The times ahead will be radically different from those we have experienced in our lifetimes, even though they will resemble many periods that came before. I know this because major historical changes tend to follow recurring patterns.

Throughout roughly fifty years of global macroeconomic investing, the events that proved most surprising were often events never personally experienced firsthand. Those painful surprises led to a study of the previous five hundred years of history, which revealed that similar situations had occurred many times before, during the rise and decline of the Dutch, British, and American empires. Each time, these developments signaled a changing world order.

This study offers several valuable lessons worth passing along in simplified form. Begin with the experience that first prompted anticipating the future by studying the past.

In 1971, on the floor of the New York Stock Exchange, the United States effectively ran out of money. At that time, gold was used in transactions between countries. Paper currency, including the dollar, functioned almost like a check: it had value because it could be exchanged for gold.

The United States had been spending more money than it was earning. It had issued more paper dollars than it had gold available to redeem them. As people exchanged their dollars for gold, the country’s reserves began to decline. Eventually, it became clear that the United States could not keep its promise to redeem every dollar.

On August 15, President Richard Nixon announced that the United States would temporarily suspend the convertibility of the dollar into gold. In practical terms, the country was breaking its promise, although the announcement was presented as a necessary measure to protect monetary stability.

The monetary system that had seemed so fixed began to change overnight. A stock market plunge seemed likely the following day. When the market opened, however, the opposite happened—prices surged, and the market eventually rose by nearly 25 percent.

This was surprising because a currency devaluation of that kind had never been personally experienced before. A look back through history turned up a similar event in 1933, when the United States was also issuing more paper money than it had gold to support. President Franklin Roosevelt eventually broke the government’s promise to exchange dollars for gold. In both cases, ending the link to gold allowed the United States to continue spending more than it earned by issuing additional paper currency.

When the number of dollars increases without a corresponding increase in the country’s wealth or productivity, each dollar becomes less valuable. As new money enters the economy, it often flows into stocks, gold, commodities, and other assets, pushing their prices higher.

This pattern has occurred repeatedly throughout history. When governments spent far more than they collected in taxes and conditions deteriorated, they often responded by creating more money. The value of the currency declined, while the prices of stocks, gold, commodities, and other assets rose.

This led to an important principle: when central banks create large amounts of money to relieve a crisis, the value of paper currency tends to fall while the prices of scarce assets tend to rise. Similar responses played out during the 2008 mortgage and debt crisis and again during the economic crisis of 2020, and similar measures are likely to be used during future crises as well.

Another principle follows from these experiences: to understand what is coming, it helps to understand what happened before. Studying how the speculative bubble of the 1920s became the Great Depression helps in anticipating the transition from any given financial bubble to the crisis that can follow—an almost instinctive habit of looking to the past for similar situations that might offer guidance about the future.

The Conditions Behind a Changing World Order

Over the last several years, three major developments not seen in a lifetime prompted a deeper study of history.

First, governments were unable to generate enough money to repay their debts, even after interest rates had been reduced to near zero. Their central banks responded by creating large amounts of money.

Second, serious internal conflicts emerged because of growing differences in wealth, values, and political beliefs. These conflicts appeared through rising populism and polarization between the political left, which generally favors redistributing wealth, and the political right, which generally favors protecting existing wealth and property.

Third, external conflict intensified between a rising great power and the existing dominant power, as seen in the growing rivalry between China and the United States.

Looking back through history, these three conditions had often appeared together, frequently preceding major changes in domestic political systems and the international order. The last time this sequence occurred was approximately between 1930 and 1945.

What Is an Order?

An order is a governing system that determines how people or countries interact with one another. There are internal orders that govern relationships within countries, often expressed through constitutions, laws, and political institutions, and an international order that governs relations between countries, usually through treaties, alliances, and monetary agreements.

Internal and international orders do not always change at the same time, but both typically change after major conflicts—civil wars within countries or international wars between them. Order changes occur when new revolutionary forces defeat weak, established systems.

