International Economy and Technological Shifts: 1870-1945
Item 3: The Emergence of an International Economy (1870-1945)
1. Market, Trade, and Factors
a) The Integration of Markets
Trade in antiquity was based on traditional economies in which the movement of goods was limited due to inefficient transport. Modern economies are built to sell, and with them increases the movement of goods and factors. Trade grew faster than production in the nineteenth century: GDP increased by 2.5% and trade by 4%. Foreign trade multiplied by 25 due to the internationalization of the economy. Commercial trade leads to a greater allocation of resources, and these demand more capacity. The characteristics of international trade are very high growth in absolute terms (higher than that of population and production) and in per capita terms, uneven growth, the dominance of Europe in volume and profit, and that it is intra-European trade. This creates a greater differentiation between countries and suppliers of industrial commodities. Countries supplying primary products (delayed) increase their backwardness, and countries supplying industrial products (developed) increase their development. This results in integration. On the one hand, market integration is the key to modern market economy and also is the general price decline, while prices homogenized as goods prices equal everywhere in the world and only change due to the price of transport.
b) Evolution of Trade and Trade Policies: Business Growth and the Triumph of Free Trade
Business growth is the result of industrialization and progress in transportation, while this growth is a diffusion of free trade, a theory based on the benefits of economic freedom. This occurred in several phases:
- From 1815 to 1847 – There is moderate growth due to continuing recovery after wars (1775-1814), population growth, and the industrial revolution in transport technology. The politicians of this period are forbidden or protected.
- From 1847-1864 there is rapid growth due to demand for industrial raw materials, supply of industrial products to the construction of the railway, and transportation supply. There is a division of labor and increased availability of money (gold standard). Politicians in this phase are free traders in the UK, there is a global reduction of tariffs, and the Chinese, Japanese, and Turkish markets open.
- Between 1868 and 1896 – There is a sharp slowdown in international trade, as the most important factor is the crisis turn of the century (1873 to 1895). It is produced on arrival in Europe of cheap goods from overseas (cereals, meat, wool, etc.). There is an abundance of land, and farm machinery is introduced, leading to lower prices at the origin. Prices of transport (train, boat) are reduced to 2/3 of their value. Cold technology industries (meat) spread. European prices fall in food and industrial raw materials since they cannot compete with overseas (USA, Canada, Argentina, etc.). Family farms close, and there is a crisis in European agriculture and livestock. Also, there is a financial and banking crisis since the lower international and domestic trade affects prices of transport, which causes actions to be neglected by the railway companies on the stock exchange. Hence the crisis moves to the bench.
Solutions to this crisis at the end of the century include defending national output and industrial land (with protectionism). This movement is not very intense but overall both agricultural and industrial products are very selective in products and countries, causing bilateral treaties. Nationalism becomes a reserve market, capturing foreign markets (imperialism) and has public funding for communications, health, education, support of capitalists against workers and consumers (no strikes and monopolies). Large companies are creating subsidiaries in other countries to evade tariffs. Moreover, as a solution to the crisis is technical progress: The Second Technological Revolution, which is the best option but slower than the previous one, and is produced in advanced countries. For the diffusion of new agricultural and industrial products, countries need help behind the state and market protection.
c) International Factor Movements
The Work, Migration Overseas
Migrations occur in places where labor is abundant (Europe, Asia, Africa) to where it is scarce. The characteristics of these migrations are the unprecedented scale in history (44 million people in Europe) and the Europeanization of the world. Speaking of figures, these are very high. Officially, 43.6 million people emigrated, and clandestinely 7.9 million, which totals 51.1 million people displaced. Emigration was an accelerated process:
- Up to 1850, 100 thousand people per year divided by two-thirds in the UK, one-third in Germany, two-thirds to the U.S., and one-third to British colonies.
- From 1850 to 1880, 270,000 people per year who came from the UK, Germany, and southern Europe, and went to the USA, to the English colonies, Argentina, and Brazil.
- From 1880-1914, 900 thousand people per year of which half came from Southern Europe and 60% migrated to the USA, the British colonies, Argentina, and Brazil.
There is a predominantly European migration but with contributions from abroad, continued migration of African slaves to South America and the Spanish Antilles. A surge in Asian emigration to America of Chinese, Indians, and Japanese.
