The Anxious Triumph

by Donald Sassoon

  Protectionism also dominated the growing capitalist economy of the United States, now widely perceived as the champion of free trade. Here the southern states, which traditionally favoured free trade, since they exported cotton picked by slave labour, had been defeated in the Civil War by the protectionist and industrializing northern states. The end of slavery ‘removed the social foundation for sustained opposition to bourgeois hegemony’, explained Eugene Genovese, somewhat regretfully.59 The North’s victory led to an exceptionally high wall of tariffs (far higher than in any European country except Russia) behind which American industry continued its long journey towards global triumph. The USA’s commitment to economic protectionism clashes with the popular image of American capitalism as uninhibited, go-getting, raw, and naked. In reality such fearless jungle capitalism could roar at will only because it was cushioned and protected by a state that made sure it never had to face international competition unless it could beat it. When Friedrich List explained in The National System of Political Economy (1841) that the industrialization of the latecomers could only be assured by protective tariffs, he was speaking with the voice of German nationalism and also in union with the sentiments of Alexander Hamilton, one of the Founding Fathers of the United States and author of well over half of the Federalist Papers (the main source for the interpretation of the Constitution). It was not in Germany but in the USA (he lived there as an exile between 1825 and 1832) where List refined his protectionist views.60 Hamilton, the first US Secretary of the Treasury, realized that Britain’s economic policy would compel the USA to remain a mere exporter of primary products and importer of manufactured goods (as was Latin America). Convinced that only industrialization could bring about prosperity, Hamilton, in his Report on Manufactures (1791), written for Congress, advocated protectionism as the instrument that would make the USA a leading agricultural and industrial power.61 As it turned out, he was right. An unprotected American cotton-manufacturing industry could not have successfully withstood British competition: ‘Removal of the tariff would have placed almost all American cotton textile producers … under severe pressure. Few would have survived the introduction of free trade.’62

  American tariffs were high throughout the nineteenth century and beyond. During the 1870s and 1880s industrialists became ever more enthusiastic about protectionism because it kept European competitors at bay. The high tariffs provided benefits not so much to small firms as to ‘the giant American corporations that were integrating vertically and gaining a long-term advantage over their European competitors, who were restricted to smaller markets’.63 Protective tariffs were an essential element in the economic programme of the then dominant Republican Party, which stood for an industrially independent and self-contained prosperous nation.64 The extent to which protectionism actually promoted industrialization in the southern states of the USA is uncertain, but it certainly was of benefit to the North.65

  In the United States tariffs had also been virtually the sole way of raising revenue for the Federal government before the Civil War. Afterwards they were seen as a means of supporting the pension system for Union veterans, thus further strengthening Republican dominance in the North.66 The first peacetime federal income tax, introduced only in 1894 (the Revenue Act) precisely in order to compensate for an eventual lowering of tariffs, was very low (2 per cent). On 4 March 1897, in his inaugural address, President William McKinley explicitly declared that direct taxation should always be avoided, except in time of war. What he called ‘tariff taxation’ (i.e. tariff duties) was much to be preferred. For this would ‘give ample protection and encouragement to the industries and the development of our country’.67

  Throughout Europe, whether in France or Russia, Germany or Italy, governments, in the decades preceding the First World War, took measures to encourage their own industries (steel in particular) and gave priority to their own domestic entrepreneurs in public-works programmes. This was the era of ‘protected markets’, markets made safe from foreign competition by a tariff wall, or made difficult to access by a mixture of political and economic measures. Great Britain had few tariffs, but its empire, formal and informal, was, in practice, a protected market. Spain, on the other hand, suffered from sluggish growth because it had lost much of its Latin American markets to the British.68

  In Britain conservatives embraced protectionism once more. It seemed to offer a way out of the difficulties facing the country after a long period of supremacy, above all the challenges it faced from Germany, the United States, and other powers. British agriculture as a share of GNP had been declining throughout the nineteenth century, dropping from 20 per cent in 1860 to 7 per cent in 1914.69 This is when British consumers started to consume Danish bacon, Dutch eggs, and New Zealand butter instead of producing it themselves.70 In 1870 the UK’s share of world manufacturing production was 31.8 per cent, the USA was second with 23.3 per cent, and Germany, the third manufacturing power, was at some distance with 13.2 per cent. By 1881 the USA was first with 28.6 per cent while Germany was still well below the UK. On the eve of the First World War, however, the USA had 35.8 per cent of world manufacturing, a greater share than the UK had had in 1870. Germany had 15.7, and the UK was now third with 14 per cent.71 No wonder the British were alarmed.

