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#OtvFACTS: The Real Story of How America Became an Economic Superpower


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Very rarely, you read a book that inspires you
to see a familiar story in an entirely different
way. So it was with Adam Tooze’s astonishing
economic history of World War II, The Wages of
Destruction . And so it is again with his
economic history of the First World War and
its aftermath, The Deluge . They amount together
to a new history of the 20th century: the
American century, which according to Tooze
began not in 1945 but in 1916, the year U.S.
output overtook that of the entire British
Yet Tooze’s perspective is anything but
narrowly American. His planetary history
encompasses democratization in Japan and
price inflation in Denmark; the birth of the
Argentine far right as well as the Bolshevik
seizure of power in Russia. The two books
narrate the arc of American economic
supremacy from its beginning to its apogee. It
is both ominous and fitting that the second
volume of the story was published in 2014, the
year in which—at least by one economic
measure —that supremacy came to an end.
“Britain has the earth, and Germany wants it.”
Such was Woodrow Wilson’s analysis of the
First World War in the summer of 1916, as
recorded by one of his advisors. And what
about the United States? Before the 1914 war,
the great economic potential of the U.S. was
suppressed by its ineffective political system,
dysfunctional financial system, and uniquely
violent racial and labor conflicts. “America
was a byword for urban graft,
mismanagement and greed-fuelled politics, as
much as for growth, production, and profit,”
Tooze writes.

The United States might claim a broader
democracy than those that prevailed in
Europe. On the other hand, European states
mobilized their populations with an efficiency
that dazzled some Americans (notably
Theodore Roosevelt) and appalled others
(notably Wilson). The magazine founded by
pro-war intellectuals in 1914, The New Republic ,
took its title precisely because its editors
regarded the existing American republic as
anything but the hope of tomorrow.
Yet as World War I entered its third year—
and the first year of Tooze’s story—the
balance of power was visibly tilting from
Europe to America. The belligerents could no
longer sustain the costs of offensive war. Cut
off from world trade, Germany hunkered into
a defensive siege, concentrating its attacks on
weak enemies like Romania. The Western
allies, and especially Britain, outfitted their
forces by placing larger and larger war orders
with the United States. In 1916, Britain bought
more than a quarter of the engines for its new
air fleet, more than half of its shell casings,
more than two-thirds of its grain, and nearly
all of its oil from foreign suppliers, with the
United States heading the list. Britain and
France paid for these purchases by floating
larger and larger bond issues to American
buyers—denominated in dollars, not pounds
or francs. “By the end of 1916, American
investors had wagered two billion dollars on
an Entente victory,” computes Tooze (relative
to America’s estimated GDP of $50 billion in
1916, the equivalent of $560 billion in today’s
That staggering quantity of Allied purchases
called forth something like a war mobilization
in the United States. American factories
switched from civilian to military production;
American farmers planted food and fiber to
feed and clothe the combatants of Europe. But
unlike in 1940-41, the decision to commit so
much to one side’s victory in a European war
was not a political decision by the U.S.
government. Quite the contrary: President
Wilson wished to stay out of the war entirely.
He famously preferred a “peace without
victory.” The trouble was that by 1916, the
U.S. commitment to Britain and France had
grown—to borrow a phrase from the future—
too big to fail.
Tooze’s portrait of Woodrow Wilson is one of
the most arresting novelties of his book. His
Wilson is no dreamy idealist. The president’s
animating idea was an American
exceptionalism of a now-familiar but then-
startling kind. His Republican opponents—
men like Theodore Roosevelt, Henry Cabot
Lodge, and Elihu Root—wished to see America
take its place among the powers of the earth.
They wanted a navy, an army, a central bank,
and all the other instrumentalities of power
possessed by Britain, France, and Germany.
These political rivals are commonly derided as
“isolationists” because they mistrusted the
Wilson’s League of Nations project. That’s a
big mistake. They doubted the League because
they feared it would encroach on American
sovereignty. It was Wilson who wished to
remain aloof from the Entente, who feared
that too close an association with Britain and
France would limit American options. This
aloofness enraged Theodore Roosevelt, who
complained that the Wilson-led United States
was “sitting idle, uttering cheap platitudes,
and picking up [European] trade, whilst they
had poured out their blood like water in
support of ideals in which, with all their
hearts and souls, they believe.” Wilson was
guided by a different vision: Rather than join
the struggle of imperial rivalries, the United
States could use its emerging power to
suppress those rivalries altogether. Wilson
was the first American statesman to perceive
that the United States had grown, in Tooze’s
words, into “a power unlike any other. It had
emerged, quite suddenly, as a novel kind of
‘super-state,’ exercising a veto over the
financial and security concerns of the other
major states of the world.”
Wilson hoped to deploy this emerging super-
power to enforce an enduring peace. His own
mistakes and those of his successors doomed
the project, setting in motion the disastrous
events that would lead to the Great
Depression, the rise of fascism, and a second
and even more awful world war.

