answer question 1 page due 6-7 hours

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the landowners, but so long as the workers are free to move, competition among the employers will drive the wage up to the value of the marginal product of labor, and since the latter is still fairly close to the value of the average product (because of the abundance of land) little surplus will remain. The Russian situation prior to the peasants5 enserfment corresponds to this case.

The next and final step to be taken by the government still pursuing its objective is the abolition of the peasants1 right to move. With labor tied to land or to the owner, competition among employers ceases. Now the employer can derive a rent, not from his land, but from his peasants by appropriating all or most of their income above some subsistence level.3 That Russian serfs could stay alive, and even to multiply, while working for themselves half-time and less suggests that the productivity of their labor (with poor technique, little capital, but abundant land) must have been quite high.

To recapitulate, the strong version of this hypothesis (without capital, management, etc.) asserts that of the three elements of an agricultural structure relevant here—free land, free peasants, and non-working landowners—any two elements but never all three can exist simultaneously. The combination to be found in reality will depend on the behavior of political factors_governmental measures_treated here as an exogenous variable.

The presence of this exogenous political variable seriously weakens the effectiveness of my model： it makes the presence of free land by itself neither a necessary nor a sufficient condition for the existence of serfdom. It is not a necessary condition because so long as marginal productivity of labor is high, serfdom may continue to exist even if free land is no longer present ； it may even be imposed at this stage, as it was in the Russian Ukraine in the eighteenth century. Free land is not a sufficient condition because, as I stated above, without proper governmental action free land will give rise to free farmers rather than to serfs.

For the same reasons the model cannot predict the net effect of a change in the land/labor ratio on the position of the peasants. Suppose that with constant land, technology, and per capita stock of capital, population increases. The economic position of the peasants will worsen (even serfs can be exploited more), but the landowners will be less inclined to interfere with

The Causes of Slavery or Serfdom I 101 the peasants' freedom. Let population decline instead. The peasants will be better off provided they do not become less free. Thus a change in the land/labor ratio can set in motion economic and political forces acting in opposite directions.

The strength and usefulness of the model could be increased by making the political variable endogenous. But this I cannot do without help from historians and political scientists.

These difficulties notwithstanding, I would still expect to find a positive statistical correlation between free land and serfdom (or slavery). Such a correlation was indeed found by H. J. Nieboer of whom youll hear more in Part III.

What about the end of serfdom (or slavery)? Traditionally it was assumed that it would or did disappear because of the inherent superiority of free labor. This superiority, arising from the higher motivation of the free man, was supposed to increase with greater use of capital and with technological progress. Let us disregard the possibly greater reliability of the slave and the longer hours he may be forced to work (particularly in traditional societies where leisure is highly valued),

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and let us assume that the economy has reached the position where the net average productivity of the free worker (P) is considerably larger than that of a slave (P8). The abolition of slavery is clearly in the national interest (unless the immediate military considerations, such as of the Muscovite government, overwhelm the economic ones), but not necessarily in the interest of an individual slave owner motivated by his profit and not by patriotic sentiment. He will calculate the difference berween the wage of a free worker (W) and the cost of subsistence of a slave ( W g ) and will refuse to free his slaves unless P^.—P g > all this on the assumption that either kind of labor can be used in a given field.4

As the economy continues to develop, the difference —P g can be expected to widen. Unfortunately, the same forces_technological progress and capital accumulation_responsible for this effect are apt to increase W^. as well, while W g need not change. We cannot tell on a priori grounds whether —P g will increase more or less than —W g . Therefore we cannot be sure that technological progress and greater use of capital necessarily reduce the profitability of slave as compared with free labor. Much will depend on the nature of technological progress. Thus Eli Wliimey’s gin greatly increased the profitability of slavery, while a transition from raising crops to breeding sheep in medieval England might have acted in the opposite direction by creating a surplus of workers. (See Part II.) American planters must have used better agricultural techniques and more capital than their Latin-American and particularly Russian colleagues, but the Americans defended slavery with much greater zeal.

In a traditional society without technological progress and capital accumulation, the end of slavery is, paradoxically, more certain. As population continues to increase and the society eventually becomes Malthusian, the marginal product of labor descends to the subsistence 102 I World Economic Development

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level. Now the free man costs little more to employ than the slave, while, hopefully, being less bothersome and more productive. The ownership of human beings becomes poindess because of the great multiplication of slaves, and they become free provided they stay poor.5 It is land that becomes valuable, and rents collected from estates worked by free laborers or tenants without any noneconomic compulsion are sufficient to support an army of servitors or idlers. If the Muscovite government could have only waited a few hundred years!

Where I come from, an economic model without empirical testing is equated with a detective story without an end. My attempts to test the present model, however, merely caught me that the job is not for the amateur. I shall report to you the results of my skin deep investigation in the hope that my mistakes will stimulate the specialists. I concentrate on the Russian case, with short excursions into the histories of Poland-Lithuania, Western Europe and the United States.

1. Russia. The phenomenon to be explained here is not only the development of serfdom but its particular timing： before 1550 Russian peasants were free men； a hundred years later they were serfs. The relevant variables are:

(1) the number of servitors required by the military needs of the Moscow state, and (2) the population density.

According to Kliuchevsky, prior to the middle of the fifteenth century, Moscow, still a Tatar vassal surrounded by other Russian lands, fought very few foreign wars； its population became dense because Moscow was the safest spot in the area with few outlets for emigration.6 We may conclude that there was no need as yet for a large class of servitors, and that the landowners could derive rents from their estates (patrimonies, to be exact) without enserfing the peasants. It is true that Russia, from the Kievan times onward, always had a substantial number of slaves. At the time, these were mostly household servants and retainers rather than peasants.7

From the middle of the fifteenth century the situation changes drastically. Having become independent from the Tatars (officially in 1480, actually earlier), and having gathered a number of Russian lands, Moscow was confronted with powerful enemies: with Poland-Lithuania and Sweden in the west and northwest, and with the Crimean Tatars in the south. The struggle with the latter went on continuously, while 5〇 out of the 103 years from 1492 to 1595 were spent in wars against Poland-Lithuania and Sweden, as were the following 30 out of 70 years from 1613 to 1682, not to mention the Time of Troubles, 1598-1613, filled with both civil and foreign wars.8

The military proficiency of the Muscovite armies being poor, refuge was sought in large numbers. More than 300,000 men were reported to have been under arms during Ivan the

The Causes of Slavery or Serfdom I 103 Terrible s Livonian War. There must have been a great increase in the number of servitors. With trade and industry making no significant progress, the government liad to assign land to them. This process began on a large scale in the second half of the fifteenth century and was accelerated throughout the sixteenth century.9

In the meantime, the central areas of the country became depopulated. The conquest of the whole expanse of the Volga river (begun in 1552) opened up large areas of better soil and attracted

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large masses of peasants fleeing from high taxes, Ivan the Terrible s oppression (the famous oprichnina) and Crimean invasions. And then came the Time of Troubles which devastated the country once more. Already in the sixteenth century there was fierce competition for peasant hands among the landowners. It must have intensified after 1613.10

Thus both ingredients for the development of serfdom—a high land/labor ratio and the government s determination to create a large class of servitors—were present. In addition, there were several other forces working in the same direction. The first was the decline in the power of the great magnates, both at the hands of Ivan the Terrible and during the Time of Troubles. By offering the peasants privileges and protection, these magnates had been quite successful in bidding the peasants away from the servitors； for this reason the magnates favored the free movement of peasants, while the servitors, quite naturally, opposed it. Now the peasants lost the support of their <tfriends.，>11 The second reason lay in the fiscal interest of the state： peasant migrations, particularly from the center to the periphery of the state, disorganized tax collections.12 And finally, the peasant communities objected to the emigration of their members because the community carried a collective responsibility for the tax liabilities of its members (until in later years this responsibility was taken over by the masters)； the departure of several members would leave the rest overburdened until the next census.13

Space does not allow me to give additional details of the process which gradually enserfed the peasants, or to discuss the disagreement between Kliuchevsky, who emphasized the hopeless indebtedness of the peasants to their landlords as the main obstacle to their movement, and Grekov and Blum who put greater stress on legislative enactments (particularly on the so-called ^Forbidden Years," zapovednyegody).u Let me mention instead two further reflections of the scarcity of labor in Russia： the first manifested itself in the replacement of the basic land tax by a household tax in the seventeenth century, and by a poll tax under Peter the Great.15 The second is an interesting cultural trait which remained long after its cause had probably disappeared： as late as in the first half of the nineteenth century, the social position of a Russian landowner, as described in contemporary literature, depended less on the size of his land holdings (which are seldom mentioned) than on the number oisouls (registered male peasants) that he owned.16 104 I World Economic Development

