How World War I Paved the Way for the Warfare State

800px-Royal_Irish_Rifles_ration_party_Somme_July_1916by David Stockman

Remarks To The Committee For The Republic, Washington DC, February 2014 (Part 1 of 6 Parts)

[From David Stockman's Contra Corner.]

Flask in hand, Boris Yelstin famously mounted a tank outside the Soviet Parliament in August 1991. Presently, the fearsome Red Army stood down—an outcome which 45 years of Cold War military mobilization by the West had failed to accomplish.

At the time, the U.S. Warfare State’s budget— counting the pentagon, spy agencies, DOE weapons, foreign aid, homeland security and veterans—-was about $500 billion in today’s dollars.  Now, a quarter century on from the Cold War’s end, that same metric stands at $900 billion.

This near doubling of the Warfare State’s fiscal girth is a tad incongruous.  After all, America’s war machine was designed to thwart a giant, nuclear-armed industrial state, but, alas, we now have no industrial state enemies left on the planet. The much-shrunken Russian successor to the Soviet Union, for example, has become a kleptocracy run by a clever thief who prefers stealing from his own citizens.

Likewise, the Red Chinese threat consists of a re-conditioned aircraft carrier bought second-hand from a former naval power—-otherwise known as the former Ukraine. China’s bubble-ridden domestic economy would collapse within six weeks were it to actually bomb the 4,000 Wal-Mart outlets in America on which its mercantilist export machine utterly depends.

On top of that, we’ve been fired as the world’s policeman, al Qaeda has splintered among warlords who inhabit the armpits of the world from Yemen to Somalia and during last September’s Syria war scare the American people even took away the President’s keys to the Tomahawk missile batteries.  In short, the persistence of America’s trillion dollar Warfare State budget needs some serious “splainin”.

The Great War and Its Aftermath

My purpose tonight is to sketch the long story of how it all happened, starting precisely 100 years ago in 1914. In that year the Fed opened-up for business just as the carnage in northern France closed-down the prior magnificent half-century era of liberal internationalism and honest gold-backed money.

The Great War was self-evidently an epochal calamity, especially for the 20 million combatants and civilians who perished for no reason that is discernible in any fair reading of history, or even unfair one. Yet the far greater calamity is that  Europe’s senseless fratricide of 1914-1918 gave birth to all the great evils of the 20th century— the Great Depression, totalitarian genocides, Keynesian economics,  permanent  warfare states, rampaging central banks and the exceptionalist-rooted follies of America’s global imperialism.

Indeed, in Old Testament fashion, one begat the next and the next and still the next. This chain of calamity originated in the Great War’s destruction of sound money, that is, in the post-war demise of the pound sterling which previously had not experienced a peacetime change in its gold content for nearly two hundred years.

Not unreasonably, the world’s financial system had become anchored on the London money markets where the other currencies traded at fixed exchange rates to the rock steady pound sterling—which, in turn, meant that prices and wages throughout Europe were expressed in common money and tended toward transparency and equilibrium.

This liberal international economic order—that is, honest money, relatively free trade, rising international capital flows and rapidly growing global economic integration—-resulted in  a 40-year span between 1870 and 1914 of rising living standards, stable prices, massive capital investment and prolific  technological progress that was never equaled—either before or since.

During intervals of war, of course, 19th century governments had usually suspended gold convertibility and open trade in the heat of combat.  But when the cannons fell silent, they had also endured the trauma of post-war depression until wartime debts had been liquidated and inflationary currency expedients had been wrung out of the circulation. This was called “resumption” and restoring convertibility at the peacetime parities was the great challenge of post-war normalizations.

The Great War, however, involved a scale of total industrial mobilization and financial mayhem that was unlike any that had gone before.  In the case of Great Britain, for example, its national debt increased 14-fold, its price level doubled, its capital stock was depleted, most off-shore investments were liquidated and universal wartime conscription left it with a massive overhang of human and financial liabilities.

Yet England was the least devastated. In France, the price level inflated by 300 percent, its extensive Russian investments were confiscated by the Bolsheviks and its debts in New York and London catapulted to more than 100 percent of GDP.

Among the defeated powers, currencies emerged nearly worthless with the German mark at five cents on the pre-war dollar, while wartime debts—especially after the Carthaginian peace of Versailles—–soared to crushing, unrepayable heights.

In short, the bow-wave of debt, currency inflation and financial disorder from the Great War was so immense and unprecedented that the classical project of post-war liquidation and “resumption” of convertibility was destined to fail.  In fact, the 1920s were a grinding, sometimes inspired but eventually failed struggle to resume the international gold standard, fixed parities, open world trade and unrestricted international capital flows.

Only in the final demise of these efforts after 1929 did the Great Depression, which had been lurking all along in the post-war shadows, come bounding onto the stage of history.

America’s Needless Intervention In The Great War And The Ensuing Chain of  20th Century Calamities

The Great Depression’s tardy, thoroughly misunderstood and deeply traumatic arrival happened compliments of the United States. In the first place, America’s wholly unwarranted intervention in April 1917 prolonged the slaughter, doubled the financial due bill and generated a cockamamie peace, giving rise to totalitarianism among the defeated powers and Keynesianism among the victors. Choose your poison.

Even conventional historians like Niall Ferguson admit as much. Had Woodrow Wilson not misled America on a messianic crusade, the Great War would have ended in mutual exhaustion in 1917 and both sides would have gone home battered and bankrupt but no danger to the rest of mankind. Indeed, absent Wilson’s crusade there would have been no allied victory, no punitive peace, and no war reparations; nor would there have been a Leninist coup in Petrograd or Stalin’s barbaric regime.

Likewise, there would have been no Hitler, no Nazi dystopia, no Munich, no Sudetenland and Danzig corridor crises, no British war to save Poland, no final solution and holocaust, no global war against Germany and Japan and no incineration of 200,000 civilians at Hiroshima and Nagasaki.

Nor would there have followed a Cold War with the Soviets or CIA sponsored coups and assassinations in Iran, Guatemala, Indonesia, Brazil, Chile and the Congo, to name a few. Surely there would have been no CIA plot to assassinate Castro, or Russian missiles in Cuba or a crisis that took the world to the brink of annihilation. There would have been no Dulles brothers, no domino theory and no Vietnam slaughter, either.

Nor would we have launched Charlie Wilson’s War to arouse the mujahedeen and train the future al Qaeda. Likewise, there would have been no shah and his Savak terror, no Khomeini-led Islamic counter-revolution, no US aid to enable Saddam’s gas attacks on Iranian boy soldiers in the 1980s.

Nor would there have been an American invasion of Arabia in 1991 to stop our erstwhile ally Hussein from looting the equally contemptible Emir of Kuwait’s ill-gotten oil plunder—or, alas, the horrific 9/11 blowback a decade later.

Most surely, the axis-of-evil—-that is, the Washington-based Cheney-Rumsfeld-neocon axis—- would not have arisen, nor would it have foisted a $1 trillion Warfare State budget on 21st century America. But….I digress!

The real point is that the Great War enabled the already rising American economy to boom and bloat in an entirely artificial and unsustainable manner for the better part of 15 years. The exigencies of war finance  also transformed the nascent Federal Reserve into an incipient central banking monster in a manner wholly opposite to the intentions of its great legislative architect—the incomparable Carter Glass of Virginia.

Go to Part 2. 

Reprinted with permission from the author. 

Comments are closed.