Section VI: VIThe Third Transition, 1815 to 1945

The third transition opened with the British Empire at the height of its military and financial reach. Panics are the record of that reach outrunning the imperial freight the system was built to carry. The City and its imitators lent ahead of traffic: Britain’s railway mania of the 1840s built lines no freight could pay for and broke in 1847. In 1873 the Vienna exchange crashed in May, and Jay Cooke’s house failed on the Northern Pacific in September, opening a Long Depression that ran, on most counts, into the 1890s. Each crisis moved financial rescue powers a step closer to public institutions. In 1890 the Bank of England assembled a guarantee fund for Barings because the house’s bad Argentine paper would have taken the City of London down with it, the first rescue of a house “too big to fail.”

In 1907, the American successor had no such institution, and panic was settled in J. P. Morgan’s library by men deciding among themselves which financial houses would live and which would die. Six years later Congress built the Federal Reserve so that an oligarch’s library would no longer be needed. The Empire was the lender of last resort and lent to the world, and the City of London built the US railroads and lived on the interest, which is the financial arc of the earlier transitions at its largest scale to date: the old center’s money building an economic base that would eventually replace it.¹⁶

By 1913, Britain’s overseas investment equaled a third of its national wealth on Michael Edelstein’s count in Overseas Investment in the Age of High Imperialism (1982), its returns beating domestic returns by about a point per year. Roughly 40% of the issues floated between 1870 and 1913 went to railways and 30% to governments, and the United States was the largest single destination for both.

European states also held about a tenth of Africa in 1870 and almost nine tenths by 1914, the partition regulated at Berlin in 1884 and 1885. The European powers divided the continent among themselves without fighting over it, and by the time of the “Great War” only Ethiopia and Liberia were left. In the Congo, which Leopold of Belgium held as his private property, the rubber quota was enforced with a severed hand.

The motives were many: prestige, strategy, religious missions, etc. but the ledger was the one Hobson set out in 1902: capital that could not earn at home at the rate it wanted went abroad, and it first wanted to settle in territory held by its own state. Rosa Luxemburg drew the consequence in 1913: capital accumulates by selling into what is not yet capitalist, and each partition consumes the “outside” that it lives on via expansion. The container reaching the edges of the world was simultaneously using up the conditions of its growth. By 1914, there was no more outside to divide, only divisions to contest. This prediction was how the third transition’s crucible came to be fought among the partitioners themselves, and this work notes that the “outside” was predicted by Luxemburg to be fully consumed nearly 100 years ago.¹⁷ There were further outsides she could not predict from where she stood, but this work aims to examine the “outside” in the current conjuncture in the exploration of the current US-Chinese case.

The outside was a lever, not the engine. Marx put the colonial plunder at the dawn of capitalist production and was exact about where it worked: the treasure seized abroad floated back to the mother country and was there turned into capital, which happened only where there was capital to turn it into. Spain received the silver and stayed what it was, and England, where free labor was already yielding relative surplus value, turned plunder into machines. The partition fed a machine that ran on the exploitation of its own workers, and the true closing of the “outside” matters now for a reason Luxemburg did not need: the machine itself has moved.¹⁸

The growth of European arms peaked in the same decade the interest payments did. Daniel Headrick’s Tools of Empire (1981) names the instruments of military eclipse of the rest of the world: the steamship, quinine, the breech-loader, and the Maxim gun. Omdurman in 1898 is the exhibit, roughly 11,000 dead against 48 British soldiers,¹⁹ which Belloc set in a couplet the same year: “whatever happens, we have got the Maxim gun, and they have not.”

The cracks of European military supremacy came in the same generation that such supremacy fully completed. At Adwa in 1896, an Ethiopian army destroyed an invading Italian one with rifles bought mostly from France and Russia. This was help from the Italians’ rivals, as well as some weapons coming from Italy itself under the treaty it was invading to enforce.²⁰ At Tsushima in 1905, Japan sank a European fleet with European methods it had adopted 37 years earlier. From 1899 to 1902 Afrikaner settler rebellions fought a guerrilla campaign against British forces for years. In a foreshadowing moment of what was to come, they were eventually only beaten by the deployment of “scorched earth” campaigns and concentration camps by the British.

