The Deluge: The Great War, America and the Remaking of the Global Order, 1916-1931

by Adam Tooze

Most troublesome questions are thus handed over, sooner or later, to the historian. It is his vexation that they do not cease to be troublesome because they have been finished with by statesmen, and laid aside as practically settled . . . It is a wonder that historians who take their business seriously can sleep at night’. Woodrow Wilson1

The war, he warned them, was remaking the world. ‘It is the deluge, it is a convulsion of Nature . . . bringing unheard-of changes in the social and industrial fabric. It is a cyclone which is tearing up by the roots the ornamental plants of modern society . . . It is an earthquake which is upheaving the very rocks of European life. It is one of those seismic disturbances in which nations leap forward or fall backward generations in a single bound.’

Mapping the emergence of this new order of power is the central aim of this book. It requires a particular effort because of the peculiar way in which America’s power manifested itself. In the early twentieth century, America’s leaders were not committed to asserting themselves as a military power, beyond the ocean highways. Their sway was often exercised indirectly and in the form of a latent, potential force rather than an immediate, evident presence. But it was nonetheless real. Tracing the ways in which the world came to terms with America’s new centrality, through the struggle to shape a new order, will be the central preoccupation of this book.

Economics was the pre-eminent medium of American power, military force was a by-product.

If the United States was bent on instituting an Open Door world and had formidable resources at its disposal to achieve that goal, why did things go so badly awry?

counts. The wager of this book is different. It seeks to locate a dramatic shift in the calculus of power, not external to, but within the government machinery itself, in the interaction between military force, economics and diplomacy.

The upshot of this reinterpretation is that contrary to the Dark Continent narrative, the violence of the Great War was resolved in the first instance not into the Cold War dualism of rival American and Soviet projects, nor into the no less anachronistic vision of a three-way contest between American democracy, fascism and Communism. What the war gave rise to was a multisided, polycentric search for strategies of pacification and appeasement. And in that quest the calculations of all the great powers pivoted on one key factor, the United States. It was this conformism that filled Hitler and Trotsky with such gloom. Both of them hoped that the British Empire might emerge as a challenger to the United States.

No self-respecting nineteenth-century nation was without its sense of providential mission. But what was remarkable in the wake of World War I was the degree to which American exceptionalism emerged strengthened and more vocal than ever, precisely at the moment when all the other major states of the world were coming to acknowledge their condition as one of interdependence and relativity.

For all their forward-looking vision, progressives both of Wilson’s and Hoover’s generation were fundamentally committed not to a radical overcoming of these limitations, but to preserving the continuity of American history and reconciling it with the new national order that had begun to emerge in the wake of the Civil War. This then is the central irony of the early twentieth century. At the hub of the rapidly evolving, American-centred world system there was a polity wedded to a conservative vision of its own future.

The most powerful states of Europe were now borrowing from private citizens in the United States and anyone else who would provide credit. Lending of this kind, by private investors in one rich country to the governments of other rich developed countries, in a currency not controlled by the government borrower, was unlike anything seen in the heyday of late Victorian globalization.

As the billions piled up, maintaining payments on the outstanding debts, avoiding the humiliation of a default, became overriding preoccupations both during the war itself and even more in its aftermath.

The speed with which the United States claimed pre-eminent political leadership was as sudden as the emergence of its naval and financial power. It was a product of the Great War itself.

But thanks to its God-given natural endowments, America had no need of extensive territorial conquests. Its economic needs had been formulated at the turn of the century by the ‘Open Door’ policy. The US had no need of territorial domination, but its goods and capital must be free to move around the world and across the boundaries of any empire.

But, as Lloyd George had been arguing already since the summer of 1916, American loans established not simply Britain’s subordination to Wall Street, but a condition of mutual dependence. The more that Britain borrowed in America and the more it purchased, the harder it would be for Wilson to detach his country from the fate of the Entente.

If the war ended in a world divided between victors and vanquished, the force necessary to sustain it would be immense. But what Wilson aspired to was disarmament. At all costs he wanted to avoid the ‘Prussianization’ of America itself. This was why a peace without victory was so essential. ‘Victory would mean peace forced upon the loser . . . It would be accepted in humiliation, under duress, at an intolerable sacrifice, and would leave a sting, a resentment, a bitter memory upon which terms of peace would rest, not permanently, but only as upon quicksand .

However, the world he wanted to create was one in which the exceptional position of America at the head of world civilization would be inscribed on the gravestone of European power. The peace of equals that Wilson had in mind would be a peace of collective European exhaustion. The brave new world would begin with the collective humbling of all the European powers at the feet of the United States, raised triumphant as the neutral arbiter and the source of a new form of international order.21 Wilson’s vision was neither one of gutless idealism nor a plan to subordinate US sovereignty to international authority. He was in fact making an exorbitant claim to American moral supremacy, rooted in a distinctive vision of America’s historic destiny.

