Anti-globalism and Populist Politics

2019/08/09

Recently, topics regarding anti-globalism and populist politics have been causing a stir in the media. Today, I would like to look at the flow of democracy from the era of Yukichi Fukuzawa to the present and consider recent populism. This is a story in three acts.

To begin with, what is "normal" politics that is not populism? I consider it to be "representative politics." In other words, it is a form of government where the citizens do not conduct politics themselves, but instead act as principals who select reliable agents and delegate the authority to conduct politics to them. Conversely, populist politics is politics where the principal conducts politics themselves without relying on agents, or where the principal has the sensation (or perhaps hallucination?) of making political decisions directly.

Modern and contemporary populist politics exhibits three characteristics. The first is "anti-elitism." Since it means "doing politics without agents," it is naturally rooted in the masses' distrust of the elite. The second is "nationalism," which is clearly demonstrated by President Trump's "America First" and the UK's Brexit. And the third is "anti-globalism."

Today, I would like to focus on three keywords—globalization, the elite (anti-elite), and nationalism—and consider how these three elements have intertwined through the pre-WWI era, the interwar period, and the post-WWII era to lead to today's populist politics.

The Elite Cannot Sleep

The first act covers the period from 1860 to around 1913, before World War I. This period was truly the "era of the elite." The elite were the main players in politics, and their goal was to maintain the existing system.

This was also an era when the elite suffered from insomnia. For example, the word "insomnia" frequently appears in the biographies of Hirobumi Ito, Bismarck of Prussia-Germany, and Sergei Witte of Russia.

Let's look at Hirobumi Ito. In 1881, Kaoru Inoue told Takayuki Sasaki about Ito's condition: "His neurosis has flared up; he suffers from insomnia every night and only manages to fall asleep after drinking a sho (approx. 1.8 liters) of sake." Also, in 1898, Masayoshi Matsukata said, "His complexion is haggard, and he doesn't seem himself. At any rate, when I suggested he go to Oiso to recover his health, Ito kept saying he would put on priestly robes and become a monk."

Meanwhile, in Bismarck's biography, there is a passage where he sends a letter to his friend von Roon, the Minister of War: "By 1869, Bismarck's fury and hypochondria had progressed greatly, and he once again used the threat of resignation. 'My illness has progressed terribly, and I have a gallbladder ailment. I haven't slept a wink for the last 36 hours and have been vomiting continuously. My head feels like a burning oven thrust into an ice pack. I shall probably lose my mind soon.'"

We can see that these elites bore the heavy responsibilities of the state and were under immense pressure, but on the other hand, illness also became a weapon for them. In other words, there was a calculation that if Ito resigned, the administration would come to a halt, so those around him would give in and say, "We'll listen to you, so please don't quit," allowing Ito's opinions to prevail.

The Progress of Globalization

Behind the pressure they faced were two simultaneous phenomena. One was globalization, and the other was nationalism. They were in a difficult position where they had to maintain internal and external balance and preserve the regime within this fundamental contradiction of the 19th century.

Regarding the progress of globalization, the expression in John Maynard Keynes's "The Economic Consequences of the Peace" is truly vivid.

"What an extraordinary episode in the economic progress of man that age was which came to an end in August 1914! ... The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages... (omitted) ... But, most important of all, he regarded this state of affairs as normal, certain, and permanent... (omitted) ... The internationalization of social and economic life was nearly complete."

In this passage, I believe Keynes wanted to say that the flow toward globalization, which had been progressing as a matter of course, was suddenly severed in August 1914 by the assassination of the Archduke of Austria in Sarajevo, as if by a natural disaster.

However, I do not think that was necessarily the case. The movement toward war progressed simultaneously with the rise of nationalism within globalization. In other words, the three elements of nationalism, the movement toward democratic politics, and militarism were progressing as a trinity.

The Rise of Nationalism and War

According to military historian Gunther Rothenberg, the French Revolution and the Napoleonic Wars were the major turning points where war changed from "an event related to the 'monarch' to an event related to the 'state'."