Where the conquered fought the mode without owning its methods and armaments, they lost, however large the rising: the Indian soldiers of 1857 held Delhi for four months and were destroyed, the Taiping held Nanjing and much of the Yangtze valley for eleven years and fell to a Qing army partly officered by Europeans, the Mahdist state ruled the Sudan for thirteen years until the Maxim gun reached Omdurman, and the Boxers of 1900 were crushed by eight invading powers who then billed China for the expedition. Where they bought and/or copied the mode, they won, and the winning of the local battle was the limit.

Ethiopia kept its independence with rifles from Italy’s rivals and lost it to Italy’s aircraft and gas decades later in 1936, and Japan, the only non-Western state to adopt the whole Western package, was admitted on the only terms it was offered, as an empire among empires. The Japanese victories of 1896 and 1905 were read across Asia as proof that the West could be beaten, and the young Nehru, at school in England, remembered the news of Japan’s victories as a thrill, but what they proved was narrower. The European edge could be copied, and the copier inherited an appetite.²¹

The wars that opened the transition were wars of national unification that were eating away at the dynasties. Italy was assembled between 1859 and 1870, Germany in three wars between 1864 and 1871, its empire proclaimed in the Hall of Mirrors at Versailles in January 1871, and Japan’s restoration of 1868 put a unified state behind an industrial program in the same decade. The growing successor fought its own. The American Civil War of 1861 to 1865 was the unification of a continental market under its industrial section, the plantation South and its slave labor destroyed.

This was the era where Congress wrote the successor’s actual constitution in economic law: the Homestead and Pacific Railway acts of 1862, the national banking acts of 1863 and 1864, and a protective tariff that lasted into the next century. In a single decade, four states became nations with a market, a banking system, a railway net and a mass army behind them. This was the nation doing for the developmental container what the dynasty could not, and each of the four would be a principal of the crucible war that settled the third transition.²²

The third transition’s opening battles also give us an interesting lesson that repeats twice in later wars. During the German Unification War against France in the 1870s, the Battle of Sedan taught the German Army staff that the best plan was to destroy the enemy’s army so completely in the opening weeks of war that no second, extended phase could arrive, and the second phase arrived anyway. Gambetta, the republican minister who escaped Paris by balloon, raised his provincial armies behind Napoleon III’s surrender to Bismarck. The French retook Orléans from the Germans on November 9, 1870, and Moltke, the Prussian chief of staff, spent the winter fighting a war he believed he had already won, until Bismarck offered terms and a Bordeaux assembly took them.

The staff therefore learned the wrong lesson of attempting an annihilation before the levée en masse can rise, which carried through German Generals Schlieffen to Halder in the next two major wars. Each imagined their campaigns against France and against the Soviet Union won in days that stretched into years of grinding attrition. The state that had built the most capable army in Europe to attempt to survive diplomatic and military encirclement would march that army again and again directly into crushing encirclements, often that the building of such an army itself had created.

Germany rose inside the incumbent hegemon’s system and asked for what it felt was its “fair share” of it. In the second industrial revolution’s industries, Germany led: its chemical firms made most of the world’s dyes, its electrical firms stood beside the Americans, and its steel output passed Britain’s in the 1890s. In 1897 its foreign secretary claimed “a place in the sun” for it: the naval laws of 1898 and 1900 built a battle fleet whose only possible opponent lay across the North Sea, and the railway it began to Baghdad in 1903 pointed at the Gulf the incumbent hegemon held. The challenger’s demand was re-division of territory, and the incumbent’s answer was encirclement by entente with France in 1904 and Russia in 1907, the diplomatic ring the Sedan 2.0 plan was built to break.²³ This is the model the present incumbent reads onto the fourth successor, the rising power that must demand re-division by force, and the difference this work draws later is that the fourth has built the base without asking for the colonies.

