Economic Transformations: Europe and Spain’s Modern History

Posted on May 26, 2025 in Business Administration and Management (BAM)

Unit 1: 19th Century Economic Dynamics

19th Century European Population Growth

The significant increase in the European population throughout the 19th century was indeed caused by the economic growth derived from the Industrial Revolution. Agricultural productivity greatly improved, leading to cheaper food. Life expectancy also improved, and both birth and death rates were reduced. Furthermore, technological advancements during this period contributed to urbanization, as people migrated to cities in search of employment opportunities. In summary, improved technology, increased agricultural efficiency, and lowered food prices all contributed significantly to this population growth.

Germany’s Late Industrialization & Rapid Growth

During the 19th century, Germany had a strong focus on the agricultural sector, which dominated its economy. Additionally, Germany lacked crucial resources for industrialization, such as coal and iron, and therefore relied on imported resources. Both factors combined slowed its industrial development. However, once it began to grow, it did so at a higher rate than Britain. This phenomenon is known as the catching-up effect, which states that lower-income countries tend to have higher rates of growth than wealthier countries, eventually allowing them to catch up. Moreover, the German government shifted its perspective and began creating policies, such as tariffs and subsidies, which boosted economic industries and facilitated trade and economic growth.

Objectives of Spain’s 1869 Figueroa Tariff

As a result of the new political context in Spain, the Figueroa tariff was enacted to eliminate existing import and export requirements. The “Base Quinta” was included in the tariff, aiming to reduce tariffs annually to eliminate barriers and move towards free trade. However, Base Quinta was never applied. One of the main objectives was to promote industrial development. This tariff aimed to protect and promote domestic industries by reducing import duties on raw materials, thereby lowering production costs. By reducing protectionist measures and promoting free trade, the state encouraged economic integration with other countries.

Keynes’ Criticisms of the Versailles Treaty (1919)

First and foremost, John Maynard Keynes criticized the treatment of the vanquished by the victors. He was against the harsh war reparations applied to Germany as part of the treaty. He argued that the reparations were excessive and would hinder Germany’s ability to recover. He also criticized the neutral position of the U.S. and England. Keynes warned that these reparations would create economic distress and have negative effects for the entire European economy. In addition to these factors, he argued that such measures could foster resentment within the German population, potentially leading to future conflicts.

Revisiting the English Industrial Revolution Term

The statement that “the English Industrial Revolution is an inappropriate way of calling the series of changes that occurred in the economy of British society prior to 1900” is correct. The term “revolution” implies a large number of changes occurring in a very short time. Great Britain began its economic development in the 17th century with mercantilism, and the term “Industrial Revolution” masks the continuous evolution of the British economy.

Unit 2: Free Trade, Gold Standard, and Protectionism

Mid-19th Century British Free Trade Reforms

In 1846, the Corn Laws were abolished, which had been one of the most protectionist measures in England. These laws were based on high tariffs and trade restrictions designed to shield domestic industries. Their repeal removed these barriers and opened British markets to international trade. Another significant change was a major trade treaty signed in 1860, known as the Cobden-Chevalier Treaty, which included the Most-Favored Nation (MFN) clause. The MFN clause stipulated that if either country signed another treaty granting better conditions to a third country, those same conditions would automatically extend to the other signatory. This led to the subsequent extension of trade agreements across Europe, promoting technical efficiency and increasing productivity.

Most-Favored Nation Clause & European Economy

The MFN clause originated from a commercial treaty signed by France and Great Britain, known as the Cobden-Chevalier Treaty, with the aim of moving towards free trade. This clause imposed that every time Britain signed another commercial treaty, it had to include the same concessions that the British applied to France, and vice versa. Because of this, tariffs began to decrease, leading to more free trade. From this point on, the golden age of free trade began.

Central Banks’ Role in the Gold Standard System

Under the Gold Standard, central banks had a fundamental commitment to maintaining the convertibility of their currency into gold at a fixed exchange rate. They were responsible for ensuring that the value of their currency remained fixed in relation to gold. Moreover, they had to accumulate and maintain a sufficient amount of gold reserves to back their currency. These gold reserves acted as a guarantee for the convertibility of the currency. Central banks played a crucial role in the Gold Standard system, providing confidence in its stability and acting as major actors within it.

Impact of Cheap Grain Imports on Europe

Increased grain imports resulted in lower prices for grain-based products, benefiting consumers through reduced costs. However, domestic farmers and agricultural industries in Europe faced increased competition, which put pressure on their profitability, leading to job losses (unemployment) and reduced farm incomes. It also exposed European countries to a greater reliance on imports from distant countries. As mentioned, consumers and food processing industries benefited from these cheap imports, while domestic farmers were adversely affected.

