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The history of money

By Murray Bourne, 17 Oct 2006

The history of wealth creation is quite fascinating. In the investment book, Fortune Strategy by Grey, A., German, C. and Higgins, E., there is a comparison of the years taken for output per person to double.

United Kingdom: 53 years (1780 - 1838) The UK led the industrial revolution, which created extraordinary wealth for those who were machinery owners and who could trade their cheaply-made goods to the world, especially the colonies.
United States: 47 years (1839 - 86) Rapid industrialisation occurred as a result of pushing the railroad through the vast centre of the US, opening up markets and bringing new technologies.
Japan: 34 years (1885 - 1919) After the Meiji Restoration, Japan rapidly opened up to the outside world and imported many technologies, including the railways, which are still vital arteries for the world's second largest economy.
South Korea: 11 years (1966 - 77) The Koreans now enjoy a high standard of living, including being the most Internet-connected place in the world.
China: 10 years (1977 - 87). Now China is repeating the successful model of producing manufactured goods cheaply and exporting them to the world.

Such growth was often interrupted by wars and recessions. The period between the 2 world wars was among the worst, with the worldwide depression of the 1930s causing crippling poverty and economic ruin.

The Bretton Woods conference that was held in the final days of World War II resulted in the creation of the IMF, World Bank and the GATT trade body in an attempt to reduce economic disasters and resulting massive military conflicts. Even though there are a lot of questions being asked about these institutions today, they have mostly achieved what they set out to do.

Unfortunately, the communist Soviet Union, poor African states and later China did not participate in these world bodies. This increased their isolation and economic mismanagement.

World population doubled from 2 billion in 1945 to 4 billion in 1970, but world wealth multiplied tenfold in real terms to around $4 trillion.

The Bretton Woods system began to break down in the early 1970s when France resented the US for financing its foreign policy (including the war in Vietnam) using its deficits. The French began to deplete US reserves of gold, forcing Nixon to devalue the dollar against gold by 15%. This led to the breakdown in fixed exchange rates.

Where are we now?

I'm still left wondering whether globalisation on balance is a "good thing". It has helped pull many nations out of a poverty trap and promises to do the same for many others. But it has led to the concentration of wealth into the hands of a small number of people and this cannot be good for future world stability.

If Raffles had not insisted that Singapore should be a completely open port in the early 1800s, it would not have enjoyed the growth and prosperity that it has now. If China had not opened up its economy and its trade policies during the 1980s, it would not be growing at its current breakneck speed.

Should countries try to spread wealth more evenly using taxation (like Australia and many European countries)?

But what I am really interested in now is the speculation that the whole economic system may collapse some day soon. The US deficits are unsustainable and there are a lot of "funny money" deals going on in hedge funds and derivatives and the like. We only need some US-hating country rich on petrodollars to suddenly pull the plug on their bond buying and there could be a run on the US dollar. Now, that would be interesting...

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