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By comparison with past centuries, the twentieth has
produced extremes. Its earliest part was a benign continuation of the
pax of the 19th century. But this calm before the storm was followed by
World War I, communism, hyperinflation, fascism, depression, genocide,
World War II, the atom bomb, and the Soviet occupation of Eastern
Europe. There followed a period of comparative stability, punctuated by
the balance of terror of the Cold War, the Nato Alliance, and
decolonialism. Toward the end of the century the Cold War ended, the
Soviet Empire was dismantled, democracy emerged in Eastern Europe, the
Pax Americana flourished and the euro came into being. The clue to the
20th century lies in the links between its first and last decades, the
"bookends" of the century.
In 1906, Whitelaw Reid, the US Ambassador to Britain, gave a lecture at
Cambridge University with the title, The Greatest Fact in Modern
History, in which the author, a diplomat, journalist and politician, was
given as his subject, the rise and development of the United States!1 It
cannot have been obvious then that the rise of the United States was the
"greatest fact in modern history" but it was true that in a matter of
only two centuries a small colony had become the biggest economy in the
world. The first decade of the century hinted at what the last decade
confirmed, viz., American preponderance. Forget the seventy-five years
between 1914 and 1989!
An underlying theme of my lecture today is the role of the United States
in what has been aptly called the "American century." I want to bring
out the role of the monetary factor as a determinant of political
events. Specifically, I will argue that many of the political changes in
the century have been caused by little-understood perturbations in the
international monetary system, while these in turn have been a
consequence of the rise of the United States and mistakes of its
financial arm, the Federal Reserve System.
The twentieth century began with a highly efficient international
monetary system that was destroyed in World War I, and its bungled
recreation in the inter-war period brought on the great depression,
Hitler and World War II. The new arrangements that succeeded it depended
more on the dollar policies of the Federal Reserve System than on the
discipline of gold itself. When the link to gold was finally severed,
the Federal Reserve System was implicated in the greatest inflation the
United States has yet known, at least since the days of the
Revolutionary War. Even so, as the century ends, a relearning process
has created an entirely new framework for capturing some of the
advantages of the system with which the century began.
The century can be divided into three distinct, almost equal parts. The
first part, 1900-33, is the story of the international gold standard,
its breakdown during the war, mismanaged restoration in the 1920's and
its demise in the early 1930's. The second part, 1934-71, starts with
the devaluation of the dollar and the establishment of the $35 gold
price and ends when the United States took the dollar off gold. The
third part of the century, 1972-1999, starts with the collapse into
flexible exchange rates and continues with the subsequent outbreak of
massive inflation and stagnation in the 1970's, the blossoming of
supply-side economics in the 1980's, and the return to monetary
stability and the birth of the euro in the 1990's. The century ends,
however, with our monetary system in deficit compared to the first
decade of the century and that suggests unfinished business for the
decades ahead.
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