The Contest of the Century (37 page)

Attacking the power of the U.S. dollar is not a new form of geopolitical sparring. In the 1960s, General Charles de Gaulle sought to challenge American leadership of the West and to position himself in the middle ground between Washington and Moscow. One of his tactics was to withdraw France from the military arm of NATO. The other was to take aim at the dollar. Throughout the mid-1960s, as America became bogged down in Vietnam and its public finances came under pressure, de Gaulle gave a series of press conferences in which he called for an end to the primacy of the dollar and urged other countries to convert their holdings of U.S. currency into gold. And it was a French finance minister (and later president), Valéry Giscard d’Estaing, who famously complained in the 1970s that the benefits America derived from the dollar were “an exorbitant privilege.” “There was no doubting de Gaulle’s intention: to promote his drive to reduce US economic, military and cultural influence,”
Time
magazine said of his campaign. (As part of his effort to demonstrate independence from Washington, de Gaulle recognized the People’s Republic of China in 1964, a full seven years before Nixon and Kissinger made their celebrated opening to Beijing.) China sees a global role for its currency in a similar light to de Gaulle’s, as both good business and good power politics. Even though
Beijing knows it will be a long process that could take several decades, some officials see it as a central part of a broader struggle to place limits on American power and to increase China’s own room for maneuver. In their minds, it is a rather nerdy, pointy-headed proxy war for influence.

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When then U.S. treasury secretary Tim Geithner spoke to a group of students at Peking University in 2009, he was asked if China’s holdings of U.S. government debt were safe. Of course they are, he responded. The audience laughed. It is not just the Chinese elite who frets about the dollar. One of the surprising aspects of the Chinese reaction to the financial crisis has been the way in which seemingly technical issues about the international financial system have seeped into public debate. The U.S. dollar has become a flashpoint for some of the broader nationalist tensions that have been boiling up within China. In 2012, the car of the U.S. ambassador to China, Gary Locke, was surrounded by an angry mob of around fifty people who had been protesting at the nearby Japanese Embassy. One demonstrator grabbed the flag off the front of the car. Then the crowd shouted: “Give us back our money.”

In Song Hongbing, China’s currency nationalists have found an unlikely cheerleader. A few years ago, Song was an unknown economist at a Chinese government think tank. But his 2007 book
Currency Wars
turned him into an unlikely star of the publishing world, selling half a million copies, and making him the spokesman for popular resentment at the dollar-based world. The book aims to be a sort of financial history, but it is really a hodgepodge of dubious stories about financial conspiracies down the ages, arguing that the Rothschild banking dynasty has been pulling the strings in the international financial system ever since the nineteenth century, when it made a fortune speculating on the outcome of the Napoleonic wars. He claims the Rothschild family wealth is now a hundred times greater than that of Bill Gates. One of his main targets is the fact that the regional U.S. Federal Reserve banks are technically owned by the private banks rather than the government. But Song also manages to recycle some ugly myths about the prominence of Jews in the financial sector and their alleged role in events ranging
from Waterloo to the Asian financial crisis. Such insinuations did not prevent the book from generating buzz in some surprising places—two different sources told me that Premier Wen Jiabao had asked to read a copy of
Currency Wars
.

Song’s background does not make him an obvious critic of American financial excess. While he was living in the U.S., he did some work creating financial-risk models for Fannie Mae and Freddie Mac, the two mortgage finance institutions at the center of the housing bubble. But the book seems to have tapped into popular suspicions that international finance is rigged against China and that the U.S. will debase its currency. His timing was impeccable:
Currency Wars
came out just before a massive financial crisis which was caused in part by the arrogance of a U.S.-based international financial elite. That has helped turn Song into an often quoted authority on the links between finance and politics. In the process, he has also helped popularize a certain strain of victim nationalism that sees the dominance of the dollar as one of the tools used to curtail China’s rise. “Before my book, people thought currencies were really an academic issue, but now they see it as a political issue, as a struggle for power,” Song told me. “The big power is the one who issues the money, who can define what money is. The currency war is a struggle, a fight for who controls the money and who can issue it.”