Former enlightened monarchs "roughly followed the principle of expected utility maximization, deciding on 'war' or 'peace' based on cost-benefit calculations," and combat was "left to 'standing armies consisting of mercenaries'," so at the time of war, "the will of the people was never questioned, nor were they expected to take up arms." Naturally, in war, "feelings of antagonism between states" were "at least not at the forefront," and "because manpower, supplies, and financial resources were limited, combat actions were carried out under strict restrictions." However, with the French Revolution, when the people gained the status of "citizens," "the people became active participants in war," and the "total power of the state" was devoted to war (The Origin and Prevention of Major Wars, JIH, 18 (4)).

In other words, war in the era of enlightened monarchs was a kind of business investment, where the monarch's own capital was directed toward the conquest of a certain territory, so when financial resources ran out or it was judged that the expected results from the investment could not be obtained, it would end quickly.

However, when the people emerged as citizens—the proactive constituents of the state—they gained both the right and the duty to participate in war. And war also changed into a struggle for the nation's honor, survival, or the continuation of its system. It can be said that from the end of the 18th century, war and nationalism became two sides of the same coin.

German Nationalism

These changes also spread to Prussia, which was occupied by Napoleon's army. Christopher Clark points out its characteristics as follows:

"For two reasons, nationalism was potentially radical. First, nationalists, like liberals and radicals, spoke for the nation, not the monarch.

For liberals, the nation was a political group consisting of educated, tax-paying citizens. For nationalists, it was 'ethnicity' defined by having a common language and culture. In this sense, liberalism and nationalism have an ideological affinity.

In fact, nationalism was in a sense more inclusive than liberalism, whose base was the wealthy, highly educated urban residents. This is because nationalism encompasses all members of the same ethnic group. In that respect, it has similarities with the democratic character of radicalism in the mid-19th century. It is no coincidence that many German radicals became relentless nationalists" (Iron Kingdom).

What we are witnessing today is also populism against the backdrop of nationalism. Looking at America, whether it is the Democratic Party or the Republican Party, the attitude of "listening to the voice of the people" is common. However, the urban-based group is the left wing of the Democratic Party, while the rural areas are represented by the Republican Party, especially the people who are Trump's support base.

Clark also makes an interesting point regarding "German unification." Namely, "In many parts of Europe, nationalism was 'destructive' because the vision of creating a nation-state meant a fundamental change in the political map." However, "Even if nationalism meant the political decomposition of the empire for the Habsburg Empire, for Germany its significance was 'integrative.' This is because it had the purpose of joining together the fragments of the German fatherland that should originally have been one" (ibid.).

Looking at Figure 1, the conflict between the rule by the elite from above in Prussia and the push from nationalism from below is clearly visible. The dark shaded area is Prussia. It has an unnatural shape with a hole in the middle. This is the result of the territorial division centered on Russia, Austria, and Prussia at the Congress of Vienna (1815) after defeating Napoleon. Poland was ceded to Austria and Russia, and in return, Prussia acquired regions along the Rhine River rich in coal and iron ore resources. This led to the industrialization of Prussia.

This is a remnant of the era when monarchs controlled armies and expanded territory through war as an investment, ignoring the culture, language, and religion of the people. For example, the Rhine basin had many Catholics, while Prussia had many Protestants. From there, the voice of the people arose to reorganize the territory based on ethnicity. A movement occurred not just to connect the western and eastern territories of Prussia, but to integrate all of Germany and form a state based on ethnicity.

Humboldt's Educational Reform and Nationalism

Regarding the changes in Prussian society at the time, Clark says that while "'subjects' needed to be reborn as 'citizens' of the state," the reformers of the time understood that "administrative and legal reforms alone were insufficient" to make "Prussian citizens face the problems confronting the state," and that "by combining those reforms with a broad educational program reform, they had to give them even more energy" (ibid.).

Thus, Wilhelm von Humboldt was entrusted with the reform of the educational system of the Kingdom of Prussia. He "fundamentally transformed Prussian education by adopting a liberal educational program," and through this, "the kingdom established for the first time a single standardized public education worthy of the latest achievements of progressive education in Europe." And Humboldt wrote that "education will henceforth be separate from the concept of technical and vocational training," meaning "the purpose of education is not to make the children of shoemakers into shoemakers, but to turn children into citizens," and schools must be places that instill in students the "ability to think for themselves and learn on their own." He notes that "by learning from predecessors the ability sufficient to learn on one's own, a mature citizen is born" (ibid.).

