Since the end of the Second World War, we have witnessed a long and remarkably stable peace between the major industrial democratic powers. Even the possibility of armed conflict between the U.S., Britain, France, Germany, and Japan seems so remote as to be not worthy of consideration. An increasing number of political analysts have ascribed this happy state of affairs to the fact that the above states have liberal-democratic forms of government. They argue that the norms of conduct and institutional restraints found in a liberal-democracy virtually guarantee that liberal-democratic states will maintain a zone of peace with each other.

However, there is another explanation for the long post-World War Two peace which stresses not so much internal political institutions as the larger international order. According to this explanation, states tend to adopt policies of militarism or peace depending on which policy option promises to bring the most material benefit. A system of free trade among states maximizes possibilities of voluntary exchange and overall wealth creation, creating powerful inducements to peace. The erection of barriers to trade, on the other hand, contributes greatly to inter-state animosity, militarism, and in some cases, war.

In order to fully understand why free trade contributes to peace, we must turn to a number of distinguished thinkers from the past, thinkers whose writings contributed to the making of a new order in international politics.

For centuries, military conquest was perceived to be an important and desirable means of acquiring material goods. War chiefs could build mighty empires by plundering other civilizations, enslaving peoples, and acquiring new lands. Even democratic and semi-democratic republics, such as Athens and Rome, would go to war against fellow republics in the hope of acquiring new slaves and loot. Throughout ancient and medieval times, the economic benefits of conquest remained unquestioned.

However, by the sixteenth and seventeenth centuries, a number of observers in Europe began to notice an interesting pattern: trading states such as Venice and the Netherlands prospered greatly despite their military weakness, while great expansionist military powers such as Spain and France had little to show for their repeated attempts at conquest. This led to some rethinking in Europe as to the material benefits of military competition, and European thinkers began to argue with greater frequency about the unprofitable nature of war as compared with peace and trade. Adam Smith, writing in 1776, argued that optimal wealth creation rested not on the conquest and rule of empires but rather on expansion of the international division of labor and the freest possible trade between peoples. Human productive capabilities were maximized, Smith argued, when each nation specialized in what it did best and exchanged its products with the rest of the world. David Hume, arguing against mercantalist conceptions that the pursuit of wealth was a zero-sum game, wrote that it would benefit Britain greatly if the other states of Europe also flourished economically, that there was more to be gained by trading with other wealthy states than with impoverished states. At the time, this was considered a radical doctrine.

The logical implications of these findings were clear: if states could best fulfill their material needs by peaceful production and trade with other states, then it was economically counterproductive to hinder or destroy the prosperity of other states by means of militarist policies. As long as the possibility of voluntary exchange existed, conquest and pillage was unnecessary or even pointless. Moreover, restrictions on trade hindered productive advances, encouraging old ways of militarism.

It took some time for states to make the transition from policies of military expansion to trade. European powers continued to embark upon imperial adventures in Asia, Africa, and the Middle East in the eighteenth, nineteenth and early twentieth centuries. However, it is important to note that even these imperial policies were directed primarily at areas of the world which were underdeveloped. The empire-building which took place in the underdeveloped world was not merely an act of conquest and plunder, though that did take place, but a temporary phase of dominion and organization which aided the future development of free commerce. For as underdeveloped regions became organized and integrated in the global market system, further acts of military coercion became unnecessary and unprofitable.

A good example of this phenomenon was Great Britain’s experience with its American colonies. When the American colonists declared independence in 1776, Britain attempted to forcibly regain control over America. However, as Adam Smith noted, Britain’s war against the colonists was economically counterproductive. According to Smith, if Britain let the colonies go, it could still obtain the economic benefits from trade with America, and yet not incur the massive costs of administering and defending the colonies.

Subsequent events would prove Smith correct. Britain lost control of America, but continued to prosper, despite, or rather because of this loss. After Britain’s defeat, America and Britain continued to maintain a mutually enriching trading relationship, while Britain saved on the costs of defending and administering its American colonies. By the nineteenth century, Britain was at the forefront of the industrial revolution.

British foreign policy in the nineteenth century aimed at maintaining a network of free trade and ensuring the continuance of a stable balance of power on the European continent. The long period of peace which resulted from this policy has rightly been celebrated as the era of the “Pax Britannica.” Although the Pax Britannica has been attributed largely to Britain’s dominance in naval power, an equally important component of the peace was the set of incentives offered to other states by the free trade system established by the British. By allowing full access to British markets, by providing a steady flow of capital to other parts of the world, and by generally upholding international property rights, Britain provided opportunities for other states to develop and increase their wealth by peaceful means.

