# Lessons of History

#### Harold James, Princeton University

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**Lessons of History**

Harold James, Princeton University

There are two reasons for taking history seriously at a meeting devoted
to the elaboration of scenarios of the future. First, in a similar way
to that in which a multiplicity of future scenarios can be mapped out,
there is also a multiplicity of scenarios about the past. The stories
that resonate most in explaining the present and shaping the future are
those that draw on deep historical roots. Thus in current perceptions or
misperceptions of the position of the United States, hostile critics
like to draw on very old images: Europeans sometimes see their
relationship to the United states as Greeks faced by the power of Rome;
radical Moslems contemptuously term Americans as "crusaders".

Secondly, a long run view of history reminds us of the presence of
changes, ruptures and discontinuities. It should warn us against simply
extrapolating from a brief period of a few years, and projecting the
future as simply a continuation of the immediately lived and experiences
past.

\* \* \*

The longer term -- historical -- framework may often be uncomfortable.

However bad security relations are between what can now really be called
the opposed sides of the Atlantic, or whatever spats there are across
the Pacific on the value of the renminbi and the yen, there is a
frequent hope that the strength and complexity of the economic
inter-relationship (a product of globalization) is so great as to offer
a counterweight to the political tensions. Indeed the reason that both
sides can afford to be rhetorically carried away is a function of the
sense of interdependence, and that a really bad outcome is not possible.
We feel very secure about this -- maybe we feel too secure.

One of the comfort blankets that modern people clutch is the idea that
there was only ever one big simultaneous world depression, produced by
such an odd confluence of causes as to be quite unique: the legacy of
the First World War and of the financial settlement of reparations and
war debt; the chaotic banking system of the largest economy of the
world, the United States; and inexperience in handling monetary policy
in a world that was still pining for metallic money. Since these
circumstances were so unique, they can't occur again. Historians should
say that this reasoning may be quite wrong.

A great deal of the historically informed literature on globalization
makes the point that there were several previous eras of increased
worldwide integration that came to a halt, and were reversed, with
painful consequences. The most familiar precedent for modern
globalization is that of the late nineteenth and early twentieth
century, that ended definitively with the interwar Great Depression. But
there were also earlier epochs of integration: the Roman empire, the
economic rebound of the late fifteenth and early sixteenth centuries
(the economic backdrop to the Renaissance), or the eighteenth century,
in which improved technology and increased ease of communications opened
the way to global empires (for Britain and France).

All of these previous globalization episodes ended, almost always with
wars. Bad policies can obviously wreck individual economies in a whole
range of different ways; but systemic collapse is a product of
militarized conflict. Globalization as an economic phenomenon depends on
the movement across state boundaries of goods, labor and capital.
Security concerns produce heightened worries about all these kinds of
mobility. Trade may create a dependence on imports that leads to
strategic vulnerability, and one of the oldest arguments for
agricultural protection was the need for autarkic self-sufficiency in
case of attack. Labor flows may camouflage the movement of spies or
saboteurs. Thus, for instance, First World War Britain was gripped by
panic about the numbers of Germans employed in London restaurants.
Finally, capital controls have often been justified on grounds of
national security. One way of destabilizing politics was to try to
promote financial panic, and restrictions on capital mobility might be a
way of generating increased immunity to speculative attack.

Is this the recurrent collapse of globalization and the phenomenon of
war an accidental or coincidental linkage?

There are two major ways in which war undermines globalization. The
first, most obvious (and the one that has been most studied), is simply
the consequence of the cost of war considered in a broad sense: the
problem of financing unproductive military activity, the disruption of
commerce, the suspension of migration and the freezing of capital
movements because of security priorities. The second is the way in which
armed conflict, even when its scope is quite small, provokes the
emergence of new issues that produce international disaccord that
affects other areas of international interaction. In this way, war
challenges assumptions about the global distribution of economic and
political power.

The idea that war is costly and disrupts "normal commerce" is well
understood in the classic literature of economics. Indeed, for those who
experienced the wars of the American and French revolutions, how could
it be otherwise? Adam Smith's first volume of the [Wealth of
Nations]{.underline} (1776) closes at the end of Book III with the
reflection that "the ordinary revolutions of war and government easily
dry up the sources of that wealth which arises from commerce alone."

