History tells us about the existence of financial system in the world enabling the countries to exchange their currencies. The Bimetallism prevalent prior to 1875 gave way to the Classical Gold Standard. The World War I brought an end to the age old British dominance in the World money management. The Great Depression in 1931 called for a central regulatory system to ensure economic stability in the countries across the world. Thus the move started in 1944 by 44 countries in Brettonwoods in UK brought two Institutions to manage the global financial word. While International Monetary Fund (IMF) was expected to provide assistance to come out of Balance of Payment crisis, the sister institution International Bank for Reconstruction and Development (IBRD), popularly known as World Bank, took the responsibility of extending financial aid to build up ruined economies across the world. The lack of confidence in the British Raj in management of International Monetary System consequent to the failure of the Classical Gold Standard led to replacement of Great Britain by United States on the control. The dominance of US can be witnessed visibly in the Brettonwoods System which had thrust upon the responsibility of conversion of Dollar into Gold at a specified rate which was revised thrice. The failure of US to meet their commitment was the reason fro the failure of Brettonwoods System.
The 1922 Geneva Economic Conference provided the platform for giving birth to an International Banking Institution to bring co-operation among the Central Banks across he world. Thus the Bank for International Settlement (BIS) was established in 1931 with its Head Quarters in Geneva to promote central bank co-operation.
The Latin American Crisis and the East Asian Currency Crisis in the 1990s were ample evidence for the failure of all the above institutions in managing the International Financial System. If we closely examine the administration of these bodies, we can clearly see the US dominance everywhere. Thus the US has grown to the level of a major economic power capable of deciding the fate of the economies in the world because they are the custodian of the wealth of these economies. Though European Monetary System emerged as an alternate mechanism and Euro was positioned against US Dollars, so long as US Dollar remains as the intervention currency and the foreign exchange reserves of countries are maintained US Dollars, the economic power of US is difficult to be controlled. After dwindling for quite a long time since its inception, Euro is getting stabilized only now.
The current financial crisis also was triggered by the US economy. The US subprime crisis was the root cause for the meltdowns of banking institutions and loss of jobs, homes and security for millions in the world. Still they continue to be the custodian of the wealth of economies in the world. Now a new demand has emerged out of the discussion among the world economists for constitution of a Global Financial Regulatory Authority. Prof. Joseph Stiglz while delivering the Lakdwala Speech in New Delhi had put forward this suggestion as a solution to check future meltdowns. At the same time he had criticized the economic policies of US administration and had squarely blamed them for the present crisis.
If we examine the role of IMF, World Bank and BIS in preventing a meltdown as that happened in the previous years, we have to accept the fact that these institutions have miserably failed in preventing a crisis. I feel that they were silent spectators of the crashing of markets. The reasons, I feel, could be the US dominance.
Now it is not clear what would be the shape of a new regulatory authority. Can the US hands be kept out of this agency? If US dominates this one also will it not be another institution like IMF or World Bank? Being the holder of the major portion of the wealth of nations how can one keep away US from the proposed authority? In my opinion, the countries have to shift their reserve currency from US Dollars to Euro and use Euro as the intervention currency in order to prevent future financial crisis. With weak banking system and lack of control mechanism US can create more havocs in the world financial markets. Unless US is kept out of the scene no new authority can effectively prevent future meltdowns.
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