As Dollar Drops, China's RMB Could Emerge as Currency of Empire

Commentary, Franz Schurmann,
Pacific News Service, Dec 03, 2004

Editor's Note: The U.S. dollar's decline might be opening the door for a new imperial currency: China's yuan.


At its pinnacle a century ago, the British pound sterling and the various currencies linked to it through its colonies reigned imperially all over the world. But a half-century ago the pound had become badly weakened by World War II, and the American dollar became the primary imperial currency. Now, another half-century later, is it America's turn to abandon its mighty dollar to another rising imperial currency?

Imperial currencies have to circulate not only in their homeland but, increasingly, all over the world. They have to have great stores of money, both public and private. And they must offer "safe financial havens" in times of war and disaster.

China's yuan -- aka RMB -- fulfils all three requisites.

money trader
(A Kuwaiti money trader exchanges RMB, the Chinese currency.
The image of Mao Zedong can be seen on the bills.
Photo by Xinhua News Service.)

During most of the 19th century, only Britain's pound sterling fulfilled all three requisites. And in the 20th century the American dollar also fulfilled all three. But now fewer and fewer people are buying U.S. T-bonds. And America is pressuring China to float its RMB on the market.

Many economists and hordes of businessmen now flocking to booming China. One of those who has been in and out of China for many is Columbia professor Robert Mundell, who got a Nobel prize in economics 1999.

He is also called the "father of the euro." He and many others believe that China has evolved its own economy that is worth studying and could become a model for the world. For one thing, it was the only big economy that was able to avoid the recent global recession.

When the euro was launched in 1999 it was pegged at 1.18 euro to 1 dollar. But soon enough the euro plunged well below the dollar. The European bankers also found out that the megatons of oil and Liquefied Natural Gas (LNG) needed to keep their modern economies going had to be denominated in U.S. dollars. The euro is a great venture, but not an imperial currency.

When the dollar started plunging vis--vis the euro, it was almost coincident with Bush's invasion of Iraq on March 20, 2003. For the first time, there was talk among some oil producing countries about accepting payment in currencies other than dollars. These countries, mostly Arab nations, were angry at Bush.

But some three-fourths of oil and LNG exports have continued to be denominated in dollars. The reason is that the bulk of oil lifting is still a worldwide Anglo-American monopoly. And among European bankers were many who saw the Iraq invasion as a golden chance to appreciate the euro upwards. But weakening America's currency did not deal with Europe's huge economic problems.

Now that Bush is securely in power for another four years, it looks like he will concentrate mostly on the American empire. Not only must he deal with three wars (the War on Terror, Afghanistan and Iraq), but he is also promising to "restore the strong dollar."

With the bulk of oil exports still denominated in dollars, China cannot wield its strong currency until it has a significant share in the world's fossil fuels. Recently it concluded a 30-year agreement with Iran for LNG at a cost of upward of $70 billion. Presumably the payment was from the Chinese Central Bank in U.S. dollars, of which the Chinese have huge tonnages.

Washington does not like Iran, and is forced to tolerate China and Russia. China has the tonnages of currency and Russia the enormous reserves of oil. If Bush makes another mega-mistake like the invasion of Iraq, then China will become the successor of the British and American Empires. Otherwise, America and China could work together as semi-empires. That is what former president Jiang Zemin proposed to Condoleezza Rice when last fall, she, following Dick Cheney, visited Beijing.

PNS Editor Franz Schurmann (fschurmann@pacificnew.org) is emeritus professor of history and sociology at U.C. Berkeley and author of numerous books.