Return to Protectionism in the 1880s

The free trade era was short-lived. One of the main reasons for its decline was the Grain Invasion. For European cereal producers, free trade resulted in less profitability and high competition, as transport costs declined and Europe was “invaded” by foreign producers. This return to protectionism was made to protect European producers, many of whom were members of parliament and large landowners. In summary, foreign competition began to take advantage of technological improvements, and faced with this pressure, protectionist policies started to be adopted.

Evolution of the Gold Standard (1875-1914)

The theory of the Gold Standard posits that a country with a deficit in its Balance of Payments (BoP) must compensate for this deficit with gold. Therefore, a gold outflow would occur. If gold reserves declined, the Central Bank had to contract the money supply, leading to a rise in the discount rate, an increase in interest rates, a fall in investment, a decline in wages, and deflation. According to the mentality at the time, the internal crisis did not matter because it equilibrated the deficit in the BoP. However, the system never worked as perfectly as in theory. It functioned largely due to the British Pound; the Bank of England committed to convertibility. All major operations were conducted in pounds, as it was convertible to gold, and London was the financial center. Cooperation between the Bank of England and France was also crucial; when the situation became alarming, the French lent money to the Bank of England.

Unit 5: Spain’s Post-War Economic Transformation

Spanish Economic Changes (1951-1958)

In 1951, Spain experienced a change of government and a modest domestic liberalization, as the autarky model had not yielded good results. By the late 1940s, the foreign sector was on the verge of collapse, which was a clear signal for Franco’s authorities. This domestic liberalization involved eliminating food rationing and reducing quotas for raw materials and energy. The most important change occurred with the signing of the Pact of Madrid, as Spain had been excluded from the Marshall Plan. This pact changed the perception of the Dictatorship’s duration, as American backing helped Spain with international relations and stability. In agricultural markets, prices were almost fully liberalized, with the exception of wheat, and the black market disappeared. There was a significant difference in economic growth in the 1950s compared to the 1940s (4.8% growth). The Import Substitution Industrialization (ISI) model was based on inside-led growth with high barriers to foreign products, but also economic flexibility for capital goods imports, exchange controls, and direct state intervention in the production of specific goods.

Spanish Economic Growth & Imbalances (1951-1958)

During the 1950s, an Import Substitution Industrialization (ISI) model was implemented in the national economy with the objective of building a powerful industry that would lead to economic development. The means to achieve this was to promote industries to serve the national economy. However, it faced two important imbalances: one internal and one external. Inflation was a partial consequence of price controls, but more importantly, it was due to the rise in money supply, stemming from a public budget deficit financed through public debt (e.g., the INI). An external deficit also occurred as Spain was closed to foreign investment, leading to export stagnation and a high propensity to import. As soon as American aid ended, a significant gap emerged. Franco realized it was time for the Stabilization Plan.

Spain’s 1959 Stabilization & Liberalization Plan

The 1959 Stabilization and Liberalization Plan was a classical stabilization operation with the objective of reducing inflation, mainly due to a lack of monetary discipline. Public spending was controlled, the issue of public debt was limited, and the Bank of Spain’s discount rate increased. Inflation was held back, and public debt financing through money creation was abolished (indirect taxes were increased instead). Liberalization involved partly liberalizing domestic markets by suppressing regulations and simplifying administrative procedures. Prices of goods and services were adjusted to close the gap between official prices and production costs. An opening policy and liberalization of foreign relations were also key. Spain entered international organizations created after 1945, integrated the peseta into the Bretton Woods system, and moderately liberalized foreign direct investment.

National Institute of Industry (INI) Analysis

The National Institute of Industry (INI) was created in 1941 during Franco’s regime. It consisted of a group of public companies established by government initiative. Its purpose was to develop industrial sectors under state supervision, following a centralized approach where the state had significant influence over its activities. The INI aimed to foster industrialization in Spain and reduce economic dependence on agriculture. It played a crucial role in controlling and directing economic activities in strategic industries to ensure their development. Key sectors where the INI intervened included:

• Energy: Companies like Fenosa.
• Automobiles: SEAT.
• Raw Materials: Encaso, which sought to extract oil from mineral deposits.

In conclusion, the economic results were partial; while it promoted industrialization, it also faced inefficiencies and a lack of competition in some sectors. Its financing in the 1940s largely came from public debt and direct state subsidies.

