A History of the World Economy_ch4-5

A History of the World Economy_ch4-5 - internationai factor...

Info iconThis preview shows pages 1–20. Sign up to view the full content.

View Full Document Right Arrow Icon
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 2
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 4
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 6
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 8
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 10
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 12
Background image of page 13

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 14
Background image of page 15

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 16
Background image of page 17

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 18
Background image of page 19

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 20
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: internationai factor mohi tam—75 The previous chapter explained the general determinants of the pattern of trade and trade policy. Trade also needed merchants to spot the opportunities for profits and to organise the shipping. finance and marketing. Their organisation could influence the gains from. and directions of. trade. For these people at the midvcentury there were enormous opportunities for locating and carrying on business in new countries. lf entrepreneurs were mobile. so was their capital. And less wellvlinanced people were also willing to move between continents in search of a better material life. So flows of enterprise. capital and labour could provide a substitute or a complement for trade. Mobility of merchants stimulated trade. On the other hand. mobility of other factors might have reduced differences in comparative advantage. Both trade and factor migration should have tended to equalise the returns — wages. rents and prolit rates between economies. "fire cosmopolitan bourgeoisie International sales and purchases of goods made special demands on credit. information and trust. Because of their overseas connections. foreign merchants were often at an advantage ~ especially if they had settled long enough to build up domestic contacts in the more commercially open countries. Foreign merchants not only controlled international trade in most low>income states. They formed a world-wide cosmopolitan bourgeoisie by the midvnineteenth century (Jones. 1987. pp. 27—9. bfwgl. A large part of British trade with lfiiurope was carried out by German families with branches in Tvlanchester. Bradford and l.,.iverpool. Odessa‘s trade was largely conducted by Greeks and German Jews: in thi Germany superseded Britain as Russia‘s premier trading partner. By l87<l the number of Greek firms in i'lanchcster exceeded (,ierman primarily because they were able to find markets for British cotton piece goods in parts of the world where British representation was weak 7 ’l'urkey. Egypt and Africa. They imported grain through the Black Sea ports. especially Odessa. and to a lesser /nrernar/'0na/ factor mob/lily, 7850—75 51 extent the Baltic. helped by the repeal of the (Torn Laws. The Ralli brothers. who also operated in lndia. were preeminent. reputedly employing 4.000 clerks and litttttt workmen in the 1850s (Chapman. 1992. pp. 157—8), .lulius Knoop. a German. began his New York career as a pedlar and sent his son Ludwig to an apprenticeship with De Jersey‘s. in Manchester. When .lersey. specialising in the export of yarns and later machinery to Russia. went bankrupt in l847. Ludwig Knoop effectively took it over. along with the Russian agency for Plant Bros. the textile machine builders. By 1875 Ludwig was probmly‘ tl e largest cotton buyer in the world. with extensive mill interests in Russia and branches in all the cotton markets in Europe and America. Knoop built 2nd n anaged Rusian cotton mills (123 spinning concerns in total 7y the 1810s). but a so was active in the cotton trade with the USA and in bankirg. Commodities new to international trade called forth new forms of trad'ng iterprise. in the middle of the nineteenth century. the Siemers brothers. sell'ng ectrie telegraph equipment. were a family multinational that merged old and new organisations. Werner (1816-92). the eldest. a lieutenait in the Pruss’an a ‘tillery. upset the Prussian postmastengeneral with his technological honesty and so lost all Prussiai sales. But he gained a massive order for R issia beginning in MS}. Karl was transferred to St Petersburg to conduct the bus'ness. He marred aid engaged in less than successful business diversification in Russia. Wilhelm ( 823783). later ‘nventor of the Siemens open»hearth steel process. went to London. operatet a subsidiary of the company. and married he daughter 0 a Glasgow engineering professor (Siemens. 1957‘). He was knighted in 1882. When \‘v'alter was killet in 'l‘itlis supervising the construction of the Indo-European 'l‘elegraph Company‘s line. Georg took his place in negotiations at Tehran. lit the liar l,:.ast. British informal and formal control created a vast free-trade area in which (Tiincse international entrepreneurs flourished (Latham. 1986. l‘itx‘a‘). ’l‘an Kim (‘hing's (1829—93) career earned him political honours and influence from .la van to Siam. He took over the family rice-trading business in Singapore and acquired rice mills in Saigon. Bangkok and elsewhere. as well two steamvships and. iiland from Singapore. tin~mining concessions whose workers he could supply with rice. For linguistic and political reasons. Europeans were obliged to employ oeals. compradores. to conduct their trade with China. The Chinese compradore system could subtly transform a British trading house into an unprofitable formal British business and a highly profitable subsidiary of a Chinese enterprise. heated by the compradore (Wang. l993). Similar arrange— ments in .lapan stemmed from the obligation on foreign merchants to restrict their commercial activities to an area of 25 miles around the treaty ports. They were therefore dependent on .apanese employees or merchants if they wished to buy raw silk or tea for export from the interior. .iardine Mathieson. a partnership based in Hong Kong ant Shanghai. with a Yokohama branch front 1859. lost a great deal of money in he lts’ofis because of its lack of information about the merchants with whom it t ealt. consequent upon the restrictions imposed on them. More generally. western nercliants were unable to develop trade much they r1; (2 52 A History of the War/d Economy wished. and the view that they 'ct'iutrollcd’ (.‘liinese and Japanese foreign trade confuses appearance with reality (Sugiyama. was. pp. 5336). The fragmented British staple industries created an opportunity for merchant iouses. especially in India but also in Latin America and elsewhere. These houses reduced the selling costs abroad of British manufacturers. who were not obliged o establish foreign sales organisations for their exports. Manufacturers could thus remain small and specialised. in the longer term. the merchant house facilitv mav rave exercised a harmful influence over exports compared with whatisales departments might have achieved in larger firms. Within a unitary organisation. the flow of information back from the customer to the producer is likely to have teen greater. and so too would have been the responsiveness to the market. The American style. just beginning to emerge. was to favour unitary organisations vecause American products were typically complex machinery that could not be distributed in the same way. The Singer SewingY Machine Company. which entered foreign markets in 1854. operated as a multinational company from the irst (Davies. 1076). Tracie, factor price equalisatian, and income gaps between countries By creating opportunities for overseas sales and purchases. merchants indirectlv transformed economic life at home. Because of the export possibilities open to the wheat-growing areas of the United States. the price of wheat in terms of textiles was higher there than it otherwise would have been. Therefore so too was the value of the wheat—growing land. Conversely. the a\ ailability of wheat imports to Britain reduced the market price of British wheat in terms of textiles. As British landlords recognised in their opposition to the repeal of the Corn Laws. imports indirectly also lowered British rents relative to wages. But thanks to transport costs. even in 1870 wheat prices were more than oil per cent higher in Liverpool than, in Chicago. and Ill per cent higher than in New York. The London—Cincinnati meat and animal fats price differential was 93 per cent in 1870. falling to 18 per cent in 1913. Much lower was the cotton textile price gap between Boston and ly'lanchester. at 14 per cent in 18711 and 1 per cent in 1913. Philadelphia‘s average iron products prices were till per cent above London's. falling to 20 per cent in the same years. international trade in goods was reducing differences in relative domestic factor prices that gave rise to trade (Samuelson. 1949‘). Convergence of factor prices tended to etpialise incomes per head. Countervailing forces inhibiting income convergence include transport costs. tariffs and institutional or cultural barriers. any of which prevented the emergence of a single price for internationally traded commodities. in doing so. they also precluded a single price for the factors used to produce these goods. which the factor price equalisation theorem predicts under idealised conditions.‘ in a later period. between 1870 and 1913. commodity price equalisation served to eliminate one-fifth of the US—UK wage gap. a figure exceeding actual convergence //7rer/7at/0na/ factor mob/My, 7850—75 53 because of stronger l‘S industrial performance (O‘Rourke and Williamson. 1992). \‘vagefl'ental ratios rose in western Europe and declined in the regions of recent European settlement. Induced factor—saving biases in technology were important as well as price convergence. factor migration. capital deepening and the closing of the US frontier (CTRonrk‘e er r1/.. 1993,). The steamAship and the railway mainly affected intra~continental trade rather than longer-distance routes in the third quarter of the nineteenth century. Hence r gions within Europe were opened up to the international market in these years. l the factor price theorem is relevant for this period. there should have been a greater tendency to equalise wages within Europe. rather than between Europe and the rest of the world. l‘lowever. even within countries the size of factor price differentials remained substantial. Both between regions and internationally. trade and factor mobility induced changes in the expected directions. In particular. labour flowed towards higher-real—wage and labour-scarce areas. But migration was not sufficiently responsive to eliminate all wage differences between markets. and often needed to fight against countervailing. but tempor— ary. collapses in the demand for labour. According to the evidence available at present. during the 1850s l‘iuropean national income gaps tended to widen (Bairoch, l‘l7o). Britain. the richest country. was the second fastest growing economy. while Russia. with the lowest income. experienced the lowest growth rate. The next decade showed more signs of convergence. France and Germany both attained growth rates greater than those of the small open economies which took the top four places in the income per head league (Crafts. 1983). That these countries 7 Britain. Belgium. Switzerland and the Netherlands — were clustered together may itself be taken as evidence of the effects of trade. for being small. regional differences within them may have been less persistent and the cost of C f trading with their neighbours was relatively low. linropean income growths diverged primarily because national 'nstitutions and political developments limited the extent to which trade and factor migration could take advantage of the new opportunities at home and abroad. The poor perf<n‘mance of the Spanish economy owed much to political instavility. Between 1834 and Mott 74 Spanish finance ministers were responsible for budgets typically arranged for short-term political objectives (Flatt. 1984. p. 107). About 20 per cent of the government expenditure was spent on the Army; at he time of the 18M revolution there were 504 generals on the Army list. Political uncertainty and diversion of resources to non'productive uses reduced overall productivity and lowered tendencies to convergence. However. politics did no entirely shield Spain from the growth—inducing impact of the international economy. The Crimean War boosted the economy into an upswing between 185,4 and 1866. and export—oriented mining attracted substantial volumes of foreign capital from 1875 to 1881 (\r’ives. lllo‘). pp. 7414. 744). Austria—llungary also remained backward. largely unintegrated with the world economy. Only in 15750 was the customs frontier between Austria and Hungary abolished. and the new tariff of 1852 merely replaced outright prohibitions on the 54 A H/story of [he War/d Economy importing of many articles with high duties. lfnsuccessful wars with Piedmont and France in 1859 and with Prussia in ism similarly did not encourage economic development. On the other hand. from 151.53 Austrian trade with the Zollverein was hoosted by large tariff reductions. The empire as a whole fell hehind the growth of western liurope until 18711 (Ranki. 1083; (iood. 1003). liven after political unification in lh‘hl. Italian economic development was slow. Unlike Germany. ltaly's customs union hefore unification remained at the project stage and economic reforms. with the exception of free trade after independence. were timid. Vy’idespread discontent in the south imposed the additional expense of maintaining letHltltl soldiers there. The relathely small size (and unprofitahility) of the ltalian railway system reflected the poor prospects for economic growth and extraordinarily high running costs ("l'oniolo 100(1). Outside Europe a distinction can he drawn hetween economies receiying lahour and capital from Europe. and the rest. Worker migration international movements of merchants were on a small scale and less disruptive of traditional patterns of economic life than migrations of workers. Such mohility can he measured only when the horders are policed and individuals recognise the concept of a nation. National horders were irrelevant to nomad trihes. wintering in the plains and driving their animals tip to the highlands in the spring. ln Baluchistan on the north-west frontier of India as late as 1011. only 54 per cent of the population lived permanently under a roof and one-third were pure nomads. while the remainder divided their dwellings hctwceti tent and house. Permanent migration was often induced hy force of adverse circumstances Failure of the lrish potato crop for the second consecutive year in lit-lo was a disaster. .