2. Poland-Lithuania. On the theory that the length of a report should be proportional to the intensity of research done, this section will be very short. The relevant facts are as follows：

(1) In the fourteenth century vast open and very sparsely populated territories in the Ukraine were conquered by the Lithuanians.17

(2) In the fifteenth and sixteenth centuries, Ukraine was repopulated by immigrants from the more central areas of the state. The migration depopulated the central areas to such an extent as to constitute, according to Grekov, a threat to the Polish state.18

(3) By the end of die sixteenth century，the peasants were enserfed.19 What is not clear to me is the time sequence of events (2) and (3). In Vol. Ill (p. 110),

Kliuchevsky dates the repopulation of the Ukraine in the sixteenth century； in Vol. I (p. 293), in the fifteenth century. But in both places he attributes the migration of peasants to the intensification of serfdom in Poland-Lithuania. Polish serfdom, according to him, had been established already in the fourteenth century, and Lithuanian, in the fifteenth century.20 On the other hand, Grekov asserts that according to the Polish constitution of 1493, each peasant could still leave the land, having seeded accounts with his landlord. But he also reports that in 1444 the

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Galician gentry demanded that the government prevent other landlords from interfering with the peasant movements.21 Evidently, such interference was taking place even then.

In Poland-Lithuania great gaps between legal enactments and the actual state of affairs were quite possible. There were probably considerable regional variations, both in law and in practice as well. I would be happier if it could be established that migration to the Ukraine preceded the development of serfdom, but I am certainly not in a position to settle the matter. It is quite possible that migration and serfdom were reinforcing each other.

Since I have not studied the development of serfdom in other East European countries, I can make only two brief comments on Blums well-known and very interesting article on KThe Rise of Serfdom in Eastern Europe^ His stress on the increasing power of the nobility and on the general depopulation of the area afrom the Elbe all the way across to the Volga .. " is heartily welcome.22 But his use of alternating periods of prosperity and depression as important causes of the rise and decline of serfdom cannot be evaluated until he presents an analytical explanation of the causation involved.

3. Western Europe. We shall deal here very briefly with four events： (1) The emergence of serfdom in the late Roman Empire (2) The decline of serfdom by 1300 (3) Its non-recurrence after the Black Death (4) The relationship between sheep breeding and serfdom.

The Causes of Slavery or Serfdom I 105

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The depopulation of the late Roman Empire is, of course, well known. Referring to Byzantium, Georg Ostrogorsky states： ttAnd so ever-increasing masses of the rural population were tied to the soil. This is a particular instance of the widespread compulsory fastening of the population to their occupation which scarcity of labour forced the later Roman Empire to pursue systematically.”23

This is the clearest statement on the relation between scarcity of labor and the development of serfdom that I have come across in my reading of European economic history.

Similarly, the great increase in population in Western Europe by the end of the thirteenth century when serfdom was declining is also well known. Thus Ganshof and Verhulst talk about “…a considerable and growing reserve of surplus labor in France, and Postan discusses signs of overpopulation in England： a growing number of wholly landless men, sub-holdings of many tenants, shortage of pasture, etc.24 The same information for Western Europe in general is supplied by Smith, who adds that： aThe problem therefore for western landowners, at any rate before the demographic collapse of the mid-fourteenth century，was not to keep tenants， but how to get the most out of them.25 Since these facts fit my hypothesis so nicely, let me stop here while I am still winning.

But when we come to the depopulation caused by the Black Death after 1348 (though, according to Postan, English population stopped growing even earlier),26 my hypothesis is of litde value in explaining the subsequent course of events. (See Part I.) Why did serfdom fail to come back after such a sharp increase in the land/ labor ratio?

I address myself only to England. Except for one rather queer economic explanation to be discussed presently, I have none to offer and have to fall back on political factors. Serfdom could not be restored unless the landowners were reasonably united in their pressure on the government, and unless the latter was willing and able to do their bidding. But it is most unlikely that every estate lost the same fraction of its peasants. Hence, those landowners who had suffered most would welcome the freedom of peasant movement, at least for a while, while those who had suffered least would oppose it. If so, the landowners could not be united. Postan also suggests the probability that the main pressure behind Richard Us legislation came not from feudal landowners, but from smaller men;27 English magnates, like their Russian colleagues (see above), could evidendy take care of their own interests. Though I cannot judge the ^spirit" of medieval legislation, it seems to me that the measures undertaken by Richards government were somewhat halfhearted.28 In any case, they were ineffective. So economic forces could reas- sert themselves and help the peasants.

The queer economic explanation which I have just mentioned would delight an economist if only it squared with facts. It is the expansion of sheep breeding, an activity which is land-using

106 I World Economic Development and labor saving.29 Unfortunately such data as I could find do not support the contention that there was an expansion of sheep breeding in the hundred years following the Black Death. The legal exports of English wool, in raw and in cloth, fell from 12 million pounds in 1350 to 8.7 million in 1400-a drop of 27 percent. Another fall of 12 percent (of the 8.7 million) took place by 145〇.30 My authorities do not state the proportions of wool consumed at home and smuggled out

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of the country.31 Perhaps these were affected by the Hundred Years' War. But as things stand, I certainly cannot claim that an expansion of English sheep breeding took place after 1350 and that it helped to save the peasants from the return of serfdom.32

Judging by Thomas More s famous passage about sheep devouring men, by Bishop Latimer s “Sermon of the Plough”（1549)，and by other more direct evidence, there must have been considerable expansion of sheep breeding at the expense of crops and of people in the sixteenth century.33 By that time, however, English peasants hardly needed the help from the sheep in staying free.

But is it possible that the early expansion of sheep breeding which must have taken place sometime prior to 1350 had helped the English serfs to gain their original freedom after all?

4. The United States. The American South fits my hypothesis with such embarrassing simplicity as to question the need for it. The presence of vast expanses of empty fertile land in a warm climate, land capable of producing valuable products if only labor could be found seems to me quite sufficient to explain the importation of slaves. What is not clear to me is the failure of the North to use them in large numbers. Besides social and political objections, there must have been economic reasons why Negro slaves had a comparative advantage in the South as contrasted with the North. Perhaps it had something to do with the superior adaptability of the Negro to a hot climate, and/ or with his usefulness in the South almost throughout the year rather than for the few months in the North.34 I have a hard time believing that slaves could not be used in the mixed farming of the North； much food was produced on southern farms as well, most of the slave owners had very few slaves, and many slaves were skilled in crafts.35 A study of the possible profitability of slavery in the North, along Conrad and Meyer s lines, which could show whether the North could have afforded paying the market price for slaves, would be most welcome.

I have not come across any good evidence that slavery was dying out in the United States on the eve of the Civil War, and I side here with Conrad and Meyer, though, in truth, I am not sure that such a thorough investigation was required to prove the profitability of slavery in the South.36

The Causes of Slavery or Serfdom I 107 Ill

In conclusion, let me say a few words about the origin of my hypothesis and about its place in economic history. Although I had discussed it in my classes for a good dozen years, I did not write it up until 1966 because I had been told on good authority that the idea was old and well known. My source was indeed correct because a brief search in the library revealed quite a few predecessors. The most important of them was the Dutch scholar Herman J. Nieboer whose magnum opus of 465 pages under the title of Slavery as an Industrial System: Ethnological was published in 19〇〇.37 The hypothesis which I have immodestly called “mine” was stated by him time and again, and tested against a mass of anthropological and historical data. As you might expect, he was satisfied with his results.

But the hypothesis was not really original with Nieboer. He in turn referred to A. Lorias Les Bases Economiques de la Constitution Sociale oi and to E. G. Wakefields^ View of the Art of Colonization published in 1834. Some glimpses can be found even in Adam Smiths The Wealth of Nations•货

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I have two disagreements with Nieboer. First, his definition of free land has too much legal and not enough economic content to my taste, though he seems to have been unclear rather than wrong. Second, he exaggerated the importance of the hypothesis by claiming, though not in so many words, that free land or other free resources are both necessary and sufficient for the existence of slavery or serfdom： a . . . Only among people with open resources can slavery and serfdom exist, whereas free labourers dependent on wages are only found among people with close resources .，，39 He protected himself with a note on the same page by excluding simple societies of hunters, fishers, and hunting agriculturists, hardly a fit company for the farmers of the American North. He disregarded the possibility that serfdom, once established, could exist for a long time after its initial cause—free land—had disappeared, or that serfdom may be even introduced in the absence of free land. He ignored the role of government. These, however, are minor defects in an important major contribution.

