The Hundred Years’ Peace

Below, I will reproduce extracts from the opening Chapter, titled as above, of Karl Polanyi’s  The Great Transformation: the Political and Economic Origins of Our Times . This is essential background in conjunction with the history of Central Banking which was covered in  Lecture 13  of  Advanced Macro II . The central concept underlying the course is that of Entanglement (Lecture 18B)  – economic theories can only be understood within their historical context, and also, history can only be understood in light of theories being used by contemporaries to understand and respond to this history. The first segment of the lecture was discussed in two previous posts.  Origins of Central Banking  describes the historical context within which the Bank of England was created. Monetization, Maturity Transformation, and MMT describes the theoretical lessons about money and money creation that we learn from this history. The next segment of the lecture deals with the evolution of Central Banking over the period 1800-1914. To understand this, we need to study the history of these times. By an amazing coincidence, Karl Polanyi has identified this period as The Hundred Years’ Peace . Below we provide extracts from this first chapter, partly for the relevant background, but also to illustrate his excellent writing style. Material in italics are my comments on the text:

First Section: Writing in the post WW2 period. Introduces the broad themes and concerns of the book as a whole. Explanation is built around four institutions — the now forgotten Institutional Economics. He argues that it was the collapse of the Gold Standard that led to WW2. This is what links Polanyi’s history to the understanding of roles and functions of Central Banks, which is our goal. He relates the Gold Standard to the myth of the Self-Regulating Market, which is at the heart of the market economy. This section is reproduced in toto, because it provides a broad outline of the main arguments of the book itself.  

Nineteenth century civilization has collapsed. This book is con­cerned with the political and economic origins of this event, as well as with the great transformation which it ushered in.

Nineteenth century civilization rested on four institutions. The first was the balance-of-power system which for a century prevented the occurrence of any long and devastating war between the Great Powers. The second was the international gold standard which symbolized a unique organization of world economy. The third was the self-regu­lating market which produced an unheard-of material welfare. The fourth was the liberal state. Classified in one way, two of these insti­tutions were economic, two political. Classified in another way, two of them were national, two international. Between them they deter­mined the characteristic outlines of the history of our civilization.

Of these institutions the gold standard proved crucial; its fall was the proximate cause of the catastrophe. By the time it failed most of the other institutions had been sacrificed in a vain effort to save it.

But the fount and matrix of the system was the self-regulating market. It was this innovation which gave rise to a specific civilization. The gold standard was merely an attempt to extend the domestic market system to the international field; the balance-of-power system was a superstructure erected upon and, partly, worked through the gold standard; the liberal state was itself a creation of the self-regulating market. The key to the institutional system of the nineteenth century lay in the laws governing market economy.

Our thesis is that the idea of a self-adjusting market implied a stark Utopia. Such an institution could not exist for any length of time with­out annihilating the human and natural substance of society; it would have physically destroyed man and transformed his surroundings into a wilderness. Inevitably, society took measures to protect itself, but whatever measures it took impaired the self-regulation of the market, disorganized industrial life, and thus endangered society in yet another way. It was this dilemma which forced the development of the market system into a definite groove and finally disrupted the social organi­zation based upon it.

Above paragraph introduces the theme of the “Double Movement” — Markets seek to expand, while Society seeks to protect itself from the deadly effects of the expansions of markets. See my  Summary of the Great Transformation .

[Omitted material]

Ours is not a historical work; what we are searching for is not a convincing sequence of outstanding events, but an explanation of their trend in terms of human institutions. We shall feel free to dwell on scenes of the past with the sole object of throwing light on matters of the present; we shall make detailed analyses of critical periods and almost completely disregard the connecting stretches of time; we shall encroach upon the field of several disciplines in the pursuit of this single aim.

First we shall deal with the collapse of the international system. We shall try to show that the balance-of-power system could not ensure peace once the world economy on which it rested had failed. This accounts for the abruptness with which the break occurred, the incon­ceivable rapidity of the dissolution.

But if the breakdown of our civilization was timed by the failure of world economy, it was certainly not caused by it. Its origins lay more than a hundred years back in that social and technological up­heaval from which the idea of a self-regulating market sprang in Western Europe. The end of this venture has come in our time; it closes a distinct stage in the history of industrial civilization.

