(FORTUNE Magazine) – Whatever baggage we are dragging with us into the new millennium, at least we have had the good sense to leave some of the century's most poisonous economic ideas behind. Communism is buried. Beggar-thy-neighbor trade policies have been banished to a few lunatic-fringe political parties, and (in developed nations, at least) capital controls are artifacts of mainly historical interest. To a student of global economic history, this is a rare sweet spot.

It's important to note, however, that we've been here before. The last time the world saw anything like this fin de siecle surge in global economic cooperation was, coincidentally, the last time the world saw a fin de siecle. And in that lies a message of considerable optimism--and a warning.

Most people regard globalization as a recent phenomenon, but in fact the process was well under way at the end of the 19th century. Technological breakthroughs like the telegraph, railroad, and steamship shrank the globe and converged economies. In 1870, for example, the price of wheat in Liverpool exceeded that in Chicago by 60%. By 1912, the gap had fallen to about 15%. By 1913, Britain was exporting capital on a scale equal to 9% of GDP per annum. (By comparison, Germany and Japan's current-account surpluses at their peak in the mid-1980s were only 4.5% of GDP.) This flow of investment capital from Britain financed much of the infrastructure of the U.S., Canada, Australia, and Argentina. As the century began, Germany, France, and the Netherlands were also exporting capital to Russia, the Middle East, and their colonial empires on a growing scale.

Labor was also extremely mobile, more so even than today. During the last half of the 19th century, nearly 40 million Europeans moved to North America, and millions of others headed south to Australia and Argentina. Masses of Indians and Chinese also left home, forming the backbone of the merchant class in British territories from Singapore to South Africa.

All this global freedom occasioned an extraordinary rise in living standards. "The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth," wrote the economist John Maynard Keynes of the prewar era. "He could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits."

This happy era came to a catastrophic end with the assassination of a Hapsburg prince in Sarajevo in 1914. To be sure, the political upheavals that ensued from the First World War had their origins long before 1914, in the social disruptions and political conflict triggered by the Industrial Revolution. But the war was their culmination. In its aftermath several world powers lost their ruling dynasties, and the powers that arose in the vacuum divided the world for the next eight decades.

The technological breakthroughs continued, however (see chart). Had the First World War not broken out, those advances would probably have brought us a prosperous, integrated global economy as early as the 1930s and 1940s. Instead, we got the Great Depression and another world war.

The world economy today is trending back to the era before 1914, but with certain advantages. The average level of tariffs in the industrial countries is now less than 10% of the level that prevailed in the era before the Great War. Since 1991 nearly 600 new treaties have liberalized the rules for foreign investment as well. Meanwhile, deregulation has accelerated the decline in transportation costs resulting from new technology; increased competition in the shipping industry dropped the cost of shipping a ton of iMacs to Japan (or Toyotas to the U.S.) by 70% between 1980 and 1996.

Another new feature in the global business landscape is the multinational company. The world's 60,000 transnational corporations now account for about one-quarter of the world's output, and sales by overseas affiliates amount to $11 trillion. Global exports, by comparison, add up to just $7 trillion.

While the multinational corporation has spearheaded global integration, portfolio investment has also grown deeper and broader. In the half-century before 1914, most capital flows traced back to a few thousand wealthy European families. Today they are driven by fund managers allocating the savings of hundreds of millions of people in pension funds and mutual funds. Currently most of the world's retirement assets are in the U.S., Britain, Switzerland, the Netherlands, and a few other, English-speaking countries. But countries as diverse as Chile and Thailand have been promoting pension savings, which also should encourage the growth of their domestic capital markets. When the Cold War ended ten years ago, there were probably about 100 million people on the planet who owned a share of stock or had a pension plan. By the year 2010, it is not difficult to imagine the number rising to one billion. China's stock market is only eight years old, but the country already has more than 60 million retail stockholders--that's more stockholders than Communist Party members. The processes bringing the world economy together seem all but irreversible.

But this isn't the first time people believed that. In 1911, The Great Illusion, a book by the British journalist Norman Angell, predicted that there would never again be a European war because it would make no economic sense. Germany, after all, was Britain's largest trading partner. Lloyd's of London had even insured the German merchant marine.

The lesson from 1914 is that economic integration alone does not guarantee that nations will agree to cooperate or even avoid trying to destroy one another. The forces of nationalism, tribalism, and ethnic rivalry are still very much part of the human condition, especially in developing countries. Remember that two-thirds of the world's people still live in the countryside. Between now and the time they are integrated into an Internet-ready, supranational, total-quality-management economy lies great potential for conflict. The recent worldwide embrace of market economies and global free trade gives us a second chance to share the benefits of the Industrial Revolution with all the world. We should take care to do better this time.

DAVID HALE is chief global economist for Zurich Financial Services in Chicago.