Spanish Export Stagnation (1940-1950) Factors

Several factors explain the fall and subsequent stagnation of Spanish exports between 1940 and 1950. First, this was a post-war period, and many European countries faced economic disruptions as they had to rebuild their own economies, which affected Spanish export opportunities. Secondly, Spain’s economic recovery was significantly slow, marking a long post-war period. Moreover, the Spanish economy aimed to be independent from the international market to become self-sufficient, leading to total economic and political isolation during this decade. Regarding the foreign sector, there was strong protectionism with two basic tools:

• Restrictions on imports: Official authorization from the Ministry was required.
• Exchange controls (IEME): The IEME had a monopoly on all foreign-currency transactions. Private possession of foreign currency was prohibited, and exporters had to hand it over to the IEME. The official exchange rate was overvalued, which hurt exports.

Spanish Economic Variables (1939-1949)

This period was one of economic stagnation, often referred to as the “Dark Age of Spanish Industrialization.” Spain experienced limited technological renewal and gross capital formation due to the isolation imposed by Franco’s regime. Compared to other European countries, public investment was relatively modest due to Spain’s limited resources and economic constraints. Due to Spain’s autarky during the 1940s, real wages fell dramatically, leading to a significant fall in consumption. There was a great shortage of food and products, which caused the appearance of a black market and led to rising prices. Autarky proved to be a disaster.

Unit 6: Spain’s Golden Age of Growth and Transition

Factors of Spain’s Post-1959 Economic Growth

The Stabilization Plan of 1959 had a positive impact in both the short and long run. In the short run, there was a real income decline and increased unemployment; however, there was an impressive improvement in the external sector. In the long run, thanks to the free market, Spain experienced outstanding economic growth (high Total Factor Productivity, TFP, growth) from an increase in productivity. Moreover, it profited from the inflow of foreign currency, and imports doubled during the period. One of the most essential parts was the liberalization of foreign capital investment by entering the Bretton Woods system with the Peseta and becoming a member of European organizations (GATT, EEC, etc.). The 1960 tariff also played an important role; while still protectionist, it eliminated many restrictions on imports. Tourism, migrants’ remittances, and foreign investment also played crucial roles.

Spanish Industrial Production Growth (1960-1975)

During this period, Spain experienced its golden age of growth, thanks to accelerated industrialization. This can be explained by a structural change in the agricultural sector, as employment decreased from 42% in 1959 to 23% in 1975. With the opening to the outside world and the devaluation of the Peseta, exports improved, and technological renewal was imported, which increased productivity. However, emigration to Europe was extremely important, as employment creation in the industrial sector was initially low. Moreover, it should be mentioned that Spain had an opportunity for rapid industrialization given its initial low-income level (the catching-up effect).

Spanish Export Boom Factors (1960-1975)

Trade openness and the devaluation of the Peseta are the two main reasons explaining the boom in Spanish exports during this period. Spain switched from a protectionist economy to an open one without restrictions on imports, which resulted in technological renewal that increased productivity. Moreover, the 1970 preferential trade agreement with the EEC reduced tariffs between 25% and 60%. By 1973, liberalized trade reached 80%, while quotas had almost disappeared. In summary, trade openness, agreements with the EEC, and technological renewal explain this export boom.

Moncloa Pacts (1977): Objectives & Consequences

The Moncloa Pacts represented a set of structural reforms and economic policy measures supported by the consensus of the main political parties. They were based on an income policy that contained the increase in real wages and an active monetary policy to decrease inflation and control the money supply. Furthermore, the Moncloa Pacts had significant tax impacts, based on three pillars: personal income tax, corporate tax, and VAT. Some of the consequences included the control of inflation (decreasing from 26% to 14%), the devaluation of the Peseta which improved the external balance, fiscal reform, and the complete liberalization of the financial system (by 1992). The overall result was acceptable, though not a complete success. The upward price spiral was eliminated, and a disinflation process followed. However, the balance was not as positive for the labor market and GDP growth.

Spanish Trade Policy: 1940s vs. 1960s

During the post-war period (1940s), Spain’s trade policy was independent from the international economy, promoting self-sufficiency and aiming to reduce dependency on imported goods. There was total economic and political isolation during this time. Moreover, the autarkic model of the 1940s was followed by a protectionist foreign sector that required official authorizations for imports and strict exchange controls (IEME). High tariffs and import quotas were imposed. On the contrary, during the 1960s, Spain shifted towards trade openness, beginning with the Stabilization Plan. This involved an opening policy and liberalization of foreign economic relations. Spain’s objective was to increase exports, attract foreign investment, and integrate into the global economy. The 1960 tariff eliminated many restrictions on imports, even though it was still somewhat protectionist. Participation in European institutions such as GATT and the IMF gradually reduced tariffs.

