HISTORY PROJECT

Topic- Economics of
the First world War:
Imperialism & Lassiez
Faire

Submitted by: Submitted to:

Srajan Yadav Dr. Rachna Sharma
Roll no. - 19078 (Assistant Professor of History)

RAJIV GANDHI NATIONAL UNIVERSITY OF LAW, PUNJAB

ACKNOWLEDGEMENT
On completion of this project, it is my privilege to acknowledge my heartfelt gratitude and
indebtedness towards my teachers for their valuable suggestion and constructive criticism. Their
precious guidance and unrelenting support kept me on the right path throughout the whole
project.

I wish to express my sincere gratitude to my History Teacher Dr. Rachna Sharma ma’am for her
guidance and encouragement in carrying out this project work.

I also wish to express my thanks to my friends for their ideas because of which this project
became more captivating. I am also thankful to my institution library for providing the required
materials.
 CERTIFICATE

Dr. Rachna Sharma                                                               Date:18/05/2021

(Assistant Professor of History)

This is to certify that the project is submitted to Rajiv Gandhi National University
of Law, Patiala in partial fulfilment of the requirement of the B.A. LLB (Hons.)
course. It is an original and bona-fide research work carried out by Mr Srajan
Yadav under my supervision and guidance. No part of this project has been
submitted to any University for the award of any Degree or Diploma, whatsoever.
 TABLE OF CONTENTS

1) Introduction

2) Imperialism
i. As a Cause of First World War
ii. Economic Imperialism
iii. Imperialism after war

3) The Policy of Laissez Faire

i. Pre-World war Laissez faire
ii. Origin of Macroeconomics

4) Conclusion
 INTRODUCTION

The war fought between July 28, 1914, and November 11, 1918, was known at the time as the
Great War, the War to End War, and (in the United States) the European War. Only when the
world went to war again in the 1930s and ’40s did the earlier conflict become known as the First
World War. Its casualty totals were unprecedented, soaring into the millions. World War I is
known for the extensive system of trenches from which men of both sides fought. Lethal new
technologies were unleashed, and for the first time a major war was fought not only on land and
on sea but below the sea and in the skies as well. The two sides were known as the Allies or
Entente—consisting primarily of France, Great Britain, Italy, Russia, and later the United States
—and the Central Powers, primarily comprised of Austria-Hungary (the Habsburg Empire),
Germany, and the Ottoman Empire (Turkey). A number of smaller nations aligned themselves
with one side or the other. In the Pacific Japan, seeing a chance to seize German colonies, threw
in with the Allies. The Allies were the victors, as the entry of the United States into the war in
1917 added an additional weight of men and materiel the Central Powers could not hope to
match.

The war resulted in a dramatically changed geo-political landscape, including the destruction of
three empires: Austro-Hungarian, Ottoman and Russian. New borders were drawn at its
conclusion and resentments, especially on the part of Germany, left festering in Europe.
Ironically, decisions made after the fighting ceased led the War to End War to be a significant
cause of the Second World War. As John Keegan wrote in The First World War (Alfred A.
Knopf, 1999), “The First World War was a tragic and unnecessary conflict … the train of events
that led to its outbreak might have been broken at any point during the five weeks of crisis that
preceded the first clash of arms, had prudence or common goodwill found a voice.”

Prime Minister of Germany Otto von Bismarck had prophesied that when war again came to
Europe it would be over “some damn foolish thing in the Balkans.” Indeed, the assassination of
Archduke Franz Ferdinand, heir apparent to the Habsburg throne of Austria-Hungary, and his
wife, Sophie, by a Serbian nationalist on June 28, 1914, was the match that lit the fuse—but it
didn’t create the powder keg. The outbreak of war between European nations was the result of
several factors:1

 Concern over other countries’ military expansion, leading to an arms race and entangling
alliances

 Fear of losing economic and/or diplomatic status

 Long-standing ethnic differences and rising nationalism in the Balkans

 French resentment of territorial losses in the 1871 Franco-Prussian War

 The influence exerted by military leaders

Following their 1871 victory in the Franco-Prussian War, the German states unified into a single
nation. Its leader, Kaiser Wilhelm II, eldest grandson of Britain’s Queen Victoria, envisioned an
Imperial Navy that could rival Great Britain’s large and renowned fleet. This would increase
German influence in the world and likely allow the country to expand its colonial holdings.
Britain, fearful of losing its dominance of the seas, accelerated its naval design and construction
to stay ahead of the Kaiser’s ship-building program.

