Sinking Globalization

Niall Ferguson

From Foreign Affairs, March/April 2005

Summary:  Could globalization collapse? 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.

Niall Ferguson is Professor of History at Harvard University, a Senior Fellow at the Hoover Institution, Stanford University, and a Senior Research Fellow of Jesus College, University of Oxford. Copyright (c)2005 by Niall Ferguson.

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.

PARALLEL UNIVERSE