The Educational Philosophy of Humboldt and Fukuzawa

A way of thinking similar to Humboldt's can also be seen in the educational philosophy of Yukichi Fukuzawa. That is the idea of a "nation that takes up arms." This philosophy is clearly shown in Gakumon no susume (An Encouragement of Learning).

"Independence of the Individual Leads to Independence of the Nation

Nations are equal to one another, but when the people of a nation lack the spirit of independence, the rights and justice of that nation's independence cannot be extended...

Suppose there is a country with a population of one million. Of these, 1,000 are wise men and the remaining 990,000-plus are ignorant commoners. If the wise men use their talent and virtue to govern these commoners, loving them like children, nurturing them like sheep, or sometimes threatening or soothing them, and if they show the way through both benevolence and authority, the commoners may follow the orders of those above without knowing it, and the country may be governed peacefully without reports of theft or murder. However, the people of this country are divided into two types: masters and guests. The masters are the 1,000 wise men who govern the country as they see fit, and the rest are all guests who know nothing. Since they are guests, they naturally have few worries and simply rely on the masters without taking anything upon themselves. Therefore, it is inevitable that they do not worry about the country as the masters do; it is truly a lukewarm state of affairs. While things within the country may be fine, consider the inconvenience if a war with a foreign country were to occur. The ignorant and powerless commoners might not turn their spears against their own, but since they are guests, many would likely flee, saying it is too much to sacrifice their lives. Thus, although the population of this country is nominally one million, when it comes to the stage of defending the country, the number is very small, and it is extremely difficult for the nation's independence to be achieved" (From Gakumon no susume (An Encouragement of Learning), Part 3, Collected Works of Yukichi Fukuzawa).

That is precisely why he preaches that to protect Japan's independence, one must "fill the entire nation with the spirit of freedom and independence."

Bismarck, the White Revolutionary

It would be misleading to call this way of thinking itself populism, but at the very least, in the eyes of the ruling class of the time, it must have appeared as a dangerous factor that mobilized the masses and created instability in the order. Elites such as Toshimichi Okubo, Koin Kido, Hirobumi Ito, and Tomomi Iwakura understood that while nationalism could be a force for starting domestic industries, it could also be a dangerous force that could threaten the external political and military balance. Therefore, they themselves struggled to adjust the delicate balance.

Bismarck, from whom Iwakura and the others received guidance, was the very representative of the elite's position. George Kennan, who had a great influence on American diplomacy during the Cold War, evaluated Bismarck as follows: "Bismarck was not a German 'nationalist.' Although he was capable and held great power, he was a loyal subject serving his monarch—first the monarch of Prussia, and later the monarch of the newly born German Empire" (The Decline of Bismarck’s European Order). In other words, he was a typical agent. However, he was an agent of the monarch, not of the people.

Bismarck created the German Empire in 1871, and two years later, on March 16, 1873, he met with the Japanese mission in Berlin. His speech at that time is recorded in the "Bei-O Kairan Jikki" (A True Account of the Ambassador Extraordinary and Plenipotentiary's Journey of Observation Through the United States of America and Europe).

"Currently, all countries in the world interact while maintaining feelings of friendship and courtesy. However, this is entirely a matter of principle; behind the scenes, there is a secret struggle between the strong and the weak, and the reality is that there is mutual distrust between large and small countries. ... (omitted) ...

The so-called 'International Law' is a principled agreement to preserve the rights of various nations, but when a great power pursues its interests, it will strictly observe international law if it is beneficial to itself. However, if observing international law is disadvantageous to its own country, it will immediately resort to military force, and it is impossible for it to always observe international law. Small countries desperately value the principles and ideas written in international law and strive to protect their sovereignty by not ignoring them, but it is common for them to be almost unable to protect their position when faced with power-based political strategies that toy with the weak. Our country was also in such a state, so I was indignant and thought that someday I would strengthen our national power and conduct diplomacy on an equal footing with any country. I have acted with stirred-up patriotism for decades, and finally, in recent years, I have at last achieved that desire" (Modern Translation: Bei-O Kairan Jikki, Keio University Press).

And Kunitake Kume, who recorded this story, concludes by saying, "This speech, given while the envoys of both countries were gathered together, was very significant, and I was well able to recognize Bismarck's excellent eloquence and his mastery of political strategy. It should be said that these were words to be savored deeply."