Already by the end of April, Washington had provided Britain with an unprecedented official advance of $250 million, pending congressional approval of as much as $3 billion in loans. As it turned out, Congress took longer than expected, which only served to highlight the state of complete dependence into which the Entente had slipped. In the last days of June, Britain came within hours of insolvency.29 But with the US as a co-belligerent, there was no longer any real risk of disaster.

Wang pilloried the stark difference in America’s attitude towards European and Asian affairs: ‘It is becoming rather ridiculous, at a time when America is engaged in a world-war . . . with the avowed principal object of saving democratic principle of government from being smothered by autocratic militarism, that the power and influence of the US should be applied in one place abroad, and should not be applied in another place abroad.’

Ukraine was no less vital to Russia’s future as an industrial power. The region produced all of Russia’s coking coal, 73 per cent of its iron and 60 per cent of its steel. Ukraine’s manganese was exported to all the blast furnaces of Europe.3 If an independent government established itself in Kiev this would be a huge blow to the Soviet regime. Furthermore, unlike the baronial assemblies that were providing the Germans with a fig leaf of legitimacy in the Baltic and Poland, the Rada could not be dismissed as a creature of foreign power. At Brest, the Bolsheviks had so far managed to present themselves as the champions of national liberation against German aggression. But already in December as the first exchanges between the Soviet authorities and Kiev deteriorated into hostility, the all-important qualification to Lenin and Stalin’s endorsement of self-determination became apparent.

But despite this triumphalism, by the spring of 1918 not even a victorious peace of stupendous dimensions could restore the national unity that had launched the German war effort in August 1914. The USPD denounced Brest as a Peace of Violation (Vergewaltigungsfrieden). For the SPD, the once loyal Eduard David spoke fiercely against the short-sightedness of the Kaiser’s government. Germany had gambled away a unique opportunity to found a lasting new order in eastern Europe. ‘The grand perspective of arriving at a friendly neighbourly relationship with all of eastern Europe encompassing both politics and economics has been buried.’

Back in 1914 conventional liberal wisdom had insisted that the globalization of the world economy would make prolonged war impossible. The collapse of trade and finance would bring the fighting to a halt within months. That crisis had indeed arrived in the autumn of 1914, when financial markets seized up and the stocks of ammunition ran low.

Central banks took charge in the money markets of New York, London, Paris and Berlin.1 Imports and exports were tightly regulated. Scarce raw materials and food were rationed. Far from limiting the combat, industrial mobilization and technological innovation acted as a flywheel on the war.

In November 1918 Germany’s planned economy surrendered in the face of a second even more powerful economic vision – a triumphant model of ‘democratic capitalism’. At the heart of the democratic war effort stood the much-heralded economic potential of the United States. World War I marked the point at which America’s wealth stamped itself dramatically on European history.

Despite the already legendary prowess of Detroit, there was too little time for America’s distinctive new system of mass-manufacturing to have a truly decisive impact.13 The year 1918 should not be confused with 1944. In 1918 it was the American Army that fought with French weapons, not the other way around. Three-quarters of the aircraft flown by the US Air Service were of French origin.

Originally confined to the financing and purchasing of wheat, then the distribution of coal, inter-Allied cooperation extended in the autumn of 1917 to the common regulation of all-important shipping capacity.22 The Allied Maritime Transport Council, based in London, was made up of representatives of all the combatant governments, headed by Britain and France. Though each delegate owed primary loyalty to his national government, they collectively constituted an inter-governmental authority capable of making decisions affecting the lives of literally every inhabitant of Europe, whether civilian or soldier. Given the extremity of their situation, by early 1918 it was the Entente Powers, not Wilson, who were exploring radical new forms of cooperation and coordination.

the limit of the Entente’s credit would undoubtedly have been reached in the course of 1917. But instead, overriding the limit of the private capital market and replacing it with a radically new geometry of financial and economic power, one rich democracy, the United States, channelled huge public loans to London, Paris and Rome. It was this direct financing out of US public credit that helped to give the Entente its crucial margin of advantage over Germany.

But once the decision to engage the US was adopted, once it was made into both a cornerstone of military strategy and of Entente propaganda, it created an immense dependence, and the Wilson administration both before and after American entry into the war was conscious of this. In the spring of 1917 Wilson’s Treasury Secretary (and son-in-law) William McAdoo made quite clear that he aimed to replace sterling with the dollar as the key reserve currency.35 As a first move, McAdoo proposed that no funds from congressionally approved Liberty Loans should be used to support either sterling or the franc. Nor should London be permitted to use such funds to repay overdrafts that it had contracted with J. P. Morgan during Wilson’s credit freeze over the winter of 1916–17.

