Imperial struggles (no fairy tale)

Tuesday, May 17, 2005

A country can gamble away a reputation built over decades in far less time. Don't jump to any premature conclusions when reading the following story where I have omitted one detail for the sake of thrill - until the end of the story.
Once upon a time there was an empire with seemingly unsurpassed military strength. Its friends spanned the globe due to strong trade relations with all other major nations, a polite foreign diplomacy and the accepted knowledge that this empire would not hit out against anybody else as it had followed a pacifist policy - save some small quarrels - and was seen as a mighty but friendly power in most places.
In most, but not in all places. Extremists of a different ethnicity and religious belief had drawn up plans how to gain greater autonomy that included toppling the ruling elite as they viewed living conditions very differently than these elites partying away in the capital and the big cities. This was fueled by low taxes, a bustling stock market and a solid economy whose trading sector funneled all the money from the production base in the provinces into the center of power. The reputable banks there became the redistributor for these enormous profits by directing them into other productive ventures, most of them in quite distant places.
Sounds familar, eh? Don't jump to any premature conclusions.
One day the picture changed all of a sudden. A terrorist group of different political and religious beliefs staged a bloody attack nobody would have considered a serious threat - until it happened.
Don't jump to conclusions yet.
The startled rulers of the big empire decided to punish the insurgents heavily. Without giving too much thought to the fact that dissent had been brewing under the surface for some years already they sent troops to the region where the terror act had originated. Being confident that it would take only a limited deployment of troops for a limited period of time to squelch the insurgency, not much thought was given about the financing of the punitive expedition. After all, this was a rich empire we are talking about and it would step in with all its military grandeur and punish those lice in the fur adequately, restoring its rule firmly.
Don't jump to premature consclusions yet.
But this is the point where events started turning against them. The serious under-estimation of the insurgent's will and the government's own ill-equipped forces led to an escalation into an outright war. The war did not stop there as other regions longing for independence from the big empire felt encouraged by the unsuccessful attempts of the government to stop the insurgency as it relied on warfare strategies that did not fit the times anymore.
Don't jump to premature conclusions yet.
The imbalance between an army that had bet on its sheer size and its superior weapons technology on the one hand and the hunger for freedom by the fighters of the insurgency on the other hand began to turn in favour of the insurgents, not least owing to the fact that more and more insurgency movements sprung up in other areas, forcing the government to split its forces into ever more divisions that tried to smash the unrest in more and more locations. This was also an economic necessity as the centre of power depended on its productive provinces where the goods were made the cities' merchants relied upon.
Borrowing for the war
Soon it turned out the punitive expedition was to become a long war. The government had to turn to other sources to finance this longer term struggle for power.
Don't jump to premature conclusions yet.
It turned to capital markets and began issuing a lot of bonds. Due to its solid reputation as a reliable debtor in a globalized world where transport and communications had reached speeds never seen before it had no problems raising more and more money.
But as the goal of the war was pushed further and further into the future, it encountered problems that were first answered with a slight devaluation of its currency by turning on the money printing press.
Don't jump to premature conclusions yet.
At this point of time the debasing of the currency and a huge growth in money supply had set in. The country was not able to guarantee the flow of imports it needed to survive. Supplies for the homeland became scarce.
Four years after the move against a guerrilla insurgency had begun, the said war was finally over. It cost the rulers dearly. The country lost all its foreign dependants with their huge pool of commodity and energy resources, the government was replaced by a different political system where workers had a greater say.
The biggest winner of all was the dragon of inflation. While the currency, once a reserve currency for a big part of the continent, had declined to 1/30th of its value during the war, it fell to post-war value of 1/17,000th later and never regained its advantageous status as a reserve currency again.
This was a (very) short history of the downfall of the Austro-Hungarian empire, which was reduced from being continental Europe's biggest empire with 70 million inhabitants to a dwarf-state of 6 million in the course of less than six years, its resource-rich provinces breaking away into independent states and its military power lost forever. All from a fight against insurgents that turned into World War I not long after the first shot was fired.
One Austrian gold crown of 1914 had given way to 14,400 paper crowns by the end of the war and diminshed further to 17,000 paper crowns by 1924. After that it was replaced with the Austrian shilling on a base of 10,000 crowns for one shilling. Rampant speculation led to the downfall of the banking sector by the end of the 1920's when the number of banks dwindled to half mostly because of bad loans given to corporate raiders in a largely unregulated environment and a lax judicial system where the right political connections could save a delinquent or bank manager from a threatening punishment.
War and inflation are a couple holding hands
War and inflation are a pair that come hand in hand, one can learn from history. If you ever try to forecast economic future, look into history first. The only fact that is proven is that history repeats itself, although the repetition might be masked by technological innovation for a while. In the end technological innovation and the accompanying build-up of velocity in communications has always just lead to a more pronounced end of the various crises. Empires come, empires go, and it will never be different as will be the hardship of the majority in these periods of transition.


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