\'lortality soared; from a population of o\ er eight million in 1845 nearly one million died in the next six years. Between 1811.7 and 1554. 11» million lrish left the lils' mainly for the lFSA (Harkness. 191301. ’l‘ahle 4.1 shows that the very high lrish propensity to migrate continued through the ltlotls. (hie of the heneficial effects was a rise in the average si/e of agricultural holding. 'l‘hose over 15 acres increased and those under declined Real wages rose strongly from the lfs‘oUs. suhstantially choking off emigration tllatton and Williamson. l‘N—l: Boyer er u/.. 1994). The Scots also showed a high tendency to migrate. Andrew Carnegie’s family left Dunfermline in 1848 for tl e United States. after his mastersweaver father despaired of finding suitahle work. Although the father was no more successful in the USA. his son. Andrew. created Steel and hecaine a multi—millionaire. Behind these movements was the push of lack of employment and low wages. hut equally important in principle was that there should he somewhere hetter to go. The same considerations apply to the integration of the lahour market as to markets for goods and services. discussed in the previous chapter. it two national /nremat/0na/ factor mob/My, 7850—75 Table 4.} intercontinental migration rates 1851718'80 Annual average rate per 1,000 population. 1914 houndarics 1K51iotl 1x614”) 1871w8f) lreland lit) 14p of) Scotland 5.0 4.6 4.7 lingland 1w 2.8 1.0 Norway 3.4 5.8 4.7 Denmark 2.1 Portugal 1.9 2,9 Germany 1.5 Swit7erland 1.3 ltaly 1.1 Netherlands (1.5 Sweden ‘15 “s l 2.4 :\ustria»llongary {1.3 frame (1.] Source: Hahn's ( 1W9 1 ). lahour markets are connected. shocks in one will spill over to the other. Th4 forces that hrought southern and central European labour markets into the worlt economy included population growth. which had not made its impact felt at th mid-century. Countries: that were to rise to prominence as sources of intercon tinental migration in the later nineteenth century v Italy. Austria—Hungary ant Spain 7 are hardly represented in this period. only partly because the Statistics art poor. Italians heading for South America embarked from Genoa where. sinci lhfilh. a regular service via Marseille and Spain sailed to La Plata and Brazil Spanish arrivals in Argentina during the 1850s were few compared with ltaliaris in land respectively ‘13“ and 3.349. with respectively 376 and 1.633 departures Total official emigration from Austria-llungary in that year was only 2.032 Germans emigrated in large numbers after the 1840s. A Chilean emigratio: agency recruited Germans from the 1850s. Australian colonial governments too. a leading part in encouraging migration hy directly offering help with chea' passages and land grants (about it) per cent of total immigration was assisted) Perhaps this explains why Charles Dickens chose to send the impecunious ant fictional Mr .'\licawher there at the end of David Copperfield. Ending slavery within the British Empire encouraged the demand for chea lahour in the tropics. in particular through indentured labour from India. A indentured lahourcr signed a contract to work abroad for a specified period. ofte for specitied wages. in return for the passage money. and sometimes the retur fare. The contract was a way of overcoming the difficulty that poor peopl experienced in horrowing even for productive investments. The drawback wa that. once ahroad. the lahourer was often at the mercy of the employer. why tended to control the state apparatus. A fairly steady stream of indenturei workers travelled to the British \‘v’est indies (including British Guiana) in th 5% A H/story of the War/0’ Economy third quarter and to Mauritius. Such migration was regulated by the 1ndian authorities. who stopped emigration to British tirirana in 1841\7751 because of the high mortality on the voyages. to Natal in ism and 1871 because of unsatist‘aetorv labour conditions. and to .lamaica in 1863 because ot economic depression and the unsuitability oi the would~be immigrants (li‘indlay Shirras. 1039)). Japanese labour markets remained untntegrated with the world economy because emigration was. torbidden on pain o1 death. by the ‘seclusion law‘ of 1038'. General emigration was not legalised tintil 1855. but an imperial edict ol' 1871 urged young men and women to seek t'tt'm't/rioir in the \‘vest. Population pressure could be largely absorbed in the series o1 .lapancse territorial acquisitions '7'» beginning in lists. which iy 1010 had increased the land area :orrilable to lapan by 75 per cent. while adding only 18.5 million to the population (lchihashi. 1982). A great deal oi international migration was physically. not itist economically. coerced. After 1820 a quarter of a million indian. French. Spanish. Russian. French and British convicts were shipped across the worlds oceans. Russian- registerel migrants to Asiatic Russia hour the 1550s. to the 1880s were predominantly prisoners and exiles. numbering 100.000 in the first decade. rising to 180000111 the third. Peasant migration which was to rise markedly by the end (it the century. averaged 1.10.000 a decade: The number ol' nonAlree British whites sent to Gibraltar and Bermuda was greater than Chinese contract labourers taken to British Guiana and the British Caribbean. More British convicts arrived in Australia after 1833 than before. More linropean Russians went to Asian Siberia between 1800 and 1018 than the intercontinental liows ol‘ Indian contract labour. French whites sent to New ("aledonia were more numerous than the African contract labourers brought to the French ('arrbbean islands. Alter the mid— century. however. ii'ee labour entirely dominated international migration. The opportunities lot the protitablc mobility o“ tree labour arose mainly from ruraliurban migration and. between countries. migration t'rom the old countries to the new. The movement oi indentured labour trom lndia and (‘hina to. plantations was an exception to the rur'alirurban pattern The tune and costs spent on longvdistance travelling were reduced by the susamishrp eycn when steam was uneconornical tor longvdistanee freight. The simple llecltslieivflhlin theory predicts that such migration would normally reduce the volume oi trade. but the reverse was true because the natural resources ot the L‘riitcd States. Australia and New Zealand were complementary to the mobile l‘actors: without t'actor mobility there would have been less international trade because the natural resources on which it was based would not have been utilised. The first major influx ot immigrants to the United States was in the decade alter 1844 when 3.87 million Europeans ioined a population ot only 19.5 million. Before the. Civil War. immigration preceded railway building and followed coal output. Alter the war both immigration and coal output lagged behind railway building (B. Thomas. 1073. pp. 02%). Below the 1570s. when the exploitation oi natural resources gave transport developments the principal role. the rate. of American expansion was conditioned b\ new labour which built the railways. The /m‘emat/ona/ factor mobility, 7850.75 57 second intiux o1 migrants. from 1863 until 1873. also preceded fixed capital investment. Subsequently. railway building ceased to be the dominant force that it had been. and changes in migration. such as the third expansion of 1878-88. were induced by changes in the general level of investment. The complementarity of natural resources and capital equipment also suggests why factor prices were not equalised by migration between Europe and the United States. Paul David has maintained that nineteenth—century mechanical technology happened to involve a greater input of ‘land‘ per unit of output when operations were rnechanised to save labour (1975. pp. 874%). The woodworking machinery which was popular in America and neglected in Britain was not only labour saving but also wasteful of wood (Amcs and Rosenberg. 1968). American cotton»spinning machinery was not only more capital-intensive than English equipment but also required a greater input of longer—staple cotton (21 more costly grade o1 raw material) per pound o1 yarn (Sandberg. 1969). The efficient use of mechanical rcapers required a level. stonetree farm terrain. arranged in large and regularly shaped enclosures. a specific natural resource input that in the mid-nineteenth century was obtained much more cheaply (relative to the price of grain) in the United States than in the British Isles (David. 1975.. ch. 5). Hence in America the capital formation encouraged by the greater possibilities of jointly substituting natural resources and capital for labour may have been responsible for driving up the relative price of labour. New economies smaller than the United States were more dependent on international factor mobility. The movement of British factors of production to .~\ustra1ia. particularly to supplement local Australian savings. dominated econo- rrric development more than in any other growing new country (Butlin. 1964. ch. 11. Australia was a maior destination for transportation of convicts. These were youthful workers with high literacy. work skills and physical fitness. In 1840. 71 yer cent oi the male Australian world'orce were convicts or err—convicts (Nicholas. 1988. p, 5.”). During the 1860s overseas borrowing from Britain amounted to approximately half of total investment. British funds dominated financing of iastoral assets and were a major part of the finance required for communications development. This transicr. the selling of the greater part of exports to Britain. and the purchase of most commodity imports in Britain. all suggest a dependent 'elationship usually assumed to be exploitative. In fact. Australian living standards appear to have been considerably above those of Britain (£46 GNP per head in 1861 at constant 1911 prices) and the rate of growth in Australia was iigher (1.4 per cent per annum in GDP per head between 1861 and 1877) than in Britain. The flows of British capital and labour increased GDP by 4.9 per cent per annurn. much more than labour productivity. from 1861 to 1877. Population grew iy 3.5 per cent per annum. considerably above all other countries in the western world. and a substantial portion of the increase came from immigration. Between 1861 and 1890 about twohtths or the addition to population was due to migration, almost all trom Great Britain and behind. The Australian economy clearly gained substantially from Britain. 58 A H/Story 0f the War/0’ Economy The relevance ofRybczyris/r/"s theorem Suppose we represent the regions of recent litrropean settlement and their trading iartncrs as consisting of two factors. land and labour, Rybczynski‘s theorem (see. or example. Ethicr. 1%}. pp, lilflwli implies that. if the conditions of the *iecksheriOhlin theory are satisfied. then the growth of a country’s labour force through immigration will. in the absence of other changes in the "endowments of he economy. raise the output and export of labourvintcnsive goods by pro iortionately more than the increase in the labour force. The output of andintensive goods will actually fall. the landemtensive goods are agricultural aroduce and the labour-intensive goods are manufactures. We do not observe this pattern in the United States. Canada. A~\ustralia and i-\rgcntina in these years vecause the supply of land in these economies was being raised by transport 'mprovemcnts at the same time as immigration grew. Once, the effective supply of and could no longer be increased the closing of the lTnited States‘ frontier is traditionally dated to 1800 ~ continuing immigration could be expected to bring about the Rybczynski predictions, Capital movements When labour migrated. the factor reward. wages. went with it. 'l‘he migration of capital. by contrast. gave rise to a stream of profits and interest back to the source economy. In the case of labour migration. the total effect is the sum of the factor supply increase in the regions of recent settlement and the corresponding reduction in Europe. The abundant natural resources of ,vXustralia and the United States meant that labour productivity was higher there than in Europe. and therefore total world output increased, A similar productivity e‘feet was also generated by foreign investment. but the distribution of the rewart s between the source and host economies was likely to differ from the case of labour migration. The economy that bore the ‘cost‘ of raising the capital received a t irect reward. Of the two main capitaleexporting countries. Britain tended to invest in the land-abundant regions. thereby reducing the costs of its food ant raw material imports. and France tended to invest in 1,:urope, 1%} 1851 Frenchmen had lent about two billion francs to foreign governments. and (1.5 billion francs had been directed to private projects lt‘ameron. tam. p. 8‘5). Spanish 'ailways were substantially financed and built by the lirench. Plait t’ifthiii. ch. 5) estimated that. in 1t‘7tl. 4f) per cent of Spanish railways had been financed from abroad. After 1851 a much increased proportion of French investment. at most one~half of new foreign investment. went into enterprise. Railways alone. on the lberian and Italian pcninsulas. in central [Europe and in Russia. accountet for oneahird of this investment. Banking. mining and metallurgy were also key sectors. Perhaps the most powerful institution tor French foreign inyestment was the /ntemat‘/'0na/ factor mob/Y/ty, 7850*75 E Credit Mobilier of the Pereire brothers. Isaac and ljmile (Jenks. 1971. pp, 2—124 this was a form of industrial bank intended to assemble resources by the sale shares, and obligations to small investors. At the height of its power it handli about 3t) per cent of the new security business arising in Paris. Credit Mobili controlled a huge system of state'built Austrian railways and purchased anoth from the Russian government. it established subsidiaries in Spain and Hollai owning mines. gasworks. shipping companies and railways. all financed by t', bank. Both Credit .