Prior to the nineteenth century, European interstate relationships were described as “balance of power” politics; a system in which the continent’s various kings, queens, and princes sought to protect themselves from one another by matching their power with that of their potential adversary. It was, thus, a system characterized by the constant jockeying for control over resources, territory, and political influence, with no one state emerging triumphant. Even the wars conducted against Napoleon were fought by a series of unstable alliances. Seven successive coalitions were raised to counter France’s occupation. By the war’s end, the trauma of the two-decade-long conflict brought with it a realization on the part of Europe’s monarchs, that they could not return to the former status quo. Balance of power politics, with its unremitting struggle for dominion, had “generated intolerable international tensions, produced increasingly serious armed conflicts, and inspired progressively extravagant plans of aggression.”1 Moreover, Napoleon had threatened the political existence of all of Europe’s monarchs. If Europe was to maintain peace and sovereign leaders preserve their dominions, something new and altogether different would have to be devised. From 1814 to 1815, representatives from over two hundred European polities came together. Led by the Allied powers—Great Britain, Prussia, Russia, and Austria—the first European Congress was held in Vienna.
By 1817, after a subsequent series of congresses, the “Concert of Europe” was in place: a set of multilateral agreements that laid the foundation for “a functioning and promising system of international relations” radically different from the balance of power system it replaced.2 The new order was based on “a principle of general union, uniting the states collectively with a federative bond, under the guidance of the principal Powers.”3 Indeed, the Concert of Europe marked a new world order, one that was unique in European history. It was a period of sustained peace. From 1814 to the outbreak of the First World War in 1914, there were, of course, a small number of wars in Europe, but they were relatively limited in impact and duration and involved only a handful of states.4 Although there is debate about the accuracy of Polanyi’s characterization of this period as the “Hundred Years Peace,” in terms of average battle durations, battle deaths per year, and a host of other statistical criteria, nineteenth-century Europe was far less war-ridden and militaristic than it had been in the eighteenth century or was to become in the twentieth century. In fact, “During the 17th and 18th centuries, the Great Powers were involved in war 94% and 78% of the time, respectively, compared to 40% of the time in the nineteenth century.”5
Two major components of the New World order helped secure the peace. First, a framework was created to ensure that peace would be the common responsibility of the major five powers—the four Allied powers plus France (after the Bourbon King had been restored to the throne). To achieve this end, the negotiating powers devised “a loose mechanism for consultation and dispute resolution through periodic great-power meetings.”6 Meetings of the sovereigns or their respective ministers were scheduled to be held at fixed periods, “for the purpose of consulting upon their common interests, and for consideration of the measures which at each of those periods shall be considered the most salutary for the repose and prosperity of Nations and for the maintenance of the Peace of Europe.”7 But perhaps even more importantly, the great powers redrew the map of Europe. Territorial rights of large and small states alike were agreed upon. This included the guaranteed independence of Switzerland and Spain; Holland’s restoration; the formation of a confederated Germany; the division of Italy and restoration of papal states to Rome, as well as agreements over contested territories between Portugal and Spain, Norway and Sweden, and Russia and Prussia.
Settled boundaries put an end to destabilizing large-scale conflicts among the largest powers on European soil. Conflicts did continue to be staged between Europe’s dominant powers but, for the most part, hostilities among the most powerful nations were moved offshore. No longer competing for territories in Europe, “wars in the periphery of the system” took on far “greater significance.”8 Rivalries over the control of resources and markets were waged in far-flung territories, like the Levant, the Sudan, and Afghanistan. “The post-Napoleonic period was to be a period of unparalleled colonial expansion. During the last three decades of the nineteenth-century, ‘extra-state wars’ peaked.9 The forums developed in the Concert of Europe were even used to negotiate settlements over how to carve up the entire African continent among the European powers. Through these mechanisms, “the map of domination of the world’s spaces changed out of all recognition between 1850 and 1914,” 10 furthering economic development of the Western economies.