The same decades built the counter-force the transition was supposed to produce. The International Workingmen’s Association of 1864, for which Marx wrote the inaugural address, broke up after the Commune, and the Second International founded in Paris in 1889, on the centenary of the Revolution, grew into the largest organized movement of the working class the world had seen. By 1912 the German party it anchored was the largest in the Reichstag, with a third of the vote, and that November its congress at Basel pledged the workers of every country to oppose the coming war by every means. Engels had supplied the explanation of what followed before it happened, in the labor aristocracy the empire’s rents paid for, and Lenin supplied it again afterwards: the superprofits of partition had bought the upper stratum of the working class in the partitioning states. The rents had bought the class’s upper stratum and its leaders, not the class, and the vote of August 1914 recorded below is the national binder holding where the class binder was supposed to, with the mass of the class following its leaders into the war and, within four years, out of it.²⁴ Engels, in the last year of his life, wrote the correction the tradition would need again: history had proved him and Marx wrong about 1848, because the Continent had not been, by a long way, ripe for the elimination of capitalist production, and capitalism had still had a great capacity for expansion, which the half-century since had spent planting big industry across Europe on a capitalist basis.²⁵

Forecasts were written about the institutions the Franco-Prussian war of 1870 had created: Engels, in 1887, reasoning from nothing but the spread of the Napoleonic and later Prussian conscription systems across the continent, and the growth of industrial capitalism, forecast a world war of 8 to 10 million men, a Thirty Years’ War compressed into three or four years, with crowns rolling in the gutter by the dozen with no one to pick them up. Ivan Bloch, a Warsaw banker, wrote in 1898 from the firepower alone that the next war would become a siege that bankrupted every belligerent, and the general staffs dismissed him as merely a banker, not a general. The Socialist International that had published Engels voted for the war credits that would create that exact conflagration 27 years later.

The offensive of August 1914 of Germany against France was the Sedan plan enlarged to a continent, and it failed at the Marne in five weeks. What replaced it was the siege the banker had described, four years of it, in which the belligerents spent their reserves, their gold, their overseas portfolios, and then their men. The state that fought it was creating something new: Rathenau’s raw-materials office in Berlin from August 1914, the Ministry of Munitions in London from 1915, the Hindenburg programme of 1916 that put the German economy under military allocation were the first planned economies of the industrial age, built by the belligerents to feed the trench, and Lenin read them in 1917 as the material preparation for socialism, state-monopoly capitalism one step from the thing he intended to build, the next stage of historical materialist development of human society.

The war decided itself based on the productive capabilities of the belligerents. The blockade the British navy imposed, the American loans and then the American army that entered in 1917 outweighed everything the Central Powers could raise. Germany held the second largest industrial base in the world and lost its home front to the blockade before it lost its army, a difference between production and reproduction we return to later. The Hundred Days of 1918 were won by the side whose factories and creditors were on the other side of the Atlantic.

The war also broke the first “weak link” of the global economy. Russia mobilized 15 million men on a relatively “backward” semi-feudal economic basis, lost the army at Tannenberg and the railways to the front, and dissolved in 1917 into revolution, echoing the Bourbon French. The crucible that made the American century also made the Soviet one in the same four years. The old regime the historian Arno Mayer described did not survive the war: the Romanovs, the Habsburgs, the Hohenzollerns, and the Ottomans fell in turn, 1917, 1918, 1918 and 1922, the thing Engels had meant by crowns in the gutter with no one to pick them up.²⁶

Lenin wrote the war’s theory in Zurich in the first half of 1916 and published it the next year as Imperialism, the Highest Stage of Capitalism. He built it from Hobson’s evidence and Hilferding’s Finance Capital of 1910 and set it against Kautsky’s hope of an ultra-imperialism in which the powers would exploit the world jointly and in peace: capital concentrated into monopolies, bank and industrial capital fused into finance capital, the export of capital more important than the export of goods, international cartels dividing the world’s markets, and the territory of the world already divided among the great powers, so that any change in their relative strength had to be settled by re-division, and re-division by war. The war proved him right about the third transition, and the fourth is where this work keeps his mechanism and drops one of its terms. The fourth transition’s successor is the largest official lender to the developing world and holds no colony, and its incumbent holds finance capital at its most concentrated with no colonies to lose, so that re-division by war between the principals is foreclosed by the bomb and the transition runs through the borderlands, the rails and the ledger: Lenin’s mechanism with its territorial term removed.²⁷

