When does a bunch of big things happening add up to economic regime change?
When asked about the most important event of the twentieth century, people often pick out the first or second world wars, or the cold war that followed. The rise and fall of Soviet communism is another common answer, as is the advent of the nuclear age. Future historians may plump for the start of the anthropocene era around 1950 when human factors began to dominate global ecology.
It’s relatively rare that people pick the eclipse and decline of the British Empire as the key event. Yet from an economic and monetary point of view, the British story and the pivotal events of 1914 provide a critical analogy for current geopolitical and economic events, especially for those who think there is a structural not just a cyclical change underway.
Prior to the First World War, the global economy under the imperial system was probably the most integrated it would be until the late 1990s. Writing during the Versailles peace conference in 1919, John Maynard Keynes in his 'Economic Consequences of the Peace’ noted that in 1914,
“The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages”
The Great War then saw the roof collapse on European civilisation. The bitterness caused by Germany’s treatment at the Versailles peace talks made the inter-war years into an unstable armistice rather than a lasting peace, and it was only after the catastrophe of World War II that Europe (the Western bit at least) found peace and prosperity.
One can track of the health of the world economy and the process of regime change it was undergoing by tracking the form the global monetary system took at the time. The classical gold standard ended with the start of hostilities in 1914. Various unsuccessful attempts were made to resurrect it (in the form of the gold-exchange standard) during the inter-war years, but it was only with the Bretton Woods agreement, signed in 1944 with the end of World War II in sight, that the prospect of monetary - and therefore economic - stability appeared on the horizon.
Bretton Woods was the point at which the US dollar was anointed to replace the British pound as the key global currency, although it was still to be backed by gold at $35 per ounce. This transition from pound to dollar also marked the eclipse of the British Empire, bankrupted by war and increasingly indefensible as an institution in the face of rising national awareness amongst its colonies, a process in part aided by new-found US assertiveness on the global scene with respect to national self-determination.
What is perhaps surprising is that the classical pre-1914 gold standard, managed in a fashion by the Bank of England (with the support of the other major central banks), lasted as long as it did. With the industrial revolutions of the nineteenth century and the opening up of economies in the new world (especially the US and Argentina) and the European colonies, the global economy exploded in a way which a gold-based monetary system, where money in the form of coin or specie was physically limited, might have been expected to struggle.
As the nineteenth century progressed, the credit requirements of the agricultural cycle in the US and Argentina increasingly put pressure on the wafer-thin gold reserves at the Bank of England, and it seems in retrospect highly serendipitous that a series of major gold finds occurred in California (1849), in Australia (the 1850s), in South Africa (the 1880s) and in the Klondike region of Canada (in the late 1890s) which meant the stock of gold - and therefore money - could rise as the global economy expanded rapidly with industrialisation and urbanisation.
Yet even as the gold standard teetered on, Britain’s role at the heart of an increasingly global economy was under threat. While the Royal Navy still guaranteed free trade via the Pax Brittanica, both Germany and the US had overtaken Britain in terms of industrial production by 1900. More ominously for the UK, the discovery of oil in the US almost guaranteed Uncle Sam’s ascendancy as crude eclipsed coal as the world’s energy-source of choice. A twentieth century dominated by oil may well have been destined to be one dominated by the US dollar, and this development was ultimately confirmed by the birth of the petro-dollar in the 1970s.
In this way, the gold standard and the pound sterling seemed for around a century to be a fixed system or regime, but it was an unstable barometer for the world economy whose existence depended to some extent on chance and good fortune but also whose survival was not guaranteed as historical events played out.
The point here is that one can look at the global money system as reflecting the spirit of a particular economic era or regime. The classical gold standard reflected British policy - free trade, limited government and individual liberty. Its demise reflected the rise of the state at the expense of the individual in the twentieth century as governments sought to centralise power, particularly after war was declared in 1914. The twin themes of social democracy (the advent of the welfare state) and the consumer society (buying what one wanted rather than what one needed) also demanded a new, more credit-flexible type of money, and these together spelled the ultimate demise of gold as money, the death-knell of which was sounded in 1971 when the dollar’s convertibility into gold was suspended by President Nixon.
If one then looks at the US dollar and the process of globalisation that has cemented its dominance since the the 1980s, an analogous set of events (bits of good fortune) can be discerned of the sort which kept gold jogging along well after the British Empire had passed its zenith.
The collapse of the Soviet Union and the opening up of the former Soviet economies (and of course China’s economy) were one-off deflationary events that in a way masked the naturally-inflationary nature of a fiat money system centred around the dollar. China’s entry into the World Trade Organisation in 2000 marked another event which supercharged the flow of dollars out of and then back into the US. Likewise, the shale revolution of the 2010s was another one-off energy supply event which kept the petrodollar-dominated fiat system chugging along, abetted by historically-low levels of central-bank interest rates. In this way, ‘regimes’ may well turn out to be just a favourable sequence of events.
While the US dollar still dominates, recent economic history is starting to tell us that we are past high noon for the greenback and perhaps for the US as well. The rise of China is just part of it. Global trade topped out in 2007 and has never surpassed that level, a permanent reminder of the peak in private credit that marked the start of the global financial crisis that year.
The Sino-US trade war and the more recent sanctions-led conflict with Russia again mark a shift away from globalisation, albeit a less overtly-violent one than happened in 1914. But that is not to say their consequences will be any the less dramatic, even if the form the conflict takes (economic and information warfare) differs from the old-fashioned hot war one. The advent of a multi-polar world is being discussed by serious people in serious places, and the weaponization of the dollar is an increasingly overt part of US foreign policy. If one is looking for signs of regime change, then tracking the dollar and its potential rivals is one part of it. There are mumblings about China and Russia organising a new and separate currency system for the BRICS nations.
Domestically too though, one wonders if the extraordinary event of the Covid lockdowns and the accompanying government fiscal largesse marked the apogee of another twentieth century trend, that of government centralisation. With inflation and resource scarcity nibbling away at the value of money and therefore the power of the state, a withering of the sinews of government power may well indicate a new regime, that of the implicit decentralisation or draining away of political and economic power.
When a money system no longer works, it ultimately gets replaced. The call of ‘King and Country’ in 1914 proved to be a hollow one, and the failure of empire went hand-in-hand with the demise of the gold standard. The ensuing fiat-money era has been a ‘mass’ one - mass democracy and mass consumerism. If the promises of the state again turn out to be hollow (unfunded government pension liabilities stand out) or if consumer culture no longer proves to be viable due to resource scarcity or ecological concerns, then does that mean the the fiat-money regime and the dollar currency which have dominated it are due for a reset?
Yes.