Russia was rebuilding and modernizing its large army and had begun a program of
industrialization. Germany and Austria-Hungary saw the threat posed by Russia’s large
population and, hence, its ability to raise a massive army. They formed an alliance for self-
protection against the Russian bear.

France, still stinging over the loss of Alsace and part of Lorraine in the Franco-Prussian war,
made an agreement allying itself with Russia in any war with Germany or Austria-Hungary.
Britain, after finding itself friendless during the Second Boer War in South Africa (1899–1902)
allied itself with France and worked to improve relations with the United States of America.
Russia, with many ethnic groups inside its vast expanse, made an alliance with Serbia in the
Balkans.

1
Lambert, Nicholas A. (2012), Planning Armageddon, British Economic Warfare and the First
World War, Harvard University Press, Cambridge, Mass.
The old Ottoman Empire was crumbling; “The Sick Man of Europe” was the phrase used to
describe the once-powerful state. As its ability to exert control over its holdings in the Balkans
weakened, ethnic and regional groups broke away and formed new states. Rising nationalism led
to the First and Second Balkan Wars, 1912 and 1913. 2 As a result of those wars, Serbia increased
its size and began pushing for a union of all South Slavic peoples. Serbian nationalism led 19-
year-old Gavrilo Princip to assassinate Archduke Franz Ferdinand, heir apparent to the Habsburg
throne of Austria-Hungary, and his wife, Sophie. Austria-Hungary, urged on by Germany, sent a
list of demands to Serbia in response; the demands were such that Serbia was certain to reject
them. When it did, the Habsburg Empire declared war on Serbia on July 28, exactly one month
after the archduke’s assassination.3 Russia came in on the side of the Serbs, Germany on the side
of the Habsburgs, and the entangling alliances between the nations of Europe pulled one after
another into the war. Although diplomats throughout Europe strove to settle matters without
warfare right up to the time the shooting started, the influence military leaders enjoyed in many
nations won out—along with desires to capture new lands or reclaim old ones.4

IMPERIALISM

Imperialism is a system where a large, powerful nation dominates and exploits smaller nations,
which are known as colonies. Together, the imperial power and her colonies are known as an
empire. In most cases, the imperial nation is euphemistically referred to as the ‘mother country’.
It establishes control over its colonies against their will – for example, through infiltration and
annexation, political pressure, war or military conquest. Once control is established, this territory
is claimed as a colony. Colonies are governed by either the imperial nation, a puppet government
or local collaborators. A military presence is often stationed in the colony, to maintain order,
suppress dissent and uprisings and deter imperial rivals.5

2
Exchange in Greek Macedonia, The Rural Resettlement of Refugees, Clarendon Press, Oxford.
3
Id.

4
Id.

5
Robbins, L. (2000), A History of Economic Thought – The LSE Lectures, Medema, S. G.,
Samuels, W. J. (ed.), Princeton University Press, Princeton, New Jersey
Imperialism can have military or geopolitical advantages but its main lure is economic. Colonies
exist chiefly to enrich the imperial power. This may involve the supply of precious metals or
other resources, such as timber, rubber, rice or other foodstuffs. Colonies can also be invaluable
sources of cheap labour, agricultural land and trading ports.6

According to Paul Kennedy, economic imperialism and the Anglo-German trade rivalry were
crucial factors leading to the emergence of the Anglo-German antagonism, which contributed to
the outbreak of World War I. By the end of the Bismarck era, high German tariffs and growing
protectionism had already excluded many British goods from the German market. 7However,
despite Kennedy’s precise analysis of trade, this thesis is based on an oversimplification of
complex relations. One has to distinguish between the objective figures on the one hand and the
perceived situation on the other. In relative terms, in the two decades before 1914 one can talk
about a British decline and a German rise in export economies. In 1910 Germany’s share of the
world’s manufacturing capacity was already greater than that of the British. For British Social
Darwinists and nationalists, this development was identical to decline. However, this view did
not capture the reality of economic developments. Germany remained an important market for
British goods and vice versa. In 1913 Germany was in fact the second biggest market for British
exports and re-exports. Even if trade rivalry was a problem for individual firms, its dramatization
was mainly due to the press, which explained Britain’s relative decline with notions such as
“unfair competition”. Especially in imperial affairs, German and British traders and bankers
often cooperated quite successfully; at the same time, German banks had to compete with other
German firms, while British banks had to deal with British competition.

