What History Teaches Us About Today's Shifting World Order

Have you ever felt like we're living through events that have a strange, familiar echo? It’s a notion that suggests history doesn't just record the past, but perhaps offers a roadmap to the future. Consider the grand sweep of time, where nations, much like people, seem to follow a discernible pattern of birth, growth, flourishing, and eventual decline. This isn't about unfounded premonitions, but about recognizing a rhythm, a "Big Cycle" as some observers term it, that has played out for centuries, influencing the fate of empires and the very order of our world. By understanding the stage at which a nation or the global system might be, we can perhaps better anticipate what lies ahead.

The Unseen Blueprint: History's Repetitive Rhythm

Over 500 years of studying great empires reveals a striking truth: history often repeats itself. Events that feel unprecedented today have likely occurred before, albeit in different attire. The rise and fall of colossal powers like the Dutch, British, and American empires weren't random occurrences. Each experienced its zenith and its nadir, and each transition was marked by significant shifts in the global order.

Consider, for instance, the economic landscape of 1971. A profound shift occurred when the U.S. government announced it would no longer convert dollars to gold at a fixed rate for international transactions, an event that effectively signaled a fundamental change in its financial commitments. Historically, transactions often relied on tangible assets like gold, with paper money acting merely as a certificate, a promise of gold in reserve. However, by the mid-20th century, America's spending patterns led to a situation where it was compelled to print new batches of banknotes, straining the link to gold reserves. When international partners sensed this imbalance and increased demands to exchange their paper dollars for gold, it became clear the existing promise couldn't be fully upheld at the prevailing terms.

On August 15, 1971, President Nixon announced measures that effectively suspended the direct convertibility of the U.S. dollar to gold. Though initially framed with nuanced terms, this policy shift has lasted for decades. Surprisingly to some, the stock market showed resilience and even surged shortly thereafter. This seemingly perplexing reaction to a major currency policy change prompted many observers to delve into historical precedents, where a somewhat similar scenario had unfolded in 1933. Then, too, under different circumstances, paper dollars were linked to gold, the government faced economic pressures, and President Roosevelt announced policies that altered the U.S. dollar's relationship with gold for citizens.

In both historical instances, a common subsequent feature was an increase in the money supply. But a country doesn't necessarily become richer by simply creating more unbacked currency; the value of each individual currency unit can fall. This freshly available money often flows into assets like stocks, gold, and raw materials, potentially causing their prices to soar. This pattern – governments facing fiscal pressures, adjusting monetary policy or printing money, potentially leading to currency devaluation and asset inflation – has been observed numerous times. Central banks may inject new money to ease financial crises, which can lead to rising prices for certain assets while paper money itself may depreciate. Such interventions were seen in response to the 2008 financial crisis and again in 2020. It's a widely held view that financial bubbles, if they form, will eventually burst or deflate. A key insight from these observations is that to understand potential future developments, it's often invaluable to study the past. This principle, for example, helped contextualize how the exuberant 1920s in the U.S. gave way to the significant economic downturn of the 1930s.

Three Tides of Transformation

Looking back, three powerful forces often converge to signal major shifts:

1. The Monetary Response: To maintain financial stability or stimulate growth, governments sometimes resort to creating significant amounts of new fiat money.
2. The Internal Divide: The gap between the economically prosperous and the less fortunate can expand, potentially fueling internal conflicts as some call for wealth redistribution while others aim to protect their existing assets.
3. The Global Power Dynamic: External conflict or competition can intensify, particularly between a rapidly developing nation that challenges a dominant, but perhaps relatively weakening, leading power – a dynamic observable in various historical periods and in current global relations.

These three patterns have recurred over centuries, consistently leading to changes in both internal societal structures and the worldwide order. The last such period of profound global reconfiguration is often cited as occurring between 1930 and 1945.

The Global Stage: What is the World Order?

The "world order" refers to the overarching system of global governance and power distribution. Internally, a country's order is usually defined by its constitution or foundational legal framework; externally, it's shaped by treaties, alliances, and agreements between nations. These internal and external orders often change at different times, typically spurred by revolutions, civil wars, or major international conflicts that usher in new ideas and overthrow outdated systems. For instance, the U.S. internal order was largely set by its 1789 Constitution. China's current system was established in 1949 following a civil war.

As of the early 21st century, the system significantly influenced by American leadership still underpins much of the world order. After World War II, the United States' economic superiority allowed it to become a dominant global power. The Bretton Woods Agreement of 1944, for example, established the U.S. dollar as the world's primary reserve currency. A reserve currency, recognized and used globally, is a cornerstone of a nation's economic influence and power. With each new dominant power, a new world order tends to be established or significantly reshaped.

