How Close Are We To A New Monetary System?

How Close Are We To A New Monetary System? Looking at history can sometimes give us interesting information about the present. History may not repeat itself but it certainly rhymes more times than we can count.

In this case we going to compare the lifespan of the previous monetary systems, starting from 1816 and ending to 1973, and use the results to identify our current situation.

The Rise And Collapse of Monetary Systems

In the 200 years of the later human history we had three major monetary system changes. All of them due to great wars. All of them tried to stabilize global economy with their view on how things should be run. All of them succeed and then failed. But how long they lived and what we can learn from them?

Pre WWI Financial Order 1871-1914

The pre WWI financial order, also known as “first age globalization“, lasted about 44 years from 1871 to 1914 when the WWI started. Before 1871 the gold standard was just a widespread participation option where one could choose not to accept for its own reasons.

Great Britain changed that when its capital exports helped to correct global imbalances as they tended to be counter-cyclical, rising when Britain’s economy went into recession, thus compensating other states for income lost from export of goods. In contrast to one of the next monetary systems, the pre–World War I financial order was not created at a single high level conference; rather it evolved organically in a series of discrete steps.

Between the World Wars 1914-1944

The period between the World Wars lasted about 30 years from 1914 to 1944 and have been described as a period of “de-globalization”, as both international trade and capital flows shrank. During World War I, countries had abandoned the gold standard. Except for the United States.

By the early 1930s, the prevailing order was essentially a fragmented system of floating exchange rates. In this era, the experience of Great Britain and others was that the gold standard ran counter to the need to retain domestic policy autonomy. To protect their reserves of gold, countries would sometimes need to raise interest rates and generally follow a deflationary policy. The greatest need for this could arise in a downturn, just when leaders would have preferred to lower rates to encourage growth.

By the end of World War I, Great Britain was heavily indebted to the United States, allowing the US to largely displace it as the world’s foremost financial power.

The Bretton Woods System 1944-1973

The U.S. Secretary of the Treasury, Henry Morgenthau, Jr., addresses the delegates to the Bretton Woods Monetary Conference, July 8, 1944 (Credit: U.S. Office of War Information in the National Archives).

After WWII British and American policy makers began to plan the post-war international monetary system in the early 1940s that lasted 29 years from 1944 to 1973 and is know as the Bretton Woods System. The objective was to create an order that combined the benefits of an integrated and relatively liberal international system with the freedom for governments to pursue domestic policies aimed at promoting full employment and social wellbeing.

Two international institutions, the International Monetary Fund (IMF) and the World Bank were created. A key part of their function was to replace private finance as a more reliable source of lending for investment projects in states.

Towards the end of the Bretton Woods era, the central role of the dollar became a problem as international demand eventually forced the US to run a persistent trade deficit, which undermined confidence in the dollar. This, together with the emergence of a parallel market for gold in which the price soared above the official US mandated price, led to speculators running down the US gold reserves.

Eventually these pressures caused President Nixon to end all convertibility into gold on 15 August 1973. This event marked the effective end of the Bretton Woods system; attempts were made to find other mechanisms to preserve the fixed exchange rates over the next few years, but they were not successful, resulting in a system of floating exchange rates.

The post Bretton Woods System 1973 – present(?)

The post Bretton Woods system also known as Washington Consensus, started at 1973 roughly after president Nixon suspended the dollar’s convertibility into gold.

Various problems in global economy led serious people to call for a New Bretton System at 2007, that would revamp the key international institutions to meet the demands of the current age. Between 2008 and mid-2009 the term New Bretton Woods was increasingly used.

By late 2009, with less emphases on structural reform to the international monetary system and more attention being paid to issues such as re-balancing the world economy.

“We must have a new Bretton Woods, building a new international financial architecture for the years ahead.”

Gordon Brown , Britain’s former Prime Minister

Yet there was no substantial progress towards reforming the international financial system, and nor was there at the 2009 meeting of the World Economic Forum at Davos.

History Meets Bitcoin

The brief history of the previous monetary systems shows us that is there is a cycle in changes of the monetary systems. If we calculate the average lifespan of the monetary systems that have come and gone the number is 34 years.

The recent global economical crisis happened in 2008-09. 35 years after the previous monetary change, a number that is very close to the 34 year average.

The difference between this huge global crisis and the old ones is that now we didn’t change the system but we “patched” it. But how long will the “patch” last? The answer is until inflation starts to kick in again and we are already 10 years “patched” increasing the lifespan of our current monetary system to 46 years.

On 2009 though, a new option was introduced, Bitcoin. It had all the advantages of gold by simulating it’s supply properties and mining procedure in its algorithm and none of the disadvantages of it, that is the physical weight.

So far, Bitcoin follows organic growth since its conception, much like gold did in the Pre WWI Financial Order did. Historically speaking, the idea of a decentralized global monetary system was an utopia that now can be achieved through technology.

The End of An Era

As we can see in the below graph of global depth of the IMF report of 2010. All monetary systems ended at the start of the two Worlds Wars in 1914 and 1939 as well as in 1973 when the Cold War started to cool of after United Stated showed their dominance to the world by sending the first humans on the moon in 1969-1972.

chart by IMF report

The way nations faced the latest economic crisis shows that there is no plan B so far and they just extended the time to find one. Or there is a plan ₿, that is already growing 10 years now flawlessly, waiting for people to notice it.

The only thing that we know for sure, is that we are going through a critical period in the global economy. Big tech corps want to have an active part in the way that global economy will form in the next years and a fight is to be expected on this side.

At the same time regulators trying to somehow deal with the Bitcoin and other digital currencies. Only time will tell what will happen.

image by: studioEAST/Getty Images AsiaPac

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