What is to be done?

UPDATE: The post below was composed on Friday and Saturday, so the news is a little outdated.

The distinction I made is parallel to the distinction Virginia Postrel makes in her recent post between the "illiquid" (the immediate credit crunch, the unwillingness of lenders to lend) and the "insolvent" (the narrower and longer-term problem of serious restructuring or bankruptcy, caused by mortgage loans not performing or in default). She also makes the wonderful suggestion that any net profit Treasury makes on federal intervention should be rebated directly to taxpayers.
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The Paulson-Bernanke proposal for a financial sector bailout still seems to be floundering in Washington. The House Republicans, at last report, are still split on the idea, and without a united front from them, the Democrats are not willing to jump in alone.

For a moment, set aside the economics of the proposal and focus on the politics. The Congressional Republicans suffered in the 2006 elections from the perception that they had completely lost it on restraining federal spending. They had also spent six years in partisan lockstep with Bush on spending, expanding government, and the Iraq war. Enough conservative and independent voters got pissed off by the Republican abandonment of anything resembling conservative policies that many just stayed home or, in some cases, voted Democratic. The Republicans lost control of Congress.

That painful lesson floats in the background now as the House Republicans struggle with the question of whether to support the plan. Some support it because they think it's a good idea, and others oppose because they think it's bad. What hangs in the balance is how much Bush can call on simple partisan and personal loyalty. He lacks the automatic Republican support he enjoyed in his first term, and thus we see a political cliffhanger.

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Now turn back to the economics of the plan. Paulson and Bernanke got themselves in some trouble because they failed to explain the situation and their proposal completely enough.

Some of the problem is everyone's ignorance about when and where the housing market will bottom. That event will be crucial in determining the final, diminished values of the assets that back the financial paper (bonds and other credit instruments) that many now suddenly mistrust. Those values in turn will determine the ultimate losses that lending institutions, depositors, and bondholders will face. Many will just have a bad day; a subset will suffer large losses; a subset of that subset will go bankrupt. No one knows the full scope yet. Yesterday's Washington Mutual failure threw some more paint on the canvas and filled in another part of the still-incomplete picture.

Paulson and Bernanke are also wrestling with a crisis that has two very distinct parts, subcrises with different origins, time horizons, and consequences. Their plan addresses both at once, which was probably a mistake, and thus evokes a lot of skepticism.

There's a large advantage to separating these two parts. Part two will take a few years to fully work out and make sure that the government is not overpaying for distressed assets. No one can make those judgments now -- it's too early. At the same time, part one can address the credit crisis right away, but through short-term loans, not buying up assets.

Part one, the credit market crisis, is immediate and needs to be confronted quickly. Failure here would cause severe economic problems, as short-term credit acts as quasi-money for businesses, government, and individuals. If banks and other lenders suddenly decide all at once to stop lending, we will have something like the Great Depression on our hands. The Fed is already acting as it should to prevent this, keeping low the interest rates it controls (federal discount and interbank overnight). It also injects cash by buying up Treasury and government agency bonds and exchanges longer-term bonds for shorter-term. All act to keep the money supply flowing, or "liquid," as economists say.*

But it might prove necessary to do more with the credit crisis than the Fed, under its normal rules, can do. The New York Federal Reserve's AIG loan is the model to follow. It's a relatively short loan (twenty-four months) and, during its term, gives the Treasury some say in how AIG is run. The Treasury, by charging AIG interest, is also forcing AIG to pay for the privilege of rescue.** Such an approach is about preventing a short-term credit crisis, nothing else. It should be ad hoc and address serious dangers quickly as they arise with time-limited rescues. It's not about the collapse of underlying asset values (houses, mainly).

Dealing with that collapse is part two of the crisis, where we have to think in terms of a few years or even a decade, not weeks or months. The model should be the Resolution Trust Corporation that dealt with the savings and loan bust of the early 90s. Here's where the RTC-like agency collects distressed assets in a kind of giant fire sale.† It then resells them, not immediately, but over a period of time, to get better prices and not glut the market for those assets all at once. The RTC worked well in the end, costing taxpayers only about $100 billion.†† The initial cost seemed much higher, because the RTC was in buying mode at first. But in resale mode later on, it recouped most of its gross costs. It worked because it spread out the impact of the S&L bust over a number of years, preventing the cost from being felt all at once.
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* Bernanke has a strong interest in the Great Depression, when banks failed in large numbers, as the Fed kept pursuing the exactly wrong policy. In effect, it hoarded gold (the dollar was backed by gold in those days) and starved its member banks.