Triggers are the mechanisms of expulsion (in the absence of land, there is no work) and attraction (which is an improvement in living standards). Contributing factors include the disappearance of legal barriers, improved transport, and free overseas lands.
As a consequence, Europe has reduced pressure on land and has overseas exploitation of new lands and new investment opportunities.
International Capital Movements
Until the fourteenth century, there was little movement of international capital.
A surge in the nineteenth century due to the accumulated savings with industrialization, the need to invest profits high, the development of specialized financial institutions and markets (the gold standard and banking), and the development of transport and communications (telephone and telegraph).
There were several major investor waves: the first from 1830 to 1850 focused on the railway and mining, the second from 1859 to 1870, focuses on public services (urban, water, gas, electricity, tram), and the third from 1870 to 1913 focuses on the private sector (steel, chemicals, and plantations).
The mechanisms are, as in the movement of people, appeal and expulsion.
In terms of figures, a total of 9.55 billion pounds were mobilized, which come 42% of GB, 22% in France, and the rest of the United States and Germany. Their destination was Europe 51%, the rest was divided between Latin America, Asia, Africa, and Oceania.
The consequences are big business, and businesses failed or irregular payments in exporting countries, creating FC lines, mines, and industrial enterprises in recipient countries. The international economy is the engine of development for some countries, for others, uneven growth increases the tax burden and external dependence.
2. A New Payment System: The Gold Standard
a) Introduction: The Means of Payment
The growth of international trade required an increase in the means of payment. The means of payment (money supply) grew in the nineteenth century due to the mobilization of savings through the banking, the discovery of new deposits of gold and silver in California and Alaska, the diffusion of bank money hitherto underutilized such as tickets and sight deposits (current accounts), further dissemination of the bill of exchange for international payments, and the creation of the gold standard as an objective reference.
b) Currency and Monetary Standards
Up to this point, currency (money) was called any universally accepted means of payment, such as salt, shells, pieces of gold, gold or silver coins, bills, etc.
The functions of money were three: 1. Unit value: assign value to products. 2. Pay Unit: Allows you to pay the value. 3. Savings: to put in the bank.
The characteristics of the currency relative to the acceptability were permanence, portability, divisibility, and the difficulty of counterfeiting.
The forms of currency were diverse: theoretical account or accounts or contracts, in cash (the physical money) that could be real so that it would be the value it represents (weight in gold, silver, or copper), or as trustee would have an excess of material, would be for paper or plastic.
The monetary system is how to organize the coin. The conditions for a monetary system are having a metallic standard, i.e., a certain amount of precious metal, freedom of movement and trade of precious metal, and full convertibility for the precious metal (coins, banknotes, and bullion).
There are two types of metal patterns: monometallic: gold standard or silver in an exclusive manner which is easiest to combine or bimetallic gold and silver, are more versatile, encourage speculation, and end up abandoned.
The formation of the gold standard relies on the liberal theory of international trade of Adam Smith or D. Ricardo. It requires that in addition to the free movement of goods and factors has some internationally accepted means of payment and various agencies to expedite transactions such as foreign exchange markets and compensation mechanisms to avoid the actual movement of metal such as letters and checks.
The first country to implement it is the United Kingdom after the Napoleonic Wars.
The key to applying the gold standard are that it is based on gold, not silver or both, that any bank bill is exchanged for its gold value, gold should move freely on a global scale. If a country buys more than sold, demonetized, but survives, produces deflation (falling prices) and the goods are valued on the outside thus recover the lost coin.
The rest of the countries adopted the gold standard but quickly thereafter. The factors behind this are the changes in technology extraction of silver by electrolysis, the discovery of large reefs in Nevada occurs as the devaluation of silver, and the weight of the British economy in international trade.
The first European nation to change to gold was Germany for the recovery of compensation for the Franco-Prussian War, with five billion francs silver acquired £50 million gold, so it creates a new currency based on gold.
By 1890 bimetallism is dead in Europe due to the win of the gold standard.
c) The Increasing Need for Means of Payment
Despite the increase of coins, the largest exchanges required other means of payment such as bank notes and deposits view, since it was not comfortable doing business with large sums of money in coins.
