A New World Dis-Order
Lessons from the Gold Standard, the Nixon Shock, and Today’s New Mineral Trade Paradigm
John Maynard Keynes once quipped that the Gold Standard was a “barbarous relic.” It imposed an unnatural paradigm where minerals determined economic value, rather than the value of goods being determined by the minerals used to make them. For the last two thousand years, this paradigm perdured, but its failures in the 1930s and 1971 demonstrated that the global economy could no longer be tethered to a fixed quantity of gold. Nevertheless, the lessons learned from the Gold Standard provide valuable insights at a time when global critical mineral supply chains are becoming increasingly responsible for a growing share of the global gross domestic product. Nations, aware of the increasing importance of critical minerals for the global economy, are taking more and more disjointed and coercive measures to restrict access and capture additional value from their means of production.
While there is no “critical mineral” standard, these minerals enable the production of a wide variety of goods, ranging from semiconductor chips and renewable energy to military equipment. Their importance today is, in some ways, akin to the value of gold under the Gold Standard and the Bretton Woods system. Without critical minerals, the majority of economic activity would grind to a halt. The value of goods is not derived by fiat, but by the marginal increase in utility that consumers derive from them. In essence, global trade is in part backed by the value of critical minerals, and that’s a natural law.
Amidst the global scramble for critical minerals, a new order is emerging, one in which countries—both allies and adversaries—are competing over access to these materials. Such competition, stemming from adversarial policies involving export bans and tariffs, harkens back to the calamitous failures of the interwar Gold Standard and the untethering of the gold-dollar link under the Bretton Woods system.
As during the fall of the interwar Gold Standard, when tariffs and competitive devaluations were leveraged to enhance export competitiveness, followed by the unilateral actions taken by Bretton Woods members and ultimately Nixon’s closure of the gold window, mineral-producing economies are taking matters into their own hands. Commodity-importing countries now aim to restore their ability to produce commodities for final consumption through punitive tariffs and export restrictions on both friends and foes. This new brand of resource nationalism is sewing the seeds of a multipolar order, unbound by the heterodox norms of free trade, but rather constricted by self-interested nationalistic tendencies. The question now is how the global order will evolve in light of a renewed rush to capture natural resource supply chains.
Resource Nationalism, Revisité
The Gold Standard was an early form of resource nationalism. By basing currencies on a single commodity, international trade was, in effect, a zero-sum game, as a shipment of bananas or a ton of tin imported was issued a bill of equal value, which would draw down from the national treasury upon the merchant’s request. In effect, the trade balance of a country was based on the total amount of gold held at the central bank, which determined the value of its currency. Nations are now treating critical minerals akin to gold due to their importance across military, renewable energy, and semiconductor applications. Export bans, quotas, and licensing requirements are all becoming commonplace in today’s critical mineral landscape.
The resurgence of outdated trade policies hinders the current reorientation of mineral trade flows. Since 2009, export restrictions on critical minerals have increased nearly sevenfold. [1] In some cases, export restrictions can be used to compel domestic investment into refining industries, as was the case with Indonesia’s nickel sector in 2020 and more recently in the Philippines. Similarly, Chile, Namibia, and Zimbabwe have imposed export controls on unprocessed lithium in recent years to move up the value chain and spur economic growth. In recent weeks, the Democratic Republic of the Congo imposed export bans on cobalt to stem the precipitous decline in prices (this is in part due to cobalt being a co-product of the DRC’s copper production). Somewhat similarly, the U.S.’s imposition of tariffs on steel, aluminum, and now copper imports is yet another example of the splintering of global trade norms in an attempt to support domestic production; however, the actual reason behind these tariffs is unclear and likely to be ineffective (see “Critical Mineral Tariffs Are No Panacea”).
Conversely, China’s chronic use of export restrictions on a variety of minerals such as gallium, germanium, natural graphite, antimony, and others offers a different story. In this case, China’s export restrictions have been leveraged as a geopolitical tool directed at the U.S., but it is not without precedent. Fifteen years ago, the Chinese government imposed export bans on rare earth elements going to Japan after a maritime dispute, signaling China’s willingness to continue such practices. [2] China’s dominance in the rare earth sector, too, led to the quasi-resolution over the Trump Administration’s trade negotiations. Still, restrictions remain on the export of dual-use materials.
A renewed competition over resources now tests the existing systems of free trade, further eroding confidence in institutions such as the WTO. In 2014, for instance, the WTO ruled against China and in favor of the U.S., European Union, and Japan over the imposition of rare earth export quotas, which sent prices soaring. [3] Today, the wonton imposition of tariffs on the U.S.’ allies, the carefully designed restrictions on semiconductor technology exports to China on the part of the U.S. to the myriad of export restrictions on critical minerals set by China, are corroding the norms of international trade and reliance on international institutions. Such corrosion will ultimately lead to the reorientation of economic alliances, much as we saw in the 1930s and in 1971.
The Gold Standard vs Today
Today’s fracturing global order is a poignant reminder of the demise of the interwar Gold Standard in 1931 and the termination of the gold-backed dollar under the Bretton Woods System in 1971. From 1919 to 1931, the interwar Gold Standard emerged as the prevailing standard, in which countries individually set their exchange rates based on the gold standard. The unraveling of the Gold Standard was at least partly due to the pressures from the Smoot-Hawley tariff bill in 1930, alongside the onset of the Great Depression. [4] As the U.S. and European countries reeled from the malaise of the “hollow years” and sought to shore up their domestic economies through protectionist policies, fissures in the Gold Standard began to form. [5] Tariffs and other protectionist measures, in essence, contributed to the formation of stratified trade blocs such as the British Commonwealth. [6] The fracturing of preordained trading relationships, as exemplified by the British willingness to negate multilateralism and the U.S.’s efforts to shore up domestic industry through the Smoot-Hawley bill, are both alarming parallels to what we see in today’s geopolitical theater.
