James G. Rickards

From King World News

One of the turning points in the history of world trade was the failed mission in 1793 of Lord George Macartney, representing King George III of England, to the Imperial Court of Qianlong, Fifth Emperor of the Manchu Dynasty of China.  Beginning in the late 18th century, England had increased its imports of goods from China including tea, silks, spices, porcelain and other manufactured goods.  England paid for these imports with silver, and later with exports of opium, which it obtained from its Imperial provinces in Central Asia.  Lord Macartney attempted to persuade Emperor Qianlong to open up China to trade with England so that England’s trade deficit could be balanced with exports from England of cotton and woolen textiles, new mechanical devices such as clocks, weapons and other manufactured goods.  Macartney famously offended Qianlong by refusing to perform the kowtow, an elaborate ritual of bowing and prostration, and in the end Qianlong rejected Macartney’s offer on grounds of China’s “celestial supremacy” summarized in his remark that there was nothing in the world which China lacked, therefore trade was unnecessary.

Left with only silver and opium with which to balance their trade deficit, England quickly decided that they preferred to keep their silver at home and would thereafter balance their trade with massive opium exports to China.  Opium exports to China grew enormously between the 1790s and 1830s until addiction reached crisis proportions and the Manchu Dynasty took steps to seize imported opium and to shut down the opium trade.  England responded with military force to open the ports and suppress the Manchu officials responsible in a series of Opium Wars which stretched from 1839 to 1856 and which ended in the humiliation of the Manchu and the subordination of the Chinese economy to the mercantile interests of England, France, Russia, Germany, Japan and the U.S.  Conveniently, England was able to continue to settle its trade deficits with China using opium, which it grew cheaply and in vast quantities.

Plus ça change…. Today the U.S. faces massive, continual trade deficits with China and has for decades.  We take DVD players, flat screen TV’s and iPods instead of tea and silks but the fundamental dynamic of world trade has not changed in 300 years; the U.S. still needs to find a way to pay for its deficit.  From 1944 to 1971 under the Bretton Woods international financial system, the U.S. would settle its deficits in gold, much as England had paid in silver in the 1790s.  But in the Bretton Woods period, the U.S. saw its gold reserves dwindle from about 20,000 metric tonnes in 1950 to about 9,000 metric tonnes in 1970.  As a result, President Nixon suspended redemption of dollar reserves held by trading partners for gold.  Thereafter, trading partners with surpluses and dollar reserves could only invest in dollar denominated assets, principally U.S. Treasury obligations, or dump their dollars for some other currency.

Plutocracy, rule by the rich, is not named for Pluto, god of death, but his spoiled son, Plutus, the personification of wealth. The juxtaposition of a dead economy and bank billionaires makes this lineage apt.

The failure of Washington and Wall Street to foresee the financial crisis is well known. Less well known is their failure to grasp the depth of the crisis once it began. The crisis did not emerge suddenly in September 2008 with Lehman and AIG; it was in full swing by August 2007 with the Fed’s emergency discount rate cut. Why were our leaders blind not once, at the outset, but twice, after the crisis had begun?