The United States established its current internal order through the Constitution in 1789, following the American Revolution. Russia replaced its old order after the revolution of 1917, and that system eventually ended in 1991. China established its current internal order in 1949, when the Chinese Communist Party won the civil war.

The current international system is often called the American world order. It was created after the Allied victory in World War II, when the United States emerged as the world’s dominant power. This order was established through agreements governing international relations, global trade, and monetary systems. In 1944, the Bretton Woods Agreement established the dollar as the world’s leading reserve currency.

A reserve currency is widely accepted for international trade and savings. Controlling the dominant reserve currency is a major advantage because it allows a country to borrow more easily and finance its economic and military power. When a new dominant power and monetary system emerge, a new world order begins. These transformations follow a recurring historical pattern that can be called the big cycle.

The Big Cycle

By studying the ten most powerful empires of the last five hundred years and the last three major reserve currencies, we can observe the rise and decline of the Dutch Empire and the guilder, the British Empire and the pound, and the United States and the dollar. We can also observe the rise of China, alongside the decline of other major empires, including the Spanish, German, French, Indian, Japanese, Russian, and Ottoman empires. To better understand China’s development, it is also useful to study the rise and fall of Chinese dynasties and currencies dating back to approximately the year 600.

Although every empire is unique, the broad patterns are remarkably similar. The cycles generally overlap and last approximately 250 years, with transition periods of ten to twenty years between dominant powers. These transitions are often periods of intense conflict, because established powers rarely decline without resistance.

To measure the strength of an empire, several key factors matter:

• Education
• Innovation and technological development
• Competitiveness in global markets
• Economic output
• Share of global trade
• Military strength
• The strength of its financial markets
• The global status of its currency

These factors reinforce one another. Strong education contributes to innovation. Innovation improves productivity and competitiveness. Economic strength expands trade. Trade supports military power and financial influence. Eventually, a country’s currency may become the world’s preferred reserve currency. As these strengths decline, they often weaken in a similar sequence.

The Rise of an Empire

The big cycle usually begins after a major conflict, often a war, that establishes a new leading power and a new international order. Because the new leadership is dominant and widely supported, a period of peace and prosperity usually follows. During this stage, leaders must build institutions that increase national wealth and power.

Strong education is essential—not only technical knowledge, but character, discipline, civility, and a strong work ethic, typically developed through families, schools, religious institutions, and community organizations. A healthy culture encourages respect for rules, low corruption, social order, and cooperation around a common purpose.

As people become more productive, a country shifts from producing basic goods to inventing new technologies. The Dutch, for example, became highly educated and innovative, developing ships capable of traveling around the world and financial systems that helped fund those voyages. Leading powers also remain open to the best ideas from around the world, which improves productivity and helps them compete in international markets.

As trade expands, a country must protect its trade routes and overseas interests, which leads to the development of military power. A virtuous cycle emerges: education produces innovation, innovation increases productivity, productivity expands trade, and trade generates the wealth needed to invest in infrastructure, research, and further education.

The most successful empires also develop systems that reward productive entrepreneurs and encourage investment. Capital markets allow people to convert savings into businesses, inventions, and infrastructure. The Dutch created the first publicly traded company, the Dutch East India Company, along with one of the world’s first stock markets—institutions that helped finance the expansion of Dutch wealth and influence.

The leading empire also develops the world’s most important financial center: Amsterdam during the Dutch era, London during the British era, and New York during the American era. China is now developing major financial centers of its own.

In many cases, government, business, and military interests work closely together. The Dutch East India Company operated with government support and its own military forces. The British followed a similar model through the British East India Company. The American military-industrial system represents another version of this relationship, as does China’s current system.

