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The approach of the hundredth anniversary of the outbreakof World War I in 1914 has jolted politicians and commentators worried by thefragility of current global political and economic arrangements. Indeed,Luxembourg’s prime minister, Jean-Claude Juncker, recently argued that Europe’sgrowing north-south polarization has set the continent back by a century.
The lessons of 1914 are aboutmore than simply the dangers of national animosities. The origins of the Great War includea fascinating precedent concerning how financial globalization can become the equivalent of anational arms race, thereby increasing the vulnerability of the internationalorder.
In 1907, a majorfinancial crisis emanatingfrom the United States affected the rest of the world and demonstrated thefragility of the entire international financial system. The response to thecurrent financial crisis is replaying a similar dynamic.
Walter Bagehot’s 1873classic Lombard Street described the City of London as“the greatest combination of economic power and economic delicacy that theworld has ever seen.” In one influential interpretation, popularized by thenovelist, Labour Party MP, and future Nobel Peace Prize laureate Norman Angellin 1910, the interdependency of the increasingly complex global economy madewar impossible. But the opposite conclusion was equally plausible: Given theextent of fragility, a clever twist to the control levers might facilitate a military victoryby the economic hegemony.
The aftermath of the1907 crash drovethe hegemonic powerof the time – Great Britain – to reflect on how it could use its financial clout to enhance itsoverall strategic capacity. That is the conclusion of an important recent book,Nicholas Lambert’s study of British economic planning and the First World War,entitled PlanningArmageddon. Lambert demonstrates how, in a grand strategic gamble,Britain began to marry its military – and especially naval – predominance andits global financial leadership.
Between 1905 and1908, the British Admiralty developed the broad outlines of a plan forfinancial and economic warfare against Europe’s rising power, Germany. Economicwarfare, ifimplemented in full, would wreck Germany’s financial system and force it out ofany military conflict. When Britain’s naval visionaries confronted a rival inthe form of the Kaiser’s Germany, they understood how power could thrive on financialfragility.
Pre-1914 Britain anticipatedthe private-publicpartnership that today links technology giants such as Google, Apple, orVerizon to US intelligence agencies. London banks underwrote most of the world’s trade; Lloydsprovided insurance for the world’s shipping. These financial networks provided the information thatenabled the British government to discover the sensitive strategicvulnerabilities of the opposing alliance.
For Britain’s rivals,the financial panic of 1907 demonstrated the necessity of mobilizing financialpower themselves. The US, for its part, recognized that it needed a centralbank analogous to the Bank of England. American financiers were persuaded thatNew York needed to develop its own commercial trading system to handle bills ofexchange in the same way as the London market and arrange their monetization(or “acceptance”).
The central figure inpushing for the development of an American acceptance market was Paul Warburg,the immigrant younger brother of a great Hamburg banker who was the personaladviser to Germany’s Kaiser Wilhelm II. The Warburg brothers, Max and Paul,were a transatlantictandem,energetically pushing for German-American institutions that would offer an alternativeto British industrial and financial monopoly. They were convinced that Germanyand the US were growing stronger year by year, while British power would erode.
Some of the dynamicsof the pre-1914 financial world are now reemerging. In the aftermath of the2008 financial crisis, financialinstitutions appear both as dangerous weapons of mass economic destruction, butalso as potential instruments for the application of national power.
In managing the 2008crisis, foreign banks’ dependence on US-dollar funding constituted a majorweakness, and required the provision of large swap lines by the Federal Reserve. Addressing thatflaw requires renationalization of banking, and breaking up the activities oflarge financial institutions.
For European bankers,and some governments, current efforts by the US to revise its approach to theoperation of foreign bank subsidiaries within its territory highlight thatimperative. They view the US move as a new sort of financial protectionism andare threatening retaliation.
Geopolitics is intruding into bankingpractice elsewhere as well. Russian banks are trying to acquire assets inCentral and Eastern Europe. European banks are playing a much-reduced role inAsian trade finance. Chinese banks are being pushed to expand their role inglobal commerce. Many countries have begun to look at financial protectionismas a way to increase their political leverage.
The next step in thislogic is to think about howfinancial power can be directed to national advantage in the case of adiplomatic conflict. Sanctions are a routine (and not terriblysuccessful) part of the pressure applied to rogue states like Iran and North Korea. Butfinancial pressure can be much more powerfully applied to countries that aredeeply embedded in the global economy.
In 1907, in the wake of an epochal financial crisisthat almost brought a complete global collapse, several countries started tothink of finance primarily as an instrument of raw power that could and should be turned tonational advantage. That kind of thinking brought war in 1914. A century later,in 2007-2008, the world experienced an even greater financial shock, andnationalistic passions have flaredup in its wake. Destructive strategies may not be far behind.
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