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The economic factors that contributed to the outbreak of World War I, with a particular focus on Anglo-German relations and the decline of laissez-faire economics. the importance of colonial holdings, economic imperialism, and the policy of laissez-faire in the context of European powers' competition and the subsequent shift towards state intervention and protectionism.
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On completion of this project, it is my privilege to acknowledge my heartfelt gratitude and indebtedness towards my teachers for their valuable suggestion and constructive criticism. Their precious guidance and unrelenting support kept me on the right path throughout the whole project. I wish to express my sincere gratitude to my History Teacher Dr. Rachna Sharma ma’am for her guidance and encouragement in carrying out this project work. I also wish to express my thanks to my friends for their ideas because of which this project became more captivating. I am also thankful to my institution library for providing the required materials.
The war fought between July 28, 1914, and November 11, 1918, was known at the time as the Great War, the War to End War, and (in the United States) the European War. Only when the world went to war again in the 1930s and ’40s did the earlier conflict become known as the First World War. Its casualty totals were unprecedented, soaring into the millions. World War I is known for the extensive system of trenches from which men of both sides fought. Lethal new technologies were unleashed, and for the first time a major war was fought not only on land and on sea but below the sea and in the skies as well. The two sides were known as the Allies or Entente—consisting primarily of France, Great Britain, Italy, Russia, and later the United States —and the Central Powers, primarily comprised of Austria-Hungary (the Habsburg Empire), Germany, and the Ottoman Empire (Turkey). A number of smaller nations aligned themselves with one side or the other. In the Pacific Japan, seeing a chance to seize German colonies, threw in with the Allies. The Allies were the victors, as the entry of the United States into the war in 1917 added an additional weight of men and materiel the Central Powers could not hope to match. The war resulted in a dramatically changed geo-political landscape, including the destruction of three empires: Austro-Hungarian, Ottoman and Russian. New borders were drawn at its conclusion and resentments, especially on the part of Germany, left festering in Europe. Ironically, decisions made after the fighting ceased led the War to End War to be a significant cause of the Second World War. As John Keegan wrote in The First World War (Alfred A. Knopf, 1999), “The First World War was a tragic and unnecessary conflict … the train of events that led to its outbreak might have been broken at any point during the five weeks of crisis that preceded the first clash of arms, had prudence or common goodwill found a voice.” Prime Minister of Germany Otto von Bismarck had prophesied that when war again came to Europe it would be over “some damn foolish thing in the Balkans.” Indeed, the assassination of Archduke Franz Ferdinand, heir apparent to the Habsburg throne of Austria-Hungary, and his wife, Sophie, by a Serbian nationalist on June 28, 1914, was the match that lit the fuse—but it
The old Ottoman Empire was crumbling; “The Sick Man of Europe” was the phrase used to describe the once-powerful state. As its ability to exert control over its holdings in the Balkans weakened, ethnic and regional groups broke away and formed new states. Rising nationalism led to the First and Second Balkan Wars, 1912 and 1913.^2 As a result of those wars, Serbia increased its size and began pushing for a union of all South Slavic peoples. Serbian nationalism led 19- year-old Gavrilo Princip to assassinate Archduke Franz Ferdinand, heir apparent to the Habsburg throne of Austria-Hungary, and his wife, Sophie. Austria-Hungary, urged on by Germany, sent a list of demands to Serbia in response; the demands were such that Serbia was certain to reject them. When it did, the Habsburg Empire declared war on Serbia on July 28, exactly one month after the archduke’s assassination.^3 Russia came in on the side of the Serbs, Germany on the side of the Habsburgs, and the entangling alliances between the nations of Europe pulled one after another into the war. Although diplomats throughout Europe strove to settle matters without warfare right up to the time the shooting started, the influence military leaders enjoyed in many nations won out—along with desires to capture new lands or reclaim old ones.^4