The Federal Reserve is actually not part of the government. It's a publicly chartered, non-commercial private entity that regulates the money supply, which includes not just cash, but various forms of credit and foreign exchange. It's a "bank of banks," which federally chartered banks are required to join and contribute to. Other banks can join too, if they want.

Recently, proposals have been floated to allow non-bank entities (insurance companies like AIG, for example) to join. They would get the help the Fed can provide in a crisis, but they would also have to pony up some of their assets in exchange and accept a higher level of regulation.

** From the government and taxpayer point of view, a loan is better than a guarantee. It makes AIG's assets collateral in case of default. The conditions are more spelled out than a guarantee usually is, and the term is limited in time. Someday, people will thank Paulson and Bernanke for this.

† By themselves, assets are not "distressed." They become so when a loan or some other financial obligation is attached to them that assumes a value well above what they can actually be sold for. Selling the asset raises some cash, but not enough to fully cover the attached obligations.

†† I know, I know - "only" :)

Do you remember where you were?

I mean, do you remember where you were in October 1929?

The Brits usually do this better than we do: some comic relief while the financial crisis continues to lurch forward. It's impossible to get through these things without some gallows humor.

There's no stopping Biden's gaffe-o-matic:

When the stock market crashed, Franklin Roosevelt got on the television and didn't just talk about the princes of greed," Biden told [Katie] Couric. "He said, 'Look, here's what happened."

'Cuz when the stock market crashed in 1929, FDR had already become president, and there was a television in every living room -- really :) There's a real point there, somewhere: the level of political eloquence and plain-speaking has, on the whole, dropped noticeably since then. And it's not a forte of our current president or, actually, almost any of our current politicos.

But this brings up a more serious point. Another one of those encrusted, hoary myths is that the 1929 stock market crash "caused" the Great Depression, even though the American economy wasn't in depression territory before 1932. It was, however, already in recession at the end of 1928, according the the National Bureau of Economic Statistics, founded in 1920, an outgrowth of the World War One era's burgeoning interest in statistics and planning.

It would be more accurate to say that the stock market in late 1929 was, relative to an economy already in recession, wildly overvalued by speculative excess (by a factor of about six to eight, an overvaluation not seen since then). The crash was a sharp correction to that overvaluation.

Meantime, what was a severe recession need not have become the "Great" Depression. It didn't, for example, in Britain and France. But the string of bank failures that started in late 1930 ensured that it would. By early 1933 (when Roosevelt actually became president), one US bank in three was shut. Following exactly the wrong policy, the Federal Reserve caused the money supply to contract by about a third, and a severe deflation followed (about a 40% drop in prices), ruining debtors -- like home mortgagors.* Instead of keeping their money in banks, people started putting it under mattresses, where it did no good.

It's not so much that these monetary and banking failures caused the Great Depression; they were the Great Depression. Of course, they caused more negative developments, like 26% peak unemployment, and prompted governments in reaction to essentially shut down international trade and raise taxes in a vain attempt to balance their budgets -- making everything even worse.

POSTSCRIPT: Why do these financial crashes seem to happen in the autumn? Is it the falling leaves, perhaps? The end of summer and intimations of mortality?

POST-POSTSCRIPT: The cure has been found for wild financial market behavior: estrogen. Seriously: that, plus some old guys.
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* Deflation is hell on debtors: they have to pay back fixed money amounts in dollars that are worth more and more each day that passes. Creditors love deflation for just that reason.

Conversely, debtors love inflation: they pay back fixed money amounts in dollars that are worth less and less as time passes. Creditors, and indeed, investors and savers generally, hate inflation for the same reason.

The conflict between debtors and creditors is one of the great perennials, a key "class conflict," if you like, in American history, going back to the days of Hamilton and Jefferson.

