Economic Fluctuations and the Rise of Protectionism in the 19th Century
The **Great Depression** and a Return to Protectionism
Another consequence of international economic integration was the synchronization of price movements. In the preindustrial economy, price fluctuations were due to local issues affecting crops. However, with increasing industrialization and the international market, fluctuations began to relate more to the state of trade and fluctuations in demand. These became cyclical, spreading from country to country through trade channels.
The complex interactions between real and monetary factors caused fluctuations in production. These fluctuations used to cause fluctuations in prices. A drop in prices could last for years, while one in production was usually brief. The long-term trend was clearly upward. In Europe and the U.S., prices peaked early in the century, shortly before the end of the Napoleonic wars, for both real reasons, such as wartime shortages, and monetary reasons, such as the exigencies of war funding. Therefore, until mid-century, the secular trend was downward. In this case, the causes were also real, such as technological innovations and efficiency improvements, as well as monetary, such as governments paying off war debts. Prices saw a rise in the 1850s as a result of gold discoveries in California (1849) and Australia (1851).
The Panic of 1873
In 1873, following an expansion of several years, there was a financial panic in Vienna and New York that affected most industrial nations. The result was a fall in prices that lasted until the middle or end of the 1890s and was known in Britain as the “Great Depression”. Finally, the gold discoveries in South Africa, Alaska, Canada, and Siberia reversed the downward trend in prices, pushing them gently upward again until the First World War, which resulted in rapid inflation.
This depression was probably the most acute and widespread of the industrial era to that point. It was followed by a reaction from industrialists, who blamed international competition and asked for a return to protectionism. They were joined by farmers, who before 1870 had not felt threatened by overseas competition. In 1870, reductions in transport costs due to the extension of the railway, together with price reductions of cargo by sea because of improvements in steam navigation, joined the vast areas of new production in virgin grasslands. For the first time, European farmers had to face tough competition in their own markets.
Germany’s Shift to Protectionism
Germany at that time was divided into two: an industrializing west and an agricultural east. The Junkers of East Prussia, owners of large estates, had long engaged in the export of grain through the Baltic to Western Europe, including West Germany. They were the major exception to the fact that transport costs made it less profitable to transport grain over long distances before the 1870s. The Junkers had traditionally favored free trade because they were exporters. When they began to suffer from falling prices, they demanded protection, as the German population was growing in cities. The Junkers wanted to enjoy a large and growing market exclusively. Otto von Bismarck, founder and chancellor of the new German Empire and a landowning Junker himself, took note of the situation. When western German industrialists called for protectionism, and the Junkers did as well, Bismarck agreed to their demands and approved the creation of a new tariff law in 1879, which introduced protectionism in industry and agriculture. This was the first major step in a return to protectionism.
France’s Protectionist Policies
Protectionist interests in France gained momentum following defeat in the Franco-Prussian War and even more so with the German tariff of 1879. In 1881, a new tariff law was passed, but free-trade supporters still retained considerable political influence. New treaties were signed in 1882 with seven countries that respected the principles of the Cobden-Chevalier Treaty. When the elections of 1889 gave a majority to the protectionists in the House, they succeeded in adopting the Méline tariff in 1892, considered extremely protectionist.
Tariff War Between France and Italy
A tariff war between France and Italy from 1887 to 1898 saw Italy follow Germany with protectionism. Mainly for political reasons, Italy decided to discriminate against French imports in particular. France retaliated. For more than a decade, trade between the two neighboring countries decreased to half its normal figure.
Other Countries and the Rise of Protectionism
- Other countries raised tariffs.
- Russia declared a tariff that was virtually prohibitive.
- The U.S., before the Civil War, had followed a policy of low tariffs. With the waning influence of the South and the rise of the interests of manufacturers in the Northeast and Midwest, the nation became one of the most protectionist countries.
There were core free traders, especially Britain. Although political movements developed in favor of fair trade and empire, they gained no acceptance before the First World War. In 1887, Parliament passed the Trade Marks Act, which required foreign products to carry a label indicating the name of origin. It was expected that the label “Made in Germany” would deter British consumers from buying these items. In fact, the opposite happened. The Netherlands, specialized in the processing of overseas imports for re-export to Germany and other countries, thus had a wide range of free trade, as did Belgium. Denmark resisted large-scale imports of cheap grain but adjusted by importing cheap grain for food. Denmark also remained in the free trade bloc.
Protectionist Countries: France, Germany, Italy, Russia, the USA, Great Britain (partially)
Free-Market Countries: Great Britain (partially), the Netherlands, Belgium, Denmark
Although the rate of growth of international trade was less than in previous decades, it remained positive and accelerated in the two decades before the First World War. Nations were more dependent than ever on international trade. In most developed countries, exports accounted for between 15% and 20% of the total national income. In others, the rate was even higher. The least developed countries were also involved.