Most periods of modern conflict have been accompanied by inflationary
war finance, and followed by sharp periods of deflation. The most
obvious mechanism that made for postwar deflation is the effect of
increased government expenditure on interest rates. An alternative way
of thinking about this is as the destruction or wearing out of capital
in wartime, and a consequently higher price of new capital. The rise in
real long-term interest rates makes peacetime investment more expensive
and depresses activity. This effect is enhanced if governments try to
return to pre-war exchange rate systems with prices and wages that have
been boosted and distorted by the high levels of wartime demand.

Almost all of the most dramatic historical episodes of sustained
deflation followed in the aftermath of war. A sustained economic
depression followed the American war of independence, and accentuated
the initial anti-commercial bias of the politics of the new Republic.
After the Congress of Vienna (1814-15) ended the Napoleonic wars, Europe
had decades of deflation, in which industrial investment was costly and
the bankruptcy of entrepreneurs frequent. The aftermath of the 1860s
civil wars (or wars of unification) in Italy, Germany and the United
States all included an immediate speculative bubble, and then the
bursting of the bubble (after 1873), with stock market price collapses,
bankruptcies and reduced investment. The First World War was also
followed by a brief reconstruction boom in 1919, and then by a collapse
in the major western economies in 1920-1; one decade later came the
Great Depression.

Some of these classic effects in which war produces monetary instability
are still very visible in the aftermath of the major international
conflicts of the post-1945 era. Korea and Vietnam both produced
inflationary surges, which initially reduced and then increased real
interest rates, and which corresponded to investment surges and
declines. The 1991 Gulf War no longer fits this pattern: both inflation
and interest rates fell. It was followed by a brief recession, which is
generally held by political analysts to have frustrated the reelection
of President George H.W. Bush in the 1992 election.

One explanation of the changing effects of war in very recent times is
obvious: the cost of each war for the major superpower has been falling
since the middle of the twentieth century. In 2002 dollars, the Second
World War cost the United States \$4,700 bn., Korea \$400 bn., Vietnam
\$572 bn., the 1991 Gulf War \$80 bn., and the actual fighting in the
Iraq war of 2003 cost little over \$20 bn. It would consequently be
appropriate to expect a diminution of the purely fiscal impact of wars,
and consequently of their deflationary legacy.

If we just take a naïve approach to the demand and supply for military
action, falling costs should suggest increased demand and a new
likelihood of the use of force to effect regime change. The less a war
costs, and the fewer the casualties, both military and civilian, the
more likely it becomes.

Adam Smith made a similar point about some of the wars of the eighteenth
century. The combination of technology, which made war between advanced
and backward countries less costly for the advanced country, and new
methods of spreading the financial burden of war through the sale of
debt instruments, was making war more likely. "In great empires the
people who live in the capital, and in the provinces remote from the
scene of action, feel, many of them, scarce any inconveniency from the
war; but enjoy, at their ease, the amusement of reading in the
newspapers the exploits of their own fleets and armies."

The same conclusion can be reached by a less cynical route. During the
Cold War and the period of superpower tensions, wars were held in check
by a widespread realization that the cost of their escalation would be
too high. But since the end of the Cold War, there has been a
proliferation of international as well as of threatening domestic
conflicts as states break up.

Some commentators have jumped already to the conclusion that it is wrong
simply to think about the cost of military conflict, and that in
particular the growing expense and political embarrassment of
post-conflict Iraq precludes another such conflict. This reasoning is
fallacious, because similar situations are highly likely to recur. We
are internationally sensitive to human rights issues; and also to the
potential of bad governments to destabilize whole regions. Both concerns
are realistic, and I would add creditable. They will necessarily lead to
military engagements in sometimes expected and sometimes unexpected
places. Moreover, it is possible to envisage more attention being paid
in advance to the management of post-conflict situations in a manner
which in the Iraq case was made impossible by the rush of events.

Wars also lead to questions about the rules that are essential in
guiding economic interaction, both internationally and also
domestically. All wars, big or small, produce new problems and
divisions. There has been a spillover from security concerns to
economics. The most obvious type arises out of the financial legacies of
wars and debates about reparations and war debts. Such debates poisoned
the international economy in the 1920s (as Keynes predicted in *The
Economic Consequences of the Peace*). They are currently recurring in
the fierce debate about whether and how and what kind of pre-war Saddam
debt should be forgiven in order to help Iraq in reconstruction.