The Life Cycle of Dominance: A Universal Pattern

A study of numerous major empires over the last five centuries – including the Dutch with their guilder, the British with their pound sterling, and other significant empires like the Chinese, Spanish, German, French, Indian, Japanese, and earlier national entities – reveals a surprisingly consistent scenario for their rise and fall, and that of their currencies.

This "great cycle" typically begins after a major conflict, often a war, which leads to the formation of a new leading power and a new world order.

The Dawn: Forging a New Beginning

A period of relative peace and prosperity often sets in, as few are willing or able to challenge the new authority. People, sometimes forgetting the turmoil of the past, may come to believe this stability will last indefinitely. Trust in the state can grow, trade often increases, and the more transactions made in a country's currency, the greater its chance of becoming a recognized reserve currency.

The Ascent: Building Pillars of Prosperity

During this phase, strong and often visionary leadership emerges, promoting ideas that gain popular support and consolidate power. Effective governance systems are created. A crucial element is investment in the education of the populace – not just academic knowledge, but also character traits such as honesty, diligence, and civility, often fostered within families, schools, and community institutions. A high level of public order and respect for law allows society to progress from basic production to inventing new technologies and improving productivity.

The Netherlands, for example, historically focused on education and innovation to enhance its standing, leading to significant advancements like the development of durable long-distance ships. This allowed them to expand global trade and national power. Countries invest in protecting trade routes and may build up military strength. Wealth generated is often reinvested into education, infrastructure, and research. Notably, even nations with different political ideologies have sometimes used capitalist approaches to boost foreign trade and economic growth. As Deng Xiaoping pragmatically stated, "It does not matter if a cat is black or white, as long as it catches mice."

Developing capital markets (lending, shares, bonds) is essential, allowing savings to be channeled into investments, funding innovation and development. The Dutch, for instance, created the first publicly listed company (the Dutch East India Company) and the first formal stock market. Great empires typically establish financial centers to attract and distribute capital – Amsterdam was a key center, then London, later New York, with China now developing several significant financial hubs. Success often requires coordination between government, capitalists, and military forces if applicable. The Dutch and British East India Companies, with government backing and their own security capabilities, established trade monopolies and entered new world markets. This model of coordinating commercial enterprise with national strategy has been replicated in various forms by other powers.

The Zenith: The Privileges and Perils of Peak Power

As a country's foreign economic activity grows and its national currency is used for more and more international transactions, it naturally becomes a global medium of exchange and then, often, the leading world reserve currency (like the Dutch guilder, the British pound sterling, and the U.S. dollar). Today, there is increasing discussion and use of currencies like the Chinese yuan in international transactions.

Having the reserve currency offers enormous advantages, including the ability to borrow more easily (often in one's own currency) and even print more money when deemed necessary, as seen with the U.S. in various historical contexts. However, this privilege frequently leads to an increase in public and private debt and can contribute to the growth of financial bubbles.

The Twilight: Seeds of Decline

In wealthy, influential countries, wages and production costs tend to be much higher, which can make them less competitive compared to nations with cheaper labor. Competitors often begin to copy, and then innovate upon, the leading power's methods and technologies. For instance, British shipbuilders historically hired Dutch designers but then used less expensive British labor to construct the ships, a factor that eventually helped the British Empire surpass the Dutch in naval and commercial power.

Prosperity can also breed complacency or shifts in societal values. Higher average incomes may lead to less time devoted to certain types of work and more to leisure or other pursuits. Values can shift from the generations who built wealth and power through intense effort and sacrifice to heirs who may be more accustomed to an easier life and perhaps less equipped to handle significant difficulties. The "Golden Age" of the Dutch Empire and the Victorian Era of the British Empire are examples of such prosperous times that nonetheless carried within them the seeds of future challenges, including the development of financial bubbles.

