IN the wake of the devastating Second World War, in 1944, the United States, Canada, Western European countries, Australia, China and 44 other countries met to approve the Bretton Woods system of monetary management which required countries to guarantee convertibility of their currencies into US dollars with the dollar convertible to gold bullion. It established the International Monetary Fund (IMF) to monitor exchange rates and lend reserve currencies to nations with balance of payments deficits. John Maynard Keynes, renowned British economist proposed the bancor as a supranational currency. The name was inspired by the French banque or (‘bank gold’). This newly created supranational currency would then be used in international trade as a unit of account within a multilateral clearing system—the International Clearing Union—which would also need to be founded. The United States objected to the Keynesian proposal making the “reserve currency”—the US dollar.
This system worked for a while but with the growing dysfunctionality of the international monetary system, weaknesses were observed. The basic incongruity is that the international system depends predominantly on a national currency—the US Dollar—managed according to the interests of the state that created it. However, nothing guarantees that US priorities coincide with the broader interests of the international system that depends on the dollar. In the near past, the US has been using its currency more and more aggressively to pursue political and geopolitical goals. The dollar has been used as a weapon to target countries perceived as hostile by the West. In this milieu, Russia has been hit hard. Around $300 billion of Russia’s reserves invested in dollars and euros have been frozen.
China, with prescience, on 24 March 2009, through Zhou Xiaochuan, the Governor of the People’s Bank of China (2002-2018), made an important observation. Zhou, in his speech, “Reform the International Monetary System”, argued that the ongoing financial crisis was made more severe by inherent weaknesses of the current international monetary system and called for a gradual move towards using IMF special drawing rights (SDRs) as a centrally managed global reserve currency. He debated that it would address the inadequacies of using a national currency as a global reserve currency, particularly the Triffin dilemma—faced by issuing countries in trying to simultaneously achieve their domestic monetary policy goals and meet other countries’ demand for reserve currency.
Zhou explained global currency diversification was needed because an over concentration of foreign assets denominated in the dollar may bring about undesired consequences. Zhou argued that it was regrettable that John Maynard Keynes’s “farsighted” bancor proposal was not adopted at Bretton Woods in the 1940s. Resultantly, four BRIC General states (Brazil, Russia, India, and China) met on 16 June 2009 in Yekaterinburg, Russia, focussing on improving the global economic situation and reforming financial institutions. In the aftermath of the Yekaterinburg summit, the BRIC nations announced the need for a new global reserve currency, which would have to be “diverse, stable and predictable.”
South Africa joined the group on 24 December 2010, which was renamed BRICS. The BRICS Forum, an independent international organization encouraging commercial, political, and cultural cooperation among the BRICS nations, was formed in 2011, while two components comprising the financial architecture of BRICS: the New Development Bank (NDB), also referred to as the BRICS Development Bank, and the Contingent Reserve Arrangement (CRA) were set up. The NDB is a multilateral development bank, operated by the five BRICS states. Its primary focus of lending is infrastructure projects with authorized lending of up to $34 billion annually. The CRA is a framework for providing protection against global liquidity pressures. The CRA is perceived as a competitor to the IMF and along with the NDB is viewed as an example of increasing South-South cooperation. Impressed by the development of BRICS, over 40 countries have applied for membership of BRICS. The 15th summit of BRICS leaders that took place in Johannesburg, South Africa from 22-24 August 2023, among other aspects, considered the creation of a currency by BRICS, which by now accounts for 23 per cent of global GDP and 42 percent of the world’s population.
China is a major player in BRICS, its trade with the other four BRICS countries expanded 19.1 percent year on year to 2.38 trillion Yuan (about 330.62 billion U.S. dollars) during the January-July 2023 period, data from the General Administration of Customs showed. Thus, the time is ripe for the international monetary system to be overhauled and the Bretton Woods monetary management system should give way to the BRICS members to take charge.
For the last eight decades, the IMF has been twisting the tails of borrowing nations. Representing billions of people across three continents, with economies undergoing varying levels of growth, BRICS countries share one thing in common—disdain for a world order they see as serving the interests of rich western powers. Small wonder that Chinese President Xi Jinping, in his address to the BRICS Summit, stressed: “Our world today has become a community with a shared future in which we all share a huge stake in survival. Xi reiterated that what people in various countries long for is “definitely not a new Cold War or a small exclusive bloc; what they want is an open, inclusive, clean and beautiful world that enjoys enduring peace, universal security and common prosperity.”
On the eve of his arrival at Johannesburg to attend the BRICS Summit, in his article titled: ‘Sailing the Giant Ship of China-South Africa Friendship and Cooperation Toward Greater Success’, President Xi Jinping, President of China wrote: “South Africa’s Ubuntu philosophy advocates compassion and sharing. It resonates well with the values of Confucianism—love the people and all beings and seek harmony among all nations”. Perhaps the BRICS monetary management system, which from next year, will admit six new members: Argentina, Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates will hold the panacea for the world’s woes, ending decades of exploitation by the Occident.
—The writer is a Retired Group Captain of PAF, who has written several books on China.
Email: [email protected]
