(Mis)trusting authorities: Distributed authority networks and a social theory of currency crises

Currency crises can have devastating consequences for political, social and economic relationships, undermining the ability of individuals and states to prosper. Yet, why currency crises begin and how they progress remains poorly understood. Partially, this is due to a bifurcation evident in the study of currency crises that has impeded development of a comprehensive explanation. Despite the fact that state and market actors both play a crucial role in currency crises, economic studies concentrate on the macroeconomic triggers of one-sided speculative behavior while political approaches investigate why governments choose to abandon existing exchange rate policy. As a result, each approach only addresses one half of the currency crisis puzzle, while both approaches neglect the interrelationships between the two. A more fundamental issue has, however, prevented scholars from understanding currency crises better. Money is best understood as an evolving social institution with the exchange value of money dependent upon changing relationships of trust between the authorities who produce, exchange and regulate money. Unfortunately, current currency crisis theory does not approach currency crises from a “social” perspective. It is argued here that the meanings state and market actors attach to economic and political conditions are heavily influenced by the trust and authority relations in which they find themselves embedded. These social relations can produce a “virtuous cycle” of trust and authority highly resistant to change (hence producing exchange rate stability) or produce a “vicious cycle” of currency crisis. After specifying the nature of these relationships and how they produce distinct logics of currency exchange, what is here termed an “authority network” approach is then applied to three cases of currency crisis: the interwar gold standard crisis, Bretton Woods crisis and Exchange Rate Mechanism crisis. These cases serve to illustrate how trust and authority relations form and decay and their influence on currency stability and crisis. It is then suggested how this approach can be applied to a wider range of monetary crises.