The Last Time Globalization Collapsed: Parallels to Today

"Remember Friday, March, 14 2008: it was the day the dream of global free-market capitalism died," says the Financial Times' Martin Wolf. "For three decades we have moved towards market-driven financial systems. By its decision to rescue Bear Stearns, the Federal Reserve, the institution responsible for monetary policy in the U.S., chief protagonist of free-market capitalism, declared this era over."

Mr. Wolf argues that market deregulation has reached its limits, echoing Joseph Ackermann, chief executive of Deutsche Bank, who said that he "no longer believes in the market's self-healing power". Mr Wolf adds: "If the U.S. itself has passed the high water mark of financial deregulation, this will have wide global implications. Until recently, it was possible to tell the Chinese, the Indians or those who suffered significant financial crises in the past two decades that there existed a financial system both free and robust. That is the case no longer. It will be hard, indeed, to persuade such countries that the market failures revealed in the U.S. and other high-income countries are not a dire warning. If the U.S., with its vast experience and resources, was unable to avoid these traps, why, they will ask, should we expect to do better?"

If Mr. Wolf is correct, emerging economies will question the value of free-market capitalism. Market liberalization and integration of emerging economies will inevitably take a back seat, and globalization may sink. This sounds like a ridiculous argument, but history shows us that this scenario cannot be ignored.

"The last age of globalization resembled the current one in numerous ways," says Niall Ferguson, an award winning Scottish historian, writing in the March/April 2005 issue of Foreign Affairs magazine. "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," Ferguson argues. "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. After faltering during the war, overheating in the 1920s, and languishing throughout the 1930s in the doldrums of depression, 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."

World War I was the catalyst for globalization's collapse at the start of the 20th century. Will the fallout from the current market crisis, i.e. the end of market deregulation, lead to the collapse of the current age of globalization?

Yes, that sounds absurd and sensationalistic. I don't really buy the argument, but there are economic parallels that can't be dismissed.

"With the benefit of hindsight, however, five factors can be seen to have precipitated the global explosion of 1914-18," explains Ferguson. "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 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."

And 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."

As the economic parallels with 1914 suggest, we can't dismiss the possibility that we are about to enter an age of de-globalization. And while we are on the topic of historical parallels, let's not forget a quote from Vladimir Lenin, founder of the Russian Communist Party, who said "the best way to destroy the capitalist system is to debauch the currency."

Disclosure: None

Comments

[Dave Rensberger]

Let's not blow this out of proportion. At the end of the day, most of the U.S. economy's current troubles can be traced to the herd mentality that resulted in the housing bubble. Granted, this has far reaching implications (including the bailout of Bear Sterns), but lets not use Americans' stupid decisions regarding their houses as justification that this is the end of an era of globalization. I think that era is really just beginning.

[jimmy46]

Fear of a Russian arms buildup convinced the German general staff to fight in 1914 rather than risk waiting any longer."

I don't know where you dug that up, but Russia was the first
country to mobilize its troops in WW1 and that's what
started the war.

[clitosil]

Unfortunately, much of today's problems are only being brought to light because of the recent herd-driven bubble-ism. However, the roots of the problems go much deeper and further back than that.

[pharma]

"don't know where you dug that up, but Russia was the first country to mobilize its troops in WW1 and that's what started the war."

This popular version is "nice" but it was not the real reason for the war.

The main driving forces responsible for the WW1 were England, France and the USA.

The reason was quite simple: both Germany and Russia were growing very fast threatening to vital geopolitical interests of England, France and the USA.

British diplomacy was very skillful in provoking a major war between Germany and Russia using paramount stupidity of Russian Czar Nikolas II.

Even after declaring a the war against Russia, German troops did not move an inch. German kaiser repeatedly offered peace to Russia but Russian Czar initiated the confrontation. For this, the czar and his entire family and most of his relatives were slaughtered.

Following the WW1, Germany, as European power, has perished. But the new monsters hostile to England, France and the USA has appeared: Bolshevik Soviet Union and Nazi Germany. This followed by the WW2.

