IN JANUARY AN American former general spoke at a gathering of senior global financiers. Used to thinking about strategy and hard power, he warned that America is dealing poorly with its most complex array of threats since the cold war—from Iran and Russia to the novel coronavirus. But he also spoke of a much less visible threat: how, through its aggressive use of economic sanctions, America is misusing its clout as the predominant financial power, thereby pushing allies and foes alike towards building a separate financial architecture. “I’m not sure of the decider-in-chief’s appreciation for how the financial system works,” he said. That a former general would be thinking about the global financial system says much about how significant that danger has become.
The system is made up of the institutions, currencies and payment tools that dictate how the invisible liquidity feeding the real economy flows around the world. America has been its pulsating centre since the second world war. Now, though, repeated missteps, and China’s growing pull, have begun to tear at the seams. Many assume the status quo is too entrenched to be challenged, but that is no longer the case. A separate financial realm is forming in the emerging world, with different pillars and a new master.
The hegemon-in-waiting financially, as geopolitically, is China, whose rapid rise is tugging away at the system. The country today accounts for 15.5% of global GDP, up from 3.6% in 2000. Its economy, the world’s second-largest, is deeply woven within the fabric of global trade. Yet it weighs little in the financial system. China sees correcting this asymmetry as crucial to gaining great-power status. “The dollar dominance is being hollowed out from underneath,” says Tom Keatinge of RUSI, a think-tank. The covid-19 crisis threatens to give centrifugal forces a decisive boost.
The system’s first pillar was laid in 1944 with the founding of the World Bank, the IMF and the global monetary order at Bretton Woods, New Hampshire. Having supplied weapons to allies throughout the war, America owned most of the planet’s gold, in which it priced its wares. Much of Europe and Asia lay in ruins. The interwar system of floating exchange rates had proved dysfunctional. It was thus decided that all currencies would be linked to the dollar, and the dollar tied to gold. That made the greenback the world’s new reserve currency. Two decades later the rising economic heft of Japan and Germany, coupled with vast money-printing by America during the Vietnam war, made the pegs untenable. The system disintegrated, but the “dollar standard” survived.
In the 1970s America also gained sway over the plumbing system that underpins global payments. American banks, then barred from operating outside state borders, teamed up to develop interbank messaging systems and nationwide…