World War I


The Habsburg Crest. Courtesy of Wikipedia.


A golden age died in a hail of lead.  Western civilization arguably ended, in Sarajevo, on June 28, 1914.  Soon the conflagration of the first World War would begin sowing death and destruction.  Thus began the end of a prosperous world civilization and beginning a full century of guerre a outrance — war to the utmost.  The 20th century deserves to be characterized by historians as an era of epic war:  World War I, World War II, the Cold War.  The atrocity of 9/11, leading to the commitment of American troops to Iraq and Afghanistan, appears, so one hopes, as but an aftershock rather than the prelude to a second century of total war.

One of the first casualties of war, inevitably, is the gold standard.  Governments seriously consumed with a struggle for national survival make recourse, via the printing press, to the life’s savings of their citizens. To fully appreciate the scope of the tragedy of a century of war consider the prosperity and harmony that preceded the fall:

From The Twilight of Gold 1914-1936: Myths and Realities (Henry Regnery and Company, Chicago, 1972):

Rising living standards of a rapidly growing world population, tremendous capital accumulation, accelerated technological progress, a vastly broadening area of well-organized international trade and finance, of political democracy and individual freedom--all these were the hallmarks of growth in the century between Waterloo and Sarajevo, and of its second half in particular.  Toward the end of that period, and for a while thereafter, there was little doubt in the minds of most contemporary observers that such phenomenal developments as the skyrocketing of foreign long-term investments from under $6 billion in 1864 to over $70 billion just before World War I was closely related to the basic monetary institution of the age, the gold standard, which assured stability through the automatic self-adjustment of the balance of payments.  (P. 3)

The meaning of the gold standard--with its unrestrained and uncontrolled private ownership of gold--cannot be appreciated in isolation from the institutional and psychological backgroud that characterized the civilized world in the decades before 1914.  'The outstanding feature' of that period was the unity of the economic world, as has not been achieved at any other time.

'...there was freedom of travel without passports, freedom of migration, and freedom from exchange control and other monetary restrictions.  Citizenship was freely granted to would move unsupervised in any direction, and these movements could take any form.'

In the period under review...'International trade had to overcome tariffs, but ...they were exceedingly low.  There were hardly any quantitative restrictions on international trade (quotas, import prohibitions, etc.) ... it was a world of which recently many ... would have been inclined to assert that it could not be created because it could never work ...'  [Citing Oskar Morgenstern, International Financial Transactions and Business Cycles (New York: National Bureau of Economic Research, 1957), pp. 17-19]  (Pp. 6-7)

And then … on June 28th, Gavrilo Princip, agent of the nationalist Serbian group known as the Black Hand, shot and killed the crown prince and princess of the Austro-Hungarian empire, Archduke Ferdinand and his wife Sophie to create a sovereign pan-slavic state. Estimates of the casualties, both civilian and combatant, of the ensuing world war rise to 35 million — in a world estimated to have a population of one quarter that of today.

Politically, Princip’s bullet turned out to be the trigger that precipitated the fall of empires.   On June 28, 1914 80% of humanity lived under the jurisdiction of an emperor.  Within a decade, the Austro-Hungarian, Russian, Chinese and Ottoman emperors had all been overthrown and the British Empire began its long, slow terminal dissolution.

But the first World War caught the political elites by surprise.  It was quite literally unthinkable.  As Liaquat Ahamed observes in Lords of Finance,

“In 1909, the British journalist Norman Angell … published a pamphlet entitled Europe’s Optical Illusion.  The thesis of his slim volume was that the economic benefits of war were so illusory…and the commercial and financial linkages between countries now so extensive that no rational country could contemplate starting a war.  The economic chaos, especially the disruptions to international credit, that would ensue from a war among the Great Powers would harm all sides and the victor would lose as much as the vanquished.  Even if war were to break out in Europe by accident, it would speedily be brought to an end.  …

