Following in our footsteps

Aligning with most common perceptions, reports have surfaced that indicate China has purposely devalued its currency in efforts to boost its economy. The country has done this by using loopholes in the international banking regulatory system to its advantage. The most critical of these loopholes involves the fact that China is not under the direct purview of the International Monetary Fund, as the country does not contribute to the organization. For all intents and purposes, the IMF serves as a global watchdog to prevent manipulation of financial rules. Since China does not report to them directly, it can essentially do as it wishes.


In discussing this issue with friends and colleagues, I was surprised that most gave the same response: isn’t this what the U.S. has been doing for centuries? In a word, yes. Up until the post World War II institution of the IMF and World Bank, most countries did all they could to remain economically superior. This global trend of undervaluing currency at that time was a major contributor to the Great Depression. Since 1945, however, this practice has been frowned upon.

Should we fault China for doing what immerging economies have done in the past? While we in the U.S. might look down on a devalued currency, we are also doing little to stop it. The United States is a major trading partner with China, turning a blind eye to devaluation over the past several decades. While its actions may be suspect, is China simply taking a page from the playbook of powers coming before it?