Lesson 4: The International Economy (1870-1913)
Important contents
- Trade relationships
- Capital Markets
- The international monetary system
- The great divergence in economic development
Trade Relationships
There were three stages of trade relationships
• Mercantilism
• Free trade
• Protectionism
Mercantilism
The welfare of the economy is due to its capitals and the stock of precious metals (gold
and silver) obtained by the state. A positive trade balance (surplus), national wealth, is
the cause of economic growth. There was a restriction of imports and a promotion of
exports (manufactures) to achieve a favourable balance of trade. Some policies were:
High tariffs on imports, subsidies for exports, and restrictions on foreign trade.
Free Trade
Specialization (Adam Smith) and international trade were the main sources of economic
growth. There were no restrictions to international trade (no tariffs, quotas, or other
barriers). Free trade cause great variety of products and low price for consumers. It also
encourages competition and innovation.
Protectionism
Countries protected their national industry in order to promote its development. They
apply tariffs and other restrictions to international trade, and subsidies to support local
businesses (protect jobs and strategic industries). It also reduces dependence on foreign
countries.
1815-1847 (Mercantilism)
Transition from a protectionist policy to a slow reduction in tariffs and mercantilist trade
restrictions and prohibitions.
1848-1868 (Free trade)
,UK adopted free trade policies and forced commercial opening in some countries. During
these years, there was the Cobden chevalier treaty: Reduction of tariffs between France
and UK.
1868-1896 (Protectionism)
Protectionism turn and deceleration of international trade
1897-1913 (Protectionism)
Increase in trade and great acceleration in capital exports in a context of growing
protectionism and economic nationalism.
However, during the 19th century, there was an increase in exchanges between
countries with similar factor endowment and factor costs.
Capital Markets
Increase in International trade
There was a fast increase in exchanges. Europe was predominant in this area, with high
profits and volume. Europe exported industrial goods, and the rest of the world exported
agricultural products. Peripheral countries specialized in the exportation of a small
number of agricultural products, this generated increase in international external
dependence.
Market Integration (Globalization)
Globalization started after the 19th century according to Willianson and O´Rourke. In the
initiation, it was a trade dominated by luxury products because of the high costs. It did
not affect the ratio wages/land rent or the capital return. There was not price
convergence, but no competition at an international scale. It was not until the first
globalization that a global market was created.
Turn of the Century Crisis
There was a deceleration in trade, an agrarian crisis (arrival to Europe of cheap cereals
produced in north America), and protectionist turn.
Trade and Migration effects on Inequality
Willianson Jeffrey did a theory forecasts about trade effects:
- Without trade restrictions, poor countries should export labour intensive
products and rich countries should import labour intensive products.
- Without trade restrictions, poor countries should experience a relative increase
in wages (there is demand for labour from rich countries and poor countries have
, to increase wages). With protectionist barriers, poor countries should experience
a relative increase in scarce factors renumerations.
Willianson Jeffrey also says something about immigration:
- Immigration (increase in labour supply, wages for low skilled workers decrease)
tended to increase inequality, while emigration (decrease in labour supply, wages
for remaining workers rise) tended to reduce inequality.
Europe becomes specialized in industrial products, that leads to more demand of labour
than of land. This causes the wages rise more than the lands rents and the industrial
owners and workers win respect to the landowners. This causes a decrease of inequality.
When the new world becomes specialized in agricultural products, the demand of land
increase more than the demand for labour, and land rents increase more than wages.
Landowners win respect to the industrial owners and workers. This causes an increase
of inequality.
International Movements of Capital: Origin and Destination
The origin of this movement of capital is the unequal advance of the industrialization
process. The increase in the saving capacity in some countries and the increase in
investment opportunities in others is also another cause. More than a half of the British
foreign investment went to areas of recent colonization (exploitation of natural
resources).
Foreign Investment
The globalization of the economy causes new investment opportunities. The colonies are
the principal target (obtention of raw materials and other commodities). They also invest
for the construction of infrastructures, channels and railways.
Financial Crisis of 1873
There was overinvestment in some sectors like railways, tight monetary policy in the USA
after the Civil War, and consequences of the Franco-Prussian war. There was also the
collapse of the Vienna Stock Exchange in 1873 (May). And last, there were several
financial panics in USA and other European countries. It was the beginning of the long
depression (1873-1896)
The International Monetary System
The Gold Standard
It was the international monetary system during the 19th century (suspended during WWI
and re-established after the war). All currencies were convertible to gold at a fixed parity.
, The British pounds were the international reference and London the financial centre.
Each currency had a fixed parity to all the other currencies
Why the Gold Standard?
• There was a progressive transition from bi-metallic systems to mono-metallic
systems.
• New technologies make more difficult forgery (falsificacion).
• The banks increase the use of paper money and bills of exchange.
The Gold Standard (Advantages)
The fixed exchange rate provided stability of exchange rates; this causes a reduction in
transactions costs of international traded. It also provided stability of internal prices,
otherwise, differentials of inflation could erode international competitiveness of a
country. This is why this system favoured a great increase in movements of goods and
services during the first globalization.
But what happen if the legal parity was different to the market parity (law and demand)?
Adjustment mechanisms in the gold standard system
David Hume said that an international monetary system based on gold would adjust
automatically through movements of gold. However, in a world based on bank money,
adjustment would take place through interest rates (investment, consumption, and
aggregate demand): Deflationary adjustment. Restoration of the equilibrium falls on the
workers through wage adjustment.