  Laggard countries were worried too. Catching up had become ever more difficult for them. After Unification in 1861, Italy had relatively low tariff barriers, but in 1878 the Italian government led by Agostino Depretis slammed tariffs on wheat to keep American wheat at bay, then introduced steel subsidies while Italian suppliers were given priority in awarding public-works contracts.72 Further tariffs were introduced in 1887 by Francesco Crispi, Prime Minister after Depretis’s death in July of that year. As a consequence, relations with France, Italy’s main economic partner (in 1886, 44 per cent of Italy’s export, went to France), deteriorated, giving way to a period of acrimonious relations. In this trade war Italy emerged the net loser, since Italian exports, particularly agricultural products from the south (wine, olive oil, and citrus), to France fell by two-thirds in the years immediately after 1887.73 Some Italian industrialists, however, seemed to do reasonably well. Once tariffs were imposed, the country experienced considerable growth, particularly in textiles, whose export increased, though it is not easy to work out how much this was due to tariffs and how much to lower Italian wages.74

  Other laggards outside Europe improved their position. Mexico experienced rapid economic growth in the years 1884 to 1900 thanks to a flood of foreign investments, based on an increase in the export of mineral products (copper, zinc, lead, and silver). Exported manufacturing was mainly textiles. There was little protectionism, certainly less than in Europe, and there were no subsidies to industry. Yet very few of the gains were spent on economic modernization. The main culprits, in this case, were not foreign imperialists but local elites, who, like many in Latin America, ‘were too preoccupied with hobnobbing with the haute couture of Paris, visiting the spas of Gstaad … or gambling in Monte Carlo’, rather than developing manufacture.75 Besides, since Mexican labour was cheap, there was little incentive to innovate. The beneficiaries, apart from the local elites, were European and American investors.

  Protectionism did not interrupt either the constant growth of the world economy. Exports, as a proportion of national production, reached unprecedented levels: 14 per cent in 1913.76 In 1830, European exports had been only 2 per cent of total production, rising to 9 per cent in 1860. Trade was propelled by growth and not the other way round.77

  Globalization also increased. Until the 1880s, some 80 per cent of the trade of industrialized countries had taken place among themselves. Between 1880 and 1913 exports to what we later came to call the ‘Third World’ increased but only modestly in proportion to the overall growth of trade.78 The last remaining free-trading nation, Britain, however, became more global, and by 1913 two-thirds of British exports went outside Europe, 21 per cent to the Americas and 43 per cent to Asia, Africa, and Ocean
ia.79

  By the outbreak of the First World War protectionism had run its course, and the international trading system had become multi-polar and extremely competitive. Capitalism had become global. Britain was still rich and powerful. The Edwardian era that followed, and its continental counterpart the Belle Époque, was a period of unprecedented prosperity, at least for the industrial classes of the Western world. But this prosperity was marred by competitive nationalism. Laggards and not so laggards, old and new hegemons, all were haunted by anxiety that erupted into frequent quarrels. They quarrelled over useless colonies as well as useful ones; they quarrelled over armaments, over who was threatening whom; they quarrelled over tariffs; they entered into alliances against each other. The French and the Italians clashed over Tunisia (1881); the French, British, and Germans clashed over Morocco in 1905 and in 1911. Germany, Austria-Hungary, and Italy established the so-called Triple Alliance (1881); Russia, France, and Great Britain retorted with the so-called Triple Entente (1907). After all, as if to prove Palmerstone’s famous 1848 dictum (‘We have no eternal allies, and we have no perpetual enemies’), Russia, which had been, in 1873, an ally of Austria-Hungary and Germany (the so-called League of the Three Emperors), now switched its allegiance to France and Britain; Italy, one of Austria’s allies, detested Austria (it still claimed that ‘its’ Trentino was still occupied by the Austrians) and, in fact, when Italy entered the First World War in 1915, a year after it had started, it did so against Austria, a fellow member of the Triple Alliance; Germany feared France’s revanchist ambitions; Britain was worried about German naval rearmament.

  In October 1912 the First Balkan War broke out. It pitted four Balkan states (Bulgaria, Serbia, Greece, and Montenegro) against the Ottoman Empire, forcing it out of most of its European territories. The Second Balkan War (1913) was a conflict among the victors of the first. Bulgaria, dissatisfied with its shares of the spoils, attacked Serbia and Greece. Romania intervened, as did the Ottoman Empire, which regained some of its lost territories. Bulgaria lost out. The so-called Great Powers were in disarray, unable to decide what were their priorities were: did Britain really want to preserve the territorial integrity of the Ottoman Empire, as it claimed? Did Russia want to weaken Austria-Hungary? Was France not ready to take on Germany? To what extent did Austria-Hungary want to expand further into the Balkans? Would Slav nationalism threaten the stability of the multinational Austro-Hungarian Empire? To what extent was Serbia following Russian policies? Would Germany back Austria in case of war? No wonder the Balkan Wars were seen as a dress rehearsal for the First World War.

  Eventually, a ‘world’ war did start and it started in the Balkans. The immediate cause was of striking modernity: the action of a group of suicide bombers ‘with a cult of sacrifice, death and revenge’.80 Its repercussions were global, though the fighting was not. Most of it took place in Europe, some in the Middle East. Towards the end Japan entered the war to grab some of Germany’s colonies, as did Siam (Thailand) for internal nationalist reasons. In 1917 Russia exploded in revolution and soon dropped out of the war. The United States joined the war in 1917, even though Woodrow Wilson, who, until then, had shown little interest in foreign affairs, had declared in August 1914, probably worried that the war would divide Americans between ethnic groups of different European parentage, that ‘The United States must be neutral in fact, as well as in name, during these days that are to try men’s souls.’81 This largely European war signalled the end of European supremacy; it signalled the rise of Soviet Communism, the sole significant challenge to capitalism for the following seventy years; it signalled the end of the first wave of globalization; and it confirmed the supremacy of America.