A Failed Prophecy — Polanyi thought that WW2 had represented the self-destruction of the market society, and humanity would go back to saner ways of organizing economic production. Unfortunately, market society was restored with a vengeance, and now it is bent on creating a complete collapse of the entire planetary ecological system. Note the prescient words of Polanyi cited above: Such an institution could not exist for any length of time with­out annihilating the human and natural substance of society; it would have physically destroyed man and transformed his surroundings into a wilderness. This is precisely what is happening to the planet today directly as a result of the unregulated workings of capitalism. 

Polanyi argues that exceptional peace prevailed in Europe from 1815-1914 due to the working of “haute finance”. The interests of the financiers in keeping European powers from fighting each other were very strong, and it was this interest which kept peace between the powers. This peace interest rested on the gold standard, which permitted international trade at stable rates of exchange. Once the gold standard broke down, the economies of different European economies were de-linked, and this destroyed the interest of high finance in maintaining peace. 

Second Section: The Hundred Years Peace: Here Polanyi sets out the puzzle — explains how peace is exceptional in European history, and also explains that the century did not lack in issues over which wars take place. Thus, wars were prevented, and threats to peace extinguished, by operation of some special force which needs to be investigated.

The nineteenth century produced a phenomenon unheard of in the annals of Western civilization, namely, a hundred years’ peace—1815-1914. Apart from the Crimean War—a more or less colonial event— England, France, Prussia, Austria, Italy, and Russia were engaged in war among each other for altogether only eighteen months. A com­putation of comparable figures for the two preceding centuries gives an average of sixty to seventy years of major wars in each. But even the fiercest of nineteenth century conflagrations, the Franco-Prussian War of 1870-71, ended after less than a year’s duration with the defeated nation being able to pay over an unprecedented sum as an indemnity without any disturbance of the currencies concerned.

This triumph of a pragmatic pacifism was certainly not the result of an absence of grave causes for conflict. [Omitted materials – long list of potential war-causing conflicts of interests among the European powers. In each case listed, war was averted]

Thus under varying forms and ever-shifting ideologies— sometimes in the name of progress and liberty, sometimes by the author­ity of the throne and the altar, sometimes by grace of the stock exchange and the checkbook, sometimes by corruption and bribery, sometimes by moral argument and enlightened appeal, sometimes by the broadside and the bayonet—one and the same result was attained: peace was preserved.

Meta-Theoretical Note: A group (haute finance) with power and means protects financial interests by maintaining peace using a wide variety of means over the course of a century. This kind of explanation is shunned by positivist historians, who are now prominent in the field. If we only look at the surface of history – who did what to whom and when — we will be unable to see the underlying unity, because the same peace motive is expressed in a bewildering variety of surface forms.  

This almost miraculous performance was due to the working of the balance of power, which here produced a result which is normally foreign to it. By its nature that balance effects an entirely different result, namely, the survival of the power units involved; in fact, it merely postulates that three or more units capable of exerting power will always behave in such a way as to combine the power of the weaker units against any increase in power of the strongest. In the realm of universal history balance of power was concerned with states whose independence it served to maintain. But it attained this end only by continuous war between changing partners. The practice of the ancient Greek or the Northern Italian city-states was such an instance; wars between shifting groups of combatants maintained the independence of those states over long stretches of time. The action of the same prin­ciple safeguarded for over two hundred years the sovereignty of the states forming Europe at the time of the Treaty of Mimster and West­phalia (1648). When, seventy-five years later, in the Treaty of Utrecht, the signatories declared their formal adherence to this prin­ciple, they thereby embodied it in a system, and thus established mutual guarantees of survival for the strong and the weak alike through the medium of war. The fact that in the nineteenth century the same mechanism resulted in peace rather than war is a problem to challenge the historian.

Polanyi has now set up the problem he proposes to solve: Why did peace break-out? Why did historical events which led to wars in the past, did not do so over the Hundred-Years? 

Third Section: Explanation of the Hundred Years Peace as due to emergence of a Peace Interest — Haute Finance was interested in maintaining Peace among European Powers to protect global investments made across national boundaries. Very interestingly, he notes that literary discourse changed to reflect the peace interest. Patriotism went from being a prized virtue to a barbaric atavism! This change reflects the influence and power of haute finance. A very important theme throughout this work is the idea that a social purpose becomes effective only when it is made concrete and operational in the form of an institution. Institutions are embodiments of social goals. This ability to see through institution to the underlying spirit is extremely anti-positivists, and accounts for the clarity of Polanyi, and the confusion of the positivist historians, who can only string together sequences of observable facts without being able to discern the underlying causes. 

