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When Globalization Fails
The Rise and Fall of Pax Americana
By James Macdonald Farrar, Straus and Giroux
Copyright © 2015 James Macdonald
All rights reserved.
ISBN: 978-0-374-71294-5
CHAPTER 1
THE FIRST ERA OF GLOBALIZATION
It is commerce which is rapidly rendering war obsolete ... [and] it may be said without exaggeration that the great extent and rapid increase of international trade, in being the principal guarantee of the peace of the world, is the great permanent security for the uninterrupted progress of the ideas, the institutions, and the character of the human race. —JOHN STUART MILL, Principles of Political Economy, 1848
THE ERA OF PEACE AND FREE TRADE
It all seemed so simple around the middle of the nineteenth century. The world that Mill described seemed to be coming into existence. After more than a century of nonstop fighting, armed conflict had been replaced by trade. There had been no European wars since the final defeat of Napoleon in 1815.
From one point of view, the postwar peace was due to the Congress of Vienna. The victories of Napoleon's armies had been the result of a combination of revolutionary nationalism and traditional dynastic imperialism. The peacemakers in Vienna had sought to put both genies back in the bottle. The restoration of legitimate (prerevolutionary) regimes was to put an end to popular revolutions. The reestablishment of a stable balance of power was to ensure that no country could again seek to dominate the others. The Great Powers, acting in concert, would forestall any further threats to the peace of the continent.
But liberals such as Mill sought the underpinnings of peace elsewhere. It was not democratic nationalism that led to warfare. Once the peoples of Europe were freed from the rule of alien autocracies and allowed to control their own fates, harmony would reign among them, or so it was claimed. As for the balance of power, it was derided by the English radical John Bright as no more than "a gigantic system of outdoor relief for the aristocracy of Great Britain," whose members could indulge their preference for military office rather than productive work by pretending that they were maintaining the peace.
Moreover, liberals questioned the very idea that wars could be economically productive. How wrong it was to think that the mercantilist-driven struggle for empire had achieved, or could ever have achieved, its objectives. In 1824, the economist John Ramsay McCulloch declared such warfare to be economically futile: "The greater part of the wars of the last century ... were waged for the purpose of preserving or acquiring some exclusive commercial advantage. But does any one suppose that these contests could have been carried on, at such infinite expence of blood and treasure, had the mass of the people known that their object was utterly unattainable?"
What was truly needed to preserve peace was free trade. It was the development of commercial intercourse between nations that would prevent the recurrence of the wars that had blighted the previous two centuries. This message was affirmed in the strongest terms by its most vocal advocate, Richard Cobden.
Free Trade! What is it? Why, breaking down the barriers that separate nations; those barriers, behind which nestle the feelings of pride, revenge, hatred, and jealousy, which every now and then burst their bonds, and deluge whole countries with blood; those feelings which nourish the poison of war and conquest, which assert that without conquest we can have no trade, which foster that lust for conquest and dominion which sends forth your warrior chiefs to sanction devastation through other lands ..."
When Cobden spoke, the battle for free trade was in full swing. He was addressing a meeting in Covent Garden advocating the repeal of the Corn Laws, which had protected British agriculture from foreign imports since the end of the Napoleonic Wars. The debate between Britain's free traders and protectionists was waged with growing intensity over the following decades. A major first step was taken in 1820 when Parliament declared that future legislation should be framed with the advancement of free trade in mind. The outcome of the struggle was decided with the repeal of the Corn Laws in 1846, and three years later of the Navigation Acts, which had for centuries protected British shipping. The repeal of the Corn Laws, in particular, gave rise to a violent political battle that split the Conservative Party and led to the fall of the government. The immediate cause of the repeal was the Irish potato famine, which created a desperate need for cheap imported grain. However, there was a broader economic trend that led to the defeat of protectionism.
The Industrial Revolution led to mass migration from the country to the new manufacturing towns. Although industrialization was accompanied by an agricultural revolution that constantly increased food output, there was a growing shortfall between what the countryside could produce and the needs of the growing urban population. At the same time, the factories were turning out a quantity of manufactured goods that was greater than could be easily absorbed within the country and for which overseas markets were required. The solution to both these problems was free trade, which would open Britain to imports of cheap food, and foreign countries to exports of British manufactures. It is no surprise that the school of thought most closely connected with this belief was to be found in Manchester, the most dynamic of the new manufacturing centers. In many ways, the victory of free trade in 1846 can be characterized as a victory of the town over the country, of merchants and factory workers over landlords and farmers. It was also a victory for the liberal association of trade with peace. Napoleon had banned all trade with Britain during the wars. The Corn Laws had been enacted because the return of peace made possible the importation of cheap European wheat, threatening to put domestic farmers out of business and leaving the country dangerously dependent on foreign supplies in the event of another conflict. Free trade, by rendering war obsolete, would make such concerns redundant—or so it was hoped.