Unit 3: Global Crises and Economic Policies

Great Depression: Beyond the 1929 Stock Market Crash

No, the statement that the Great Depression is mainly the direct consequence of the U.S. stock market crash of 1929 is incorrect. While the crash was a significant event that exacerbated the economic downturn, causing consumer purchases of durable goods and business investment to fall sharply, the severity of the Great Depression stemmed from a contractionary monetary policy and inherent economic issues within the Gold Standard system. Its restoration restricted the availability of economic policy instruments. The main reasons for its severity were:

• The adjustment mechanism for a deficit country depended on deflation (not devaluation), which caused a change in domestic prices.
• It penalized running out of gold reserves, but its accumulation was not incentivized.
• The Gold Standard explained how to deal with a shock to an individual country, but a collective shock was not considered.

It is also important to mention the banking crisis and the Smoot-Hawley Tariff of 1930, which raised already high U.S. tariffs.

Classic vs. Restored Gold Standard: Comparison

Both the Classic Gold Standard and the Restored Gold Standard were based on the use of gold as the standard value for currencies. Countries participating in both systems were committed to convertibility, meaning their currencies were convertible to gold. Moreover, both systems aimed to maintain a fixed exchange rate with participating countries. However, the Classic Gold Standard was characterized by a high degree of international cooperation, where countries coordinated their monetary policies and intervened in foreign exchange markets. This cooperation did not happen during the interwar period, as countries sought independent monetary policies. Furthermore, the interwar period was marked by economic disruptions and instability, which impacted the functioning of the system. Lastly, the Classic Gold Standard encompassed many economic powers such as England, France, and Germany, while during the interwar period, fewer countries were involved, with a greater focus on Central Europe.

Factors Driving Spain’s Growth in the 1920s

In Spain, there was high economic growth in the 1920s, with per capita income increasing by almost 5%. The Primo de Rivera dictatorship implemented policies of protectionism and intense administrative regulation. However, the most distinctive reason for this growth was the increase in public spending. Public works programs during the dictatorship were activated, leading to the construction of railways, highways, and ports. This favored industries that supplied the required goods. Furthermore, a mixed banking system with a predominance of Spanish capital was created.

Spain’s Resilience to the 1930s Depression

The crisis of the 1930s did not have a significant impact on the Spanish economy, only causing a drop in exports (40%) of raw materials and agricultural products, and a fall in investment (6% per year). Spain remained relatively isolated from the international crisis due to its weak international participation and was not part of the Gold Standard, which resulted in large gold reserves since World War I. The Great Depression affected Europe through two main channels:

• Financial: American banks began to demand repayment of granted loans, first from American citizens, many of whom could not afford it, and then from their investments in European banks. Since Spain was isolated, this hardly affected its economy.
• Foreign Sector: A tariff was approved in America, and European countries retaliated with their own tariffs. World trade declined massively. This is indeed the area where Spain was affected the most (exports).

In summary, Spain’s isolation, protectionism, and economic backwardness were the main factors that shielded the country from the full impact of the crisis.

Spain’s Economic Gains from World War I

The statement that the Spanish economy benefited extraordinarily from World War I, especially thanks to foreign trade and increased productivity in industry, is correct. Spain was neutral, so it did not suffer any losses and benefited from changes in international transactions. The demand for some manufactured goods produced by neutral countries increased. Additionally, while demand and supply of some exportable goods fell, those considered essential increased in price. This helped many sectors in Spain and created a kind of protection for the Spanish market. Moreover, the increased demand for goods stimulated industrial production in Spain. However, Spain’s industrialization during this period was modest and did not experience a significant surge.

Spread of the 1929 Crisis to European Finance

After the Federal Reserve raised interest rates and many American loans became unrecoverable, American banks began to demand the payment of granted loans. First, they demanded money from American citizens, many of whom could not afford the repayments. Subsequently, banks demanded money from their investments in Europe. This is how the crisis spread to Europe. The situation was aggravated as many of the countries were on the Gold Standard, which prevented them from resorting to money creation.

Lenin’s NEP vs. Stalin’s Economic Policies

V.I. Lenin and I. Stalin pursued two different economic policies, though they shared the same ultimate objective. Lenin developed the New Economic Policy (NEP), an economic transition from capitalism towards communism. Lenin’s government established an initial economic project that prioritized energy production and other essential investments, to the detriment of other sectors. When Stalin came to power, he eliminated the NEP and returned to total central planning. He established priority production objectives for five-year periods, coordinating all sectors of the Soviet economy through the State central planning agency. Under Stalin, capitalism effectively disappeared.

