The Great Transformation

Polanyi discusses the economic and political origins of the collapse of 19th century civilization, which he believes rested on four institutions: 1) the balance of power system, 2) the international gold standard, 3) the self-regulating market, and 4) the liberal state. The gold standard’s failure—which arose as a result of the self-regulating market—predicated civilization’s collapse, as the other institutions had already been sacrificed in an attempt to salvage it.

This collapse was a series of cycles in which society tried to save itself but ended up endangering itself in other ways. Polanyi admits that his analysis may seem overly simplistic, as civilization exists as a kind of living being, yet this example of civilization is unique in that it was defined by these four institutions. He speaks to the apparent suddenness of the catastrophe that has befallen mankind, which has actually been building for a while: “A reasoned analysis of the catastrophe must account both for the tempestuous action and the quiet dissolution” (4). He believes that his work is not historical but rather seeks to illuminate the present by analyzing the past. Polanyi argues that the world economy failed, leading to the failure of the balance-of-power system to ensure peace; however, it was the idea of the self-regulating market—and the social and technological upheaval that arose as a result—that led to civilization’s breakdown.

From 1815-1914, there was an unheard-of period of relative peace in Western civilization, during which major countries fought little and for short durations, if at all. This peace existed in spite of the causes for conflict, as revolutions spread throughout Europe, empires fell, the East was forcibly opened to the West, Africa was parceled out to European colonizers, and America and Russia gained traction as world powers. Nonetheless, “every single one of these conflicts was localized” (6).

This alleged peace came about through various institutions, both secular and religious, imposing hegemony. Paradoxically, peace existed through the balance of power and the threat of war, although Polanyi believes it was more a result of mutual interest of peaceful business, which arose out of the French and Industrial revolutions. Those who espoused this new peace were those who benefitted from it and did everything in their power to assure its continuation. However, these interests had to be translated into politics and Polanyi lists several examples in which major countries succeeded in averting wars by maintaining the balance of power. Major powers also prevented smaller countries from disturbing the status quo, thereby also ensuring peace. Polanyi gives a number of examples which might negatively affect the peace to be gained from this balance-of-power approach, which does not take into account the variations in human behavior: “It is a commonplace that to ensure peace one must eliminate the causes of war; but it is not generally realized that to do so the flow of life must be controlled at its source” (9).

Polanyi talks about how the Holy Alliance (a coalition of Austria, Russia, and Prussia) sought to do this with a hierarchy of blood and grace, which was succeeded by the Concert of Europe (founded by the three countries above, along with the United Kingdom), which lacked everything that bound the Holy Alliance together yet still managed to maintain peace through haute finance. Haute finance (investment banking and corporate finance) linked the political and economic global spheres, providing the framework for international peace that the Powers could neither maintain nor establish by themselves as the Concert of Europe only acted sporadically. Haute finance was independent of yet worked closely with local governments and central banks:“Both the personnel and the motives of this singular body invested it with a status the roots of which were securely grounded in the private sphere of strictly commercial interest” (10).

This happened via groups like the Rothschilds, who were not beholden to one specific state and often made their money off of local—yet not global—wars. Haute finance was organizationally complex, as it encompassed both government financing and foreign investment; all of the banks in the Powers played a role in maintaining global security, although peace was not the goal but rather a happy byproduct of haute finance, whose only goal was gain.

During this time, nations made little distinction between economic and political power, although “power had precedence over profit” (12) and even created enemies between the Powers, such as the enmity between France and Germany after 1870, which spilled into the countries’ respective economic policies. Similarly, although other scholars have argued that Germany and England’s agreement on the Baghdad Railway demonstrates that WWI had nothing to do with economic expansionism, Polanyi argues that the treaty demonstrates the inevitability of conflict as a result of economics. Politics often played a major role in the continued tension between Powers as they vied for colonial supremacy through economic tactics:“The influence that haute finance exerted on the Powers was consistently favorable to European peace. And this influence was effective to the degree to which the governments themselves depended upon its cooperation in more than one direction” (14).

Finance acted as a moderator between smaller states through the interactions between loans, credit, and good behavior. Once countries adopted the gold standard, England, for example, could use economics to bend them to her will. In this way, colonialism and economics went hand in hand. As the Great Powers extended their influence especially through railways, the greatest threat to their empires became a war amidst themselves. Polanyi uses Turkey’s defaulting on financial agreements as evidence of how unofficial representatives of haute finance maintained peace despite latent tensions. Trade became synonymous with peace, as it “was now dependent upon an international monetary system which could not function in general war” (16).

However, capitalism and colonialism are by default violent, although they also prevent great wars from breaking out by localizing the conflicts so as to not hurt international capital while bolstering national finance. International laws safeguarded business—by allowing commerce between hostile entities, for example—even in times of war, which had never happened before. Polanyi compares this to the previous feudalism of the Holy Alliance:

In every case peace was maintained not simply through the chancelleries of the Great Powers but with the help of concrete organized agencies acting in the service of general interests […] only in the background of the new economy could the balance-of-power system make general conflagration avoidable (18).

While the Holy Alliance enacted peace on a continental scale, the Concert of Europe did it on a global scale. The international financial system was such that it needed peace in order to function, bending otherwise hostile countries to its will. Without this system, the Concert of Europe would have not been sustainable. In Bismarck’s Germany (1861-90), for example, peace was enforced at the cost of others, while ensuring the balance of power; free trade gave way to protectionism and colonial expansion, but Bismarck lost control to Great Britain. Relative security continued despite an increase in tensions, although Great Britain’s 1904 deal with France and subsequent alliance with Russia paved the way for the dissolution of the Concert of Europe and the rise of two hostile groups of power, ultimately breaking the balance of power and resulting in World War I.