On the other hand, my source may have been a bit wrong. If historians have always known about the relation between the land/ labor ratio and seddom (or slavery), they must have tried hard not to scatter too many good, clear statements in places where I could find them, though the students of the American South have been much kinder to me than others.40 Nieboer could also lodge some complaints. His name can be found neither in the bibliography nor in the index of the 1966 edition of the first volume of The Cambridge Economic History of Europe. And it is absent from Blums classic study of Russian seddom. I did find Nieboer s name in Genoveses The Political Economy of Slavery in connection with some insignificant point, but 108 I World Economic Development

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with a further notation that ^Phillips read and referred to this book." Phillips had read it, and confirmed that “hired labor was not to be had so long as land was free.”41

Perhaps in history this hypothesis occupies a place similar to that enjoyed by economic growth in economic theory not long ago. That place was once described as Kalways seen around but seldom invited in^ If so, why not invite it? After all, the land/labor ratio is readily quantifiable.

EVSEY D. DOMAR, Massachusetts Institute of Technology

NOTES __________________________________________________

1. V. Kliuchevsky, ATWM r 仍 4 仍• "/orzV (Moscow: Gosudarstvennoe sotsial’no-ekonomicheskoe izdatel’stvo, 1937). The original work was published in 1906. All my references apply to the 1937 edition. An English

translation by C.J. Hogarth, •在，was published in New York by Russell and Russell in I960.

For specific references, see Part II.

2. I mean by the “government” any organization capable of maintaining some measure of law and order and particularly of using non-economic compulsion. It can be a king, an assembly of landowners, a magnate, etc.

3. He may be restrained by custom and by the fear that his serfs can run away_a common occurence in Russia. 4. Actually, it is not easy to compare the relative profitability of free and slave labor. Since the free worker is paid

more or less concurrendy with his work, while a slave must be either reared or purchased, and may have

children, etc., the streams of receipts and expenditures from the two kinds of labor must be properly

discounted. It is assumed in the text that all indirect costs of using slaves, such as medical expense, extra

supervision, etc., are included in Wg. In a well-organized slave market, the price of a slave will approximate the present value of his discounted net

lifetime marginal product. A buyer who pays this price will discover that he will earn not much more than the

going rate of interest; he will complain about the high cost of slaves and express doubt regarding the

profitability of slavery in general, because at the margin he will be fairly indifferent between employing free or

slave labor. But so long as the supply of food and of similar items for the maintenance of slaves is elastic (which

it is likely to be), the slave-breeder should do very well. He benefits from the chronic perpetual disequilibrium

in the slave market created by the abundance of land and by the limited human capacity to procreate (assuming

no importation of slaves). But if the slave-breeder computes his rate of return on the current value of his slaves

and land, he may not record much more than the market rate of interest either. In other words, the market

mechanism transforms the profit from slaves into capital gains.

On this see Lewis Cecil Grsiy，History of Agriculture in the Southern United States to i860, published in 1933 and reproduced in part in Harold D. Woodman, Slavery and the Southern Economy: Sources and Readings (New York: Harcourt, Brace &c World,—Inc., 1966), pp. 106-09, and Alfred H. Conrad and John

The Causes of Slavery or Serfdom I 109 R. Meyer, The Economics of Slavery and Other Studies in Econometric History (Chicago: Aldine Publishing Company,

1964), pp. 43-92.

5. It is possible that even in a Malthusian society slavery (or serfdom) may linger on. Slaves may be kept for reasons of social prestige (a relic from the times when slavery was profitable ), or simply be cause a slave is more reliable

than a hired man. On the other hand, the use of a tenant (with a limited lease) or of a hired man allows the

landowner to choose the best among several applicants with much greater ease than among slaves or serfs

protected by custom.

6. Kliuchevskv, Vol. I, p. 379; Vol. Ill, pp. 9-10, 121. Blum, however, talks about depopulation already in the fourteenth and fifteenth centuries. See Jerome Blum, Lord and Peasant in Russia from the Ninth to the Nineteenth Century

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(Princeton: Princeton University Press, 1961), pp. 60-61. It is possible that Kliuchevsky describes the relative

position of Moscow among other Russian lands, while Blum refers to the whole country.

7. Kliuchevsky, Vol I, pp. 282-83; Vol. II, pp. 182-83. 8. Ibid., Vol. II, pp. 121,125,221-22； Vol. Ill, p. 135. 9. Ibid., Vol. II, pp. 221,229-42,248； Vol. Ill, pp. 63-64,230-31,257,283. Blum, pp. 93,157.

10. Kliuchevsky, Vol. II, pp. 254-57, 339-44； Vol. Ill, pp. 182, 244. Blum, pp. 147, 152-54, 157, 160, 252. B. D. Grekov, Krest'iane na Rusi s drevnelshikh vremen do XVII veka (Moscow-Leningrad: Izdatelstvo Akademii Nauk SSSR,

1946), pp. 794-96, 849.

11. Kliuchevsky, Vol. II, pp. 259, 307. Blum, pp. 253-54. Grekov, pp. 870-71, 9〇3, 9〇9. Grekov, Glavnelshie etapy v istorli krepostnogoprava v Rossii (MoscowLeningrad: Gosudarstvennoe sotsialno-ekonomicheskoe izdatelstvo, 1940),

p. 46.

It is interesting to note that when the leaders of the gentry militia were negotiating a trealy with the Polish king

Sigismund regarding the accession of his son to the Moscow throne in 1610 and in 1611, they demanded the

inclusion of a provision forbidding the movement of peasants. Kliuchevsky, Vol. II, p. 349.

12. Kliuchevsky, Vol. Ill, p. 188. 13. Ibid., Vol. II, pp. 317-18,336-37,340. Blum, pp. 96,234. 14. Kliuchevsky, Vol. II, pp. 321-23, 331-50; Vol. Ill, pp. 181-88. Blum, pp. 254-55. Grekov, Krestmne, pp. 826, 85〇

. Grekov, Glavnelshie, pp. 64-65.

If the peasants* debts tied them to their lords as strongly and as hopelessly as Kliuchevsky asserts, it is pu zzling

that the government had first to limit and then to forbid their movement by law.

15. Kliuchevsky, Vol. Ill, pp. 243-46; Vol. IV, pp. 142-48. Grekov, Glavnelshie, pp. 71-72. 16. Here are a few examples: In Pushkins Dubrovsky, the old Dubrovsky is identified as the owner of seventy

souls, and Prince Vereisky, of three thousand; in The Captain s Daughter, the commandant s wife is impressed by

Grinevs fathers ownership of three hundred souls; in Gogols The Dead Souls, Pliushkin owns more than a

thousand souls; in Goncharovs Oblomov, the principal hero owns three hundred and fifty; in h\s A Common Story,

a. certain Anton lvanich has twelve, mortgaged over and over again ________________

110 I World Economic Development 17. Kliuchevsky, Vol. I, p. 293. 18. Ibid., Vol. I, pp. 293-94. Grekov, KrestHane, p. 387. 19. Jerome Blum, aThe Rise of Serfdom in Eastern Europe,w American Historical Review, LXII ( 1957), pp. 807-36. See

particularly pp. 821-22.

20. Kliuchevsky, Vol. Ill, pp. 101-02. 21. Grekov, KrestHane, pp. 381-83. There seems to be considerable disagreement among the authorities he cites. He

mentions a number of legislative enactments passed at the end of the fifteenth century and in 1510,

1519,1520,1532 limiting the freedom of peasants to move (p. 387).

22. Blum, “The Rise of Serfdom,” p. 819. 23. Georg Ostrogorsky, aAgrarian Conditions in the Byzantine Empire in the Middle Ages,w The Cambridge Economic

History of Europe, Second Edition (Cambridge: Cambridge University Press, 1966), I, 206. See also pages 11, 27-28, 33, 66 and 257 of the same volume. Also, W. R. Brownlow, Lectures on Slavery and Serfdom in Europe (London and New York: Burns and Oates, Ltd., 1892), pp. 49-50.