The New Deal reconsidered: Whats and whys

The welfare-regulatory state of all Western societies, built in waves since the late 19th century, is headed for unstoppable, wrenching change. But choices lie ahead; the outcome is not predetermined. It behooves every sentient adult citizen of wealthy advanced democracies to understand the coming crisis in at least its basics.

The welfare state was built from a variety of motives, some benevolent, some not. In some cases, it was the conscious goal; in others, the residue of more radical, failed experiments in centralized planning. The practical breakthroughs in the evolution of the West away from classical liberal politics and limited government came as a result of the First World War and the Great Depression. But even before these watershed events, mass political movements and educated prejudice alike were starting to run against free societies, democratic government, and markets - for complex reasons: some political, some based on confused economic ideas, some imperialist, racist, or even esthetic. The common denominator was replacing spontaneous social development with the "engineered" society. Marxists believed in false theories of progressive immiseration and replacing the supposed "anarchy" of markets with the supposed "rationality" of central planning. "Welfare" liberals and progressives saw a need for a much more powerful regulatory and redistributive state, along with a strong dose of paternalism to guide the masses. The imperial-minded wanted government to redirect resources toward a society more fit militarily and better prepared to sustain itself without trade with other countries. The First World War provided the paradigm of "total" war, with quotas, price fixing, and direct government command of resources. The state took an aggressive role in suppressing social conflicts, in some cases peacefully, in others coercively and violently. Institutions of culture were seen in a new light, as available for and needing "co-ordination" to become aligned with unified social goals put forth by the political class. Contrary to myth, the supposedly "conservative" 1920s saw these measures remain half-in-place: price boards, trade and immigration restrictions, discriminatory labor laws.*

By the 1930s and the onset of the Depression, the collapse of free societies was evident everywhere. Liberal-capitalist democracy seemed obsolete; collectivism, the "wave of the future." Political intellectuals of many stripes searched for authoritarian alternatives, including fascism (a fact conveniently forgotten later). But after 1945, wartime sacrifice, and the belated discovery of what collectivist societies really looked like, retreat and compromise set in. The new push for the contemporary "entitlement" state came as a result of postwar prosperity, but had much shakier justification as serving the larger public good. Politically-designated grievance and entitlement classes emerged and began to steer the politics of the welfare state. The era of powerful, charismatic leaders able to impose limits on the greed of interest groups ended. The era of lobbyists and entrenched interests began, all seeking a piece of government power for their own use.

The larger price of the welfare state became evident: governments printing or borrowing money to pay for false promises; regulatory agencies, litigants, and activists misusing systems created earlier to serve broad social purposes for their own power-building agendas. By the late 70s, the smell of voter revolt was everywhere in the West. The generation that followed saw a revival of respect for markets, a wave of deregulation, and the re-emergence of the globalizing capitalism that had flourished before 1914, before it was wrecked by the two world wars and the Depression.

But real dangers remain. Totalitarian forms of collectivism have either been defeated or have largely collapsed from their own economic failure. But, while most democratic countries have dismantled most of their classical socialist experiments, the "half-socialized" regulatory and redistributive features remain. Their costs, and their tendency to "privatize the gains and socialize the losses," keep expanding. In the US, the economy as a whole has expanded fast enough to keep the bill from getting completely out of control - at least so far. Other wealthy countries, lacking US-style economic growth and the willingness of foreigners to lend and invest, haven't been so lucky. All of them have been forced to cut the welfare state and reform their redistributive systems, such as socialized medicine and old age pensions.

The rationale then - and now. When the welfare state was created, the world was a different place. National economies were more self-sufficient, and national governments had an easier time controlling them. The birth rate in most wealthy societies was higher than today and longevities shorter, meaning that social security systems could count on an adequate number of new taxpayers and sufficient economic growth to keep going. Many of these welfare state features were poorly designed for the long run. Keeping their most negative tendencies - the emergence of greedy interest groups misusing the power of government at the expense of everyone else - in check required disciplined and powerful political parties and charismatic political figures that, for the most part, no longer exist. Our politics today is dominated not only by powerful narrow interest groups, but by the news media, to which we have conceded much of the role once played by the parties and higher education. The result is not pretty. No one forced it on us; we just let it happen.

