Monetary order and international security

Harold James
This year includes big anniversaries in the history of the international monetary order. August 15 marked 50 years since US President Richard Nixon “closed the gold window”; and on September 21, it will have been 90 years since the British government took the pound off the gold standard. Although both episodes belong to the history of money, their implications transcended the financial domain. Each marked the passing of an entire international security regime.
The nineteenth-century global order had been built around British imperial power, with the gold standard serving as its financial foundation. The gold standard was sustained by the expectation that even if it was suspended in times of war, the end of hostilities would allow the currency to return to its pre-war gold value. That promise of a constant gold value provided an element of credibility that made it easier for a wartime government to borrow, and thus to bear the cost of the conflict.
Because the gold standard had long served as the financial underpinning of Britain’s imperial status, the country returned to it after World War I. But the cost proved to be too high. By 1931, it was evident that a departure from gold was necessary to free up more room for the easy-money policies that would eventually drive the recovery from the Great Depression.
Britain also found after WWI that it could not easily reclaim its previous position at the center of the global security order. Instead, it sought to preserve its influence through the creation of a new institution, the League of Nations. To many Britons, this precursor to the United Nations looked like an improvement on the old balance-of-powers system. It established a clear legal code for international behavior as well as limitations on “aggression.” From the perspective of other countries, however, the League looked like a scheme designed to protect British interests on the cheap.
On September 18, 1931, a few days before the sterling was de-linked from gold, the Japanese army destroyed the League’s credibility as a bulwark against aggression. By staging a false flag incident on the strategic railroad at Mukden (now the Chinese city of Shenyang), which it presented as a Chinese act of sabotage, Japan created a pretext for invading and seizing Manchuria. The League was powerless in the face of these machinations. The Japanese provocation merely underscored a point made by the League’s critics: aggression is a relative concept.
The “Nixon shock,” too, must be understood as part of a broader systemic change in the global security order. It was the cost of America’s long failure in Vietnam, which strained the US budget and prompted a shift to inflationary financing that irked other countries.
America’s humiliation in Kabul today echoes these older moments of apparent imperial collapse. Like the disintegration of the League’s order in the interwar world, and like the collapse of the American position in Vietnam, the Taliban’s reconquest of Afghanistan was not surprising. In each case, the cataclysmic end was years in the making.
This is something that monetary and security collapses share. Everyone can see the cracks in the system far ahead of time, but economic policymakers and security officials deny their intention of abandoning the status quo up until the final moment. When the collapse comes, it is necessarily chaotic (because nobody could be seen to be preparing for it). The dominant power’s credibility suddenly evaporates, and a rush to the exit – either from the currency or the country – soon follows.
The aftermath of these episodes can be even more chaotic still, as was the case in the interwar years. One common characteristic of systemic collapse is that a whole network of alliances can be immediately discredited. Hence, Afghanistan is a fiasco not just for the US administration but for every government associated with it. Suddenly, it becomes much more likely that the old security system will be tested in ways that previously seemed unimaginable. In the current case, all eyes will be on the Baltics and Taiwan.
These uncertainties create the need for a new, more viable and sustainable political order that is not dependent on the exhausted hegemon. But it is foolish to think that there can (or should) be only one pole of global stability – as if it had to be the United States alone that took the mantle from the British in the twentieth century; or that it must be China that will assume the position vacated by the US today. There are always other alternatives, and the tension between them is often a source of deep instability. The hegemonic tussle between a revisionist Japan, Russia, and Germany during the interwar period is a case in point.
Moreover, new thinking can come from new players. Nowadays, politics everywhere are being remade in response to the COVID-19 crisis. Contrary to what the pundits often suggest, it is far from clear that Russia or China inevitably will benefit from America’s humiliation. India, for example, might come to play a greater role in Central and South Asian politics.
Similarly, with the United Kingdom gone, dynamics within the European Union are shifting. France and Germany, the central axis of European politics for most of the post-war period, look increasingly tired and self-absorbed. Both are heading into elections dominated by domestic issues – or in the case of Germany’s soporific campaign, no issues at all. Meanwhile, Italy under Prime Minister Mario Draghi is producing new ideas and formulating a vision of how Europe can respond to global threats like the pandemic and climate change.
In looking for a new path forward, the essential message of 1931 and 1971 should be heeded. Chaotic financial transitions are also security challenges. Only by re-creating a viable system for managing interstate relations can financial stability be assured. And stable international politics tend to be a prerequisite for establishing new financial orders.