‘vlobilier and the Rothschilds. who were financing Austri railways. were interested in persuading the domestic market to hold the shares. that l‘rench capital was not greatly involved after the market potential had be demonstrated. The Dutch were the largest foreign holders of Austrian public de in lb’bb‘ fljltttt. 1084. pp. 90—3). British capital. like French. went mainly to foreign governments (often 1 expenditures of no benefit to the people). next to the railways. and then to t public utilities, Over the five years before Disraeli bought the Suez Canal shat (without the consent of Parliament) in 1875. British earnings on forei investment amounted to at least £50 million per annum and capital exports ran £25 million more than this figure (lmlah. 1958. p. 73). The following year t position was reversed. and Britain collected more than twice as much incor from its foreign property as was newly invested abroad. Direct investment in industry. rather than lending to governments. tended follow the trading connections which first provided the information abc investment opportunities. the \r‘v'elshman John Hughes founded his New Russi Company in 1871 to take tip a concession of coal« and ore~bearing lands in t Donetx basin. after originally becoming interested through supplying iron for t construction of a Russian battleship. A settlement he founded was nam \iU/(tle'tt after him.A \‘v’here the regions of iiuropean settlement were concerned. it seems likely tl the complementarity of the factor flows from the Old World with the abundz natural resources resulted in persistently higher wages than in Europe, instead factor price equalisation. In other areas. such as: Russia. the informatioi ditliculties and institutional restrictions (Russian serfdom was only abolished listil and the mir. village collective. was almost as restrictive) were probably t great to permit the equilibrating tendencies of the international market operate. The contribution of foreign capital to the development of the Unit States was probably only about ll) per cent of total capital investment in mi decades. in particular sectors. foreign investment could still attain high propt trons. L,’nderdevcltrpment of the domestic banking system explains the high 1 dependence on borrowing employed for trade and other short—term ere purposes. By the ltéofis the United States was already a sizcablc economy European standards. and its rapid growth could hardly have been largely financ by other industrialising countries. Their labour contribution was rather greater. 1S7t1 more than one'fifth of the workforce was foreignoborn (Kuznets. 1971). 60 A H/‘Story 0f the War/d Economy income and welfare Did more international trade make most people genuinely hctter oii‘.’ Could associated changes in economic structure have generated oiisetting adyerse effects? if they did then possihly‘ relative incomes per head are poor guides to relative average levels oi welfare. ()nc oi the most important structural changes associated with rising money incomes was urhanisation. liritain with the highest European income per head at the mid-century was also the most heavily urhanised. The greater part oi the French population in contrast continued to live in the country. The French therehy saved on investment costs oi urhanisation. such as sanitation. which may rave given an upward bias to British income (O‘Brien and Keydcr. 1078. p. 188W L‘rhanisation also replaced unmeasured home production with measured output oi market—produced goods. perhaps giving another upward hias to t'ends in measured British income. Even more fundamental is the possibility that the l‘rcnch land tenure system restrained population growth. while the British pattern oi urhanisation and industrialisation encouraged an explosion oi popu ation. These ohjections to income per head measures are oi much wider significance than the comparist‘in oi Britain with lirancc. 'lihough Britain apparently had the highest standard oi living in EL rope as measured hy money income. the lite expectation oi the British male was hy no means the highest. despite the likelihood that this would have heen regarded as one oi the most important elements oi living standards. Frc ich liie expectations: were lower than British as the income rankings predict. hut the Scandinavians were, well above. contrary to the income rankingsi In 1840 the Norwegian nialc at hirth could expect to live «13. the English male 10.2 and the French male 38.9 years. Four decades later. the relative expectations. at 48.5. 43.4 and 41.1 years. had not altered. Another source oi hias arises irom the use oi exchange rates to compare one country‘s income per head with another (Kray is er (11.. 1078). The exchange rate is determined by the goods and services that are traded internationally. hut these usually amount to only a small proportion oi the consumption oi the average person. The prices oi non—traded ioods can \ary greatly irom country to country precisely hccause the are not trat \. lower the wages which usually comprise most oi the cost oi these non-traded ll ed internationally The poorer the country. the goods. and hence the lower are their prices relative. to richer countries. Thus there will he a systematic tendency to understate the real income. the goods and services that can he hought with the ayailah c money income. oi poor countries relative to rich. Countries with larger non-traded sectors will have a more hiased income measure. Ii the traded sector is increasing M hecause. ior example. productivity tends to increase faster in traded goods »» there will he a tendency to overstate the growth oi real income using exchange rate conversion iactors. On the other hand. if the size oi the nontraded sector. such as housing. government administration and domestic service. is expanding in a poor country. the tendency for convergence oi iactor rewards is understated. /ntemat/0na/ factor mob/My, 7850~75 $1 in a comparison oi long-term growth rates: oi real per capita income between lndia and the l‘nited States. l'leston and Summers (1080) investigate the order oi magnitude oi this hias. Between 1X70 and 1070 they calculate that real income per head increased in india hy 7‘5 per cent and in the United States hy 470 per cent. implying a relative decline in 1ndian income to 31 per cent oi its 1870 standing in relation to the (SA. ()n the hasis oi exchange rate conversions. lndian income was 0.1 per cent oi that oi the L'nited States in 1870. Using the prices of the two countries to calculate the relative purchasing power of the two currencies. Indian real income per head was perhaps one'quarter of US income in 1870. Exchange rate conversions oi national income per head. as this example shows. must thereiore he accepted only with reservations. Economic growth and international economic relations The comparative advantage theory oi trade suggests that income will be increased hy opening an economy to trade, This does not. however. constitute economic growth. in the sense oi a sustained rise in income per head, Roughly speaking. theories oi growth may he classiiied into those which are demand-led and those in which growth is generated irom the supply side. An eighteenth—century conccp~ tion oi trade was that it increased the capacity and the income oi the economy by providing ‘a \cnt ior surplus‘ t_';\*lyint. 1977). This doctrine closely resembles the later export-led growth theory. in which loreign demand encourages investment in export industries. raising income and stimulating iurther investment and increased income tl'ieclverman and associates. was; Batchelor cl t'I/.. 1980. ch. 7). Supply side growth theories usually emphasise the eiiicicncy oi the price system in halaucing supply and demand. This equilibration prevents he emergence of unemployed or underutilised resources on any substantial scale unless: certain institutions prevent price adjustment. ii the price system is wo‘king in this ideal iashion. an increase in the demand itin exports will tend to divert investment and employment away irom those industries mainly supplying the home market. so that there will he no increase in growth. Increased investmen can temporarily increase growth rates. hut it can take place only at the expense oi a reduction in consumption. in current living standards. The only way in a closed economy that growth in income per head can occur is through increased techn'cal progress. The introduction oi ioreign trade raises the growth rate of the ccono iy temporarily as the gains irom trade raise income and savings. and the savings are ploughed back into industry as investment. Diminishing returns to the increaset investment set in and the growth rate ialls hack to that determined hy technical progress. Trade can permanently increase the growth rate when there 's a natural input. such as ores. seiniwprocessed metals or agricultural products. ior which it is diiticult to suhstitute other iactors (Black. 1970). In this instance. the long-term growth rate oi the isolated country is set hy the slowestgrow’ng natural input. The growth rate can he raised ii opening the economy to trade increases the 62 A H/story of the War/d Economy growth of available supplies of this input. This may he considered to he ‘import-constrained growtli‘. luxuries economic growth tray have been raised by the opportunity to increase the supply ot coal. and British economic growth certainly owed something to imports of raw cotton. lndian economic growih may have been enhanced by the importing of railway equipment. and Australian growth was boosted by imports of British capital goods. it trade were important to growth we would expect to observe. as in tact we do for all economies expanding between li‘s'F-ll and M73. a rise in the ratio of trade to national income. Demand for poorer economies~ products was strongest around the mid-century because of changes in British supply conditions as well as in British demand. The switch to latidieconomising methods of cultivation in Britain helped create a strong demand tor Peruvian guano tsee (‘liapter ll. while the gradual exhaustion of indigenous deposits of copper ore simultaneously with rising demand for copper in the railway and shipbuilding industries fostered the expansion of Chilean copper exports. liyport—led growth shifts, resources into the export sector. With importsconstrained growth. the removal oi supply constraints increases imports, which must be paid for by more exports or capital exports. But the same observation is equally consistent with increased trade in a static comparative advantage model. where growth is independent of trade in the long term. l—loweyer. when ‘temporary' increases in growth may last halt a century. as seems possible in neo-classical supply-side models. the distinction between these static and temporary increases. and the permanent increases in growth rates. may not matter much in historical interpretation.“ . in the course of economic growth. comparative advantages will tend to change as industries increase productivity. and the factors oi production are accumulated. at different rates, lt is even possible that a country need not benefit from growth through the accumulation of its relatiyely abundant factor: for example. labour in a densely populated poor country ("immiserising growth). The country will increasingly specialise in the production and export oi goods which use a large proportion of the abundant factor. and increase imports of other goods. The price of exports relatiye to imports (the terms oi trade) will fall. and the resulting loss of income may exceed the gain from the increased supply ot’ the factor. Continental Europe did not benelit from free trade in these years. but was made worse off by such immiserising growth. it has been claimed (Bairoch. W72), Railways effectively increased the supply of land which was already abundant. and forced down food prices relative to manufactures. .‘L‘igricultural productivity fell because the industrial sector could not absorb the labour force that was being made redundant by increased imports of cereals. and the labour remained on the farms. National income fell because agriculture was a large proportion of total output. The removal of protection from industry exacerbated the inability to absorb the surplus labour from agriculture. This account assumes a large rise in agricultural undcremployment. More food and lower food prices imply higher living standards unless there is a large permanent rise in unemployment or undereniployment (as the immiserising doctrine maintains). it is also very //7rernat/'0na/ factor mobi/I'z‘y, 7850—75 5. pessimistic. about the ability of the industrial sectot‘ to find comparati advantages. ‘Staple tlieory‘ is a more optimistic description of trade and growth. As hypothesis. it proposes that tor landvabundant economics the characteristics oft major export intiucnee or determine the pace and pattern of developme (Watkins. l‘ltfl; l5ogarty. 1985). Originally. the theory was formulated as account of Canadian export—oriented economic development. based first on t, weay er fur and subsequently on timher exports to the UK. As logging cleared t.’ and. agriculture began to assume a role as a source of exports from the 185i. \‘v’hereas. in the days oi the fur trade. ships returning front European mark: carried items for trading with the lndiaiis who supplied the furs. there was i iatural return cargo for the timber ships. That created a possibility of che passages for immigrants to the linited States. and eventually. at the beginning lie twentieth century. to Canada as well. Argentina‘s cattle hides and wool we comparable staple exports in this period. Australia‘s 18 million sheep by? 18 irovided considerably greater wool exports. Southern slave plantation agricultu in the [ISA offers a possibility of staple ‘path dependence. The mode u’oduction of one dominant commodity influences the possibilities of tutu development - a much stronger example of the phenomenon with which Friedri .ist wa.s concerned. But for large countries it accounts only for regior development. for few specialise so much as to be dominated by one comrnodit To explain the commodity specialisation it is necessary to revert back to thc rati of natural endowments central to l‘leclx'sherJJhlin theory. Summary and conclusion Trade and factor mobility tended to equalise national incomes per head unit) the small open economies of Europe w Britain. Holland. Belgium and Switzerla which were joined by lirance and Germany during the lSotls. In other Europe countries there were political and institutional barriers to this process. Massi endowments of natural resources in the regions of recent settlement. the Unit States and Australia in particular. were complementary to capital equipment. Tl allowed the persistence of higher returns to labour than were achieved in t countries from which so much of the labour migrated. Within national economi there were also similar effects which allowed the survival of wide interrcgior income differences. 