The Liberal Global Economy (1880-1914)

1. The Liberal Global Economy (1880-1914) Lecture notes

2. The lessons of history • Three waves of globalization? 1) 1860-1914 • 1914-1945 – disintegration • 2) 1945-1980 • 3) 1980-2008 • 2008- ?

3. The international economy integrated before 1914 Railways integrated national and continental markets, falling shipping costs opened up trade in new commodities. The telegraph had a huge impact on communications, making information transfer much easier. The emergence of an institutional framework based on the gold standard brought the world economy together. Even a rise of nationaltariffs in continental Europe and in the US, did not stop the progress of trade, and of capital flows. It was a period dominated by relative peace, by British economic dominance and by liberal ideas

5. GROWTH OF INTERNATIONAL TRADE • Between 1840 and 1873 trade in goods expanded at an average 6% a year. • In 1873 a FINANCIAL CRISIS broke out in Western Europe. This was followed by DEPRESSION OF THE 1880S. After 1894 prices start to pick up again. Rise in protectionism. • In the two decades before WW1, despite protectionism, trade accelerated again and it rose by about 4.5% a year between 1903 and 1913.

7. FREE TRADE AND PROTECTIONISM • Theoretical advantages of Free Trade exposed by the Classical economists. • Adam Smith gains from specialisation and the division of labour. • Ricardo comparative advantage. • In practice however free trade policies were an exception and protectionism, invarious forms and measures, the norm: see political factors, interest group pressures, cartels, international rivalry.

8. Brief history of trade policies. • Trade policies in the 18c and early 19c were dominated by mercantilism, a form of protectionism. • Theories were developed to justify protectionism. The ideas of Fredrick List were very influential in Germany and in other industrialising countries as well. He advocated that industrialising countries needed to protect their infant industries from British competition by IMPORT SUBSTITUTION.

9. Brief history of trade policies • In the early part of the 19th century Britain was by far the most liberal country in Europe. However it had its own protectionist arrangement, particularly in agriculture, with the Corn Laws, i.e. tariffs on imported grain - and the Navigation Acts which were measures designed to boost British shipping against foreign competition. • 1846 - repeal of the Corn Laws by the British Parliament. This was followed by the repeal of the Navigation Act.

10. Brief history of trade policies • 1860: Cobden-Chevalier Treaty. Britain removed all tariffs on imports of French goods. France removed its prohibitionist laws on the importation of British textiles and reduced its tariff to an average ad valorem level of 15%. • The Treaty was very important since at the time France and Britain were the linchpin of international trade. The Treaty included a most favoured nation clause.

11. Brief history of trade policies • 1870s and after  a massive increase of competition from overseas imports. Large-scale imports of cereals and grain are made possible by: • Falls in ocean freight • extension of railways in the US as well as Argentina, Australia, Canada, Russia. This brought new areas into cultivation since it opened up new markets.

12. Brief history of trade policies • 1879  protectionist tariff in Germany.1892 - the Meline tariff, an even more protectionist tariff in France particularly in agricultural goods. • Most other countries in continental Europe follow the protectionist wave, i.e. Italy, the Hapsburg Empire, Russia etc. Only a clutch of countries remains committed to free trade: Great Britain, The Netherlands, Denmark, and Belgium.

13. The US and trade policy • The US prior to the Civil War, under the influence of the southern planter aristocracy had followed a low tariff policy. The South depended on the export of cotton and was not interested in protectionism. • After the Civil War /1861-1865/ the prevalent interest shaping US policy were the manufacturing industries in the North and the Midwest, and the nation became very protectionist.

15. REGIONAL DISTRIBUTION OF WORLD TRADE • In 1912-3 Europe was still by far the most important originator of world trade, accounting for 62% of world exports. Much of European export trade was intra-European trade. • Germany had become the most important world supplier of manufactured goods and most of its trade was with other European countries. • Composition of trade. The more industrialised countries exported a large share of manufactured goods and imported a large share of primary goods. The reverse was true for the less developed countries.

16. Britain and world trade • Britain ran a deficit in trade of visible goods with most industrial countries, comprising mostly manufactured goods. It also had a deficit with most non- industrialised countries, except a few, among which India was by far the most important. • On the other side Britain more than compensated for this deficit by a surplus in invisible exports with the rest of the world, i.e. shipping services, banking, insurance etc.

17. THE GOLD STANDARD • Britain adopted the GoldStandard after the Napoleonic wars. • This meant that gold was the base of the entire economy's money supply. The Currency was convertible into gold. • Because of the key role played by Britain in the world economy the system of the Gold Standard attracted new countries in the course of the 19th c. Germany adopted the gold mark after its victory over France in 1870-1 and the creation of the German Empire. The USA moved to Gold in 1900, but informally it was already on gold from 1877. • Russia moved to Gold in 1897 (the same year as Japan). Austria had moved to gold in 1892. • Some countries like France (and briefly also the US after 1879) attempted to link their currencies to silver, but as the price of silver fell, they found their currencies losing value and had to revert to gold, by the 1880s.

