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Just over 64 years ago, representatives of 44 countries met at Bretton Woods in the United States to come up with guidelines for a global financial system in the aftermath of World War II. Under the regime they set up, the International Monetary Fund, the World Bank and the General Agreements on Tariffs and Trade were established. The purpose of that conference was to create a roadmap that would guide future world international financial activities as designed in capitalist countries.
The worldwide depression of the 1930s can be seen as a factor in bringing about World War II. In this sense, the current crisis should not be taken lightly. If it continues it could also have serious consequences.
Therefore in 2008 a similar panic has hovered over the world, particularly among the big powers. Prior to the G20 conference, the industrial countries undertook a series of measures to save the markets, although with little effect. To be cautious, U.S. President George W. Bush, with just two months left in the White House, called a meeting of world leaders in an effort to strengthen confidence in the economic system, both in the United States and around the world.
History too often has lessons to teach, even though they are not identically repeated. Yet the likelihood that a financial crisis can lead to extreme nationalism, rightist or leftist movements and widespread mass protests, cannot be ignored. All of these are factors that can eventually lead to wars as well.
Indeed, responsible politicians in many countries as well as influential people in the media have endeavored to find remedies to the crisis. On the other hand, some analysts are suggesting it is time to replace the global leadership, particularly the role played by the United States. This is both impracticable and dangerous, however.
The crisis that began on Wall Street has caused the whole world to panic, as the world economy is already deeply interconnected. The United States should be responsible for the bitter fruits of its excessive borrowing and overspending. Yet this is not cause enough to replace the U.S. financial leadership.
The foremost reason this would not be practical is the role played by the U.S. currency. The biggest share of foreign exchange in international financial institutions and multinational companies is not the euro or the Japanese yen; the U.S. dollar still plays the key role in both investments and in stabilizing currencies.
The euro or other currencies can play a role in stabilizing world markets, but cannot replace the U.S. dollar as the chief currency. Attempting to replace it would most likely further destabilize the world economy.
Some people have suggested that, given its huge foreign currency reserves, China should challenge U.S. financial leadership and initiate a “Chinese renaissance.” Such thinking is naïve, however. China’s foreign currency reserves are mostly in U.S. dollars, and the Chinese yuan is not yet even a convertible currency. Therefore it is premature to think of China replacing the United States in this role.
China is still a developing country, with a huge gap between its developed coastal areas and its western hinterlands. And even though China has the world’s largest foreign exchange reserves, it is still a relative newcomer with regard to the international financial institutions. China still has much to learn before it can become a leader in the complex world of international finance.
It is counter to Chinese philosophy and to China’s current foreign policy for the country to take advantage of this crisis to challenge the United States. There is a saying that one should not take advantage when someone is in danger. Any kind of aggressive action on China’s part would legitimize the notion of the “China threat,” and also it would raise suspicions as to the country’s good intentions.
Another point is that the interdependent world has generated international mechanisms regulated by norms, rules and decision-making procedures. Since World War II, financial organizations such as the IMF, World Bank and WTO have served well in managing the world economy, which can be attributed greatly to the stability of the U.S. dollar. Under these organizations all states, and particularly the big-power states, are coordinators, cooperators and stakeholders in the world economy.
However, emphasizing the need for U.S. leadership does not mean there is no need to reform or transform the present financial system. World leaders should be open to making adjustments, improvements and progress. From this perspective, U.S. leaders should be more cooperative in taking into account the concerns of other leaders, and allowing shifts in the system. A monopoly by any one regime is ultimately harmful to itself and cannot be sustained.
The purpose of changes to the global financial system should be to make it more healthy, efficient and fair. From this regard, even though the Washington conference did not accomplish this goal, it did produce a consensus that changes are needed. It is not a final result, but it is a good beginning.
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(Dr. Zhang Quanyi is associate professor at Zhejiang Wanli University in Ningbo, China, and a guest researcher at the Center for the Study of Non-traditional Security and Peaceful Development at Zhejiang University in Hangzhou. His research interest revolves around the creation of a world state. He can be contacted at qyzhangupi@gmail.com. ©Copyright Zhang Quanyi)