'l‘he doctrine that there are gains from trade rests on a fundamental definitic being able to buy more of what one wants. for the individual or family, and f society as a whole. is an improvement in welfare. Goods and services that a consumed but not priced directly can create theoretical and practical dificulticsf assessing the gains from trade, Increasing international trade required ma workers to uproot themselves and find new ~iobs in towns and in differs industries. Typically. an increasing proportion of consumption was supplied (:34 A History of the War/d Economy the market and was therefore easily measurable. the loss oi unpriced eoods and services is not. and remains a potential source ol‘ bias in estimating the improyement in real incomes. But houcter the higher ayerzice incomds are eyaluated. the extension oi international economic relations allowed ifurope and the regions of recent European settlement to support larger populations with longer lite expectations. l‘his is compelling: e\idcncc ol the cams l'rom economic deyelopment duringx the third quarter ol‘ the nineteenth century. in which the world economy played a key role. Notes l. Those conditions include identical tcchnoiogies among; the tradine nations. Ii\en with that condition not lullilled. a tendency towards tactor price ctitinlisation can he expected. 3. When the ti‘ans—Sthci‘ian railway was completed in the thls. peasant iniei'ation soared to well oyer two million in the tits! decade of the twentieth century. 3. ihc name was interchanged to Stalino and then to Donetsk (Milwzird and Saul. W75. p 4W), 4. Because public health expenditures in Britain were minimal at the Ittltiit‘ctiitlfl. income then was biased downwards in relation to weltarc. compared with lircnch income. iiyen recent retisions ol‘ Swedish national income per head do not place Swedish (monetary) liyin}; standards ahoye Britain‘s (Kraut/1 ltlssi. o. Sato (Woo) suggests that W per cent adiustnient in hctwccn 35 and .175 \cars is a plausible result l‘rom such models i ’Ji 5 "the worm monetary system, raga—rs An expanding international diyision of labour was only possible because of the corresponding development ol‘ the in ernational monetary system. Specialisation required exchanges between exporte's and importers. often separated by great distances. so that goods spent a considerable time in transit and the contracting parties could have little direct know edge of each other, As well as acceptable commodities or currencies for exchange. trust and finance were essential to toreign trade. since excitating could iot usually be conducted simultaneously A promise that a payment would he made in the future was an almost inevitable component ol‘ transactions. The in ernational monetary system in the third quarter ol’ the nineteenth century eyolved to proyide these needs. in many respects. international arrangements were merely the domestic monetary system writ large. and accordingly. though iroyiding similar advantages. they suffered similar prohlenis. Periodic linancial crises convulsed the international economy; bankruptcies and defaults caused wor 'ers to he laid off. unemployment rose. and national incomes tell, One of the tasks of this chapter is to examine the extent to which crises were domestically. rather than internationally. generated. and whether they were exacerbated or al eviated by monetary institutions or policy. But first we dcscrihe the organisation of monetary relations and the way they worked. Merchant bankers and bills of exchange Among the international monetary institutions of the mid—nineteenth century; their legendary private wealth made the Rothschild family the most glamorous. 'lihe Rothschilds were reputedly the best-informed men in Europe. using their knowledge to increase the mobility of European capital and to become even richer. The tamily fortunes can he traced to Meyer Amschel Rothschild. a dealer in coins. medals and antiques in the Jewish ghetto of Frankfurt. Meyer died in lts‘ll leaving a Vast t‘ortunc to live able sons. The eldest remained to manage the ancestra house in Frankfurt; the others separately established banks in Vienna. $5 A H/story 0f the War/d Economy Paris. London arid Naples. paying particular attention to arranging state loans. James in Paris and Solomon in Vienna were responsihle for introducing the railway to their adopted countries. l,.ione hecame the first .lew to take up a seat in the British House of Commons in lNFhT. ln l87R he helped out his friend. alheit on the other side of the House. the Prime Minister Beniainin Disraeli. hv putting up the monei to hit} the shares in the Suez Canal. Because thev lacked’an office in Berlin. the Rothschilds adopted Bleiehroder as their Berlin agent. thtts contrihut- ing to the financial strength of tierson Bleichrodct’. which permitted him to hecotne Bismarck‘s hanker fC‘orti. fills; Stein. W7: \‘v'ilson. lWZl. Almost as powerful as the Rothscltilds was the llouse of Baring. Baring Brothers also originated in (lcrmani; the llouse had hecn founded hv an emigrant from Bremen to lixeter in l—l—x 'l‘hci could claim two British Chancellors of the lixchettuer and an lrtdian \iccrtw in the familv hefore the nineteenth century was out, Baring Brothers concentrated their lotidon hankine husincss to a much greater extent than the Rothschilds on extraliuropeaii transactions. The httlk of their husiness in the ls‘ifitls arose from trade hetween the United States and Britain. ’l'he} hought ant sold merchandise and securities on commission as well as for themselves. thev operated their own ships. kept the accounts of selected depositors. and acted as financial agents for husiness houses and governments all over the world. especialh in Latin .\i ierica and the British Empire. But the mainstai of Baring was the ‘acceptance' husiness. and here the\ had developed a system for assigning credit ratings to potential customers. In lBSil f Baring‘s acceptances amounted to if.” million compared with Rotlischild‘s llflS-l inillioi. 'l‘he acceptance husiness was the arrangement of short—term finance hv granting acceptance crcdit‘. lTndcr these credits. hills of exchange were drawn out and accepted hv Baring or another acceptance house. for a commission. The hill of e‘tchange can he seen as a promise to pat a certain sum of tnonev on a particular date — most usuallv in three months time. .-\ supplier would issue a hill for the value of goods it was shipping. and for which it expected to he paid at some definite future date: the supplier agreed to ’draw a hill' on the huver. which acknowledged responsihilitv for eventual pattnent hv writing on the hill its ‘acceptance‘. This ‘acceptance‘ h; a financial institution signified that the huver was a good risk for a lender. hecattse the acceptance house was liahle in the event of default. lust as the working of the hanking system depended upon puhlic confidence in the safety of their moire}. so did the hill of exchange system. Reputation and the availahilitv of information ahout the risk of lending were essential. The London market did not regard Norwegian and Swedish hills during the listist as first-class risks hecause the exports of these countries were almost entirel} timher or shipping freight services. supplied h}. small firms without international t‘eputa» tions. In contrast. the trade of the liast Indies and (‘hina consisted of items of great value. and conseqtteutlv was managed hi large. wealth} houses. with estahlished reputations. whose hills were flt‘s’tvclttss risks. The war/d monetary system, 7850—75 to}: After acceptance the hill was sold to a financier; a lender would then 'discount the hill that it for less than the stun pavahle in the future) and the supplier WOUlt therehv horrow. ’l‘he difference hetween the purchase price of" the hill and thi value of the promise to pa_v was the interest charged on the loan. When the good were sold. the supplier was ahle to pay the debt and withdraw the hill. The hil could change ownership the rcdiscounted) during its currency should the or rat lender suddenlv need cash. Bills of exchange were therefore a valuable mean- 0 facilitating hoth natiottal and international trade at a time when transport wa slow and communication difficult. By lt‘s’75 the total value of acceptances i: l.ondon was perhaps {Sintl million. l.ondon financial institutions accepted hills even for trade that did not touc British shores. ln lh’ih’ it was said that ‘a man in Boston cannot huv a cargo of te in (‘anton without getting a credit from Messrs Mathieson or Messrs Baring fBl’l’. 1858). This type of hill finance hy London maintained its importance fr trade hetween ports of small volume in the third quarter of the nineteent century. hut once the \olume of trade increased and. along with it. informatio and confidence. the intermediation of London in trade not otherwise connecte with Britain was no longer necessary. By the lSolls. the New Y'tirkaremen trad was no longer mediated hv London, hut the Bomhavaremcn trade. being smal continued to use London hills} Not all tviies of hill were well regarded. The finance hill. issued to provid Venerallv for working capital. 0 occasion was discounted without adequate. at tention to the collateral. Const tittentfv. the over—issue of such hills. partieularlv international accomrnodatio W finance not for a particular transaction hut I v—> r l ills. was hlamed for the financial panic of 1857 (Clapham. 1952. pp. 370—1). Th distinction hetw'een tvpes of hill was. however. often misleading. Foreign hit were sometimes used to provide short—term capital. and inland hills were ofte drawn to finance foreign trade. The difference hctween types; of hill was a leg: one. not necessarilv indicating the type of transaction financed. When the ma from .V’Xustralia and New Zealand arrived only every few weeks. a Londo merchant who failed to receive in one mail the payment for his goods woul sometimes raise new credit on hill finance until the next mail (Nishimura. 197l) might he expected from this example. improved communications reduce the need for hills hv cutting down the time spent by goods in transit. E introducing greater certainty into international transactions. the telegraph Ci stock levels and allowed the money markets to finance the inventories previous held h} great merchants. The level of raw cotton stocks held in British ports at: mills was much lower after the spread of the telegraph than in the W405. despi‘ the far greater volume of husincsss (New'march. l878: Chapman. 1984. p. l38 The two decades from the mid-century saw the international telegraph laid dOWl with the exception of a transpacif‘ic cahle. A major advance in speedy internatior al communication came in November l852 with the first permanent diret communication hetween London and Paris by electric telegraph. through the lint of the Suhmarine Telegraph Company and the European and American Tcli 38 A History of the World Economy The war/d monetary system, 7850—25 i graph Conipany (Kieve. W73 pp. ltlt’iwliji. Iand communication by telegraph was impeded by wet weather in the early lh‘itis. because of inadequate insulation, The first Atlantic cable of IRSS also stopped working very quickly because of an insulation fault. New York was in telegraph communicatitni with San Francisco by HM. before a permanent link with I.ondon was established and five years before the railway joined them. Not until ltltitfi did the (frat! [faster/i manage to lay a cable that permitted permanent transatlantic communication. Fourteen years later there were nine cables across the Atlantic. Telegraphic communications between littrope and the hair liast and Australia were or en from the beginning of the ltt7tts. The first lines to India were available in l864~5 using the Turkish state line to lino via Iiachdad. and from Fao through \ttftmtuni s llllk'\ a a a 9 and others tarry \ l>ipartiiicrst t y an Indian government coastal cable to lxarachi. An alternative route between Tehran and Moscow in ltloo joined with another Indian government line from Tehran to Bushire, Neither line turned out reliable. liken though the Britainv India link was expensive (£5 for twenty words) and erratic. it was a milestone for Australian communications. In rises for ordinary people to send a message to Britain and receive a reply would take to e months. Werner von Siemens~ Anglotierman lndo—l‘ittropean ’I‘elegraph Company completed an improved line to lndia in lh‘ti‘). which was operational in l87tl (Figure fill). In the same year the British Indian 'I‘eleeraph Company connected Alexandria and Bombay by a line through the Red Sea and Aden. Singapore was li iked via Madras and l’enanc7 by the end of lts’Ttl (Machenziet Nil p. Jill Another communications route between the liar liast and liurope was through Siberia (Figure 5.3). The Siberian telegraph was a Russian military project o'iginally. reaching Irkutsk on Lake Baikal b_' lh’o}: l’se of this line was at first linith by the Chinese refusal to countenance a link on their soil. In 1809 a British businessman constructed a line across the country from Shanghai to a beacon on the bank of the Yangt/e-ls'ianci River. A. superstitious mob ripped it u ). fearingr for the eountrysidc‘s good fortune Six years later a Foochow~Amoy line was destroyed by locals and abandoned. It was therefore without permission aid under cover of darkness that in lts’7tl the Danish (irmi ,N’ort/iern landed a cable connecting with \"ladivostok in Shanghai. The followingi year the cable at ()l’ltit‘l) I) Angola W y \ intino ilt Alexandria [YEN :\l th'A Stanghai was cut into pieces and disappeared. But none the less Hong Kong; was connected in l87l and Japan was linked at Nagasaki. The Russian administration at last completed the entire Siberian line by the end of l87li and the northern route was opened to the public on l January l873i A twenty-word message from Europe to the East cost liltl francs. European news that had previously taken l5—3t) days to reach the Chitiese press now arrived in two days (Alivenainen. 