Imperialism is a system where a large, powerful nation dominates and exploits smaller nations, which are known as colonies. Together, the imperial power and her colonies are known as an empire. In most cases, the imperial nation is euphemistically referred to as the ‘mother country’. It establishes control over its colonies against their will – for example, through infiltration and annexation, political pressure, war or military conquest. Once control is established, this territory is claimed as a colony. Colonies are governed by either the imperial nation, a puppet government or local collaborators. A military presence is often stationed in the colony, to maintain order, suppress dissent and uprisings and deter imperial rivals.^5 (^2) Exchange in Greek Macedonia, The Rural Resettlement of Refugees, Clarendon Press, Oxford. (^3) Id. (^4) Id. (^5) Robbins, L. (2000), A History of Economic Thought – The LSE Lectures , Medema, S. G., Samuels, W. J. (ed.), Princeton University Press, Princeton, New Jersey
Imperialism can have military or geopolitical advantages but its main lure is economic. Colonies exist chiefly to enrich the imperial power. This may involve the supply of precious metals or other resources, such as timber, rubber, rice or other foodstuffs. Colonies can also be invaluable sources of cheap labour, agricultural land and trading ports.^6 According to Paul Kennedy, economic imperialism and the Anglo-German trade rivalry were crucial factors leading to the emergence of the Anglo-German antagonism, which contributed to the outbreak of World War I. By the end of the Bismarck era, high German tariffs and growing protectionism had already excluded many British goods from the German market. 7 However, despite Kennedy’s precise analysis of trade, this thesis is based on an oversimplification of complex relations. One has to distinguish between the objective figures on the one hand and the perceived situation on the other. In relative terms, in the two decades before 1914 one can talk about a British decline and a German rise in export economies. In 1910 Germany’s share of the world’s manufacturing capacity was already greater than that of the British. For British Social Darwinists and nationalists, this development was identical to decline. However, this view did not capture the reality of economic developments. Germany remained an important market for British goods and vice versa. In 1913 Germany was in fact the second biggest market for British exports and re-exports. Even if trade rivalry was a problem for individual firms, its dramatization was mainly due to the press, which explained Britain’s relative decline with notions such as “unfair competition”. Especially in imperial affairs, German and British traders and bankers often cooperated quite successfully; at the same time, German banks had to compete with other German firms, while British banks had to deal with British competition. Unlike the British or French colonies, economically the German colonial empire was not important for the mother country. It was also of little significance for the rising tensions between the European Great Powers prior to the First World War. For the overseas expansion of European states in the decades before 1914, informal imperialism and indirect rule were often much more important than formal colonialism, as discussed during the famous (^6) Id. (^7) Harald Wixforth (2002). The Economic Consequences of the First World War. Contemporary European History, 11, pp 477-
attempts to nationalize it. Banks viewed these projects as commercial opportunities and were unconcerned with national prestige. Many governments were not even informed about the activities of “their” banks, although in general they were aware that many firms did not follow the respective “national” aims, but were mainly interested in earning money. 10 If one compares political with economic/financial imperialism, one other general distinction should be made. Governments acted within the frame of the nation state or empire and often tried to further national expansion. Multinational firms and banks, however, were confronted with the challenge of economic globalization and had to act internationally if they wanted to expand overseas. Until 1914 London remained the financial clearing center of the world and the London stock exchange was the most important place for all kinds of transactions. The gold standard guaranteed stable exchange rates, and internationally the pound sterling was the most accepted currency for bills of exchange. In private a banker or trader could have been a hardcore nationalist, but if he wanted to earn money he had to act internationally. Not only in India, but also in many other regions of the world such as China, South Africa, Egypt, and some Latin American countries, merchant bankers and traders from various countries were able to invest and earn money because the British Empire and the British navy directly and indirectly guaranteed stable relations and preserved so-called “Western” liberal norms and laws. In a couple of cases economic investments could spur imperial conflicts. Governments could claim to protect or defend investments that were threatened by an indigenous state or an imperial competitor. Examples include the bankruptcies of Egypt (1876) and the Ottoman Empire (1875) and the Venezuelan debt crisis, which started at the end of the 19th^ century. After the breakdown of state finances in Egypt and Turkey, private committees of bankers founded new institutions ( Caisse de la Dette Publique Égyptienne, Caisse de la Dette Publique Ottomane ), which took control of tax revenues. As a result, the states lost a considerable part of their sovereignty and foreign banks controlled the state’s budget. 11 For European firms this classical form of financial imperialism was much more effective than direct rule. At the same time, behind the scenes European governments tried to influence “their” committees and bankers. During the 1870s and (^10) Supra note 7. (^11) Kiriţescu, C. C. (1967), Sistemul bănesc al leului ş i precursorii lui, Vol II, Bucharest. Kontogiorgi, Elizabeth (2006), Population