Unlike the British or French colonies, economically the German colonial empire was not
important for the mother country. It was also of little significance for the rising tensions between
the European Great Powers prior to the First World War. For the overseas expansion of
European states in the decades before 1914, informal imperialism and indirect rule were often
much more important than formal colonialism, as discussed during the famous
6
Id.

7
Harald Wixforth (2002). The Economic Consequences of the First World War. Contemporary
European History, 11, pp 477-488
Robinson/Gallagher controversy. The economic expansion of European firms, banks and
merchants, sometimes openly supported by “their” respective governments, created spheres of
influence that could later became areas of international and imperialist competition. However,
even if states and governments tried to control this form of economic expansion and hoped to use
it in connection with “national” political aims, economic and financial imperialism very often
remained a multinational project.8 It would be wrong to assume that “British”, “French” or
“German” enterprises always acted in the interests of their governments. In Neo-Rankean
terminology, used both by contemporary diplomats and by diplomatic historians, states acted as
subjects and consequently the economy was nationalized. However, economic imperialism
followed its own rules, which in some cases fit with the respective national political interests but
did not necessarily have to.

The intricate diplomatic and political problems caused by economic expansion are illustrated by
the example of the famous Baghdad Railway project. Since the late 1880s German banks,
especially the Deutsche Bank, had been active in Turkish affairs and in financing several Turkish
railway enterprises.9 At the turn of the century the position of German firms was so strong that
one can refer to certain regions of Turkey as parts of a German economic informal empire. The
government of the Ottoman Empire tried to persuade the German bankers to extend the already
existing railway lines to Baghdad and the Persian Gulf, mainly for strategic reasons. However, as
mentioned above, in 1903 these ideas met with British resistance, as this line would have been
the fastest route to India and would have been controlled by German firms. At the same time, the
German public discovered the project and started to “nationalize” it. However, despite the fact
that both German public opinion and the German government favored this “German” railway
line, it remained a multinational enterprise: more than one-third of the capital came from French
investors and French bankers, although the French government openly opposed the project.
Before 1914 financial imperialism very often remained multinational despite governmental

8
Hastings, Max (2013), Catastrophe 1914: Europe Goes to War, Alfred A, Knopf, New York.

9
Hermann, David G. (1996), The Arming of Europe and the Making of the First World War,
Princeton University Press, Princeton, N.J.
attempts to nationalize it. Banks viewed these projects as commercial opportunities and were
unconcerned with national prestige. Many governments were not even informed about the
activities of “their” banks, although in general they were aware that many firms did not follow
the respective “national” aims, but were mainly interested in earning money. 10

If one compares political with economic/financial imperialism, one other general distinction
should be made. Governments acted within the frame of the nation state or empire and often tried
to further national expansion. Multinational firms and banks, however, were confronted with the
challenge of economic globalization and had to act internationally if they wanted to expand
overseas. Until 1914 London remained the financial clearing center of the world and the London
stock exchange was the most important place for all kinds of transactions. The gold standard
guaranteed stable exchange rates, and internationally the pound sterling was the most accepted
currency for bills of exchange. In private a banker or trader could have been a hardcore
nationalist, but if he wanted to earn money he had to act internationally. Not only in India, but
also in many other regions of the world such as China, South Africa, Egypt, and some Latin
American countries, merchant bankers and traders from various countries were able to invest and
earn money because the British Empire and the British navy directly and indirectly guaranteed
stable relations and preserved so-called “Western” liberal norms and laws.

