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Last week we described the rise and fall of the Dutch Republic in an attempt to layout an archetype of how the superpowers of the world rise and fall and the cycle of money that follows it. This week we detail the cycle as it applies to the British Empire.
The British Empire
In 1694 the Bank of England was initially established to help finance the then-current war against France. The creation of a central bank allowed for banknotes to be issued on top of the precious metal deposits received, similar to the Bank of Amsterdam before it. However, the banknotes circulating were more akin to our modern-day cheque as they were issued to pay a specific person and the minimum issue amount was £50. These banknotes were not widely used as a medium of exchange when you consider that the average yearly wage was £20. Coins made from precious metals (mostly silver, a hard money) were still used for settlement by the majority of society at the time.
In 1717 the physicist Sir Isaac Newton (who was the warden of the Royal Mint) proposed that the British Empire should define the pound sterling’s value in gold and not silver. During this time, the foundations for the first industrial revolution were being laid and the period was officially ushered in from 1760, this marked the beginning of an exceptionally prosperous period for the British Empire. However, as the Dutch Republic was faltering and other rising powers started putting their hand as a contender to be the new global superpower, war ensued. Gold being redeemable for the banknotes issued on top of reserves continued until 1797 when the Bank of England suspended its convertibility during the Napoleonic Wars. This was due to the concern that privately owned banks did not have sufficient gold bullion reserves to meet demand. They had issued banknotes of a value greater than reserves and had effectively been creating counterfeit money. As a result, several parliamentary acts were passed which started the process of effectively permitting the Bank of England a monopoly over the issuance of banknotes. After the end of the Napoleonic Wars and by 1821 the pound sterling was once again redeemable for gold and there were few countries in a position of power to challenge the British Empire. In 1844 the Bank Charter Act was signed which now gave the Bank of England a full monopoly over the printing and distribution of banknotes that were backed by gold reserves held. The British Pound by now had firmly established itself as the world reserve currency.
A period of peace and prosperity in Europe was enjoyed for a while. The second industrial revolution also began in the late 19th century and Britain had rapidly expanded its empire across the globe. It had been Great Britain’s 100 year-long “imperial century”. However, just as what happened to the Dutch Republic before, several countries took advantage of the peaceful period and used it to focus on growing their own economies and began to challenge the current superpower. The Empire that Britain had managed to create and grow was becoming very costly to maintain and defend. They started incurring large debts, wealth gaps increased, arguments ensued as to how wealth should be divided within countries and military powers started becoming comparable. Tensions were heightened within Europe and alliances were formed, as one thing led to another, World War One broke out in 1914.
WW1 resulted in the gold standard being suspended once again in Britain. This was because Britain could not sustain the war effort without expanding its monetary base beyond the reserves held in the Bank of England’s vaults. In secret they broke the peg with gold, effectively devaluing the pound. They began issuing additional pounds at a rapid rate and incurring huge debt, mostly owed to the United States. To put it in perspective the country held around 40% of the world’s investments before the war and afterwards they had £850 million in debt. Interest payments made by the British government accounted for half of all their spending after the war. When you couple this with the Spanish Flu that occurred directly after the war that killed between 20 and 50 million people worldwide, Britain were in a very precarious position. Below is a chart of the historical debt levels of the UK, note the periods leading up to and during WW1.
Even though their debt levels had reached a critical stage the British were still party to the Treaty of Versailles. This was once again a meeting, similar to the Congress of Vienna where the victorious allied powers divided up the losing powers as they saw fit. There were several outcomes from the meeting but the most notable from a monetary perspective was the huge war reparations that Germany would have to pay. However, in 1925, several years after the meeting, the gold standard was reintroduced in Britain. By now it may have been too little too late as the British Empire by the end of the 1920s had been overtaken by America as the worlds leading industrial power
Across the globe there was a period of relative peace, however, there was economic stagnation. This didn’t last long as the world was thrown into chaos as the great depression hit in 1929. Overnight people lost almost everything. By 1931 the gold held in the British treasury was being withdrawn at a rate of £2½ million a day. This proved to be a problem as during the previous war they had broken the peg to the gold they held (without depositors’ permission) and could not facilitate the withdrawals. Britain, once again, suspended the gold standard and this time it proved to be the last, their economy was now based officially on a government fiat money. Countries across the globe started reeling. Debt levels began to rise unsustainably. One of the hardest hit was Germany who went into a period of hyperinflation, there was a combination of factors that led to this but it was mainly due to the printing of money to pay the war reparations they owed to the Allied powers. This sowed the seeds for the beginning of World War 2.
In 1939 Germany attacked Poland. War had once again arrived on Europe’s doorstep. The British Empire had been severely weakened by the previous war and had never recovered to its previous height of economic and military power. America on the other hand had positioned itself to be the manufacturing hub of the world. Once the war broke out, America who was initially neutral started selling weapons and supplies to both sides of the war effort (they never sold weapons to Germany but many essential supplies such as engines for their trucks and oil for their planes). Once the attack on Pearl Harbour occurred and they officially joined the war they continued supplying the Allied powers with a vast majority of what they needed to sustain the war effort. The Americans only took payment in physical gold for all these goods and supplies, a very smart tactic. Towards the end of the war, the US was in possession of around two-thirds of the world’s total gold supply. This placed them in an extremely strong position of power. This position of power was realised during the Bretton Woods agreement.
In next week’s update, we will explore how America rose to power and where we see them in their current money and economic cycle.
Notable Articles and News Stories This Week:
MassMutual Buys $100M in Bitcoin, Bets on Institutional Adoption With $5M NYDIG Stake
Massachusetts Mutual Life Insurance Co. the 169-year-old insurer has purchased $100 million worth of bitcoin for its general investment fund. This is the largest institution so far to get involved in the digital assets space. According to their spokeswoman Chelsea Haraty, “We see this initial investment as a first step, and like any investment, may explore future opportunities”.
Read the full story here
Singapore’s Largest Bank DBS Sets Up Crypto Exchange Platform
Singapore’s largest bank is establishing a new cryptocurrency exchange division called DBS Digital Exchange. The crypto exchange will only be accessible to institutional and accredited investors, who will be able to trade Bitcoin (BTC), Ether (ETH), Bitcoin Cash (BCH) and XRP. In addition, DBS Digital Exchange will provide a platform for tokenizing assets such as shares in unlisted companies, bonds and private equity funds. DBS will also offer a custodial service to store cryptocurrencies on behalf of clients.
Read about it here
ECB Boosts Emergency Bond-Buying Program by 37% to €1.85T Amid Pandemic Resurgence
The European Central Bank on Thursday said it would boost the size of an emergency asset purchasing program and extend a bank loan program by a year as a resurgence in coronavirus cases takes a toll on the region’s economy. The pandemic emergency purchase program (PEPP) will increase by €500 billion to €1.85 trillion (US$2.2 trillion), and the horizon for net purchases was extended to March 2022.
Read the article here
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