The end of power politics had also brought to a close “the era of great European trading monopolies” and “non-tariff barriers which had distinguished the eighteenth century.”11 Although certain sectors of trade and industry would continue to be protected,12 by and large, the peace marked the demise of Mercantilism as it had been practiced for centuries. Therefore, another consequence of the Concert of Europe was that the new order “had profound and long-lasting effects on international trade worldwide.”13 Indeed, the “world’s trade between 1800 and 1840 [almost] doubled.”14
Change in trade protectionism did not happen in one fell swoop. The Napoleonic Wars had been long and severe. Directly after the decades long conflict, the continent was exhausted, trade and industry were depressed, and governments were encumbered with debt. Added to these woes, “In 1816 there was a disastrous harvest all over Europe. The price of all provisions rose while the prices of all other commodities continued to fall.”15 Even when new innovations in farming were able to produce record harvests,16 without the high government demand that had existed during the war, agricultural prices plummeted.17 Given how large a portion of Europe’s population was engaged in agriculture, these price fluctuations had an enormous impact. Clapham ventures that, in England, despite having the continent’s strongest economy, “the years from 1815 to 1820 were, both economically and politically, probably the most wretched, difficult, and dangerous in modern English history.”18 The depression in England was so deep that it “continued almost unabated until 1833, when importation of foreign fertilizers greatly reduced production costs.”19 The “great agricultural depression of the period after the Napoleonic wars,” thus, prompted a “clamor for protection to agriculture.”20
And yet, there were rays of hope. At the same time that agriculture was languishing, industry was slowly rallying. Between 1819 and 1825 manufacturing began to recover.21 England experienced “a building boom” before 1825, which produced a “general increase of physical production . . . in cotton textiles, coal and iron, and transportation.”22 Ironically, the resurgence of industry was due in large part to the same the cessation of war demand. Whereas agricultural prices were negatively impacted, the dramatic change in demand “caused dislocation and unemployment on a vast scale.”23 This, counterintuitively, spelled good fortune for the industrialists, because “ample labour supplies” were “moving into the market,” rendering the price of labor relatively cheap. The cumulative effects amplified over time, so that between 1853 and 1855, industrial “employment grew by leaps and bounds” both in Europe and overseas, “whither men and women now migrated in enormous numbers.”24 Everything from British cotton exports to Belgian iron exports just about doubled between 1850 and 1860.25 Even in Prussia, 115 companies, not counting the ubiquitous railway companies, were established: “almost all of them in the euphoric years between 1852 and 1857.”26
The recovery of industry was also made possible because a surge of investment, which, in spite of all the difficulties of the postwar period, was considerable. Though the long war hurt farmers and agriculturalists, “large Government borrowings had created a new class—the Fund holders.” These financiers “benefited from the falling prices; [and] the system of taxation tended to favour them at the expense of other classes, they, therefore, continued to have a substantial surplus to invest.”27 With this rise in investment and industry, trade barriers were slowly peeled away. “Prohibition of export of raw silk was withdrawn in Piedmont, Lombardy and Venetia in the 1830s, freedom to export coal from Britain enacted in the 1840s.”28 In France, “tariffs were adjusted downward, in coal, iron, copper, nitrates, machinery, horses,” after “Industries complained of the burden of the tariff on their purchases of inputs, and especially on the excess protections accorded to iron.”29
By the end of the 1840s, a movement towards free trade was underway across Europe:
The Swiss constitution of 1848 called for a tariff for revenue only and protective duties were reduced progressively from 1851 to 1885. Netherlands removed a tariff on ship imports and prohibitions against nationalization of forcing ships. Belgium plugged gap after gap in its protective system in the early 1850s . . . Piedmont . . . and Spain, Portugal, Norway and Sweden (after 1857) undertook to dismantle their protective prohibitive restrictions.30