In a couple of cases economic investments could spur imperial conflicts. Governments could
claim to protect or defend investments that were threatened by an indigenous state or an imperial
competitor. Examples include the bankruptcies of Egypt (1876) and the Ottoman Empire (1875)
and the Venezuelan debt crisis, which started at the end of the 19th century. After the breakdown
of state finances in Egypt and Turkey, private committees of bankers founded new institutions
(Caisse de la Dette Publique Égyptienne, Caisse de la Dette Publique Ottomane), which took
control of tax revenues. As a result, the states lost a considerable part of their sovereignty and
foreign banks controlled the state’s budget. 11For European firms this classical form of financial
imperialism was much more effective than direct rule. At the same time, behind the scenes
European governments tried to influence “their” committees and bankers. During the 1870s and

10
Supra note 7.

11
Kiriţescu, C. C. (1967), Sistemul bănesc al leului şi precursorii lui, Vol II, Bucharest.
Kontogiorgi, Elizabeth (2006), Population
1880s in Egypt, several disputes between the French and the British caused tensions. For the
British, the German support was crucial. The Venezuelan debt crisis of 1902/03 led to serious
tensions between some European states, notably Germany and the United States. After internal
uprisings and civil war, the Venezuelan government was unable to pay back its foreign debts. A
British-German-Italian naval blockade escalated as German cruisers provoked skirmishes. These
military events alarmed the United States, which feared that the Monroe Doctrine would be
violated.

However, even if informal and financial imperialism contributed to the worsening of relations
between certain states during this first wave of globalization between the 1880s and 1914, during
this period close economic ties and global financial networks were also created. Because of the
combination of cooperation and competition among multinational firms, some contemporary
commentators believed that a major war in Europe was impossible, arguing that economic
globalization would guarantee peace. They were convinced that countries would not risk
destroying the global economic system. They strongly believed that the destruction of the close
connections in finance and trade, which would be the result of a great war among the European
powers, would lead to a global economic disaster. As World War I showed, this opinion was
correct.12

Between 1912 and 1914 the British government tried to improve Anglo-German relations
through economic imperialism. It is possible that the British attempted to appease Germany’s
13
aggressive imperialism by offering it colonial acquisitions in Africa. After the failure of the
famous Haldane Mission in 1912, British statesmen looked for objectives outside of Europe for
which there could be compromise solutions with Germany. The extremely difficult negotiations
for the Baghdad Railway were successfully finished in the spring of 1914. 14 Additionally, in the
1913 treaty partitioning the Portuguese colonies, the British accepted huge German colonial

12
Green, Edwin, John R. Lampe and Franjo Šti- blar, eds. (20040, Crisis Renewal in Twen- tieth
Century Banking, Ashgate, Aldershot, UK.

13
Green, Edwin, John R. Lampe and Franjo Šti- blar, eds. (20040, Crisis Renewal in Twen- tieth
Century Banking, Ashgate, Aldershot, UK.
acquisitions in Africa at the expense its traditional ally, Portugal. In the same year German banks
and firms created economic zones of interest (using railway projects and chartered companies) in
southern Angola and in the north of Mozambique. By the summer of 1914, economically the two
regions were firmly in the hands of the Germans and could have been annexed under the pretext
of a violation of German interests by Portuguese authorities. This example shows that both
Africa and smaller European states like Portugal were simply pawns for the European Great
Powers. At the same time, economic imperialism could be used as a means to defuse political
tensions.

THE POLICY OF LAISSEZ FAIRE

The period after the First World War was crucial for the at least temporary abandonment of the
dominance of the laissez-faire concept in economic theory and policy. The World War brought
about huge political, economic, and social changes in the world, including changes in the
dominance between the most important industrial nations.15 In the first two decades after the war
most economies struggled with problems in public finance (huge budget deficits), followed in
some of them by inflation (Central European countries), and with monetary policy that was no
longer limited by the gold standard, due to its suspension during and in the years immediately
after the war. 16The return to the gold standard with pre-war parity was wrong for both economic
activity and employment, especially in the economies with overvalued currencies such as Great
Britain. The need in European countries for industrial and infrastructural capacity and the
reconstruction of facilities demanded significant credit injection and a more important role for
17
the government in guiding economic activity. The economic system based on laissez-faire