The following twenty years witnessed not only a rapid growth in trade but also the fastest increase of real wages of the entire nineteenth century, justifying the hopes of the Manchester liberals. The British conversion to the cause of free trade was mirrored elsewhere. Perhaps the most important moment was the signing in 1860 of the Cobden-Chevalier Treaty between Britain and France, appropriately named after two of free trade's most vocal advocates. In the wake of the treaty, which led to the doubling of trade between the long-term rivals, the Prussian ambassador was moved to remark that war between the two countries had now become "impossible." Until the 1870s, the trend was for the reduction of tariffs and trade barriers throughout Europe. In 1855, a Belgian association for customs reform was set up, inspired by the example of Britain "where, since the introduction of Sir Robert Peel's reforms, agriculture, navigation and industry, far from declining, have flourished in force and energy in the most unexpected way." In 1862, Germany and France lowered duties on many goods by as much as 80 percent, and in the following years a number of intra-European trade treaties were set up with clauses that guaranteed the signatories tariffs no higher than those prevailing with either country's "most-favored nation." This encouraged reciprocity and the ratcheting down of barriers throughout the continent.
The move toward free trade was one of several trends that favored the rapid advance of commerce in the nineteenth century. Among these was what can be described as the first era of decolonization. The footprint of the European empires had reached an apex in the mid-eighteenth century with the expansion of British and French claims to territory on top of the older Spanish and Portuguese dominions. By the 1820s, however, the vast majority of the Americas had been decolonized. The first to achieve independence were Britain's thirteen American colonies in 1783. Then, in 1803, the French territories in North America were sold to the United States by Napoleon. In 1801, the colony of Saint-Domingue, the jewel of the French empire in the Caribbean, rebelled and by 1804 had achieved independence as the republic of Haiti. Spain's mainland colonies were liberated in a series of wars between 1811 and 1825, although its Caribbean empire lingered until the end of the century. Brazil achieved de facto autonomy in 1808 and formal independence in 1822.
To the Manchester liberals, this was as it should be. In a world of peaceful free trade, empires were an unnecessary burden. Richard Cobden argued that "the desire and the motive for large and mighty empires; for gigantic armies and great navies ... will die away; I believe that such things will cease to be necessary."
Decolonization boosted international trade because the early European empires had operated as closed shops in which trade with the colonies was monopolized by the mother country. The dissolution of the Spanish and Portuguese empires led to the end of their restrictive trade controls, and while the newly independent countries of Latin America set up their own tariff barriers on imported goods, these were less of an impediment to trade than the restrictions they replaced. At the same time, the two Northern European empires were moving away from mercantilist controls and toward trade liberalization. The Dutch East India Company was dissolved in 1808. The English East India Company lost its monopoly of Indian trade in 1813. After 1822, British colonies were allowed to trade with each other as well as with the mother country, and in 1825 customs duties on non-British goods were lowered sharply. After the 1840s, tariffs were either small or nonexistent in most colonies, and the preferential rates that had favored trade with Britain disappeared.
As important as the reduction of barriers to trade was the reduction of transport costs. Road surfaces were progressively improved using the techniques pioneered by John McAdam in the late eighteenth century. These advances were accompanied by the creation of alternative and more cost-effective forms of land-based transport: canals and then railways. By the 1850s, 7,000 miles of railway track had been built in Britain alone; Germany was not far behind, with 5,000 miles. The rate of building in the United States, especially in the second half of the century, was astonishing, as befitted the vast expanses that had to be covered. The first transcontinental line was completed in 1869, and by 1890 America had 130,000 miles of railroad track, of which nearly half were in the West. The railway revolution was not by any means confined to the industrialized world. The British built tracks all over their empire and elsewhere, and by 1913 India had the fourth-largest network in the world.
Steam power also transformed sea trade. When oceangoing steamships were introduced in the 1830s, they were so expensive that they largely carried passengers and high-value goods, like present-day aircraft. However, by the end of the century they were carrying bulk commodities as well, and sail ships had all but disappeared. The cost reduction effected by steamships was cumulative rather than instant, but they have been calculated to have reduced shipping costs by 1.6 percent per year over the second half of the century. When canal-building techniques were applied to sea trade, the result was an immediate reduction in transit times, as with the opening of the Suez Canal in 1869.
The combined effect of these innovations was remarkable. The cost of transporting wheat from America to Britain fell by two-thirds from 1860 to 1910, while the cost of shipping coal from Britain to Italy fell by more than three-quarters. As a result, the prices of goods in different countries started to equalize, even those separated by vast continents and oceans. Between 1870 and 1913, the premium on American bacon in Britain fell from over 90 percent to a mere 18 percent.
