The Great Transformation Read online

  Finance—this was one of its channels of influence—acted as a powerful moderator in the councils and policies of a number of smaller sovereign states. Loans, and the renewal of loans, hinged upon credit, and credit upon good behavior. Since under constitutional government (unconstitutional ones were severely frowned upon) behavior is reflected in the budget and the external value of the currency cannot be detached from the appreciation of the budget, debtor governments were well advised to watch their exchanges carefully and to avoid policies which might reflect upon the soundness of the budgetary position. This useful maxim became a cogent rule of conduct once a country had adopted the gold standard, which limited permissible fluctuations to a minimum. Gold standard and constitutionalism were the instruments which made the voice of the City of London heard in many smaller countries which had adopted these symbols of adherence to the new international order. The Pax Britannica held its sway sometimes by the ominous poise of a heavy ship’s cannon, but more frequently it prevailed by the timely pull of a thread in the international monetary network.

  The influence of haute finance was ensured also through its unofficial administration of the finances of vast semicolonial regions of the world, including the decaying empires of Islam in the highly inflammable zone of the Near East and North Africa. It was here that the day’s work of financiers touched upon the subtle factors underlying internal order, and provided a de facto administration for those troubled regions where peace was most vulnerable. That is how the numerous prerequisites of long-term capital investments in these areas could often be secured in the face of almost insuperable obstacles. The epic of the building of railways in the Balkans, in Anatolia, Syria, Persia, Egypt, Morocco, and China is a story of endurance and of breathtaking turns reminiscent of a similar feat on the North American Continent. The chief danger, however, which stalked the capitalists of Europe was not technological or financial failure, but war—not a war between small countries (which could be easily isolated) nor war upon a small country by a Great Power (a frequent and often convenient occurrence), but a general war between the Great Powers themselves. Europe was not an empty continent, but the home of teeming millions of ancient and new peoples; every new railroad had to thread its way across boundaries of varying solidity, some of which might be fatally weakened, others vitally reinforced, by the contact. Only the iron grip of finance on the prostrate governments of backward regions could avert catastrophe. When Turkey defaulted on its financial obligations in 1875, military conflagrations immediately broke out, lasting from 1876 to 1878, when the Treaty of Berlin was signed. For thirty-six years thereafter peace was maintained. That astounding peace was implemented by the Decree of Muharrem of 1881, which set up the Dette Ottomane in Constantinople. The representatives of haute finance were charged with the administration of the bulk of Turkish finance. In numerous cases they engineered compromises between the Powers; in others, they prevented Turkey from creating difficulties on her own; in others again, they acted simply as the political agents of the Powers; in all, they served the money interests of the creditors, and, if at all possible, of the capitalists who tried to make profits in that country. This task was greatly complicated by the fact that the Debt Commission was not a body representative of the private creditors, but an organ of Europe’s public law on which haute finance was only unofficially represented. But it was precisely in this amphibious capacity that it was able to bridge the gap between the political and the economic organization of the age.

  Trade had become linked with peace. In the past the organization of trade had been military and warlike; it was an adjunct of the pirate, the rover, the armed caravan, the hunter and trapper, the sword-bearing merchant, the armed burgesses of the towns, the adventurers and explorers, the planters and conquistadores, the man-hunters and slave-traders, the colonial armies of the chartered companies. Now all this was forgotten. Trade was now dependent upon an international monetary system which could not function in a general war. It demanded peace, and the Great Powers were striving to maintain it. But the balance-of-power system, as we have seen, could not by itself ensure peace. This was done by international finance, the very existence of which embodied the principle of the new dependence of trade upon peace.

  We have become too much accustomed to think of the spread of capitalism as a process which is anything but peaceful, and of finance capital as the chief instigator of innumerable colonial crimes and expansionist aggressions. Its intimate affiliation with heavy industries made Lenin assert that finance capital was responsible for imperialism, notably for the struggle for spheres of influence, concessions, extraterritorial rights, and the innumerable forms in which the Western Powers got a stranglehold on backward regions, in order to invest in railways, public utilities, ports, and other permanent establishments on which their heavy industries made profits. Actually, business and finance were responsible for many colonial wars, but also for the fact that a general conflagration was avoided. Their affiliations with heavy industry, though really close only in Germany, accounted for both. Finance capital as the roof organization of heavy industry was affiliated with the various branches of industry in too many ways to allow one group to determine its policy. For every one interest that was furthered by war, there were a dozen that would be adversely affected. International capital, of course, was bound to be the loser in case of war; but even national finance could gain only exceptionally, though frequently enough to account for dozens of colonial wars, as long as they remained isolated. Every war, almost, was organized by financiers; but peace also was organized by them.

