I’m not in the habit of trying to make lemonade out of lemons, but there may be an upside to the seismic financial transformation of the last few weeks. A couple of weeks ago, one of our correspondents (and since I can’t do a search on the comment strings, I can’t remember who it was) suggested reading Karl Polanyi’s book The Great Transformation. Because I trust the community, I immediately ordered it on Amazon. For the last three days I have been reading it and finding myself making more margin underlines than any book I’ve read in a while. Polanyi, one of our great economic historians published the book in 1944, when the world was exhausted by two world wars in forty years.
He begins the book by looking back to the Century of Peace from 1816-1916 , in which no major world war was fought, to try to understand where we went wrong in the 20th Century. His conclusion is that the key to a long period of peace is a stable Balance of Power between three or more states, combined with a stable world financial system (he calls it Haute Finance) which constantly stresses that war is destructive to trade.
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 the 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.
The bankers who financed the great powers–Great Britain, France, Germany and Russia (the Concert of Europe) worked hard to maintain the equilibrium and prevented the grievances of small powers from disturbing the status quo.
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 goodwill.
And Polanyi is very clear about why the Balance of Power collapsed. After 1904, Britain made deals with both France and Russia to form a power block against Germany. The multi-polar world became a bi-polar world.
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.
So how does this history apply to our moment? Since the fall of the Berlin Wall, America has lived in a Uni-polar world. We were the acknowledged super power. But slowly over the last 8 years the Bush Administration has managed to surrender that position both by reckless wars that didn’t need to be fought and by the savage destruction of our economic power. We now have returned to a world where the balance of power is real and in that reality is the hope for a new Hundred Years of Peace.
I see the balance of power as two tiers. On the top tier are the U.S., China, Europe and Russia. With a collective population of 2.2 billion, they are clearly the top of the world order. The second tier of influence would be India, Brazil and the petro-states of the Gulf Region. Here the influence stems from either natural resource wealth or sheer mass of population. If you look at any of the recent actions where the U.S. has sought to act unilaterally, the actions of other great powers have sought to frustrate us. Even in Georgia, it’s obvious the Europe does not view Russia through Dick Cheney’s cold war lens. China and Russia both work with Iran to balance American aggression. China invests in Brazil to spur their new oil discoveries.
And all the while the powers of finance extract their tribute. When Russia gets too aggressive in Georgia or with Joint venture partners like BP, capital flees and their stock market falls sharply. The U.S. refuses to regulate its mortgage bond market and European investors flee. Even though French President Sarkosy was trying to make American style capitalism work in his country, he and his government are now pulling back.
Prime Minister François Fillon has called on Washington to act. “We’re not going to accept to pay for the broken dishes of a failed regulation” and a “corruption of capitalism,” he said Thursday.
The next American President is going to live in a multi-polar world. Unilateralism is dead. If we can steady the financial world, this balance of power could allow us to enter into a new phase of global cooperation and commerce. Our ability to navigate this world will not be determined by the size of our army, but by our diplomatic skills. I am convinced that John McCain does not grasp this reality. But it’s clear to me that Barack Obama does.