How The First Reserve Currency Died

Is the collapse of the Dutch Guilder a warning for the Dollar?

Reserve currencies have been a keystone that have helped uphold the dominance of empires for centuries. Nation-states, striving for power and influence, have risen to defeat others and acquire territory from neighbors. With a strong economic and social base and successive military victories, some have risen to become hegemons, and with this growth, they gain access to network effects and economies of scale that make their supremacy difficult to challenge.

With this might they can enforce their political and economic will onto the world around them- and draw nations, tribes and kingdoms into the fold, offering a medium of exchange that is accepted all over the realm. This status creates internal demand for the currency, facilitating borrowing and spending on the Treasury level, helping to keep the State solvent and well-financed to fund wars of expansion.

However, over time, long term imbalances build up and the financial situation becomes untenable. A new power, rising with economic and political might, finds itself challenging an incumbent that has become old, decadent, entitled, and weary. The new power eventually usurps the old, and with it, their most valuable asset- their money.

This is how the Dutch Guilder died.

In the chart below from Ray Dalio, we can see relative comparisons of all the great empires for the last 500 years. The Dutch, the British and the United States have all become veritable empires, and few nations, or even groups of nations, could challenge their authority during their zenith. 

Most of us are taught in school that history is linear. Event A happens, then B, then C because of B, and finally a battle is fought, a treaty is signed, or a king is toppled. Events are simple and straightforward- easy to memorize and regurgitate on the next history exam. Reality, however, is far more complicated.

Instead of following this simplistic straight-line view of history, many have promoted a view of history that is cyclical. Similar to the amount of light in a day, the seasons of the year, or the birth and decay of trees, man’s actions follow a similar path. In their groundbreaking book The Fourth Turning, historians Neil Howe and William Strauss lay out the base for their theory:

IT'S ALL HAPPENED BEFORE 

The reward of the historian is to locate patterns that recur over time and to discover the natural rhythms of social experience. 

In fact, at the core of modern history lies this remarkable pattern: Over the past five centuries, Anglo-American society has entered a new era—a new turning—every two decades or so. At the start of each turning, people change how they feel about themselves, the culture, the nation, and the future. Turnings come in cycles of four. Each cycle spans the length of a long human life, roughly eighty to one hundred years, a unit of time the ancients called the saeculum. Together, the four turnings of the saeculum comprise history's seasonal rhythm of growth, maturation, entropy, and destruction: 

@ The First Turning is a High, an upbeat era of strengthening 

institutions and weakening individualism, when a new civic order 

implants and the old values regime decays. 

® The Second Turning is an Awakening, a passionate era of spiritual 

upheaval, when the civic order comes under attack from a new 

values regime. 

® The Third Turning is an Unraveling, a downcast era of strengthening 

individualism and weakening institutions, when the old civic order 

decays and the new values regime implants. 

® The Fourth Turning is a Crisis, a decisive era of secular upheaval, 

when the values regime propels the replacement of the old civic 

order with a new one.

-The Fourth Turning, Chapter 1

Strauss and Howe tracked this cycle throughout American and European history, which had the best records, but also observed it in China, Japan, the Middle East, and more. Every 80 years there is a Fourth Turning. 

A crisis.

The first Fourth Turning peak came in roughly during the 1780s, as America fought for independence.

The next came in the 1860s, as the nation desperately fought to end slavery and hold the Union together.

Then a new crisis arrived in the 1940s, as the United States faced off against powerful adversaries of Germany and Japan with the help of her allies. The victor of this war would determine the new world order.

Finally, 2020 and the Covid pandemic unleashed inflation not seen in 40 years, along with George Floyd riots and record levels of political extremism on both sides. M2 Money Supply grew 40% in a year. QE was extended without a end date in sight or a “ceiling” on the liquidity wave unleashed, and the Fed even began buying corporate bond ETFs.

Notice a pattern? Every 80 years, or roughly one long human lifespan, this cycle repeats. Each generation also gains a unique characteristic identity due to the economic, social and environmental factors dominant in their childhood and adolescence. 

These Fourth Turnings take around 22 years to fully play out, and we likely have not seen the peak of the one we are in right now. Currently, the United States is witnessing record levels of drug abuse, depression, homelessness, and an exponentially increasing debt load which is hurling us into financial oblivion. Despite the glowing and moderating inflation, jobs figures touted by financial media, most are finding it harder- not easier- to survive than they did a few years ago. A malaise is emerging across the country, and clear signs appear to show us that our time as a global superpower is coming to an end, not the least of which was the botched withdrawal from Afghanistan and the ammunition shortages in the U.S. as Congress sends billions of dollars worth of arms to Ukraine.

It feels new. Like it’s happening to us for the first time.

But it’s not.

Hundreds of years ago, the Dutch, who were arguably the first global trade empire, controlled the dominant reserve currency, the guilder. The Netherlands, located in Northwestern Europe, has a history dating back to the early medieval period. However, it was during the 17th century, often referred to as the Dutch Golden Age, that the Dutch Republic truly flourished. The Dutch established a formidable maritime empire, with their merchant fleets and powerful trading companies leveraging superior ship building to navigate the globe, bringing spices and other rare commodities from Asia to Europe via their trade routes.

In 1602, in response to intense competition among burgeoning Dutch enterprises vying for a share of the lucrative East Indies spice trade, which had led to rising spice prices and oversupply in European markets, the Dutch government intervened. Through official decree, it consolidated these companies into a single entity known as the United Dutch East India Company, or Vereenigde Oost-Indische Compagnie (VOC). The VOC was bestowed with an exclusive monopoly on all maritime trade routes to Asia via the Cape of Good Hope and the Straits of Magellan, effectively quelling the competitive chaos and solidifying Dutch dominance in these vital trade networks.

By the mid-1600s, the VOC had become an economic behemoth, with approximately 150 merchant vessels and a workforce of 50,000 personnel. Additionally, it maintained a formidable private army comprising 10,000 soldiers and established trading outposts spanning from the Persian Gulf to Japan. Essentially, the Company functioned as an autonomous entity, akin to a sovereign state within a state, possessing the authority to engage in warfare, negotiate treaties with foreign leaders, administer justice and penalties to wrongdoers, establish fresh colonies, and mint its own currency.

The VOC emerged as a colossal trading entity, becoming the world's first multinational corporation. Its supremacy was so pronounced that from 1602 to 1796, its fleets embarked on nearly 5,000 journeys from the Netherlands to Asia. Throughout the 17th century, the entirety of Europe collectively paled in comparison, dispatching only a small fraction of the ships and workforce that the VOC commanded. The Honourable East India Company of England, although a distant runner-up to the VOC, managed to return with merely one-fifth of the cargo tonnage during this period.