This is Part 1 of a two-part chapter on the US Empire and its path along the archetypical big cycle of dominant powers. It covers the period up through World War II. In Part 2, we will cover from the beginning of the new world order right up to this moment. It will be out on Tuesday, July 21.
To remind you, I did this study so that I could understand how we got to where we are and how to deal with the situations we are facing, but I am no great historian. I’m just a guy with a compulsion to understand how these things work and to bet on what will happen, who has access to great research assistants, fabulous data, incredibly informed experts, lots of insightful written research, and my own experiences. I’m using all of this to try to figure out what’s true and what to do about it. I am not ideological. I am mechanical. I look at reality as a perpetual-motion machine with cause/effect relationships driving developments through time. I am sharing this information with you to take or leave as you like and to have you point out any inaccuracies you think might exist as we try to figure out together what’s true and what to do about it.
This chapter is a continuation of the last chapter in which we started to look at each of the leading reserve currency empires over the last 500 years, starting with the Dutch and British empires. We first saw the Dutch and then the British rise to become the richest and most powerful reserve currency empire and then decline into relative insignificance in cycles that were driven by timeless and universal cause/effect relationships. We ended with the British Empire declining in the first half of the 20th century. That brought us up to World War II, after which the British Empire was replaced by the US Empire. In this chapter we will examine the US and in the next we will examine China—now the two leading world powers—to see how they are progressing along the path of the archetypical cycle. That will complete our examination of the rises and declines of the leading empires over the last 500 years. We will then make one more quick review of the past before trying to squint into the future.
As we move closer to the present, I will increasingly shift from describing each country’s story individually to weaving the most relevant countries’ stories together chronologically so you can better see the interactions, and I will do it in greater detail. I will start in 1930 and bring the story up to the present for both the US and China, and then I will focus more closely on US-China interactions, which are the most important ones today. While telling the story this way will make it a bit more complicated, it will help you see how what is happening now is similar to what happened in the past because the most important forces and cause/effect relationships behind them are essentially the same. As we delve into the particulars of the last 90 years, it is easy to lose sight of the big arcs, most importantly the three big cycles—i.e., the long-term debt/monetary cycle, the wealth and political gap cycle, and the global geopolitical cycle—as well as the eight major types of power and the 17 major drivers behind them. I will try to keep it simple, emphasizing just the most important developments in just the most influential countries, but if you find that the story starts getting more complicated than you’d like, remember that you can just read the text in bold in order to get the main points without complication.
World affairs and history are complicated because there is a lot going on both within and between relevant countries. Understanding just the most important relevant issues of just the most important countries is challenging because one has to see all of these perspectives accurately and simultaneously. All countries are living out their own stories that transpire on a daily basis, and these stories are woven together to make up the world story. But typically, at any one time, there are only a few leading countries and a limited number of major themes that make up the major story of the changing world order. Since the end of World War I, the most relevant stories have been those of Great Britain, the United States, Germany, Japan, the Soviet Union, and China. I’m not saying that these are the only countries that matter because that isn’t true. But I am saying that the story of the changing world order since World War I can be pretty well told by understanding the main developments within and between these countries. In this chapter I will attempt to briefly tell the stories of these countries and their most important interactions. This is the highlights version of the more complete version of the stories that I will pass to you in Part 2 of this book.
In telling these stories I will try to convey them without bias. I believe that to accurately understand both history and what is happening now, I need to see things through the relevant parties’ eyes, including those of enemies. While there are of course allies and enemies and it is tempting to demonize the enemies, most people and countries are simply pursuing their own interests in the ways they believe are best for them, so I find it productive to try to see things through their eyes and counterproductive to demonize them. If you hear me say things that sound sympathetic to former or existing enemies—like “Hitler built a strong economy before going to war”—please know that it is because I am seeking accuracy and need to be truthful rather than politically correct in conveying my thinking. While I might be wrong and we might not agree, that’s all OK with me as long as I am describing the picture as accurately as I can.
Before I begin recounting the story of the United States I’d like to remind you of the archetypical Big Cycle that I described earlier so you can keep it in mind as you read about how events transpired up to the present. Though a super-oversimplification of the whole thing, in a nutshell it appears to me that the archetypical Big Cycle transpires as follows.
A new world order typically begins after radical changes in how things work within countries (i.e., via some form of revolution) and between countries (typically some form of war). They change in big ways who has wealth and power and the approaches used to get wealth and power. For example in 1945, when the latest world order began, the US and its capitalist and democratic allies squared off against the communist and autocratic approaches of the Soviet Union and its allies. As we saw from studying the Dutch and British empires, capitalism was key to these countries’ successes but also contributed to their failures. It was successful because the pursuit of profit motivated people, and the competitive process of allocating capital and profit making directed resources relatively efficiently to what people wanted enough to pay for. In this system those who allocated efficiently profited, which led to them gaining more resources, while those who couldn’t allocate well died economically.
