Liberty. It’s a simple idea, but it’s also the linchpin of a complex system of values and practices: justice, prosperity, responsibility, toleration, cooperation, and peace. Many people believe that liberty is the core political value of modern civilization itself, the one that gives substance and form to all the other values of social life. They’re called libertarians.
history, the global system of trade and finance has only ever been in
"balance" by lucky coincidence — or when a hegemonic power has imposed
its will in order to make the system work. In addition to setting the
rules, these powers also supplied crucial liquidity to facilitate the
flow of trade between countries. Sanjeev Sanyal explains.
of the common characteristics of international monetary systems
throughout history is the willingness of a major economy — usually the
pre-eminent power of its time — to trade its credibility to provide the
world with a monetary anchor.
Spain spent its wealth on expensive wars in the Netherlands and elsewhere. As a result, it constantly ran trade deficits.
leads to a symbiotic relationship between the anchor country and the
rest of the world: The anchor country gets cheap financing and the rest
of the world gets the monetary liquidity needed to lubricate economic
During the Roman times, for instance, the world economic system
was underpinned by booming trade between the Roman Empire and India, the
export champion of the ancient world. Merchant ships sailed down the
Red Sea or the Persian Gulf and then took advantage of the monsoon winds
to cross the Arabian Sea to India.
The problem with Indo-Roman trade, however, was that India ran a
large trade surplus with the empire. As Pliny (23-79 AD) wrote: "Not a
year passed in which India did not take fifty million sesterces away
The trade deficit meant that there was a continuous drain in gold
and silver coins that, in turn, created shortages of these metals in
Rome. Expressed in modern terms, this meant that the Romans were
constantly facing a monetary squeeze.
Matters were made worse by the fact that the empire frequently
ran fiscal deficits due to external and internal wars. Roman emperors
tried to deal with the twin deficits in various ways. Emperor Vespasian
tried unsuccessfully to impose restrictions on imports from India in the
1st century AD.
However, the more common response to the problem was the
debasement of imperial coins by reducing the gold/silver content (the
ancient equivalent of printing money). Not surprisingly, the real value
of the coins declined and the Romans experienced inflation.
It is estimated that the price of a military uniform rose 166
times between 138 and 301 AD. The price of wheat rose more than 200-fold
during this period. This should dispel another common belief that
inflation is a modern invention.
The Romans tried many things to stabilize prices, including
Emperor Diocletian's famous edict to fix prices. None of these efforts
worked in the face of a continuous trade deficit with India, persistent
fiscal deficits and the consequent debasement of coinage.
(Interestingly, the Indians continued to accept the debased coins for
centuries, although probably at a steadily falling exchange rate).
Ultimately, inflation led to serious distortions in the economy.
It is said that soldiers' pay was so diminished in real worth that a
full year's pay could barely buy eight week's worth of bread. This was
one of the pressures that eventually eroded Roman credibility even as
the empire went into terminal decline.
Pieces of eight
For a thousand years after the decline of Rome, Europe played a
relatively small role in the global economy even as trade boomed between
the Arabs, Indians, Chinese and the kingdoms of South East Asia.
War, colonization and drug-running were key ingredients in managing the international monetary system.
discovery of the Americas and Vasco da Gama's discovery of the sea
route to India changed this. Spain now became a superpower and its
financial strength was bolstered by its access to silver from New World.
Between 1501 and 1600, 17 million kilograms of pure silver and
181,000 kilograms of pure gold flowed to Spain. However, Spain spent its
wealth on expensive wars in the Netherlands and elsewhere.
As a result, it constantly ran trade deficits with the rest of
Europe and paid for it in silver coins. This injection of monetary
liquidity, in turn, caused an economic boom in the rest of Europe and
helped spread the spirit of the Renaissance.
Nonetheless, the increase in the supply of precious metals also
caused a sustained bout of inflation. Prices rose at least four-fold in
Spain over the course of the 16th century. Despite its access to New
World silver, Spain became increasingly unable to service its war debts.
Spain's supplies of gold and silver were often pledged years in
advance to Genoese bankers. Eventually, Spain repeatedly defaulted on
sovereign debts (in 1607, 1627 and 1649) and went into geopolitical
decline. Italian bankers such as the Fuggers were ruined by the
The political and economic center of gravity now shifted north to
Holland, France and Britain. They would by turns come to dominate world
trade in the 17th, 18th and 19th centuries.