24. Francois Louis Ganshof and Adriaan Verhulst, aMedieval Agrarian Society in its Prime: France, The Low Countries, and Western Germany,M Cambridge Economic History, I, 294; M.M. Postan in his essay on “England,”

same volume, pp. 552-56, 563 - 64, 624; Blum, “The Rise of Serfdom,” pp. 810-11 •

25. R. E. F. Smith, The Enserjment of the Russian Peasantry (Cambridge: Cambridge University Press, 1968), p. 4. 26. Postan, essay on aEngland,w Cambridge Economic History, I, 566-70.

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27. p.6〇9. 28. Brownlow, on Slavety, pp. 157-83. Smith.,Ensetfment, pp. 4-5. 29. The idea that sheep-breeding may have had something to do with serfdom was suggested by Nieboer in his book

(pp. 371-75) discussed in Part III.

30. K. G. Ponting, The Wool Trade Past and Present (Manchester and London: Columbine Press, 1961), p. 30. The figures are based on a chart facing p. xviii of by E. Cams Wilson.

31. According to Postan, p. 568, domestic consumption of cloth is not known. Peter J. Bowden arbitrarily assumed it to be 5〇 percent. See his The Wool Trade in Tudor and Stuart England (London: Macmillan &c Co., Ltd., 1962), p. 37.

32. Data on the size of the sheep population, or more correctly on increments in it, would not be sufficient for our problem. We would have to know how many cropraising peasants were replaced, say, by 1,000 extra sheep.

33. See E. Lipson, The History of the Woollen and Worsted Industries (London?: Frank Cass &c Co., Ltd., 1965), p. 19; E. Nasse, On the Agricultural Community of the Middle Ages, and Inclosures of the Sixteenth Century in England (London: Macmillan &c Co., 1871), pp. 77-78; Brownlow, Lectures on Slavery, p. 184; Bowden, Wool Trade, p. xvi.

The Causes of Slavery or Serfdom I 111

34. Woodman, Slavery and the Southern Economy, p. 7. 35. Conrad and Meyer,五⑶衫卿/a p. 80; James Benson Sellers,瓜(University, Alabama: University of

Alabama Press, 195〇), pp. 71, 120, 162-63; Rosser Howard Taylor, Slaveholding in North Carolina: An Economic View (Chapel Hill: University of North Carolina Press, 1926), p. 72; Harrison Anthony Trexler, Slavery in Missouri (Baltimore: The Johns Hopkins Press, 1914), pp. 13, 19; Woodman, Slavery and the Southern Economy, pp. 14-15.

36. As the authors practically admit on p. 78. On the profitability debate see Stanley L. Engerman, aThe Effects of Slavery Upon the Southern Economy: A Review of the Recent Debated Explorations in Entrepreneurial History, Second Series, IV (1967), pp. 71-97.

37. It was published in The Hague by Martinus NijhofF. A republication is scheduled in 1970 by Burt Franklin, Publisher, New York.

38. Adam Smith, The Wealth of Nations (London: Cannans edition, 1922), II, 66-68. There is another book by hkefiehi on the same sublet: England and America: Comparison of the Social and Political State of Both Nations (London: Richard Bentley, 1833), Vol. II. Other sources: J. E. Cairnes, The Slave Power (London: Parker, Son, and Bourn, Principles of Political Economy, 1848 (Ne w York: D. Apple ton and Co., 1920), 1,316.

39. Nieboer, Slavery as an Industrial System, pp. 312,389. 40. A clear statement by Ostrogorsky was quoted in Part II. For the American views, see Woodman s collection. 41. Eugene D. Genovese, The Political Economy of Slavery (New York: Vintage Books, 1967), p. 84. Ulrich B. Phillips,

aThe Economic Cost of Slaveholding in the Cotton Belt,M Pol. ScL Q., XX (June 19〇5), partially reproduced in Woodman, Slavery and the Southern Economy, p. 36.

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Topic Four Questions

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1. Explain Domar s theory of slavery and serfdom as it relates to population and land endowments.

2. Compare and contrast the manorial system in Western Europe with Russian serfdom.

Suggested Supplemental Reading North, Douglass C., and Robert Paul Thomas. KThe Rise and Fall of the Manorial System!9 The Journal of

Economic History 31, no. 4 (December 1971): 777-803.

Topic Five

EUROPE AND CHINA ON THE EVE OF THE INDUSTRIAL REVOLUTION

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The Economy in the Fifteenth Century

Preconditions for European Expansion

Paola Massa

An Integrated Economic System: Europe in the Fifteenth Century

The geographical background Geographers describe Europe, or the Old Continent as it is sometimes called, as a large indented peninsula extending for thousands of kilometres seawards. This circumstance has had a decisive effect on Europe's climate and greatly influenced the lives of its people, motivating them to navigate, explore and colonize new lands. Over the course of centuries the internal territorial divisions of Europe have undergone considerable variations as a result of numerous wars and subsequent political changes. However, despite their impact and influence, and despite enduring political divisions, economically we can consider fifteenth-century Europe as a single unit, as a community united by similar, or at least complementary, interests.

The French historian Fernand Braudel identified a process of integration in the economic fabric of Europe, occurring between the Middle Ages and the modern period, and he took the Old Continent as the basis for a model of economic development that he defined as a world system1 or world economy1.1 In his model, the population was subdivided into different social groups. These had differing demands for goods and manufactured products, and were largely self-sufficient for their requirements； thus they did not recognize any great economic advantage, or chance of enough profit, in exchanges with other groups beyond their boundaries. A further interesting aspect of Braudels development model of modern Europe is how the

Paolo Massa, "The Economy in the Fifteenth Century: Preconditions for European Expansion,w An Economic History of Europe: From Expansion to Devebpment, ed. Antonio Di Vittorio, pp. 1-25. Copyright © 2006 by Taylor & Francis Group. Reprinted with permission.

117 territory and economy of the Old Continent ultimately came to include not only the whole

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Mediterranean area, but also the North African countries that had economic links with it. The waters of the，internal，sea of the Mediterranean were an important point of intersection for the movement of goods, precious metals and people.

This idea of Europe is one that embraces an economic world with physical boundaries, limited by mountain chains, the North Pole and the African desert. It is a view of Europe that perhaps we can still look to today as we reflect on its political and cultural characteristics and historical traditions.

Urban poles of development and markets An important aspect of the world economy1 model in its application to fifteenth century Europe2 is the way it underlines the dynamic changes that lead to successive and increasingly advanced stages of development. Braudel argued that a number of urban centres emerged, which he defined as poles', and which provided leadership1 at different times. It was under their motivating force that certain sectors of die economy were expanded and formed bodies that, in different periods of history, acted as nuclei attracting greater numbers of productive resources, because of the more advantageous operating conditions.

At least until the mid-fifteenth century, apart from the textile industry (particularly the manufacturing of woollen cloth), it was in commerce where good profits could be made. Commerce, which could be called commercial capitalism1, had existed since the early thirteenth century. Marco Cattini has described it as 'the merchant acting as middleman between producer and consumer and closing the great gap in time and space that lay berween the place where certain goods were acquired and where they were sold’.3 Merchants were men with con- siderable financial means and credit, and were considered reliable. They had a close technical knowledge of their wares in addition to being well versed in commerce, law and accounting.

During the fifteenth century two key areas of trade became increasingly important for the whole European economic system. The first coincided with the Italian cities of the Mediterranean including Genoa, Venice, Pisa, Amalfi, Ancona, Naples, Messina and also Sienna and Lucca, which specialized in trade with the East and supplied Europe with indispensable products such as spices.4 They also engaged in trading primary goods such as cereals and raw materials. The second was in the Baltic Sea area, where as far back as the mid-thirteenth century a group of ports, including Bruges and Antwerp, Hamburg, Danzig, Stettin, and Novgorod on the Russian coast, had joined to form part of the Germanic Hanseatic League. Hansa ships sailed from the Baltic Sea to the North Sea through the Sound, and all the northern European countries, including England, depended on them for their supplies.

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Political factors complicated the pre-existing social and economic balances however. Overland trade was made difficult during the Hundred Years War (1337-1453), but it enabled Bruges to succeed in establishing itself as a midway port. When, at the end of the fifteenth century, Bruges fell out of favour with the Habsburg dynasty, its place was taken by the cosmopolitan mercantile centre of Antwerp, which was also the venue for one of the first international commodity exchange markets.