The definitive turning point came in 1860, when France and Great Britain signed a free trade agreement (see Chapter 5). The treaty ended tariffs on main items of trade between the two countries, such as wine, brandy and silk goods from France; and coal, iron, and industrial goods from Britain. But the effects of the treaty went far beyond these two nations. As Kindleberger writes, “with the Anglo-French treaty the trickle [of free-trade] became a flood.”31 This set the stage for the dramatic upsurge a liberal trade in the mid-century, when “Between 1850 and 1870 it increased by 260 percent.”32
Polanyi observed that after the Napoleonic Wars, “London had become the financial center of a growing world trade.”33 One reason for London’s ascent was that the war had undermined the eighteenth-century seats of finance, Amsterdam, and Paris. “Amsterdam’s relative position would deteriorate during the Napoleonic Wars and never fully recover. Paris, too, was hard hit by France’s defeat.”34 The defeat of France further enhanced the position of London’s financiers because debts incurred by Napoleon’s campaigns, particularly the disastrous Russian campaign, were enormous. With the added burden of war reparations, “The restored [French] monarchy remained very weak and was only rescued by a series of new loans in 1817.”35 It was the London-based bank, Baring Brothers, that provided the funds. Thus, “The financing of France’s war debt was a clear sign of London’s ascendance as the leading financial centre.” Indeed, “By 1815, Barings had become the largest bank in Europe.”36 Within a decade, however, Barings was overshadowed by another British banking family, the financial behemoth run by the Rothschild family, who had also made their fortune financing Great Britain’s war effort during the Napoleonic Wars. Between the Baring Brothers Bank and the Rothchild’s, Britain became “the world centre for the issuing of foreign loans. Countries such as Prussia, Austria, Russia, Belgium, Spain, Brazil, and Argentina took out loans in the British capital.”37 The cumulative result was that by 1875, London was “supreme in cosmopolitan and domestic money markets alike.”38
Britain’s uncontested control over finance is also attributable to its industrial and imperial expansion during the Napoleonic Wars. During the war effort, the British army and navy funded improvements in steam engines as well as critical innovations in iron and related trades—including iron railways and iron ships. In this way, the “seat and backbone of the nineteenth-century British capital goods industry” were developed through wartime spending, which bolstered the subsequent phases of the Industrial Revolution.39 All the while, “imperial tribute extracted from the colonies into capital invested all over the world enhanced London’s comparative advantage as world financial center vis-à-vis competing centers such as Amsterdam and Paris.”40 As a result, “By the end of the Napoleonic Wars, Britain was in a unique position relative to other European states. It was the only industrial power. It had the only naval force that was truly global. And its empire far surpassed in geographic scope that of any other European power.”41 The combined effect was that London was set to become “the natural home of haute finance.”
Once established, British banking remained the center of global finance. Throughout the nineteenth century, Britain “enjoyed relative economic preeminence, the deepest financial markets, and the largest creditor position.”42 Their worldwide financial networks and dominant position in trade had forced countries to be dependent upon the kingdom and maintain allegiance to Britain. The global networks of the “closely knit body of cosmopolitan financiers” became a central “instrument of British governance of the interstate system.”43 Indeed, for most of the century, the United Kingdom was able “to govern the interstate system as effectively as a world empire.”44
With its economic and military might, Britain became the world leader—the taste- and change-maker of the day. Given her inordinate powers, Britain was able to foist her ideology of free markets upon the world. As Polanyi argues, “The nineteenth century, as cannot be overemphasized, was England’s century. The Industrial Revolution was an English event. Market economy, free trade, and the gold standard were English inventions.”45 British predominance was, thus, a critical means through which economic liberalism became internationalized.