The bank note is a certificate by which a bank undertakes to repay the bearer deposit in precious metal. Diffuses into the nineteenth-century the monopoly of central banks.
The sight deposit money equivalent to what is immediate liquidity.
d) Building a Global Payment System
The growth in international trade required a global payment system.
Surge and payment for compensation and you do not need the physical transfer of money. The advantages of this is that there is no risk and saving on transport costs and increasing the money supply.
With this, the money would be made up of: first, the currency of each country in international exchange rates (for domestic trade) and on the other hand, the bill of exchange for compensation between countries is the banking discount.
3. The Second Technological Revolution
a) High Growth in Output and Income
By 1873 sold out the growth cycle of the British Industrial Revolution by both the agricultural and industrial crisis and financial.
At the same time, opened a new cycle, made possible by the second technological revolution. This was a cycle of strong and sustained growth, which varies, depending on periods and also by country: there are advantages to adopt innovations such as new sectors, economies of scale, and technical schools, as there are advantages for some regions within each country due to its own raw materials, energy, transport, and communications.
b) The Second Great Technological Revolution
Technical Innovations
The definition is a set of diffusion of innovations between 1870 and 1970 that would lead to unprecedented growth of the GDP and income higher than the industrial revolution. This diffusion is greater after the First World War.
The origins of the technological revolution are the exhaustion of the possibilities of innovation in traditional sectors like textiles and steel which are becoming less profitable, so they risk some companies to experiment with new materials and processes. Play a major role scientific knowledge rather than individual inventors without equipment and laboratories.
The features are the integration of new processes to obtain cheaper materials known as iron in order to better uses. It also integrates new artificial materials that replace natural are scarce and expensive. New forms of energy and energy transformers: the engines that get better use of energy. Large firms also appear corporations calls new forms of management and control.
Create new systems of organizing production and labor.
The great innovations in technology are:
- The improvement of the old materials as steel: steel is changed Bessemer steel was the traditional Gilchrist-Thomas (modern).This produces a final lower prices and wider dissemination throughout the world. Allows alloys with other metals such as chromium, vanadium or tungsten, which gives a steel with lower hardness and wear ability. It makes possible the manufacture of machine tools such as lathes, milling and drilling machines, thus achieving higher accuracy. At the same time are achieved by standardizing products of higher quality, durability and economy. Examples of this are the arms, watches, agricultural machines, sewing machines and write and the bike.
- The discovery of new materials such as aluminum. Aluminium is a precious metal to the dissemination of electrolysis, from that moment, the price falls. The advantages of aluminum compared to steel is that it is ductile, lightweight, and highly resistant to corrosion. One of its applications are the engines of aircraft. Other materials with new applications are: first caustic soda for the manufacture of paper pulp, cement, chemical fertilizers, rubber, aspirin, coloring, chemicals and products such as explosives, paint and celluloid. From here comes the origin of large companies such as Bayer, Hoechst, BASF, Agfa, or Ciba Geige.
- The utilization of new sources and forms of energy. On the one hand the oil and related industries, which have advantages over coal and converters that are small in scale, more secure, clean and have variation in power also reveals that subsequent explosions of fuel in a piston that moves a piston transmits movement to a shaft, this engine is invented by NA Otto in 1876 and is retrofitted to oil (mobile) and created for gas (fixed). The first gasoline engines were created by Daimler and Benz in 1885. Car such as new inventions resulting differential, bearings and tires. It is also adaptable for carrying passengers on the bus, goods in the truck or tractor agriculture, the sea in ships, the air with the aircraft, sporting, military and commercial.