  The precise nature of this strictly pragmatic system, which guarded with extreme rigor against a general war while providing for peaceful business amid an endless sequence of minor ones, is best demonstrated by the changes it brought about in international law. While nationalism and industry distinctly tended to make wars more ferocious and total, effective safeguards were erected for the continuance of peaceful business in wartime. Frederick the Great is on record for having “by reprisal” refused, in 1752, to honor the Silesian loan due to British subjects.* “No attempt of this sort has been made since,” says Hershey. “The wars of the French Revolution furnish us with the last important examples of the confiscation of the private property of enemy subjects found in belligerent territory upon the outbreak of hostilities.” After the outbreak of the Crimean War, enemy merchantmen were allowed to leave port, a practice which was adhered to by Prussia, France, Russia, Turkey, Spain, Japan, and the United States during the fifty following years. Since the beginning of that war a very large indulgence in commerce between belligerents was allowed. Thus, in the Spanish-American War, neutral vessels, laden with American-owned cargoes other than contraband of war, cleared for Spanish ports. The view that eighteenth-century wars were in all respects less destructive than nineteenth-century ones is a prejudice. In respect to the status of enemy aliens, the service of loans held by enemy citizens, enemy property, or the right of enemy merchantmen to leave port, the nineteenth century showed a decisive turn in favor of measures to safeguard the economic system in wartime. Only the twentieth century reversed this trend.

  Thus the new organization of economic life provided the background of the Hundred Years’ Peace. In the first period the nascent middle classes were mainly a revolutionary force endangering peace as witnessed in the Napoleonic upheaval; it was against this new factor of national disturbance that the Holy Alliance organized its reactionary peace. In the second period the new economy was victorious. The middle classes were now themselves the bearers of a peace interest, much more powerful than that of their reactionary predecessors had been, and nurtured by the national-international character of the new economy. But in both instances the peace interest became effective only because it was able to make the balance-of-power system serve its cause by providing that system with social organs capable of dealing directly with the internal forces active in the area of peace. Under the Holy Alliance these organs were feudalism and
the thrones, supported by the spiritual and material power of the Church; under the Concert of Europe they were international finance and the national banking systems allied to it. There is no need to overdo the distinction. During the Thirty Years’ Peace, 1816–46, Great Britain was already pressing for peace and business, nor did the Holy Alliance disdain the help of the Rothschilds. Under the Concert of Europe, again, international finance had often to rely on its dynastic and aristocratic affiliations. But such facts merely tend to strengthen our argument that in every case peace was maintained not simply through the chancelleries of the Great Powers but with the help of concrete organized agencies acting in the service of general interests. In other words, only on the background of the new economy could the balance-of-power system make general conflagrations avoidable. But the achievement of the Concert of Europe was incomparably greater than that of the Holy Alliance; for the latter maintained peace in a limited region in an unchanging Continent, while the former succeeded in the same task on a world scale while social and economic progress was revolutionizing the map of the globe. This great political feat was the result of the emergence of a specific entity, haute finance, which was the given link between the political and the economic organization of international life.

  It must be clear by this time that the peace organization rested upon economic organization. Yet the two were of very different consistency. Only in the widest sense of the term was it possible to speak of a political peace organization of the world, for the Concert of Europe was essentially not a system of peace but merely of independent sovereignties protected by the mechanism of war. The contrary is true of the economic organization of the world. Unless we defer to the uncritical practice of restricting the term “organization” to centrally directed bodies acting through functionaries of their own, we must concede that nothing could be more definite than the universally accepted principles upon which this organization rested and nothing more concrete than its factual elements. Budgets and armaments, foreign trade and raw material supplies, national independence and sovereignty were now the function of currency and credit. By the fourth quarter of the nineteenth century, world commodity prices were the central reality in the lives of millions of Continental peasants; the repercussions of the London money market were daily noted by businessmen all over the world; and governments discussed plans for the future in the light of the situation on the world capital markets. Only a madman would have doubted that the international economic system was the axis of the material existence of the race. Because this system needed peace in order to function, the balance of power was made to serve it. Take this economic system away and the peace interest would disappear from politics. Apart from it, there was neither sufficient cause for such an interest, nor a possibility of safeguarding it, insofar as it existed. The success of the Concert of Europe sprang from the needs of the new international organization of economy, and would inevitably end with its dissolution.

