This dissertation develops a theory of interstate monetary security to show what determines the role of a currency in the international economy. This theory underscores that even if a state has outstanding economic conditions, the international use of its currency will still be inhibited if other states are worried about security threats. This is because cross-national monetary relationships can be exploited for political coercion in interstate disputes. Given such security concerns, at least one of the two political conditions below should be satisfied so that the currency of a state with superior economic conditions but also serious security threats to other states can play a critical international role. One is if the issuing state makes other states believe that it will not employ monetary coercion in major political disputes with them. The other is if other states are protected by defensive military alliances lowering the likelihood of such disputes. In particular, states with credible property rights protection are more likely to satisfy the first political condition.
I tested this theory with a series of statistical analyses along with two historical case studies. For these statistical analyses, official data on cross-national monetary relationships are mostly kept confidential. I thus created a global dataset using an econometric method of estimating part of those relationships together with data from the International Monetary Fund. The covered period is from 1968 to 2007. As for the historical case studies, they look at challenges from the US dollar and the Reichsmark to the British pound’s role in the world economy before WWII. After the general tests, I applied the theory to the rise of China’s currency, the renminbi (RMB). This research models how the efforts of the Chinese Communist Party (CCP) to survive have given birth to some institutional mechanisms conducive to the international use of the RMB. Several preliminary tests of this model highlight that the prospect of the RMB’s rise depends on whether China can maintain not only the rapid economic development but also those institutional mechanisms in the Xi Jinping era.