Wealth distribution often becomes increasingly uneven; those with substantial financial resources can leverage them to enhance their education, political influence, and connections, sometimes leading to the rich getting richer while the poor struggle to improve their standing. This can foster growing popular discontent. As long as the overall standard of living for the majority of people continues to rise, this discontent may not boil over into widespread conflict. However, the status of having the world reserve currency almost inevitably leads to excessive borrowing and the accumulation of debt to foreign and domestic creditors. In the short term, borrowing increases purchasing power, but in the long term, it can weaken the financial position if not managed wisely. The costs of maintaining and protecting a global empire or sphere of influence eventually tend to exceed the direct income derived from it, making it economically unsustainable. The Dutch waged costly wars to protect their lands and trade routes. The British Empire became mired in debt, especially after two World Wars, and lost its competitive advantages. Since September 11, 2001, the United States has spent vast sums on military engagements and maintaining numerous military bases globally. These military and imperial maintenance costs are incredibly burdensome. Eventually, even the richest countries can become bogged down in debt, often borrowing from rising nations that are seeking to accumulate reserves of the dominant currency. This dynamic was seen, for example, in the 1980s when Americans borrowed significantly from the Japanese and later the Chinese. A sustained inability to secure new lending or manage existing debt can lead to a state's decline and its movement to the next stage of the cycle.

The Inevitable Fall: When the Ground Shifts

The fall of an empire, or a significant decline in its relative power, is typically characterized by several interconnected developments:

1. An economic downturn or prolonged stagnation.
2. Brewing or escalating internal conflict, often over wealth, power, and values.
3. Costly and often draining struggles (military, economic, or diplomatic) with other nations.

The decline often starts gradually, then can accelerate due to accumulated long-term problems. As other countries become reluctant to lend more money, or demand much higher returns, the state may find it cannot cover its expenses, and financial bubbles can burst. The typical responses are to either default on debts or print more money – the latter is almost invariably chosen or occurs through market mechanisms. This inevitably risks significant currency depreciation and rising inflation. Holland's major financial crisis in the late 18th century was exacerbated by excessive spending in the Anglo-Dutch Wars and subsequent debt problems. Britain was financially crippled by the debts from two World Wars. Since 1990, U.S. financial markets have experienced several crises that have prompted increasingly decisive and large-scale interventions by its central bank.

When a state cannot adequately finance itself or its obligations, the standard of living for many people can fall. Internal conflict between different ethnic, religious, social, or racial groups can intensify, potentially leading to political extremism. Society may become sharply divided, for example, between those on the "left" who advocate for significant wealth redistribution and social safety nets, and those on the "right" who may seek to preserve existing wealth structures and emphasize fiscal conservatism. During unstable times, wealth taxes may increase, and to save their assets, affluent individuals and corporations might try to move them abroad. This can lead to an outflow of funds from the country, reducing tax deductions. If this capital leakage continues to grow, a government might eventually impose capital controls, completely blocking or severely restricting the withdrawal of funds to other countries. Those with wealth who cannot move it out of the country may begin to panic.

Internal conflicts undermine a country's productivity, can lead to economic decline, and provoke further disagreements and divisions. The time becomes ripe for populism, where charismatic leaders make passionate speeches promising to take control of the situation and restore order. If democratic institutions prove unable to control growing anarchy or deep-seated divisions, power can pass to a stronger, often more authoritarian, popular leader. The escalation of conflict within the country can ultimately lead to revolution or civil war. The people, often hungry for change, may demand a fundamental redistribution of wealth and power. This conflict can sometimes be resolved relatively peacefully, as with some aspects of Roosevelt's New Deal which involved significant policy shifts in response to crisis. However, it is more often violent, as seen in the French, Russian, and Chinese revolutions, which led to the establishment of entirely new internal orders. Internal conflict invariably weakens a nation and makes it vulnerable to competing states. The weaker the empire becomes, the stronger the temptation for rivals to challenge it, especially if a challenger has built up sufficient military and economic power. The declining nation is forced to defend itself, and this entails huge military expenditures that it often cannot afford due to its internal economic crisis. The winner of any subsequent international conflict is typically the one whose military and economy prove stronger and more resilient. The old empire can find itself backed into a corner with only two stark options: fight or retreat. Defeat means collapse or significant loss of status; retreat signals to other countries that the empire is weak and unable to fight back effectively.

Worsening economic conditions lead to increased competition for wealth and power, both internally and externally. War can break out. Military conflicts are incredibly costly for all countries involved, but it is often through such major conflicts that global changes are cemented. A great cycle comes to an end, or transitions significantly, when other countries begin to abandon the current reserve currency in favor of a new, perceived more stable or advantageous currency. Since the year 1700, there have been roughly seven hundred and fifty distinct currencies in the world, and only about twenty percent of that number have survived to this day; the remaining currencies were devalued or disappeared entirely. The collapse of the Dutch empire as a dominant power occurred after its defeat in the 4th Anglo-Dutch War; the Netherlands was unable to pay off its debts to creditors, the Bank of Amsterdam eventually took desperate measures, and the Dutch guilder was significantly devalued over time. The decline of the British empire as the sole superpower accelerated after the end of World War II; despite Britain being on the victorious side, it was financially exhausted, unable to repay the vast loans taken to finance its battles. English banks had effectively printed substantial amounts of money, which led to the weakening and depreciation of the pound sterling. A new world order was created in which the United States emerged as the dominant power, and a new primary reserve currency, the U.S. dollar, was established.