PS
The situation prior to the WW1 reminds me the present situation with the emergence of China and Russia.

[300mph]

yawn..... zzzzzz

[johngonole]

Pharma pretty sure your version of history is not correct. Wasn't the US late to WWI. There was a lot more moving parts than your conspiratoral sounding version.

I think the bubble was caused by herd mentality but the easy credit had to spent somewhere. The stock market was shaky, bonds had a low return, and so those willing to leverage put in into housing which "Could never go down" seemed a natural choice after the internet bubble.

But the easy credit was driven by the Federal reserve who was again trying to avoid recession by bailing out the stock market speculators. From listening to some of the new regulation powers that some want to now give the Federal reserve I think the era of deregulation is over.

I disagree with the notion that free markets were the problem. I think the notion is problematic of a false definition of free markets. Free markets must be free from influence of monopolies. The government monopoly is the one people usually think of. This time the culprit is the Federal Reserve and government deregulation in the sense that it allowed financial institutions monopoly like power where their own self interests were no longer tied to serving the customer (a sign of monopoly power). Accountants, bankers brokers, investiment houses all combined under one roof have too many opposing interest to serve their customers. Instead they lobbied government for deregulations that would help them to use mutual fund money to fund IPO's of shaddy internet companies that few individuals would have seriously considered buying before the frenzy. Then accountants signed off on balance sheets so that the same company could get investment banking business etc... The annual stock holder votes for various companies are no longer controlled by large individual stock holders but by mutual funds that always vote yes because if they voted "no" they would not get the IPO or bond business. Nor could the they sit on their board of directors. Again in a free market the people who own the stock would vote not the mutual fund. The conflict of interests are the results of selective deregulation and result in monopoly like powers. Personally I thinkit was just bad dergulation.

You can have a free market but still have laws that say the building inspector can't work for the builder or have financial interest in the builder.

Again the financial industry was allowed to consolidate too much and certain good regulations (good for the free market) were done away with. The Federal reserve has monopoly power over the creation of the dollar and uses it to control interest rates and credit. So the problems in my opinion have little to do with freedom of choice and the free market but with poor lawmaking and monopoly like interference.

So lets not confuse deregulation with the natural operations of the free market. When people have to invest their money in banks, mutual funds, bonds, etc...just because if they don't inflation (induced by the Federal reserve) will eat away at it and then those same institutions are free manage that money in a self dealing way thus hurting the customer and do it knowing that the customer will be back because well they have to invest with our industry its not really so much of a free market but something between fascism and a free market.

Without the Federal reserve we really wouldn't have to invest or even deposit money in banks just to retain our purchasing power. Thus freedom of choice could reign in this self dealing. As it is reality dictates that our money should be depositied in some kind of financial institution. And somewhere in financial food chain it will be used for the purpose of the financial institution most likely in a way that customer really doesn't want.

The powers of the federal reserve constitute a monopoly that unfortuneately is abusing its power to serve speculators, those who leverage or borrow too much, and the irresponsible. They have the power to silently rob from the savers and those storing their purchasing value in their currency. And if you don't store your capitol in the form of a dollar you must invest with the same damn people cause they are all interconnected now so much. Or you buy GOLD which the government has in the passed outlawed. Or you buy real estate which the government taxes.

It is quite a web the government and various REGULATED industries have weaved. I wouldn't call it a free market.

[Kunst]

The fundamental problem is overconsumption based on debt, a phenomenon which has been going on for decades at both the personal and governmental level. This was enabled by the US financial system, which made lots of money on interest. Now the problem has built to the inevitable point where more debt is not sustainable, and (high) interest ensures that borrowers cannot borrow their way deeper into the problem.

At least that's where we've arrived on the individual level. The government, on the other hand, is still able to borrow a little longer. That too will reach an end, as our federal debt makes us prisoners of foreign creditors that can and will raise the interest rate until national bankruptcy is achieved.

Debt is financial heroin. The only honest solution is to stop borrowing. That will be about as easy as kicking heroin.

[johngonole]

Kunst - Your right on spot

And those who try to save and live within thier means are punished.