Michael Pettis points out why there will be a long gap between when China is the largest economy on all measures and when the RMB will become a dominant currency.The USA was the world’s largest economy for fifty years prior to WW1, and Germany the world’s second largest economy, and yet the US dollar was of minor importance in international trade and the German goldmark only third in importance, behind the French franc and far behind sterling.
London had spent decades proving that it was far less likely to intervene in sterling markets then any of its competitors and so, as long as it did not do so, inertia alone allowed sterling to retain its primacy, but it certainly did not need to worry about a challenge from the dollar until WW1 completely transformed global governance and the institutions that characterized international finance. The dollar in the late 19th century did not enjoy high levels of confidence in the international markets because there were doubts about the quality and credibility of Washington’s governance and about whether Washington would resist intervening in its financial markets or in the currency if it felt that it was in the national interest to do so. Even if the dollar today were at risk somehow of losing the huge advantage inertia creates, the same constraints that prevented the dollar from mounting a challenge to sterling’s pre-eminence before WW1 make the ERMB an unreliable international currency.
While use of the RMB as a reserve currency or as a trading currency will probably rise in the next decades, this is mainly because of its still very low base. According to SWIFT, for example, which settles interbank trading orders and is one proxy for currency use, the RMB broke into the top five currencies at the end of last year, accounting for 2.2% of SWIFT transactions (the USD accounted for 45% and the euro 28%. 50% is the most any currency can have)
But was the real US economic passing point the year US output surpassed the entire British Empire ?
In 1870, at the time of German national unification, the population of the United States and Germany was roughly equal and the total output of America, despite its enormous abundance of land and resources, was only one-third larger than that of Germany,” he writes. “Just before the outbreak of World War I the American economy had expanded to roughly twice the size of that of Imperial Germany. By 1943, before the aerial bombardment had hit top gear, total American output was almost four times that of the Third Reich.
Before World War 1, the great economic potential of the U.S. was suppressed by its ineffective political system, dysfunctional financial system, and uniquely violent racial and labor conflicts. “America was a byword for urban graft, mismanagement and greed-fuelled politics, as much as for growth, production, and profit,” Tooze writes.
According to Tooze the American century began not in 1945 but in 1916, the year U.S. output overtook that of the entire British empire.
The combined GDP of the USA, EU and Canada is about $35 trillion.
Adam Tooze believes President Wilson was the first American statesman to perceive that the United States had grown into “a power unlike any other. It had emerged, quite suddenly, as a novel kind of ‘super-state,’ exercising a veto over the financial and security concerns of the other major states of the world.”
Following history, China’s RMB currency domination may not truly begin until its GDP is about double the USA and surpasses the entire “US empire” (the USA and close military and economic allies). The US empire could be considered NATO or the US, EU and Canada. Although it might not considering that they have their own currency.
SOURCES – Atlantic, Warwick University, Michael Pettis blog