One of the peculiar aspects of Song’s writings is that he shares many of his concerns with a section of the right wing in America. He has not only an intense aversion to the investor George Soros, but also a deep suspicion of the powers of the U.S. Federal Reserve. “Congress should have the power to issue money, not the Fed,” he told me. “No one audits the books of the Fed.” He added: “Ron Paul has very much the same view. Why is money issued by a small group of unelected people?” When I asked him why he was so obsessed about Jews in finance, such as Soros, he smiled a little uncomfortably and attempted the sort of compliment that runs its own risks of stereotyping. “I personally admire the Jews,” said Song. “They were prohibited from doing anything else, they could not own land, so money was the only way to succeed.”

A bespectacled forty-something in a starched shirt with personalized cuff links, Song was clearly enjoying his success when I met him. He had opened a new consulting business, called the Global Business
and Finance Institute, to give advice on international financial issues. A sequel to his book,
Currency Wars 2
, which describes plans by a small group of bankers to launch a new global currency, had been published, and a third volume is in the works. He had also just rented a suite of offices in Beijing near Dongzhimen Avenue, modern China’s new power center, which houses the imposing and slick headquarters of many of China’s largest state-owned companies. One side of the office was taken up by a new side business: a group of young computer programmers were designing a video game based on
Currency Wars
. Song described to me the outline for the game. The early stages would involve starting your own business and building up capital. If a gamer managed to reach the final stage, he would get to become a big hedge-fund speculator who could launch an attack on the U.S. dollar. “You can become the sort of financial big guy who has the resources to start a currency war,” he said. “Someone like George Soros.”

JEKYLL ISLAND

In November 1910, a group of the great and the good from America’s financial elite assembled after dark in a railway car at a quiet siding in Hoboken, just across the river from Manhattan. They used only their first names in front of the porters. When they reached Brunswick, Georgia, two days later, they took a boat to Jekyll Island and checked in at the private club partly owned by J. P. Morgan. They told people they were going duck hunting, and one of the party even carried a shotgun onto the train to keep up the pretense, although he had never used one in his life. But their real purpose was to draft legislation to completely shake up the country’s banking system. In the process, they also revolutionized the role of the U.S. dollar.

The men at the secret meeting on Jekyll Island included Benjamin Strong, head of Bankers Trust; Henry Davison, who was J. P. Morgan’s right-hand man; Paul Warburg of Kuhn, Loeb; and Frank Vanderlip, a former journalist who was by then the boss of what became Citibank. They were joined by Senator Nelson Aldrich of Rhode Island, head of the Senate Finance Committee, whose daughter was married to John Rockefeller, son of the richest man in the country, and Abraham Piatt
Andrew, assistant secretary of the Treasury Department. The most famous consequence of the meeting was the bill that created the Federal Reserve, America’s central bank. The 1907 financial crisis had exposed the vulnerabilities of the economy to such an extent that the government effectively had to rely on J. P. Morgan to broker a solution—he called leading bankers to his Manhattan town house and would not let them leave until they had devised a rescue plan. As a result of the legislation they wrote, the Federal Reserve System took over that role of regulating and managing credit conditions in the country. Every modern economy in the world now has a central bank that plays the role of lender of last resort. But, given that sections of the American right believe the Fed is an example of excessive government interference, the Jekyll Island meeting is, to this day, viewed by some as an elite conspiracy against the interests of ordinary Americans. In 2010, the libertarian politician Ron Paul was the headline guest at a conference on Jekyll Island about the misdeeds of the Fed. “People are demanding that we not put up with a secretive organization like the Fed that prints all this money and causes all this mischief,” the former presidential candidate told the audience.