In fact, at that time, almost no one in Germany could understand Bismarck's ideas. He held revolutionary ideas but was an absolute monarchist, and at the same time, from the perspective of absolute monarchists, he was the possessor of ideas that were far too revolutionary; they didn't know what he was thinking. Yet, Ito, Okubo, and especially Kido were honestly impressed.

Why were they able to understand Bismarck? To solve this mystery, a paper titled "The White Revolutionary" by another important American diplomat, Henry Kissinger, who evaluated Bismarck, provides a hint.

A "White Revolutionary" does not mean an anti-establishment (red) figure, but a "royalist revolutionary." Since the Meiji Restoration was a restoration of imperial rule and a revolution that unified the country while returning to a past system, the position of a white revolutionary like Bismarck was likely very easy to understand.

Do Institutions Lose to Geniuses?

By the way, this paper was written in 1968, but it contains the following passage. As an experiment, try reading it while forgetting about Bismarck for a moment and thinking of Donald Trump.

"What does it mean to be revolutionary? If the answer to this question were not 'ambiguous,' very few would succeed as revolutionaries. Only posterity can understand what a revolutionary's goal was. ... (omitted) ... The 'establishment' cannot understand that a fundamental challenge is occurring there. ... (omitted) ... As a result, the 'revolutionary nature' of the revolutionary is also called into question. Even if the revolutionary clearly states a fundamental challenge to society, it is regarded as nothing more than an exaggerated statement made for the sake of bargaining. ... (omitted) ... As a result of stability continuing for a long time, an 'illusion' is born that 'change' is nothing more than a form of adjustment of the existing framework and does not destroy the existing framework itself.

... (omitted) ... No matter how solid a conservative foundation is, if it encounters a 'challenge' that exceeds its limits, it loses the framework for managing politics and society. This is because institutions are designed based on average behavior. ... (omitted) ... It is rare for institutions to be able to respond to 'genius' or 'demonic talent.' If a society requires a 'great person' in every generation to maintain its internal and external position, such a society is certain to collapse. This is because the emergence of a 'great person'—or even more, the recognition of the existence of a 'great person'—depends on luck."

Bismarck was a politician who accomplished the great task of German unification, unlike Mr. Trump who is focused on destruction, but I think this expression is also helpful for understanding the Trump revolution. In American society, where the separation of powers is institutionally established, President Trump is merely the head of the executive branch. However, he is "challenging" the judiciary and the legislature and trying to destroy the ability of institutions to manage society. For example, regarding the construction of the wall on the border with Mexico, where the federal budget would normally be decided by Congress, he bypasses Congress's budget-setting authority by declaring a national emergency.

Institutions are fine as long as an average load is imposed, but they will break if an unexpectedly strong load is imposed.

"The Wizard of Oz" and the Populist Movement

Now, in discussing "populism," let me also say a word about the political movement that was explicitly called "populism (People's Party)" in history.

There was a politician in America named William Jennings Bryan. He ran in the presidential elections three times—in 1896, 1900, and 1908—and lost all of them. In the 1896 election, he challenged the gold standard of the time and called for silver to be added as a standard currency. At that time, America was in a deflationary spiral, so he thought that if banknotes could be issued with both gold and silver as reserves, the money supply would increase, inflation would occur, and the hardships of farmers would be alleviated.

Bryan is also known for being the model for the timeless masterpiece "The Wizard of Oz." To begin with, "Oz" refers to the ounce (written as "OZ"), a weight for gold, and the "Wizard of Oz" refers to the financial district (Wall Street) that supports the gold standard. Dorothy, the girl who challenges it, was born in Kansas, located in the Midwest. Both then and now, it is the support base for the populist movement, a climate that reacts against Wall Street.

Dorothy takes along companions—the Scarecrow (farmer) who lacks wisdom, the Tin Man (industrial worker) who lacks a heart, and the Cowardly Lion—and follows the yellow brick road to the Emerald City. Yellow is the symbol of the gold standard, the Emerald City is Washington, and the Cowardly Lion is Bryan himself. However, the actual Bryan was a famous orator, a person who became a presidential candidate overnight through his public speaking.

Similarities Between Bryan and President Trump?

Comparing Bryan and Mr. Trump, there are similarities. The first is "anti-elitism." At that time, being an elite in America was associated with connections to Wall Street.