In the 1860s, only two countries were on the gold standard: Great Britain and Portugal. Most countries used some form of bimetallism. There were countries that adopted both silver and gold as legal tender, as had been done initially in the United States. Others designated silver as their national currency and issued a parallel gold currency for international trade.46 However, after 1870, an increasing share of the world economy came into the orbit of the classical gold standard.47 By 1885, “So complete was this transformation” that “there was no longer a single mint open to the unlimited coinage of silver in either Europe or the U.S.”48 In fact, within five years of the network of free-trade agreements that had begun with the Cobden-Chevalier Treaty, Europe had begun to move toward the unification of their monetary systems.
A few factors helped promote the adoption of a unified system of exchange. At the most basic level, gold is an ideal medium for high-volume trading. In fact, “the value per bulk of gold was roughly 15 times greater than that of silver,” therefore, it has been argued that “gold would naturally become more important as a medium of exchange in the environments where the size and frequency of transactions and incomes were growing.”49 But the major impetus behind adopting a unified currency was that Europe was rapidly becoming a “single market” system. The dramatic growth in international commerce had brought into being “a climate favourable to the simplification of commercial practices.”50 As early as 1851, discussions began about standardizing the means of trade. The reason that year is notable is that representatives from around the world came to London for “The Great Exhibition of Works of Industry of All Nations.” The event was basically the first of a series of World’s Fair, at which countries from around the world could display their achievements in special exhibitions. Given the opportunity, the participants of the Great Exhibit were able to discuss trade relations. They quickly recognized that the existing system of trade was anachronistic. The problem was that goods measured and priced in units that differed from country to country was impeding trade.51
Initially, France played a central role in this process. In fact, as early as 1850, France, Belgium, Switzerland, and Piedmont were unofficially using a common currency.52 In December 1865, this group of countries, under the direction of Napoleon III, formally rationalized the exchange system and adopted the Latin Monetary Union (LMU). In addition to adopting a single currency—the franc (which was the first official international monetary system ever established), France, Belgium, Italy, and Switzerland also agreed upon a unified system of weights and measures—grams, meters, the decimal systems.53 But France did not stop there. Once the LMU was ratified in 1866, the French Ministry of Foreign Affairs sent out a letter to diplomatic agents across Europe, as well as in Russia, the Ottoman Empire, and the USA, inviting all the advanced nations to either join the LMU and adopt the French coinage, or at the very least to participate in a conference that would be organized to create a new monetary union.54
Even so, as important as France was to the rationalization of European exchange, it is difficult to take the enormous economic and political power of Britain out of the equation. Britain may not have had “hegemonic” control over the global economy as many have argued,55 but her power and influence was undeniably critical in shaping the adoption of the gold standard. The first sign of British influence came immediately after the LMU was established. Though several countries were supportive of France’s proposed convention, the British Foreign Secretary “declined the offer to join the Convention,” explaining that the agreement would require that they “alter very materially the existing monetary system of this country.”56 Without British support, the French program for a unified coinage was dead by 1871.57 In its stead, the British backed its own international gold standard.
The regime of the classical gold-standard superintended by the British was distinct from what France had proposed in the 1860s. The international gold standard, as it came to be implemented, was integrally connected to the “liberal creed.” Unlike the proposed French system, the British gold standard would not be monitored or regulated through political collaboration. It would work automatically, steered by the inviolable mechanism of the market.58 It therefore very much reflected the values of the British establishment. British liberals, “such as Mill and Cobden saw free trade primarily as a tool to strengthen a peaceful cosmopolitan world society. Free trade would foster peace, they argued, by creating ties of interdependence and spreading ‘civilization.’ ”59 They therefore asserted that, by itself “the gold standard would maintain international equilibrium, discipline government policy, and foster international trade and finance by providing a common monetary standard. And it would accomplish these goals automatically through market forces with a minimum of discretionary government involvement in the monetary sector.”60
There were some dissenting voices, even in Britain. Nationalists feared that the gold standard would overpower national economic interests. German economist Friedrich List famously criticized liberals for seeing “individuals as mere producers and consumers, not as citizens of states or members of nations”; and argued that in contradistinction to the liberal notions of cosmopolitanism, “As the individual chiefly obtains by means of the nation and in the nation mental culture, power of production, security, and prosperity, so is the civilisation of the human race only conceivable and possible by means of the civilisation and development of the individual nations.”61 In the end, however, the tide had already turned. Opposing voices were drowned out by the drumbeat of haute finance.
