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 empire.
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 money).
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.
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.
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.
Take the case of France, which suffered more in material terms than any World War I belligerent except Belgium. Northeastern France, the country’s most industrialized region in 1914, had been ravaged by war and German occupation. Millions of men in their prime were dead or crippled. On top of everything, the country was deeply in debt, owing billions to the United States and billions more to Britain. France had been a lender during the conflict too, but most of its credits had been extended to Russia, which repudiated all its foreign debts after the Revolution of 1917. The French solution was to exact reparations from Germany.
Britain was willing to relax its demands on France. But it owed the United States even more than France did. Unless it collected from France—and from Italy and all the other smaller combatants as well—it could not hope to pay its American debts.
Americans, meanwhile, were preoccupied with the problem of German recovery. How could Germany achieve political stability if it had to pay so much to France and Belgium? The Americans pressed the French to relent when it came to Germany, but insisted that their own claims be paid in full by both France and Britain.
Germany, for its part, could only pay if it could export, and especially to the world’s biggest and richest consumer market, the United States. The depression of 1920 killed those export hopes. Most immediately, the economic crisis sliced American consumer demand precisely when Europe needed it most. True, World War I was not nearly as positive an experience for working Americans as World War II would be; between 1914 and 1918, for example, wages lagged behind prices. Still, millions of Americans had bought billions of dollars of small-denomination Liberty bonds. They had accumulated savings that could have been spent on imported products. Instead, many used their savings for food, rent, and mortgage interest during the hard times of 1920-21.
But the gravest harm done by the depression to postwar recovery lasted long past 1921. To appreciate that, you have to understand the reasons why U.S. monetary authorities plunged the country into depression in 1920.
Grant rightly points out that wars are usually followed by economic downturns. Such a downturn occurred in late 1918-early 1919. “Within four weeks of the … Armistice, the [U.S.] War Department had canceled $2.5 billion of its then outstanding $6 billion in contracts; for perspective, $2.5 billion represented 3.3 percent of the 1918 gross national product,” he observes. Even this understates the shock, because it counts only Army contracts, not Navy ones. The postwar recession checked wartime inflation, and by March 1919, the U.S. economy was growing again.
As the economy revived, workers scrambled for wage increases to offset the price inflation they’d experienced during the war. Monetary authorities, worried that inflation would revive and accelerate, made the fateful decision to slam the credit brakes, hard. Unlike the 1918 recession, that of 1920 was deliberately engineered. There was nothing invisible about it. Nor did the depression “cure itself.” U.S. officials cut interest rates and relaxed credit, and the economy predictably recovered—just as it did after the similarly inflation-crushing recessions of 1974-75 and 1981-82.
But 1920-21 was an inflation-stopper with a difference. In post-World War II America, anti-inflationists have been content to stop prices from rising. In 1920-21, monetary authorities actually sought to drive prices back to their pre-war levels. They did not wholly succeed, but they succeeded well enough. One price especially concerned them: In 1913, a dollar bought a little less than one-twentieth of an ounce of gold; by 1922, it comfortably did so again.
James Grant hails this accomplishment. Adam Tooze forces us to reckon with its consequences for the rest of the planet.
Every other World War I belligerent had quit the gold standard at the beginning of the war. As part of their war finance, they accepted that their currency would depreciate against gold. The currencies of the losers depreciated much more than the winners; among the winners, the currency of Italy depreciated more than that of France, and France more than that of Britain. Yet even the mighty pound lost almost one-fourth of its value against gold. At the end of the conflict, every national government had to decide whether to return to the gold standard and, if so, at what rate.
The American depression of 1920 made that decision all the more difficult. The war had vaulted the United States to a new status as the world’s leading creditor, the world’s largest owner of gold, and, by extension, the effective custodian of the international gold standard. When the U.S. opted for massive deflation, it thrust upon every country that wished to return to the gold standard (and what respectable country would not?) an agonizing dilemma. Return to gold at 1913 values, and you would have to match U.S. deflation with an even steeper deflation of your own, accepting increased unemployment along the way. Alternatively, you could re-peg your currency to gold at a diminished rate. But that amounted to an admission that your money had permanently lost value—and that your own people, who had trusted their government with loans in local money, would receive a weaker return on their bonds than American creditors who had lent in dollars.
Britain chose the former course; pretty much everybody else chose the latter.
The consequences of these choices fill much of the second half of The Deluge. For Europeans, they were uniformly grim, and worse. But one important effect ultimately rebounded on Americans. America’s determination to restore a dollar “as good as gold” not only imposed terrible hardship on war-ravaged Europe, it also threatened to flood American markets with low-cost European imports. The flip side of the Lost Generation enjoying cheap European travel with their strong dollars was German steelmakers and shipyards underpricing their American competitors with weak marks.
Such a situation also prevailed after World War II, when the U.S. acquiesced in the undervaluation of the Deutsche mark and yen to aid German and Japanese recovery. But American leaders of the 1920s weren’t willing to accept this outcome. In 1921 and 1923, they raised tariffs, terminating a brief experiment with freer trade undertaken after the election of 1912. The world owed the United States billions of dollars, but the world was going to have to find another way of earning that money than selling goods to the United States.