As a country becomes the leading international trading power, its currency becomes widely accepted. Because people around the world use that currency for transactions, they also begin saving in it—it becomes both a medium of exchange and a store of wealth. This is how a currency becomes the world’s leading reserve currency, providing a major advantage: countries and investors around the world are willing to hold the currency and lend it back to the issuing country. When the country runs out of money, it can often create more. This “exorbitant privilege” allows borrowing to increase and eventually contributes to the development of a financial bubble.

The Top of the Cycle

At the top of the cycle, the strengths of the leading power are still visible. However, the conditions that produced its success also begin creating the seeds of decline.

As people in wealthy countries earn more, their labor becomes more expensive compared with workers in emerging countries. At the same time, other countries copy the leading power’s technologies and methods, reducing its competitive advantage. This occurred when British shipbuilders hired Dutch designers to create better ships that could be built more cheaply by British workers—the British gained competitiveness while the Dutch began to decline.

As people become wealthier, they may also work less, pursue more leisure, and become accustomed to greater comfort. Over time, values can shift from discipline and sacrifice toward entitlement and complacency. The generations that build an empire tend to be disciplined by hardship; later generations inherit the benefits without experiencing the struggles that created them, and may become less resilient and more vulnerable to challenges.

As people become accustomed to prosperity, they begin assuming that good times will continue. They borrow money to invest, consume, and maintain their lifestyles, which eventually produces financial bubbles. The benefits of prosperity are rarely distributed equally, and wealth gaps grow between those who own assets and those who depend primarily on wages. Wealth gaps are self-reinforcing: wealthier people can provide their children with better education and greater opportunities, and can use their resources to influence the political system.

As differences in wealth, values, and opportunity increase, resentment grows among those who feel excluded from the system. As long as living standards continue rising for most people, these tensions may remain manageable, but when living standards stagnate or decline, conflict intensifies.

The reserve-currency advantage also encourages excessive borrowing. The dominant country can accumulate large debts with foreign lenders, which increases spending power in the short term but weakens the country’s financial health over time. Borrowing allows the empire to appear stronger than its underlying fundamentals justify, financing domestic overconsumption and the military expenditures required to maintain the empire.

Eventually, the cost of maintaining the empire becomes greater than the economic benefits it produces. The Dutch Empire expanded across the world and fought increasingly expensive wars to protect its territory and trade routes. The British Empire became large and bureaucratic while rival powers, especially Germany, became more competitive, contributing to an expensive arms race and the two world wars. A similar pattern can be seen in the United States, which has accumulated enormous costs through foreign wars, overseas military operations, and the maintenance of bases around the world.

Another early sign of a shifting balance of power occurs when wealthy countries begin borrowing from poorer countries that save more. The United States began borrowing heavily from China in the 1980s, while Chinese savers accumulated dollars because the dollar was the world’s reserve currency. The British borrowed extensively from their colonies, and the Dutch also borrowed from poorer regions during their period of dominance. When an empire begins running out of new lenders, investors may stop buying and holding its currency and begin selling instead—at that point, the strength of the empire begins to decline.

The Decline

Decline usually results from a combination of internal economic weakness, domestic conflict, costly external conflicts, or all three. It often begins gradually and then accelerates suddenly.

When debts become too large and the economy weakens, the empire may no longer be able to borrow enough money to repay its obligations. The financial bubble bursts, creating hardship and forcing the government to choose between defaulting on its debts or creating more money. Historically, governments usually choose to create more money—first gradually, then on a much larger scale—which devalues the currency and increases inflation.

For the Dutch, the process followed financial excesses and the cost of the Fourth Anglo-Dutch War. For the British, it followed the financial burdens of two world wars. In the United States, several cycles of debt, financial expansion, and crisis have been met with increasingly aggressive central-bank intervention.

As economic conditions deteriorate and living standards decline, conflicts between wealthy and poor groups intensify, and political and cultural divisions grow between ethnic, religious, and racial groups. These conditions produce political extremism and populism—the political left tends to demand wealth redistribution, while the political right tends to defend existing property and wealth.