Goods, routes and means of transport Throughout the fifteenth century, and for much of the sixteenth, the most important economic sector in Europe continued to be the production and trading of textiles. Tens of thousands of lengths of wool and silk cloth were traded and redistributed from Flanders, the Venetian hinterland, Tuscany and the important Italian silk cities5 such as Lucca, Venice, Florence and Genoa. There was also a significant seaborne trade, involving bulk commodities such as grain, salt and timber. Important raw materials like iron, lead, tin, copper, leather, wax and furs, as well as grains such as rye ，oats and barley, were transported to the North Sea ports by the

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Hanseatic League, while cargoes of Asian and Mediterranean produce such as oil, wine, spices, rice, dried figs, raw wool, dyes, alum5 and textiles arrived from the opposite direction. Goods with a high unit value and low bulk were exchanged at international trade fairs such as the one in Champagne, which had been taking place since the thirteenth century, or in Geneva and Lyons since the fourteenth century. Every three months these fairs provided important meeting places for merchants, who came from the main countries, both north and south, to exchange goods and conduct their business transactions.6

Transporting goods along the various trade routes was not always easy. Mule caravans loaded with goods and people had to cross the Alps over passes that were often deep in snow. In die interior of Europe there were plenty of regular services and shipments along the rivers and canals, but there were still numerous obstacles, such as water mills or fulling works in midstream, that made costly transfers necessary. There were also dues and tolls to pay, or services that were under the monopoly of the corporations. The route of choice was therefore the sea； the transport it provided was slow and hazardous, owing to mishaps caused by human error or acts of nature, but it was undoubtedly less cosdy. Sailings did not usually take place in winter, but this was offset by the greater distances that could be covered and the high profits from the transport of both expensive goods and the relatively cheap bulk commodities. Before the explorations and geographical discoveries at the end of the fifteenth century, ships still sailed within sight of the coast wherever possible, but there was a gradual increase in the tonnage of the vessels. These were now being equipped with a greater number of masts and with stern rudders, and were making better and more rational use of sail power. Alongside the rowing galleys,7 ships known as carracks，or were appearing, and caravels later in the fifteenth century. For coastal navigation smaller boats were used. They were similar one to another but often had very different names. Throughout the century improvements to instruments, and developments in cartography, gradually reduced the margins of error and lowered the risks that were an integral part of navigation.

The gradual development of an efficient money market In medieval tradition, going back to the time of Charlemagne, the treasury held the right to mint coins. It was a right that the most important cities also claimed for themselves, and when after lengthy and often difficult negotiations they succeeded in winning that right，they guarded it closely. Monarchs resisted this, since coins were seen as a symbol of sovereignty, but also, and perhaps more important, because the mint was a primary source of financial revenue. The revenue was acquired either legally through the right of seigniorage'8 or illegally through gains the treasury could make by issuing coins of increasingly poor quality but whose legal value remained unchanged.

120 I World Economic Development During the early Middle Ages the only coin actually in circulation was the silver denaro, whose

weight and fineness varied considerably from one mint to another and from one year to the next. However, the general tendency was for these to decrease, one reason being the scarce supply of the

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metal on the markets. With rare exceptions, gold, as a means of payment, was used in the form of objects or bars whose value was measured by weight, or in the form of Byzantine or Arab coins. The wide availability of these coins delayed monetization in the western areas of Europe even after 1000, which was a period of strong recovery in trade that coincided with the first Crusades, a considerable increase in population and a steady decline in barter.

In the period until the eleventh century, exchanges were typically made using forms of pay- ment that the French historian Frederic Mauro has defined as borderline1. For example a family made use of any surplus goods, produced beyond its own needs, for the purpose, though this arrangement was more common in country areas and generally in closed economies. Barter was widely practised on regional or international markets, and for this purpose salt was one of the most enduring commodities. Another widespread form of payment1 was the free provision of care and medical treatment for much of the population, by the Church and the monastic orders. Before the spread of printing, parishes and convents provided education and culture. They also organized water supplies in the urban centres.

After the mid-thirteenth century, coin gradually made its way into every field of economic life ； even feudal taxes that had been payable in kind were now starting to be paid in money. Some historians maintain that the first gold coin of any importance was the genovino, which was coined in Genoa and dated back to the second half of the twelfth century. Thefiorino, issued in Florence, and the Venetian gold ducat, later called the zecchino, belonged to a slightly later period. France followed the example set by the Italian cities and in 1266 issued the parigino, while some years later England did the same with the noble. However, the development of a money market was delayed because there was insufficient precious metal in circulation suit- able for coining. Thus, until the mid-fifteenth century, there was a considerable discrepancy between supply and demand. Only modest quantities of precious metals were being extracted and, in any case, these were only partly used for coinage. Gold, as well as silver, was required for making jewellery and plate, church and convent treasures, which were considered as risk-free investments.

In the second half of the century the bimetallic system developed in Europe, and the search for new deposits of gold and silver produced positive results； meanwhile the increasing price of metal provided a further impetus. The application of new mining techniques that were being developed led to better exploitation of the known deposits. The availability of silver increased with the improved exploitation of German, Austrian and Hungarian mines, and at the end of the century there were increases in the quantities of gold. Two simultaneous circumstances

The Economy in the Fifteenth Century I 121 caused an increase in the availability of gold. First there was the exploitation of the gold reserves in Guinea and Senegal, following the Portuguese explorations along the African coasts. These sources boosted the circulation of European money, supplementing the gold supplies that had long been coming from the Sudan, across the Sahara to North Africa, where they were exchanged for Italian and Spanish products. Second there was the result of the early voyages of Columbus that brought

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the gold of the isles1 from Santo Domingo, Porto Rico, Cuba and the Antilles into Spain. However, even this was still very little compared with the growing needs of the economic system

of Europe, the development of which was closely linked with variations in the available quantities of precious metals and the instability of their value. Here it should be pointed out that the monetary organization of all states was based on a distinction between real, or coined, money and money of account, between which the state fixed a ratio. Money of account acted as a unit of measure for the currency in circulation,9 and, at least until the sixteenth century, was rock-solid.

All in all there were many different coins circulating in Europe, yet, at the same time, attempts were being made to bring stability to the international money market. Apart from money of account, there was also a tendency towards trying to keep the exchange ratios constant. Two examples illustrate the efforts that were made to bring order and innovation to a technically archaic system. First there was the formation of the Rhenish Monetary Confederation in the fifteenth century; eleven sovereigns and seventy-four German cities signed an agreement whereby, for a certain period, the Rhenish florin was to act as the only legal currency. Second there was the scudo di marco, which had a more sophisticated and significant purpose； this type of money of account had first circulated in the thirteenth century fairs of Champagne, and during the course of almost three centuries had gradually merged in such as way as to meet the needs of merchants from different countries.

It is more difficult to assess how rapidly money circulated in the fifteenth century. Gold was circulating less rapidly than silver (dirough the effects of Gresham’s law10); this circumstance was further conditioned by individual territorial circumstances, the role of credit, and the slow recovery of capital invested in commerce and manufacturing. The consequences were to be much greater in the following century, when the first great period of European inflation occurred, and when there was exceptional development in commercial and financial business on an international level. From this point of view the fifteenth century, particularly the second half, was a time when the European economic system was adapting to pressures of all kinds.

122 I World Economic Development The merchant bankers: the first instruments and institutions of credit While economic activity was still carried on within a feudal framework the lack of money was not seen as an important problem, but the gradual development of trade—which postulates the need for a suitable substitute for money_led to attempts to get round this deficiency. The granting of credit long remained an unregulated and often illegal practice, and as a result, though average rates of interest in western Europe varied between 5 percent and 10 percent, merchants and artisans did not acquire the capital they needed for an investment, since its cost would certainly have been greater than any profit from it. Initially the clientele of banker- moneylenders consisted mainly of people

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requiring money for the purchase of consumer goods. But the fifteenth century was still dominated by the medieval conviction that any payment for the loan of money was immoral, which was the official view of the Church. Even the bill of exchange was viewed with suspicion and considered as a loan in disguise (which indeed it did become), despite its use for a commercial transaction. The only case where it was permissible was if it was negotiated on another market and in a different currency from the drawer’s, in which case the interest was camouflaged within the exchange rate.

