The New Empire of Debt: The Rise and Fall of an Epic Financial Bubble (17 page)

On April 2, 1917, Thomas Woodrow Wilson stood before a joint session of Congress and dazzled the assembly with a torrent of rhetorical air. He had hardly to say a word.The animals were already snorting and pawing the ground.The European powers had locked horns. Now, it was America’s chance to join the battle and Wilson’s chance to become alpha male of the entire world.

“We must put excited feeling away,” said the president, and then launched into one of the greatest mob-inciting declarations ever delivered. Wilson was urging Congress to declare war against Germany.The Huns, he said, were governed by a “selfish and autocratic power.”
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What they had done to justify trying to kill them was a matter of great dispute. Robert “Fighting Bob” La Follette, senator from Wisconsin, thought they hadn’t done much of anything. They were accused of bayoneting babies and cutting off the arms of boys in Belgium. But when a group of American journalists went on a fact-finding mission to get to the truth of the matter, they could find no evidence of it. Clarence Darrow, the lawyer who later made a monkey out of William Jennings Bryan in the Scopes Trial, said he would offer a $1,000 reward to anyone who came forward whose arm had been cut off by the Germans. A thousand dollars was a lot of money back then (this was when the Fed had barely settled down to work), equal to about $20,000 today. Still, no one claimed the money.

The Germans had also sunk a few ships. But there was a war going on in Europe. Germany tried to impose a blockade of English ports with the only weapon it had, submarines.You took a risk trying to sail into England, especially if your ship was carrying ammunition; everyone knew it. The English were blockading German ports, too. The difference was that the English had a bigger navy and were better at it. There was nothing new about naval blockades. Lincoln had blockaded the South during the War between the States.

It was a long and complicated story. In retrospect, the United States would almost certainly have been better off by staying out of it. Senator Robert La Follette thought so at the time. He told anyone who would listen that the struggle in Europe was best understood as a political and commercial rivalry. The Germans were challenging the English everywhere.The German economy was growing faster.While Germany industrialized much later than England, she went about it with typical German thoroughness and energy. Output increased over 600 percent from 1855 to 1913. Whereas Britain’s empire seemed to be peaking out, the Germans were building new factories and developing new markets. As late as 1870, Britain was responsible for a third of the entire world’s manufacturing. By 1910, her percentage had fallen in half; Germany and America both produced more. In Africa, German colonialists were menacing English territories; twice in the years running up to World War I, a crisis in Africa brought the major powers close to war. In Europe, German manufacturers were taking market share from their English competitors. On the high seas, the German Navy was becoming a bigger and bigger threat to the Royal Navy. And so, the English and the Germans were finally having it out. Leave them to it, said Fighting Bob La Follette.

But Woodrow Wilson had his own ideas. “Civilization itself ” seemed in the balance, he told the politicians. “We shall fight for the things we have always carried in our hearts—for democracy, for the right of those who submit to authority to have a voice in their own governments, for the rights and liberties of small nations [he did not mention Mexico, Haiti, or Nicaragua], for a universal dominion of right by such a concert of free peoples as shall bring peace and safety to all nations and make the world itself at last free.”
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When he finished his speech, most of the members of Congress rose to their feet and cheered. Tears streamed down many faces. At last, the United States was going to war! Two million people had already died in the war. For what reason, no one quite knew. Wilson had to resort to bombast and balderdash to try to explain it. It had been just another foolish European war until then—the very sort of war the Founding Fathers had urged their descendants to avoid. Don’t go forth looking for “monsters to slay,” said Adams. But now the happy moment had come. Now, the United States was ready.Wilson had found a monster. Hallelujah!

Until this date, the war in Europe was just another war in Europe. Not the first, and not the last. As recently as 1870, France and Germany had gone at it. France had attacked. Germany counterattacked so brilliantly, she was able to encircle Paris and lay siege to the city.

The United States felt no desire to enter the Franco-Prussian War. She was still hobbling around on crutches from her own War between the States. And when the war of 1870 was over, the French were forced to pay reparations. But the money paid over to the Germans was quickly recycled back to the French, from whom the Germans bought goods and services. Losing the war turned out to be as good as winning it; France boomed and Germany, too. Apart from that conflict, Europe had enjoyed an entire century of peace and prosperity. The upper brain might have thought—well done, we will hold a steady course. But down in the limbic system, primitive urges were swelling. After such a long period of peace, war might be refreshing.After such a long period of prosperity, they heard the wild call of debt, destruction, and insolvency.

On June 28, 1914, the archduke Franz Ferdinand, of the Austro-Hungarian Empire, and his wife were shot and killed by a malcontent named Gavrilo Princip. No one in America particularly cared. For all it mattered out on the prairie, they would have had the duke stuffed and used as a parlor ornament. Few people had any idea why the Europeans were at war.They had been warned by the Founding Fathers to mind their own business. America had the most dynamic economy in the world; Americans had plenty of business to mind. To sensible people in the United States, minding your own business still seemed like the best foreign policy.

But the editorial pages fulminated with reasons to get into the fight. Nationalism, economic competition, militarism, secret treaties, lofty ideals, lowdown secret deals, treachery, rivalry—the answers flew out of the frontal lobe like plastic bags out of a welfare high-rise. Pretty soon, they were hanging from every tree and electric pole.

Even today, you could go from one end of the country to the other asking historians why the United States decided to enter the war or why it entered on the side of England and France instead of on the side of Germany and Austria. You would get plenty of answers, but not a single reason that comes close to justifying the deaths of nearly half a million Americans.You would not, because they don’t exist.