1981). At Shanghai the system linked up with the cables of the Eastern Extension Company which connected India with China. Singapore and Australia. The Indian exporter could now sell cotton by contract even before it was shipped. and therefore had no need of bill finance. Such were the difficulties of traversing the Australian continent that the Darwin~London link was operational. in November 187k before the overland route was completed." (iibiallai isoiiso lltl l RNIIQ m A H/story of the War/d Economy The war/d monetary System/ 7850H75 3” Exchange rates ’lihe telegraph eyentually alil‘ected international exchange and interest rates by improying communicatious. The Value of one currency in terms of another. the market exchange rate was determined primarily by the buyers and sellers of bills ol exchange on the t'oreign exchange. Here were traded debts and claims that originated from exporting or importing or from other international transactions. such as im'estment or toreign trayel. ll England was heayily in debt to France. but laclted claims on lirance lalling due to an equivalent value. those few English merchants who held credits in their Paris accounts could obtain rather more for them than when debts and credits were more equally balanced: there was a tendency tor the [tune to rise against sterling. A nation with a precious metal monetary standard undertook. at least nominally. to buy or sell gold or silver (or in the case of a bimetallic standard. both) at a tixed and predetermined rate against the national currency. Further- more. the precious metal was allowed to circulate freely within the national economy exchangeable against the domestic note issue. For every pair of nations that undertook this commitment against the same precious metal. there was a ‘mint par" exchange rate determined by the metal content of the two coinages. The tranc—sterling mint par. for instance. was determined as follows (Clare. l89l. p.74): g i. ’l'lie Bank ot' lingland coined ~lts’llo7. Troy of gold ll/llth line into Wei) L soyereigns. E 2. The Bank ol France coined l,tlt]tlg of gold Owltlth line into l55 Napoleons of 3 3H lrancs each. e. 3‘ l o7. ’l'roy : Klltlfli u. 4. The gold etiuiyalent L/ 1.! :1. u u Q J, N 480 ll >< 3l.ltl35 >< 3.ltltl more yaluable in francs than it was in sterling at the prevailing rate of exchange. l‘he ‘speeie points were the exchange rates on either side of the mint par at which the import or export of bullion (or specie) became profitable. Because of different assaying and melting charges. the specie points depended on the form of the metal. as \yell as on the transport and insurance costs. as shown in Table 51. Although the linited States was also effectively on a gold standard in the 18505. ‘ i m 1' ’37 - c. x; \tlcll Elltli Ll A r """"""" ~- -3i-.'_l3 lldllLS. he in ‘vi 3 '"“ It was unlikely that the mint par exchange rate would usually correspond “\M if \ exactly with the math exchange rate. But it the divergence became anything fl 6% . / more than slight. there were opportunities for profit from ‘arbitragc‘ in precious /// :5 \7 l . metals. from haying bullion in one country and selling it in another. If the Sterling / E .f l, r t i i rate against the, t'ranc fell below 25.10 francs. for example. gold would flow out of M/Sxe’wl if England in considerable quantities because a given quantity of gold had become 5 ‘i l ’ j i ' “x g? , ,/\ '22 A H/story of the War/d Economy Tattle 5.1 Specie points for the sterling tranc exchange rate Above 35.3% Hank bullion sent liom lirancc lieiow l; It’ll Relinable bullion sent to to England l‘lltlltjt‘ Above 15.331 Shipments o1 market bullion :5 1‘ 15.151 Market bullion lea\es lrozn l7rancc l: ind 25.307353tll (iold bullion from (‘ahtorma If. i I 251111 Hank ot lingland reserves or Australia bought by the drawn down Bank of lCngland at “ 9931 PM. Standard mm“. -. . ,5 UH ( onsitlcrable withdrawais oi test‘t‘y es. Source: Scyd ( 187(1). he great distance between America and linrope limited most bullion arbitrage to European countries. Between the time of shipment and arrival of the bullion from across the Atlantic. the conditions that had appeared to make the operation )rolitahle could well have altered. (‘hanges in national holdings of American "ailway bonds were a common way ol' settling the t'oreign exchange balance. and ater the securities ol various governments were widely employed in arbitrage operations (Clare. 18%. p, 74). In the absence o1 exchange risk. bond arbitrage. like specie arbitrage. increasingly harmonised European interest rates as lL‘ngi’ttplt and railway ietworks spread, In 180‘) discount rates in London were only about (3.5 per cent iigher than in Paris. Frankfurt. Hamburg and Brussels. At Berlin and Amster» dam. rates were between (1,25 and on per cent higher than in London. Neither he Austro—lwlungarian nor the Russian currency was linked to precious metals. interest rates in those states therefore diverged from the rest oi liurope because of risks of changes in exchange rates. Discount rates in \"ienna were nearly 1.5 )er cent higher than in London. and the St l’etersburg rate was more than double he London rate. The money markets in Turin and Madrid were too small to exert much influence on European conditions t [he {zt‘o/zoniist. 186,9). What was true of bonds was also true to a lesser extent oti goods. 'l‘he international movement of goods. or ot precious metals. ensured that there were isually no great divergences in the (wholesale) price levels of countries that maintained precious metal standards. and theretore that also maintained lixed exchange rates with eacr other (liigure 5,3). The new gold Opportunities for the profitable international movement of precious metals. goods and bonds were expanded by the discoveries in California and Australia. which massively increased the annual quantity of gold supplied to world markets. As Table 5.2 shows. the annual average supply from 1851 to 1855 was more than ten times that of lglll to 1810. and o\er the haltivcentury before 184‘) supplies The war/d monetary system, 7850-75 73 9m c .t, NV United States i \. Germany 290 » anandons gold 1' \ *" USA convertibility ; X m lndia tTO s ‘ {l *\ fi‘ Britain ‘ i “\A mm France ‘5 / z e \ :50 .7 ~ -\ 1) / \ / z“ ‘ — \ / / " \ Q ~< \/ /\ “ 3 130 » i " ‘ ' f llO " A / /' \./ 1/ Wm- g 90? ' r30 5 l l l 50 m l l l ‘ i 1850 1855 1860 1865 1870 1875 Figure 5.3 National price levels. 185114) liable 5.2 l he relative mine of production and market price of gold and silver. 1801‘80 \niue oi production (annual average) Average price —---"-————-~—-———‘-—-——* Proportion of silver of bar silver Ratio of Period Silver (Em) Gold (film) to gold production (d per oz) market value lhtllrltt son: 2.480 323631 6117316 15.6121 1851-5 :\'.tll‘l 27.815 11.22811 61. '16 15.1 :1 ‘1th no N235 28,145 0.2911 (715.8 15.3tlzl ism 5 was 25.816 0.3861 61154 15.40% ism To Host 27.207 0440:] nus/s 6.55:1 1R7} ' 17.332 24.2610 (1.71021 5911 15.97:] is7u~su 1‘3. to} 34.052 0.79411 5216/15 17,8111 Source: I'inu/ [hi/tort of the Royal commission on (Io/11' tirithi/r‘crt isss. p. 5). meraged only one—seventh of those available in the 1850s. barely sufficient ti compensate tor wear and tear of the coinage. At the time many argued that price in gold standard countries would rise greatly. from the simple notion that price are merely a quantity oi money against which goods are exchanged (for example .levons. WW). At least two other views of the price level in this period have beer advanced. however. The contemporary economists Thomas Tooke and William Newmarch believer that the new gold stimulated economic activity (already encouraged by transpor and conununication improvements and the freeing of trade) Specialisation am the division of labour were extended by the greater availability of means 0 exchange. So output rose. rather than prices (Tooke and New/march. 1928). Th real danger. Newmarch thought. was that new gold supplies would fall. Thi 7‘4 A History of the War/d Economy evidence of the 1S7t1s confirmed his \iew. he ochexed: wholesale prices in London in the period 183.145 to 187(17 rose by only ltl per cent. which. considering the wars of the lh’otls and 187th (the .Atnierican (fiin “at. the liranco-Prussian War and the Russo—"liurkish War) and their disruption lit production. was remarkably little. Newmarclrs hypothesis that the increased spending permitted by the new 1 gold primarily incre id output. rather than prices. is a ogical possibility. But in eloped economies it is likely to he only a short~terin effect. as capacity sation is increased by greater demand. third causal pattern is that during the period loot! to 18711 it was investment dey utili in the new opportunities appearing in coal. iron. railways. stcamAships. textiles and clothing that expanded production. which in turn caused a rise in prices (Schumpeter. 19391.g Money. in this account. was, passive. Output growth was independent of monetary expansion. although it may have encouraged the development of bank credit. Consistent with this last View. the period of the lastest expansion of the British money stock. from the late 184th to the late 185th, did not correspond with the most rapid growth of British GNP at current or constant prices. Nor did it match the fastest deeadal rise in the price index. which was from the late lfifitls (Table 5.31. lt may therefore have been purely fortuitous that the period of rapid output growth (184(F73) in the premier gold standard nation coincided with the rapid growth of gold supplies. When the total money stock grew faster than in any other period of the nineteenth century. bank and credit money w as the principal driving force The share of bank and credit money in the money stocks of the lfriited States. Britain and France increased from 37 per cent in 1849s to W per cent in 1872 (Triftin. 1968. table 1.3;). Ranking innovations and extensions, were probably a response to the rise in economic activity. The decline in British monetary growth in the 1870s occurred primarily because of a fall in hank deposit growth. rather than because of a fall in the growth of the coin circulation tt'ollins. 1‘lh’ll. Similarly. an estimate for the whole world shows bank deposits and capital growing at in per cent per annum from 1840 to 187th but at only 3.5 per cent per annum from 1871) to 1890 tMulhall. 1892). llad the new gold been the main cause of monetary growth. bank deposits would not hate increased their share of the money stock. If Table 5.3 ’lfhe growth ot' money. national income and prices in liritain. Nutty/till (compound annual growth rates. per cent) (Bold and 'liotal tiNl‘ at Iaeior Implicit sily er coin money cost. constant price in Britain stock Wot) prices dellatoi 1845 'Sttrltlfio (it) 5.2 .17, 3.} 11.4“ ldfiti'titl’v-lts‘oo 7t! 3.1 1‘1 3.5 (1.83 1866 70487730 2s : s in 4143 Source: Collins ( 19811. 7779 world monetary system, 7850—75 75 the new gold did not cause the monetary growth. it is unlikely to have boosted total spending and output substantially. Hence the decline in monetarv growth in the 1870s most likely stemmed from a retardation of world economic growth. not \ ICC \'CYh£l, The international transmission at" price increases Why then did prices rise so little in response to the new gold. if Tookc and Newmarch were mistaken‘.’ As long as a large part of the growing world economy was linked by fixed exchange rates. the new gold could not drive up prices of internationally traded goods in one country faster than those of that country’s partners on metallic standards. Therefore price increases depended mainly on the growth of the fixed exchange rate world output and money stock. rather than on the output and money of any one country. The initial impact of the new gold was to raise the prices of all domestic commodities in the mining economies of California and Australia. as resources switched from agricultural to mining production, Australia quickly became a net importer of food instead oi. as formerly. a net exporter (just as South Africa did with the gold discoveries later in the century). Australia exported gold to Britain with which Australia effectively shared a common currency) in exchange for manufactures. as Chapter l showed. and to other countries in exchange for agricultural produce. Because the new discoveries made gold cheaper by about a ralf in terms of commodities. Australian prices. being gold prices of commodities. "ose. Foreign goods therefore sold more easily in Australia than elsewhere. and .llcll’ prices were accordingly bid up in gold terms. But many of these prices 'ndirectly constituted a cost of gold mining. for minch had to buy the goods with their earnings. The costs of gold mining therefore rose. stimulating a diversion of resources hack to agriculture. By 1870 gold production in Victoria had fallen to tall the level of 1856. and exports other than gold had almost doubled. but at a now higher level of prices in Australia and in the rest of the world (Bordo. 1975). Prices responded less to the new gold than might have been expected also iecause of the bimetallism of France and. until 1853. of the United States. Bimetallism created considerable difficulties for the monetary systems of the two countries. in the United States the divergence between the legal and market ‘atios of ver to gold had become sufficiently great for ‘bimetallist arbitrage” to ie profitable by 1849. The divergence between the ratios continued to widen until . t. iy l853 the market ratio was 15.411 and the legal ratio 16:1 (Laughlin. 1897. pp. 75—831. Bimetallist arbitrage worked as follows: 1.6th ounces of silver could be taken to the bullion market and exchanged for 100 ounces of gold with 60 (2 l.otl(1— 154(1) ounces of silver left over. The payment of debts in gold rather than silver. as bimetallist legislation allowed. was profitable as the above example shows. and this tended to increase the speed at which gold drove out silver. Equally profitible was the sale of silver for gold. and the sale of the newly 76 A History of the War/d Economy acquired gold to the Mint. (fongress reduced the mint ratio to less than 15:1 in 1853 to stop these arbitrage operations. llad the Mint been willing to take an unlimited amount of silver for coinage at this rate. silver would have tended to replace gold at the .v int. because the market gold---silvcr ratio was still above 15: 1. However. the law provided that the Mint need only iilbt.