14
Id.

15
Wolf, H. C. and Yousef, T. M. (2007), “Break- ing the Fetters: Why Did Countries Exit the
Interwar Gold Standard?”inThe New Comparative Economic History, Hatton, T., O`Rourke, K.,
H., Taylor, A., M. (eds), MIT Press, Cambridge, Mass. http://www.maynardkeynes.org/john-
may- nard-keynes-treatise-general-theory.html

16
Id.

17
Supra Note 7.
policy making was in deep trouble, indicating that the golden age of the liberal concept was over
and that a new economic policy was needed, with emphasis on fiscal policy as the best method
for improving employment and effecting economic activity. At the same time, intellectual
advocates of laissez-faire (neo- classical) economic theory faced significant criticism. Beyond
questioning methodological and theoretical issues of neoclassical orthodoxy, most critics
questioned the neoclassical view that the market system, based on private motives, acts
harmoniously with optimal results, and consequently that laissez-faire is the best government
policy. The key opposition to mainstream economic theory came from heterodox economic
thinking, particularly the American institutionalists (non-Marxian heterodox economists), the
Austrian school, and the under consumptionists, the most prominent of who was J. M. Keynes.
The focuses of economic analysis also changed. Macro- economic issues gained importance,
which resulted in the birth of modern macroeconomics, with the Keynesian revolution at its
heart. Such radical changes in economic thought meant that although the economic situation was
bad in most European economies, economic theory improved significantly during the interwar
period. 18

British economic success, which was the source of its political and military power, is attributed
to the success of laissez-faire ideology, industrialization, and commitment to free trade. Thus
before the First World War there was no serious alternative to the laissez-faire concept in
economic theory19. Yet its application (even though it had never been fully applied even in the
countries which advocated it most) contributed greatly to the increasing disparities in economic
development between countries.20 These differences were obvious in European countries, in
particular the three most industrially advanced economies, Britain, Germany, and France, and in
the European ‘periphery’, which included the countries of South and Eastern Europe. On the
other hand, the rise of the United States’ economy at the end of the 19th century augured the end

18
Roncaglia, A. (2006), The Wealth of Ideas – A History of Economic Thought, CUP, Cam-
bridge

19
Supra Note 7.

20
Burgin, A. (2012), The Great Persuasion – Reinventing FreeMarkets since the De- pression,
Harvard University Press, Cam- bridge, Mass.
to the European century, and the equal, if not greater, importance of non-European countries in
economic, social, intellectual, and scientific development in the 20th century. 21

Despite the slowdown in the British economy at the end of the 19th century the global economy
grew significantly due to rapid scientific developments. In the period 1890-1913 industrial
production in Europe more than doubled as a consequence of growth in the chemical and
electrical industries, which contributed to the development of already existing industries such as
metallurgy and engineering. Particularly important was the building of hydroelectric power
stations, which alleviated the position of countries without coal.

Germany recorded the most rapid growth before World War I. It was the last of the major

European countries to become industrialized: in the first half of the 19 th century it had been a
backward agricultural area without industrial production or a developed transport infrastructure.
Political disunity was a significant problem: it consisted of a number of states with different
monetary systems and trade policies that restricted trade with each other. Germany’s
unprecedented rapid economic development was the result of many factors, one of which was
foreign influence. In the first phase of development this was reflected in the ideas of the French
Revolution, and of the impact of the Napoleonic wars; in the second stage in the inflow of
foreign capital, technology, and enterprises; and in the last period in the expansion of German
industry into inter- national markets. All of these developments were influenced by economic
policy and the substantial transformation of German society, which became more urban during

the 19th century. However, the most important factor was probably the new industrial revolution
in Germany and the United States.

The countries of Southern and Eastern Europe - the so-called ‘European periphery’ – were even
more drastic examples of uneven European development. Al- though they applied the laissez-
faire concept and the Western model of economic policy, these countries failed to reach the level
of development of the Western and Central European countries. 22 This was particularly true for
the Balkan economies, which remained predominantly agrarian (75%-80% of the active

21
Hughes, J. and Cain, L. P. (2007), American Economic History, Pearson Addison Wes- ley,
Boston
population), with low industrial production, low GDP per capita, and low rates of economic
growth (most Balkan countries had negative growth rates).