The lack of economic policy coordination amongst nations on the Gold Standard during the interwar period eventually led to competitive devaluations and the creation of exclusive currency zones such as the Sterling area, the Gold Bloc, and the Reichsmark Block. The current critical minerals trade regime, where most of the world’s minerals flow to China for processing and inclusion in final goods, recalls the Gold Standard’s asymmetry, where gold flowed in the direction of goods consumed. In the case of the U.S., it was the largest holder of gold in the 1930s.
Post Bretton Woods
After the end of World War II, the Bretton Woods system established the gold-backed dollar. This system enabled the creation of a stable medium of exchange, allowing Europe to acquire the resources it needed to rebuild after the war. It formed the basis for what we now know as the International Monetary Fund, the World Bank, and the European Bank for Reconstruction and Development. However, as postwar Europe rebuilt, the desire of member nations for monetary and resource independence grew, creating tensions in the global monetary order.
Following the postwar reconstruction, as productivity in the tradable sectors rose relative to non-tradable goods, so did inflation in the 1960s. [7][8] In the case of the U.K., it was the sterling crisis in the winter of 1964 that drove the British government to convert its reserves into gold and devalue its currency, marking the beginning of the end of the contentious system. [9] The following year, in France, Général de Gaulle demanded the convertibility of dollars for gold in his famous “Criterion” speech, signaling fatigue over the dollar’s privilège exorbitant in the words of his then Minister of Economy and Finance, Valéry Giscard d’Estaing.
Across the pond, the U.S.’s expansionary fiscal and monetary policies resulted in the overvaluation of the dollar relative to the amount of gold in circulation.[10] Gradually, Germany, Austria, Belgium, the Netherlands, and Switzerland allowed their currencies to float in mid-1971, while France and Britain sought to convert their dollar holdings into gold a few months later.[11] Ultimately, in August of 1971, President Nixon announced the closing of the gold window, known as the Nixon Shock today.
To that end, today’s critical minerals face a similar backdrop in which countries are increasingly taking unilateral action to gain a competitive edge and protect industrial sovereignty. The era of free trade, which ushered in a “new normal” of relatively cheaply produced consumer goods from East to West, is now at risk of a gravitational collapse.
Redrawing Geopolitical Boundaries
Daniel Yergin’s phrase, “The New Map,” encapsulates the reconfiguration of a natural resources-based geopolitical order, and it is no longer “East vs. West.” In some ways, the BRICS coalition (Brazil, Russia, India, China, South Africa), which holds a significant share of the world’s mineral resources, is an example of resource-holding countries strengthening their bargaining power relative to the Western world's have-nots. To that end, the invitation of Saudi Arabia, the United Arab Emirates, Iran, Egypt, and Ethiopia to the BRICS group, demonstrates the growing solidarity amongst resource-producing countries and a growing alignment that could alter global trade flows and uproot the stability of the last two decades, foreshadowing growing anomie amongst trading partners and the formation of unlikely alliances. Perhaps the formation of the BRICS coalition is rooted in the foundations of the Council for Mutual Economic Assistance, which was the soviet response to the Marshall Plan.
While commodity producers amass bargaining power, commodity consumers are scrambling to form new alliances to re-shore their supply chains, akin to the formation of trade blocs and currency zones in the interwar period. New alliances are forming, such as the Mineral Security Partnership, which aims to secure critical mineral supply chains for the U.S., European Union, and others, along with the G7 Critical Minerals Action Plan. The formation of these new trading blocs, however, is threatened by the Trump Administration's onslaught of tariffs on long-standing allies from Europe to Canada and Mexico. At the same time, BRICS members seek to either leverage their resource dominance (in the case of China) and scale up domestic production (Indonesia, Namibia, Chile, DRC) through the utilization of export controls.
Global Dis-Order
The previous order of global cooperation is unraveling, and a multipolar world is emerging. Now, just as gold flowed between Gold Standard members, critical minerals are on the verge of flowing in new directions. While China’s longstanding monopsony role in the critical mineral complex will likely remain intact for now, the new scramble for minerals will follow an unruly path. The fall of the Gold Standard and the Bretton Woods system both illustrate a future confrontation-based order. A renewed resource nationalism is effectively revitalizing the role of the gold standard and ushering in an era of zero-sum international trade.
This post will be among my last posts for some time, as I will be starting a new gig in the energy business. Thank you to my loyal Substack base.
With edits from
[1] https://www.oecd.org/en/publications/raw-materials-critical-for-the-green-transition_c6bb598b-en.html
[2] https://www.nytimes.com/2010/09/23/business/global/23rare.html
[3] https://www.reuters.com/article/business/china-loses-appeal-of-wto-ruling-on-exports-of-rare-earths-idUSKBN0G71QA/#:~:text=Prices%20soared%20by%20hundreds%20of,efficient%20lighting
[4] https://www.nber.org/system/files/working_papers/w25830/w25830.pdf
[5] The Hollow Years: France in the 1930s, Eugen Joseph Weber
[6] https://www.nber.org/system/files/working_papers/w25830/w25830.pdf
[7] (Ghironi, Lecture Slides, 2024)
[8] https://www.jstor.org/stable/1829464
[9] https://www.history.upenn.edu/sites/default/files/Avaro%20-%20Penn%20Econhist%20Forum%20March%2017th.pdf
[10] (Ghironi, Lecture Slides, 2024)
[11] (Ghironi, Lecture Slides, 2024)