‘ the quantity of silver necessary for makin devalued coins. a suiply of them quickly came into use. but gold remained the main coin currency. n the ten years after the (iold Rush of 1841). $400 million of gold coins were struck, Legislation in 1873 dropped the silver dollar from the coinage list. but these pieces had disappeared from circulation many years before. The real abandonmeit of the bimetallic standard took place in 18.53 not 1873. as was to be widely alleged subsequently by those who favoured monetary expansion (see Chapter 8). At the end of lilol the link to gold and silver was in any case abandoned (except oi the West Coast) and it was not resumed until 1871). As in the United 8 ates duri ig the earlv‘ 1850s. Uold was also driving silver from a small change. Since 11 no longer paid to melt down these e the French currency circulatio i. and the silver was being shipped to the East. By the tholls France. was virtually on a tie/into gold standard (Parker Willis. 19bit. p. 91. It was against this bac ‘ground that (‘hevalici's 'l’arachute‘ thesis was formulated The ‘l’arachute‘ l'mited the rise in the relative price of silver to the increase sufficient to displace silver by gold in the countries whose currencies were fixed in terms of both precious metals. When the displacement was complete. Chevalier predicted that gold irices would fall substantially and silver prices rise (Sayers. 1933).” hi the mean ime. however. prices and exchange rates of the major European gold. bimetallist and silver standard countries were all tightly linked. and the gold price of s'lv'er rose only a little tsee Table 5.41.5 The German price level moved in parallel with those of France and Britain (figure 5.3). even though Cie‘nrany held to a silver standard until 1871. France. remained with bimetallism until 1874 and Britain n'iaintained a gold standard. The silver that France lost from circulation went mainly to lndia. a silver standard economy. Because ludia did not produce silver in any great quantities. perhaps it) million rupees in silver were needed each year merely to provide for wear. losses and population growth. if prices were to be maintained at the same level (Barbour. 191%. ch. 3). The large imports of silver from 1&55 to 1866 were due mainly to borrowing to meet expenditure incurred because of the Mutiny. to the foreign investment in building the railway system. and to the increased value of cotton exports as a result of the blocltade ot' the Southern cotton ports during the American Civil \‘v’ar. Unlike Germany. however. as far as can be judged. the parallelism of Indian prices with European prices was much weaker: between 1864 and 1%?) the two sets of prices diverged probably because of the effects of foreign investment. famines and the foreign demand for cotton in India. as well as the greater distances involved in trade. The rupee showed a rise against sterling in the period 1845 to 1855 proportionately greater than the rise in the. gold prices of silver. So too did the silver standard Dutch currency. As long as exchange rates moved. price levels had some freedom to diverge. The world monetary system, 7850~75 7? Table 5.4 Average annual exchange rates against sterling. 18-15-59 Paris Hamburg Amsterdam (‘alcutta London silver \ca; t’tianc t; 1) tmark E 1 Vi (guilders £ 1) (rupee) prices 1&5 13.155 13.725 59gd per oz H.511 15.11 12.15 (wild per or. lsFS 131* 11.11.) oljdperox 1X51? 15.55 11.16» olfdperoz Source: \evvrnarch ( its/v11. pith»). Floating exchange rate regimes The exchange rate of a country with an 111C011VCI‘11171C currency gave the greatest freedom to national price movements, An inconvertible currency could not be changed into a precious metal at a legal rate, The value was determined solely by the goods and services that could be bought with it. both in the present and in the future. The external value of the currency. the exchange rate. was similarly determined by the relative strengths of foreign demand for the currency and domestic demand for foreign currency. A government therefore possessed the povver to alter the domestic and external value of inconvertible money by changing the quantity in circulation. To European liberalism this power was an ‘iutolerable cv 11‘. because of the disturbance to contracts and expectations caused by the consequent changes in the price level (Mill. 1929. ch, 13. esp. pp. This liberal doctrine had been ‘tolerable effectually drummed into the public mind' of industrialisiug countries. but even there. the exigencies of war nance could require the abandonment of the precious metal standard. in Latin America and in central and eastern Europe. liberal strictures against currencies and exchange rates influenced by state financial needs seemed to have been borne out. The failure to reform the money market may have contributed to the long-term retardation of Brazil (l’elaez. 1976). The Bank of, Brazil received extraordinary privileges which allowed it to supply one—third of the banking services in Brazil as well as being responsible for financing the government’s budget deficit and the resulting intlation. The growth in the national money stock \\ as absorbed by rising prices. rather than by increases in productivity. Even after reforming its currency in 1843. Russia continued to increase its issue of paper roubles unbaclted by gold. and the foreign exchange value of the rouble declined on trend against the metal—backed currencies. The rouble exchanged for 35. British pence in 1844 but for only 24 in 1880. Austria—Hungary was in a similar but less extreme position. During the 1870s. with an uncovered paper currency issue of over otltl million tlorius. the exchange rate of the florin fluctuated around 20 pence, only tive-sixths of the value of the gold florin. Both Austria—Hungary and Russia suffered from erratic development during these years (Mulhall, 1892). The experience of the l‘nited States with floating exchange rates. on the other fit A H/story 0f the War/d Economy hand. suggests that the liberal argument perhaps confused cause with effect. Convertibility of the currency into precious metals was not a means of disciplining governments so much as a manifestation of a governmental desire to conform to the liberal ideas of good behaviour. The costs of financing the Civil War meant that from rat): to l87l) there was no official link between the L78 dollar and gold. and therefore no fixed parity between the l‘S currency and the potrnd sterling. The average monthly dollar (‘grecnl‘rack‘l price of gold. and hence of sterling. varied widely. reaching a peak in li‘s’tt-l corresponding to a price of more than Sill per pound. or 3.5 times the previous and subsequent tixcd exchange rate (Friedman and Schwartz. 1%}. p. R5}. l’riees in the l'nitcd States needed to fall if the exchange rate was eventually to return to the previous parity. and the massive expansion of national output. especially agricultural production. combined with monetary restrain . achieved this goal. The decline in prices hurt farmers already loaded with debt. and fuelled the Greenback Party. which agitated for a plentiful supply of money to raise prices. This unsuccessful movement was surprisingly the only major polit'cal reaction under the floating exchange rate regime: by comparison with tie twentieth century. the pressures for government spending in excess of tax receipts. which would have been possible. were small. A second charge tirade against lloating exchange rate regimes is that they are prone to des ahi ising speculation. The forces which determined the actual exchange rates of the gold and silver standard countries within the specie points could not be counted on to stabilise the exchange rate in the absence of these points. The A ner'can crisis of law) has been instanced as a classic example of the instability of toat'ng exchange rates and the detrimental consequences for trade (Wimmer. 1975). During August and September ism. .lay' Gould led a determined at erupt to increase the greenback price of gold in the New York gold market. This was equivalent to attempting a depreciation of the exchange. The gold dollar had been $1.31 in greenbacks. By 33 September the price had reached Sl.4l. The fo lowing day the greenback prict fell from {it .hl to Si .34 in half an hour when the President autiorised the sat t 'l‘reasury gold dollars. Gould claimed that 1‘ was trying to ease the massive T78 harvest exports by forc'ng down the exchange rate. Gold intlows into New York in September were a major impediment to Goulds speculation The success that he achieved was due to he marketh belief that the government supported his activities. Had the government stated its neutrality. the movement would have been broken earlier. Under a fixed exchange rate regime. the government would have been forced to act ear ier by the gold outllow‘. which would have threatened the convertibility of he currency. To this extent the ‘discipline~ argument of liuropean liberalism is CU supported. Much of the public distrust of tioating exchange rates was based not on he objections already discussed. but on a mistaken theory of value. A study of he Austro—liungarian floating exchange rate shows that the contemporary debate on restoring the gold standard centred on a belief that it was precious metals taat conferred value rather than the goods and services that could be bought with the The war/d monetary system, 7850—75 '18 currency (Yeager. Wow. in turn this might be accounted for by the comparatively late development and use of general price indices which measured the value oi money (Fisher. “93:. appendix ll.“ Monetary; unions if all countries in a potential union already linked their currencies to the same precious metal. the general economic policies they could pursue would he very similar. A monetary union would involve little effective loss of sovereignty. Even so. the desire to link political objectives with the formation of economic institutions was paramount in two of the three unions of the period. and greatly reduced their effectiveness. The economic benefits of a monetary union were similar to those arising from trade in general: the integration of national monetary units was merely one facet of the integration of national economies by factor mobility. trade and the establishment of common institutions so that resources were put to their best possible use, Changing relative prices of gold and silver were instrumental in the formation of the largest monetary union of himetallist states. Better communications and increasing trade were also major forces behind the establishment of monetary unions. Perhaps the single most important cause. though. was the shared political values of the ruling groups in Europe. a belief in the benefits of trade and industry. and in progress. .\'lill. for example. asserted that ‘political improvement would eventually culminate in one world currency. as nationalistic irrationalities disappeared (Mill. 1929‘). Events in the German states underwrote his confidence. The Zollvcrein treaty required the standardisation of coin systems. At the Dresden convention of H38. participating states adopted either the Thaler or the Gulden coins. both defined by their silver content. The convenience of the Prussian one—thaler piece. and the absence of legal tender status for bank notes. meant that the Prussian coinage spread throughout Germany. even in the Gulden states (lttloltferich. 1993). With the German examile in mind. a consensus emerged at the Great l'ixhibition of lb‘Sl that no only was an international system of weights and measures necessary. but so too was a common currency. Subsequent International Statistical Congresses reinfo ced that opinion. in 1857 Austria and the Zollvcrein founded the Austro-German Union with a common unit of account. the silver mark. Three distinct traits with a fixed rate of exchange provided the medi rm of exchange (Bartel. l974). No real integration of money and banking systems took place. however. and the Union was dissolved in ltthh with the outbreak of he AustroPrussian War. Austria—Hungary failed to restore convertibility of its currency into silver and so could find no place in the l‘nion. which Prussia domirated. The Latin Monetary [Prion proved more durable. The falling price of gold relative to silver dtrring the thrills produced difficulties for the French bimetallic at} A /-//st0ry of the War/d Economy monetary system. In response to the export of silver. the French adjusted the silver contetrt of their coinage. therehy creating prohlems for economic relations with Belgium. Switzerland and Italy (Parker \Villis. Won". ch. 4). In Moll. 87 per cent of the circulation of suhsidiary coin in Belgium was Iircnchr the Swiss had adopted the lirench standard of HS“. and the Italians had done the satire in INC. The ivlonetary Convention of Novcinher ln’of‘ met to resolve these difficulties, According to Willis. France wanted to maintain the status quo hecause the Batik of France and French tinancial leader's found himetallist arhitragc pt'olitahlc. The other countries wanted to standardise on gold. as did a good part of the French delegation. The political domination of the French ensured that the Latin h’lonetary Union of 33 Decemher ltv’ofi codified the status quo. although it also militated against the success of the throne hccause it inhihited voluntary co-ordination within the linion. A tnore amhitious unior was soon proposed instead. Thirty—three delegates from twenty countries attended the lh'o7 i’aris International Monetary Confer— ence. They recommended at international gold standard with coins of 00 per cent tinenessr The international coin was to he a Zil‘r'anc gold piece. \‘v'ith small adjustment. the pound ster ing and five dollars would he equivalent to this coin. A British Royal Commission was persuaded. hut did not recommend any change in British monetary arrange nents ((fottrell. lWZ). Austria and Switzerland hegan minting the ZS—franc 'international'. hut ‘nationalistic iri‘atiorralitics proved too strong for Britain. and the upshot of the conterence was a widening of France‘s hinietallist Latin Monetary fnion. When Austria joined the Latin Union in lts’o7. the terms of the treaty specified gold as the medium of exctange. (ireece hecame a memher in ltv‘on‘. Germany moved from silver to gold hetween lh‘Tl and 1873‘ and sold suhstantial quantities of silver, India could not ahsorh it all hccause of a growing indehtedness to Britain. and hecause the introductiort of a note issue in Idol and improved transport reduced the need for silver for transactions The value of silver relative to gold hegan to fall. hut not. judging hy the timing. as a response to (ierman silver sales. or to the demonetisation of silver hy the Latin ITnion in 1878,. Once the value of silver in terms ot gold hegan declining any Latin Union memher state could gain a financial advantage hy issuing silver coins. Italy was particularly prone to indulge itself in this respect. The silver coins were then exported to fellow metnher states whose central hanks would he asked to exchange the coins for gold at the agreed rate. lirom Moll to rate? Italian government spending. including expenditure on railways and the ’pacification policy" in the newly conquered south. was twice that of tax revenues (Parker Willis. was. ch. 7). In lh‘ho the Italian government declared its currency inconvertihle. Italy could not he persuaded to cease mintmg silver coins, ,Aks a compromise. the Treaty of M74 shared the gains from silver minting with a rule of proportionate increases among memher states. These were small enough not to he inl‘lationary. France‘s agreed silver issttc amounted to 5 per cent of metallic The war/d monetary system, 7850—75 8% circulation over three years (lilandreau. “)93). Italy. however. did not acquiesce in the ISM decision to move to a dc facm gold standard. and at the l878 conference announced its intention to continue coining silver. The Union in tact formally ahandoned silver in l87h‘. restricting the amount Italy coined and extracting a pledge that this would he the last silver issue. Ahandoning gold and choosing silver instead as the basis for their currency was an option tor the Latin Union. It was himetallism that was unsupportahle when sustained changes in the relative market prices of gold and silver occurred. The Union chose to standardise on gold hecause that was the currency remaining and hecause htisinesses preferred gold: they did so because of the pie-eminence of gold standard Britain in international trade and because large~scale commerce favoured the metal with the greatest value for the smallest hulk (Laughlin. 