It may not be the top subject of discussion around the average family dinner table, but China’s Nov. 30 entry into the International Monetary Fund’s Special Drawing Rights (SDR) currency basket marks the start of a new era in the global economic structure. The accession will not immediately bring about seismic changes in the yuan’s usage, rocketing it up to international reserve currency status in one glorious surge. That kind of usage growth, if indeed it ever does happen, will take years to come about. The more immediate change is actually subtler and has more to do with what China is — or more specifically, what it is not. The yuan has become the first SDR basket currency to belong to a country that is not a clear U.S. ally — the other slots are filled by Japan, the United Kingdom and the eurozone. This is important because it is part of a wider trend, reflecting increased economic power in new parts of the world. The IMF (along with the World Bank) is the key institution of the world order that was designed by the United States and its allies at Bretton Woods in 1944. The IMF’s including the yuan in the SDR coincides with an attempt to reform this system in favor of these new powers — an attempt that the United States has stalled with a veto for five years. The important question, then, is how the United States, as the architect and leader of the existing system, will cope with these new challenges.

Origins of the SDR

But before we get into the Nov. 30 developments, it is important to first understand the basis of the current system. When the United States crafted today’s economic order at Bretton Woods in 1944, it was acting, as is so often the case, with an eye toward avoiding the mistakes of the past. The United States is blessed with the most favorable real estate and geographical positioning of any country in the world, with extensive fertile lands and river systems, access to both major oceans and sizable barriers against any major threats. But these gifts have been both a blessing and a curse, for while they enable immense productivity, and hence power, they also create a temptation toward isolationism; Americans tend to retreat behind their ocean buffers and enjoy their continental paradise. This temptation was so strong that for the first 150 years of its history, the United States did exactly that — fighting engagements to protect trade routes and secure its own strategic position, but rarely interfering in the politics of other continents. It was forced out of this comfortable position by World War I and again by World War II. By 1944, the lesson the United States had learned was that it needed to be present to prevent these situations from arising in the first place, and the most sensible strategy was to exert its own power to block the rise of any single large challenging bloc or competitor. With some estimates putting U.S. gross domestic product at 50 percent of the world share in 1945, the United States was in a position to do so.

The resulting global order was quite a departure from the one it replaced largely because of the differences between the United States and the United Kingdom, its predecessor as global hegemon. By surface area, the British Isles are a 30th the size of the United States. The British Empire’s strength came from its accrual and skillful management of overseas possessions, in keeping with the colonialist climate of the times; the empire ultimately covered a quarter of the world’s surface. Colonies were used mainly for their resources to the benefit of the colonizer, somewhat constraining their potential development. Even China, which notionally escaped colonization, was invaded and carved up first by Western powers and then by Japan.

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