Reforming the welfare state will mean starting the debate on the proper functions of government over again from scratch. We must start by recognizing that, whatever the failures of markets and the larger society, "government failure" is just as real.** The debate will have to proceed without the discredited baggage of central planning or phony economic arguments. Every civilized society needs a government of some sort. The question is not just, what do we want it to do, but also, what can government do? It doesn't create wealth; it can only redirect or restrict it. And the welfare state debate cannot be framed in terms of rights, which are limitations on government power, not expansions of it. Concern for the poor, the disabled, and the otherwise helpless; making sure the able-bodied avoid chronic bad decisions affecting their welfare; and regulation of complex economic and technological systems, must be framed in terms of the responsibility of the society at large. In a free society, what is legitimate and not legitimate for political regulation? How much power should government have to redirect the citizenry's lives and decisions?

POSTSCRIPT: Much of this history is retold more completely and authoritatively by Robert Skidelsky's excellent The Road From Serfdom, a basic work for understanding the last century. Jonathan Rauch's Government's End (first edition, Demosclerosis) is an indispensable complement to understanding the late welfare state paralysis of interest groups.
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* For example, before 1914, only diplomats needed passports. During and after World War One, almost all countries adopted much tighter restrictions on travel and immigration for everyone.

** As the citizens of New Orleans well know. We must also speak of "media failure" as well: grotesque, "narrative"-driven misreporting of even basic facts on a grand scale.

The New Deal reconsidered: The forgotten man

After looking at the rise and fall of collectivism over the last century with Jonah Goldberg, let's focus more narrowly on the New Deal itself with Amity Shlaes, author of the recent and remarkable The Forgotten Man: A New History of the Great Depression. The history is again not hidden, merely forgotten. After voters largely repudiated the New Deal in the 1938 midterm elections, the truth about the 30s became more and more obscured in a haze of myth. FDR's reputation, which was sinking from the end of 1937 on, was utterly transformed by his wartime leadership. America's triumph in 1945 put the reality of the New Deal behind a fog of nostalgia.

Understanding the New Deal period and its legacy makes it easier to understand how the rise of the federal welfare state and vote-buying created the interest groups that now dominate American politics. Before, there were local and state governmental welfare functions, but (veterans apart) no federal welfare role. After, the US had something like today's federal welfare state. More pieces have been added since (Medicare, Medicaid, partial federal funding and control of education), but the New Deal remains the watershed. While the New Deal is remembered as a period of experimentation with central planning and government ownership of certain sectors of the economy, those quasi-socialistic features had a short life and were mostly gone by 1939. But the New Deal transformed the older state and local Democratic party machines that doled out money and patronage to Democratic-voting groups (urban ethnic voters, white Southerners, other groups later) into a truly national political machine of "tax and tax, spend and spend, elect and elect."*

That wasn't the way the New Deal was viewed at the time. The Great Depression was an unprecedented emergency of uncertain origins that demanded a reaction. Deeply impressed by experiments in collectivism in Russia, Italy, and Germany, the conventional wisdom for much of the decade was, if not "red," at least a "pink-brown" mix. Even otherwise conservative types (businessmen, Republican farmers in the Middle West and West) were bewitched, for a while, by the false promise of central planning and state ownership (all facts, BTW, conveniently forgotten by the 1950s). Shlaes makes effective use of the large body of work by economists and historians done since the 1930s in better understanding the causes of the Depression. In 1930, while America was still a largely rural country, its farmers had become so productive that there were simply too many of them, trying to hang on by borrowing, only to see grain and other food prices crash periodically, wiping them out. Meanwhile, Europe, America's largest export market, was no longer able to pay its way after 1918. Major European countries had become indebted to the US. But the US, like almost all wealthy countries after World War One, imposed high tariff barriers on the very European goods that could have paid off those loans. American farmers were shut out of their most important foreign markets, leaving that sector weak well before the October 1929 stock market crash. In fact, the US was already in a serious recession by the end of 1928.