1880s in Egypt, several disputes between the French and the British caused tensions. For the British, the German support was crucial. The Venezuelan debt crisis of 1902/03 led to serious tensions between some European states, notably Germany and the United States. After internal uprisings and civil war, the Venezuelan government was unable to pay back its foreign debts. A British-German-Italian naval blockade escalated as German cruisers provoked skirmishes. These military events alarmed the United States, which feared that the Monroe Doctrine would be violated. However, even if informal and financial imperialism contributed to the worsening of relations between certain states during this first wave of globalization between the 1880s and 1914, during this period close economic ties and global financial networks were also created. Because of the combination of cooperation and competition among multinational firms, some contemporary commentators believed that a major war in Europe was impossible, arguing that economic globalization would guarantee peace. They were convinced that countries would not risk destroying the global economic system. They strongly believed that the destruction of the close connections in finance and trade, which would be the result of a great war among the European powers, would lead to a global economic disaster. As World War I showed, this opinion was correct.^12 Between 1912 and 1914 the British government tried to improve Anglo-German relations through economic imperialism. It is possible that the British attempted to appease Germany’s aggressive imperialism by offering it colonial acquisitions in Africa. 13 After the failure of the famous Haldane Mission in 1912, British statesmen looked for objectives outside of Europe for which there could be compromise solutions with Germany. The extremely difficult negotiations for the Baghdad Railway were successfully finished in the spring of 1914.^14 Additionally, in the 1913 treaty partitioning the Portuguese colonies, the British accepted huge German colonial (^12) Green, Edwin, John R. Lampe and Franjo Š ti- blar, eds. (20040, Crisis Renewal in Twen- tieth Century Banking, Ashgate, Aldershot, UK. (^13) Green, Edwin, John R. Lampe and Franjo Š ti- blar, eds. (20040, Crisis Renewal in Twen- tieth Century Banking, Ashgate, Aldershot, UK.
policy making was in deep trouble, indicating that the golden age of the liberal concept was over and that a new economic policy was needed, with emphasis on fiscal policy as the best method for improving employment and effecting economic activity. At the same time, intellectual advocates of laissez-faire (neo- classical) economic theory faced significant criticism. Beyond questioning methodological and theoretical issues of neoclassical orthodoxy, most critics questioned the neoclassical view that the market system, based on private motives, acts harmoniously with optimal results, and consequently that laissez-faire is the best government policy. The key opposition to mainstream economic theory came from heterodox economic thinking, particularly the American institutionalists (non-Marxian heterodox economists), the Austrian school, and the under consumptionists, the most prominent of who was J. M. Keynes. The focuses of economic analysis also changed. Macro- economic issues gained importance, which resulted in the birth of modern macroeconomics, with the Keynesian revolution at its heart. Such radical changes in economic thought meant that although the economic situation was bad in most European economies, economic theory improved significantly during the interwar period. 18 British economic success, which was the source of its political and military power, is attributed to the success of laissez-faire ideology, industrialization, and commitment to free trade. Thus before the First World War there was no serious alternative to the laissez-faire concept in economic theory^19. Yet its application (even though it had never been fully applied even in the countries which advocated it most) contributed greatly to the increasing disparities in economic development between countries.^20 These differences were obvious in European countries, in particular the three most industrially advanced economies, Britain, Germany, and France, and in the European ‘periphery’, which included the countries of South and Eastern Europe. On the other hand, the rise of the United States’ economy at the end of the 19th century augured the end (^18) Roncaglia, A. (2006), The Wealth of Ideas – A History of Economic Thought , CUP, Cam- bridge (^19) Supra Note 7. (^20) Burgin, A. (2012), The Great Persuasion – Reinventing FreeMarkets since the De- pression , Harvard University Press, Cam- bridge, Mass.
