Financial Statecraft: The Role of Financial Markets in American Foreign Policy

Steil and Litan note an increasing tendency by the United States to try to influence international capital flows in order to further its foreign policy goals -- whether to punish errant countries, inhibit the proliferation of nuclear weapons, slow the financing of terrorism, or prevent the laundering of drug money. The authors call this "financial statecraft" and provide a trenchant critical analysis of these efforts, which often turn out to involve symbolic politics at its worst: they have no impact on the stated objective, because the scope and operation of financial markets are now worldwide; they harm U.S. economic interests; and in some cases, they harm the alleged beneficiaries (refugees in the Sudan, for example). But the authors also argue that in certain respects the United States has engaged in too little financial statecraft. They attribute the financial crises of emerging markets during the past decade largely to the existence of separate national currencies and make a spirited case for "dollarization" -- the adoption of the U.S. dollar, or perhaps the euro, as a replacement for national currencies by many developing countries. The United States, they argue, should facilitate that policy by sharing with such adopters the modest financial gains, called seigniorage, that arise from issuing a currency widely used by the public.