THE CHANGING WORLD ORDER 55 UK ARC 1600–PRESENT Major Wars United Kingdom Netherlands United States Level Relative to Other Empires (1 = Max) 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 New Order Peace of Westphalia Global Empire & Reserve FX Innovation Industrial Revolution External Conflict & High Indebtedness Inequality & Losing Innovative Edge New Order US-led Western Block New UK-led Order Congress of Vienna English Civil War Victorian Era Suez crisis WWI & WWII 1600 1700 1800 1900 2000 1950 1850 1750 1650 Napoleonic wars (1) (3) (4) (5) (6) Internal Conflict & Emergence of Better Government Glorious Revolution (2) Innovation Financial innovations, competition with the Dutch 2% 3% 4% 5% 6% 7% 8% 9% 10% 1700 1750 1800 1850 -3% -2% -1% 0% 1% 2% 3% 1700 1750 1800 1850 GBR GOVT BOND YIELD GBR GOVT BOND YIELD (VS MAJOR COUNTRY MEDIAN) THE CHANGING WORLD ORDER 56 GBR GOVT REVENUE (%GDP) Massive expansion of fiscal state 1500 1550 1600 1650 1700 1750 1800 0% 2% 4% 6% 8% 10% 12% 14% 0 2 4 6 8 1500 1600 1700 1800 1900 1500 1600 1700 1800 1900 NLD GBR FRA MAJOR INVENTIONS (PER MLN POPULATION) SHARE OF MAJOR INVENTIONS 0% 20% 10% 30% 40% 50% 60% 70% THE CHANGING WORLD ORDER 57 REAL GDP PER CAPITA (2017 USD) EUR NLD GBR ESP DEU FRA 1,000 2,000 4,000 8,000 1400 1500 1600 1700 1800 1900 Dutch outperformance Spanish decline British industrialization German catch-up FRA GBR FRENCH UNIVERSITIES FOUNDED (%WLD, 30YR AVG) 0% 10% 20% 30% 40% 50% 1500 1600 1700 1800 1900 1500 1600 1700 1800 1900 LITERACY RATE (% POP) 10% 20% 30% 40% 50% 70% 90% 60% 80% THE CHANGING WORLD ORDER 58 FRENCH INFLATION (5-YEAR AVG) -10% 30% 10% 50% 70% 90% 1700 1720 1740 1760 1780 1800 1820 FRENCH CURRENCY VS GOLD (INDEXED, LOG) .01% .1% 10% 1% 100% 1,000% 1750 1770 1790 1810 1830 1850 1870 Currency collapse accelerates from 1792 to 1796 GBR EMPIRE SIZE (% WORLD, EST) 1600 1650 1700 1750 1800 1850 1900 1950 2000 0% 5% 10% 15% 20% 25% THE CHANGING WORLD ORDER 59 GBR SHARE OF WORLD EXPORTS (% TOTAL) 0% 30% 20% 40% 50% 10% 1700 1800 1900 2000 Between 1850 and 1914, about 60% of world trade denominated in pound sterling 0% 20% 40% 10% 30% 50% 60% 70% INTERNATIONAL INVESTMENTS (% DEV WLD GDP) 1825 1845 1865 1885 1835 1855 1875 1895 1905 GBR NLD FRA DEU USA THE CHANGING WORLD ORDER 60 SHARE OF GLOBAL DEBT IN GBP (EST) 0% 20% 40% 60% 80% 1700 1800 1900 2000 SHARE OF GLOBAL TRANSACTIONS IN GBP (EST) 0% 10% 20% 30% 40% 50% 60% 1700 1800 1900 2000 USA GBR DEU INVENTIONS (% OF GLOBAL INVENTIONS) 10% 20% 30% 40% 50% 1870 1890 1910 1870 1890 1910 GDP (% OF GLOBAL GDP) 10% 20% 30% UK declines as US and Germany catch up Rise of the US Steady UK decline 10 10 GBR GDP share includes income of countries controlled by the British Empire. THE CHANGING WORLD ORDER 61 UK WEALTH GAP (TOP 1% WEALTH SHARE) 55% 65% 60% 70% 75% 1800 1820 1840 1860 1880 1900 1920 0% 1% 2% 3% 1870 1913 PUBLIC EDUCATION EXPENDITURE (%GDP) GBR DEU FRA Germany outspends both Britain and France to develop its education system I THE CHANGING WORLD ORDER 62 % OF NOBEL PRIZES WON FROM 1900 TO 1913 0% 10% 20% 5% 15% 25% 30% 1870 1880 1890 1900 1910 DEU GBR USA DEU GBR SHARE OF WORLD PATENT APPLICATIONS 0% 5% 15% 25% 10% 20% German patent applications become a significant share of the world’s total and overtake Britain GBR DEU FRA 2% 10% 18% 26% 6% 14% 22% 1860 1880 1900 RELATIVE SHARES OF WORLD MANUFACTURING OUTPUT German manufacturing goes from less than a half of Britain's in 1860... …to around 75% by 1900 THE CHANGING WORLD ORDER 63 GBR DEU WARSHIP TONNAGE (THOUSAND TONS) 0 2,000 1,000 3,000 1870 1890 1880 1900 1910 1880 1900 1890 1910 1914 SHARE OF GLOBAL MILITARY SPENDING (EST, 10YR AVG) 5% 15% 10% 20% Competition between Germany and Britain leads to a ramp-up in military armament by both countries DEU REAL GDP PER CAPITA 40% 80% 120% 160% 40% 80% 120% 160% JPN REAL GDP PER CAPITA 35 39 43 47 37 41 45 49 35 39 43 47 37 41 45 49 THE CHANGING WORLD ORDER 64 JPN SPOT FX VS USD (INDEXED TO 1935) 35 39 43 47 37 41 45 49 35 39 43 47 37 41 45 49 DEU Black Market Spot FX vs USD (Indexed to 1935) DEU Spot FX vs USD (Indexed to 1935) 0 20 60 100 40 80 0 20 60 100 40 80 June 1948: FX replaced, with financial asset holders facing -90% haircut 11 GBP SHARE OF GLOBAL RESERVES (EX-GOLD, EST) GBP SHARE OF GLOBAL DEBT (EST) GBP SHARE OF GLOBAL TRANSACTIONS (EST) 0% 20% 40% 60% 80% 100% 1900 1960 2020 WWII 1900 1960 2020 0% 10% 20% 30% 40% 50% 60% 70% 1900 1960 20200% 10% 20% 30% 40% 50% 11 This chart shows the official exchange rate between dollars and deutschemarks as well as an unofficial (black market) rate that was based on actual transactions between New York and Germany during that time period. The unofficial rate shows that the true value of the deutschemark was col- lapsing during the period. THE CHANGING WORLD ORDER 65 USD/GBP (INV) GBR FX VS GOLD (£/OZ, INV) 0.15 0.25 0.35 0.45 1900 1935 1970 First devaluation (1946–49): Convertibility crisis when the UK removes capital controls Second devaluation (1967): UK gives up defending the peg 1935 1900 1970 2 4 6 8 10 12 14 16 18 20 USD/GBP (INV) GBR REAL FX VS TWI -20% -10% 0% 10% 20% 1930 1940 1950 1960 0.15 0.25 0.35 0.45 1930 1940 1950 1960 GBR CURRENT ACCOUNT (%GDP) -15% -10% -5% 0% 5% 10% 15% 1930 1940 1950 1960 THE CHANGING WORLD ORDER 66 GBR CURRENT ACCOUNT (%GDP) GBR GOLD RESERVES (OZ, MLN) 60 62 64 66 68 70 20 30 40 50 60 70 80 90 Gold reserves fall over the decade, accelerating in 1967 -3% -2% -1% 0% 1% 2% 3% 60 62 64 66 68 70 Deterioration of the current account, connected to EUR recession GBR REAL FX VS TWI -10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10% 60 62 64 66 68 70 GBR SHORT RATES (DIFF TO USA) 60 62 64 66 68 70 -1% 0% 1% 2% 3% 4% 5% Sharp rate hikes amid currency defense USD/GBP (INV) 60 62 64 66 68 70 0.25 0.30 0.35 0.40 0.45