The zenith of European military power was deployed against the zenith of European military power and found stalemate. The British imperial portfolio was sold to pay for the war. From July 1915 the Treasury had the Bank of England buying dollar securities from British holders. By the end of 1915 it had obtained about 233 million dollars nominal, and in January 1917 a Defence of the Realm regulation compelled surrenders of securities and foreign currency to the British treasury. Morgan was the purchasing agent on the other side, handling more than 3 billion dollars of Allied war purchases,²⁸ and in 1917 the United States crossed from net debtor to net creditor, the successor collecting the incumbent’s portfolio as the price of the incumbent’s war for maintenance of hegemony, which would repeat again in the next war with Germany.

The portfolio moved because the base had already moved. The United States passed Britain in steel in the 1880s and in manufacturing output before 1900. On the economic historian Paul Bairoch’s series, its share of world manufacturing was 24% in 1900 against Britain’s 18% and Germany’s 13%, and 32% in 1913 against 14% and 15%.²⁹ The instruments were the ones the arc’s echoes predicts: a continental market behind a tariff wall, a proletariat imported by the shipload from the countries whose capital was following them, the corporation and the trust as the organizational form, the business historian Alfred Chandler’s managerial revolution, and the industries of the second industrial revolution: steel, electricity, oil, and chemicals, built at a scale no European economy could match inside its borders. By 1914 the successor held the production while the incumbent held the world’s clearing, the fleet, and the law.

The successor turned outward when its own frontier closed. The census of 1890 found no line of settlement left to draw, Frederick Jackson Turner told the historians in 1893 that the first period of American history had closed with it, and in 1898 the United States annexed Hawaii and took the Philippines, Puerto Rico and Guam from Spain, then fought a three-year war to hold the Philippines. The form it chose afterwards was its own. The Open Door notes of 1899 and 1900 asked for equal access to China’s market and no share of its territory, the Roosevelt corollary of 1904 made the hemisphere a zone the United States would police, and its first chokepoint was one it dug: the canal across an isthmus it had helped detach from Colombia opened at Panama in August 1914, the month the incumbent’s war began. Access in place of colonies, the police power in its own hemisphere, and a strait of its own making were the shape the successor’s hegemony would take, and they are the shape the present sections find contracting back to the hemisphere.³⁰

The successor also held the fuel of the next century’s enforcement. The first commercial oil well was drilled in Pennsylvania in 1859, Rockefeller’s Standard Oil had consolidated most of American refining within two decades and was broken up by the Supreme Court in 1911, and American wells produced about two thirds of the world’s crude through the 1920s. The incumbent’s fleet ran on coal it mined at home until Churchill, at the Admiralty, committed the navy to oil in 1912, and oil the incumbent did not have at home had to be held abroad. In May 1908 a British syndicate had struck it at Masjed Soleyman in southwest Persia, and in June 1914 the British government bought control of the Anglo-Persian company that was pumping it. That purchase is the hinge of this work’s enforcement arc. From 1914 the incumbent’s navy depended on the Gulf, the Gulf became a chokepoint of empire again four centuries after Albuquerque, and the enforcement that has run through Hormuz ever since, British and then American, begins with the decision to burn oil in battleships.³¹

The first attempt at a post-WW1 settlement failed as a new organizing form without a true guarantor. The US Senate rejected the US proposal for the League of Nations in 1919 and 1920. Keynes read what was going on with the “peace” within a year of it in The Economic Consequences of the Peace (1919): a settlement that demanded reparations Germany could not pay and a stability no one would fund was a form without a power behind it, and the Senate’s refusal of the League was the American statement that the economic base that had won the war would not yet bear the political and military costs of settlement. As a result, the Japanese invasion of Manchuria in 1931 and Italian invasion of Abyssinia in 1935 showed what a covenant without a power behind it was worth, and Charles Kindleberger’s sentence in The World in Depression (1973) explains the decade between: the depression was so wide, so deep, and so long because Britain could not and the United States mired in isolationism would not assume responsibility for stabilizing the system.