[Omitted material explaining the varied and complex constellation of classes with interests in maintaining peace]

Interests, however, like intents, necessarily remain platonic unless they are translated into politics by the means of some social instrumen­tality. Superficially, such a vehicle of realization was lacking; both the Holy Alliance and the Concert of Europe were, ultimately, mere group­ings of independent sovereign states, and thus subject to the balance of power and its mechanism of war. How then was peace maintained?

Fourth Section: After describing specific details of peaceful outcomes, the surface events, Polanyi turns to examination of the deeper causes , which led to these outcomes. In particular, he focuses on the role of haute finance. He describes how these transnational financiers had interest in maintaining peace, to protect their investments, and also how they acted to do so.

But the Concert of Europe, which succeeded it (The Holy Alliance), lacked the feudal «s well as the clerical tentacles; it amounted at the best to a loose federa­tion not comparable in coherence to Metternich-‘s masterpiece. Only on rare occasions could a meeting of the Powers be called, and their jealousies allowed a wide latitude to intrigue, crosscurrents, and diplo­matic sabotage; joint military action became rare. And yet what the Holy Alliance, with its complete unity of thought and purpose, could achieve in Europe only with the help of frequent armed interventions was here accomplished on a world scale by the shadowy entity called the Concert of Europe with the help of a very much less frequent and oppressive use of force. For an explanation of this amazing feat, we must seek for some undisclosed powerful social instrumentality at work in the new setting, which could play the role of dynasties and episcopades under the old and make the peace interest effective. This anonymous factor was haute finance.

Haute finance, an institution sui generis, peculiar to the last third of the nine­teenth and the first third of the twentieth century, functioned as the main link between the political and the economic organization of the world in this period. It supplied the instruments for an international peace system, which was worked with the help of the Powers, but which the. Powers themselves could neither have established nor main­tained. While the Concert of Europe acted only at intervals, haute finance functioned as a permanent agency of the most elastic kind. Independent of single governments, even of the most powerful, it was in touch with all; independent of the central banks, even of the Bank of England, it was closely connected with them. There was intimate con­tact between finance and diplomacy; neither would consider any long-range plan, whether peaceful or warlike, without making sure of the other’s good will. Yet the secret of the successful maintenance of gen­eral peace lay undoubtedly in the position, organization, and techniques of international finance.

Both the personnel and the motives of this singular body invested it with a status the roots of which were securely grounded in the private sphere of strictly business interest. The Rothschilds were subject to no one government; as a family they embodied the abstract principle of internationalism; their loyalty was to a firm, the credit of which had become the only supranational link between political government and industrial effort in a swiftly growing world economy. In the last resort, their independence sprang from the needs of the time which demanded a sovereign agent commanding the confidence of national statesmen and of the international investor alike; it was to this vital need that the metaphysical extraterritoriality of a Jewish bankers’ dynasty domiciled in the capitals of Europe provided an almost perfect solution. They were anything but pacifists; they had made their fortune in the financ­ing of wars; they were impervious to moral consideration; they had no objection to any number of minor, short, or localized wars. But their business would be impaired if a general war between the Great Powers should interfere with the monetary foundations of the system. By the logic of facts it fell to them to maintain the requisites of general peace in the midst of the revolutionary transformation to which the peoples of the planet were subject.

Organizationally, haute finance was the nucleus of one of the most complex institutions the history of man has produced. [Omitted materials detailing this complexity]

Haute finance was not designed as an instrument of peace; this function fell to it by accident. The motive of haute finance was gain; to attain it, it was necessary to keep in with the governments whose end was power and conquest. (…) The organization and personnel of haute finance, on the other hand, was international, yet not, therefore, alto­gether independent of national organization. For haute finance was able to serve a new interest, which had no specific organ of its own, for the service of which no other institution happened to be available, and which was nevertheless of vital importance to the community: namely, peace. Not peace at all cost, not even peace at the price of any ingredient of independence, sovereignty, vested glory, or future aspira­tions of the powers concerned, but nevertheless peace, if it was possible to attain it without such sacrifice.