Establishing the Fed was only one part of the 1910 Jekyll Island plan, however. The legislation they developed also created the legal instruments for the dollar to become an international currency—as it happens, a plan quite similar to the one China is now pursuing. They started by establishing procedures so that trade could be settled using U.S. dollars. Then they created the legal framework for the issuance of international U.S. dollar bonds. The impact was dramatic. According to the financial historian Barry Eichengreen, just one decade
after the bill was passed in 1913, the U.S. dollar already accounted for a larger share of central-bank reserves than the British pound. It was also used in more bond issues and exceeded sterling in loans linked to trade by a factor of two to one. Even before the Jekyll Island plan was implemented, the American economy had the scale for the dollar to play a larger role in the global economy, but lacked the legal instruments and market infrastructure. Within just a decade of its approval, the status of the U.S. dollar had been transformed and sterling’s diminished.

Just as Americans should not be surprised by China’s urge to build a grand navy, they should also not be blindsided by Beijing’s ambitious
plans to turn the renminbi into a global currency. After all, this is precisely what America did at a similar stage in its development, when it wanted to start turning its economic scale into greater international influence. Whereas America’s plan was written by an elite band of Wall Street and Washington figures, China’s global-currency push has been orchestrated by a small group of the Communist Party elite. (The party’s senior officials also often plot new strategies at its own beachside retreat, Beidaihe, a few hours east of Beijing.) Given America’s current troubles and China’s inexorable growth, it is tempting to think that something similar might happen again over the coming decade or two, when it is quite likely that China will become the biggest economy in the world. But for history to repeat itself, and for the renminbi to eclipse the dollar, two very substantial conditions will need to be met. China will have to tear up its economic model, and America will need to let it happen. Both are possible, but neither is inevitable.

GRIDLOCK

As to the second condition, there certainly is no shortage of reasons for thinking that the U.S. could be heading for the sort of crisis that would shake the foundations of the dollar era. The litany is a familiar one—high debt levels, chronic budget deficits, political gridlock, spiraling entitlement spending, and crumbling infrastructure. In some ways, the status of the dollar is actually making things worse. The U.S. government’s ability to keep borrowing from abroad allows it to put off taking some of the tough decisions that will eventually need to be taken. Some Americans worry that having a reserve currency is the equivalent of a “resource curse,” the sort of natural advantage that leads to indulgent, ineffectual government.

Yet, despite all these problems, the fate of the U.S. dollar still lies largely within the control of the U.S. government. Big shifts in the international monetary system take place rarely, and then usually only in response to dramatic events. Once gained, the position of reserve currency is not easily lost. The system is a reflection of the collective confidence and force of habit of millions of economic agents around the world and only changes from one anchor to another when there is little
alternative. The loss of influence suffered by the British pound is one example. The decade starting in 1914, which was the period in which the U.S. dollar began to stake its claim at the heart of the international monetary system, was also the decade that included the First World War, an event which all but bankrupted Great Britain. With
the value of sterling plummeting from 1915, all of a sudden Brazilian coffee traders started pricing their goods in dollars, and Dutch tulip-bulb farmers wanted export credits to be issued in dollars. The Second World War finished the job on Britain’s finances and completed the process of transition from sterling to the dollar. The ascendance of the dollar required not only the decisive plan that was devised on Jekyll Island, but also a collapse of confidence in sterling.

Now, admittedly, it is not completely out of the question that the U.S. will suffer a similar financial convulsion. In the summer of 2011, some members of the U.S. Congress seemed quite happy to use the threat of default as a short-term political tactic. The subsequent downgrading of U.S. government debt by Standard & Poor’s was a stark warning about the potential erosion of confidence in the dollar. Ever since then, Washington has been living from one budget crisis to another. Yet even this 2011 mini-crisis served to demonstrate the unique position that America holds in the international financial system. In such moments of nervousness, investors seek a safe haven, and the place they looked to was, ironically, the U.S. Treasury bond market. In the very week when America’s credit rating was downgraded, the price of American debt actually rose by near-record levels. There are huge incumbent advantages to being the principal reserve currency that are not easily dismantled. If the U.S. can muddle through its current troubles and present a coherent long-term plan for bringing its debts under control, the U.S. dollar will retain a central role, if for no other reason than inertia. That is politically easier said than done, of course, but the correct response to the Chinese challenge to the dollar is nothing more and nothing less than good housekeeping. The U.S. holds its fate in its own hands.