The laws of 1919 died in Manchuria and Abyssinia because no one was willing to enforce it, and the law of 1945 was written by a guarantor that finally was. Later refusal to be bound by law is where our present day liquidation section’s record begins, and the record reads differently once it is known that the law was born still with exclusions in it.³²

Versailles wrote the first world order in law: a covenant, a league, an assembly, a court, and the principle that borders and sovereignty were to be settled by rules rather than by the last army standing. It applied the principle to Europe’s new “self-determinative” states, carved from the empires the war had broken, and it withheld the principle from essentially everyone else, still colonial possessions. The Ottoman and German possessions went to the victors as mandates, a legal form for a partition, Sykes-Picot with a covenant on top. The German rights in Shandong went to Japan rather than to China, which had sent laborers to the Western Front, and students who marched in Beijing on May 4, 1919 against that clause founded, two years later, the party this work’s second half is about. The racial-equality clause Japan proposed for the covenant was rejected by the chair’s ruling that unanimity was required, and a young Vietnamese in Paris who petitioned the conference for his country’s rights was not answered. Self-determination was a European right in 1919, and the peoples it was denied to learned the lesson the same year.

The two wars converted the base into hegemony in four steps. The first war made the debtor a creditor. The 1920s made the creditor the system’s lender, the Dawes plan of 1924 recycling American loans to Germany into reparations to Britain and France and war debts back to New York. And the second war made the new hegemon: Lend-Lease at $50 billion, 300,000 aircraft, 2,700 Liberty ships, the carriers, and the bomb, with Bretton Woods and San Francisco written before the shooting stopped. The base moved before 1914, the wars made it hegemony, and the settlement crowned the newer, larger container. The challengers’ century that follows is what this crucible made on the other side.³³

Before the first World War and again after it, another organizing form crystallized twice. After the Franco-German Unification War, the Paris Commune of 1871 raised a working class army to fight both the remnants of the French Empire and the invading Germans, and was crushed in a week in May, at a cost the sources put between 6,000 and 30,000 dead.³⁴ The British and French governments absorbed its form and discarded its essence: municipal democracy and the secular social republic went into the Third Republic and into continental social democracy, and actual proletarian self-rule went into the ground at Père Lachaise, in the accounts of Robert Tombs (1999) and John Merriman (2014). The Russian Revolution and the Soviet Union that grew from it was the second that again attempted proletarian self-rule, which this time lasted 74 years instead of 72 days.

The Soviet state that eventually beat the German Nazi armies had spent 20 years building what Gambetta improvised in four months: universal service from September 1, 1939 and a trained reserve near 14 million. Industry sited away from the western border, which Svechin had prescribed in 1927 before the state shot him in 1938 and then fought the war he had described. Attrition first and deep operations after Stalingrad, and a commissar system restored in 1941 in a line that runs back through Trotsky to the représentants en mission of 1793; the form of the Jacobin army, again utilized by a state that had destroyed its Jacobins, and which abolished the commissars again on October 9, 1942, once the front held.

The perfection was yet again in regeneration, and at one point on the map it was literal: Orléans fell again on December 4, 1870 but the French Loire campaign of the levee against Germany collapsed. Moscow held in December 1941, the Germans came again in 1942 toward the Caucasus and the Volga and were broken at Stalingrad, and after Kursk in 1943 the initiative never came back to them. Some 229 division-equivalents were lost in 1941 and regardless, a fourth army was raised for Stalingrad. Bismarck offered terms to France, but in 1941 no terms existed on either side.