  The era of Bismarck (1861–90) saw the Concert of Europe at its best. In two decades immediately following Germany’s rise to the status of a Great Power, she was the chief beneficiary of the peace interest. She had forced her way into the front ranks at the cost of Austria and France; it was to her advantage to maintain the status quo and to prevent a war which could be only a war of revenge against herself. Bismarck deliberately fostered the notion of peace as a common venture of the Powers, and avoided commitments which might force Germany out of the position of a peace Power. He opposed expansionist ambitions in the Balkans or overseas; he used the free trade weapon consistently against Austria, and even against France; he thwarted Russia’s and Austria’s Balkan ambitions with the help of the balance-of-power game, thus keeping in with potential allies and averting situations which might involve Germany in war. The scheming aggressor of 1863–70 turned into the honest broker of 1878, and the deprecator of colonial adventures. He consciously took the lead in what he felt to be the peaceful trend of the time in order to serve Germany’s national interests.

  However, by the end of the seventies the free trade episode (1846–79) was at an end; the actual use of the gold standard by Germany marked the beginnings of an era of protectionism and colonial expansion.* Germany was now reinforcing her position by making a hard and fast alliance with Austria-Hungary and Italy; not much later Bismarck lost control of Reich policy. From then onward Great Britain was the leader of the peace interest in a Europe which still remained a group of independent sovereign states and thus subject to the balance of power. In the nineties haute finance was at its peak and peace seemed more secure than ever. British and French interests differed in Africa; the British and the Russians were competing with one another in Asia; the Concert, though lamely, continued to function; in spite of the Triple Alliance, there were still more than two independent Powers to watch one another jealously. Not for long. In 1904, Britain made a sweeping deal with France over Morocco and Egypt; a couple of years later she compromised with Russia over Persia, and the counteralliance was formed. The Concert of Europe, that loose federation of independent powers, was finally replaced by two hostile power groupings; the balance of power as a system had now come to an end. With only two competing power groups left, its mechanism ceased to function. There was no longer a third group which would unite with one of the other two to thwart whichever one sought to increase its power. About the same time the symptoms of the dissolution of the existing forms of world economy—colonial rivalry and competition for exotic markets—became acute. The ability of haute finance to avert the spread of wars was diminishing rapidly. For another seven years peace dragged on but it was only a question of time before the dissolution of nineteenth-century economic organization would bring the Hundred Years’ Peace to a close.

  In the light of this recognition the true nature of the highly artificial economic organization on which peace rested becomes of utmost significance to the historian.

  * Sontag, R. J., European Diplomatic History, 1871–1932, 1933.

  * Feis, H., Europe, the World’s Banker, 1870–1914, 1930, a work we have often textually followed.

  * Feis, H., op. cit., p. 201.

  † Cf. Notes on Sources, p. 273.

  * Hershey, A. S., Essentials of International Public Law and Organization, 1927, pp. 565–9.

  * Eulenburg, F., “Aussenhandel und Aussenhandelspolitik,” in Grundriss der Sozialökonomik, Vol. VIII, 1929, p. 209.

  C H A P T E R T W O

  Conservative Twenties,

  Revolutionary Thirties

  The breakdown of the international gold standard was the invisible link between the disintegration of world economy which started at the turn of the century and the transformation of a whole civilization in the thirties. Unless the vital importance of this factor is realized, it is not possible to see rightly either the mechanism which railroaded Europe to its doom, or the circumstances which accounted for the astounding fact that the forms and contents of a civilization should rest on so precarious foundations.

  The true nature of the international system under which we were living was not realized until it failed. Hardly anyone understood the political function of the international monetary system; the awful suddenness of the transformation thus took the world completely by surprise. And yet the gold standard was the only remaining pillar of the traditional world economy; when it broke, the effect was bound to be instantaneous. To liberal economists the gold standard was a purely economic institution; they refused even to consider it as a part of a social mechanism. Thus it happened that the democratic countries were the last to realize the true nature of the catastrophe and the slowest to counter its effects. Not even when the cataclysm was already upon them did their leaders see that behind the collapse of the international system there stood a long development within the most advanced countries which made that system anachronistic; in other words, the failure of market economy itself still escaped them.

  The transformation came on even more abruptly than is usually realize
d. World War I and the postwar revolutions still formed part of the nineteenth century. The conflict of 1914–18 merely precipitated and immeasurably aggravated a crisis that it had not created. But the roots of the dilemma could not be discerned at the time; and the horrors and devastations of the Great War seemed to the survivors the obvious source of the obstacles to international organization that had so unexpectedly emerged. For suddenly neither the economic nor the political system of the world would function, and the terrible injuries inflicted on the substance of the race by World War I appeared to offer an explanation. In reality, the postwar obstacles to peace and stability derived from the same sources from which the Great War itself had sprung. The dissolution of the system of world economy which had been in progress since 1900 was responsible for the political tension that exploded in 1914; the outcome of the War and the Treaties had eased that tension superficially by eliminating German competition while aggravating the causes of tension and thereby vastly increasing the political and economic impediments to peace.