Britain’s ability to compel other countries to adopt this liberalized version of the gold standard was due to her predominance on the world stage. As global capital markets became progressively centered in London, gold gained ascendency. Some have argued that “the status of gold derived disproportionately from the British example”;62 in other words, that it was due to England’s soft power. Certainly, by mid-century Britain had become the model of progress and success. Great Britain was the “undisputed technological leader, [ . . . ] the largest exporter and importer in the world and possessed the largest commercial fleet.”63 Nonetheless, London’s coercive power was clearly central. London’s financial markets had become the lynchpin of international finance and commercial trade, all of which were aligned with the gold standard. With the British pound functioning as “the world’s currency for international transactions,”64 Britain could impose her will on the world.
The impact of the gold standard on trade and finance was almost immediate. “From the 1870s on, the widespread adoption of the gold standard enabled capital to move internationally without fear of arbitrary changes in currency values or other financial hiccups.”65 With this surge in capital mobility, “The globalization experienced by the world economy in the decades before World War I was nothing short of extraordinary.”66 However, the gold standard enabled something else as well—increased economic instability. Domestic currencies increasingly became the handmaiden of international capital markets. Tying one’s currency to gold stockpiles made it difficult for countries to adjust their own monetary policies in response to changes in economic conditions. Thus, the gold standard and capital mobility created the conditions that would, in the not-too-distant future, bring about the demise of the new monetary regime. In particular, countries now faced the risk of suffering the consequences of a run on gold during periods of economic hardship. That is precisely what occurred in the 1870s and 1890s. Consequently, the period of formal adherence to the gold standard was short-lived: only from “1862–1866, 1883, and then again between 1924 and 1932 (when exchange controls were introduced).”67
For the first half of the nineteenth century, free-market liberalism was more of a theory than an actual practice. The fact is that guilds still controlled pricing and labor and governments continued to maintain controls over trade and moneylending. This was true even in the birthplace of laissez-faire ideology, Britain. Polanyi put great stock in the 1834 repeal of the Poor Laws, identifying this as the moment that the “liberal creed” was put into public policy. But Britain remained protectionist for another decade. In fact, most protectionist policies in Britain were not ended until after 1846. Arguably, the more significant moment for liberalism was the repeal of the Corn Laws. The “Corn Laws” had been instituted during the great agricultural depression following the Napoleonic Wars to protect farmers from the terrible price fluctuations of the period. With the defeat of the Corn Laws in 1846, the bourgeoisie won the day over feudal landlords and free markets won the day over protectionist trade laws. This laissez-faire victory was to be brought continent-wide in 1848.