At the same time, this system of increasing wealth produced widening wealth and opportunity gaps, as well as decadence in the form of people working less and increasingly living on borrowed money. As the wealth and opportunity gaps grew, that produced increasingly widespread views that the system wasn’t fair. When the debt problems and other factors led to bad economic times at the same time as the wealth and values gaps were large, that produced a lot of internal conflict that led to large, revolutionary changes in who had wealth and power and the processes for getting them. Sometimes these big changes were made peacefully, and sometimes they were made violently. When the leading countries suffered from these internal challenges at the same time as rival countries had become strong enough to challenge them, the risks of external wars increased. When these seismic shifts in how wealth and power are distributed occur within countries (i.e., via revolutions) or between countries (typically through wars, though sometimes peacefully), the old world order breaks down and a new world order begins, and the process starts all over again.
To refresh your memory, the chart below shows the relative powers of the leading countries as measured in indices that measure eight different types of power—education, competitiveness, innovation/technology, trade, economic output, military, financial center status, and reserve currency status. In examining each country’s rise and decline I look at each of the eight measures and convey the highlights of their stories while diving into key moments to understand how they transpired in a more granular way. We will now do that with the United States and China, which as you can see in this chart are currently the leading powers.
The US Empire and the US Dollar
While this section primarily focuses on the story of the US since it overtook the British Empire as the dominant global power during the world wars, we will first take a quick look at the whole arc of its rise and its somewhat recent relative decline. The chart below shows the eight types of power that make up our overall measure of power. In it you can see the story behind the US’s rise and decline since 1700. We start in 1700 because that was just before the emergence of the United States. While the area now occupied by the United States was of course inhabited by native people for thousands of years, the history of the United States as a nation begins with the colonists, who revolted against the colonial power of Great Britain to gain independence in 1776. In the chart you can see the seeds of the US’s rise going back to the early 1800s, starting with rising strengths in education and then in innovation/technology and competitiveness. These powers and world circumstances allowed the US to create massive productivity growth during the Second Industrial Revolution, which was from around 1870 to the beginning of World War I and then beyond it. These increased strengths were reflected in the US’s increasing shares of global economic output and world trade, as well as growing its financial strength, exemplified in New York becoming the world’s leading financial center, continuing leadership in innovations, and great usage of its financial products. You can see that these measures of the United States’ powers relative to its own history reached their peaks in the 1950s immediately after the Allies won World War II. At that time, the gap between the US and the rest of the world was at its greatest and the US dollar and the US world order became dominant. Though the United States was clearly the dominant power in the post-World War II period, the Soviet Empire was a rival, though it was never nearly as strong overall. The Soviets and their communist satellite states vied against the much stronger US and US allies and satellite states until Soviet power began to fade under the weight of its growing inefficiency around 1980 and then collapsed in 1989-91. That is about when China began to rise to become a comparable rival power to the US where it is today.
As you can see, while the United States’ relative strengths of education, competitiveness, trade, and production have declined significantly and steadily over the last 100 years (to now be around the 50-60th percentile versus other leading powers), its relative strength in innovation and technology, reserve currency status, financial center power, and military have remained at or near the top. At the same time, as we will see when we delve into China’s picture, China has gained on the US in all these areas, has become comparable in many ways, and is advancing considerably faster than the US.
Let’s now drop down from the 40,000-foot level to the 20,000-foot level and pick up our story in 1930 so we can see how the United States evolved to become the dominant world power. While we focus predominantly on the US story, the linkages between economic conditions and political conditions within the United States and between the United States and other countries—most importantly with the UK, Germany, and Japan in the 1930s, with the Soviet Union and Japan from around 1950 until 1990, and with China from around 1980 until now—must be understood because economics and geopolitics within and between countries were and always are intertwined.
1930 to 1939/41: The Economic War
As a principle:
Before there is a shooting war there is usually an economic war.
Severe economic downturns with large wealth gaps, large debts, and ineffective monetary policies make a combustible combination that typically leads to significant conflicts and revolutionary changes within countries.
During periods of great conflict there is a strong tendency to move to more autocratic leadership to bring order to the chaos.