Not otherwise. Power had precedence over profit. [Omitted historical materials to prove that national power considerations trumped commercial considerations]

International finance had to cope with the conflicting ambitions and intrigues of the great and small powers. (,,,) And yet by functional determination it fell to haute finance to avert general wars. The vast majority of the holders of government securities, as well as other in­vestors and traders, were bound to be the first losers in such wars, especially if the currencies were affected. The influence that haute finance exerted on the Powers was consistently favorable to European peace. And this influence was effective to the degree to which the gov­ernments themselves depended upon its co-operation in more than one direction. Consequently, there was never a time when the peace in­terest was unrepresented in the councils of the Concert of Europe. If we add to this the growing peace interest inside every nation where the investment habit had taken root, we shall begin to see why the awful innovation of an armed peace of dozens of practically mobilized states could hover over Europe from 1871 to 1914 without bursting forth in a shattering conflagration.

Fifth Section: Haute Finance promoted peace to protect international investments. Constitutional Governments, with budgets, and gold standard, were enforced, because these suited international investors — Austerity was required because expansionary monetary policies would adversely affect exchange rates and damage positions of foreign investors. IMF plays exactly the same role today — though this happened after Polanyi’s writing.  

Finance—this was one of its channels of influence—acted as a powerful moderator in the councils and policies of a number of smaller sovereign states. Loans, and the renewal of loans, hinged upon credit, and credit upon good behavior. Since, under constitutional govern­ment (unconstitutional ones were severely frowned upon), behavior is reflected in the budget and the external value of the currency cannot be detached from the appreciation of the budget, debtor governments were well advised to watch their exchanges carefully and to avoid policies which might reflect upon the soundness of the budgetary posi­tion. This useful maxim became a cogent rule of conduct once a coun­try had adopted the gold standard, which limited permissible fluctua­tions to a minimum. Gold standard and constitutionalism were the instruments which made the voice of the City of London heard in many smaller countries which had adopted these symbols of adherence to the new international order. The Pax Britannica held its sway sometimes by the ominous poise of heavy ship’s cannon, but more frequently it prevailed by the timely pull of a thread in the international monetary network.

[Omitted historical material which traces how haute finance operated across the globe, avoiding wars between European]

We have become too much accustomed to think of the spread of capitalism as a process which is anything but peaceful, and of finance capital as the chief instigator of innumerable colonial crimes and ex­pansionist aggressions. Its intimate affiliation with heavy industries made Lenin assert that finance capital was responsible for imperialism, notably for the struggle for spheres of influence, concessions, extrater­ritorial rights, and the innumerable forms in which the Western Powers got a stranglehold on backward regions, in order to invest in railways, public utilities, ports, and other permanent establishments on which their heavy industries made profits. Actually, business and finance were responsible for many colonial wars, but also for the fact that a general conflagration was avoided. Their affiliations with heavy industry, though really close only in Germany, accounted for both. Finance capi­tal as the roof organization of heavy industry was affiliated with the various branches of industry in too many ways to allow one group to determine its policy. For every one interest that was furthered by war, there were a dozen that would be adversely affected. International capital, of course, was bound to be the loser in case of war; but even national finance could gain only exceptionally, though frequently enough to account for dozens of colonial wars, as long as they remained isolated. Every war, almost, was organized by financiers; but peace also was organized by them.

The precise nature of this strictly pragmatic system, which guarded with extreme rigor against a general war while providing for peaceful business amidst an endless sequence of minor ones, is best demonstrated by the changes it brought about in international law. While nationalism and industry distinctly tended to make wars more ferocious and total, effective safeguards were erected for the continuance of peaceful busi­ness in wartime.  [Omitted Material: many examples of how commerce continued, despite wars].

Thus the new organization of economic life provided the back­ground of the Hundred Years’ Peace. (omitted historical details) in every case peace was maintained not simply through the chancelleries of the Great Powers but with the help of concrete organized agencies acting in the service of general interests. In other words, only on the background of the new economy could the balance-of-power system make general conflagrations avoidable. But the achievement of the Concert of Europe was incomparably greater than that of the Holy Alliance; for the latter maintained peace in a limited region in an unchanging Continent, while the former succeeded in the same task on a world scale while social and economic progress was revolutionizing the map of the globe. This great political feat was the result of the emergence of a specific entity, haute finance, which was the given link between the political and the economic organization of international life.

