Next year marks the 110th anniversary of a global financial crisis that shaped the world. The crash of 1914 was the biggest systemic crisis that the City, the centre of imperial rent extraction, had faced. It was also, at the time, a largely unremarked upon event. The unprecedented closure of the London Stock Exchange did cause headlines, with this paper noting that the shutdown left brokers swarming outside like “ants around the destroyed heap”. In the summer of 1914, however, Britons could be forgiven for being preoccupied by a life-and-death struggle emerging on the continent.
What makes the episode historically significant is the UK government’s unprecedented scale of spending to save the City. In 1914, the Bank of England invented quantitative easing by purchasing bad loans from the banks in order to support the economy. Britain’s declaration of war on Germany effectively rendered banks bust, since international bills of exchange, bills of trade and other financial instruments issued by enemy nations were unenforceable and hence in default. Since these were traded in London, the losses began to pile up in the City’s finance houses. Something had to be done.
Richard Roberts, in his book Saving the City, calculates that about £200m – 9% of GDP – was provided to the banks by the state. When the first British effort to raise funds for the war by selling bonds failed, gilts worth £38bn in today’s money were instead bought up by the Bank. Freed from the gold standard, it simply conjured money out of thin air, a trick it was to repeat almost a century later. Globalisation’s first financial crisis went unnoticed perhaps because no major City institution failed. Instead, the chancellor David Lloyd George, once the scourge of the rich, was accused of excessive generosity towards them.
Contemporary hegemony
These events revealed the dominance of the City and that its rescue was necessary whatever the cost. As Britain’s comparative advantage moved farther away from manufacturing to services, financial capitalism was increasingly threatened by geopolitical tensions. British bankers facilitated global trade and investment and relied on profits from the economic growth of rivals France, Germany and the US. Many UK manufacturers, by contrast, feared German trade competition and agitated for protection. Such interests dominated Edwardian Britain, whose political class was protected from the consequences of extreme income inequality by disenfranchising all women and 40% of poorer men.
The first era of globalisation probably undid itself. Germany’s successful industrialisation fuelled a military caste’s appetite for greatness. Established powers were nervous as capital flows and technology transfer helped Russia converge on their position. States feared being unable to raise a fighting force as labour costs rose. Britain worried that a continental power would challenge its supremacy at sea and hasten the end of its empire. Vibes matter in international relations.
Monetary technology has transformed the world today. After the end of the first world war, America and Britain competed for control of key industries and services – and, crucially, the global oil supply. The second world war established American hegemony. The US now heads a world system dominated by the dollar. It has gigantic external and fiscal deficits without a run on its currency or escalating debt-servicing costs that would lead to a crippling domestic economic crunch. Paul Tucker, a former deputy governor of the Bank, wrote in his 2023 book Discord that “if the contemporary hegemon has an unknowing headquarters, it is the Federal Reserve building in Washington”.
China provides a present-day parallel to events 100 years ago, with Beijing offering an alternative vision of the kind of world we could live in. Like Britain and Germany, it has been undergoing rapid industrialisation and is dependent on international trade. Like France and US in the 1920s, it engaged in currency manipulation to remain competitive. The return of industrial policy will see a contest over corporate competition, the global division of labour and the distribution of economic power. The green transition risks conflict. Countries know that if they get locked into a high-carbon future, they hazard becoming quickly uncompetitive. If China feels shut out of key markets, the world could become a significantly more dangerous place.
Exorbitant privilege
Neither the war in Ukraine nor that in Gaza was inevitable. But that both territorial disputes could turn deadly and have huge geopolitical ramifications was unsurprising. Interdependence, like that before the first world war, seems to be increasing the scope for friction between countries. Attacks on commercial shipping by the Iran-backed Houthis from Yemen’s ports threaten global trade through the Suez canal, a familiar pre-1914 theme. But the world now is substantially changed too. The proposed seizure of $300bn of Russian central bank assets weaponises the modern financial system. The US-led move makes holding large dollar reserves more risky and raises the question of what would happen if a rival nation with a rival currency claimed jurisdiction over trades denominated in it.
The current world system relies on the dollar, just as the pre-1914 system relied on the pound. Today, however, the dollar’s exorbitant privilege comes with a heavy burden of duty. US consumers and businesses get benefits in exchange for Washington providing a security guarantee to friends and being the de facto lender of last resort to the world. If Washington rejected these costs, it would erode demand for its currency, and so its leadership role.
Today’s system appears to be sowing the seeds of its own destruction. Since the 1980s, US-led financialisation has seen rising inequality. The UN was right this year to worry about the gap between rich and poor, and to say that reducing it should be a priority. Rising disparities in countries heighten trade conflicts between them. In many nations, the underlying political struggle is between the owners of financial assets and ordinary households – between the very rich and everyone else. Ordinary workers, says the UN, have been losing out since 2000. They are being deprived of purchasing power, and hoodwinked by rightwing opportunists into being pitted against each other. Trade wars, like territorial disputes, have a nasty habit of leading to armed strife.
The decades after the first world war saw the international economic order collapse, leading to conflict, revolution and genocide. The world is not yet experiencing anything like that level of disruption. But that is no reason for complacency.