What went wrong? “When all is said and
done,” Tooze writes, “the answer must be
sought in the failure of the United States to
cooperate with the efforts of the French,
British, Germans and the Japanese [leaders of
the early 1920s] to stabilize a viable world
economy and to establish new institutions of
collective security. … Given the violence they
had already experienced and the risk of even
greater future devastation, France, Germany,
Japan, and Britain could all see this. But what
was no less obvious was that only the US
could anchor such a new order.” And that was
what Americans of the 1920s and 1930s
declined to do—because doing so implied too
much change at home for them: “At the hub of
the rapidly evolving, American-centered world
system there was a polity wedded to a
conservative vision of its own future.”

Periodically, attempts have been made to
rehabilitate the American leaders of the 1920s.
The most recent version, James Grant’s The
Forgotten Depression, 1921: The Crash That Cured
Itself , was released just two days before The
Deluge : Grant, an influential financial
journalist and historian, holds views so old-
fashioned that they have become almost retro-
hip again. He believes in thrift, balanced
budgets, and the gold standard; he abhors
government debt and Keynesian economics.
The Forgotten Depression is a polemic embedded
within a narrative, an argument against the
Obama stimulus joined to an account of the
depression of 1920-21.


President Woodrow Wilson (far right) stands with other
leaders of the Council of Four at the Paris Peace
conference in 1919. (Wikipedia)

As Grant correctly observes, that depression
was one of the sharpest and most painful in
American history. Total industrial production
may have dropped by 30 percent.
Unemployment spiked at perhaps close to 12
percent (accurate joblessness statistics don’t
exist for this period). Overall, prices
plummeted at the steepest rate ever recorded
—steeper than in 1929-33. Then, after 18
months of extremely hard times, the economy
lurched into recovery. By 1923, the U.S. had
returned to full employment.
Grant presents this story as a laissez-faire
triumph. Wartime inflation was halted.
Borrowing and spending gave way to saving
and investing. Recovery then occurred
naturally, without any need for government
stimulus. “The hero of my narrative is the
price mechanism, Adam Smith’s invisible
hand,” he notes. “In a market economy, prices
coordinate human effort. They channel
investment, saving and work. High prices
encourage production but discourage
consumption; low prices do the opposite. The
depression of 1920-21 was marked by
plunging prices, the malignity we call
deflation. But prices and wages fell only so
far. They stopped falling when they become
low enough to entice consumers into
shopping, investors into committing capital
and employers into hiring. Through the
agency of falling prices and wages, the
American economy righted itself.” Reader,
draw your own comparisons!
Grant’s argument is not new. The libertarian
economist Murray Rothbard argued a similar
case in his 1963 book, America’s Great Depression .
The Rothbardian story of the “good”
depression of 1920 has resurfaced from time
to time in the years since, most spectacularly
when Fox News star Glenn Beck seized upon it
as proof that the Obama stimulus was wrong
and dangerous. Grant tells the story with more
verve and wit than most, and with a better eye
for incident and character. But the central
assumption of his version of events is the
same one captured in Rothbard’s title half a
century ago: that America’s economic history
constitutes a story unto itself.


America's "forgotten depression" through the lens of Dow
Jones industrial averages from 1918 to 1923 (Wikipedia)

Widen the view, however, and the “forgotten
depression” takes on a broader meaning as
one of the most ominous milestones on the
world’s way to the Second World War. After
World War II, Europe recovered largely as a
result of American aid; the nation that had
suffered least from the war contributed most
to reconstruction. But after World War I, the
money flowed the other way. You can continue reading from the article SOURCE

Credits: The Atlantic. 

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