What turned a serious recession into the Great Depression was the combination of protectionism, which ended most international trade by the early 1930s, and extraordinarily bad decisions by the Federal Reserve, which had been created in 1913 precisely to prevent from happening what proceeded to happen, a monetary collapse. In order to defend the value of the dollar against the price of gold (the US was on the gold standard in those days), the Fed in effect raised interest rates to member banks to levels never seen before or since. Banks never have enough money to pay all their depositors at any one time in any case, but the resulting deflation (as the money supply contracted sharply) put US banks in a terrible bind. Depositors began to stand in long lines to get their money out, and pretty soon, a third of the country's banks were closed. Without money and credit, a modern capitalist economy comes to a stop. Twenty-six percent of the work force were unemployed. Similar banking collapses happened in certain other countries - most fatefully, Germany and Austria - leading to similar results.**

At the time, various competing theories, most of them partly or completely wrong, were widely debated and believed in: Marxism ("the end of the capitalism"), what eventually became Keynesianism (inadequate aggregate demand), and other, loopier theories. People were desperate, and political niceties like constitutions were looked upon as luxuries. It was in this atmosphere that FDR was elected in 1932. Contrary to later myth, federal reaction had already started under Hoover, including government intervention similar to the New Deal, albeit on a smaller scale. One of the largest mistakes of these policies was their attempt to keep prices and wages up at any cost, instead of letting them float downwards to a new equilibrium, which would have returned the economy to something more like full employment. These measures amounted to a make-believe of wrong-headed, politically decreed prices and wages (see here for a look back at these).

Shlaes takes her title from the late 19th century writings of William Graham Sumner, a forgotten man himself these days, but once a significant light in post-Civil War America. In his earlier work, he was a follower of the Herbert Spencer, the English popularizer of "social Darwinism" in a libertarian, quasi-pacifist form palatable to English-speaking audiences. While he modified his views in later years, Sumner, like most serious social thinkers of that era, never totally abandoned the Spencerian paradigm of peaceful, decentralized social evolution. Such thinkers were already under pressure at the end of the 19th century from various directions: the imperially-minded preaching the "white man's burden," the militaristically-minded who saw (with some reason) the commercially-oriented societies of western Europe and north America as not prepared to face the rising might of Germany, and social reformers who wanted to use government power to coercively bring about social changes and perhaps a planned utopia. Few wanted to abandon political democracy, yet these programs conflicted with the most important features of liberal society. In America, they were called the Progressives, and their frequently misguided crusades form a pre-history of later collectivist ideologies - the "liberal fascism" of Goldberg, with all its inherent internal contradictions.

Sumner put his finger on the core problem with all such collectivist schemes. A agrees to help B at the expense of C. If A and B are organized and vocal pressure groups, they can get away with it for a while, at least. But C must remain oblivious for A and B to keep it going. If C becomes conscious of being exploited and revolts, then A and B are in trouble. The scheme has to be abandoned, at least if democratic practice is to be maintained. The only alternative, Sumner concluded, is violent revolution and coercive dictatorship to keep C in his place. Sumner did not live to see the communist revolutions in Russia or China or the various types of fascism that flourished in the 1920s, 30s, and 40s - but he already had their number. In democratic societies, C is the unorganized majority.

The evidence of this central failure of the New Deal was widely understood by the end of the 30s. Voters started to see that it was impossible to, say, improve the lot of workers overall by raising wages and prices in one industry while making everyone else pay for it. Such policies never made any economic sense. As the New Deal faded away, what was left was something different from 19th century laissez-faire, although well short of socialism: the modern redistributive-regulatory state. It didn't abolish private ownership or markets, but it did come to regulate them, sometimes heavily, and redirect the larger society's consumption and investment patterns. The political heart of it was just the Democrats' old machine politics, but now writ large on a national scale. Favoring certain groups with federal largess, making state and local politicians dependent on federal hand-outs, the New Deal began the move of political life in America away from local and state governments toward Washington (including the beginnings of the centralization and consolidation of political journalism) and the end of federalism.