18. THE GOLD STANDARD: conditions Requirements for each country: 1 - its currency needs to have a fixed gold contents and is traded at a par value 2 - gold is bought and sold in unlimited quantities and a fixed price 3 - no restrictions on imports and exports of gold 4 - any banknote is exchanged into gold (and into any other currency) on demand = full convertibility

19. THE GOLD STANDARD AT WORK The amount of gold that a country’s Central Bank possessed determined the amount of credit that it could extend in forms of banknotes and deposits, held by other banks, i.e. the money supply. Fluctuations in the money supply determined fluctuations in prices. Ex. Rise in money supply pushed prices up. The system was self-correcting. The movement of gold in or out of the country – as a function of the balance of payments surplus or deficit - caused fluctuations in the money supply and in prices. An outflow of gold would generate a fall in the money supply. Interest rates would be hiked up, to stop it. Higher interest rates and less gold would lead to a fall in prices of traded goods and thus restore competitive conditions.

20. ADVANTAGES OF THE GOLD STANDARD: • Fixed exchangerate – no risk of competitive devaluation. • Gold anchor, guarantee against price inflation. • Reliable transactions. Provides multilateral clearing system of convertible currencies. Money earned in one place could be spent and invested in another country. • DISADVANTAGES - Crude adjustment mechanisms for the poorer countries (if hit by a crisis) and disinflationary/deflationary bias.

21. THE GOLD STANDARD • Shared common assumptions. • An orthodox economic policy prepared to sacrifice domestic economic concerns to international stability. • Economic policy was conducted with one single tool, the discount rate, a fairly crude mechanism of adjustment. • Commitment to a strong currency, tied to gold – maintaining a positive balance of payments and a balanced budget. • A good level of international co-operation based on a concerted approach by the main powers.

22. International Investment • The export of capital was not a new phenomenon, but by the latter part of the 19th c. it reached new heights. • Sources – from foreign earnings, both from trade, from previous foreign investment. • Who carried out? Banks, governments, companies. • How? By subscribing government, or government-backed bonds. Or by acquiring shares in business. • Why? Expectation of a higher rate of return than was available domestically. This was not always realised, however.

23. International Investment To sustain an export of capital, and to become a net exporter a country had to have generated a surplus in the balance on current account. This happened in two ways: • Either from the trade surplus: France and Germany. Or from invisible surpluses, i.e. Shipping, banking, insurance, interest earned on previous capital exports, see Britain.

24. Capital movements pre-1914 and today: comparison • A larger share of resources was transferred. Between 1870 and 1913 capital exports from Britain amounted to an average of 4.6% of Britain’s GDP. At its peak the share was nearly 10% of GDP in some years. Also net capital imports were comparatively higher, for example some developing countries such as Argentina ran current account deficits of 18.7%. Today capital flows are a two way affair, countries both export and import capital, so that net positions are smaller. While before 1914 richer countries were net exporters, today they tend to be net importers.

25. Capital movements pre-1914 and today: comparison • Pre-1914 less developed, or developing countries were large borrowers of foreign capital. Todaymost capital transactions are a flow between the more industrialised countries, rather than to developing countries. Africa in 1999 received just 1% of all FDI. • Pre 1914 foreign investments went mainly into transportation, mining, or into railways and government bonds. Today a large amount of capital is in short term assets, while long term investment are much more varied, with multinational corporations investing in manufacturing, services etc.

28. Migratory flows before 1914 and today • They were bigger than today. Apart from the 60 million leaving Europe, there were 10 million voluntarily leaving Russia for Central Asia and Siberia. And 12 million Chinese and 6 million Japanese emigrating to East and South Asia. • The impact of migration was much bigger than today also on the receiving countries. In 1911 the foreign born were 14.7% of the population of the US and 22% of Canada’s. In 1990 in the US it was 8.6%. • Today most countries have tight immigration controls. The movement of unskilled labour is tightly controlled.

29. “The global capitalism of the late nineteenth and early twentieth centuries came close to the classical ideal”. Briefly describe why. Give brief definitions of the following: Infant industry protection Comparative advantage Import Substitution In what ways was Britain at the centre of the global economy in this period? What was the Gold Standard and how did it work? What was the intellectual case for free trade? Who benefited most from international investment flows and international migration flows?

30. Controversies over the gold standard. Who were its supporters and who were its opponents and what were their arguments? Controversies over free trade. Who were its supporters and who were its opponents? And what were their arguments?