That way was found: more debt, especially more German debt. The 1923 hyper-inflation that wiped out Germany’s savers also tidied up the country’s balance sheet. Post-inflation Germany looked like a very creditworthy borrower. Between 1924 and 1930, world financial flows could be simplified into a daisy chain of debt. Germans borrowed from Americans, and used the proceeds to pay reparations to the Belgians and French. The French and Belgians, in turn, repaid war debts to the British and Americans. The British then used their French and Italian debt payments to repay the United States, who set the whole crazy contraption in motion again. Everybody could see the system was crazy. Only the United States could fix it. It never did.
Peter Heather, the great British historian of Late Antiquity, explains human catastrophes with a saying of his father’s, a mining engineer: “If man accumulates enough combustible material, God will provide the spark.” So it happened in 1929. The Deluge that had inundated the rest of the developed world roared back upon the United States.
The Great Depression overturned parliamentary governments throughout Europe and the Americas. Yet the dictatorships that replaced them were not, as Tooze emphasizes in The Wages of Destruction, reactionary absolutisms of the kind re-established in Europe after Napoleon. These dictators aspired to be modernizers, and none more so than Adolf Hitler.
“The United States has the Earth, and Germany wants it.” Thus might Hitler’s war aims have been summed up by a latter-day Woodrow Wilson. From the start, the United States was Hitler’s ultimate target. “In seeking to explain the urgency of Hitler’s aggression, historians have underestimated his acute awareness of the threat posed to Germany, along with the rest of the European powers, by the emergence of the United States as the dominant global superpower,” Tooze writes. “The originality of National Socialism was that, rather than meekly accepting a place for Germany within a global economic order dominated by the affluent English-speaking countries, Hitler sought to mobilize the pent-up frustrations of his population to mount an epic challenge to this order.” Of course, Hitler was not engaged in rational calculation. He could not accept subordination to the United States because, according to his lurid paranoia, “this would result in enslavement to the world Jewish conspiracy, and ultimately race death.” He dreamed of conquering Poland, Ukraine, and Russia as a means of gaining the resources to match those of the United States. The vast landscape in between Berlin and Moscow would become Germany’s equivalent of the American west, filled with German homesteaders living comfortably on land and labor appropriated from conquered peoples—a nightmare parody of the American experience with which to challenge American power.
Could this vision have ever been realized? Tooze argues in The Wages of Destruction that Germany had already missed its chance. “In 1870, at the time of German national unification, the population of the United States and Germany was roughly equal and the total output of America, despite its enormous abundance of land and resources, was only one-third larger than that of Germany,” he writes. “Just before the outbreak of World War I the American economy had expanded to roughly twice the size of that of Imperial Germany. By 1943, before the aerial bombardment had hit top gear, total American output was almost four times that of the Third Reich.”
Germany was a weaker and poorer country in 1939 than it had been in 1914. Compared with Britain, let alone the United States, it lacked the basic elements of modernity: There were just 486,000 automobiles in Germany in 1932, and one-quarter of all Germans still worked as farmers as of 1925. Yet this backward land, with an income per capita comparable to contemporary “South Africa, Iran and Tunisia,” wagered on a second world war even more audacious than the first.
The reckless desperation of Hitler’s war provides context for the horrific crimes of his regime. Hitler’s empire could not feed itself, so his invasion plan for the Soviet Union contemplated the death by starvation of 20 to 30 million Soviet urban dwellers after the invaders stole all foodstuffs for their own use. Germany lacked workers, so it plundered the labor of its conquered peoples. By 1944, foreigners constituted 20 percent of the German workforce and 33 percent of armaments workers (less than 9 percent of the population of today’s liberal and multicultural Germany is foreign-born). On paper, the Nazi empire of 1942 represented a substantial economic bloc. But pillage and slavery are not workable bases for an industrial economy. Under German rule, the output of conquered Europe collapsed. The Hitlerian vision of a united German-led Eurasia equaling the Anglo-American bloc proved a crazed and genocidal fantasy.
Tooze’s story ends where our modern era starts: with the advent of a new European order—liberal, democratic, and under American protection. Yet nothing lasts forever. The foundation of this order was America’s rise to unique economic predominance a century ago. That predominance is now coming to an end as China does what the Soviet Union and Imperial Germany never could: rise toward economic parity with the United States. That parity has not, in fact, yet arrived, and the most realistic measures suggest that the moment of parity won’t arrive until the later 2020s. Perhaps some unforeseen disruption in the Chinese economy—or some unexpected acceleration of American prosperity—will postpone the moment even further. But it is coming, and when it does, the fundamental basis of world-power politics over the past 100 years will have been removed. Just how big and dangerous a change that will be is the deepest theme of Adam Tooze's profound and brilliant grand narrative.
We want to hear what you think about this article. Submit a letter to the editor or write to email@example.com.