The leading figures in the sector of credit were the merchant bankers. They were non-specialist financial dealers who opened current accounts and received deposits without, initially, paying any interest, at least not overdy. An account would be opened to facilitate a clients payments, withdrawals and giro operations 4in writing1, which meant that the transaction was entered into the merchant banker s account books at his banco, or * bench1. The banker could use the sums he received to carry out his own business, which might be mercantile or entrepreneurial or in the field of insurance, and at the same time gain greater professional and social credibility for himself. When changes in the doctrinal attitudes of the Church allowed greater freedom, it meant that the depositor could now be paid a 'fair1 interest rate. Business deals, which were initially negotiated only on the \ocA piazza, or market place, gradually moved to other markets, or fuori piazza. Venice, Genoa and Barcelona, but especially towns in south Germany and Tuscany,11 were flourishing centres for this type of activity, which now saw the progressive development of a wide range of instruments of credit, including advance payments on goods and associated banking techniques such as endorsements and cheques.

Apart from the large and dynamic families of merchant bankers, who operated mainly out of Italy with branches and correspondents throughout Europe, there were also a number of public institutions of credit, particularly in Spain and Italy. One of the oldest of these was the Banco di San Giorgio (Bank of St George), which was founded in Genoa in 1408. Other forms of credit also existed, and these would be further refined over the next centuries. They included loans to sovereigns or cities, securities, annuities and investments for partnership in companies. The mid-fifteenth century was especially marked by the spread of pawnbroking under the

The Economy in the Fifteenth Century I 123 management of the Monti di Pieta, whose main purpose was to provide charitable aid. These organizations were founded by the Franciscan monks, and the first Monte, in Perugia, dates from 1462. The Monti were an alternative to usury for people who, though poor, were not destitute； the money was required in the short term, and the borrower was confident of soon finding the resources to pay back the debt and redeem the items he had pawned. By the end of the century this typically Italian institution had spread to most of the peninsula. Its strong point lay in the low interest rates, which did not usually exceed 10 percent and in some cases were much lower. In the case of particularly small amounts they were even zero. The capital the Monti used for their activities initially came from their own sources of revenue, and was not subject to any charges. A century later some of them started gathering deposits, but for a long time no interest was charged.

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The supply of and demand for goods: agricultural and manufactured goods

Population patterns In quantitative terms the major factor conditioning the demand for goods is population. However, no definite or complete data for population patterns and structure between the Middle Ages and the modern period are available, since the first censuses and reasonably accu- rate figures date only from the early nineteenth century. However, some estimates, especially those concerning urban areas, can provide a certain degree of reliability, and even on a wider territorial scale it is possible to make some statistical observations and hypotheses.

The medieval period was marked by a long-term steady growth in the European population, despite a high mortality rate that could be defined as catastrophic1 and which was caused by wars, famines and epidemics.12 There was also the normal1 mortality rate, which in itself was very high, especially as regards the death of infants and children under the age of ten. Such a mortality rate was a direct consequence of the poverty and hardships that the population endured. Its effect on the demographic structure of the Old Continent was almost paradoxical； it was always a ‘young’ population, with the average life expectancy calculated by Carlo M. Cipolla as never being more than forty to forty-five years.13 Cipolla had addressed the immense problem of calculating the overall population of Europe, including European Russia and the Balkans, and concluded that in 1000 it was about 30 million to 35 million inhabitants. He calculated that in the mid-fourteenth century it had grown to 80 million, amounting to almost a third of the total world population of around 300 million. Between 1247 and 1351 the population of Europe was reduced by a third, as a result of the enormously high number of deaths during the great epidemic known as the Black Death, which had started in the East and 124 I World Economic Development

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spread very rapidly.14 Besides the high number of deaths, there were two further consequences. The first was that, from then on, the plague became endemic in Europe, with scattered focal points and serious outbreaks at regular intervals. The second was that, for over a century, the European population remained at considerably reduced levels compared with the pre-1347 levels. It was not until the end of the fifteenth century that the overall population again reached the 80 million mark, although during the first half of the century there were marked regional imbalances. Growth was slow in France owing to the Hundred Years War (1337-1453)，and in Italy the upward trend was also very slow. On the other hand the Iberian peninsula, Germany and England showed much stronger rates of growth. A more generalized upward trend started after 1450 with the recovery of the economic system, which had been heavily affected by the plague. The reduction in population, and hence in demand, increased the availability of

The Economy in the Fifteenth Century I 125 resources somewhat, and led to improved living conditions for people for several decades, though it did not activate the economy as a whole.

The European population was also showing a tendency towards concentrating in towns. This was mainly to seek better protection, but also to search for more lucrative employment. It has been calculated that in the pre-industrial period the population living in urban centres averaged 10 percent, with peaks of 15-20 percent in some areas.15 The movement towards the towns usually followed one of two trends； either from rural areas or from smaller to larger towns. In Italy there was a movement of people from Padua and Verona to Venice, while Milan was an important magnet for other Lombard centres. In the early fifteenth century, in Italy alone, there were about ten cities of around 5〇,〇〇〇 inhabitants16 while the rest of Europe had no more than nine.17 Such movements of people inevitably had consequences for the urban areas, and the greater concentrations of population in the towns obliged the public authorities to provide a more wide-ranging and efficient system for the supply and distribution of primary consumer goods.

Consumption and investment Expenditure in fifteenth century Europe was primarily on consumption, and largely to meet private demand； the amount of capital invested in manufacturing activities was considerable, but this was more a result of the slow market process than because it was tied up in plant and machinery, and in any case it concerned only a small minority of the population. Public expenditure on goods and services was not very different from private expenditure, except in times of war; investment in the productive sectors was negligible, with the mining industry as practically the only exception. Means of communication were the only infrastructure in which states showed any real interest； there was state involvement in the building of ports, canals, road networks and shipyards as well as civic authority buildings. The Churcli and the Roman Curia similarly invested in building activities. F. Mauro has debated the question of whether the financing of maritime enterprises in remote countries could also be considered as public investment：18 the conclusion is probably that it could.

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This applies not so much to the Spanish conquests, but certainly to the policy of the Portuguese sovereigns who, throughout much of the fifteenth century, financed shipbuilding as well as trading expeditions.

Private individuals, especially from the aristocracy, channelled their profits from land, and other investments, into expenditure on goods such as fine furniture, tapestries, paintings and jewellery, which are not easily separated into luxuries and investments. In any case, the greatest share of individual income was absorbed by primary needs such as food, housing and heating. Even the spiritual relationship a person had with the Church needed to be paid for, not to mention the compulsory payment of tithes. In normal1 years, around 80 percent of a persons 126 I World Economic Development income went on primary goods, and the demand for these goods was constant even during the frequent agricultural crises. If people ate little and badly an important reason lay in the very low average of individual incomes. Clothing was a further item that involved considerable expense but this increased in relation to income, unlike food.

The staple 'diet1 of the poor classes consisted of cereals (which apart from wheat also included rye, barley, oats and spelt), chestnuts and almost a litre per head per day of drinks such as wine and beer (which provided energy). Income levels varied according to wage patterns and price levels and set natural limits to people s wants and needs. Social and economic differences were reflected in calorie intake and diversification of foodstuffs. Apart from differences between rich and poor, there were those between town and country, as well as the different geographical areas of Europe. In the central and eastern parts of Europe the consumption of meat and animal fats needs to be reassessed, and the same applies to vegetable oils in the Mediterranean area. The intake of fish protein in areas by the sea should not be underestimated, and salted or dried fish was also widely consumed, despite its high cost. The demand for salt and spices remained steady though it was limited to small quantities per capita.

