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Financial Crisis and War

PRINCETON – The approach of the hundredth anniversary of the outbreak of World War I in 1914 has jolted politicians and commentators worried by the fragility of current global political and economic arrangements. Indeed, Luxembourg’s prime minister, Jean-Claude Juncker, recently argued that Europe’s growing north-south polarization has set the continent back by a century.

The lessons of 1914 are about more than simply the dangers of national animosities. The origins of the Great War include a fascinating precedent concerning how financial globalization can become the equivalent of a national arms race, thereby increasing the vulnerability of the international order.

In 1907, a major financial crisis emanating from the United States affected the rest of the world and demonstrated the fragility of the entire international financial system. The response to the current financial crisis is replaying a similar dynamic.

Walter Bagehot’s 1873 classic Lombard Street described the City of London as “the greatest combination of economic power and economic delicacy that the world has ever seen.” In one influential interpretation, popularized by the novelist, Labour Party MP, and future Nobel Peace Prize laureate Norman Angell in 1910, the interdependency of the increasingly complex global economy made war impossible. But the opposite conclusion was equally plausible: Given the extent of fragility, a clever twist to the control levers might facilitate a military victory by the economic hegemon.