On the other hand, electricity and the electricity industry: Its first applications are for communications in the telegraph, telephone, radio telegraphy, radio and television, as they have low consumption. The following applications are in lighting, electric motors and electrochemistry with higher consumption. There are different ways to obtain electricity: water flows (rivers, hydro) but has problems for transport because it requires high voltage lines; Thermal with coal but its production has high prices, and nuclear, with the merger of the atom, which has low prices but high environmental cost. The advantages compared to coal are flexibility because it produces light, heat or loud and has a cheap transport, the transfer because they can connect multiple computers to network and divisibility by reducing or increasing the intensity at the time and cleaning, security, versatility … As to applications and leads voltaic ring is in the cinema, outdoor lamp by Edison in 1879, the electric motor for the tram discovered by Siemens in 1879 and for the metro rail and appliances. It gave rise to large companies such as Philips, Siemens, AEG, General Electric, Westinghouse …
Changes in the organization of work: Taylorism
The Taylor is a system designed by FW Taylor based on the scientific organization of work is to divide the production and a minor product in the assigned time. It is implemented by Henry Ford in the automobile manufacturing chain. The advantages is that it eliminates the tiempor dead, improves productivity at work, employing unskilled workers and reduces costs, but the disadvantages are large, fatigue, reduced working hours and wage increases.
All this leads to standardization of product.
Changes in Business Organization
The increase in international trade and transport led to larger markets because they require mass production to larger enterprises and corporations as the holdings, the trust or zaibatsus.
Large companies can not function as small as organizational changes occur. The characteristics of these changes are the production and mass distribution, economies of scale, the vertical and horizontal integration. The problem is that restricts competition with cartels and consortia.
4. Imbalances Between the Wars
a) The First World War and Postwar Problems
The War and Nature
The First World War is a break between nineteenth and twentieth centuries. Europe no longer the political and economic relation in the world to become this regard the United States. This marks the end of the international payment system (gold standard) and the end of freedom of movement of labor and capital and goods by a resurgence of protectionism. Increased state intervention in economics.
Origins of the Armed Confrontation
The increase in military potential of countries armed peace leads to improvement in weaponry such as machine guns and also improvements occur in the steel. There are improvements in transportation and communications (cars and telephones). There is a previous period of military hostilities (war pre-war) in the colonies, Germany, Morocco, Middle East and the Pacific and in some European countries like Austria Turkey and Russia in the Balkans, for the decline of the Turkish Empire. The consequences of these wars are the formation of alliances: the Central Powers and the Triple Entente.
The spark was the murder of the heir to the Austro-Hungarian throne in Sarajevo in that Austria declares war on Serbia and produces a total involvement.
Characteristics of War: A Different War
New weapons, more powerful and destructive as are tanks, airplanes, submarines and gases and the high cost in the UK from 4 to 38% in the intervention GDP expenditure the state in the economy, but not in the market as a regulator, causing an increase in the production of weapons, transport and supplies as well as production planning prices, and business cartels. Another important feature is the improvement in the production of products such as cars, planes and submarines as well as productivity due to the introduction of the assembly line in Europe due to the militarization and women’s work, that produces social change: the revolution in Russia and that due to state capitalism to market produce and the Revolution in Germany, Austria and Hungary due to the internal enemy and at the end of the war.
Consequences of the Conflict
Falls workforce due to the mobilization of 5 million soldiers who leave work to go to war. 8 million soldiers died just as well as the disabled because of bombings or other attacks as well as all the unborn as the majority of men in childbearing age was in the war, this leads to a dramatic population decline workforce, which has great impact on the economy. Also there are 2 million civilians dead. The conflict mainly affects Balearic and Russia as well as France and Germany.
The Debt Among the Contenders
This is made up of loans between the contenders, the United States is the major creditor, money paid to its allies: The United Kingdom and France to be repaid. When Germany lost the war becomes a net debtor, which would have to pay to France and Britain and these United States, but Germany was almost impossible.
The Treaty of Versailles
The Paris meeting is therefore is called the Treaty of Versailles or the Paris peace and meet all the countries participating in the war, to demand reparations from the vanquished, that is, to pay costs of war. France demands that Germany pay the direct costs (just the cost of weapons, equipment …) and indirect, ie everything that France produced by the war. However, the United States imposes its thesis that Germany only pay the direct costs. Since Germany was not in a position to pay, in practice the repairs accounted Germany kick off early payment. They took the coal, gold reserves, military, marine and rail which represented a 20% of German income. This led to disagreements with the payment of money by what occurred treaties and subsequent plans. With all this, pay the costs of the war for Germany is a major effort. To get credit needed to ask the United States to launch and recover its economy, pay for repairs. For all the looting and the joke begins to Germany, Nazism was born.