What kept this system from flying apart were strong political parties and the imperial presidency. These held the underlying centrifugal tendencies in check. But starting in the 1960s, this self-discipline broke down. After Nixon's resignation and the end of the imperial presidency, it was no longer possible to control the abuse of governmental tax, spending, and regulatory power. The modern lobbying industry, born in the 1970s, descended on Congress looking for favors on a scale far larger than before, and Congress was only too happy to oblige - and help itself to pork as well. Sometimes, these favors were sold to voters at large as serving the larger public good (which was rarely true). Modern conservatism started as an attempt to push back against this trend. But it was only partly successful and for a limited time. By the late 90s, the forces of "tax and tax, spend and spend, elect and elect" got the upper hand again - except now, curiously, they were "borrow-spend-elect" Republicans.

POSTSCRIPT: Shlaes gave this talk last fall at Hillsdale College. Consider also this review by David Boaz of another recent book on the 1930s, German historian Wolfgang Schivelbusch's Three New Deals: Reflections on Roosevelt’s America, Mussolini’s Italy, and Hitler’s Germany, 1933–1939.

A somewhat older classic on the rise and fall of 20th century collectivism is Robert Skidelsky's The Road from Serfdom, an excellent complement to these books by Shlaes and others.
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* Harold Ickes' words from 1938.

** Britain and France experienced no banking collapses and so suffered less. But even they faced high unemployment from the late 20s on, especially Britain, which insisted on overvaluing its currency and pricing its exports out of world markets.

The New Deal reconsidered: Liberal fascism

PRE-POSTSCRIPT: Here's a podcast interview with Jonah Goldberg.
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Up there on Amazon's best-seller lists for months now has been Jonah Goldberg's Liberal Fascism: The Secret History of the American Left, From Mussolini to the Politics of Meaning. The book has brought back a debate that should be at the forefront of our politics, but rarely is. One of Goldberg's goals is to lay to rest a mythology that has been central to the American left and more mainstream liberals since the 1930s, that Anglo-American conservatism is somehow "fascist"; and more generally the misuse of fascism to describe the free-market and individualist right. It's only become "right" because the left foisted this mythology on us all those decades ago, that leftism and fascism are mutually exclusive and exhaustive poles of politics. Having the slightest familiarity with modern political history, especially from a European perspective, no one educated person could have fallen for this. But in our age of media-induced amnesia, it's helpful to now and then wake up and read some real history for once. It's history that's not hidden, just forgotten, sometimes deliberately so. Readers of Hayek's 1944 classic, The Road to Serfdom, will recognize the essentials.

Most of what is called "conservative" in the English-speaking world in the last 80 years is really a blend of what 19th- or 18th-century educated people would have correctly called "liberal" (meaning limited government and individualist) and "conservative" (meaning traditionalist). The two are still in tension (we think of "conservative" versus "libertarian," for example), but they were also in tension then. In the generation before the First World War, a new force, not answering to either label, arose in opposition to the older limited-government liberal ideal. It went under various names: "reform" liberalism, the "new" liberalism (as opposed to the "old"), "progressivism." Influenced by Marxist and socialist doctrines, they came to dominate American politics in the teens and then again during the Great Depression and the New Deal. It's the basis today of what is conventionally and very misleadingly called "liberalism" in the US and more correctly called "social democracy" or "welfare liberalism" in the rest of the world. We're all familiar from our history classes what this meant: in democratic societies, a much larger and more powerful government; far more overt political involvement in social and economic decisions; the state (to an extent) taking over once-private or familial functions (education, old age and sickness insurance), and so on. The political values associated with classical liberalism largely remained, but its economic and social values were transformed into a form of democratic statism.

But in countries with weaker or non-existent democratic traditions, while it meant all those things, it also meant something else: a comprehensive alternative to liberal democracy altogether. In reconstituted empires like the Russian and Chinese, it was the fantastic and deadly fake, coercive utopia of communism. In countries with old cultural identities but recent and weak political unification (Italy, Germany, Japan), the new collectivism and statism were merged with a post-nationalist imperial chauvinism, eventually christened "fascism" by Mussolini. He named his idea and movement after the Roman fasces, the bundled sticks that represented the supersession of individuals going about their business by a concentrated unity of purpose embodied in the person of the dictator. Hitler and Nazism then did it all better by adding a mystical romantic racism and a Teutonic thoroughness the Italian model lacked.