It must be clear by this time that the peace organization rested upon economic organization. Yet the two were of very different consistency. Only in the widest sense of the term was it possible to speak of a polit­ical peace organization of the world, for the Concert of Europe was essentially not a system of peace but merely of independent sovereign­ties protected by the mechanism of war. The contrary is true of the economic organization of the world. Unless we defer to the uncritical practice of restricting the term “organization” to centrally directed bodies acting through functionaries of their own, we must concede that nothing could be more definite than the universally accepted principles upon which this organization rested and nothing more concrete than its factual elements. Budgets and armaments, foreign trade and raw material supplies, national independence and sovereignty were now the functions of currency and credit.

By the fourth quarter of the nine­teenth century, world commodity prices were the central reality in the lives of millions of Continental peasants; the repercussions of the Lon­don money market were daily noted by businessmen all over the world; and governments discussed plans for the future in light of the situation on the world capital markets. Only a madman would have doubted that the international economic system was the axis of the material existence of the race. Because this system needed peace in order to function, the balance of power was made to serve it. Take this eco­nomic system away and the peace interest would disappear from poli­tics. Apart from it, there was neither sufficient cause for such an inter­est, nor a possibility of safeguarding it, in so far as it existed. The suc­cess of the Concert of Europe sprang from the needs of the new interna­tional organization of economy, and would inevitably end with its dissolution.

[Omitted Materials: Dizzyingly complex and shifting constellations of powers and economic regimes, but through all the changes, peace was preserved]

In the nineties haute finance was at its peak and peace seemed more secure than ever. British and French interests differed in Africa; the British and the Russians were competing with one another in Asia; the Concert, though limpingly, continued to function; in spite of the Triple Alliance, there were still more than two independent powers to watch one another jealously. Not for long. In 1904, Britain made a sweeping deal with France over Morocco and Egypt; a couple of years later she compromised with Russia over Persia, and the counter alliance was formed. The Concert of Europe, that loose federation of independent powers, was finally replaced by two hostile power group­ings ; the balance of power as a system had now come to an end. With only two competing power groups left its mechanism ceased to function. There was no longer a third group which would unite with one of the other two to thwart whichever one sought to increase its power. About the same time the symptoms of the dissolution of the existing forms of world economy—colonial rivalry and competition for exotic markets— became acute. The ability of haute finance to avert the spread of wars was diminishing rapidly. For another seven years peace dragged on but it was only a question of time before the dissolution of nineteenth cen­tury economic organization would bring the Hundred Years’ Peace to a close.

In the light of this recognition the true nature of the highly artificial economic organization on which peace rested becomes of utmost sig­nificance to the historian.

Concluding Remarks: Trans-national character of haute finance led to the emergence of a powerful force, backed by enormous amounts of money, which had interest in maintaining peace between European powers. This interest was actualized by the use of available institutions, namely the balance of power being maintained by the Concert of Europe. The balance of power ended in 1904 (as above). Also, the economic system based on exploiting exotic markets came to a close as about 85% of the globe came under European influence in early twentieth century — there was no more colonies to conquer. Breakdown of balance of power, together with the zero-sum nature of trade — one power could only benefit at expense of the other — led to the outbreak of WW1. Note that Polanyi’s account dynamites the methodology of modern economics, by showing the inseparable linkage between politics and economics, and also the necessity of looking at the historical context. This historical background provides the context for the study of the role and functions of Central Banks in the period 1800-1914, as discussed in Lecture 13, based on a paper by Goodhart. This analysis will be taken up in the next post.   


2 thoughts on “The Hundred Years’ Peace

  1. Referring to this period as “100 years of peace” is simply wrong. There were numerous wars in Europe from 1815-1914, including the Franco-German war of 1870, the war between Prussian and Austria in 1866, and two wars involving several northern European powers in 1848 and 1864.
    This was not a peaceful period in Europe.

    1. Read The Great Transformation by Karl Polanyi for a discussion – he is the originator of the phrase, and explains the reasons for its use, and also the apparent exceptions.

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