1897i pp, 1674)). Frances continued adherence to himetallism and Germany‘s move to gold encouraged the Scandinavians to form their own monetary union towards the end of the third quarter of the nineteenth century: rather than join the larger Latin Union The Scandinavian .\'lonetary Union of Sweden and Denmark in l873. joined hy Norway in lts‘75. turned out to he the longest lasting of the three unions. It ended only when currency inconvertihility with gold. the central banks response to the First \‘v'orld War. allowed nationer monetary policies and price levels to diverge (Bergman cl (1]., l993; Bartel. 1974). Success was due to the essentially similar character of the equally open economies of Norway. Sweden and Denmark. hased upon agriculture. engineering. forestry. fishing and trade, The gains from specialisation did not therefore require very great reallocation of resources. Identical gold coins circulated freely within the Union. hut by 1885 gold was essentially a reserve currency. with more than half of Sweden‘s money stock heing notes not hacked hy an equivalent value of gold in the Central Bank. A rudimentary clearing scheme for notes established by the central banks further helped monetary integration e International fluctuations in economic activity So far: this chapter has heen principally concerned with the structure of the international monetary system and its normal working. We now consider the pathology of monetary relations. Ultimately. the ills of the system can be traced to the structure of hank and trade credit built on the cash hase ~ precious metal coinage for those countries on metallic standards. Monetary policy was directed to ensuring that this structure did not hecome too large or too small for the needs of the economy, hut the main focus was on the hullion reserves of the central hank. for those countries that had such hanks. When reserves began to be depleted either hecause of foreign demands (an ‘external drain’) or domestic demands (an ‘internal drain‘t this was a signal for a rise in the price (discount rate) at which the central hank would lend funds to selected horrowers caught short of liquidity. 83 A History of the War/(l Economy A higher cost of credit reduced the demand for funds and reduced the credit pyramid relative to the cash hase. 'l‘herehy the central hank ensured con\ci‘tihilit\ of claims into precious metal, while at the same time preventing widespread hankruptcy and loss of confidence in the monetary system. hy acting as a lender of the last resort. Lacking a central hank in these years. the lfnited States was a source of instahility for the international monetary system and was dependent on Europe 'or funds during crises.” The Banks of lingland and France were the chief regulato‘s of the system. although in lts‘Tfl l—‘rance ceased temporarily to maintain convertibility of its currency and so lost influence. A shock to one economy maintaining the same metallic standard as another may wel he passed on to the second country more strongly than if the two allowed their exchange rate to float. .»\ crisis and depression in one gold standard country owered the demand for imports and attracted hullion and foreiin assets. Fewer itiports allowed more room for expansion for domestic production and employment hut reduced the exports and employment of the gold standard trading partners. The halancc of trade surplus tended to lower interest rates and expand tie money supply with similar effects. By contrast. under floating rates a crisis ant depression caused a rise in that country's exchange rate. when import demand fell relative to foreign demand for exports. and the domestic currency therefore heeame scarcer in terms of foreign currency in the exchange markets. This higher exchange rate reduced the marketahility of exports and prevented monetary expansion: hoth forces tended to ensure that the depression continued. The second economy remained largely insulated from the shock hy the exchange rate movement. The United States in 1857 offers an example of the tirst case. and in 1873 of the second. From the viewpoint of the rest of the world. the lfnited States with a fioating exchange rate in 187.? was less harmful than with a fixed rate in 1857. for in 1857 it could export its unemployment to the rest of the world hy reducing its imports, whereas from 187 small amount ietween 18: almost 7 per cent more. The forces that caused appreciation under a paper standard would haye hecn channelled into stimulating the domestic economy or 3 until 1B7“) ll could not. The greenhack appreciated a 73 and 1876;. and in the following year appreciated arresting the fall of prices under gold standard conditions. 1n 1877 there were signs of an upturn in railway investment. huilding. manufacturing and mining. This indicates that under a gold standard deflation might well have ended by 1877 instead of 1870. as it actually did. The classification of exchange rate regimes assumes implicitly the ahsence of a countervailing central hank policy. which is appropriate for the United States hut not for western Europe. Though central hanks could prevent widespread financial collapses. so long as they maintained precious metal standards with small reseryes. they could not prevent the international transmission of crises. In many instances. the crises occurred simultaneously from similar causes in different countries. and it is therefore difficult to distinguish the extent to which a depression originated at home or ahroad. lloweyer. the political crisis of tsot in The war/d monetary system, 7850—75 tr: the Lfiiitcd States supplies a clear—cut instance of unemployment heing fot’Ct upon Britain from ahroad. and the 1866 collapse in Britain had a similar impa on Australia. l’rohahly the German crisis of 1873. a direct consequence of ti receipt of lirench reparations. was responsith for the rise in British unemplo incnt then. The l‘rench remained largely immune hecausc they had not the resumed convertihility. The widespread employment of British finance in world trade and t1 consequent impact of British interest rates on the rest of the world has sometirri led to the inference that the rest of the world had to suffer unemployment fore: on it hy Britain. Such an interpretation mistakenly assumes that British interc rates were uniquely controlled hy British conditions and policy. The majority the crises that required adjustment of national economies originated outsir Britain in these. years. that of Moo heing the exception. The 7 85 7 crisis The state of the national harvest was an important determinant of natior. fluctuations in this period. and sometimes good harvests coincided in the maj exporting countries. In 1857 three factors contributed to a flooding of the wor grain markets: ahundant harvests. the re—estahlishment of normal commerc. relations hctyyeen Russia and western Europe after the Crimean War. and t. construction of new railways in the fertile Hungarian plain (Henderson. 19? Hughes. Win). The price of wheat fell and the whole US market was affecte The failure of the Ohio Life insurance and Trust Company in August 1857 w the signal for a general panic. The fall of agricultural prices left farmers unable seryice their dehts and institutions that had lent them the money were as a rcsr endangered. l’anie withdrawals of hank deposits in the United States requir cash from ahroad. irimarily from Britain. Sterling fell against the dollar. and gc was exported to the ‘t‘nited States. To protect its reserves. so that Britain cou remain on the golt standard. the Batik of England raised hank rate (the rate which it was prepared to act as lender of the last resort) to 10 per cent Noycmher 11957. Tie hanking panic spread to British and Irish depositors. wZ demanded their money hack; from the Bank‘s view there was now an ‘intcrr drain on its reseryes as well as an ‘external drain‘ (Hawtrey. 1938. pp. 25-7). Britain two Scottisi hanks. one Liverpool and two leading London bill—broke failed hetween 12 ()ctoher and 11 November 1857. These and other failures. w'i the increase in han ' rate. dragged down businesses in Hamburg in Germany: 1 firms with total liahilities of £15 million failed. The 1857 crisis then clear originated in the Inited States and the wheat~cxporting economies. but w exacerhated hy a contraction of demand associated with bank failures. oth hankruptcies and a failure to renew hill finance. Under the hill system. trade were liahle to pos pone purchases that would commit them to finding cash three months” time. if there was a risk of other traders heing insolvent. Trade: ahility to meet their commitments depended on the hills they held for the sale 34 A H/Story of the War/d Economy their goods being met on maturity. During the 185: crises there was a general reluctance to buy goods by bill acceptance; orders tor manuliacturcrs therefore tell. unemployment rose. and consumers incomes tell. lligh discount rates reinforced the contraction. reducing traders‘ demands and spreading the recession to South America. South Alrica and the hat liast (lx’indlebergcr. 108‘). p. 143). The crises of the 78608 Lincoln‘s election as President of the United States in November taut precipi- tated the secession of the slave—owning Southern states. New York had linanced the greater part of Southern exports. The. approach ol secession. by removing this finance. caused a banking crisis in the South. and the North began to absorb gold, This switch in the USA from being a gold exporter to a gold importer disrupted the European monetary system at a time when the llank ot France was in any case short of gold (Hawtrey. 1938. pp. :841 l. The Bank oi lingland took over St] million trancs of silver from the Bank ot France in exchange tor gold. American gold demand subsided only when the greenback issue in the summer ot' 18(31 got under way. A high bank rate and other interest rates in lingland were dellationary. pushing up unemployment in MM and isth. Recovery began in ltlhfi. Continental Euroie suffered a setback in lts’ol (bank rate reached 9 per cent in November). but British activity continued to expand. With the ending of tie US Civil War and the blockade ot‘ Southern cotton ports. the world price o' cotton collapsed. as had the price ot wheat in 18,57. in London the prestigious hill~brokers Overend is; Gurney collapsed in won. The Bank of England showed that they were insolvent; their liabilities exceeded their assets when valued at pr'ccs normally prevailing. a negatiye net worth (Batchelor. 1986). The British liore'gn Secretary tinpreecdcntcdly sent circular telegrams to the embassies sta ing that the national linances were in no danger (.lenks. W71. p. 201). Many other lirms. mainly those associated with railway contracting (including l’eto‘s . went iankrupt at the same time. The Bank of England's 10 per cent discount rate remained in force for three months. and gold did not flow in even though the Bank oi France. discount rate was Fowl pct cent. The subsequen British recession was mild. howexcr. and the United States also experienced only a mild decline in economic activity from April 1865 to December l8o7. {ailway construction continued to increase. in Austriavl‘lungary and Prussia the prospect of war pulled down stock market prices. and business was reported to we paralysed in Italy and Russia as well. The .rXustro-l’russian War oi“ 1866 final y ended the career ol the Pereire brothers. Credit Mobilier held large quantities o ‘ Austrian securities which d *prcciatcd with the Austrian defeat. in 1866 the bank lost 8 million francs and French financial contidence was shaken (Corti. 1928. p. 41(7). More distant countries. linked to the British economy by lixed rates. in particular lndia and Australia. suitei'ed a similar recession with a lag. Not only triumph] ctr-inoomw hut tho mylliincw mt i:i\\ t‘t‘lith ni‘ir‘t‘s‘ trnns‘mitti‘rl tbr' The world monetary system, 7850—75 85 contraction. While the American (‘ivil War lasted. the blockade of the South encouraged a land boom on the other side ol the world. in Bombay. as lndian cotton exports expanded to replace those lost to Lancashire. With the ending of the war. the boom collapsed. taking with it a large number of banks that had invested in cotton. Appointed litpiidator ot the Asiatic Banking Corporation in London. young .lamsetii Tata used his spare time to visit the Lancashire cotton mills. Within three years he had bought and converted a mill in India (Piramal and llcrdcck. ltlt‘s‘o. pp. ."itlsiél. in Australia the shock was amplified by the failure of the London bank through which the Queensland government had been raising capital to build railways (Pressuell. 