The coming world-historic change was precipitated by an agrarian recession, in which a European-wide economic crisis was sparked. It began in 1846 when a major harvest failure in Ireland and England created a shortage of domestic food supplies. The food shortages in the United Kingdom had a domino effect. It produced “price increases and trade deficits” that were so severe that they led to “an external drain of bullion from the Bank of England.”68 To make matters worse, the banking crisis was magnified by a speculative bubble. Between the 1820s and the 1840s, there had been “a vast expansion of credit, particularly through speculative investment centered in projects for railway construction.”69 With the retrenchment of the British economy, railroad investments now “exceeded the limits of the capital resources of the nation.”70 In short, the agrarian recession burst the European “railroad bubble.” “Credit money in effect came crashing down, leaving a shortage of ‘real money’ and specie in 1847–8.”71
The credit crunch was felt across the entire European continent. The problem was that “the whole continent [had become] vulnerable to simultaneous” economic calamities, as Europe became “more and more unified precisely because of the internationalism of money power.”72 A witness to these events, John Stewart Mill, described how the crisis spread:
This combination of a fresh demand for loans, with curtailment of the capital disposable for them, raised the rate of interest, and made it impossible to borrow except on the very best security. Some firms . . . stopped payment: their failure involved more or less deeply many other firms which had trusted them; and, as usual in such cases, the general distrust, commonly called a panic, began to set in.73
The social and political impact of the economic crisis was enormous. It did not only impact banks and speculators. The agrarian crisis “undermined the already low living standards of peasants, workers and the petit bourgeoisie, . . . [and] led to an increase in strikes, demonstrations, food riots and increased criminality.”74 France was particularly hard hit. “Runs on banks resulted in many failures in the provinces and affected even the Bank of France, which saw its deposits reduced from 320 million in June 1845 to 57 million in January 1847.”75 The lapse in confidence, thus, “produced a liquidity crunch at just that moment when calls for the unpaid balance on railway shares found French capitalists dangerously overextended.”76 From the banks and the capitalists, the effects of the credit crunch cascaded across society in a descending spiral:
Once the crisis began seriously to impinge on the financial sector, it was inevitable that it should also affect industry. In rural areas, grain shortages translated into a reduction in cash income because none but the richest peasants disposed of a sufficient surplus to take advantage of high prices. The result was a decrease in rural purchasing power and demand for urban goods. The diminished need for agricultural labor also accelerated the migration of landless peasants toward the cities. This growing urban working class was particularly hard hit, because its greater market dependence left it highly vulnerable to economic fluctuations.77
In fact, the banking crisis so destabilized Europe that it precipitated a year of revolution. In 1848, “Revolution triumphed through the great central core of the continent.”78 In countries across Europe, the radical lower middle-classes banded together with discontented artisans and small shopkeepers, to demand a new order based on the liberal principles of civil rights and parliamentary governments. Between February and April of that year, Europe’s monarchies were overthrown in succession. The “revolutionary zone” stretched west from France, north to the German Confederation, south to Italy, and east to the Austro-Hungarian Empire. Developed and underdeveloped countries were equally vulnerable, with anti-monarchical zeal hitting regions as “backward” as Calabria and Transylvania, as “advanced” as Rhineland and Saxony, as literate as Prussia, and as illiterate as Sicily.79
In the end, the liberal moment did not last. By the end of 1849, “all the revolutions had collapsed and the short and violent European experiment in liberal (and, in some countries, democratic) politics was over.”80 Yet, the impacts of 1848 were long lasting. Europe’s traditional order never fully recovered. After the revolutions of 1848, sovereigns across Europe were forced to adopt liberal changes. “Even the most arch-reactionary Prussian junkers discovered during that year that they required a newspaper capable of influencing ‘public opinion’—in itself a concept linked with liberalism and incompatible with traditional hierarchy.”81 “Most important of all was the emancipation of hundreds of thousands of peasants, religious minorities and colonial slaves.”82
The credit crisis of 1847–48 had, thus, upset the footing upon which the old order had stood. As national banks fell like dominoes, trust in a state-led economic order was eroded. The crisis sparked an “overwhelming consensus among economists or indeed among intelligent politicians and administrators” that the antidote to the economic woes of the mid-1840s was economic liberalism.83 After 1849, all existing “institutional barriers to the free movement of the factors of production, to free enterprise and to anything which could conceivably hamper its profitable operation, fell before a world-wide onslaught.”84 Across the continent, guild laws that prohibited artisans’ freedom to practice whatever trade they wanted were abolished, the laws against usury were disbanded, and governments loosened their control over mining. “Even establishing joint-stock companies with limited liability became both considerably easier and independent of bureaucratic control.”85
The remnants of the medieval mercantilist economy were finally and forever liquidated. A new consensus was now in place that would allow capitalism to reign. In Polanyian terms, the credit crisis of 1847–48 was the catalyst that allowed the liberal creed to flourish and disembedded markets to spread internationally.