Does Financial Crisis Threaten America's Central Role in Global Economy?

The financial meltdown on Wall Street and elsewhere is not simply endangering investments, payrolls, consumer purchases, and business transactions in America. It is also triggering predictions—especially from overseas—that the era of American financial primacy is coming to a dramatic end.

The unique role of the U.S. dollar as the world's broadly chosen reserve currency, along with the globe-straddling role of the U.S. financial sector, have long been a key source of power, prestige, and financing opportunities for American companies and the U.S. government. Eroding that stellar status endangers a central pillar of the mostly U.S.-inspired system that has basically defined the contours of international affairs since World War II.

The American status in matters financial, not surprisingly, has inspired both respect and resentment over the decades. So, as Wall Street and other banks have been shaken, some of the overseas reaction has been quick to call for a loosening of the longstanding American grip on global finance.

Some of that reaction reflects outright unhappiness with the Bush administration, not to mention renewed rivalry with the United States over unrelated issues. Russian President Dmitri Medvedev cited U.S. "egoism" in the financial fall and predicted, with apparent pleasure, "The times when one economy and one country dominated are gone for good."

But even from stalwart economic partners and military allies, the sense of indignation at being drawn into a crisis is coming through loudly. British Prime Minister Gordon Brown this week acknowledged abuses by financial firms in the United Kingdom but added, "Most of this has come out of America and then affected the British banking system."

In Germany, U.S. leadership capacity in the financial world is now seen as irreparably wounded, and the feeling is that big changes must follow. German Chancellor Angela Merkel has urged stronger multilateral market regulation. Her government's finance minister, Peer Steinbruck boldly asserted, "The U.S. will lose its status as the superpower of the world financial system." That system, he said, would now become "multipolar."

And yet, in such a fast-moving and unpredictable crisis, any such sweeping predictions may well be premature. As financial regulators try to salve and heal the partial freezing of credit markets, leading foreign policy analysts are divided over the degree of damage to America's power position in the world.

Some argue that the dollar will remain pre-eminent. "I do not see any replacement for the dollar," says George Schwab, president of the New York-based National Committee on American Foreign Policy. The euro and other currencies can't supplant it, he says.

Walter Russell Mead, an author and senior fellow at the Council on Foreign Relations, notes that financial crises are a recurring feature of an international system dominated first by Great Britain and then the United States for centuries. "They [financial crises] haven't sunk us in 300 years," he says. "We seem to find a way to manage this." Mead contends that the fundamentals of American power are "probably as strong as they were in 2001."

Still, that confidence in the United States being able to restore the status quo ante in financial power is questioned by other foreign policy scholars.

Chas Freeman, a former U.S. ambassador to Saudi Arabia and president of the Middle East Policy Council, foresees global demands on the United States to "come up with a work-out plan" to restore solvency. The message from other big economic players, he predicts, will be, "We're not going to finance your improvidence indefinitely." That is a reference to vast investments by China and other nations in U.S. public debt that have allowed the United States to run historic deficits in pursuit of foreign and domestic aims.

Yale historian Paul Kennedy, author of the seminal 1988 work The Rise and Fall of the Great Powers, suspects that foreign investors, including important sovereign wealth funds, will reassess their commitment to buying American debt over time. "You will see that very cautious people...slip more out of dollar-denominated funds," he says. "It [the financial crisis] will confirm in the minds of Asians the need not to be so fiscally dependent on Uncle Sam."