I did not even know that the British Empire is dying, still less did I know that it is a great deal better than the younger empires that are going to supplant it.”
—George Orwell, Shooting an Elephant
History tells us that the decline of one empire inevitably results in the rise of others. Some, like the Roman and British, bring a semblance of order to the state of international financial affairs. Trade prospers, and a common currency, backed by a strong central government, becomes the standard of commerce and finance.
Yet as empires decline, the transition from one to another often causes great economic uncertainty. Economies shrink and governments collapse. Historians note that the Western Roman Empire fell not so much because of barbarian invasions, but instead because of a weakened central government that could not generate and collect tax revenues.
More recent superpowers have managed their economic declines in a more graceful manner. The British pound sterling was the currency of international finance during the 19th century, and, although Britain’s economy is no longer one of the largest, the pound remains a widely used and generally stable global currency.
The United States has much to learn about managing a transition from “sole financial superpower” to “great power among many.” Orwell spoke of militaristic empires, but the United States’ empire may go down in history as one based primarily on business and finance. Since the end of World War II, ours has been the most innovative, most prosperous and wealthiest financial empire in the entire world.
During recent years, however, signs of the U.S. dollar’s diminishing preeminence have become apparent. The Euro, the common currency of continental Europe’s major economies, is now worth more than the dollar. Also, people of many non-Euro economies like Russia now choose to hold their savings in both Euros and dollars. This marks a change from the last half of the 20th century, when people all around the world chose to hold their savings only in dollars, viewing it as the most stable and valuable of the global currencies.
Perhaps the most startling indications of America’s decline in global financial prestige come from recent statements from the leaders of China. The world’s largest holder of U.S. debt with more than $1 trillion in Treasury bills, China finds itself in a position to subtly influence U.S. financial policy. Premier Wen Jiabao said he was “worried” about the safety of China’s investment in U.S. government debt, given the recent fiscal stimulus packages. He went on to ask that the United States take steps to guarantee the full value of its debt. Such comments from the leader of a rising country to that of a superpower would have been unheard of even five years ago; China’s leader seemed to infer that the United States was not the wealthiest country in the world, but rather a developing nation.
In truth, China is flexing its power. In that respect, its leaders have every right to question our creditworthiness. The nation that rebuilt Europe after World War II is now heavily in debt. China, the country projected to have the largest economy in the world by 2035, lays the groundwork for its own financial empire.
Chinese officials followed their remarks about U.S. debt with an even more remarkable proposal: Instead of using the U.S. dollar as the de facto world reserve currency, countries should instead use a basket of global currencies as the international exchange standard. Here is another example of global discontent with a fading U.S. economic empire. U.S. Treasury Secretary Timothy Geithner brushed off Chinese officials’ suggestion as impractical. But, in future years, when China generates most of the world’s economic output and prefers its own currency as the global standard, will the United States be able to ignore its demands?
China’s nascent financial empire remains small compared to our own, but even now, U.S. officials should begin planning for the day when the greenback no longer dominates world trade. We can begin by making the levers of global finance more equitable today and hope that future economic powers keep them in place tomorrow. The power of existing international trade and commerce regulators, like the World Trade Organization and International Court of Arbitration, should be strengthened. Rising nations like China deserve more influence in the operation of these organizations. Also, the U.S. Federal Reserve has done well to coordinate monetary policy with the Bank of England and European Central Bank, but U.S. officials should also seek input from monetary officials in Brazil, Russia, China and India. These nations are the new engines of the global economy, and their voices need to be heard more frequently in economic discussion.
A policy of accommodating the rise of new economic powers is, in reality, the only option available to the U.S. government. In 2005, Congress indirectly blocked an attempt by the Chinese state-owned oil company Cnooc to buy American oil company Unocal. Yet American banks like Morgan Stanley and Goldman Sachs operate in China with very little interference from Chinese authorities, and China was one of General Motors’ few growing car markets during the last few years. Thus, protectionist sentiment in this country only will undermine growing and profitable trade links between the two nations. When Chinese companies wish to sell their own cars in America, will Congress once again try to block their sales to protect America’s own declining auto industry? Protectionist policies simply delay the inevitable.
The fall of an empire is often debilitating and destabilizing to existing social, political and economic systems. As we enter a new and more uncertain age of global commerce, we may do well to reflect on Orwell’s words.
Andrew’s column runs biweekly Thursdays. He can be reached at a.golden@cavalierdaily.com.
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