allowing as well for ?euro-ization,? as must be the case if it is not to be a recipe for a global fiat money monopoly, with all the potential for abuse such a global monopoly would entail.

That many of the world?s citizens would be better off using dollars or euros than continuing to be forced to rely on their own governments? monies is certainly true ? Steve Hanke and Kurt Schuler (whose writings are also surprisingly overlooked) have been pressing the point for some time now.[6] Nevertheless ?dollarization? hardly suffices to free us from the constraints and infirmities of monetary sovereignty. It merely replaces a set of national fiat monies with a pair of (or perhaps several) imperial ones, with no guarantee that the imperial monetary authorities will continue to manage them in even a relatively responsible way.

In pleading for ?The End of National Currency? in mid-2007, Steil could dare to pin his hopes, and to ask us to pin our own, on the U.S. government?s willingness to ?perpetuate the sound money policies of former Federal Reserve Chairs Paul Volcker and Alan Greenspan and return to fiscal discipline.?[7] Surely neither he nor Hinds can do that any longer.


1. George Selgin, ?Steam, Hot Air, and Small Change: Matthew Boulton and the Reform of Britain?s Coinage,? Economic History Review 56 (3) (August 2003), pp. 478-509.

2. Milton Friedman, ?The Resource Cost of Irredeemable Paper Money,? Journal of Political Economy 94 (3) (June 1986), pp. 642-47.

3. For a correct account of the resource costs of a gold standard with fiduciary money see Lawrence H. White, The Theory of Monetary Institutions (Oxford: Blackwell, 1999), pp. 42-49.

4. Lawrence White, Free Banking in Britain: Theory, Experience, and Debate, 1800-1845, second edition, London: Institute of Economic Affairs, 1995.

5. See, for example, Eric Helleiner and Emily Gilbert, eds., Nation-States and Money: The Past, Present and Future of National Currencies, London: Routledge, 1999.

6. For references see Kurt Schuler?s Currency Board and Dollarization website,

7. Benn Steil, ?The End of National Currency,?Foreign Affairs, 83 (3) (May/June), p. 96.

George Selgin is the author of Good Money: Birmingham Button Makers, the Royal Mint, and the Beginnings of Modern Coinage, 1775-1821 (University of Michigan Press, 2008).