Money, Banking, and International FinanceHegemony
A nation can exert relational and/or structural power over other nations. Relational power is
one nation can force another nation to do something or not do it. Many sports, like football,
soccer, or chess, are forms of relational power. For countries, a nation’s military strength
determines its relational power. On the other hand, Structural power represents a nation’s
ability to shape and influence the international institutions. All nations, political institutions,
businesses, and people operate under the international institutions. Some nations possess
structural power to affect the international institutions and change the rules in its favor.
The United States possesses both relational and structural powers. It gained both powers
after World War II. The United States leads countries in technology, has the world’s largest
economy, and possesses a strong military. Furthermore, the U.S. has the structural power to
influence the World Bank and the International Monetary Fund. Of course, the United States
helped create these institutions and became a large financial contributor.
A hegemony exceeds relational and structural powers. A hegemony is one country
dominates other countries in international commerce. Hegemony is the richest and most
powerful nation that establishes the institutions of international trade. Hegemony is a leader in
industrial and agricultural production, has a strong financial system, and dominates international
trade. Hence, the hegemony becomes a source of wealth, power, and economic growth. Modern
world has seen three modern hegemonies. The United Provinces (or Holland) ruled international
trade in the 18th century; Great Britain ruled the world during the 19th century, and the United
States has dominated the world after World War II.
A hegemony is critical for free trade because international markets and institutions are
public goods. Hegemony fosters free trade, ensures peace and security by protecting trade from
pirates and rogue nations, balances nations’ powers, creates the system of international
payments or the money system, and establishes the international institutions. These public goods
are expensive to provide, and many nations can free ride on the international system without
contributing to it. A free rider is a country that opens itself to international trade and benefits
from trade without paying for the public goods that establish and maintain free trade.
A hegemony provides the international public goods, even supporting the free riders
because the benefits outweigh the costs. When a hegemony rises, the world economy grows and
prospers. Thus, the markets create wealth for all participating nations. For example, the United
States supports a system of free trade. After World War II, the U.S. became the largest industrial
producer because the European factories lay in ruins. Then the United States greatly benefited
from international trade after creating the Bretton Woods System. The U.S. experienced a strong
world demand for goods produced in its manufacturing industries during the 1950s and 1960s,
leading to goods wages with a high living standard.
Costs of a hegemony, unfortunately, rise over time, weakening the hegemony's wealth and
power. If the hegemony fails, then the public goods for international trade disappear, causing
world trade to break down. Then the world’s economy stagnates and begins declining. An
interesting twist for a hegemony is a rich and powerful nation gains control after a large war.