By early 1918 the Indian currency system was close to collapse. In Bombay political discussion of the Montagu-Chelmsford reforms was overshadowed by tumultuous scenes on the exchanges as merchants scrambled to cash their rupee notes for the dwindling stock of silver. Given London’s precarious position, only the United States had the resources to underwrite the monetary system of the Raj. On 21 March Washington announced that it would throw open for sale the enormous silver reserves of the US. Under the Pittman Act the sale of 350 million ounces of silver was approved, at the fixed price of one dollar per ounce.

In their struggle to defeat Germany, the Entente entered into an unprecedented period of dependence on the United States. This new asymmetrical financial geometry signalled the end to the great-power competition that had defined the age of imperialism. It did so in a double sense. On the one hand, the Entente’s transatlantic war effort defeated Germany. But at the same time it raised the US to a position of unprecedented dominance, not over its Caribbean satrapies or the Philippines, but over Britain, France and Italy, the great powers of Europe. In its basic outline this was exactly the kind of unilateral power to which Woodrow Wilson had aspired with his strategy of ‘peace without victory’.

Would the democracies of Europe cooperate in their submission to the financial demands of their new creditor? Would Washington be able to block the efforts of the European Powers to enrol the United States in their own, more multilateral vision of a new international economic order? And would America’s own institutions prove adequate to the challenge of an entirely new kind of financial leadership?

The ultimate driver of this inflationary wave was monetary expansion originating at the heart of the global monetary system in Europe and the US. As war expenditure surged, in none of the combatant countries did taxes keep up. The state skimmed off purchasing power by issuing government bonds repayable long after the end of the war. But much surplus purchasing power remained in circulation. Furthermore, a large part of the bonds were purchased not by savers but by banks. Rather than immobilizing household funds, the bonds provided the banks with a safe investment that could be resold for cash to the central bank – the Bank of England, Bank of France or Reichsbank. Like a cash deposit, the bonds therefore served as the basis for a pyramid of credit-creation.

Despite the propagandistic bluster, there was no substantial increase in either output or productivity. With an expanding flow of demand competing for a static volume of output, the result was inevitable. The war was paid for through an inflation tax. Whereas real output barely increased, between 1916 and 1920 nominal national income surged from $43.6 billion to $82.8 billion. Prices doubled.

As the cost of living surged, real wages lagged behind.54 Between 1914 and 1916 the profits earned by American export industry were nothing short of phenomenal.55 As labour unions struggled to maintain their members’ real earnings, they unleashed an unprecedented wave of labour disputes that shook America between 1917 and 1919.

Far from serving as the stable anchor of a new international economic order, the effect of the wartime mobilization on the US economy was profoundly destabilizing. Both the American public and key decision-makers in the Wilson administration came to experience their country no longer as standing detached and pre-eminent above the global crisis, but as dangerously enmeshed within it. The stage was set for the post-war backlash.

The new order must offer impartial justice for both victors and vanquished. No special interests ought to prevail over the common interests of all. There could be no special understandings within the league. There could be no self-interested economic combinations, nor any continuation of warlike boycotts or blockades. All international agreements must be entirely public. Once more Wilson claimed to be giving voice to the ‘unclouded’ thoughts ‘of the mass of men’, and he challenged the leaders of Europe, if they dared, to voice their dissent from his principles.

It becomes far easier to understand the course of events after October 1918 if we acknowledge at the outset that Wilson was always highly sceptical about the democratization process in Germany. The American President was the very opposite of the universalist for which he is too often mistaken. For Wilson, genuine political development was a gradual process deeply determined by profound ethno-cultural and ‘racial’ influences. Regarding Germany he held simplistic views. Ever since the summer of 1917 he had been convinced that the ‘military masters’ of Germany were pursuing a two-pronged strategy: ‘... stand pat if they win, yield a parliamentary government if they lose’.

In 1914 British public debt had stood at only £694.8 million. Five years later the figure had mounted to a dizzying £6.142 billion, of which £1 billion was owed to America, and not in sterling but in dollars (Table 7).45 Already in 1919 debt service amounted to 25 per cent of the budget and would in the foreseeable future rise to something closer to 40 per cent.

The treaty of separation between Germany and Poland was one of the most comprehensive and technical settlements in the annals of diplomacy.32 Never before in Europe’s long history of territorial rearrangement had such careful consideration been given to squaring both general principles of justice and the imperatives of power with complex territorial realities. Never before had the interests of different national and ethnic groups, both political and economic, been so carefully weighed in the balance.

