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Spirit of the age

Otto Dix, Assault under Gas (1924)

Via the highly recommended blog Code Three, which I've just added to the old blogroll, comes an essay by Niall Ferguson from the March/April issue of Foreign Affairs that asks, "Could globalization collapse?" and draws parallels between 2005 and 1914:

It may seem unlikely today. Yet despite many warnings, people were shocked the last time globalization crumbled, with the onslaught of World War I. Like today, that period was marked by imperial overstretch, great-power rivalry, unstable alliances, rogue regimes, and terrorist organizations. And the world is no better prepared for calamity now.


It may seem excessively pessimistic to worry that this scenario could somehow repeat itself--that our age of globalization could collapse just as our grandparents' did. But it is worth bearing in mind that, despite numerous warnings issued in the early twentieth century about the catastrophic consequences of a war among the European great powers, many people--not least investors, a generally well-informed class--were taken completely by surprise by the outbreak of World War I. The possibility is as real today as it was in 1915 that globalization, like the Lusitania, could be sunk.

FĂ©lix Vallotton, Barbed-wire (1916)

Ferguson thinks that the world economic situation then was relevantly similar to the present situation:

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 ... 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 ...

But according to Ferguson, they should have seen it coming:

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.

Frans Masereel, Arise, You Dead, Infernal Resurrection (1917)

Could it happen again? Could we be sitting ducks, oblivious on the eve of disaster?

As the economic parallels with 1914 suggest, today's globalization shows at least some signs of reversibility. The risks increase when one considers the present political situation, which has the same five flaws as the pre-1914 international order: imperial overstretch, great-power rivalry, an unstable alliance system, rogue regimes sponsoring terror, and the rise of a revolutionary terrorist organization hostile to capitalism.

The United States--an empire in all but name--is manifestly overstretched ... 500,000 troops is the maximum number that Washington can deploy overseas ... Even just to maintain the U.S. presence in Iraq, the Army is extending tours of duty and retaining personnel due to be discharged. Such measures seem certain to hurt re-enlistment rates.


Then there is the second problem: great-power rivalry. It is true that the Chinese have no obvious incentive to pick a fight with the United States. But China's ambitions with respect to Taiwan are not about to disappear just because Beijing owns a stack of U.S. Treasury bonds. On the contrary, in the event of an economic crisis, China might be sorely tempted to play the nationalist card by threatening to take over its errant province ...

As for Europe, one must not underestimate the extent to which the recent diplomatic "widening of the Atlantic" reflects profound changes in Europe, rather than an alteration in U.S. foreign policy ... Meanwhile, Muslim immigration and the prospect of Turkey's accession to the European Union are changing the very character of Europe ... These rivalries are one reason the world today also has an unstable alliance system

None of these problems would necessarily be fatal were it not for the fourth and fifth parallels between 1914 and today: the existence of rogue regimes sponsoring terror--Iran and Syria top the list--and of revolutionary terrorist organizations ...

A doomsday scenario is plausible. But is it probable? The difficult thing--indeed the nearly impossible thing--is to predict a cataclysm. Doing so was the challenge investors faced in the first age of globalization. They knew there could be a world war. They knew such a war would have devastating financial consequences (although few anticipated how destructive it would be). But they had no way of knowing when exactly it would happen.

The same problem exists today. We all know that another, bigger September 11 is quite likely; it is, indeed, bin Laden's stated objective. We all know--or should know--that a crisis over Taiwan would send huge shockwaves through the international system; it could even lead to a great-power war. We all know that revolutionary regime change in Saudi Arabia would shake the world even more than the 1917 Bolshevik coup in Russia. We all know that the detonation of a nuclear device in London would dwarf the assassination of Archduke Ferdinand as an act of terrorism.

... we seem no better prepared for the worst-case scenario than were the beneficiaries of the last age of globalization, 90 years ago. Like the passengers who boarded the Lusitania, all we know is that we may conceivably sink. Still we sail.

You can read the full article here.

Do check out Code Three, by the way; it really is excellent. Look through the archives as well.

For more World War I era art, go here.

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