  The issue of protectionism, its timing, its extent, had been endlessly debated. Arguments varied and were more or less plausible according to the size of the country, the structure of its industry, and the relative strength of the various elites, particularly the industrial and financial classes. Yet the political establishment, at least in Europe, was still dominated by landed and aristocratic interests, though by then they had come to accept the desirability of industrialization. Capitalism was winning not because the capitalists were powerful, or better lobbyists, or more articulate or backed by a majority of public opinion, but because industrial power had become the unavoidable backbone of state power. The triumph of capitalism, in the decades before the First World War, meant that no government, regardless of its inclination, could ignore industrialization.

  Protectionism, a return to mercantilism that would have horrified Adam Smith, altered fundamentally the relation between the state and the economy and the relations between states. Under free trade, the state could pretend to be ‘outside’ the economic sphere. It could look on, benevolently, as industrialists competed the world over for a larger share of markets. Trade seemed to be a private matter. If ‘their’ own industrialists did well, politicians could glory in their successes, attributing them to some national or ethnic superiority as they would glory in the success of their writers or scientists. Protectionism was different. It was a national state policy aimed at changing the rules of the game in favour of ‘their’ industrialists. It was the unmistakable sign that the state saw it as its duty to protect ‘its’ industrialists against those of other countries. It transformed the competition between firms into a competition between nations. In the era of globalized capitalism, protectionism linked, indissolubly, the fate of a nation’s capitalism to that of a nation’s government. Yet, at the same time, many capitalists were also ‘internationalists’ in the sense that they chose a globalizing strategy. Capitalism has no unifying logic. The controversy over free trade and protectionism could never be resolved, because their economic realities are diverse and variable. What may be advantageous at one time may be disadvantageous at another. Trade could facilitate capitalist development in one country while making it more difficult in another. Politics may demand what economics warns against. Protecting inefficient sectors may be economically undesirable but politically desirable.

  Conclusion: Still Triumphant? Still Anxious?

  The decades preceding the First World War were, for the industrialized countries, a time of progress and optimism. Looking back to those years and aware of the incipient conflict, we might surmise that any optimism was mixed with anxiety, perhaps even foreboding. Yet neither the people of Europe nor their leaders were particularly conscious of being on the eve of a major catastrophe. There was anxiety, of course, but it was inbuilt in the capitalist system, its dynamism, the speed with which it proceeded, the novelties it produced, and the rapidity with which old habits were destroyed. Capitalism moved on without a goal or a project. Its nemesis, socialism/communism, is/was not a system like capitalism; it was a political project devised by conscious political actors aimed at establishing a communally owned economy or, in its milder social-democratic version, a socially concerned, ethical, compassionate, and heavily regulated capitalism. Capitalism’s predecessor, feudalism, did not have change at its core (though it changed continuously). In a feudal system, things remained exactly as they were, with day following night, spring following winter, and serfs paying their dues to landlords while living in the fear of God.

  Capitalism is different. Although it too has no mind, no politics, and no unity, change is part of its own dynamic, its own history. Change comes from within itself. Capitalism’s only criterion of success is its own survival, which in turn depends on constant change. ‘Modern capitalism,’ wrote Joan Robinson, ‘has no purpose … except to keep the show going.’1 Robinson was on the Keynesian ‘left’. But on the neo-liberal ‘right’ Friedrich Hayek also argued, in The Fatal Conceit (1988) – his final envoi against socialism – that ‘the extended order of human cooperation, an order more commonly, if somewhat misleadingly known as capitalism … resulted not from human design or intention but spontaneously.’2 Hayek, perhaps unwittingly, was echoing Marx, for whom the ‘only purpose’ of capital was ‘self-expansion’.3 ‘Accum
ulate, accumulate! That is Moses and the prophets!’ Marx wrote, adding:

  Accumulation for accumulation’s sake, production for production’s sake: by this formula classical economy expressed the historical mission of the bourgeoisie, and did not for a single instant deceive itself over the birth-throes of wealth.4

  And, as Keynes wrote in 1933, ‘the … individualistic capitalism’ that had emerged after the Great War, ‘… is not a success. It is not intelligent, it is not beautiful, it is not just, it is not virtuous – and it doesn’t deliver the goods …’ And he added: ‘But when we wonder what to put in its place, we are extremely perplexed.’5 Capitalism itself does not ‘understand’ what is going on.

  To be anxious is not new, since the future is mysterious. For centuries there was plenty to be anxious about: the weather, pestilence, natural catastrophes, wars: all like acts of God. We knew these were inevitable, we just hoped they would not strike us, or not now. We prayed, tried to prevent diseases, prepared for self-defence, and accumulated stocks against eventual crop failures. With capitalism and modernity this changes. Dangers do not come from the gods (or not only from the gods) – but from human interaction.