Real functioning the gold standard system
Important contents
- Trade relationships
- Capital Markets
- The international monetary system
- The great divergence in economic development
Trade Relationships
There were three stages of trade relationships
• Mercantilism
• Free trade
• Protectionism
Mercantilism
The welfare of the economy is due to its capitals and the stock of precious metals (gold
and silver) obtained by the state. A positive trade balance (surplus), national wealth, is
the cause of economic growth. There was a restriction of imports and a promotion of
exports (manufactures) to achieve a favourable balance of trade. Some policies were:
High tariffs on imports, subsidies for exports, and restrictions on foreign trade.
Free Trade
Specialization (Adam Smith) and international trade were the main sources of economic
growth. There were no restrictions to international trade (no tariffs, quotas, or other
barriers). Free trade cause great variety of products and low price for consumers. It also
encourages competition and innovation.
Protectionism
Countries protected their national industry in order to promote its development. They
apply tariffs and other restrictions to international trade, and subsidies to support local
businesses (protect jobs and strategic industries). It also reduces dependence on foreign
countries.
1815-1847 (Mercantilism)
Transition from a protectionist policy to a slow reduction in tariffs and mercantilist trade
restrictions and prohibitions.
1848-1868 (Free trade)
,UK adopted free trade policies and forced commercial opening in some countries. During
these years, there was the Cobden chevalier treaty: Reduction of tariffs between France
and UK.
1868-1896 (Protectionism)
Protectionism turn and deceleration of international trade
1897-1913 (Protectionism)
Increase in trade and great acceleration in capital exports in a context of growing
protectionism and economic nationalism.
However, during the 19th century, there was an increase in exchanges between
countries with similar factor endowment and factor costs.
Capital Markets
Increase in International trade
There was a fast increase in exchanges. Europe was predominant in this area, with high
profits and volume. Europe exported industrial goods, and the rest of the world exported
agricultural products. Peripheral countries specialized in the exportation of a small
number of agricultural products, this generated increase in international external
dependence.
Market Integration (Globalization)
Globalization started after the 19th century according to Willianson and O´Rourke. In the
initiation, it was a trade dominated by luxury products because of the high costs. It did
not affect the ratio wages/land rent or the capital return. There was not price
convergence, but no competition at an international scale. It was not until the first
globalization that a global market was created.
Turn of the Century Crisis
There was a deceleration in trade, an agrarian crisis (arrival to Europe of cheap cereals
produced in north America), and protectionist turn.
Trade and Migration effects on Inequality
Willianson Jeffrey did a theory forecasts about trade effects:
- Without trade restrictions, poor countries should export labour intensive
products and rich countries should import labour intensive products.
- Without trade restrictions, poor countries should experience a relative increase
in wages (there is demand for labour from rich countries and poor countries have
, to increase wages). With protectionist barriers, poor countries should experience
a relative increase in scarce factors renumerations.
Willianson Jeffrey also says something about immigration:
- Immigration (increase in labour supply, wages for low skilled workers decrease)
tended to increase inequality, while emigration (decrease in labour supply, wages
for remaining workers rise) tended to reduce inequality.
Europe becomes specialized in industrial products, that leads to more demand of labour
than of land. This causes the wages rise more than the lands rents and the industrial
owners and workers win respect to the landowners. This causes a decrease of inequality.
When the new world becomes specialized in agricultural products, the demand of land
increase more than the demand for labour, and land rents increase more than wages.
Landowners win respect to the industrial owners and workers. This causes an increase
of inequality.
International Movements of Capital: Origin and Destination
The origin of this movement of capital is the unequal advance of the industrialization
process. The increase in the saving capacity in some countries and the increase in
investment opportunities in others is also another cause. More than a half of the British
foreign investment went to areas of recent colonization (exploitation of natural
resources).
Foreign Investment
The globalization of the economy causes new investment opportunities. The colonies are
the principal target (obtention of raw materials and other commodities). They also invest
for the construction of infrastructures, channels and railways.
Financial Crisis of 1873
There was overinvestment in some sectors like railways, tight monetary policy in the USA
after the Civil War, and consequences of the Franco-Prussian war. There was also the
collapse of the Vienna Stock Exchange in 1873 (May). And last, there were several
financial panics in USA and other European countries. It was the beginning of the long
depression (1873-1896)
The International Monetary System
The Gold Standard
It was the international monetary system during the 19th century (suspended during WWI
and re-established after the war). All currencies were convertible to gold at a fixed parity.
, The British pounds were the international reference and London the financial centre.
Each currency had a fixed parity to all the other currencies
Why the Gold Standard?
• There was a progressive transition from bi-metallic systems to mono-metallic
systems.
• New technologies make more difficult forgery (falsificacion).
• The banks increase the use of paper money and bills of exchange.
The Gold Standard (Advantages)
The fixed exchange rate provided stability of exchange rates; this causes a reduction in
transactions costs of international traded. It also provided stability of internal prices,
otherwise, differentials of inflation could erode international competitiveness of a
country. This is why this system favoured a great increase in movements of goods and
services during the first globalization.
But what happen if the legal parity was different to the market parity (law and demand)?
Adjustment mechanisms in the gold standard system
David Hume said that an international monetary system based on gold would adjust
automatically through movements of gold. However, in a world based on bank money,
adjustment would take place through interest rates (investment, consumption, and
aggregate demand): Deflationary adjustment. Restoration of the equilibrium falls on the
workers through wage adjustment.
Real functioning the gold standard system