198.2). When news or the crisis reached Queensland in .luly Woo. there was immediate panic. The government was expected to be unable to finance railway construction. unemployment would rise and social disorder would quickly follow. Local politicians favoured inconvertibil— ity. which would allow them to pursue an independent. offsetting monetary policy. with exchange rate depreciation. Money was nevertheless raised without adopting an incomertiblc paper currency. The CNS/5 of 7873 The next slump was precipitated on 0 May 1873. by the inllation ot’ German credit with the payment ot the French indemnity o1~ live billion francs, This colossal sum amounted to or e—tiuartcr ot' lirench GNP in 1871 and one—third ol‘ Geritiany‘s. Yet within two and a halt years ot the signing of the peace treaty at Frankfurt in May 1871. it had been paid in lull. French savings rose and German savings fell. tierman imestment was tar heavier than usual between 1872 and l877 (Gavin. 1992; llawtrcy. 1938'. pp. 9373). Germany's tinancial crisis oi 1873 quickly spread to Vienna. The British bank rate reached to percent in lime (in 1873 it changed twenty—tour times ~— a record) and gold imports occurred. (in 1‘) September the American crisis broke. Jay (‘ookc was unable to borrow in Frankfurt. (ierman inyestors in United States railways had lirst supported him. but then cut oft" their supply of speculative tunds. ltaly. llolland and Belgium were pulled in, The died on (ircat Britain was less severe than in 1&57. but there was still a panic ant bank rate reached ‘) per cent by November 1873 to staunch the outflow ol gold. in Paris and Brussels the discount rate reached 7 per cent. In the most important South American economy. Brazil. the banks almost ceased lending. in Buenos Aires the private banks actually did so. and property values fell by between 3n and W per cent. By 1875 stock market prices were lower everywhere. Three years later there were said to be 1.2 million unemployed able—bodied men roaming the LPSA. ()ne‘tilth ot' L78 railways were foreclosed or under proceedings (New march. 18%; Ciil‘len. 188th. lts‘b‘tlb: Kindleberger. 198‘). p. 1-16). As with the 1857 depression but to a greater extent. transport improvements caused marked and unexpected price declines. The Suez Canal had been opened in tut/kit sis/l \l\,\ i-viilu w\ .w t tnin at Us” xxw\rl/il1“irl lmsnn T")r\;/‘llx' me/lv‘I/‘flr‘l ln Anerriu 88 A H/srory of the War/d Economy "tern had increased from 3.3tttt miles in fist/>5- to t'i.tlttft in for}. almost all the an system had been built after tstis‘. and the railway system of the L'nited 1-: States had doubled in the seven years before its/3 i-m liad harvests in Britain in lt m and l87o. together with cattle disease. forced food prices up there and reduced the demand for manufactures. The depression in Britain w as. however. less deep than in many countries. at least until after the failure of the (‘ity of (,llasgow batik in l87h’, Despite the decline in export demand tot more than it) per cent to the USA between 1873 and 1870). the llritish economy cypericnccd no increase in pauperism or decline in state revenues as had happened in lts’FT and ism The raw material producing countries suffered more from the recession than did economics specialising principally in manufactures. 'l‘ransport improvements more immediately affected their earnings. \‘v'hen agricultural prices began falling. the foreign investment that often financed the new railways and port facilities ceased to be profitable, New investment ceased to flow into these economies. which then suffered shortages of liquidity. This was the pattern in Australia and the United States as well as in South America and Russia, in Britain the crisis was largely endogenous. stemming from the realisation of the unsound nature of so many of the foreign loans recently advanced. lending to Turkey paid interest on previous loans until Turkey defaulted in 1875, Spain was also unable to servicc its national debt, The entire international financial market was becoming increasingly pessimistic about the likelihood of repayment by primary producers. Egyptian loans which could have been floated earlier became unsaleable and. without the continuing injection of foreign funds. the ligyptian state defaulted on existing debt service in l87o (Fedcr and .lust. Whit). Both in depth and in duration. the depression that began in lts’73 was the second severest in the history of the international economy. Only the downturn The earliest investigators into these that began in 102‘) was longer and deeper. periodic slumps and booms. and modern monetarists. believe they were caused by ‘Ctuctuations in the supp\y of money or credit. precipitated by the fn‘vancia\ crisis or shocks on which the preceding account has \ocytsed fibrilmaty and Lotbian. Whit. \\ \s nossnaw .\\o\s es es . \\\1\\ \\\e gt can \\\\:t\ne\\,\\ cy'yscs \\ ct e tesnsvnses \yy dyyss \\\.\n ns '\\\ ecnnyynyw sensing . ‘r\\\t\ tesynten \yswrv nyagnsgcs \y‘y estncstuyysyns \gg\\e\‘a\‘en \as \\\e cy\\\yy\\sy: \Rnstnss . \Wt’is. ch. “in \ ,ew'vs. \‘Vmb: \syncnckmtsggy‘ _ \sssw . "\“n’e ensuing panic then accc\cratcd the decline. but did not indicate it. \nstcad. changes in the determinants and directions of investment. especially in transport improvements. were the fundamental causes. in either case. exchange rate regimes and monetary policy for its absence) influenced the severity and transmission of these fluctuations. Summary and conclusion The international monetary system throughout the third quarter of the nineteenth century depended to a considerable extent on the money and credit of the worlds The war/d monetary system, 7850~75 a? largest trader. Britain, l1yen trade which did not touch British shores was often financed by British institutions The acceptability of British money and finance owed much to its apparently unbreakable link with gold for a number of reasons: a belief that gold itself. not social acceptability, conferred value on money; the guarantee that the British government could not reduce the value of the money by increasing the stock. as long as the commitment to gold was maintained; and a strong mercantile preference for gold over other precious metals because its higher value in relation to weight made gold more suitable as an ultimate means of payment for the increasing value of international trade. The system of commercial banking and bills of exchange. helped by the international spread of the electric telegraph. in fact ensured that very little gold was needed for international exchange. As long as confidence in the financial institutions was maintained. the pyramid of credit built upon the gold base served as a means of exchange. The gold discoveries of the late l84tls were less responsible for the monetary growth of the period than was the development of commercial banking. There was only a gentle rise in prices from this monetary growth because of the relatively rapid accompanying expansion of international and domestic trade. The greater availability of gold provided the opportunity for the major industrial powers to move to gold standards whether (16]!th or defacm. This increased demand for monetary gold provided another reason why prices in the industrial world rose very little. France and the United States. whose currencies were linked to both gold a rd silver. found that the price of gold fell in response to the increased gold supp ies sufficiently to drive silver coins out of circulation. lint bimetallism seems to have prevented a great rise in the price of sil\er rclatiyc to gold. and therefo‘c limited the appreciations of the silver standard exchange rates. such as those of lndia and Germany. The formation of monetary unions in Europe supported the tendency of trade to unify international markets, in turi. monetary unions were a manifestation of the prevailing liberal intci‘nationalist beliefs. However. nationalism was strong enough to keep Britain out of an in ernational currency agreement. Where the .'»\ustro—(icrman and Latin lTnions were concerned. nationalism was as much the driving force of the initiators as liberalism. The success of the Scandinavian Monetary l'nion derived from the lac ; of nationalist antagonism. which allowed a genuine integration of financial institutions between the countries. lvlonctary unions were facilitated by adherence to a common metallic standard, This created virtually fixed exchange rates between the lifferent currencies within the limits by the specie points. Although monetary unions and fixed exchange rate regimes created a stability of international relative prices that facilitated trade. they also potentially allowed the international transmission of recessions and booms from which an economy could in principle be insulated under a floating exchange rate regime, In fact. fluctuations in international economic f activity seemed o have been caused by discontinuities in the profitability of investment. largely in transport facilities. in agricultural and raw material producing areas. When the investments began to come to fruition andror wartime 88 A H/srory 0f the War/(I Econon'iy restrictions ended. the prices ol agricultural products. collapsed. creating dil’ticul— ties for financial institutions yyhich had lent to primary producers and which noyy lound their assets illiquid or reduced in \alue. it is douhtl’ul that the eychai tee rate t transmission oli these crises. hecausc line made a great dititicrcnec to the mestic monetary policies yyere so important. ’lihe depression in the l‘nitcd States alter l873 yyas prohahly '9! do exacerhated hy the lloating e\chaiiee rate and the eoi’ititu‘tionary monetary policy designed to allow a return to the prettiyil \‘v‘ai tiyed exchange rate. licononiic recovery tended to raise the exchange rate at the expense oti expanding domestic capacity utilisation. lloyyeyer. in this instance the lorccs making tor depression originated in the ifnited States to a much greater extent than they yyere transmitted trom ahroad. Britain Stiiiic‘t‘cti relatiyely little initially. c pite maintaining a lixed eXchangc rate \yith countries such as (iermany yyhich new hard hit. because Britain had. hy the ll‘l7tlsi a relatively small commitment to primary production. l’rohahiy ot more importance than the exchange rate regime was the willingness ol the Bank ot' lingland to act as lender ol last resort and to control domestic monetary conditions. This tacility provided some contrihution to preventing marked contractions oi the money stocl\ hy controlling and reducing internal and external “cash drains yyhen residents or toreigners panicked and demanded gold. rather than hank deposits or hills. The severity and duration ot the depression ol l8”.i hcgan the undermining ol' the liheral consensus among industrialisinc nations ahout the hcnelits ot' inter- national trade and investment. .\ heliet that the international market yyould not i t raise or preserve liHlltl standards adeout tey hecame more widespread. lnstead. governments or other corporate torms ot organisation such as trade unions and cartels were increasingly expected to taite remedial or positi\c action in the lace ol' market l'orces. Even in Britain the \erities ol‘ tree trade seemed less than eternal, (,iitten remarked on the ’continual rel‘erences to the increase in manul’actures ahroad'. By the lts’7tls Britain no longer occupied the same dominant position in the international economy that it had in the ltsStls. in the new era that yyas heginning, the industrial capacities ot the leading nations new more equal. trade was less tree and the international economy \ias increasingly used to aehieye ohiectiycs ol littt‘Cié‘“ t‘tlihl News 1, Rothschild’s‘ led in loans. lty contrast. contracting l.ondi‘ issues to a nominal \alue ol {Silo million hetyveen lh’otl and listltt. \yhcrcas lit“: \ managed {NW7 million over the same period tllidy. WW; t'hapmau. tilts—ti pp, to to (ioschen t lhoot is a uselul contemporary account. The Russian ernhassy in l’eldng hecamc a lain: ol liiiiopean post ot'tice. distrihuting messages sent, once the end ot the Siherizm line had heen reached. hy horsehaek or caravan to the liast. 4. The British Australian telegraph (’oint‘iany charged LS its tor merit} words to l)ttt'\\ttt ‘1 Lu [J The war/d monetary system, 7850—75 >. Rostoyt tl‘Hts’) adopts a similar line ot’ argument. The three hypotheses can represented hy the Cambridge quantity theory of money. This assumes that demand lor money equals the supply of money (M). Demand is determined by product ol‘ the price le\el (P). the level of income (Y) and K. the fraction of mor income averagcly held as money halances. The fraction varies with the rate of inter and the state ot monetary institutions among other things, Using lower-case letters indicate proportionate rates ol' growth of the upper—case letter variables. (‘amhrtdge relation can he written M : [CRY or m : k +p +_\', \tht'e ‘w indicates causal direction. the rate of growth equation can represent tiist hypothesis ot' the text as 771 a p. the second (Newmareh) hypothesis as m —> and the third (Schumpeter) hypothesis as y a p and perhaps m, o. Sayers slioyvs that (‘hexalier was wrong. When displacement is complete. prices n not tall much hecause of the size of the new gold area relative to increments in the SlUCis'. l‘his was the view ot‘ the British Royal Commission on the Precious Metals (BPP. 1E part 1. p. (My lA’isher states that .leyons‘ yyork ol‘ tan} entitles him to he called 'the 'ather of in numhers‘. tl. lathain (107%.. ch. 5) has suggested another major source of business fiuctuati namely the l‘ailure or success of the Asian rice harvests. The high prices of rice w‘ the hary est tailed increased the income available to the rice farmers and mercha yyho typically demanded British manufactures and semi—manui‘actures. An increasr the demand lor exports tended to send the whole British economy into a hoom. ' \ieyr \vould hayc more credibility for the third quarter of the nineteenth centur .~\sia. and particularly India. was more important in British. European or Ameri trade. hut as the figures given in previous chapters have indicated. the poor count prohahly accounted tor too small a proportion of world trade to he a major caust fluctuations. ltl. hi the L‘nited States. output expanded rapidly despite the marked decline in prit ’l‘his‘ prohahly reduced the seyerity of the depression relative to that of the 18908, (l3 ...
View Full Document

Page1 / 20

A History of the World Economy_ch4-5 - internationai factor...

This preview shows document pages 1 - 20. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online