The second is "unilateralism." In other words, the position that America should focus on its own affairs and not intervene in global problems. He became Secretary of State in the Woodrow Wilson administration during the World War I era. At that time, an incident occurred where the British passenger ship Lusitania, which was carrying many Americans, was attacked and sunk by a German submarine, and the Wilson administration leaned toward entering the war against Germany. Bryan opposed this and resigned as Secretary of State.

However, even though they both represent unilateralism, it can be said that Mr. Trump stands for a "Great America" policy, in contrast to Bryan's "Small America" policy. While Mr. Trump believes that America's prestige will increase by rejecting international obligations, Bryan argued that America should not be involved in international problems in the first place. If Bryan's argument had prevailed and America had not participated in World War I, what would have happened?

Another difference is that Bryan was a very moralistic person and also a prohibitionist. Returning to "The Wizard of Oz," Dorothy takes her dog Toto (TOTO) with her, and this name comes from "Teetotaler" (a prohibitionist). In other words, "The Wizard of Oz" is a metaphor for Bryan, who championed the traditional values of the people of the Midwest, heading to Washington with the aim of becoming president.

So why did Mr. Trump win the election while Bryan lost? Regarding Bryan's defeat, economist Milton Friedman analyzes it in his book "Money Mischief." In the presidential election, the Republican side, supported by Wall Street, argued that "introducing silver would lower the value of gold and might cause financial instability," using clever tactics to stoke the anxiety of wealthy citizens.

In the recent French presidential election, although the populist National Front leader Le Pen included "leaving the Euro" in her policy, the French people felt fear that asset values would plummet if the currency were returned to the franc, and support weakened. The opposing candidate McKinley had such effective fear tactics. However, Bryan stuck to only one policy—the introduction of the silver standard—and lost without being able to retain the support of voters.

The Suffering Elite, Again

Before concluding this era, I will return once more to Hirobumi Ito. In the so-called "Political Crisis of 1881," Shigenobu Okuma and others were expelled from the political world, and Ito seized power. Then, the following year, 1882, he visited Germany again to prepare for the enactment of a constitution in anticipation of the opening of the National Diet.

Ito first met Bismarck in Prussia, but Bismarck said, "The best point of the Prussian constitution is that it already exists." In other words, if it didn't exist, one would have to think from scratch, but since it already existed, one should just use it; this way of thinking was not helpful for Ito, who was trying to create a constitution from scratch.

Next, in 1883, Ito also met with Emperor Wilhelm (I). Emperor Wilhelm, a thorough monarchist, said, "Even if Japan should reach the point of opening a National Diet out of necessity, it is better not to establish a provision requiring the approval of the Diet to collect national expenses; such a provision would especially become a source of internal strife" (from "Biography of Hirobumi Ito," edited by Shunpo-ko Tsuisho-kai). In other words, he said that even if an assembly is created, do not hand over the budget authority. This would make the opening of the Diet meaningless. Ito was in the same position as Bismarck in terms of conducting politics from the side of the monarch, but compared to Bismarck and Wilhelm I, he was more positive about incorporating the will of the people.

Ito was disappointed, but in Vienna, he met the legal scholar Lorenz von Stein and, receiving his advice, worked out the concept for the Constitution of the Empire of Japan.

Through repeated sleepless nights, both Bismarck and Ito sought a mechanism that could maintain peace. While the mechanism, which was like delicate glassware, was maintained, war did not occur and the economy developed. However, a mechanism that always requires a genius cannot last forever.

Bismarck once told the Japanese mission, "My country was weak at first." In fact, he knew the era of weakness, and in his father's generation, they had the experience of being invaded by Napoleon. Therefore, once German unification was achieved, he strove to avoid any further external expansion policies. However, as Prussia became a great power, people's thinking also changed, and they came to see war between great powers as an unavoidable flow of history.

In particular, his successors easily accepted the military alliance between Russia and France, which Bismarck had tried to avoid at all costs. This was based on the idea that as long as they cooperated militarily with Austria, it would be contrary to justice to team up with Russia, which was in conflict with Austria in the Balkans. As a result, Germany was forced to participate in World War I, which arose from the conflict between Russia and Austria. Through World War I, the three empires of Germany, Austria, and Russia collapsed, and the elites who were agents of the monarchs also disappeared along with the world order they tried to maintain.

