Published by EH.NET (September 2003)

Eric Helleiner, The Making of National Money: Territorial Currencies in Historical Perspective. Ithaca, NY: Cornell University Press, 2003. xii + 277 pp. $32.50 (hardcover), ISBN: 0 8014 4049-1.

Reviewed for EH.NET by Lawrence H. Officer, Department of Economics, University of Illinois at Chicago.

Eric Helleiner (Trent University) defines territorial currencies as currencies that are (1) homogeneous, (2) national, and (3) exclusive. This is a broader definition than “national currency,” the concept that most monetary historians would use. A “national” currency is not “territorial” unless and until there are no other currencies — whether foreign or privately issued domestic — in the land, and the currency is homogeneous in quality. It is doubtful that any currency has ever been “territorial” in that pure sense, and in fact Helleiner’s usage is looser than he admits.

After an introduction, which summarizes the entire book excellently, the author divides the volume into two parts, each with five chapters. Part 1 (“The Birth of Territorial Currencies in the Nineteenth Century”) focuses on the origins of territorial currencies; Part 2 (“The Contestation and Spread of Territorial Currencies”) deals with expansion of territorial currencies in the twentieth century and the challenges to territorial currencies, both historical and present-day.

Contradicting the conventional wisdom of international-relations scholars (but certainly not of monetary historians), Helleiner observes that prior to the nineteenth century, monetary systems everywhere diverged from the territorial-currency model: foreign money circulated with domestically-issued money, low-denomination money was not rigidly related to official currency, and even officially issued domestic currency was non-standardized and varied in value in different regions of the sovereign territory. In the nineteenth century, all three deviations from the territorial-currency norm were corrected.

How did this happen, and why in the nineteenth century, rather than earlier? Helleiner sees the answer as double-layered. First, new industrial technologies (for example, steam power, steel plates, and siderography) enabled standardization of coin and note production. Second, nation-states emerged with the power to achieve territoriality in their money (for example, via enforcement of legal-tender laws) and with trust of the citizenry in the state’s capability of managing money. Second, the authorities had the motivation to create territorial currencies. There were four reasons for this motivation, according to Helleiner. A territorial currency was seen as a means to (1) reduce currency-related transactions costs, (2) control the money supply for macroeconomic purposes, (3) extract seigniorage, and (4) strengthen national identity. The technology and nation-state prerequisites, and at least some of the reasons for the motivation, were not in existence (or of insufficient strength) until the nineteenth century.

Challenges to the territorial currency in that century took the forms of the free-banking movement and international currency unions; but the territorial-currency movement prevailed. In the interwar period, territorial currencies reached their pinnacle. Powerful central bankers in center countries provided substantial support for strong and independent central banking (an important ingredient of a territorial currency) in countries not yet within the territorial-currency rubric. Montagu Norman, Governor of the Bank of England, “was so keen to see central banks created abroad that he even refused to visit countries that did not yet have them” (p. 147). Benjamin Strong, Governor of the Federal Reserve Bank of New York, felt the same way. The advisory missions of Edwin Kemmerer in enabling creation of central banks (and therefore territorial currencies) in Latin American and elsewhere are, properly, emphasized.

Attention (an entire chapter) is devoted to colonial currency reforms, where, surprisingly, distinct colonial currencies were generally created, usually in the form of currency boards. With many newly independent countries generated from ex-colonies after World War II, the creation of territorial currencies received a new impetus. In addition to the usual rationales, some new ones were involved: the desire to increase transactions costs (in connection with the abandonment of colonial currency unions) and the objective of national macroeconomic management. Monetary reforms involving territorial currencies were supported by the United States, but generally opposed by Britain and France (naturally, as these were the ex-colonial powers).

In the final chapter, Helleiner addresses current challenges to territorial currencies. He sees four such challenges. First, there is the movement to monetary unions, spurred largely by European monetary union, which resulted in creation of the euro. Second, there is increasing use of foreign currencies within poorer countries of the world, taking the form of dollarization and, in some cases, even abolition of national currencies in favor of entering the “dollar zone.” The weakness of the nation state is viewed as the ultimate cause. Third is the development of “local currencies” — important in previous eras, including (in the interwar period) during the Great Depression. This development, little known in the literature, is properly noted by Helleiner as potentially important because, unlike in the 1930s, the impetus is more than just a temporary response to a depression. Fourth, perhaps most interestingly, “electronic money” (corporate currencies, such as value cards, and electronic payments) is coming to the fore. This is a new technology of producing money that now acts against territorial currencies.

The author concludes with an adroit summary of his findings: “territorial currencies have had a relatively short life, and they have experienced constant challenges in various regions of the world throughout their existence” (pp. 243-44).

Helleiner deserves praise on several grounds. First, the work is a history of thought as much as a history, and the two themes are cleverly welded together. Second, an interdisciplinary approach (economics, political science, sociology) is used throughout. Third, in refreshing contrast to the tendency of economic historians to concentrate on the Anglo-Saxon or European experience, much attention is given to other areas of the world: Japan, China, Latin America, Africa, and the Middle East. The typical economic historian can learn much in this context. Fourth, to help the specialist, there is an extensive bibliography, covering 25 pages. Fifth, the author does what economic historians tend to say is important but rarely do: relate historical experience to the present day. Sixth, the book is well organized and the author sticks to his focus relentlessly.

One hesitates to criticize an author with these virtues; but there are as many or more limitations of the volume. First, and perhaps foremost, Helleiner does not work with data at all. There are no tables and almost no figures at all in the book. Without measurement, the study becomes qualitative in nature, and the author’s statements lack quantitative support. Second, although there is breadth, there is not much depth in the analysis. Third (and related), the author’s treatment tends to be disjoint. For example, the U.S. national banking system is discussed in several contexts and places in the book, with no over-all consideration. Fourth, Helleiner’s concern is with ideology more than effective influence on policy, with motivation more than outcome. The relative importance (in Helleiner’s judgment) of various ideologies does not necessarily correspond with their practical impact — a feature that diminishes the value of the book to the economic historian. Fifth, the author does not distinguish between the monetary base and the money stock, nor between the money stock and its velocity.

Finally, the author’s strictures against the optimum-currency-area (OCA) approach are overblown and perhaps unfair. Helleiner, in effect, claims that the OCA theory is purely economic, thereby ignoring political implications, and contains the prediction that countries make a rational judgment that their country is now an OCA and therefore decide to create a territorial currency. He also observes that “most countries are not optimum currency areas” (p. 11). In response, first, an OCA character can be acquired via a territorial currency (or forming/joining an existing currency union); OCA is not a property that is only endowed. Second, economists are well aware of the importance of political as well as economic factors in this context. For example, Leland B. Yeager (International Monetary Relations, second edition, New York, Harper & Row, 1976, p. 133) distinguishes the following attributes of a country that would favor creation of a currency union: “flexible prices, large size, openness of its members to each other but closedness to the outside world, homogeneity, factor mobility, policy prudence, and acceptability of a union-wide government.” Several of these qualities are at least partially political in nature!

In sum, this book can be recommended to economic historians for its virtues but with an eye to its limitations.

Lawrence H. Officer is Professor of Economics at University of Illinois at Chicago. As Editor, Special Projects, EH.Net, he has recently completed “What Was the UK GDP Then?” which is available on the EH.Net website.