Spain’s Slow Post-1929 Economic Recovery

The Spanish economy experienced an extraordinarily low growth rate and a long period to recover its 1929 GDP levels primarily due to the Civil War and, above all, the establishment of the New Francoist State. This period was enormously traumatic for Spanish society, fracturing the dynamics of economic growth from previous decades. Throughout the first post-war decade, a situation of deep depression and misery was experienced. Stagnation and hardship perfectly describe Spain’s situation during this time. Spain needed much more time than its neighboring countries, even those directly affected by WWII, to recover pre-war product levels. The Spanish economy after the war was the slowest in Europe, and the explanation lies in the autarkic policy that ruined the country, although it enriched businessmen who supported the regime.

Unit 4: Post-War Global Economic Order

Bretton Woods Institutions & Objectives

The Bretton Woods Agreement represented a completely new way of designing the world economy for the next 25 years, organizing capitalism at the international level. The World Bank and the International Monetary Fund (IMF) emerged from this agreement. Their basic objectives were:

• To foster international integration through each government’s commitments to these institutions.
• To establish a market economy with a significant role for the state.
• To balance American leadership with Western cooperation.

This framework was an extraordinary success, not only for advanced economies, leading to high economic growth, very low unemployment rates, and price stability (1945-1972). The General Agreement on Tariffs and Trade (GATT) also emerged, aiming to promote international trade by reducing trade barriers, including tariffs and quotas, and by establishing rules and principles for trade among its member countries.

Factors of European Economic Growth (1950-1973)

Apart from North American aid (e.g., the Marshall Plan), Total Factor Productivity (TFP) growth and the development of all productive factors, except for agriculture, were of great importance for Europe’s recovery and sustained growth between 1950 and 1973. Some reasons for TFP growth include:

• The Classical Growth model, where the production function exhibits decreasing returns to capital and exogenous TFP.
• Technological change.

Moreover, a structural shift in Europe towards high-productivity sectors with moderate salaries (corporate profits) increased investment. In essence, the acceleration of TFP growth came from greater investment in both physical and human capital.

Macroeconomic Trilemma: Gold Standard & Bretton Woods

Policymakers in open economies face a macroeconomic trilemma, which states that only two out of three objectives can be achieved:

• To stabilize exchange rates.
• To enjoy free international capital mobility.
• To engage in a monetary policy oriented toward domestic goals.

Because only two can be achieved, policymakers must decide which one to forgo. The Gold Standard was a highly globalized period characterized by mostly fixed rates, free capital mobility, and limited monetary independence. The Bretton Woods system, in contrast, provided monetary autonomy with stable, fixed but adjustable exchange rates, necessitating strict limits on capital mobility.

Understanding the Catching-Up Effect

The catching-up effect refers to the phenomenon where less developed economies tend to grow at a faster rate than more advanced ones, resulting in a reduction of the economic gap between them. It essentially describes a country’s potential to grow at a higher rate compared to other countries (in terms of income per capita). A good example is Europe’s growth between 1950 and 1973, largely thanks to American aid through the Marshall Plan. American technology exports, increased investment, and employment made this convergence possible.

Gold Standard vs. Bretton Woods: Exchange Rates & Policy

I partially agree with the statement, but it contains incorrect affirmations. The Classic Gold Standard was indeed based on free capital mobility and therefore limited monetary independence. However, it was based on a fixed exchange rate. This meant that interest rates were automatically determined in the country, preventing governments from exercising discretionary monetary policy. At the same time, the Bretton Woods system did provide monetary independence, with strict limits on capital mobility, and a stable, fixed but adjustable exchange rate tied to the U.S. dollar. This allowed countries to fix their exchange rates by tying their currencies to the U.S. dollar and enabled the application of discretionary monetary policies.

Sources of Western European Economic Growth (1950-1975)

When decomposing the economic growth rate, the goal is to identify the contributions of different factors, such as capital accumulation, labor force growth, and Total Factor Productivity (TFP). If one were to look for the sources of economic growth in Western European countries between 1950 and 1975, one would expect to find significant contributions from the “catching-up effect.” Western European countries had a very high potential to develop and grow as they were behind other advanced countries (specifically the USA, which held technological leadership), yet they possessed the right institutions (private property, markets, etc.) to do so. Thanks to the import of technology and business organization from the U.S., Western Europe was able to achieve such rapid growth. Moreover, the main source of growth can be explained by the increase in Total Factor Productivity (TFP), which came from greater investment in both physical and human capital. To sum up, the reasons for this rich growth derive from the adaptation of American technologies, TFP growth, and the new international economic order.