Angell’s pamphlet was issued in book form in 1910 under the title The Great Illusion. The argument that it was not so much the cruelty of war as its economic futility that made it unacceptable as an instrument of state power struck a chord in that materialistic era.  The work became a cult.  By 1913, it had sold more than a million copies and been translated into twenty-two languages….  More than forty organizations were formed to spread its message.  It was quoted by Sir Edward Grey, the British foreign secretary, by Count von Metternich, and by Jean Jaures, the French Socialist leader.  Even Kaiser Wilhelm, better known for his bellicosity than his embrace of pacificism, was said to have expressed some interest in the theory. …

“It was no wonder that during a series of lectures on The Great Illusion delivered at Cambridge and the Sorbonn, Lord Esher would declare that ‘new economic factors clearly prove the inanity of war,’ and that the ‘commercial disaster, financial ruin and individual suffering’ of a European war would be so great as to make it unthinkable.  Lord Esher and Angell were right about the meager benefits and the high costs of war.  But trusting too much in the rationality of nations and seduced by the extraordinary economic achievements of the era — a period the French would later so evocatively call La Belle Epoch — they totally misjudged the likelihood that a war involving all the major European powers would break out.”

As Niall Ferguson wrote in The Pity of War (p. 184), Keynes was appalled by the war.  “On 4 January he told Ottoline Morrell that he wished for ‘a general strike and a real uprising to reach … those bloody men who enrage and humiliate us’.  He told Duncan Grant on December 1917: ‘I work for a government I despise for ends I think criminal.’”

The National Bureau of Economic Research Research Associate Hugh Rockoff, in 2004, assessed the cost of World War I to America alone as more than half of its then annual GDP, financed 22% by taxes, 58% through borrowing from the public, and 20% by monetary creation.  (The financial costs to the European belligerents were, of course, catastrophic.)  But according to Rockoff, the real impact was twofold.  First, New York replaced London as the world’s leading financial center.  Second, and much greater, was the intellectual impact: the successful wartime experience

"’increased the confidence on the left that central planning was the best way to meet a national crisis, certainly in wartime, and possibly in peacetime as well.’ This view became increasingly important after the Democrats reached power during the Great Depression. ‘Almost every government program undertaken in the 1930s reflected a World War I precedent,’ explains Rockoff, ‘and...many of the people brought in to manage New Deal agencies had learned their craft in World War I.’ The author concludes that the scope and speed of government expansion in the 1930s were likely greater because of the impact of the war on the world view of new economic and political leaders, who in turn inspired future generations of reformers. ‘For America, to sum up," writes Rockoff, "the most important long-run impact of the war may have been in the realm of ideas.’"

Research is emerging implying that world peace is breaking out. As shown in Steven Pinker‘s The Better Angels of Our Nature: Why Violence Has Declined, Joshua Goldstein’s Winning the War on War, and the Human Security Report Project and summarized elsewhere:

“…the number of war battlefield deaths has dropped by a factor of 1,000, falling from 500 per 100,000 in prehistoric times, to 60-70 in the 19th and 20th century (notwithstanding epic wars) to… less than one such death per 300,000 now in the 21st. Genocide deaths have dropped by well over a factor of 1000 from 1942 to 2008.

“The number of republics has quintupled in just 65 years, the number of authoritarian regimes has dropped from 90, 35 years ago, to 25.  In England, murder fell by a factor of 100 from the Middle Ages until today.  The trends are much broader than this and although a single nuclear exchange or terrorist incident could skew the numbers, even such a horrific tragedy, Heaven forbid, would not skew the secular trend.”

The gold standard always is an early casualty of war. There are grounds for optimism that peace — and, with it, prosperity —may prove to be a precursor to the gold standard’s restoration. It depends upon whether our duly elected officials will heed Ernest Hemingway’s cautionary words from Notes on the Next War:  A Serious Topical Letter, from Esquire, September 1935:

The first panacea for a mismanaged nation is inflation of the currency; the second is war.

Both bring a temporary prosperity; both bring a permanent ruin.

But both are the refuge of political and economic opportunists.

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