During 2013, massive infusions of liquidity—initiated by the Fed and pursued by the world’s major central banks over five years—finally succeeded in overcoming the negative effects of the global financial crisis. In Europe, the acute stage of the eurozone crisis was declared to be over and signs of growth emerged even in Japan after two decades of hopeless stagnation.
In the United States, growth was anemic but steady, and the labor market, while still depressed, showed some improvement. Major stock market indices broke out of recent ranges, with the Dow Jones Industrial Average setting a new record above 16,000 while the technology-dominated NASDAQ Composite Index surpassed 4,000 for the first time since 2000.
This was a nice anniversary gift to the Fed, which was established 100 years ago, in late December 1913. However, the year 1913 is in many respects ominous, and it may provide a cautionary tale in today’s economic and political environment.
A Century Ago
Historians claim that the modern era began in 1914, with the start of what became known as the Great War. This makes 1913 the last full year of the old 19th century. Indeed, back then the world was still ruled by crowned heads and dominated by a handful of enormous empires, with Europe as its unquestioned center.
World War I shattered that stable and mostly peaceful environment and created a fundamentally new world order, defined by shrinking distances, rapid technological and social change and the emergence of hundreds of nations. It also ushered in instability, repression and organized murder on a previously unimagined scale: In the 1914-1950 period, in “civilized” Europe alone upwards of 50 million people were killed in wars and actions by oppressive governments. Over the past 100 years, untold millions died from such causes around the world.
While 1913 was a remarkably peaceful year, many of the forces that were unleashed in August 1914 were already in place. Horses and railways were the main means of traversing distances and hauling cargo, but automobiles, airplanes and radio—the three technologies that began to shrink distances and bring the world closer together—had already been invented. The machines of warfare had demonstrated their potential to kill and injure half a century before, during the American Civil War. Still many people in Europe, anticipating the looming military conflict, believed it would be short and even benefit the moral health of their nations.
The U.S., Russia, Germany and Japan, which dominated the next century, were already well on their way to becoming industrial powers and were coming into conflict with one another. The 16th Amendment, which introduced the income tax in the U.S. and made America’s emergence as the global superpower possible, was ratified in 1913, as well.
Some developments of recent years, including potentially tectonic shifts that gained visibility during 2013, parallel events of a century ago. Taken together, they suggest the imminent end of one broadly defined economic period—or cyclical wave, to use Kondratieff’s terminology—and the start of a new one.
Information technologies have matured dramatically, and the early stage of rapid growth and constant change has been completed. They have already changed the face of warfare, but as they have been employed only on a limited scale, in remote local conflicts, we have not yet seen their true destructive power.