Despite this shift, Spanish silver coins (known as "pieces of
eight" or Spanish dollars) continued to be the key currency used in
world trade right up to the American Revolutionary War. In fact, they
remained legal tender in the United States till 1857 — long after Spain
itself had ceased to be a major power.
The opium trade
It was only in the 19th century, following the defeat of
Napoleon, that Britain was finally able to impose a system that affirmed
its role as the world's anchor economy.
This system is known to historians as "triangular trade" between
Britain, India and China. Under this arrangement, the British sold
manufactured goods to the Indians and purchased raw cotton and opium.
The opium was then sold to the Chinese in exchange for goods such as tea
and porcelain. These were then sold back in Europe to fund the
manufacture of exports to India.
discoveries in California, Australia and South Africa allowed the
world's gold supplies to expand roughly in line with economic activity.
this way, Britain did not bleed gold in order to keep the system
flowing. Note that this global trade system functioned because the East
India Company was militarily able to impose its will. The imports of
British-made industrial goods devastated India's large artisan-based
At the same time, Chinese attempts to close down the opium trade
resulted in the Opium Wars of 1839-42 and 1856-60. In other words, war,
colonization and drug-running were key ingredients in managing the
international monetary system.
By the middle of the 19th century, the world was functioning on a
bimetallic system based on gold and silver. However, following the
British example, most major countries shifted to a gold standard by the
The Bank of England stood ready to convert a pound sterling into
an ounce of (11/122 fine) gold on demand. The U.S. Treasury was
similarly committed to convert an ounce of gold at $4.86. This, in turn,
locked the dollar-pound exchange rate.
This underlying monetary system anchored a great age of expansion
in global trade and economic activity. Nevertheless, its success was
underpinned by a lucky coincidence — a succession of gold discoveries in
California, Australia and South Africa that allowed the world's gold
supplies to expand roughly in line with economic activity. It helped
that many of these discoveries were conveniently in British control.
Even then, it was not an age without problems. There were periods
of inflation as well as periods of deflation. A succession of "panics"
affected the global financial system. There were worries that excessive
gold supplies would lead to sustained inflation.
The system was finally disrupted by World War I, but by this time
Britain had long ceased to be the world's most powerful economy.
Britain was overtaken by the United States around 1890 and then by
Germany in the 1900s.
After the war, harsh terms were imposed on Germany by the
victorious allies. With no other resources available, the German
authorities resorted to printing ever greater amounts of paper money
till the process spiraled out of control.
By November 1923, a kilogram of bread cost 428 billion marks, a
kilogram of butter 5,600 billion marks, a newspaper 200 billion marks
and a tram ticket 150 billion marks. This experience with hyperinflation
remains imprinted in German memory.
By November 1923, a kilogram of bread cost 428 billion marks, a newspaper 200 billion marks and a tram ticket 150 billion marks.
the British tried to reestablish the pre-war global order by going back
to a gold standard in 1925. There were also attempts to create a
mercantile system of "Imperial Preference" within the British Empire
that would have served the same purpose as had triangular trade in
The world had changed, however, and Britain's position was no
longer credible. With the Great Depression taking hold, the Bank of
England was forced to choose between providing liquidity to the banks
and honoring the gold peg. It opted for the former on September 20,
The Economics of persistent imbalance
The current economic crisis, variously named the "Great
Contraction" or the "Great Recession," is often interpreted as a crisis
of the world monetary system triggered by indebtedness and a loss of
Many experts have argued for "reform" of the global monetary
system. There have been many suggestions ranging from a return to gold, a
greater role for the IMF's Statutory Drawings Rights (SDR) or a
completely new world currency.
What most people are little aware of is how old a problem this
really is. Ancient Indians were willing to accept debased Roman coins
just as modern central banks and economic participants are willing to
hold U.S. dollars — despite its private and public indebtedness, its
political wrangling and even a sovereign ratings downgrade.
Then as now, this is not because nations cannot see the problem
of an asymmetric arrangement, but due to their willingness to pay a
price for keeping the world economic system liquid.