The Second World War had an important second axis to note. The Central Powers of the first war had included the Ottomans, the non-Western empire that entered the crucible as a declining state and was partitioned by it under the new laws. The Axis of the second included Japan, the non-Western power that had entered the West’s system as a rising one, on the West’s own terms, and had risen to parity. The Meiji state had adopted the whole package: the conscript army, the fleet, the constitution, the corporation, the empire. It worked: the alliance with Britain in 1902, the defeat of Russia in 1905, the seat at Versailles among the five great powers, but what such a package could not buy was equality. The racial-equality clause was refused in 1919, the Washington treaty of 1922 fixed the Japanese fleet at three fifths of the American and British ones, and the immigration act of 1924 closed the United States to the Japanese by name. The lesson Tokyo drew was the one the system had taught, that the powers admitted to the system were empires, and it assumed that an invasion of Manchuria in 1931, China in 1937, and the co-prosperity sphere of 1940 was the true price of membership.

The offensive of December 1941 to June 1942 was the nearest any challenger has come to the West’s edge by the West’s own method. The carrier force that struck Pearl Harbor was the most capable in the world, six fleet carriers operating as one. European colonies in Singapore fell in February, the Philippines and the Dutch East Indies in the spring, and the fleet that met the US at Midway in June was, ship for ship, the better one. It lost the war on the productive base, the arc’s lesson stated in tonnage: the United States commissioned more than a hundred carriers of all classes during the war and Japan fewer than 20, and by 1944 the American yards were launching a fleet carrier a month against an enemy that could not replace its pilots. Parity in the instruments of war without the economic base behind it lasted six months, and the Loire that Japan had no room to fall back into were tiny Pacific islands. The Japanese mainland didn’t even have a chance at a Loire campaign.

The corruption itself was in the method of adoption. Japan had learned the West’s system from inside and had reflected, to reach parity, what the system had shown it rewarded. It was destroyed by an economic base it could not copy, while it did to Korea, Manchuria, and China what the West had done to it and them.

That is the case the Chinese leadership had in front of it in 1949 and has kept in front of it since, and it explains something important we explore later: our current potential successor has built the fleet, the yards, and the economic base and has not taken a colony, because the one non-Western state that reached the West’s edge by the West’s method was consumed. Japan, like the French and Germans, had built an empire on an economic base it could not sustain.³⁵

The actual settlement was written in two halves: Bretton Woods in 1944 wrote the monetary half and San Francisco in 1945 the juridical-political half; a Concert of Europe reborn as five permanent seats and their vetoes, and the beneficiary was Washington, whose capital had financed both wars and whose industry had built the arms for both. Destroyers-for-Bases marked an official handover of hegemony from Britain to the US that had been underway for many decades prior.

The war that produced these settlements ended with the atomic bomb by the new US hegemon which too cemented its position. At the precise moment the levée was institutionalized as the whole of the industrial state, the bomb made general war between the principals, Loire campaigns at unimaginable scale, unwageable. It is ironic the same moment the general total war had come to humanity, it became impossible as an instrument between “great powers”.

The next crucible could not be finished the way the last one was, and many believed such transitions and crucibles to be permanently over.

In the Third Transition: Western centrality peaked and was then divided: the scramble for Africa, the Maxim gun, Omdurman, the world partitioned among six powers by 1914 in the form Lenin called imperialism, Japanese expansionism, and all “Chinese walls” battered down by cheap commodities as the Manifesto had predicted.

Marx wrote out in 1853: he expected a Chinese revolution to “throw the spark into the overloaded mine of the present industrial system and cause the explosion of the long-prepared general crisis…” a “peripheral” crisis detonating the core. He was writing about the Taiping Rebellion and Opium Wars, which themselves did no such thing.

But the fourth transition runs exactly that direction, at the same time the capital relation expanded into the credit system, the joint-stock company, and the further export of capital. Engels wrote to Marx in 1858 that the English proletariat was becoming more and more bourgeois, a “labor aristocracy” the empire’s rents paid for, a point that we shall return to as our fourth transition comes into view.³⁶ The third transition is the precedent the present has to beat. The City financed the successor, sold its portfolio to pay for the war, and watched the base it had financed carry the system on, and the succession renewed capitalism and extended Western power and ended neither. A fourth transition that repeated it would end the American era and leave the mode intact under a new center. This work claims more, and the burden it takes on is to show why the renewal the third transition achieved is blocked now, which is what the recovery audit and the tests on the successor are for.