War and Globalization

The great elites of this era paid attention to international balance and tried to avoid war, but they had the weakness of being agents of the monarch and not representing the voice of the people. Conversely, the promoters of nationalist ideology, which could lead to total war between nations, had the strength of standing on the voice of the people. In the end, everything was swept up in nationalism and led to war. Even globalization became a tool of war.

The development of means of transportation such as ships and railroads, international finance, and international trade are symbols of globalization. These were mobilized for war. In the Russo-Japanese War, more than 2 million soldiers gathered in Manchuria and the Korean Peninsula, which were third-party territories and neither Japan nor Russia. Without the development of transportation means, this would have been utterly impossible. In particular, the reason Russia was able to send in a force of over 1 million was because of the Trans-Siberian Railway.

As another factor that made giant wars possible, the globalization of financial markets can be cited. The Trans-Siberian Railway could also be constructed precisely because funds could be raised from the French capital market.

As is well known, Japan was also able to raise war funds precisely because Korekiyo Takahashi succeeded in issuing government bonds in London and New York. At the beginning, I introduced Keynes's words that "the inhabitant of London could order... sipping his morning tea in bed" and "adventure his wealth in... any quarter of the world," but part of that investment was directed toward Japanese government bonds issued to conduct the war with Russia.

The Gold Standard and the Great Depression

Let's enter the second act. After World War I, the elites of various countries built friendships across borders and tried to restore international order. However, their efforts were frustrated by the Great Depression at the end of the 1930s.

I will briefly explain the reason and process. The thinking of the elites was that to integrate the divided world economy once again after World War I, it was necessary for each country to build a currency system based on a common foundation (for example, "gold"). In addition, because government bonds and banknotes had been issued recklessly to raise war funds, the fiscal discipline of each country had also been lost, so they thought that to restore that discipline, the "gold standard"—that is, a system where a country's currency can be exchanged for a promised amount of gold at any time (gold convertibility)—was necessary.

Of course, since it makes it possible to exchange currency and gold at any time, gold reserves are necessary to adopt the gold standard. According to classical economic theories like those of David Hume, to accumulate gold reserves, each country should acquire gold through an export surplus (trade surplus) and start gold convertibility after accumulating sufficient gold. In that case, it is the gold-producing countries that record an import surplus (trade deficit) and help other countries accumulate gold reserves.

However, immediately after World War I, Germany bore the obligation to pay reparations, its working population had decreased, and it had lost territory, so it had no export capacity. The victorious nations of France and Britain were also exhausted and bore debts to the United States. When major countries did not have the ability to maintain an export surplus, how could they restart the gold standard? In fact, there was a back door: "borrowing gold." In other words, borrowing funds from Wall Street in America, which had not been damaged by the war. Using the borrowed money as reserves, they would restart the gold standard.

For example, Germany could not pay the reparations decided by the Treaty of Versailles, its finances were failing, and it resorted to increasing the issuance of banknotes, so it experienced hyperinflation in 1923. Triggered by this, Wall Street supplied funds, and an international agreement was launched to pay the Treaty of Versailles reparations with that money. This was the Dawes Plan. Wall Street not only advanced Germany's reparations but also supplied long-term funds for reconstruction. Because of this, the economies of not only Germany but also various European countries recovered.

Meanwhile, within America, an investment boom occurred because investment destinations with good interest rate conditions were born. For example, if someone wanted to rebuild a school building in Germany, Wall Street would actively lend funds, saying, "That sounds good. Why don't you build a pool as well while you're at it?"

In this flow, the gold standard contributed to instilling in investors the psychology that "the risk of international investment has been reduced." In reality, this psychology was an illusion. In recent terms, it is the same development as when Greece, which had been a habitual offender of external debt default, adopted the common European currency "Euro," and investors suddenly had the illusion that investment had become safe, causing interest rates to drop significantly.

However, for countries that actually practiced gold convertibility to spread throughout the world, cooperation between major central banks was the key. Each country's central bank prepares to respond to gold convertibility, but gold reserves may drop to a danger zone due to bank runs or long-term trade deficits. To prepare for this, each central bank enters into agreements to mutually lend gold or dollars. This was necessary for the maintenance of each country's—and by extension, the international—economic order based on the gold standard. And these cooperative relationships were supported by the personal relationships of trust and friendship among the financial elites of each country.