to the European century, and the equal, if not greater, importance of non-European countries in economic, social, intellectual, and scientific development in the 20th century. 21 Despite the slowdown in the British economy at the end of the 19th century the global economy grew significantly due to rapid scientific developments. In the period 1890-1913 industrial production in Europe more than doubled as a consequence of growth in the chemical and electrical industries, which contributed to the development of already existing industries such as metallurgy and engineering. Particularly important was the building of hydroelectric power stations, which alleviated the position of countries without coal. Germany recorded the most rapid growth before World War I. It was the last of the major European countries to become industrialized: in the first half of the 19th^ century it had been a backward agricultural area without industrial production or a developed transport infrastructure. Political disunity was a significant problem: it consisted of a number of states with different monetary systems and trade policies that restricted trade with each other. Germany’s unprecedented rapid economic development was the result of many factors, one of which was foreign influence. In the first phase of development this was reflected in the ideas of the French Revolution, and of the impact of the Napoleonic wars; in the second stage in the inflow of foreign capital, technology, and enterprises; and in the last period in the expansion of German industry into inter- national markets. All of these developments were influenced by economic policy and the substantial transformation of German society, which became more urban during the 19th^ century. However, the most important factor was probably the new industrial revolution in Germany and the United States. The countries of Southern and Eastern Europe - the so-called ‘European periphery’ – were even more drastic examples of uneven European development. Al- though they applied the laissez- faire concept and the Western model of economic policy, these countries failed to reach the level of development of the Western and Central European countries.^22 This was particularly true for the Balkan economies, which remained predominantly agrarian (75%-80% of the active (^21) Hughes, J. and Cain, L. P. (2007), American Economic History , Pearson Addison Wes- ley, Boston
class or nation. The extremely unrealistic assumptions of neoclassical theory were not very helpful in resolving the emerging and increasing economic problems and a completely new theoretical concept of the economic system was necessary. 23 This was offered by John Maynard Keynes, a leading figure in British economic theory and policy, who brought about an unprecedented change in economics by designing a new economic discipline, macroeconomics, which would deal with economics as a whole and provide a ‘general’ view of real economic developments. CONCLUSION In the late 19th century the acute changes caused by industrial growth and the adoption of mass production techniques proved the laissez-faire doctrine insufficient as a guiding philosophy. In the wake of the Great Depression in the early 20th century, laissez-faire yielded to Keynesian economics—named for its originator, the British economist John Maynard Keynes—which held that government could relieve unemployment and increase economic activity through appropriate tax policies and public expenditures. 24 Keynesianism attracted wide support and influenced government fiscal policies in many countries. Later in the 20th century, the notion of laissez-faire was revived by the school of monetarism, whose leading exponent was the American economist Milton Friedman. Monetarists advocated carefully controlled increases in the rate of growth of the money supply as the best means of achieving economic stability. After the First World War the economic system, based on the laissez-faire concept of economic policymaking, was in deep trouble, indicating that the golden age of the liberal concept was over and that a new economic policy was needed that emphasised fiscal policy as the best method for improving employment and effecting economic activity. 25 After the war European economies abandoned free trade and turned to government intervention, a regulated market system, (^23) Cameron, R. and Neal, L. (2003), A Concise Economic History of the World , 4th ed, Ox- ford University Press, Oxford. (^24) Keynes, J. M. (1936), The General Theory of Employment, Interest and Money , London: MacMillan Cambridge University Press
economic nationalism, and protectionism, with negative effects on global trade and production, all of which resulted in attempts to maintain the laissez-faire system. However, in the interwar period the key elements of the laissez-faire system were gradually questioned and abandoned. These changes were neither easy nor simple, demanding as they did changes in both economic theory and economic policy. The unrealistic assumptions of neoclassical theory could not resolve the emerging economic problems of rising unemployment, huge budget deficits, and inflation. Laissez-faire economics’ solution to monetary and public finance problems was the implementation of the gold standard, so that the fate of the gold standard reflected the fate of laissez-faire policy. A new economic paradigm was needed. The British economist, John Maynard Keynes, provided a new macroeconomic approach to economic theory (^25) Jakšić, M. and Praščević, A. (2007), Istorija ekonomije , Ekonomski fakultet Univer- ziteta u Beogradu, Beograd