The primary sector: forms of cultivation and innovations The primary sector includes industries such as agriculture, forestry and fishing, which involve natural raw materials.19 Agriculture, in particular, has been the main occupation of pop illations for centuries, and in the pre-industrial period it engaged over 65 percent of people. According to some economists,20 an important indicator of the structural change of an economic system is when the great changes resulting from the industrial revolution lead to equal numbers of workers in both the agricultural and the industrial sectors. Indeed, when a persons income increases, there is a corresponding decrease in the proportion he invests in food resources. At the end of the Middle Ages land was still the major resource of the European economy in terms of value, what it produced and the labour force it employed. It is difficult to provide a clear, overall picture of agricultural yields, organization and produce, because of the many differences determined by the climate and geography of the continent. In the Mediterranean areas of Europe, cereals were cultivated alongside a number of crops such as vines, olives, mulberries and citrus fruits, in addition to sugar cane and cotton in the most southerly areas. Oats, barley and rye, as well as plants such as flax and hemp used in manufacturing textiles, were grown in the northern and Atlantic areas. Cereal crops, which were also an important source of supplies for the rest of the Old Continent, were cultivated in central and

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eastern Europe. The population increases in Europe, which became more generalized from the middle of the

fifteenth century, had a number of wider consequences in the long term. One was the gradual break-up of the closed medieval curtis21 of western Europe and its opening up to the

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market. Another was deforestation, which in the second half of the fifteenth century made new areas available

for agriculture, at a time when all usable land was already under cultivation. There were also land reclamation

projects, as well as the introduction of new agrarian contracts, such as the mezzadria sharecropping system in Tuscany at the end of the century and ricefields in the plains of the Po valley, where pre-capitalist forms of

management and large-scale land leases were introduced. These were all indications that the fifteenth

century, rather than being a period of crisis, was one of readjustment after violent upheavals, and that the

economic system was going through a transitional stage. During the first decades the negative consequences

of the wars, famines and epidemics of the previous century were being felt, with serious effects on the

economy because of the decrease in population and reduced trade, not to mention the difficulties in

organizing production. However, after 1450 the process was reversed and the population once again started to increase, though already there had been signs that wages were increasing and that a new equilibrium

between the quantity of cultivable land and the supply of labour was being found.

In agriculture, the most important innovation was the replacement of the classic binary rotation system,

in which fields were left fallow every other year, with a three-yearly rotation system. This brought several

advantages： soil productivity was improved, since the amount of cultivated land increased by a third； work

was more equally distributed throughout the year, since crops were now sown in autumn and spring； in

addition, there was less risk of famine. There were also rwo significant innovations closely linked with the new

form of crop rotation. First a new type of heavy wheeled plough was introduced, which was no longer made of

wood but of iron, and second draught horses were used, with important changes being made to harnessing

and equipment. Contemporary writers calculated that each horse could carry out the work of three or four

oxen. However, their maintenance was three times as cosdy, and they were also required for transport and

military operations. The cost effectiveness of adopting horse power thus depended on circumstances and had

to be carefully assessed.

The secondary sector The goods and manufactures required by the population, apart from those produced for its own consumption,

gave rise to activities that involved the processing of raw materials, and since they were located in different

areas important flows of traffic developed for their redistribution. The fifteenth century was a pre-industrial ，

period, in the sense that it came before the period of industrialization that started with the English industrial

revolution in the mid-eighteenth century. However, if the expression is limited to meaning the use of

technology appropriate to that particular period, then the fifteenth century can be considered *industriar. The

raw materials subjected to industrial processes included agricultural products such as cereals, wood for 128 I World Economic Development

building ships and making tools, plants such as flax for manufacturing textiles, or the mulberry which was important in the production of silk. One extremely important raw material was wool, while leather, used for many different manufactures, was also worked in countries along the Mediterranean coast of Africa. In the second half of the century, paper was produced from rags as well as from fibres containing cellulose. Important centres of paper production in Italy were located in Tuscany and Fabriano, but also in other parts of Europe such as the Vosges and the Dauphine.

The sector that employed by far the greatest number of workers was textile manufacturing, particularly wool products, which had been the case for centuries. England and Spain were the most important areas providing the raw wool, while the manufacturing centres were mainly

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urban centres such as the cities of Flanders and those of central and northern Italy. Their high quality products were much in demand on the international market and were bought and sold at the fairs and ports. Associated with this was a heavy demand for dyes and the previously mentioned alum, as well as the manufacture of clothing and other goods in common use.

The mining and metallurgical industries, as well as early attempts at working iron, especially in the central and western areas of Europe, provided tools, ploughs, building materials and arms. A wide range of metals, especially precious metals, became available and their particular locations often meant they had to be transported long distances by sea.22

The sea itself provided an abundance of resources such as coral, fish and salt, which were the basis for a variety of manufacturing processes and employed people living in its vicinity. Salt 130 I World Economic Development in particular was an important commodity, used not only for everyday purposes but also for salting meat and tanning leather. In the mountain areas it was in great demand from the catde farmers, who used it for feeding to their animals. In northern Europe, where the seas had a lower salt content, people needed it in order to preserve fish. Indeed, salt was perhaps one of the best examples of long established exchanges berween European peoples. The Mediterranean areas produced it from the sea and exported it in considerable quantities to northern Europe, while at the same time the countries of central Europe supplied the rock salt they obtained from mines. In their turn, the fishermen in northern Europe sent back the fish they had caught and preserved with the imported salt.

Imports from the Asian continent In F. Braudels model of the European economic system, with its self-sufficiency as regards goods,23 there was one important exception, which was spices. Europeans had depended on imports from the Asian continent for centuries, and since precious metals were the only form of payment accepted on the Eastern markets before the arrival of the Portuguese, the Old Worlds economic system suffered from a significant and constant trade imbalance.

The trade included spices such as pepper, nutmeg, ginger, cinnamon and cloves but other commodities like perfumes, medicinal herbs and roots, in addition to the dyes, arms, silks, carpets, cotton, precious stones and ivory all gave rise to one of the most flourishing and ancient international trades. There were two phases to the trading operations. First the Eastern merchants, from countries such as Malaysia or India, consigned their products to Arab agents on the shores of the Indian Ocean, at places like Calicut in Malabar. The goods were then transported to the shores of the Mediterranean via sea and/or land, or up the rivers from the Caspian and the Black Sea, even as far as northern Europe. European merchants were involved in the second phase, acting as intermediaries between East and West. In the fifteenth century, the most important merchants in the Mediterranean area were from Venice and Genoa, and, to a lesser extent, from Provence or Catalonia. Throughout the period spanning the twelfth and sixteenth centuries, Venice was the greatest spice market in Europe and attracted large numbers of merchants from the European interior. Other maritime centres also made huge fortunes from this trade in cosdy luxury goods, which for European society had by now become a need1, creating a steady demand for them. In order to acquire them, people were prepared even to sacrifice part of their income, though the way

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they were used determined the level of the demand. Historians do not all agree as to their uses. Some argue that it was part of a vogue, a longing for

an unnecessary extravagance or a way of displaying wealth, in view of their high cost. Others maintain that therapeutic and aphrodisiac properties were attributed to spices, and that they

The Economy in the Fifteenth Century I 131 were also used to preserve food, or to camouflage the poor state of the food itself when it was being cooked. Doctors recommended the use of spices, and spice sellers would sell them to the sick at high prices. In food preparation and seasoning they played a comparable role to that of salt. The quantity of pepper that was traded was the same as that of all the other spices put together, and it is calculated that at the end of the fifteenth century Asian production was more than 100,000 cwt, almost all of which found its way into Europe. Other products included betel, rhubarb, opium, amber and musk, sandalwood, incense and camphor, and from the medical point of view were considered to have therapeutic functions.

The enormous profitability of this international traffic continued to attract capital and interest, even in the second half of the fifteenth century in spite of the long depression following the Black Death, and the situation in the Middle East that was becoming increasingly complex, after the fall of Constantinople and the subsequent Turkish conquest of Egypt. But, as Roberto Lopez has stated,24 the Golden Age of the Mediterranean merchants had ended, and capital and interest no longer came from them but from the sovereigns of the Atlantic states. However, Italian entrepreneurs, for whom the pepper trade had driven the economy for almost two centuries, continued to play a significant role.25

Work organization and techniques

The organization of labour Rural domestic industry By using raw materials that were easily accessible and did not need to be acquired from the market, farming families had long met their own needs in the way of manufactured goods— especially textiles and utensils made out of wood and iron. These subsistence manufactures were produced when the family nucleus was not occupied in farming activities, and they went a considerable way to meeting the agrarian population’s demand for primary goods. This was therefore ruralfamily (or domestic) industry for auto-consumption.

Artisans and corporations On the other hand, in the urban areas of Europe since the Middle Ages, the main economic activities had been organized into professional or trading associations. These were based on two common principles： equality and solidarity between members, and remaining separate from everybody else. Stipulations regarding the way specific forms of production were co-ordinated went even further： raw materials were to be purchased collectively； inside competition was prohibited and quality

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standards and common prices for the manufactured goods were expressly laid down. There were set procedures for membership and for learning individual trades.