The non-democratic forms of 20th-century collectivism, rather than being opposites, are best viewed as rival siblings. They were born at around the same time and answered similar needs. The career of Mussolini illustrates their entangled origins: born to radical parents (who named him Benito after the Mexican revolutionary Benito Juarez), drifting through Marxism (too German-pedantic) and anarchism (fit the Latin temperament better), then to the realization that he could really make a big splash if he fused the two rivals, chauvinistic nationalism and socialism. The epiphany came to him, as it did to many, during the first modern "total" war. World War One demonstrated the apparent practicality of nationalized economies, centralized control, and total unity, with the hope that they could be carried over permanently into peacetime.

There were parallels in various countries and between democratic and non-democratic forms. Progressivist Woodrow Wilson viewed the limited government paradigm of the American founders as obsolete, to be replaced by an organic system, with the President as the "head" of the body politic. His younger colleague, Franklin Roosevelt, later succeeded where Wilson failed. H. G. Wells coined the term "liberal fascism" in a 1931 speech in which he called for a synthesis of the older "liberal" (what we now misleadingly call "conservative") political values with state manipulation and control of society and economy. Wells wasn't thinking of Soviet Russia, but of Fascist Italy, where Mussolini had done more than make the trains run on time. Wells had seen this apparent "wave of the future," and it seemed to work. After 1918 and especially after the onset of the Great Depression, liberal democracy, free societies, and free economies seemed passé. All of this was of course deliberately forgotten after 1945. From then on, "liberalism" and "fascism" were supposed to be opposites.*

But Goldberg arrives to tell us otherwise, exhumes this repressed history, and updates it with the distinctive excesses of the 1960s New Left, its eroticized cult of violence and worship of exotic foreign dictators, both reminiscent of fascism and its 30s fellow-travellers in democratic countries. In certain ways, Goldberg exaggerates: the tragedy of American liberalism since Wilson is not that it is fascism (it isn't), but that it tries to combine what cannot be: unlimited government in the service of liberal goals. It has led modern liberals to one predictable disaster after another.
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* We also can't ignore the effect of the Popular Front period (1936-39), when Stalin and Soviet-oriented zombies worldwide tried to manipulate the democratic left and liberal middle-class parties with a common program in opposition to fascism. The real controlling factor was Soviet policy towards Germany, which zigzagged from neutrality, to hostility, to friendship, all in a few years. In Europe, the PF program made at least superficial sense. In the US, there wasn't much to oppose really - except, strangely, the New Deal itself, which had multiple features in direct and conscious imitation of Mussolini's system. The emotionalistic use of "fascist" as an empty epithet to label anyone not with this program started in the Popular Front era, then reappeared in the 60s.

The Hitler-Stalin pact of August 1939 brought the Popular Front to an end, although the crude manipulation of gullible non-communists to serve Soviet foreign policy goals was already evident before then. And the illusions of the Popular Front survived long after the Popular Front itself.

The other eleventh day

It's still not over - World War One, that is. On the western front, the fighting ended with the armistice that took effect this morning, 89 years ago, at 11 o'clock. The fighting that touched Russia and Turkey did not end until 1922. In some respects - the Balkans, the Middle East, remains of overseas European empires - it's never stopped. Treaties - Versailles, Triannon, and Brest-Litovsk for western, central, and eastern Europe, Sèvres and Lausanne for the Middle East - were supposed to formally settle the conflict. In fact, they settled much less than that.

Europe is - or at least, once was - quite conscious of the war's significance, while it has never sunk as deeply into American awareness. The US lost a somewhat more than a hundred thousand dead. But the 20th century was simply a consequence: understand it, and the century following becomes crystal-clear. The British empire lost almost a million; the continental powers many more: Italy, half a million; France, almost two million; Germany, over two million; Austria-Hungary, a million and a half; Russia and Ottoman Turkey, several million - no exact number was ever determined in the postwar chaos.

