Newsletter

Can a Global Economy Ever Truly Succeed?

ISSUE #20: October 29, 2014

written by Josh Porter
Globalization has presented the world with tremendous challenges. Nations and cultures, once distinct and self-contained entities, are now intrinsically linked through a vast network of trade and communication.

As our interconnectivity grows, so do our challenges in maintaining world order. Case in point: the global economy. In the overall scheme of history, the idea of a worldwide economic system is still in its infancy. Since the industrial revolution accelerated globalization, we’ve been doing our best to reconcile the diverse (and often stubborn) economic standards of individual cultures and nations. Have we ever succeeded?

To answer that question fairly, we must first establish a contextual definition for success. In a perfect world, an effective global economic system would bring prosperity to all corners of the globe. However, this is certainly no utopia we’re living in, and no economic system can fix the problem of humanity’s greed and thirst for power.

Still, to be considered effective, a system should at least keep the richest and most powerful entities accountable, and give the opportunity of financial success to anyone willing to work hard enough for it. This is the key to stability and mutual benefit, which are arguably the cornerstones of a successful economy. Based on those criteria, the closest we’ve ever come to achieving a successful international monetary system was, ironically, our very first attempt.

The so-called “First Age of Globalization” (1870-1914) was unique in the fact that it formed organically from emerging trends in industry and trade, rather than being created by a high-level committee. While it lasted, this age gave the budding world economy an essential infusion of steady uninterrupted growth, and almost no financial crises to speak of. How was this achieved?

A number of factors likely contributed to the economic prosperity of this era. A lack of major global conflicts certainly helped, and the new jobs and projects generated by the industrial boom added momentum to this new spirit of global cooperation. Still, this doesn’t explain how so many nations with drastically different infrastructures were able to suddenly form a stable and mutually beneficial global economy. What was the common thread that tied it all together?

Gold. The only true constant was the globally accepted value of gold. This was the universal language of worth that tied all goods and services together, making it possible for individuals, businesses, and entire nations to trade fairly across borders and oceans.

Pure gold cannot be manufactured, and it has the same consistency everywhere on earth. Therefore it also has the same value everywhere on earth. This characteristic is known as “fungibility” – a pure gold coin from the US is mutually exchangeable for a pure gold coin from China, France, India, or anywhere else. As long as strict weight and purity standards were maintained, it could be used as a benchmark for all currency conversion, and valuation of goods and services. Gold was the beating heart of the most prosperous global economic period in history. But all good things must come to an end.

This brings up one of the greatest challenges presented by globalization: maintaining peace. When World War I began, the First Age of Globalization ended. Even in the midst of an ideal world economy, the delicate balance can still be easily upset by the devastation and trauma of war. When relations between nations deteriorate enough to start an all-out armed conflict, everything else tends to go out the window.

The Great War left many nations and their infrastructures in disarray, and the residual effects of that conflict led to a period of de-globalization. Most countries abandoned the gold standard during or shortly after the war, which seriously hindered trade and cooperation between nations. The Great Depression punctuated this era of global regression.

As World War II reared its head, British and American policy makers began working together to decide what the next international monetary system ought to look like. They weren’t about to repeat the painful post-WWI period of economic stagnation. Before the dust had even cleared from the second war, the Bretton Woods System was established.

This new system was comprised of two fundamental rules. First, nations agreed to a system of fixed but adjustable exchange rates, where their currencies were valued against the US dollar (by far the healthiest and richest economy after the war). Second, and most importantly, the dollar itself would be fully convertible into gold.

This was basically a new iteration of the pre-WWI system, but the biggest difference was the fact that one nation (ours) held economic sway over the rest. The fact that the US was still accountable to the gold standard made this an easier pill to swallow for the other nations involved.

Unfortunately, this only lasted until 1971, when President Nixon took us off the gold standard entirely, due to the fact that too many foreign nations were exchanging their US Treasury holdings for gold, causing our stockpiles to run dangerously low.

When looking through the last two centuries of global economics, a pattern emerges. Gold, due to its unchanging value and fungibility, has proven the most effective benchmark for a stable and prosperous world monetary system. Conversely, human arrogance and volatility eventually undermine that prosperity every time, causing a worldwide economic reset.

In the next issue, now that we’ve gained some historical perspective, we’ll bring this analysis to the present day as we predict the shape that the new world economy will take. Hint: gold will play a major part.

Interested in acquiring precious metals? Give one our knowledgeable PPM brokers a call today! We’re also happy to discuss anything from this newsletter, or regarding market news in general. We look forward to serving you financially.

Sincerely,
Justin Domnitz

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