Growth through saving or consumption: Part 2
The world is undergoing a once-in-a-century transition of economic power. Hyperbole and speculation are rife while the passivity of such a transition is still unknown.
Drastic changes in the world order have occurred before. Using the litmus test that the world order is controlled by the nation who holds the worlds reserve currency, and starting with the invention of capitalism and public markets we can see that superpower status has transitioned many times before. From the monopolistic Dutch, to the imperial British, to the capitalist Americans, from whom it will transition to the autocratic* Chinese.
This leads us to the second key question – how does history prescribe the narrative of changing world powers?
The first nation to control a reserve currency was the Dutch Republic who gained independence from the Spanish Empire in 1581 (an Empire who themselves very nearly controlled a reserve currency). Unlike most economic powers at the time the Dutch were free from many of the class divisions and inequalities that were associated with absolute monarchies. They possessed a culture that emphasised the importance of education and possessed literacy rates double that of the world average.
Yet perhaps most importantly to the progress of the Dutch Republic was its advanced financial system. The Dutch had a low marginal propensity to consume. This implied high savings rate meant the Bank of Amsterdam was able to invest much of the national wealth into further productive means. While a high marginal propensity to consume does increase the multiplier effect (and thus GDP) it can encourage an economy to focus too heavily on unproductive endeavours. In the case of the Bank of Amsterdam, much of the nation’s savings were invested into the booming shipping industry.
Becoming world leaders in shipping lead to the rise of the Dutch East Indies Company, the world’s first publicly traded entity and the genesis of the public stock exchange. This behemoth was at one point part-owned by one in fifty Dutch citizens and facilitated one third of all global trade. A product of holding a near-monopoly on global trade was the rise of the Dutch guilder as the world’s de-facto reserve currency.
Yet nearly as fast as the Dutch Republic rose to dominance its power began to erode. Its quality of education fell during the 17th century, and the Dutch East Indies Company became progressively less competitive as lower costs of labour and improved technologies allowed Britain to gain both shipping and naval supremacy.
Ultimately, the freedom of Dutch trade became to be its own unravelling. Continued trade with American colonies was pivotal in fomenting the fourth Anglo-Dutch War, a war the Dutch lost. Even the historic cultural aversion to unnecessary consumption broke down. The Tulip mania bubble of the 1630’s saw individual flowers reach prices equivalent to over ten times regular annual salaries.
With consumption out of control, the price of expensive wars mounting, and the loss of competitiveness of its key monopoly, the British and French Empires and their respective currencies overtook the Dutch. Before the end of the 17th century the Dutch East India Company no longer existed, the value of the Dutch Guider had crashed, and France had control over the Netherlands.
With the Dutch Republic in terminal decline there were two candidates to control world economic order, Britain and France. Both nations had growing empires, strong currencies and were primed for industrialisation. Yet France’s efforts failed. Their attempts at replicating the success of the Dutch East Indies Company’s trade monopoly through the Mississippi Company had ended disastrously. Compounding this, unlike 17th century Britain which held a balance of power between its parliament and monarch, France possessed a weak, absolute monarch. Class divisions and inequality were allowed to fester and ferment until a brutal revolution set the nation back decades economically, as the British made headway into the First industrial revolution.
While some argue that under Napoleon France did create their own world order, I would argue this period saw France become a military superpower, not an economic one. This draws parallels to the latter half of the 20th century where few argue that the US was the world’s economic superpower. This included a period of time where half of the world was under some form of communist regime. While the USSR and US may have been ideological and military rivals, by virtue of its far more productive economy, the US was never in danger of losing its dominance on global trade. By the same token, Napoleonic France was a nation geared for war, not industrialisation. While its military was a rival of Britain’s, the tenacious economic tides had their way as Napoleon was out-gunned and out-resourced.
The rise of the British Empire mirrors many of the traits of the early Dutch Republic. Both had stable, economically liberal governments. There was a culture that encouraged education and the accumulation of knowledge. The economy supported open, developed, free-market capitalism and was supported by a stable currency. Critically, while the Dutch were once the world leaders in ship building and global trade (something the British were world leaders in by the mid-18th century), Britain became the world leaders in a new pillar of global economics: industrialisation.
Inventions such as the steam engine and weaving machines saw Britain become a world leader in many crucial sectors including ship building, agriculture, steel production, coal extraction, textile manufacture and many others. A product of Britain’s explosive productivity was the formation of an empire ‘on which the sun would never set’ (an ominous title that had once been given to the Spanish Empire). Goods from across the globe allowed Britain to dominate world trade, controlling 20% of the world’s income for a time.
It would be far too easy to attribute all this success to strong productivity and economic management. The impact of slavery and, in the case of the Chinese Opium wars, drug trade, were crucial to maintaining the dominance of British trade.
Much like the narrative of the Dutch Republic, the peak of British dominance was deceptively short lived. Mass inequality was a blight on British society where 1% of the population controlled 70% of the wealth. Unions formed, strikes were held and by the end of the 19th century, Britain, like the Dutch before them, were losing their competitive advantage and had succumbed to excessive consumption.
And so the familiar narrative continued to playout. As British competitiveness fell, two great economies began to catch it. The United States and Germany. Britain had not taken full advantage of the second industrial revolution and had relied too heavily on its increasingly costly empire to maintain economic dominance.
Although militarily successful, the First World War was economically disastrous for Britain. While some argue the Great Depression allowed for important structural changes in the distribution of wealth in both Britain and the US, it led to a rise of populism in Germany, Japan, Italy, Spain and what would become the USSR.
If the world had not already recognised that America would become the new world order, the Second World War assured it. Relatively unscathed by the horrific fighting that plagued Europe, America had capitalised on its position as the world’s most industrially advanced economy. It supplied weapons to both Axis and Allied forces, and compounded its wealth through an enormous sale of bonds to a litany of (predominantly) European nations. America was then the world’s new (nuclear armed) economic superpower.
The Pound maintained its reserve status for some twenty years after the Second World War. There were many structural changes required around the globe to facilitate a change of reserve currency and Britain still held significant cultural power over the Commonwealth. I would argue that Britain had truly lost any semblance of significant economic or cultural power by the mid-1960s when key Commonwealth nations, Australia and New Zealand, changed from using Pounds to their own native dollar. A familiar product of costly wars and a preference for excessive consumption over astute investment.
* Note I have not described China as communist, as this would discredit the many forms of communism that differ so wildly. To equate Hoxha’s Albania and Gorbachev’s USSR, or even modern China with Mao’s China, suffocates the word of any meaning.
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