One tradition of thinking about wars (and especially of the smaller
scale wars of the classical late nineteenth century era of
globalization) suggests that they have economic origins, and that they
are fought -- especially in eras of globalization -- because of a wish
to control a greater share of global resources. This is familiar to
historians and social scientists as the Hobson-Hilferding-Lenin
interpretation of imperialism. It is largely wrong as an explanation of
the origins of the wars, but very powerful in understanding the
political response to them.

This paradox arises because of other effects of eras of globalization.
New opportunities to create new wealth mean radical changes in
distributions. Large and apparently illegitimate increases in fortune
provoke resentments and a populist reaction. There are clear historical
precedents to the current worldwide wave of reaction against and
rejection of what is now perceived as U.S. style capitalism.

The model of the imperialist war that the British liberal Hobson, and
the Marxists who adapted his explanation, had in mind was the relatively
short, non-total, war that characterized the era of high globalization.
The Spanish-American war (1898) brought the United States into the
international system. It was, unlike the sustained conflicts earlier in
the nineteenth century, a very unequal conflict between the world's
fastest growing and largest industrial economy, and a very backward
European imperial power. 274,000 U.S. soldiers were deployed, but only
379 killed. It was soon followed by another unequal conflict, the
British conquest of the Boers.

Both these unequal wars were acutely controversial in domestic politics
and could be interpreted as "land grabs", demands for resources that
were scarce: sugar from the Caribbean, and diamonds (from the Kimberley
field) and gold in southern Africa. At first the wars produced
electorally successful nationalism, with the 1900 British "khaki
election" producing a large Conservative and imperialist vote, and a
surge of popularity for Roosevelt, who had been the hero of the 1898
war. Then there was a backlash, in which critics pointed out
associations between war and personal gains of a small group of corrupt
businessmen and financiers.

In Britain, Leo Chiozza Money denounced the corruption of finance. The
Liberals made much of the hypocrisy of the British government's
denunciation of the racial discrimination of the Boers while encouraging
a massive Chinese immigration to provide labor for the development of
southern Africa. They won a stunning electoral victory in 1906. The mood
turned against the financiers who had bought the election of President
McKinley in 1896. Roosevelt himself began to denounce "certain
malefactors of great wealth" who had appropriated many of the gains
produced by public action. Populists presented war and corporate scandal
as going hand in hand.

These wars also made international relations significantly more tense.
The Boer War was one of the quite decisive moments in the growing breach
between Britain and Germany, with the German Kaiser publicly supporting
the Boers. The small conflicts thus set the stage for bigger and more
global clashes, in which arguments over the distribution of spoils
worsen the international climate.

The capacity of relatively small conflicts to destroy large elements of
international agreement obviously looks familiar in 2003. But the danger
of escalating conflict disrupting globalization has historical
precedents that go back much further than the world of late nineteenth
century globalization.

\* \* \*

The first volume of Edward Gibbon's classic study of [The Decline and
Fall of the Roman Empire]{.underline} was (by chance) published in 1776,
the year of the signing of the American declaration of independence, and
of Adam Smith's [Wealth of Nations]{.underline}. Gibbon's advice and
Smith's concern about war destroying commerce looks immediately relevant
today, and quite alarming. Both Smith and Gibbon were thinking, in the
wake of the humiliation of a global British commercial and military
system, about the problems of what might be termed a reverse of
globalization.

Gibbon begins with praise for the peaceful character of the Emperor
Augustus, and of Roman realism and multilateralism: "Inclined to peace
by his temper and situation, it was easy for him to discover that Rome,
in her present exalted situation, had much less to hope than to fear
from the chance of arms; and that, in the prosecution of remote wars,
the undertaking became every day more difficult, the event more
doubtful, the possession more precarious, and less beneficial." This is
a fine description of the attractions and perils of economic prosperity.
However much the Emperor Augustus realized the pointlessness of distant
wars, he actually did not have much choice. The wars were created out of
the instability that inevitably swirls around success, or at least
around successful imperial systems. Rome might have basked in consumer
prosperity, but was sucked into a world of conflict.