China’s New Investment Bank: A Premature Prophecy – By Mark Fleming-Williams

Has the U.S. Lost Its Role as Driver of Global Economy?‏

China’s New Investment Bank: A Premature Prophecy

Global AffairsGlobal Affairs – April 22, 2015 | 08:00 GMT – STRATFOR

By Mark Fleming-Williams

Former U.S. Treasury Secretary Lawrence Summers wrote on April 5 that this month may be remembered as the moment the United States lost its role as the underwriter of the global economic system. His comments refer to the circumstances surrounding China’s launch of a new venture, the Asian Infrastructure Investment Bank (AIIB). Wary of China’s growing ambitions and influence, the United States had advised its allies not to join the institution, but many signed up anyway. The debacle was undoubtedly embarrassing for Washington, but even so, Summers’ prophecy is a bit premature at this stage.

To understand why, one must first understand the basis of the United States’ dominant economic position in the world. At the height of World War II, the heavily indebted United Kingdom signed the Lend-Lease deal, which handed over British naval bases to its American cousins in exchange for financial support. This act was akin to passing the military superpower baton, since it transferred control of the world’s oceans to the United States.  

Then, three years later, in a slightly run-down hotel in New Hampshire, delegates from each of the major Allied nations spent three weeks at the Bretton Woods Conference, where they shaped the postwar economic order. What emerged from the summit was a monetary system that was based on the U.S. dollar and two new institutions: the International Monetary Fund, which would monitor trade flows, and the World Bank, which would help provide financing for developing nations. Both were to be headquartered in Washington, and the United States effectively inherited the global economy.

The U.S.-centric system functioned well for the next 25 years. The United States had emerged from the war with the world’s strongest economy and, under the Marshall Plan, pumped money into the reconstruction of Europe. But in 1971, as the United States was entangled in a costly war in Vietnam, then-President Richard Nixon discovered that under the Bretton Woods system, he could pay for the war by printing more money and exporting the resulting inflation to the rest of the world. France pushed back, and a new fiat currency system that released the dollar from its explicit anchoring role was born, though it nevertheless retained its place as the dominant global currency. [Read more]

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