In more unbuttoned moments Lloyd George referred to the Poles as ‘hopeless’. Lord Cecil regarded them as ‘orientalised Irish’. Jan Smuts resorted to his South African idiom. As far as he was concerned the Poles were simply ‘kaffir’.

I always forget how racist Europeans can be towards each other.

For the Entente there was nothing that was clearer in the wake of the war than that its economic and financial position had changed forever. For the French the shock was no doubt severest of all.5 Before the war Paris had been second only to London as a source of international credit. Now France was a needy borrower.

In some respects it was clearly dangerous, but, with more than two years distance from the events, Keynes was able to admit that ‘public passions and public ignorance play a part in the world of which he who aspires to lead a democracy must take account; . . . the Peace of Versailles was the best momentary settlement which the demands of the mob and the characters of the chief actors conjoined to permit’.

If Britain and America were to insist on full repayment, ‘victorious France must pay her friends and allies more than four times the indemnity which in the defeat of 1870 she paid Germany. The hand of Bismarck was light compared with that of an ally or of an associate.’

Those who after World War I were calling for a rapid return to private finance were arguing ‘by analogy . . . that a comparable system between governments’ could be made a ‘permanent order of society’, this despite the fact that the war had left obligations that were ‘far vaster’ and of ‘definitely oppressive scale’. These debts corresponded in daily life to ‘no real assets’ and were unrelated in any direct way to the system of private property. To attempt an immediate return to laissez-faire liberalism was both unrealistic and dangerous.

But he was scathing about those who believed that ‘with the early removal of obstacles in the form of the blockade and similar measures to free international intercourse, private enterprise may be safely entrusted with the task of finding the solution’. The problem of restoring Europe was simply ‘too great for private enterprise, and every delay puts this solution further out of court’. The governments of Europe and America must act to restore basic lines of credit so that private initiative might then take over, otherwise those countries most in need of credit would be caught in a vicious circle of economic crisis, political uncertainty and diminished creditworthiness.42 If the liberal economy was to be saved, if unpolitical international markets were to be restored, the precondition was a political masterstroke.

By 22 March communist militants had formed into Red Guard detachments and seized control of the industrial cities of Essen and Duisburg. A desperate effort was made at mediation, but with 50,000 of its own men under arms, the radical left now wanted a trial of strength.63 Amidst bitter fighting and gruesome reprisals, tens of thousands of pro-government troops, spearheaded once more by the Freikorps, retook the Ruhr. The government side suffered at least 500 dead. Over 1,000 insurgents were killed, the majority of whom were executed after capture.

The significance of the demand for racial non-discrimination for the Hara government in the spring of 1919 was precisely that it was the only issue on which the militants of both left and right could agree.

To pre-empt the Japanese, House sought to persuade Balfour to accept an amendment to the Covenant’s preamble that would include a quotation taken from the Declaration of Independence to the effect that all men were created equal. ‘Colonel H’s view was that such a preamble, however little it squared with American practice, would appeal to American sentiment, and would make the rest of the formula more acceptable to American public opinion.’13 Balfour’s response was striking. The claim that all men were created equal, Balfour objected, ‘was an eighteenth-century proposition which he did not believe was true’. The Darwinian revolution of the nineteenth century had taught other lessons. It might be asserted that ‘in a certain sense . . . all men of a particular nation were created equal’.

In light of attitudes in California on the Asian issue it was hugely convenient to let the British Empire provide the first line of resistance.15 There was no prospect whatsoever of Congress approving a Covenant that limited America’s right to restrict immigration.

In early 1919 General Ugaki Kazushige, a subordinate of Tanaka, commented: ‘Britain and America seek, through the League of Nations, to tie down the military power of other nations whilst nibbling away at them through the use of their long suit, capitalism. There doesn’t seem to be much difference between military conquest and capitalist nibbling.’36 Japan must hone its sword to respond in its own way. In October 1921 three young Japanese military attachés met in Baden-Baden, Germany, to discuss the example provided by the European states for Japan. For these future leaders of right-wing Japanese militarism, Ludendorff’s concept of a new era of Total War waged between huge global power blocs was one of the most inspiring concepts produced by World War I.

Both the victors and the vanquished looked to the United States as the pivot of the new order. As Wilson had prepared to leave Paris on 26 June, Lloyd George addressed to him a final despairing letter, imploring him to place the credit of the American government ‘at the disposal of the nations for the regeneration of the world’.2 But it was not only financial reconstruction that hinged on Washington. The Franco-German peace depended on the joint security guarantee of London and Washington. In Asia, Prime Minister Hara of Japan was hinging his foreign policy on Washington, whilst China looked to the League of Nations for redress.