What Real Economic Warfare Looked Like

Sanctions against Russia over Ukraine are mild compared with Britain’s effort against Germany before World War I.

A crowd outside the Bank of England during the financial crisis of 1914.
Photo: Universal Images Group via Getty Images

By Nicholas A. Lambert

March 18, 2022 6:18 pm ET

In the wake of Russia’s invasion of Ukraine, Moscow has accused the West of waging economic warfare. Many in the West have agreed, celebrating the supposedly unprecedented nature of Western sanctions as evidence that the West isn’t dead yet. But these claims on both sides are overwrought. There are precedents: The U.S. government froze the assets of Japan’s central bank in July 1941. And we could go back further still, to a time when the world knew better than it does today what this kind of warfare could achieve.

The only previous period when the world economy was as globalized as it is now was in the early 20th century, before World War I. Then as now, advanced industrial nations depended on access to the global trading system for sociopolitical stability. Globalization was characterized by high volumes of international trade, driven by cheap oceanic transportation and facilitated by cable and wireless communications and sophisticated financial instruments.

These made possible long-distance supply chains and just-in-time ordering (then known as “hand to mouth”). The system lowered costs and reduced consumer prices, but it was fragile. If an economic shock occurred, its effects were bound to propagate swiftly throughout the entire system. All of this should sound familiar.

Britain, the hegemon of the day, had a uniquely powerful capacity to turn the propagation of shock to its advantage. British companies dominated the infrastructure of the global trading system: international financial services, shipping and telecommunications. Taking what would now be called a “whole of government” approach, the British government realized the strategic opportunity latent in this dominance well before 1914 and planned accordingly.

Thus, when war broke out, the British moved at once to cut off Germany from the world chiefly through denial of access to the infrastructure of the globalized world economy. The British intent was to derange and “dis-credit” the German economy rapidly and provoke enough social unrest to generate political pressure on the German government to sue for peace. The strategy was seen as a shock weapon that sought to exploit, and where possible exacerbate, the natural economic forces of chaos unleashed by war. This was full-scale economic warfare in a globalized world.

What the West is attempting in ad hoc fashion in response to the invasion of Ukraine is different, both quantitatively and qualitatively. On a Richter scale of economic warfare, Britain aimed at a 10 and achieved an 8 before scaling back to a 5; what the West is doing to Russia now is maybe a 3, and it lacks the coherence of the 1914 British operation.

Western governments haven’t issued edicts prohibiting their nationals from doing business with Russia across every sector of economic activity. They are freezing Russian assets, not confiscating or destroying them. The overseas offices of Russian firms remain open. The economic sanctions that Western powers have levied against Russia are to Britain’s campaign of economic warfare against Germany what a taser is to a pistol: One is designed to immobilize, the other to kill. The economic consequences for Russia have been severe, but it’s far too early to predict their full impact.

It is also too early to predict their consequences for the West. Here the flip side to the British campaign of economic warfare against Germany is suggestive. While Britain’s control of the infrastructure of the global trading system gave it some advantage, its dependence on imported food also made it vulnerable.

In the decades before the outbreak of World War I, Britain had come to rely on the international grain trade for roughly 80% of its supply. When British officials studied the implications of this food-security problem, they concluded that the real threat in wartime was not being cut off from grain but being unable to purchase grain at politically affordable prices—that is, at prices the population would tolerate without provoking civil disorder. As Britain’s campaign of economic warfare sought to generate domestic pressure on the German government to sue for peace, so rising wheat prices in time of war might generate pressure on the British government to do the same. These forces were two sides of the same coin.

When World War I began, it didn’t take a coordinated campaign of economic warfare to cause the rise in grain prices that the British government feared. Nature did that: Unusually bad weather around the world cut global supply. Turkey’s closure of the Dardanelles delivered the coup de grace. Then as now, Ukraine was a breadbasket, and the loss of Ukrainian wheat caused grain prices to soar.

But what makes the World War I example especially pertinent today—when supply chains are already under strain from the pandemic, and there is disarray in global shipping—is that rising prices didn’t stem solely from the disequilibrium in supply and demand. They also resulted indirectly from the wartime derangement of the wider global economic system.

To supply the British army in France, for instance, the Royal Navy had commandeered many coastal colliers, forcing their coal onto the railways and thereby congesting the network. Disruptions rippled through the transportation system, compelling merchant ships to wait weeks outside ports before unloading their cargo. Spiraling prices at every step ultimately ended up being paid by consumers. The first- and second-order consequences might have been predictable, but the fifth- and sixth-order consequences weren’t. The propagation of shock through the system inflicted widespread costs that could be neither contained nor foreseen. The same seems likely to prove true of sanctions against Russia.

The impossibility of confining the costs of shock to the enemy makes public finance—which is receiving relatively little attention at present—a critical component of economic warfare, and even of sanctions. Waging economic warfare in a serious and sustained way requires some wealthy nation (the ruling hegemon) to serve, in effect, as a lender of last resort. Credit and money buy time for economic warfare to work despite its imposition of costs in one’s own, allied and neutral countries.

In 1914 one of the first things Britain did was to prop up the City of London. Practically overnight, the government took on obligations equal to 80% of the national debt; gradually unwinding them, it suffered losses, but not catastrophic ones. Similarly, in 1915 Britain spent $100 million (when that was real money) buying U.S. cotton to support the price and thereby appease the Wilson administration. British creditworthiness made spending on this massive scale possible—and only spending on this scale had any hope of preventing cracks from spreading in the domestic and foreign political coalitions required to wage economic warfare.

It seems doubtful that the West fully understands the forces it is playing with today. Contrary to Russia’s claims and its own, the West isn’t engaged in full-scale economic warfare. That would be a shock weapon requiring full commitment and a whole-of-government approach to succeed. Measured against that yardstick, the West is implementing half-measures, which permit the enemy the time and space to take mitigating action.

At the same time, even the West’s relatively weak measures against Russia will produce much collateral damage. These measures doubtless will hurt Russia, but they will also hurt interest groups and populations within the West. At the three-week mark in the campaign against Russia, if Britain’s experience in World War I is a guide, we are approaching the point at which patriotism and fellow feeling begin to wane, and compliance—societal and corporate—has to be purchased.

Credit has long been a central pillar of power politics, but it requires nurturing. Because the Western powers have opted to treat the past 14 years as a continuous fiscal emergency, they have left themselves little to no fiscal surge capacity for a real emergency—like the deliberate intensification of derangement in a globalized economic world system. More than anything else, the neglect of credit as a strategic factor calls into question the West’s conception of economic warfare.

Mr. Lambert is author of “Planning Armageddon: British Economic Warfare and the First World War” and “The War Lords and the Gallipoli Disaster: How Globalized Trade Led Britain to Its Worst Defeat of the First World War.”

Source: WSJ: What Real Economic Warfare Looked Like