Moreover, after 1915, importers and exporters could operate in a world of stable monetary conditions. The French Revolution had set off a period of monetary instability throughout Europe, but after the war matters rapidly stabilized. In 1821, Britain restored the convertibility of sterling into gold at the prewar exchange rate, and thereafter sterling was the primary anchor of the international financial system. The French franc, which remained stable through a string of political upheavals, provided a secondary international currency, especially within Europe. The unifications of Italy and Germany simplified the monetary map of Europe by creating single currencies within their boundaries. In 1865, France, Italy, Belgium, and Switzerland formed the Latin Monetary Union, which unified their currencies and created interchangeable coins based on the franc. The monetary unification of the world was furthered by the spread of the gold standard, whereby currencies were fixed in relation to a single precious metal. Britain had been on a de facto gold standard since 1821. Other countries joined it from the 1870s onward. By the first decade of the twentieth century, not only were all European countries on the gold standard but also the United States, Canada, Mexico, Argentina, Australia, New Zealand, and Japan. In addition, the currencies of many other parts of the world were fixed to the major European centers through their empires. There was probably never a time in which global monetary arrangements were simpler than the late nineteenth century.
Spurred by these favorable tailwinds, the nineteenth century experienced an unprecedented growth in international trade. Between 1815 and 1914, the volume of European trade rose almost forty times, compared to only two or three times in the eighteenth century. In 1815, exports had amounted to around 3 percent of European GDP. By 1914, they represented 14 percent.
THE LIMITS OF PAX BRITANNICA AND PAX EUROPAEA
The nineteenth century has been described as the first era of globalization. Certainly, with its combination of rising international trade, falling communication costs, and freedom of exchange, the century would seem to fit this description. It has also been referred to as the era of Pax Britannica—when the world economy experienced an unprecedented economic expansion and military conflict was minimal compared to both the prior and the following centuries. But how much did this peaceful expansion owe to the fact that Britannia ruled the waves?
The position of Britain in the middle of the century was certainly remarkable. Victory in the Napoleonic Wars had left it with no global competitors. The remnants of the French colonial empire had disappeared through sale to the United States or annexation by Britain. The Spanish and Portuguese colonies in the Americas gained independence in the 1820s. The British Empire, by contrast, even without its thirteen American colonies, remained formidable. It still possessed extensive territories in the Americas as well as in the Indian subcontinent and Australasia. Although Britain showed little interest in further territorial expansion in the following decades, a series of judicious acquisitions of strategic bases such as Cape Town, Aden, Singapore, and Hong Kong helped to consolidate the empire's global footprint. The empire was protected by the Royal Navy, which by the end of the Napoleonic Wars disposed of forces equivalent to all other navies combined. Even though the navy was scaled back after the war, it remained in a dominant position for the rest of the century, and Britain was able to maintain a "two-power standard"—the principle that the Royal Navy should be as large as the next two forces combined—right up to the outbreak of the First World War.
In addition to its navy and its empire, Britain held an unassailed lead in industrial development. Its dominance reached a peak by the middle of the century, with one study showing that in 1860 Britain had 35 percent of total world manufacturing capacity and was three times as industrialized per capita as its nearest rivals. One of the bases of this industrial precociousness was Britain's plentiful supply of coal and iron ore, the two key raw materials of the Industrial Revolution. Coal provided fuel for transport and industry, and together with iron ore it provided the base for the all-important iron and steel industry. In 1850, Britain produced half the world's iron and steel and two-thirds of the world's coal. Abundant coal not only fueled Britain's domestic industry, it also allowed the country to become the main world exporter of this crucial commodity. Coal also helped underpin Britain's continued dominance of shipbuilding and shipping as steam replaced sail. In 1880, British steam-powered merchant tonnage was two and a half times greater than that of the rest of the world combined.
To complement these strengths, Britain was the world's financial powerhouse. The Napoleonic era had destroyed the credit of most of Europe so that after 1815 the British public debt was the only security that could be said to enjoy investment-grade status. Over the course of the century, the interest rates paid by other countries declined, but until the 1880s Britain's borrowing costs were typically 1 percent to 1.5 percent lower than any other Great Power. The Bank of England was central to the operation of the international gold standard, and London was the major source of capital for international investment. Britain's overseas investments rose by leaps and bounds in the second half of the century, and by 1914 amounted to almost 150 percent of the country's GDP. These investments not only gave the country extensive influence around the world but also provided a substantial financial buffer that could be tapped in time of need.
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Excerpted from When Globalization Fails by James Macdonald. Copyright © 2015 James Macdonald. Excerpted by permission of Farrar, Straus and Giroux.
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