In China, which was still a world away but impacted, there was the same dynamic—a stock market bubble led by
rubber production stocks (which was China’s equivalent of America’s railroad stock bubbles that contributed to
panics there throughout the 19th century) that burst and led to a crash in 1910, which some have described as a
factor in a debt/money/economic downswing that contributed to the end of Imperial China. So, throughout that
period the Type 2 monetary systems (i.e., with notes convertible into metal money) remained in place in most
countries and holders of notes got paid good interest rates without having their currencies devalued. The big
exceptions were the US devaluation to finance the Civil War debts in the 1860s, the frequent devaluations of
Spain’s currency due to its continued weakening as a global power, and the sharp devaluations in Japan’s currency
due to its remaining on a silver-linked standard until the 1890s (and silver prices falling relative to gold prices in
this period).
World War I began in 1914 and countries borrowed a lot to fund it, which led to the late debt cycle breakdowns
and devaluations that came when war debts had to be wiped out, effectively destroying the monetary systems of
those who lost the war. The Paris Peace Conference that ended the war in 1918 attempted to institute a new
international order around the League of Nations, but the efforts at cooperation were unable to avoid debt crises
and monetary instability due to huge war indemnities placed on the defeated powers (such as Germany in the
Treaty of Versailles), as well as large war debts owed by the victorious Allies to each other (particularly to the US).
As shown in the chart below, that led to a complete wipeout of the value of money and credit in Germany, which
led to the world’s most iconic hyperinflation in the Weimar Republic. As you will read briefly when we cover
Germany’s rise and decline in Part 2 (and as you can read much more completely in my detailed examination of
the Weimar Republic in Principles for Navigating Big Debt Crises) this case was the direct result of Germany
having these enormous war-related debts and indemnities that had to be disposed of. The Spanish flu also occurred
during the period, beginning in 1918 and ending in 1920. Coming out of the war, all currencies except the US
dollar, the Japanese currency, and the Chinese currency devalued because they had to monetize some of their war
debts and because not to devalue with the countries that devalued would have hurt their competitiveness in world
markets. As shown in the chart below, China’s silver-based currency rallied sharply relative to gold (and gold-
linked currencies) near the end of the war as prices rose and then mechanically devalued as silver prices fell
sharply amid the post-war deflation in the US. That was then followed by an extended and productive period of
economic prosperity, particularly in the US, that was known as the Roaring ’20s, which like all such periods, led to
big debt and asset bubbles and a large wealth gap that sowed the seeds for the turbulence that lay ahead.

Next, in the 1930s you see different versions of the same thing happening in all countries—i.e., in the 1930-33
period there was a global debt crisis that led to economic contractions that led to the printing of money and
competitive devaluations in virtually all countries, which eroded the value of money moving into World War II.
The conflicts over wealth within countries and between countries led to greater conflicts within and between
countries. All the warring countries built up war debts while the US gained a lot of wealth (gold) in the war. Then,
after the war, the value of money and debt was completely wiped out for the losers of the war (i.e., Germany,
Japan, and Italy), as well as for China, and was severely devalued for Great Britain and France even though they
were the supposed winners of the war. I should note that during war years money and credit are not commonly
accepted between countries because there is a justifiable wariness about whether they will get paid back in
currency that has value. During wars gold, or in some cases silver or barter, is the coin of the realm. At such times
prices and capital flows are typically controlled so it is even difficult to say what the real prices of many things are.
After the war was the prosperity period that we won’t examine other than to say that within it was excessive
borrowing that sowed the seeds of the next big devaluation, which happened in 1968-73.
By the mid-1950s, before that devaluation, the dollar and the Swiss franc were the only currencies worth even half
of their 1850s value. As shown below, the downward pressure in currencies and upward pressure in gold started in
1968 and was made official on August 15, 1971, when President Nixon ended the Bretton Woods monetary
system, leaving the Type 2 monetary system in which the dollar was backed by gold, and going to a fiat monetary
system.
Since 2000 we have seen a more gradual and orderly loss of total return in currencies when measured in gold,
consistent with the broad fall in real rates across countries during those decades.