Thus, the laissez-faire model failed to generate corresponding industrialization in the Balkans or
in other peripheral countries. The optimistic and enthusiastic belief in the laissez-faire system’s
omnipotence and temporal and spatial universality in providing economic results was not born
out in economic developments.

If the historical, economic, and political conditions abetted the laissez-faire system and its
dominance in the ‘long 19th century’ (1870s-1914), the First World War represented a turning
point in the dominance of the laissez-faire concept, both in economic theory and in economic
policy. After the war European economies abandoned the laissez-faire system and free trade and
turned to state intervention, a regulated market system, economic nationalism, and protectionism.
Economic problems indicated that earlier principles of economic policy were unsatisfactory, and
that change was necessary. However, this did not automatically mean that policymakers and
academic economists knew what should replace the old economic system and the extent to which
such changes were necessary. The changes had to occur in the framework of an economic theory
that could provide a basis for the implementation of new economic policies, a theory that could
explain the economic problems that had occurred as a consequence of the World War in a way
that neoclassical theory had failed to do. This was by no means easy, nor is it possible to identify
a single step in which the change occurred. There was rather an entire period in which key
elements of the laissez-faire system were gradually questioned, and gradually abandoned, step by
step.

At the end of the First World War neoclassicism dominated economic theory, insisting on
universal market solutions and rational economic agents that operate in markets of perfect
competition, whose preferences and motives are universal and never influenced by contextual
factors, with no differences arising from membership of a particular group, whether it be social

22
Landreth, H. and Colander, D. C. (1994), History of Economic Thought, 3rd ed., Houghton
Mifflin Company, Boston
class or nation. The extremely unrealistic assumptions of neoclassical theory were not very
helpful in resolving the emerging and increasing economic problems and a completely new
theoretical concept of the economic system was necessary. 23This was offered by John Maynard
Keynes, a leading figure in British economic theory and policy, who brought about an
unprecedented change in economics by designing a new economic discipline, macroeconomics,
which would deal with economics as a whole and provide a ‘general’ view of real economic
developments.

CONCLUSION

In the late 19th century the acute changes caused by industrial growth and the adoption of mass
production techniques proved the laissez-faire doctrine insufficient as a guiding philosophy. In
the wake of the Great Depression in the early 20th century, laissez-faire yielded to Keynesian
economics—named for its originator, the British economist John Maynard Keynes—which held
that government could relieve unemployment and increase economic activity through
24
appropriate tax policies and public expenditures. Keynesianism attracted wide support and
influenced government fiscal policies in many countries. Later in the 20th century, the notion of
laissez-faire was revived by the school of monetarism, whose leading exponent was the
American economist Milton Friedman. Monetarists advocated carefully controlled increases in
the rate of growth of the money supply as the best means of achieving economic stability.

After the First World War the economic system, based on the laissez-faire concept of economic
policymaking, was in deep trouble, indicating that the golden age of the liberal concept was over
and that a new economic policy was needed that emphasised fiscal policy as the best method for
25
improving employment and effecting economic activity. After the war European economies
abandoned free trade and turned to government intervention, a regulated market system,

23
Cameron, R. and Neal, L. (2003), A Concise Economic History of the World, 4th ed, Ox- ford
University Press, Oxford.

24
Keynes, J. M. (1936), The General Theory of Employment, Interest and Money, London:
MacMillan Cambridge University Press
economic nationalism, and protectionism, with negative effects on global trade and production,
all of which resulted in attempts to maintain the laissez-faire system. However, in the interwar
period the key elements of the laissez-faire system were gradually questioned and abandoned.
These changes were neither easy nor simple, demanding as they did changes in both economic
theory and economic policy. The unrealistic assumptions of neoclassical theory could not resolve
the emerging economic problems of rising unemployment, huge budget deficits, and inflation.
Laissez-faire economics’ solution to monetary and public finance problems was the
implementation of the gold standard, so that the fate of the gold standard reflected the fate of
laissez-faire policy. A new economic paradigm was needed. The British economist, John
Maynard Keynes, provided a new macroeconomic approach to economic theory

25
Jakšić, M. and Praščević, A. (2007), Istorija ekonomije, Ekonomski fakultet Univer- ziteta u
Beogradu, Beograd