Earlier in 1917 saw the March revolution in Russia, the April entry of the US into the war, and the May "strike" of the French army. This month in 1917 saw the Bolshevik coup in Saint Petersburg, the arrival of the first American units in France, and the Balfour Declaration regarding a Jewish national home in Palestine. December 1917 saw the capture of Jerusalem by the British, Australians, and New Zealanders under Allenby. October 1917 saw the Italians' catastrophic defeat at the hands of the Austrians and Germans at Caporetto. Even this late in the war, things were not going well for the Allies, at least in Europe: Russia had dropped out, and France and Italy were effectively finished as great powers.

The 1914-18 conflict saw not only the emergence of the US as a world power; it saw the beginning of the end of Europe's four-century domination of the world, its status as the center of civilization, and its mastery of its own fate. Today, Europe is in long-term economic and demographic decline relative to the rest of the world, and neither master of its own destiny nor the center of civilization. Those facts have far more to do with post-Cold War developments there than anything the Bush-obsessed here would have you believe.

It also saw the end of empires. The British and American colonial systems began their "soft landing" toward self-liquidation; the French faced slow but inexorable withdrawal; others - like the Russian, Austro-Hungarian, and Ottoman - ended with a sudden bang. The rise of Hitler, and more generally of fascism - including the Islamic kind - was a direct result of World War One and the poisonous residue of resentment in nations that felt cheated by its outcome. The spread of genocide, ethnic cleansing, and terror dates from that time. America and Britain, technically victors, faced disillusionment followed by intense isolationism in one case and appeasement in the other.

But how did it happen in the first place? The conflict between Austria and Serbia was clear enough, and Russia got into it as a matter of course, to defend its little Slavic cousin. But the real linchpin was Germany - how did that happen? It wasn't the Kaiser, who, in spite of his sometimes bellicose rhetoric and fixation on the British Navy, nervously attempted to diffuse the crisis and coax Austria into getting war against Serbia over with quickly. What converted a Balkans war into a world war was Austria's dithering and the determination of the German General Staff to use the Sarajevo crisis to provoke a larger war with Russia and France - they saw it as their last opportunity to do so, lest Russia become too strong. And the temptation to finish their humiliation of the French was just too overpowering to resist.

And how did the combatant countries endure it? A few years ago, on a trip to Germany, I flew into Hamburg directly over the trench lines of Flanders, which are still visible from the air, marked out by the British garden cemeteries. I thought about them, 90-odd years ago, hunkered down in trenches with their packs, their gas masks and rifles, rats scurrying about. Many more years ago, I flew over the remains of the Verdun battlefield, now marked by a giant ossuary and cemetery containing the bodies and fragments of a quarter million French and German soldiers: death industrial. How did they endure four years of that? It was world's first total war: whole nations and empires were emptied of manpower and treasure, and many did not survive; others came out badly mauled. In spite of well-intentioned efforts to stimulate economic recovery in the 1920s, the Great Depression hit as the ultimate bill for the destruction and loss of life. Governments stupidly compounded that crisis with misguided trade and monetary policies.

The loveliest Great War cemeteries of are those constructed by the British War Graves Commission and maintained all over the world, but concentrated mainly in France and Flanders. Other nations have not done as much or so lovingly - while there are many local monuments scattered around the country and an "Unknown Solider" is buried at Arlington, the United States lacks a national World War One memorial. Especially in eastern Europe and in the Middle East, many of the dead were never properly counted or buried. Even on the western front, too many were blown to bits by the innovation of exploding artillery shells, or buried in collapsing trenches and foxholes, to ever be recovered or identified. In all, about ten million soldiers perished, by far the largest conflict in history until that time. Around a million Ottoman Armenian civilians died, while the Spanish flu epidemic that started near the end of the war killed more than 20 million.

The Great War, or the World War, as it was once called, was old-fashioned in this respect: it was still a war in which it was generally safer to be a civilian than a soldier. The next war changed all that, and the killing found new pools of life for the taking. These are the sorts of events that make you wonder whether humanity will survive, or even deserves to. The dead don't have to contemplate that question. Historians and the rest of us can ponder the mystery of a civilizational suicide that began on a warm June day, 93 summers ago, at a street corner in Sarajevo.

Και την ποθεινην πατριδα παρασχου αυτοις,
Παραδεισου παλιν ποιων πολιτας αυτους.

And grant them the Fatherland of their desire,
make them again citizens of Paradise.