The Leninist Theory of the First World War

12 12 2017

Did increasing inequality in the capitalist powers cause the First World War? That was the argument the Lenin famously advanced in Imperialism: the Highest Stage of Capitalism. Subsequent academic research has not been kind to the Leninist theory that greedy bankers pushed their respective governments to war in the summer of 1914. Painstaking archival research by fellow business historians helped to show that pretty much the exact opposite was closer to the truth– the bankers, far from wanting war, sought to restrain bellicose governments — for a survey of this literature, see Jonathan Kirshner, Appeasing bankers: Financial caution on the road to war. Princeton University Press, 2007.

Since I tend to believe in Capitalist Peace Theory and have applied in my business-historical research on Anglo-American relations in the 1860s, I am generally inclined to accept the view that Kirschner’s theory is much more accurate than the Leninist one.  However, I have approached the newly-released working paper by Thomas Hauner, Branko Milanovic, and Suresh Naidu on the origins of the First World War with an open mind. Their paper, Inequality, Foreign Investment, and Imperialism, revives a modified form of the Lenininst theory of the origins of the war. The paper expands upon a short comment that Branko Milanovic made in his justly famous book on trends in global inequality, where he had suggested that rising inequality c. 1900 had caused the First World War.  In that book, Milanovic wrote:


I argue that the outbreak of World War I and thus the reduction of inequality subsequent to that war are to be “endogenized” in the economic conditions predating the war, by which I mean that domestic inequalities played an important role in the run-up to the war. In making this argument I go back to an older, and in my opinion, most persuasive, interpretation of the outbreak of World War I. According to this interpretation the war was caused by imperialist competition, embedded in the domestic economic conditions of the time: very high income and wealth inequality, high savings of the upper classes, insufficient domestic aggregate demand, and the need of capitalists to find profitable uses for surplus savings outside their own country.

Here is the Abstract of the new paper:

We present an empirical restatement of the classical economic theory of imperialism and
the origins of World War I. Using recent data, we show 1) inequality was at historical highs in all the advanced belligerent countries at the turn of the century, 2) rich wealth holders invested more of their assets abroad, 3) risk-adjusted foreign returns were higher than riskadjusted domestic returns, 4) establishing direct political control decreased the riskiness of foreign assets, 5) increased inequality was associated with higher share of foreign assets in GDP, and 6) increased share of foreign assets was correlated with higher levels of military mobilization. Together, these facts suggest that the classic theory of imperialism may have some empirical support.

My reaction to the paper is that it contains a great deal of evidence of correlation without much proof of causation. I think that a mixed methods paper that included qualitative material taken from the archives of Europe’s largest banks and its foreign ministries might have produced a more convincing case for the author’s thesis.

On more theoretical grounds, I’m not at all convinced that so-called “surplus savings” and capital exports are associated with colonialism, militarism, and imperialism? In the 1980s and 1990s, Japan, which was then a famously pacific country with strict constitutional limits of military expenditure, exported lots of capital to the USA. These capital exports were due, ultimately, by the thrifty nature of many Japanese housewives. Was Japan militarist then? Or did it just focus on exports cars and VCRs? The United States of the Trump era, is a net capital importer and the adults in the room in the Oval Office know that much of this money is coming from China. In the nineteenth century, Spain, Portugal, Turkey,  and, famously, Russia, were all capital importers. (I will concede that Russia’s close ties to the Paris Bourse, and thus the savings of many French families, did indeed influence diplomacy in the years leading up to assasination of the Archduke).

I’m certainly not denying that too much economic inequality, particular economic inequality of the source type documented in  the new book by Lindsey and Teles on The Captured Economy can indeed be a very bad thing. Rising inequality can be linked to many objectively bad phenomena. However, I don’t think it is fair to associate market-created economic inequality with the chain of events that led to the First World War. Indeed, while many of the named individuals whose decisions collectively led to the First World War were indeed very wealthy and certainly within the top 1% of their societies, few of them enjoyed wealth that stemmed from the operation of the market economy. They were hereditary aristocrats, not LeBron James or Bill Gates.


Deglobalization: What Business Historians Can Teach Managers

26 03 2017


Deglobalization is the current buzzword, as I pointed out in a  blog post I published soon after the WEF meeting in Davos.  Actually economists have been talking talking about deglobalization for a number of years, ever since international trade as a share of world economic output began to decline. Now, however, CEOs and other top executives are really worried about how to respond to the rising levels of protectionist sentiment and the apparent trend in actual government policies towards protectionism.

Stephen D. King, the chief economist of HSBC, discusses deglobalization in a new book on the future of the global economy. King notes that we are in a very different historical epoch than the sunlit uplands of the 1990s, when globalization appeared unstoppable and public intellectuals announced the end of history and great power conflict. King sees a pattern that others have observed, namely that we are going back to an era of protectionism, nationalism, and  ethno-religious tensions similar to that of the interwar period of the 1920s and 1930s.  As a senior executive at a corporation that embodies the multicultural, multiracial global financial capitalism that emerged at the end of the twentieth century, King has very good reasons to be worried about deglobalization.  A similar historical analogy was used by Ruchir Sharma, Morgan Stanley’s chief global strategist in December 2016, although Sharma observed that today’s deglobalization  is somewhat different from the deglobalization of the interwar period .


It seems to me that mainstream strategy literature doesn’t appear to offer much guidance to managers seeking to formulate strategies to cope with the new phenomenon. Perhaps that’s because strategy professors haven’t yet had a chance to think about managerial responses to the newly discovered phenomenon.  Similarly, political science doesn’t  seem to offer a lot of practical advice to decision-makers in the private sector.  Michael Witt is a first-class political science/IR professor who teaches at INSEAD business school. If any political scientist could help executives to deal with deglobalization, it would be him.

Late last year,  Dr Witt wrote two pieces in which he pondered what deglobalization means for multinational firms. His first piece did an admirable job of summarizing the political science literature on globalization and deglobalization and tells people how two of the three main schools of thought in IR (Realism and Liberalism) view these phenomena. Somewhat curiously, Witt doesn’t say much as about Constructivism, another interpretative tradition in IR, which is unfortunate since constructivism has a great deal  to offer here. Anyway,  his second piece, which was published a week after the first one, sought to offer concrete advice to business executives interested in this topic. Sadly, the main pieces of managerial advice he provided weren’t that useful to managers.

Let me justify that assessment. Witt says that Liberal IR theory argues that  deglobalization is driven by rising inequality, which caused an upsurge of populist, anti-globalization sentiment from the parts of the electorate that have suffered from globalization.  Witt says that if firms wanted to continue doing business across borders, they need to shore up the political foundations of globalization by accepting a more progressive form of taxation. (Similar sentiments were heard from CEOs the January 2017 gathering in Davos).  Witt also argues recommends that  “longer-term investment plans should probably involve scenario planning”  that takes the re-imposition of tariffs into account.

The second piece of advice is sound and common-sensical, but the suggestion that senior executives do more to combat inequality  isn’t really practical, since a single CEO would be unable to combat rising inequality in their home country, unless that country happened to be very small and their firm was a major employer. There is a sort of free rider problem—if a CEO increases the wages his firm pays and no other firm follows suit, the CEO will have added to his costs without having done much to change the overall level of inequality in the country. A CEO operating in a corporate system dominated by Shareholder Value Ideology has very limited freedom to act.  That’s the problem with the argument that the left-wing venture capital Nick Hanauer made, when he said that CEOs who are worried about Trump’s protectionism should simply have paid their workers more.

It seems to me that Constructivist IR and, especially, my own home discipline of Business History could offer more useful advice to the makers of MNE strategy at this junction. (Business History informed by Constructivist IR could be a very powerful tool indeed).

The Constructivist approach to IR and International Political Economy (IPE) stresses that nations make policy in a cultural context that shapes how contemporaries view their self-interest. In other words, cultural differences such as gender ideologies, racial, religious, and ethno-national identities need to be taken into account. Deglobalization, both historically and in the present, appears to be associated with the rise in ethno-nationalist sentiment and growing hostility to the perceived other. While no single firm can reverse a pronounced trend in the culture towards  greater intolerance towards the Other, a group of firms, working together, can help to limit the spread of ethno-nationalist ideologies. For instance, they could do so by agreeing not to advertise on websites that promote the alt-right mentality that is congruent with tariff protectionism (see here).

Business history provides even more concrete advice. As business and economic historians know, deglobalization has happened before, most famously with the outbreak of the First World War. We can look to see how firms at the time handled deglobalization. Business historians have shown that a classic response to the imposition of tariff barriers is for firms to create local manufacturing subsidiaries within foreign nations.

There are other lessons about how to deal with deglobalization that managers can take from the historical record.    In a paper I published in an international-business journal, I discussed how the Hongkong and Shanghai Banking Corporation dealt with the First World War, a crisis that had the potential to destroy the corporation. HSBC, which was founded in 1865 and which had a multinational shareholder base and board of directors on the eve of the First World War, embodied that the open and cosmopolitan capitalism of the late nineteenth century, an era that was marked by falling trade barriers and increasing interconnectedness. HSBC was able to survive the First World War by paying close attention to the state of public opinion in Britain, which became increasingly xenophobic, and by severing ties to its German shareholders, directors and customers and by purging its executive workforce of a prominent individual of German-Jewish ancestry. HSBC was a much less profitable firm at the end of the conflict, but unlike many of the international banks in existence in August 1914, it survived the war. My paper aimed to use the historical experience of HSBC in war to identify lessons for the managers of present-day firms confronted with war and other drivers of deglobalization. One of these  lessons for present day managers is that conserving political capital in periods of heightened tensions between nations or other imagined communities may require the ruthless termination of relationships with people who are associated with the Other, at least insofar as the law of the land permits. (Note that I’m not saying that such a strategy would be morally right, just that it has worked in the past for firms). Another lesson that wartime managers could take from my paper on HSBC in WWI is that preserving legitimacy in the home country requires the head office to exert more control over overseas managers, less they embarrass the MNE in the home country, than would be the case in a time of generally good international relations.

There are important lessons for managers in the edited collection on the impact of the First World War on firm strategy was released by Routledge.  This book brought together the research of a business historians who use corporate archives. It is a common place among economic historians and historians of globalization to say that First World War end a long period of globalization and initiated a long period of deglobalization that that continued until after 1945. The edited collection was intended to help explore how firms confronted with a radical change in their operating environment responded. The papers in the collected documented a range of creative managerial responses to the First World War and its aftermath that included the creation of trans-national interfirm research alliances (see the paper by McGlade),  the adoption of new legal forms for companies (see the paper by Hannah), and the adoption of new management techniques in France and the UK (the chapter by Boyns). Studying how firms responded to sudden and dramatic change in the geopolitical environment in 1914 has the potential to offer lessons to the managers of today’s multinational firms.






Capitalism, Peace, and the First World War

4 08 2014


Today marks the centenary of Britain’s decision to enter the First World War. For historians of international business, this milestone offers us a chance to pause and reflect on both the origins of this particular conflict and the role of different forms of capitalism in generating peace and war.

The role of business in the origins of the First World War has been debated since, well, 1914. During the conflict, Marxists such as Lenin published books arguing that business or rather homogenous “capitalist classes” in each of the Great Powers were behind the conflict.  Such a view was, of course, laughably simplistic, since lumped all business interests into the same category, which effectively  equated steelmakers like Krupp, which did stand to profit from a (short) war from, say, perfume companies, who did not.  Writing in the immediate aftermath of the First World War, Schumpeter adapted class analysis to explain the interest-group politics that had led to the outbreak of the war. Schumpeter identified two branches of the bourgeoisie. One element was cosmopolitan and largely pacific in its outlook. Schumpeter associated this sub-class with the ideology of classical liberalism. The other element of the bourgeoisie, according to Schumpeter, were the business interests associated with militarism, economic nationalism, and imperialism. Schumpeter argues that the acquisition of political power by the wrong element of the bourgeoisie, which included armament makers, endangers peace and therefore the interests of the ordinary bourgeoisie.[1]


In the United States, many isolationists came to blame the decisions that brought the US into the conflict not on the business class as a whole but on a few bad apples on Wall Street (e.g., anglophile bankers like Jack Morgan) and, of course, the “merchants of death” who made a killing from, er, the business of killing. The term merchant of death came into common currency in the middle of the 1930s thanks to a Republican Congressman.

In recent years, the role of business interests in political life has been debated extensively in many democratic countries.  In the United States, this debate has centred on the Supreme Court’s 2010 controversial ruling in the case of Citizens United v. Federal Election Commission. In this case, the US Supreme Court ruled that laws restricting the rights of companies to try to influence elections were unconstitutional as they violated the First Amendment. In the minds of many, particularly but not exclusively those on the left, this ruling has opened the floodgates and has made it even easier for business interests to use lobbying to subvert the democratic will.

On the 100th anniversary of the decision of great trading nation (Britain) to plunge into the vortex of European militarism , it is worthwhile considering whether greater business influence over politics can sometimes be a good thing. One of the striking things about the decision-making processes that led to the First World War is that the crucial decisions were made by a handful of individuals.  Christopher Clark’s Sleepwalkers, which is an excellent work of diplomatic history, makes it clear that the key decisions were made by about 20 individuals.  Another striking thing about the crucial days between the assassination in Sarajevo and the outbreak of the war is that the business communities in the major European countries were relatively quiet, even though the vast majority of businessmen, particularly bankers, dreaded the prospect of war. These business groups failed to mobilize for peace.  Yes, it is true that German banker Max Warburg pleaded with the Kaiser to de-escalate the situation and work for peace. It’s also true that the Rothschilds, an international banking family, resisted, at first, the financial mobilization that made the mobilization of actual troops possible. But for a variety of reasons, business leaders did not undertake serious resistance to the war in the form of tax strikes or other robust mechanisms of displaying discontent. I  recently stumbled upon an article that appeared in in the South China Morning Post in the middle of August 1914 that reported that hundreds of thousands of German businessmen were resisting the war and were calling on the Kaiser to declare a unilateral ceasefire.  The article was based on an erroneous rumour,  but it raises the interesting hypothetical question of what would have happened had businessmen been more robust in expressing their preference for peace. Of course, this is a pretty difficult hypothetical to think about, given the nature of the political cultures of most European countries as this time, which expected businessmen to be somewhat deferential to monarchs and other social superiors. (Obviously the cultures of the Western democracies are today very different and encourage all social groups, including businessmen, to be much more outspoken in voicing their opinions).

I understand that many Americans are upset about the Citizens United decision. I know that some British people are annoyed that the City of London has been able to use its influence over David Cameron to water down the sanctions on Russian business imposed after the downing of the Malaysian airliner.  However, I would urge these people to consider whether the events of the summer of 1914 prove that increasing the role of business in shaping public policy can sometimes be a positive force in society.

I have one closing thought about the First World War I would like to share. International trade and globalization cannot guarantee world peace, but they can reduce the frequency, intensity, and duration of war.  It is true that the outbreak of the First World War disproves the crude version of the trade=peace theory that is sometimes articulated by journalists such as Tom Friedman of the New York Times.[2]  Friedman famously argues that since no two countries with McDonald’s restaurants have ever gone to war with each other, capitalism produces peace. The simple rejoinder to this idea is that Germany was Britain’s number one trading partner in 1914 and vice versa, and that this didn’t prevent a drift to war.   However, this is some evidence to suggest that the theory of the commercial peace has some validity, or at least enough validity to guide our thinking about public policy. Since the 1990s, many scholars of International Relations have been persuaded that the mutual economic interdependence characteristic of global capitalism reduces the likelihood of war.[3] This is a theory that can be traced back to Adam Smith’s Theory of Moral Sentiments or even Montesquieu, actually. Although this theory is still controversial in IR departments, it has been bolstered by impressive empirical research and has diffused into other academic disciplines. For instance, the psychologist Steve Pinker incorporates this insight into his well-respected book on why the world has become less, rather than more, violent, over time. Countering the conventional wisdom, Pinker shows that rates of violent death have been falling for centuries, that the 20th century was actually a pretty peaceful century by some metrics, and that things are getting better. He then searches for explanations for why people are becoming less violent. Capitalism and international trade are part of his explanation.[4]


I’m not a big fan of the inefficient little regulations the European Union imposes on firms and consumers in its member states. There are lot of problems with the EU as it is currently constituted. On balance, however, the EU is damn good thing, since it had helped to integrate the economies of nations in Europe that were once enemies, making warfare within the EU virtually unthinkable. Despite its recent problems, the European Union has been a very successful post-conflict initiative. [5] That’s why I’m proud to be a citizen of the EU. I’m also proud to put the flag of the European Union on this blog post.

In the post-1945 period, European economic integration was promoted by a former businessman Jean Monnet, who wanted to make war between Germany and France as unthinkable as warfare within North America. Monnet had travelled to North America before the First World War, when he had been a cognac merchant, and was impressed by the ways in which economic interconnected promoted peace there.[6]

The Western world is now at peace with itself, thanks, in part, to commerce. I would say that Japan is also part of this moral universe of capitalist peace: war between Japan and the US is now unthinkable, which will doubtless assure Toyota owners everywhere.  I suppose that we now face the challenge of building a global economy that fosters peace between countries from very different civilizations and religious traditions (think Gaza, think India-Pakistan, think China-Japan).  How we go about doing that is, of course, a question well above my pay grade.






[1] Joseph A. Schumpeter, The sociology of imperialism (New York: Meridian Books, 1951).

[2] Thomas L. Friedman, The Lexus and the Olive Tree (New York: Farrar, Straus, Giroux, 1999), 249-276.

[3] John R. Oneal and Bruce M. Russet, “The Classical Liberals Were Right: Democracy, Interdependence, and Conflict, 1950-1985” International Studies Quarterly 41 (1997): 267-95; Patrick J. McDonald, The Invisible Hand of Peace: Capitalism, the War Machine, and International Relations Theory (Cambridge University Press, 2009); Erik Gartzke and J. Joseph Hewitt, “International Crises and the Capitalist Peace,” International Interactions 36, no. 2 (2010): 115-145.

[4] Steven Pinker, The Better Angels of Our Nature: Why Violence Has Declined (New York: Viking, 2011).

[5] Brigid Laffan, “The European Union: a Distinctive Model of Internationalization,” Journal of European Public Policy 5, no. 2 (1998): 235-253.

[6] Trygve Ugland, Jean Monnet and Canada: Early Travels and the Idea of European Unity (Toronto: University of Toronto Press, 2011); James J. Sheehan, Where Have All the Soldiers Gone?: The Transformation of Modern Europe (Houghton Mifflin Harcourt, 2009).

Historical Parallels for the Loopholes in the New Sanctions Against Russian Banks: 1914 and 2014

30 07 2014

In the wake of the recent events in eastern Ukraine, the EU and the US have announced new sanctions against Russian business interests. The sanctions introduced earlier this year were so-called smart sanctions, targeted at just a handful of named individuals close to the Russian leadership. The sanctions that go into effect today are much broader and target entire sectors of the Russian economy. A number of Russian banks have been targeted by the sanctions, which go into effect today. However, the sanctions contain a number of loopholes regarding the UK subsidiaries of the Russian bank holding companies. Apparently, these UK-registered banks will continue to be able to operate.  (See here, here, and here). Moreover, Russia’s biggest bank, Sberbank, is exempted from the sanctions.

A columnist for Forbes magazine in the United States had this to say about the UK’s approach:

As for the UK’s David Cameron, although he likes to sound Churchillian, his core constituency, the London financial district, is undoubtedly already working 24/7 to get round the EU’s attempts to isolate Russian banks. (Read full article here).

The loopholes related to Russian banks need to be put into some historical context. Moreover, as I show before here, some of them parallel the loopholes in the sanctions against German banks that the British government imposed in 1914.

Broad sanctions raise deep philosophical questions about whether it is right to harm the economic interests of an entire country for the sake of punishing a few individuals in its political leadership. For much of human history, of course, collective punishment was the norm and was accepted as pretty much legitimate. If Prince A invaded the territories of Prince B, soldiers loyal to Prince B had the right to rape and pillage any peasants or merchants who owed allegiance to Prince A.  The same thing went on the high seas in wartime: commercial vessels belonging to private citizens in the enemy country were “fair game” for privateers, at least until the 1850s. The Old Testament, which our ancestors appear to have read a bit too frequently, seems to endorse this collective punishment approach. Indeed, parts of the Old Testament appear to condone genocide and sexual assault in war.

Anyway, the Enlightenment changed how people think about war. It did so by giving us the idea of individualism. Since then, the idea of collective punishment has been tempered by various attempts to distinguish states from citizens, innocents from policymakers, public from private property. Ever since the Enlightenment, this is an issue we’ve be wrestling with whenever a war is being fought.

Self-interest has also contributed to our increasing desire to distinguish ruler from ruled, enemy government from innocent civilian. The growth of an interconnected world economy over the last few centuries has made it difficult to wage economic warfare against a foreign nation without hurting one’s own economy.   This interconnectedness is most evident in the realm of finance, where there are long chains of financial obligations linking firms in belligerent and neutral countries..

There is a really interesting historical parallel with the First World War here. Of course, Russia and the West are not at war right now, unlike Germany and Britain in 1914. (The fighting is being done by proxy forces in eastern Ukraine). However, Western government are engaged in a form of economic warfare against Putin’s regime that has generated debates that are somewhat reminiscent of those that took place in Britain during the early phases of the First World War.

Following its declaration of war against Germany on 4 August 1914, the British government was confronted with the question of whether it was going to permit commerce with Germany to continue. This question had been discussed by policymakers since 1911. In that year, Britain and Germany had come to the brink of war and had then pulled backed and resolved their dispute, which is who was going to colonize the Moroccans, peacefully. Although war had been avoided, it got people in both the government and the private sector thinking about what war between two economies that were so closely interconnected would mean for banks. Many of the policymakers who thought about this issue had read the works of Norman Angell, who had argued that sustained warfare before major economies would be impossible in the modern world because their economies were so interconnected.



British government had two contradictory sets of precedents it could follow. (These precedents were discussed in a wonderfully detailed history that was produced in early 1912 and which I read in the National Archives in Kew).  Here’s what the official history said.

In the eighteenth century, Britain had banned virtually all commerce with citizens of enemy states during wartime.  During the Napoleonic Wars, Britain had fought a thorough going economic war against France and the other territories controlled by Napoleon. Call this the collective punishment or Old Testament approach to the global economy in wartime. This approach was advocated by Jackie Fisher, the First Lord of the Admiralty.

The other model considered by policymakers was that of the Crimean War of the 1850s, the last major European war. During this conflict, Britain opted not to interfere in trade with Russia or with merchant vessels that belonged to Russian private citizens. That war had been fought on the understanding that the West’s grievance was strictly with the Russian state, not individual Russian merchants. British firms had been allowed to trade with Russia, provided they did so through Baltic ports rather than those near the Crimea, where the fighting was.

In my view, and the view of Olive Anderson, the policy taken during the Crimean War reflected the dominance in the 1850s of classical liberal or individualist ideas about laissez-faire, free markets, and the need to distinguish individual citizens from states. The 1850s were the high-water mark for the worldview the great economist Joseph Schumpeter would later call Methodological Individualism. Later on, more collectivist ways of viewing the world (e.g., nationalism) came back into vogue.

As Nicholas Lambert has shown in a recent, brilliant, and comprehensive book, there was lots of bureaucratic infighting in the British government in 1914 over whether to wage a total economic war against the German private sector. In 1914, the British government opted for a policy that was, at least superficially, closer to the eighteenth-century practice of total prohibition than the liberal taken during the Crimean War. The Trading with the Enemy Act announced in September 1914 was part of the British government’s strategy for waging economic warfare against Germany, which involved a comprehensive blockade of Germany’s coastline. Any British subject who had any commercial dealings, however trifling, with enemy alien firms without the prior consent of the government risked penalties ranging from fines to prison sentences. Sending letters to Germany via neutral countries without authorization from the censors also became illegal. Germans resident in the United Kingdom were interned and their property was entrusted to a Custodian of Enemy Property (There’s a great new book on this rather illiberal episode in British history). (See here). Trade with neutral countries such as the Netherlands was subject to controls designed to prevent the transhipment of goods to customers in Germany. British corporations were prohibited from paying dividends to shareholders in Germany, although the British mail censors occasionally permitted needy British citizens to write to a German company with a view to having dividend remitted via the Netherlands.



The British government prosecuted a number of small firms and individuals for the offense of trading with the enemy in Britain. The goods mentioned in many of these indictments were of a non-military character, such as silk. Several owners of small factories in Britain were given prison sentences for trading with the enemy through the Netherlands and neutral countries. These were small-fry businessmen living in places like Manchester though—the politically-connected bankers in London were allowed to continuing dealing with big banks in Germany.

The Trading With The Enemy regulations of September 1914 contained a number of loopholes designed to minimize the impact on important British economic interests, particularly the cotton trade. It should be remembered that at the start of the war, the motto of the British government was “business as usual,” and that it was only halfway through that Britain developed a full-fledged command economy with conscription and food rationing and so forth. So the existence of loopholes permitting the continuation of some of the peacetime channels of trade isn’t totally surprising. The most visible of these loopholes related to banks.


In the early phases of the war, the London branches of five German banks were even permitted to continue to operate using German managers and clerks, albeit under the supervision of Sir William Plender, the senior partner of Deloitte, an accountancy firm with plenty of expertise in cross-border finance.

The slowness with which branches of German banks were liquidated was extremely controversial, especially after more and more British families received the dreaded telegram from the front announcing the death of one of their menfolk. The decision of the British government to allow the London branches of the German banks to continue operating was denounced in the newspapers owned by Lord Northcliffe, a specialist in vindictive yellow journalism. Northcliffe’s editors targeted Plender, presenting him as a traitor.

By 1916, the British public’s intensifying hatred of Germany forced the British government o accelerate the liquidation of the London branches of the German banks. However, as late as March 1918, British politicians were still complaining in parliament that the London branches of London branches of Deutsche Bank, the Dresdner Bank, and the Disconto-Gesellschaft were still operating in some fashion. In defending the policy, the Chancellor of the Exchequer, Bonar Law, explained that “these banks are kept going, not for the sake of the German shareholders, but for the sake of British and Allied creditors”. This explanation was cold comfort to the widows of British soldiers, so legislation to facilitate the termination of the London operations of these banks was passed in August 1918, when the war was almost over.

The sanctions the EU has imposed on Russia are nicely calibrated to minimize the damage done to political powerful interest groups such as the City of London. It remains to be seen whether public opinion will tolerate the current arrangement.


Corcoran on the First World War

30 07 2014

A Canadian financial journalist named Terence Corcoran has published an important yet flawed article on the economic impact of the First World War. The article is grounded in extensive reading of the scholarly secondary sources, including many of the books I’ve used as textbooks when teaching global economic history.  His article includes some snazzy graphs as well (see below). I’m really glad that someone in bringing this research to the attention of the broader public.



I wish that Mr. Corcoran had included some information about the failure of most European business leaders to do more to try to prevent this terrible conflict from starting in the first place. His article shows that the First World War had all sorts of negative consequences for business. However, he overlooks the evidence that business leaders in Europe were, in a sense, the authors of their own misfortune in that only few of them did anything to stop the drift to war during the diplomatic crisis that followed the assassination in Sarajevo. It’s true that a few bankers and other business leaders in various European countries lobbied their respective national governments to de-escalate the situation and find a peaceful solution. Unfortunately, most business leaders remained silent. Then when war broke out, they “patriotically” supported the decision of their countries to declare war. They certainly didn’t stage any tax strikes. It’s a shame that Mr. Corcoran didn’t say more about the failure of business leaders to stand up for their own interests. Their moral cowardice (i.e., willingness to go along with the patriotic mob mentality) had massive consequences for humanity as a whole.





Lessons from the financial preparations in the lead-up to the first world war

16 07 2014

by Harold James, 9 July 2014

Abstract: The 1907 panic affected the world, demonstrating the fragility of the international financial system. This column discusses the steps the US and Germany took in fortifying their financial systems following 1907. There is a link between the financial crisis and the escalation of diplomatic relations that led to war in 1914. And this link has implications for today as the world is recovering from the 2008 crisis.

Read the full article here.

Financial Crisis and the First World War

15 07 2013

That’s the title of a recent column by Harold James, a noted historian of international economic relations.