International Trade and Finance in the 19th Century
Never in international trade had the United States depended so much less than the rest of the countries. In short, the economy in the early twentieth century was more integrated and interdependent than it ever had been or would be.
The International Gold Standard
Some experts believed that integration was largely dependent on adherence to the international gold standard; others believed it was dependent on Britain and its political and financial capital, London. Since Britain, under the gold standard, worked for most of the century, it is necessary to examine it in detail. The function of the monetary standard is to define the unit of value in a monetary system, the unit into which all other forms of currency are convertible. Medieval England used the pound, a pound weight of silver. England remained with the silver standard until the Napoleonic Wars. During the wars, the Bank of England suspended payments, that is, it refused to pay in gold or silver in exchange for its banknotes. Strictly speaking, the country had no monetary standard; it had fiat money, or forced circulation. After the war, the government decided to return to the gold standard but chose gold instead of silver, while the pound sterling continued to be used. Under the gold standard, Parliament instructed that they had three conditions:
- The Royal Mint was obliged to buy and sell unlimited quantities of gold at a fixed price.
- The Bank of England was obliged to change its monetary commitments (banknotes, deposits) into gold if asked.
- They could not impose restrictions on the importation or exportation of gold.
The amount of gold stored in the vaults of the Bank of England determined the amount of banknotes and deposits that could be extended. These determined the amount of credit that could be generated. The movement of gold caused fluctuations. When the flow of international gold was little or when the influx balanced outputs, prices tended to be stable, but significant inflows, such as occurred with the gold rush in California and Australia, could cause inflation, and sudden withdrawals of gold brought with them panic. During the first three-quarters of the nineteenth century, most other countries had silver or bimetallic standards. But because of the importance of the UK market, fluctuations affected them as well. During a short period, France attempted to create an alternative to gold with the Latin Monetary Union. The gold discoveries in California and Australia caused an increase in overall prices and a drop in the price of gold relative to silver. France then went to a de facto silver standard and persuaded Switzerland, Belgium, and Italy to join her in 1865. The aim was to maintain price stability. Each country defined its currency in terms of a fixed weight of silver: Belgium and Switzerland were already using the franc, Italy defined its new lira as equivalent to the franc, and later Spain, Serbia, and Romania joined the Union, defining their coins as equal to the franc. The discovery of new silver deposits caused the price of silver to come down, and the new Latin Union was flooded with cheap silver. The solution they took was to restrict their purchases of silver and finally barred them altogether, returning to the gold standard, except for Spain. The first nation after Britain to adopt the gold standard was Germany. The defeated France in the Franco-Prussian War and earned her compensation of 5 billion francs. With this gain, the government adopted a new monetary value, the gold mark, and restored the Reichsbank as a central bank and single issuer.
Before the Civil War, the U.S. had a bimetallic paper standard. During the war, both North and South issued paper money; the Confederate emissions lost all value, but greenbacks (dollars) from the North continued to circulate, but discounted on gold. In 1873, Congress declared that the greenbacks could be redeemed for gold at the beginning of 1879. In turn, a prolonged fall in prices led to the agitation of farmers and producers of silver against the “Crime of 1873.” The U.S. used the gold standard from 1879, although Congress did not adopt it legally until 1900. Russia, in theory, was used in the silver standard during the nineteenth century, but due to the precarious financial situation, the government had resorted to large emissions of inconvertible paper money. In the 1890s, the finance minister, Count Witte, decided to switch to gold as the Russian government borrowed huge amounts of money from France. Japan, which had received a large indemnity from China due to its victory in the war of 1895, used the proceeds to create a gold reserve in the Bank of Japan and officially adopted the gold standard.
Migration and International Investment
In the nineteenth century, there was a large increase in the international movement of population and some capital. There was international migration within Europe, but the most important movement was transoceanic. The British Isles provided the largest number of migrants, who were mostly targeted to the U.S. and British dominions. The Germans went to the U.S. and Latin America. The Italians came to the U.S. and Latin America, especially Argentina. Migrants from Austria-Hungary, Poland, and Russia went outside the U.S., especially. Some returned to their home countries, but most stayed on the other side of the ocean. Migration had beneficial effects: relieving population pressures, thereby reducing pressures on real wages, contributing labor to rich countries but poor in this, workers had higher salaries than those who had been in his homeland, and eventually, it promoted international economic integration.
The export of capital, or foreign investment, promoted even more integration of the international economy. Foreign investment:
- Sources and resources: The resources available for investment abroad were the result of increases in wealth and income generated by the application of new technologies. Foreign investment requires special sources of funds generated by trade and foreign payments. There are two main categories of funds (gold or foreign exchange) for use in international investment: those from a favorable balance of trade and those from “invisible” exports (shipping, remittances from migrants…). These sources can be combined or operate differently according to different cases.
- Reasons: Hope for the investor to get a higher profit abroad than at home.
- Mechanisms: There are a series of institutional mechanisms: the currency markets, equity and bond markets, central banks, private equity and venture capital, brokers, and many others. Most grew during the nineteenth century.
Before 1914, Britain was by far the largest foreign investor, with 43% of the total. During the first half of the century, the British public bought bonds from various European countries and invested in private companies, especially in the French railroad. They also bought Treasury bills of American states that were submerged in the large-scale construction of canals and railroads and public debt of the Latin American countries. They made similar investments in Latin America and especially in the British Empire.