In 1929 the Roaring ’20s bubble burst and the global depression followed. It led to virtually all countries having significant internal conflicts over wealth that led them to turn to more populist, autocratic, nationalistic, and militaristic leaders and policies. These moves were either to the right or to the left and occurred in varying degrees. The extremities of these degrees varied by country, according to their circumstances and the lengths and depths of their democratic or autocratic traditions. In Germany, Japan, Italy, and Spain, their extremely bad circumstances and their less well-established democratic traditions led to extreme internal conflicts and a turn to populist-autocratic leaders of the right (i.e., fascists), just as at different points in time the leaders of the Soviet Union and China, which also endured extreme circumstances and had no experience with democracy, became populist, autocratic leaders of the left (i.e., communists). The US and the UK had less severe conditions and much stronger democratic traditions, so they became more populist and autocratic than they were, but not nearly as extreme as other nations.
In addition to these economically motivated conflicts within countries and the political shifts that arose from them, all of these countries faced increased external economic conflicts as they fought for greater shares of a shrinking economic pie. Because power rather than law rules international relations, there was a sequence of intensifying tests of power that led to war and then to peace and the new world order in 1945.
To help to convey the picture in the 1930s, I will quickly run though some geopolitical highlights of what happened from 1930 until the official start of the war in Europe in 1939 and the bombing of Pearl Harbor in 1941. Then I will quickly move through the war and come to 1945 when the new world order began. I will then look at where this world order has brought us up until now. While these stories are interesting in and of themselves, they are most important to understand because of the lessons they provide for thinking about what is now happening and what’s ahead.
Because the United States and China are now in an economic war that could conceivably evolve into a shooting war, and I’ve never experienced an economic war, I studied a number of past ones to learn what they are like. That taught me a bit about economic warfare, helped me better understand what is happening now, and made me aware of possibilities that I hadn’t previously considered. Comparisons between the 1930s leading to World War II and today, especially with regard to economic sanctions, are especially interesting and helpful in considering what might be ahead. For that reason, I delve into the story of this period in a bit more detail than you might care to read. If you find that to be the case, just read the bold for the highlights.
The economic wars started about 10 years before the hot wars. The Great Depression brought economic suffering to virtually all nations, which led to fighting over wealth within and between countries that led to the hot wars that began a decade later.
In 1929 gold (and to a lesser extent silver) was money, and paper money represented a promise to deliver it (there was a Type 2 monetary system in the world, as explained in Chapter 2). In the Roaring ’20s a lot of debt (promises to deliver paper money that was convertible to gold) was created to buy speculative assets (particularly stocks). When the Federal Reserve tightened monetary policy in 1929 to curtail the speculation, the bubble burst and the global Great Depression began.
The debt problems in the US were ruinous for American banks, which curtailed their lending around the world, hurting international borrowers. At the same time the depression created weak demand, which led to the collapse in US imports and other countries’ sales to the US. As their incomes weakened their demand fell and more credit problems occurred in a self-reinforcing downward economic spiral. At the same time the US turned protectionist to safeguard jobs, so it raised tariffs (via the passage of the Smoot-Hawley Tariff Act) in 1930, which further depressed economic conditions in other countries.
Turning protectionist and raising tariffs to protect domestic businesses and jobs during periods of economic bad times is common. It leads to reduced efficiency because production does not occur where it can be done most efficiently, and it typically contributes to greater global economic weakness as raising tariffs usually leads to tariff wars that typically cause the country that raised tariffs to lose exports too. It does however benefit those entities protected by the tariffs and can create political support for the leader who is imposing the tariffs.
When the Great Depression began, Germany, Japan, the Soviet Union, and China were already suffering. Germany struggled under the burdens of its World War I debt and the occupation of the Rhineland by foreign forces. Japan suffered a classic big debt crisis in 1927 that was followed by a severe depression in 1930-31 and then a classic massive currency devaluation, fiscal stimulation, and debt monetization that pretty much wiped out financial wealth in Japan. The Soviet Union suffered from its 1917-22 revolution and the civil war, a lost war to Germany, a costly war with Poland, a famine in 1921, and political purges and economic hardships through the 1930s. China suffered from civil war, poverty, and a famine in 1928-30. So when things worsened in 1930, bad conditions became desperate conditions in these countries, which set in motion the economic and eventually military conflicts that followed.
To make matters worse droughts in the US and in the Soviet Union soon followed. The drought/famine in the Soviet Union, in combination with extreme government policies, was so severe that it caused millions of deaths. Harmful acts of nature (e.g., droughts, floods, and plagues) have often caused periods of great economic hardship that when combined with other adverse conditions have led to periods of great conflict. Over the next several years in Russia internal political fighting and fears of Nazi Germany led to purges of hundreds of thousands of people who were accused of spying and shot without trials.
Continue reading here.
About the author:
I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg