The New Empire of Debt: The Rise and Fall of an Epic Financial Bubble (20 page)

World War I showed the world that the new paradigm had a deadly power beyond what anyone expected.

At the outbreak of the war, German forces followed Alfred von Schlieffen’s plan.They wheeled from the north and drove the French Army before them. Soon the French were retreating down the Marne Valley near Paris. And it looked as though the Germans would soon be victorious.

The German generals believed the French were broken. Encouraged, General von Kluck departed from the plan; instead of taking Paris, he decided to chase the French Army, retreating adjacent to the city, in hopes of destroying it completely. But there was something odd; there were relatively few prisoners. An army that is breaking up usually throws off lots of prisoners.

As it turned out, the French Army had not been beaten. It was retreating in good order. And when Galieni, the old French general, saw what was happening—German troops moving down the Marne only a few miles from Paris—he uttered the famous remark, “Gentlemen, they offer us their flank.”

Galieni attacked, driving soldiers to the front line in Paris taxicabs.The Germans were beaten back and the war became a trench-war nightmare of machine guns, mustard gas, barbed wire, and artillery.

By the time the United States entered the war, the poet Rupert Brooke was already dead, and the life expectancy for a soldier on the front lines was just 21 days.

One by one, the people back at home got the telegrams, the letters.The church bells rang. The black cloth came out. And, one by one, the maps were rolled up. Fingers forgot the maps and clutched nervously at crosses and cigarettes.There was no glory left, just tears.

Another poet’s mother got the sad news on Armistice Day. A telegram arrived informing the family that Wilfred Owen had been killed. Coming as it did on the day the war ended, the news must have brought more than just grief. “What was the point?” they must have wondered.

Wilfred Owen had wondered, too. His poetry mocked the glory of war. He described soldiers who had been gassed as “gargling” their way to death from “froth-corrupted lungs.” Owen saw many men die; it was neither sweet nor glorious, he observed, but ghastly.

It doesn’t seem quite right that so many people should have died for nothing. People can’t stand the idea. It leaves a hole, a huge gap that the brain labors to fill. Otherwise, the deaths have no meaning. It is not enough to appreciate bravery and self-sacrifice for its own sake. It must make sense. So, bring out the humbug! We found ourselves in Canada’s maritime provinces in November 2004, reading the paper. “Don’t forget to spend a moment on Remembrance Day,” the Canadian Broadcasting Company reminded readers,“to recall those many Canadians who died protecting our liberty and our country.”

Not even the maddest of the Wilsonians would have suggested that North Americans’ liberty was at stake. The Huns were not going to cross the Atlantic to attack New Brunswick or New York. What did the Yanks and Canucks have at stake? Nothing at all. But people find it easier to die than to think; and for most people, it is probably preferable.

The paper reported that one of the last Canadian World War I veterans had just died at 106 years old.There were only 10 left. (In France, there were 36 still with a pulse as of November 2004.) The old soldiers are dying fast.

Canadian soldiers were among the best colonial troops, said the press report, and the most likely to be killed. If dying in war is sweet, the Newfoundlanders got the most cavaties. One out of 4 of the 6,000 men of the Newfoundland Regiment never returned home. But “nothing matched the toll of the massacre at Beaumont-Hamel on the western front on July 1, 1916,” reports the
Toronto Globe and Mail.
“About 800 Newfoundlanders charged out of their trenches into the teeth of German machine-gunfire. They had been told that the Germans would be weakened by intense bombardment, that the lethal strings of thick barbed wire strewn across no man’s land would be gone and that another regiment would join them. None of it was true.The next morning, only 68 members of the regiment answered the roll call.

“One eyewitness said the Newfoundlanders advanced into the hail of bullets with their chins tucked into their necks, as they might weather an ocean storm.”
³²

Then, the old lie swallowed them up, like a tempest.

In the small villages of France hardly a family was spared. Every small town has its monument in a central location to
Nos Heros . . . Mort Pour La France.
Often, the list of names seems longer than the present population. And still people wonder, what happened? We can turn to Wilson’s bogus explanation . . . or any one of hundreds.The capitalists are to blame! It’s the Germans fault! If only European nations had been democracies! If only Princip had missed his mark!

But there is another way to understand the Great War: A bull market in death began in August 1914; it probably would have ended in 1916 or 1917 but for the fresh new resources of the United States.Wilson longed to give the war meaning by using it to turn America into a world-improving, hegemonic power. All he had to do, he thought, was to prevent an early settlement of the war giving him time to help the French and English win a total victory rather than a negotiated peace. Then, he believed, he would be the true victor. He could come to Europe like an archangel at a Catholic-school picnic. He would walk across the Atlantic and impose his Fourteen Points on the world as if they were written on clay tablets and had been handed to him by God.

MAKING THE WORLD SAFE FOR DEMOCRACY

When Woodrow Wilson stood before Congress and asked for a declaration of war against Germany, the words came out of the advanced part of the brain. They were the nice, multisyllabic, Latinate words you would expect from a former professor of government.They were not simple, honest words, but greasy and meaningless ones, also just what you would expect. It was the kind of bosh you find on a typical high-minded editorial page. It was as if the president opened his mouth and brightly colored bubbles popped out. Airily . . . lightly . . . they floated above the crowds, who craned their necks upward in admiration and awe. They didn’t seem to mind that the words were empty.They were gaudy; that was all that seemed to matter.

Wilson’s talk of making the world safe for democracy was nothing more than gas. He was proposing to go into the war on the side of the English, who were at that very moment suppressing democracy all over the globe. The Irish, the Indians, the Egyptians—the American president didn’t even mention them. Had the upper brain been allowed to do its work, surely it would have told him that if he wanted to make the world safe for democracy, he ought to ask some questions of the nation that held it in check. As a matter of logic he might just as well have entered the war on the side of Germany against England.

But buried deep in the president’s sly brain were idealized pictures of the Magna Carta, the robes and wigs of English judges, High Tea at the Savoy, Dickens and Thackeray—all the trappings of the English upper classes as they were imagined by a naïve and admiring college professor from Princeton, New Jersey.The president, his advisors, his cabinet, and his leading allies had such bad cases of anglophilia, they practically stuttered and drooled. And when they stirred the mob with big words, the gaudy balloons they sent aloft meant nothing more than a signal that the fight had begun. The poor schmucks’ blood was up already. All it took was a reason and they were ready to die.

A moment of real thought by firing a few synapses in the upper lateral prefrontal cortex would have shown what a losing proposition the European war would likely be. But whatever thinking was taking place was deeper down in the limbic system, not in the lateral prefrontal cortex.

Wilson had already made his decision. And the public, too, was soon engaged. The cannons were drawn up. Medals were polished. In no time at all, people were on their knees pledging all they had to the war effort, giving up their purses, their sons, and their integrity. Around the country, superpatriots were drilling holes through their walls so they could spy on neighbors with names like Bauer and Feldgenhauer. In Baltimore, a former mayor blew his brains out after being charged with being a German sympathizer.Anyone who dared to laugh or cry was soon doing penance or doing time.

War appeals to the limbic system like a new pair of shoes. The yahoos grow taller when war is announced. And when people walk, they take on a proud martial air. Looking around them, they see the bright shine of polished brass and of bombs exploding in air and they are drawn to them like sinners to the sparkling gates of Hell. Politicians feel the need to explain it, to justify it, to dress it up in respectable clothes to hide the jackboots and to slosh on perfume to cover the stench of death. But the words mean nothing. When the sentiments in the limbic system are ready for it, the common man is as eager for war as he is for an extension of his line of credit.

World War I turned out to be a catastrophe as meaningless and senseless as Wilson’s words.We look at it here because it marks the beginning of the U.S. imperium. It helps explain today’s world. Now, as then, the yahoos cheer a new group of “Wilsonian” officials. Once again, they think they are making the world safe for democracy. Once again, they believe that almost no price is too heavy for the benefits of the better world they imagine. And once again, they soften up the nation’s heads and its money to pay for it.

But it is not the same world that we had in 1917. It is Wilson’s world now, the world he helped to make. America is no longer the rising power; China is rising now. America is in Britain’s World War I position, trying to hold on to its commercial edge against newer, more aggressive rivals. Americans are no longer lean and hungry for work and profit; now they are the fattest people on the planet and have grown used to living off the hard work of others. “Virtue is what used to pay,” said Gordon Tullock. But what used to pay for Americans were the virtues of hard work, thrift, self-discipline, and minding their own business.Americans were virtuous until Wilson took over. Since then, they have given up on what used to pay in favor of what seems to pay now—meddling, borrowing, and spending—overseas as well as at home.

In the private sphere, a delusional man is soon impoverished, friendless, powerless, and hopeless. All he can do at that point is run for public office, because in public life, foolish arguments have fewer and less immediate consequences. It is in public life, that people get carried away with reason. “History is an argument without end,” said Pieter Geyl. One nation argues that it must dominate its neighbors because it needs “living room.” Another says it has a manifest destiny to do so. One public leader says he must create a “co-prosperity sphere.” Another says he will make the world safe for democracy. None of these flourishes are rooted in logic or reason, but in the rich, fetid loam of the heart.

Within every world improver and empire builder lurks a vain animal—displaying his tail feathers.And within every democratic assembly is a bunch of stags in rut, waiting for an opportunity to butt heads and make a public spectacle of themselves. For it is neither love nor money that makes the world go ’round—but vanity.Wilson had no particular love and not much money. King George V drew his measure as accurately as Freud, calling him “an entirely cold academic professor—an odious man.” But vanity he had in abundance.

Nothing softens money up as fast as war. The shells pound it. The bullets puncture it. Armies march on it. And politicians and central bankers stretch it out to the point that it inevitably breaks.

In July 1914, all the major belligerents were on the gold standard—along with 44 other countries. The system was simple and effective. It had fostered an international financial climate so conducive to the growth of capital and trade that most of the West had never been more prosperous. Central banks of the various nations held gold in their coffers. The gold was used to back up the paper currencies. If a nation spent too much on external products, its currency flowed to foreign countries. It came back in payment for either goods or services supplied by the home country. In the event of an imbalance, that is to say when a foreign nation found itself with more of the nation’s currency than it could spend on goods and services from that nation, the resulting surplus currency was presented to the central bank to be replaced by gold. Every nation’s imbalances were settled in the one thing that none of them could print or counterfeit: gold. If a nation ran a persistent trade deficit, it would find its gold pulled away. This would encourage the central bank to do something to protect it. Usually, interest rates rose, which had the effect of rewarding savings and discouraging the outflow of funds.

The system was neat. It was honest. Which made it ill-suited to the needs of war and empire builders. War, particularly, was distressingly expensive. Politicians noticed—as monarchs had long ago—that people might be enthralled by the cannon fire, but they hated to pay for it. Typically, according to R.S. Hamilton-Grace, who studied English war financing, about a third of the cost of war had to be covered by borrowing.

Gold was famously uncooperative. It yielded neither to flattery nor to technology. You couldn’t pretend it was worth more than it was. And you couldn’t create more “out of thin air.” Each ounce needed to be dug up out of the earth—at considerable expense. Increasing the money supply—no matter how glorious or worthwhile the cause—was a difficult thing to do. Central banks had only so much gold. If they wanted more, it had to come from somewhere. It had to be saved, put away, stored. The old expression, “you can’t get something for nothing,” seemed to have been coined to describe the yellow metal. Every ounce of it represented an ounce of thrift, a pound of self-discipline, and a ton of forbearance. It represented money that had not been spent on new clothes, or guns, or food, or entertainment, lodging, tools, roads, or a million other potential uses. Gold was so hard to get that central banks were reluctant to let it go. Kings used to castrate the keepers of their royal mints if they let the gold slip away, either through chicanery or lack of attention. Central bankers were naturally careful with the stuff; caution was in their blood. They knew that if they issued too much paper—that is, if they allowed too many claims against their horde of gold—they risked having it taken from them.