Today, the United States, while still a preeminent global power, is mired in significant government debt and, by many metrics, continues to spend more than it earns through taxation. For now, America often compensates for this deficit by taking out new loans (issuing bonds) and through its central bank's ability to create new money. Some countries have already begun to diversify their reserves and explore alternatives to settling all international transactions in dollars. Internal conflicts and social divisions within the U.S. are heating up and are a subject of daily discussion, though they have not yet acquired a widespread military character. It is a thesis of the cyclical theory that, as a result of these ongoing large-scale processes, new winners will eventually appear who will help structure the debts of the losers (or those in relative decline) and establish a new world order. The big cycle will, in a sense, be reset to zero. The old empire, or dominant power, will be replaced or its position significantly altered by a new, more powerful state or a concert of powers. The scenario of the big cycle can change in its details, but the essence, proponents argue, remains the same. The same fundamental dynamics have been happening since time immemorial. Only the clothes and technologies characteristic of a given era change.

Glimmers of Hope in the Shifting Sands?

The scenario of the great cycle can seem daunting, but its essence has remained remarkably consistent through time. Stopping or smoothly navigating the decline of an empire is incredibly difficult because it requires changing the course of history and often reversing or adapting to previously made decisions and their long-term consequences. However, understanding these dynamics is not to say that constructive change is impossible.

Just as a doctor assesses a patient's health using vital signs, we can look at a country's key indicators – its financial health, educational attainment, levels of internal cohesion, innovation, and competitiveness – to determine its approximate stage in the cycle. If a government and its people pay close attention to existing "health problems" and work diligently to improve these vital signs, this will help to prolong the life and prosperity of the country, or at least ensure a more managed transition. Consider a 60-year-old patient: their life expectancy can be determined not just by age, but more accurately by assessing their nutrition, activity levels, the presence of bad habits, and other lifestyle factors. Countries also have such indicators. It is interesting to note that the largest and often most difficult conflict most often arises within the state itself – this is the conflict of making difficult and important decisions necessary to maintain the success and stability of the country on the world stage.

Ultimately, prosperity is possible and sustainable primarily in two cases: if the country's income reliably exceeds its expenses, and if the people's overall welfare and opportunities are generally growing and improving. All other factors of development – education, inventions, competitiveness, military strength – are, in this view, largely ways to achieve these two main goals. This perspective encourages a deep reflection on our collective choices and their long-term impact, suggesting that taking care of the fundamentals of national health is an important contribution to a more stable future for any country.

References:

• Dalio, R. (2021). Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail. Simon & Schuster.

  This book by Ray Dalio is the foundational text for the cyclical theory of empires discussed in the article. It details the "Big Cycle" through which empires typically rise and fall, driven by factors such as debt, internal conflict, and shifts in global power dynamics. It examines historical data over the last 500 years to support its framework. (The entire book is relevant, but particularly Chapters 1-4 outline the template of the cycle).

• Kennedy, P. (1987). The Rise and Fall of the Great Powers: Economic Change and Military Conflict from 1500 to 2000. Random House.

  This seminal work explores the intricate relationship between economic power and military might in the ascendancy and decline of great powers over five centuries. Kennedy argues that a nation's relative economic strength is crucial to its ability to sustain military power and global influence, and that overextension, often military in nature, can lead to decline. (Particularly relevant are discussions on imperial overstretch and the economic shifts preceding changes in political and military power, e.g., Chapter 3 on "Finance, Geography, and the Winning of Wars, 1660-1815" and Chapter 8 on "The United States: The Problem of Number One in Relative Decline").

• Modelski, G. (1987). Long Cycles in World Politics. University of Washington Press.

  George Modelski's work is a key contribution to long-cycle theory in international relations. He posits that global order is restructured through long cycles of global leadership, typically lasting about 100 years, often initiated and concluded by major global wars. While distinct from Dalio's "Big Cycle" in some specifics, it shares the core idea of cyclical patterns in global power and order, providing another academic perspective on these large-scale historical shifts. (Chapters 1 and 2 introduce the concept of long cycles and the role of world powers in shaping them).