The representative financial elites of the time were Benjamin Strong, Governor of the Federal Reserve Bank of New York; Hjalmar Schacht, President of the Reichsbank and also Minister of Finance in Germany; Montagu Norman, Governor of the Bank of England in Britain; and Émile Moreau, Governor of the Bank of France. The friendship among these four was the background of the world's financial order.

However, Strong died in 1928. The aforementioned Friedman points out that Strong's death was the greatest cause of the Great Depression. This is because the direction of American monetary policy changed completely around the time of his death. In 1927, Britain's trade balance deteriorated and gold flowed out. At that time, Strong lowered American interest rates so that capital would head to London in search of higher interest rates, helping Britain. However, the lowering of interest rates stimulated an investment boom within America and created a bubble. In the 1920s, motorization represented by the Model T Ford progressed in America, and thanks to that, a real estate boom occurred in Florida. Furthermore, with the founding of the three major radio stations including NBC, investment projects were abundant, and when low interest rates were added to this, it became a bubble.

The Federal Reserve leaders, who had been watching the progress of the bubble with bitterness while Strong was leading monetary policy, raised interest rates after Strong's death. As a result, the domestic bubble burst, but the gold that had been flowing overseas also flowed back to America, and the world economy was turned upside down. If you were all standing on a carpet and I pulled the carpet on the count of three, you would all fall at once. The same thing happened at that time.

Toward World War II

By the way, Strong visited Japan in 1920 and also established a friendship with Junnosuke Inoue, who served as the Governor of the Bank of Japan. Since Japan had greatly increased its exports during World War I and held foreign currency, Strong thought to bring Japan into the circle of international finance as well.

Junnosuke Inoue was a person who aimed for Japan's return to the gold standard, and he expected that if the gold standard were adopted, American capital would flow into Japan. He thought to use investment from overseas as a lever to create an economic boom. However, in 1929, a stock market crash occurred on Wall Street, so the US Federal Reserve lowered interest rates. Inoue read that if American interest rates dropped this much, Japan's gold would not flow out, and he forced through the gold standard. That was in 1930. However, at that time, the situation in the international capital market had completely changed. Investors had become risk-averse. They would withdraw foreign investments at the slightest sign. In 1931, the crisis spread first to Austria and then to Germany. In that year, gold also flowed rapidly out of Japan, and it was swallowed up by the Great Depression.

To digress slightly, was there no path for Japan to avoid plunging into war? If, as Inoue calculated, high economic growth had been born at that point by calling American capital into Japan's domestic industries, I think perhaps the flow of history toward war might have changed.

The above explanation is based on macroeconomic factors—that is, that the Great Depression occurred because foreign investment from the United States to other countries first expanded rapidly, then contracted significantly, and finally flowed back. However, regarding the Great Depression, there is another frequently mentioned way of thinking. It says that a "trade war" using high tariffs between major countries as a weapon led to the Great Depression. Since the current world is also involved in a tariff war thanks to US President Trump, it is worth considering.

To conclude, what led to the soaring unemployment rates, deflation, and economic slump caused by the Great Depression were indeed macroeconomic factors, and the impact of the trade war was not very large. On the other hand, the trade war further divided a world that was already divided, creating a state where it was separated into blocks. However, since those blocks were organized by key currencies such as the pound zone and the mark zone, it still reflects the impact of "gold" being relieved of its duty as an international currency. As a result of the Great Depression, gold disappeared due to capital flight, so every country was forced to abandon the gold standard.

Figure 2 represents the division of the world economy. Specifically, it shows the impact that geographical distance has on bilateral trade. In general, past empirical research has shown that the greater the distance between two countries, the more bilateral trade decreases. In the figure, the line goes higher as it is more affected by distance, and lower as it is less affected. This figure clearly shows the impact of the so-called block economies that arose after the gold standard broke down.

First, the thick line sloping downward is the Commonwealth, that is, the pound zone of the British Commonwealth. You can see that the influence of distance is not working at all here. If you have gold or dollars, it is most convenient to trade with nearby countries, but as a result of the Great Depression, Britain could no longer hold gold or dollars and could only trade with partners with whom it could settle in its own currency, the pound. As a result, it shifted to trade within the British Commonwealth, which spread globally. Meanwhile, the light line above it is Germany's mark zone. Germany could not secure an economic zone that expanded globally like Britain's. Therefore, Germany could not create a self-sufficient system within the mark zone, and if it wanted to create one, military invasion would be necessary.

