THOSE WHO REMEMBER THE PAST ARE DOOMED TO THINK IT'S REPEATING:

Sinking Globalization (Niall Ferguson, March/April 2005, Foreign Affairs)

The last age of globalization resembled the current one in numerous ways. It was characterized by relatively free trade, limited restrictions on migration, and hardly any regulation of capital flows. Inflation was low. A wave of technological innovation was revolutionizing the communications and energy sectors; the world first discovered the joys of the telephone, the radio, the internal combustion engine, and paved roads. The U.S. economy was the biggest in the world, and the development of its massive internal market had become the principal source of business innovation. China was opening up, raising all kinds of expectations in the West, and Russia was growing rapidly.

World War I wrecked all of this. Global markets were disrupted and disconnected, first by economic warfare, then by postwar protectionism. Prices went haywire: a number of major economies (Germany's among them) suffered from both hyperinflation and steep deflation in the space of a decade. The technological advances of the 1900s petered out: innovation hit a plateau, and stagnating consumption discouraged the development of even existing technologies such as the automobile. After faltering during the war, overheating in the 1920s, and languishing throughout the 1930s in the doldrums of depression, the U.S. economy ceased to be the most dynamic in the world. China succumbed to civil war and foreign invasion, defaulting on its debts and disappointing optimists in the West. Russia suffered revolution, civil war, tyranny, and foreign invasion. Both these giants responded to the crisis by donning the constricting armor of state socialism. They were not alone. By the end of the 1940s, most states in the world, including those that retained political freedoms, had imposed restrictions on trade, migration, and investment as a matter of course. Some achieved autarky, the ideal of a deglobalized society. Consciously or unconsciously, all governments applied in peacetime the economic restrictions that had first been imposed between 1914 and 1918.

The end of globalization after 1914 was not unforeseeable. There was no shortage of voices prophesying Armageddon in the prewar decades. Many popular writers earned a living by predicting a cataclysmic European war. Solemn Marxists had long foretold the collapse of capitalism and imperialism. And Social Darwinists had looked forward eagerly to a conflagration that would weed out the weak and fortify the strong.

Yet most investors were completely caught off guard when the crisis came. Not until the last week of July 1914 was there a desperate dash for liquidity; it happened so suddenly and on such a large scale that the world's major stock markets, New York's included, closed down for the rest of the year. As The Economist put it at the time, investors and financial institutions "saw in a flash the meaning of war." The Dow Jones Industrial Average fell by about 25 percent between January 1910 and December 1913 and remained flat through the first half of 1914. European bond markets, which had held up throughout the diplomatic crises of the 1900s, crashed only at the 11th hour, as the lights went out all over Europe.

Some economic historians detect the origins of the deglobalization that followed World War I in the prewar decades. They point, variously, to rising tariffs and restrictions on migration, a slight uptick in inflation starting around 1896, and the chronic vulnerability of the U.S. economy to banking crises. To this list, it might be added that the risk of further Russian and Chinese revolutions should have been fairly apparent after those of 1905 and 1911, respectively.

The trouble is that none of these problems can be said to have caused the great conflagration that was World War I. To be sure, the prewar world was marked by all kinds of economic rivalries--not least between British and German manufacturers--but these did not suffice to cause a disaster. On the contrary, businessmen on both sides agreed that a major war would be an economic calamity. The point seemed so obvious that war came to be seen by some optimistic commentators as all but impossible--a "great illusion," in the famous phrase of the author Norman Angell. Even when the war broke out, many people optimistically clung to the illusion that it would soon be over. Economist John Maynard Keynes said that it "could not last more than a year."

With the benefit of hindsight, however, five factors can be seen to have precipitated the global explosion of 1914-18. The first cause was imperial overstretch. By 1914, the British Empire was showing signs of being a "weary Titan," in the words of the poet Matthew Arnold. It lacked the will to build up an army capable of deterring Germany from staging a rival bid for European hegemony (if not world power). As the world's policeman, distracted by old and new commitments in Asia and Africa, the United Kingdom's beat had simply become too big.

Great-power rivalry was another principal cause of the catastrophe. The problem was not so much Anglo-German rivalry at sea as it was Russo-German rivalry on land. Fear of a Russian arms buildup convinced the German general staff to fight in 1914 rather than risk waiting any longer.

The third fatal factor was an unstable alliance system. Alliances existed in abundance, but they were shaky. The Germans did not trust the Austrians to stand by them in a crisis, and the Russians worried that the French might lose their nerve. The United Kingdom's actions were impossible to predict because its ententes with France and Russia made no explicit provisions for the eventuality of war in Europe. The associated insecurities encouraged risk-taking diplomacy. In 1908, for example, Austria-Hungary brusquely annexed Bosnia. Three years later, the German government sent the gunboat Panther to Agadir to challenge French claims to predominance in Morocco.

The presence of a rogue regime sponsoring terror was a fourth source of instability. The chain of events leading to war, as every schoolchild used to know, began with the assassination of the Austrian Archduke Franz Ferdinand in Sarajevo by a Bosnian Serb, Gavrilo Princip. There were shady links between the assassin's organization and the Serbian government, which had itself come to power not long before in a bloody palace coup.

Finally, the rise of a revolutionary terrorist organization hostile to capitalism turned an international crisis into a backlash against the global free market. The Bolsheviks, who emerged from the 1903 split in the Russian Social Democratic Party, had already established their credentials as a fanatical organization committed to using violence to bring about world revolution. By straining the tsarist system to the breaking point, the war gave Lenin and his confederates their opportunity. They seized it and used the most ruthless terrorist tactics to win the ensuing civil war.

The similarities of course pale in comparison to the differences. First, Britain was not even the leading military power of the day. Though it was more engaged in world affairs, it had been apparent since the Civil War that all America required was motivation in order to crank up an unrivalled war machine, which it went on to demonstrate in the ensuing World Wars. Indeed, Britain could not have defeated several of its European rivals on its own, not least Germany. The United States has no rival today, no nation it could not defeat in hours were it sufficiently provoked. Folks imagine China a rival but America has a GDP several times that of China, despite a population less than a quarter of China's and spends more than ten times as much on its military. Not only are we not overstretched but our military expenditure as a percentage of GDP is quite low by the historic standards of a superpower. If we are an imperial power we are a mostly cultural one and we maintain it on the cheap.

Similarly, Britain didn't have the leading economy of its day. America had overtaken it in the 19th Century and today has a GDP the size of all of Europe's. Nor is America forced to pump its wealth into the black hole of colonies, as Britain was--a waste which Mr. Ferguson seems to cite with approval. Instead America is invested in its own economy; the same one that foreigners are so drawn to--a fact which Mr. Ferguson cites with disapproval.

As important though as the drastic difference in relative power between the Britain of 1914 and the America of 2005 is the imbalance between the threat of communism/socialism and that of Islamicism. In the world of 1914, a world completely dominated by Christendom, communism was an immensely appealing Christian heresy that represented a genuine internal challenge to even the successful Anglo-American model of democratic protestant capitalism. Islamicism on the other hand is totally external to the West, holding no appeal here and rather little even within Islam. It's just not a significant existential threat.

So all we're really left with is the possibility that we might do something stupid like becoming nationalistic and trying to put a stop to free trade and immigration. We may not want to dismiss our own potential for idiocy out of hand but we do need to note how little success Pat Buchanan had running on such a platform.

We'll find some way to screw up the current Golden Age eventually, but it doesn't seem likely that the era of American dominance will end in anything like the way the Pax Britannica did, or at least not for the same reasons.

Posted by Orrin Judd at March 30, 2005 11:12 PM