However, the decline in British power in the late nineteenth/early twentieth centuries, and the inability of the European balance of power system to accomodate the changes caused by the growth in German power and decline of the Austrian and Ottoman empires, contributed to the outbreak of the great conflict known as the First World War (1914-1918). It must be admitted that this war broke out despite the existence of fairly vigorous international trade flows. Thus, free trade cannot be counted on to prevent war in all cases, particularly when issues of power and nationalist pride are involved.

Nevertheless, the First World War did demonstrate beyond all doubt that there was little to be gained materially from warfare. Both victors and defeated emerged from the war worse off than before. Moreover, events in the post-war era would prove that free trade, while not a panacea, is a vital component of a stable and lasting international peace settlement. This fact was overlooked by the statesmen who gathered at the Versailles peace conference to discuss the shape of the post-war world, and the results of this neglect were disastrous for the cause of peace.

In theory, President Woodrow Wilson, the leading statesman at Versailles, was an advocate of free trade policies. One of the platforms in his famous Fourteen Points speech called for a lowering of economic barriers between states. However, at the Versailles peace negotiations, Wilson was hampered by the consideration of other problems he deemed more pressing, and the free trade plank was pushed aside. In fact, Wilson’s promise of a generous and enlightened peace for victors and defeated alike, with no annexations or punitive damages, was also abandoned. Despite having a new democratic government set up in the closing days of the war (the “Weimar Republic”), Germany was forced in the Versailles Peace Treaty to surrender a good portion of its territory and pay massive reparations to the victors.

The economic irrationality of massive reparations had already been exposed by such thinkers such as Norman Angell and John Maynard Keynes. Echoing the writings of Adam Smith and David Hume, Angell and Keynes argued that prosperity could be obtained not through the impoverishment of other states, but through their flourishing. Keynes argued that Germany was the vital center of European post-war recovery, and that massive reparations would only exacerbate the economic disruptions caused by the war. With remarkable prescience, Keynes noted that economic prosperity was the key to a stable peace in Europe, and that such a goal could be obtained not through the ruin of Germany but through the promotion of general economic recovery, among friends and former foes alike, based on the cancellation of war debts and the creation of a European free-trade zone. Keynes’s advice was rejected by the victors.

Germany, already saddled with substantial war debts, was unable to pay its reparations on schedule. It resorted to printing money as a way out of the crisis, but this resulted in hyper-inflation, destroying the savings of the middle class and diminishing the supply of working capital in Germany. Even when reparations were subsequently reduced and the German economy began to recover in the mid-1920s, the structural damage done to the German economy and society remained.

The October 1929 stock market crash in the United States inaugurated an economic downturn which quickly became world-wide in scope. The Great Depression affected the United States and Germany most severely, but few countries emerged from the 1930s without some serious economic setbacks. The depression assumed deep, worldwide proportions partly because domestic economic problems in one state tended to affect other states, but also because the structure of the international economy itself was beset with flaws which turned a temporary, if severe, business turndown into a global meltdown.

During the First World War, Europe had acquired massive debts, most of which were owed to the United States. However, as noted previously, American statesmen had rejected plans for economic recovery in Europe based on the cancellation of war debts and the formation of a free trade zone. Europe’s ability to repay its loans depended on its ability to export goods to the United States—yet, the U.S. had erected tariff barriers to prevent a large flow of imports. It was not merely the U.S. which hampered economic recovery with protectionist policies. The First World War had temporarily disrupted trading patterns throughout Europe, as each country sought to provide for itself during hostilities. The trend toward national autarky was partially reversed after the war ended, but a full transition to free trade was never made. In fact, shortly after the 1929 crash, countries around the world implemented additional trade barriers, worsening the crisis.

Some attempts were made to halt the self-defeating proliferation of trade barriers. In 1931, Germany and Austria announced the formation of a customs union which other countries would be free to join. However, France, fearful of German power, vetoed the proposal, resulting in another decline of confidence and a deepening of the depression.

For Germany, the Great Depression was a final nail in the coffin of Weimar democracy. The prospect of shared economic growth based on international cooperation being no longer credible, many Germans turned to the Nazi Party, which promised a revived Germany based on national socialism and militarist expansion. By 1932, the Nazis became the largest party in the German parliament. Shortly thereafter, Adolf Hitler overturned the Weimar Republic and consolidated all power in his hands.

At approximately the same time that Germany was experiencing its upheavals, Japan was undergoing its own problems of reconciling its material needs with international economic realities. Since the late nineteenth century, Japan had been experimenting with Western political and legal institutions as part of its modernization campaign. Borrowing from the West, it had adopted a parliamentary political system with multiple political parties and a relatively free press. In 1925, Japan granted voting rights to all males over the age of 25. However, Japan’s liberalization campaign was still struggling with older military and feudal elites, who dominated what was an outwardly democratic form of government. These elites campaigned vociferously for a policy of military expansion as a solution to a growing Japan’s need for markets and resources.