Japan, later than Germany, tried to create a yen zone starting from 1936, the year the February 26 Incident occurred, but it was insufficient and there were few things that could be bought with yen checks; in particular, oil could not be bought. Therefore, World War II began, and taking advantage of the chaos in Europe, it considered military advancement into the Dutch East Indies, where there was oil.

That concludes the second act. If things had gone well, international elites like Strong might have been able to suppress nationalism. This is because they had experienced the destruction of World War I, and especially in Europe, the anti-war sentiment was strong. If the world economy had been recovering smoothly under the gold standard, the elites might have been able to put the world economy on the track of globalization. However, in any era, an economy built on debt is unstable. When a financial crisis originating in the US hit the world and the global economy collapsed from its foundations, nationalism rose again, and the world plunged into a second great war.

The Revival and Shaking of Agent-Type Politics

And now, we enter the third act, "Nationalism in the Twitter Era."

First, in the world after World War II until the 1970s, the elite-led agent-type political form was revived and reached its golden age. The so-called IMF/GATT (later WTO) system was born, and through these international organizations, the United States tried to make US-style capitalism the world standard.

Also in Europe, the EC (later EU) was born, moving in the direction of suppressing national sovereignty, eventually unifying currency, and integrating financial and fiscal policies. In Europe, there was a strong recognition that nationalism had led to two wars, and to suppress nationalism, they tried to entrust important parts of politics and the economy to international organizations.

Today is the day when nationalism, which had been sealed away as a "demon" that brings harm to the world, has had its seal broken and has emerged. So populism in the Twitter era scatters dissatisfaction, saying that Brussels (EU headquarters) is disagreeable, the WTO is disagreeable, and the elite cannot be trusted.

The fundamental problem is that under the rule of international elites, economic benefits have been obtained in exchange for the restriction of national and local authority until now, but after the Lehman shock, economic results have dimmed, and moreover, regional disparities are expanding. That is why dissatisfaction in the American Rust Belt and Southern Europe is expanding.

Why is President Trump Strong?

In the April 17, 2019 issue of the "Financial Times," journalist Janan Ganesh makes an interesting point. He says that President Trump does not provide specific measures to solve regional inequality—that is, the problem of the Rust Belt—but only laments the problem, and that is the reason for his popularity. Also, regarding Brexit, for example, the regional disparity in Wales in the UK is serious, but it will likely worsen further with the withdrawal from the EU. Here too, no solution is presented.

Let me also introduce a point made by economist Paul Krugman ("The New York Times," March 18, 2019). He says that although American populism arises from the decline of rural areas represented by the Rust Belt and regional disparities, no one knows how to solve that decline. For example, the economic decline of agricultural areas is also driven by certain economic forces, and no strategy to reverse it has been found.

Thinking that way, Mr. Trump has grasped a strong foundation. Paradoxically, if the decline of rural areas were reversed, his political base would disappear, but as long as rural areas continue to sink, he can gain support by sympathizing with their troubles. Because their troubles will never disappear, Mr. Trump, who shows an attitude of sympathizing with them, continues to win.

However, that might not be the case. This is because there is a phenomenon in politics called "getting bored." German Chancellor Merkel gave up on running in the next leadership election after the CDU (Christian Democratic Union of Germany) struggled in the 2017 general election. Dissatisfaction with immigration policy is cited as a reason for the decline in support, but I think one reason is that people got bored with her.

Are you familiar with the term "default option"? For example, when you buy a computer and go through the initial setup, you answer questions like "What would you like to do about this?" If you do nothing, there is a setting that says "Then we will do it this way," and that is the default option.

It seems that people with long terms of office become the default option. In other words, even without going to the polling station, if supporters think "It's going to be him anyway," they do not go to vote. On the other hand, people who are dissatisfied with them will go to vote. Then, the default option ceases to be so.

In Mr. Trump's case, I do not think he is the default option, but will the people who voted for him last time out of sympathy for his grievances go to vote again? They might think once was enough. Mr. Trump's support base is not solid.

(This article is based on a lecture given at the Commemorative Lecture for Yukichi Fukuzawa's Wayland's Elements of Political Economy on May 15, 2019, with some additions and revisions.)