Taxes on the wealthy often rise during these periods. In response, wealthy individuals may move their assets, businesses, or residences to places they consider safer, which reduces the country’s tax base and contributes to a self-reinforcing process of economic decline. When governments attempt to prevent capital from leaving, those seeking to protect their wealth may become even more concerned and begin moving assets more urgently.

These conditions undermine productivity and shrink the economic pie. As resources become scarcer, conflict over how they should be distributed intensifies. Populist leaders emerge from both sides, promising to restore order—this is when democracy faces one of its greatest challenges. If democratic institutions appear incapable of controlling disorder, people become more willing to support a strong leader who promises stability.

As internal conflict escalates, it may lead to a revolution or civil war. These conflicts can sometimes remain peaceful and preserve the existing order, but they often result in a new political system. The Roosevelt transformation in the United States was relatively peaceful and preserved the existing constitutional order; the French, Russian, and Chinese revolutions were more violent and produced new internal orders.

Domestic weakness also makes an empire vulnerable to external rivals. A rising power may recognize the weakness of the established power and become more willing to challenge it, creating the possibility of international conflict, especially when the rival has developed comparable economic and military strength. Defending the empire requires increased military spending even as domestic economic conditions deteriorate. Without a reliable system for peacefully resolving disputes between great powers, these conflicts are often decided through tests of strength.

The leading power must choose between fighting and retreating. Fighting and losing is disastrous, but retreating can also be damaging because it gives ground to a rival and signals weakness to other countries. Poor economic conditions increase competition for wealth and power, making conflict more likely, and eventually war or another major confrontation may occur.

Wars are enormously destructive, but they also create major shifts in the global balance of wealth and power. The winners and losers of these conflicts help determine the next international order. The end of a reserve-currency cycle occurs when those holding the currency and debt of the declining empire lose confidence and begin selling. Of the hundreds of currencies that have existed since 1700, relatively few remain, and all have been devalued.

For the Dutch, the turning point came after their defeat in the Fourth Anglo-Dutch War. Unable to repay the debts accumulated during the conflict, the Dutch experienced a run on the Bank of Amsterdam, followed by massive money creation and currency devaluation. For Britain, the transition occurred after World War II—although Britain emerged victorious, it could not repay the enormous debts accumulated during the war, and devaluations and selling pressure weakened the pound while the United States and the dollar became dominant.

The United States has not yet reached that final stage. It has massive debt, spends more than it earns, and continues to finance its deficits through borrowing and money creation, but a full-scale selloff in the dollar and dollar-denominated debt has not yet occurred. Eventually, new winners emerge from the internal and external conflicts. They restructure the debts and political systems of the old powers and establish a new international order. The old cycle ends, and a new one begins.

Where Are We Going?

Not every empire follows the cycle in exactly the same way, but the broad patterns are remarkably consistent. The characters, clothing, and technologies change, but the underlying cause-and-effect relationships often remain similar. Most empires have their time in the sun and eventually decline. Reversing a decline is difficult because it requires correcting problems that have accumulated over many years, but it is possible.

By examining the indicators of national power, it becomes possible to estimate which stage of the cycle a country is in, whether its condition is improving or deteriorating, and how long its strength may last. These estimates are not precise—a cycle can be extended if leaders recognize the problems and improve the country’s vital signs, much as a person’s longevity depends on fitness and lifestyle, not age alone.

A country’s greatest conflict is often with itself. The central question is whether its people and leaders are willing to make the difficult decisions required to preserve long-term success. Ultimately, the answer comes down to two basic principles: earn more than you spend, and treat one another well. Strong education, innovation, competitiveness, productivity, and responsible government are all ways of achieving those two goals.

If we want to improve our future, we must improve our vital signs both individually and collectively—recognizing the stage of the cycle we are in, understanding the challenges ahead, and making wise decisions before circumstances force them upon us. The future is uncertain, but it is not completely unknowable. The patterns of history can help us navigate it with greater awareness and preparation.