A small country with few natural resources and limited arable land, Japan could not even grow enough food to support its own population, forcing Japan to import large amounts of rice. These imports had to be paid for by exports. However, other countries’ tariffs limited Japan’s ability to export. Emigration was one possible solution to Japan’s exploding population, but this option was cut off by restrictions placed by other countries on Japanese immigrants. When the Great Depression hit, Japan’s export markets shrank. When countries erected additonal protectionist barriers in the 1930s as a response to the crisis, Japan faced a catastrophe. As a result, Japanese militarists gained the upper hand politically, and they embarked upon a policy of military expansion in the hope of forcibly capturing markets and building an empire as a permanent solution to Japan’s economic problems.

The Post-World War Two Order: Building a Zone of Trade and Peace

When Germany and Japan were defeated in 1945, American policymakers were careful not to repeat the mistakes of the past in constructing a new post-war order. They believed that free trade and general prosperity were formidable deterrents to war, and hoped to create a new international peace based on a revival of free trade. With the right economic incentives, they felt, the forces of militarism could be kept in check or eradicated altogether.

One component of American policy in the post-World War Two period was the temporary aid program known as the Marshall Plan. Although the Marshall Plan has been viewed by many as proof of the efficacy of government aid in solving social problems, leading to repeated calls for new “Marshall Plans” for other regions of the world or for the American inner cities, it is important to note that the Marshall Plan was in fact merely a temporary measure designed to cover for particular shortfalls in the economies of the countries devastated by the war. As American policymakers were well aware, in the absence of major reforms in the direction of stable currencies, property rights, free markets, and free trade, post-war economic recovery in Western Europe and Japan would not have been possible, no matter how much aid the U.S. poured into its allies.

In fact, the Marshall Plan was explicitly designed so as to promote a free trade zone in Europe, ending the traditional approach of nationalist autarky and beggar-thy-neighbor policies which resulted in so much harm in the past. The U.S. pressured the states of Europe to establish a permanent Organization for European Economic Cooperation (OEEC), in order to distribute Marshall Plan aid, coordinate European recovery, and gradually lower trade barriers throughout Western Europe.

In Germany, American occupation officials, with the aid of the German economist Ludwig Erhard, issued a new, stable currency and ended controls on the market in 1948. Almost immediately, the economy began to recover. In fact, across Western Europe economic recovery was swift and dramatic. By 1952, production levels in the region exceeded pre-war levels. In such an environment, extremist parties had little to latch on to. Even as increasing tax rates and economic regulation in later decades hindered Europe’s growth and job creation, trade barriers in Europe continued to fall, ensuring that the economic disasters of the 1920s and 1930s were not repeated. As predicted, the unprecendented prosperity made possible by means of peaceful exchange made policies of militarist expansion unattractive.

Japan experienced a recovery as dramatic as Europe’s. Although Japan never completely liberalized its economy, nor fully opened its domestic economy to foreign manufactures, it was able to insinuate itself into the free-trade system set up by the U.S. Consequently, Japan finally found a reliable market for its exports and a steady source of raw materials to import. In fact, it is not likely that Japan’s export-oriented growth strategy could have succeeded at all if the U.S. were not willing to accept Japanese imports. Free trade made all the difference in confirming pacifist inclinations in this small, resource-poor, island nation. Although in recent years, the Japanese economy has faltered, the Japanese are well aware that their economic problems are internal, and require internal reforms rather than external expansion.

It has become popular of late to claim that the long peace between liberal-democracies in this century demonstrates the importance of promoting democracy in other countries. However, such a claim overlooks the large role that a system of free trade plays in promoting general prosperity and thereby providing incentives for peace. When opportunities for voluntary exchange with other productive nations are maximized, there are strong incentives to avoid major military conflict. When trade is restricted or denied, nations will more often resort to militarist policies as a solution to their economic plight. Indeed, free trade plays a significant role in ensuring that incipient liberal-democracies do not succumb to militarist-authoritarian movements in the first place.

However, the long post-1945 peace cannot be taken for granted. The temptation to erect barriers to trade continues to exist to this day, and democracies are not immune to this temptation. The desire to retreat from the world into nationalist autarky, to shield one’s country from the effects of global competition, or to punish other states by denying them trade, are still powerful impulses in the domestic politics of many states. Maintaining peace will require a renewed commitment to the principle of free trade as the best long-term guarantor of prosperous, satisfied, and pacified societies.