The Money Problems
After the war monetary problems emerge two: The war had a very high cost is not known exactly because politicians destroyed the bills. Roughly, according to Bogart, were $338 million that are being about 508 tons gold. The indirect estimate is that it took from 8-9 years to recover the pre-war income.
The Decline of European Protectionism in the Global Economy
Europe’s role falls into the world economy. In terms of figures, in productive activity falls 43% in 1913 to 34% in 1923, world trade from 59% to 50%. The war has benefited the United States, Canada, Argentina, Ham and neutral countries like Spain. Increasing social unrest: The demobilization of soldiers (65 million between workers and peasants), and can not find work easily, compared to profits of the companies participating in the war and the encouragement of social revolution in Russia and in Germany and Austria.
The Problems of Financing and Debt
Financing the war: SE thinking short war in which the loser would pay the bill, is financed by taxes (a very small part), with debt (domestic and foreign debt + money inflation) and greater exploitation of colonies. The fundamental problems were the money inflation, inflation and the breakdown of the gold standard.
Return to the Gold Standard
Is back to the prewar situation: the gold standard with convertibility. But gold lost belligerents in the war on the purchase of equipment and to supply it generate more notes in circulation, which carries a high price and inflation. This would amount to a fluctuating exchange between currencies (not gold standard) with serious consequences: hyperinflation in Germany, falling value of money, is solved with new modena: rentemark reickmark then amounting to one million marks. In the UK the pound is revalued, and social conflicts occur as the loss of savings and unemployment. In France, the devaluation of the franc and major social conflicts.
The fragility of the monetary order means that countries try to maintain the gold standard but there were no grounds upon which it rests as the world banker was no longer the United Kingdom if not the United States and the United States did not play intermediation role of global trade as it was autonomous.
Meant severe restrictions on global trade and rising protectionism.
What was formally abandoned the gold standard.
b) Reclamation and New Imbalances
In the 20s the situation returns to growth, but growth is unbalanced due to the mismatch between global supply and demand of food, falling prices and the imbalance with respect to secondary products, there are growing imbalances in income growth that cause the rich are becoming richer and the backward countries are increasingly overdue.
Growth factors are a part of technological change due to the diffusion of the second technological revolution, especially in electricity and in the car and innovations during the First World War, on the other hand the improvements in agriculture since war food demand stimulated investment in technology such as threshers, mowers and tractors that as u turn caused a drop in agricultural prices.
c) The Russian Revolution
Was caused by social problems generated by the First World War leading to the end of the tsarist regime. It involves the emergence in Russia of a new economic system than the capitalist who had the characteristics of central planning in the state supplants the market.
d) The Crisis of the 30s
The crisis is a problem born in the United States. During the 20s the situation was normalized in the United States, these were the world leader who was replacing the United Kingdom. However, in September 1929 bankruptcy of New York stock market, GDP fell by 40%, 90% investment and unemployment reached 25%.
The factors of why this occurred in such a short time are on one side the problems of American agriculture related to wheat and cotton crop for small farms existed in central and southern over-emphasized during the First World War But after that, falling domestic consumption of wheat as it is replaced by other foods, falls outside the European recovery. On the other hand, is the industrial production, wages and benefits: With the technology increases the production and productivity but this improvement does not translate to wages, these up soon, or the final price down slightly. The result is increased business margins and the change in income distribution. Thus, supply grows faster than demand, causing imbalances and leads to the crisis.
Outbreak of real estate and stock bubble. The bag and construction absorbed the greatest benefit and corporate speculation and getting bank credit uptake of small savings, this led to the stock market crash, banking and construction.
Where the Great Depression spread to Europe and the rest of the world was cutting U.S. credits to Germany, the latter can not finance their economy so bankrupt chains and companies can not afford to Britain and France expenses of the war. This crisis then moved to France and Britain which is the collapse of international trade.
The start of the crisis came from the hand of the Second World War and the new rules. Countries chose different strategies: In the U.S. the New Deal Keynesian theories applied in the Scandinavian countries and Germany Keynesianism and Italian fascism as state capitalism. The overall output was the Second World War and the creation of the International Monetary Fund and the General Agreement of Tariffs and Trade (GATT then WTO) and World Bank (IBRD).