With Currency and Contest, William Grimes, author of Unmaking the Japanese Miracle (Ithaca, NY: Cornell University Press, 2001) and co-editor of Japan's Managed Globalization (Armonk, NY: M.E. Sharpe, 2002) has written another important book, which is already becoming a standard work on the subject. Grimes examines the question of East/Southeast Asian financial region building, mainly in the aftermath of the 1997–98 financial crisis. He views the process mainly through the problematic of triangular strategic balancing, cooperation, and contest between Japan, the United States, and China. Japan is quietly at the center of the story. This book is also a fresh indication of the various ways that the ASEAN region is recently being assimilated to “East Asia,” both discursively and practically, as a matter of region wide economic integration and institution building.
Grimes explicitly approaches this subject through the lens of international relations (IR) theory, identifying himself primarily with the “realist” position. This concern for IR scholarly positions may not interest readers coming from other fields, but it is lightly done and does not interfere with the general readability and accessibility of the book, which will be useful to people working in a wide range of professional and academic domains. Underneath the explicit theory, the book is indirectly informed, via IR theory or otherwise, by systems-theoretic conceptions of the nesting of institutions at different levels of scale (internationally, domestically), and particularly the concept of insulation of domestic systems from external disturbances.
This question of insulation appears already in the first paragraph of the book. The reader discovers that, in practice, insulation here means insulation from arbitrary and self-serving US policies. The latter were notoriously exemplified by the US/International Monetary Fund response to the 1997–98 crisis in Asia, as delineated in Joseph Stiglitz's book Globalization and Its Discontents (New York: W.W. Norton, 2002). Although this experience may have been forgotten on the American side, it is well remembered in the East/Southeast Asian region and its lessons have been institutionalized. “East Asian financial regionalism was forged in the crucible of the Asian Financial Crisis,” as Grimes puts it (p. 71). The crisis demonstrated the hazards of hot-money flows—”and that it is dangerous to rely on the good will of the IMF and the United States in resolving actual crises” (p. 4). Grimes is often rather diplomatic and indirect in saying this, and he identifies the well known pathologies of the US dollar/IMF system in an abstract way that may not be clear to those new to the subject. Here, R. Taggart Murphy's now classic book, The Weight of the Yen (New York: W.W. Norton, 1997), provides the best introduction concerning the pre-crisis period. Although the debate over the dollar-standard system is not the central question in Grimes's account, readers will find it very productive to put the Murphy and Grimes lines of argumentation together.
Grimes contextualizes his study with a broad survey of the development of regional institutions and of financial regional dynamics in particular. This process is grounded in the development not only of intra-regional trade but also of regionalized production networks. Conspicuous in the wider East Asian region is a very fast process of market-led integration, combined with a regional international politics that is relatively laissez-faire compared to Europe. Grimes then develops three main subject areas in detail. The first is the creation of a new framework for “lending into crises”: Japan's unsuccessful “Asian Monetary Fund” initiative; the Chiangmai Initiative that developed out of it; and the resulting anti-crisis system of regional currency swap agreements.
The second large subject is the use of regional currency (=other than US dollars) for trade settlement, something which is still very limited. The third subject is the development of regional bond markets, which has been significant. Future students of these subjects will want to refer to Grimes's account on each. A theme that runs through the book is the muted but persistent opposition between Japanese financial policy lines and the US/IMF line, reflecting in part “a longer term Japanese effort to insulate its economy from the US power to deflect payment adjustments onto its trading partners” (p. 119) but also reflecting differing regional economic conceptions. Another lesson of the crisis was Japan's willingness to support its neighbors. The developments charted by Grimes flow not only from 1997–98 crises themselves, but also from the temporary US defeat of “East Asian”—specifically Japanese—policy initiatives that followed the crisis. The long-running movement to develop institutions of “regional self-help” (p. 67) also reflects a widespread regional understanding that current monetary arrangements are ultimately unsustainable. Both Japanese and US positions have shifted over time, but they have remained consistently distinct in the interests and visions that they represent. Grimes's approach as a political scientist is to look at the international power politics of these questions, something that in the absence of open archival records is often necessarily done in a deductive way. This is on the whole convincingly done.
But what kind of power is at stake here? Here, publically stated reasons of state and actual motivations are often widely separated. In fact, there is a significant blank spot concerning the core question here, which is the question of money itself. The power being contested is the power to create money. More precisely, it is the power to create credit, for it is not cash currency but bank credit that constitutes virtually all of what gets counted as money by any conventional measure. Who is to create internationally valid credit-money for the region? Who collects the enormous profits that come with that? Japanese financial policymakers understood what was at stake ninety years ago, when they first tried to turn the yen into a regional currency (as I describe in my book Lever of Empire [Berkeley and Los Angeles: University of California Press, 2006]). Although scholars routinely say that states create currencies, one cannot let the discussion rest there. The direct seigniorage profits accruing to states are relatively trivial, in the same way that actual cash currency is a relatively trivial part of the total money supply. Most money creation is instead a matter of bank seigniorage (in the apt phrase of Joseph Stiglitz and Andrew Weiss [“Banks as Social Accountants and Screening Devices for the Allocation of Credit,” NBER Working Paper No. 2710, National Bureau of Economic Research, 1988]). The big US banks have dominated the field of international credit creation, the Japanese banks have cooperated and competed with them, and doubtless, Chinese banks are emerging into a much greater future role. The orthodox banking propaganda (for that is what it is) that the business of banks is financial “intermediation” (i.e., between savers and investors) does not begin to describe what these banks actually do, which is to create the account money that constitutes nearly the entirety of modern money as measured by any of the standard money-supply measures. The running wildly out of control of this basic process of credit creation and leverage was also at the heart of the Japanese bubble of 1989–90, the Southeast Asian/global bubble of 1997, and the US/global bubble of 2007–08.
To point to this blank is not to single out Grimes for criticism, for one finds the same absence of discussion running right through the scholarly literature. The question has, however, become much less invisible with the bursting of the global credit bubble and the extraordinary efforts by the US Federal Reserve and other central banks since then to keep the core of the banking sector inflated. In that sense, Currency and Contest, published in 2009 as the result of a multiyear research effort, is a pre-bubble study, referring to the final decade of build-up to the bubble peak in 2007. The recent (and still ongoing) post-bubble crisis, in its banking and financial aspects, also had a notably mild incidence in Japan and in East Asia in general, notwithstanding the fact that the temporary shock to Japanese exports was one of the greatest on record. It is now very interesting to read Grimes's book in this light. Grimes's core conclusions are also unaffected by what has happened since 2008. First, “financial regionalism is happening in East Asia” (p. 204). This is of extra-regional significance because, among other reasons, East Asia is a world center of monetary (dollar) savings—the region continues to accumulate claims on the US (and the rest of the world). Another conclusion is that although the IMF has been a patently bad actor (my words, not Grimes's), regional institution building has continued to include a place for the IMF because of mutual mistrust between Japan and China. On the whole, the present three-way balance also mostly works for smaller states.
Grimes's book is based on many interviews and on a very wide reading of published sources, including Japanese-language materials. The book features some excellent graphs, though readers will need to turn elsewhere for basic quantitative data. Altogether, Currency and Contest is a model of careful and balanced scholarship and a big step forward in opening up a topic that will only become more important.
