America: Republic or Empire? An Update, Part 1 by Bill O’Grady of Confluence Investment Management

This topic was last discussed in our report from May 7, 2012. We have expanded sections of it in this update and, due to length, will present it in two parts. Over the past two years, how American society answers this question is becoming increasingly critical. There is a steady undercurrent in American politics that seeks to withdraw the U.S. from world affairs. For the past two years, President Obama has somewhat supported that position, pulling fully out of Iraq, refusing to act against Syria for using chemical weapons, being reluctant to take aggressive steps to impede Russia’s attempts to undermine the government in Kiev, etc. Most polling suggests that Americans are tired of foreign involvement. At the same time, the polls also show a high degree of dissatisfaction with the president’s approach. To some extent, it appears that the president is giving Americans what they want and they dislike him for it.

We believe there is an explanation for this divergence. First, America, at its founding, is a republic. The Constitution was designed to create a rather inefficient, decentralized government structure with multiple layers of authority. The document makes going to war and funding it a complicated process.

Second, although the U.S. did not necessarily intend to stay out of world affairs, geography conspired to give the U.S. that option. It should be noted that the lower 48 states were not fully formed until 1912. From 1792 until 1912, the U.S. was preoccupied with establishing the country.

In addition, the founders and their successors managed to fix America’s borders in such a fashion that the U.S. faces no serious military threat from its neighbors. The U.S. managed to push the border with Canada far enough north to leave that country with large expanses of Alpine wilderness that can’t support a large population. In the south, the frontier with Mexico was far enough into the desert to make attacks from that direction nearly impossible.

Third, once New Orleans was secure, the U.S. was able to exploit the Mississippi, Missouri and Ohio river systems to move grain and raw materials to other parts of the U.S. and the world. Because the U.S. is blessed with land that is highly productive and conducive to industrialization, gaining complete control over the central systems of rivers supported indigenous economic growth. This geographical benefit, coupled with a growing population, persistent immigration and large land mass, meant that the U.S. was one of the few nations in the world that was able to develop in isolation and industrialize without relying on exports.

Paradoxically, the latter two factors made the U.S. the ideal superpower; America did not have to expend resources for border defense and could develop a large enough economy to undertake the superpower role.

Conversely, European nations could not dominate that continent and thus became imperial powers in order to expand their influence.

In this report, we will discuss how the American republic began, how it evolved into an empire and how America conducted this role. Next week, we will finish our analysis and discuss market ramifications.

How Did This Happen?

America is an accidental empire. The country was born of rebellion, forcibly leaving the British Empire. America, separated by two oceans, lacking precious metals (which doomed South America to plunder) and surrounded by sparsely populated Spanish and British colonies, was able to steadily expand from 1792 to 1912.

The founding fathers created a government designed for slow change. Two legislative houses were created, one representing the size of the population and one the status of the states. The executive, at least domestically, was mostly prevented from dominating the government. The court system was given great but strictly limited power and was removed from the political process. In effect, the founders created a system with checks and balances that prevented anyone from having too much power. Unlike in a parliamentary system, minority rights are offered great protection. The republic was not built for efficiency; in fact, protection from tyranny was a key goal and a strong, centralized government was prone to despotism. Thus, the U.S. government was, at its core, designed to act with great deliberation.

This sort of government worked very well during America’s republic phase. The nation developed into a multi-ethnic, multi-cultural society that was built by waves of immigrants willing to take enormous risks to begin a new life in the United States. The rather cumbersome political process prevented rash actions from being taken and allowed change to occur gradually.

However, after WWI, the world began to intrude on the U.S. Britain, which through its empire had reigned as global superpower since the late 1700s, was faltering. The costs of the world war along with the relative decline of its economy were making it hard for Britain to maintain its superpower status. It tried to engage the U.S. in supporting its status; President Harding, an avowed isolationist, and President Coolidge, who would not consider European debt relief, made it clear that the U.S. was not interested in global involvement. Presidents McKinley, Roosevelt, Taft and Wilson had increased American involvement in global affairs, winning small wars and gathering a few colonies. However, the presidents of the 1920s reversed that internationalizing trend.

As America industrialized, it became an exporting power; interestingly enough, it also tended to use tariffs to protect industries from foreign competition. Essentially, the U.S. benefited from Britain’s superpower “public goods” of protected sea lanes and the use of the pound sterling for trade, but was not interested in supporting the British in return for those public goods.

European debt problems caused a financial crisis that spread to the U.S. The American policy response worsened conditions. The combination of tighter monetary policy into debt liquidation and a sizeable increase in tariffs added to the severity and scope of the Great Depression. The Depression also facilitated the rise of radical authoritarian regimes in Italy, Germany and Japan; the hopelessness that the Depression wrought led people to opt for extreme political figures, looking for “someone” to lead them out of the morass.

These authoritarian regimes ended in tears. WWII forever changed the geopolitical world. The European empires were steadily disbanded. Authoritarianism was discredited; the two major political systems were free market democracy and communism.

America Defaults into an Empire

Prior to WWII, there was a strong strain of American isolationism. It is important to note that the America First movement was politically powerful right up until the bombing of Pearl Harbor. This movement, with famous members such as Walt Disney, Charles Lindbergh and John Kennedy, was isolationist and worked hard to keep America out of the escalating European conflict.

After WWII, the American political elites concluded that if the U.S. retreated into isolationism then conditions would deteriorate and WWIII would occur. Most felt that retreating to isolationism would cede Europe and Japan to the communists; in fact, there is a rather strong conviction that the isolation of the 1920s and 1930s allowed for conditions that led to WWII. To prevent fighting another world war, the U.S. decided to engage the world. It should be noted, however, that this position was not universally held. Sen. Robert Taft (R-OH) opposed U.S. involvement in the Korean conflict and,

1, 2  - View Full Page