Princip was like a character from a Chekov play says historian A. J. P. Taylor. Except that he didn’t miss. Did it make sense to sacrifice half a million Americans because Princip hit his mark? Had he been a worse shot, would the war ever have begun? Is that the real reason the war began?
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Princip’s marksmanship did not so much trigger the war as allow it to commence. None of the major powers really wanted war—not in the sense that they expected any benefit from it. None was prepared for it. And yet, none was very good at stopping it. All of a sudden, troops were being mobilized throughout the Balkans. German Kaiser Wilhelm II was alarmed and tried to stop it. On July 30, at 2:55 AM, he sent an urgent telegram to the German ambassador in Vienna: Try mediation, he told the diplomats.

Then, as now, nobody really knew anything. Britain, France, Austria-Hungary, Russia, Germany—all repeatedly misread each others’ intentions, miscalculated the effect of their own actions, and completely misunderstood what they were getting themselves into. Many people in Europe at the time had been influenced by the writings of Norman Angell, who believed that war was practically impossible. Angell made a good argument. Modern economies are based on trade, commerce, and manufacture.Wealth no longer rested on land—which could be seized—but on factories, railroads, capital, and business relationships. War destroys capital and stifles economic activity. Therefore, men would not make war; it would be too costly, illogical, and unreasonable.

Norman Angell’s book,
The Great Illusion,
was translated into several languages and received high praise from many quarters. One of its most visible admirers was Viscount Esher, chairman of the War Committee in England. Lord Esher gave lectures on the new idea at Cambridge and the Sorbonne. He told listeners that “new economic factors clearly prove the inanity of aggressive wars.” No one would make war, said he, because it would cause such “commercial disaster, financial ruin and individual suffering” that people would naturally turn away from it. The whole idea of modern warfare, he explained, was “so pregnant with restraining influences” that war must soon be a thing of the past.
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There was also the argument that technology inhibits war. At the beginning of the twentieth century, Winston Churchill said, “Humanity was informed that it could make machines that would fly through the air . . . .

“The whole prospect and outlook of mankind grew immeasurably larger, and the multiplication of ideas also proceeded at an incredible rate . . . .

“While he nursed the illusion of growing mastery and exulted in his new trappings, he became the sport and presently the victim of tides and currents, of whirlpools and tornadoes amid which he was far more helpless than he had been for a long time.”
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Not long after the turn of the new century, Orville and Wilbur Wright demonstrated that the promise of air transportation was real. On the wind-swept banks of North Carolina, for the first time in history, an airplane got off the ground and completed a controlled flight.

The promise was fulfilled. Airplanes worked. Three decades after the birth of airplanes, they were over Churchill’s wartime bunker in London, dropping explosives on the city.

“We took it almost for granted that science would confer continual boons and blessings upon us,” Churchill explained. But it “was not accompanied by any noticeable advance in the stature of man, either in his mental faculties or his moral character. His brain got no better, but it buzzed the more . . . .”
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Others expected advances in civilization had made war passé. Freud explained this sentiment in the spring of 1915:

We were prepared to find that wars between the primitive and civilized peoples, between the races who are divided by the color of their skin—wars, even, against and among the nationalities of Europe whose civilization is little developed or has been lost—would occupy mankind for some time to come. But we permitted ourselves other hopes. We had expected the great world-dominating nations of the white race upon whom the leadership of the human species has fallen, who were known to have worldwide interests as their concern, to whose creative powers were due not only our technical advances toward the control of nature but the artistic and scientific standards of civilization—we had expected these peoples to succeed in discovering another way of settling misunderstandings and conflicts of interest . . . .
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Only two of the major combatants in World War I, the United States and France, were democracies, more or less officially. But all of them were headed in that direction. In every country, there were parliaments and popular assemblies. Votes were taken. Public opinions were registered. Newspapers shouted out the current prejudices and delivered the latest misinformation. Heads of state hesitated. Autocrats consulted their ministers and advisors. Nowhere in Europe were there any real absolute monarchs.The press, the church, the assemblies, the trade unions, the aristocrats, the bourgeoisie, the industrialists, the bankers, and moneylenders—all had a hearing.

After Wilson declared it a “war to make the world safe for democracy,” people began to wonder if democracy itself might have prevented the war. Wilson said as much. “Self-governing nations do not fill their neighbor states with spies,” said the chief executive, not quite anticipating the CIA. Nor do they begin “cunningly contrived plans of deception or aggression . . .,” he added.
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Kerensky, the moderate revolutionary in Russia, declared that democracies never made war on one another.The idea was widely believed at the time, even in America, where two democracies—the North and South—had battered themselves for four years in North America’s bloodiest war ever: the War between the States. Nor did anyone bother to wonder why it was that, before their very noses, the worst war in history was taking place between nations that may not have been complete democracies, but were, nevertheless, more democratic than any in history.

Even today, people still believe that democracies are more peaceful than other forms of government. The United States of America maintains that her form of democracy is so important to the peace and prosperity of the world, she not only invites other nations to join her, she insists. And yet the point has hardly ever been seriously addressed and never proven.

What we do know is that since democracy has become widespread, there has been little letup in the incidence of war and probably an increase in its violence. Unlike the subjects of a tyrant or a monarch, the citizens of a democratic regime are more fully and readily engaged in wartime. When people feel threatened, or feel that they have a stake in the conflict, they are more inclined to devote their energy and resources to victory. Popular newspapers and television work them up to violence easily. Give them the right line of guff and they are prepared to hand over their wallets as well as their lives. France was able to finance 83.5 percent of its wartime expenditures by borrowing. Offering national defense bonds in small denominations, France succeeded, says Hew Strachan, in “mobilizing the wealth of the public.”
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