132 I World Economic Development Members of the group, who were united by formal bonds under a specific set of regulations, or statute, enjoyed social benefits and took part in various forms of religious worship, with each trade having its own patron saint and very often its own devotional chapel inside a church. In Italy these groups were known as 广/wraz/ww' or j 厂//•，and in other parts of 丑urope as trade guilds. Their workshops or laboratories, which were often concentrated in a particular area of a city, were owned by master artisans assisted by apprentices and various underlings who were taught the trade but whose entry into the guild was carefully controlled by the ruling elite. The guilds enjoyed a monopoly over specific products and were able to safeguard their positions to a greater or lesser extent depending on the market trends for their goods. Before a guild member was able to become autonomous he had to undergo a tough examination at the end of a lengthy period in the workshop ； however, relatives of the master artisan, who was already enrolled or matriculated1, were exempted.

This system, on which artisan production was based, lasted several centuries and was still the pillar of urban labour organization in the fifteenth century. It was viewed benignly by the town government authorities, who saw in it a means of exercising control and guaranteeing social harmony, as well as securing tax payments. The corporations guaranteed product quality and regarded any innovation with suspicion, so much so that technological development in the sector was delayed and labour negatively affected. They went so far as to demand a ban on the entry of potentially competitive foreign products and thus achieved true customs protectionism. At the same time they were committed to safeguarding their own technical expertise and severely punished members who left the town and the guild and divulged trade secrets to the outside world.

The master artisans workshop was thus the technical unit of production, but as Carlo M. Cipolla has pointed out, concentration of labour and capital was minimal and waged labour practically non-existent.26 Tools were personal property, and the working hours were extremely long, extending from dawn to dusk, as many town statutes testify. As a rule the artisan produced goods for the market, which was not just the local one, or on commission, and was unlikely to produce any for stock； nevertheless he still took on a risk, though it was minimal (see Table 1.1). The sectors ranged widely： food, textiles, clothing, building, the working of wood, metal (from iron to precious stones) and leather. It was only when the guilds, instead of being self-governing bodies safeguarding group interests, started to become the means of gaining privileges that their interests clashed with those of society as a whole, and they began to be resented in the towns.

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The Economy in the Fifteenth Century I 133

Table 1.1 The structure of industry in medieval and modern times

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Source: G. Felloni, Profilo di storia economica deltEuropa dal medioevo all eta contemporaneay 2nd edn, Giappichelli, Turin, 1997, p. 157.

Domestic industry In many regions of Europe, artisans were sometimes involved in complex production processes where

semi-worked products were passed on to other workers with different specific skills. This was especially so

with textile manufacturing, but also in other sectors such as metal and leather working. The artisan lost the

direct link that he had had with the supply markets and the outlets for his products, and the production

process became dominated by the merchant-entrepreneur, who owned not only the raw materials and

working tools but also the finished product. Under him were the artisans, who only worked on what they

were provided with, and had no economic autonomy, and over whom he had technical control.27 The

artisans were paid by the piece, within a system that greatly reduced the risks； they ended up becoming

workers 134 I World Economic Development in their own homes as part of a network of independent workshops, all co-ordinated and managed by a single individual. It was a relatively flexible system of production. However, since the manufacturing cycle was often quite long (as much as six months in the silk sector), the merchant-entrepreneur needed to have a good knowledge of the markets, which often were international because of the range of his business, so that he could judge the degree of investment he required in raw materials and wages. Wages were paid in advance instalments； on the one hand this meant that the merchant-entrepreneur constantly required available supplies of money, and on the other that the artisan ended up by being a waged worker. This situation was further accentuated in cases where the artisan was categorically prevented from working on his own, and

A Location City or town Countryside Near source of energy or raw materials

B Workplace Workshop or laboratory Worker’s dwelling Factory (plant, mill, works, of master artisan etc.)

C Worker Master zmszny garzone (apprentice) and casual worker

Peasant Worker

D Work cyde Continuous Alternating with agricultural work

Continuous and co-ordinated

E Head of enterprise

Master artisan Merchant entrepreneur Capitalist entrepreneur

F Owner of: raw materials Master artisan Merchant entrepreneur Capitalist entrepreneur

work tools Master artisan Peasant (not always) Capitalist entrepreneur finished product Master artisan Merchant entrepreneur Capitalist entrepreneur

G Most widespread Textiles and clothing, Textiles and clothing Iron foundries, copper works, industrial sector manual processing of flourmills, sawmills, fulling wood and metals, leather, mills, papermills, tanning building, food works, glassworks, etc.

Artisan industry Home industry

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the relationship with the employer became an exclusive one. Conflicts often arose over the amount of pay and became even more acute when an important change in employment conditions was introduced whereby the employed worker could not refuse to be paid in kind. This was the *truck system，, which was still common at the time of the English industrial revolution.

The organization of the cottage industries did not change significantly when they became pardy or completely ruralized. In some areas (such as Flanders) this change was already taking place in the fifteenth century, but it became more widespread in the rest of Europe in the following centuries. Textile production carried out in the countryside was a way of supplementing family incomes, but it also meant that supplies of primary goods could be obtained more cheaply and the excessive rigidity of the urban centres and guilds could be eluded. Furthermore, even though it meant relaxing controls on production quality, it did lead to important social changes, since female labour was now introduced into the production process, playing a role that was well defined and by no means marginal.

Technical innovations In recent centuries the most dynamic factor of economic change and development has been technological innovation. During the fifteenth century there was a flourishing of technical improvements in several significant productive sectors. They affected the various fields of economic activity in different degrees and with different consequences, but were seen mainly in the mining and metallurgical industries, and in a number of manufacturing processes. However, as with agriculture, there was no clear-cut dividing line berween the Middle Ages and the modern period.

One of the most important inventions ever, and certainly of the fifteenth century, was the printing press with its movable types, and the techniques of the printing process remained almost unchanged until the eighteenth century. Though there were no immediate consequences as regards the number of workers involved, it unquestionably increased the productivity of the

The Economy in the Fifteenth Century I 135 book trade and enormously increased the availability of information, particularly the circulation of technical and economic information. A further consequence was a heavy increase in the demand for paper, the production of which had been an active concern since the fourteenth century and now experienced a boom. The superiority of paper over previous writing materials, such as parchment, lay in its lower cost. The number of readers, both inside and outside the universities, as well as those of the copyists' workshops, had already been increasing in the fourteenth century, and now experienced an upsurge. Only fifty years after the invention of movable type, Europe had 236 cities with printing shops, and around 20 million books, produced with the new technique, were in circulation.

The improvements in the art of navigation and shipbuilding also played a fundamental role in the success of the geographical explorations and discoveries. The introduction of gunpowder and

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its application to firearms, which were also carried on ships, was likewise important for European overseas conquests. This, together with the use of firearms and artillery in wars, accounts for the greater strategic importance of the metallurgical industries. The application of gunpowder in the mining industry ultimately led to other improvements such as pumps to extract air, and wagons with wooden wheels to transport material, all of which contributed to making it more cost-effective to mine at greater depths. Similarly, the first blast furnaces, which benefited from associated innovations such as hydraulic bellows, mechanical hammers and grinding mills for crushing the ore, first made their appearance in the fifteenth century, especially in Sweden and the southern part of the Low Countries and Luxembourg, but also in some areas of Italy such as Tuscany and Brescia. Methods of textile production and building remained more traditional during this period, but discounting agriculture they were still the sectors with the greatest number of workers overall.

C.M. Cipolla has pointed out that in Europe areas of great innovation (such as fifteenth century Italy) existed alongside others that were less innovative. This resulted in the movement of'human capital5, closely connected with which was the knowledge and spread of new techniques to a greater or lesser degree. It is perhaps too soon to talk of the mobility of labour, but it should be remembered that as early as the fifteenth century, and right up to the industrial revolution, countries were well aware that the emigration of specialist and technical workers could have negative consequences for the economy. The power to control the movement of people nevertheless seems to have been extremely limited at that time.

The development of sources of energy The scarcity of available energy meant that the known sources had to be rationally exploited, but it also led to experiments in more advanced technologies with the aim of increasing their 136 I World Economic Development efficiency. The search for new resources was equally important，but in practice was conditioned by the availability of the land on which they were found.

In the Middle Ages animal power played an important role alongside human energy, as we have seen in relation to agriculture. In transport it was used direcdy, or for drawing boats along the internal watercourses and canals, and horse power was particularly important in mining. Non-animal power, such as energy from wind and water, involved a different approach. Though cost-free it was discontinuous, and required investment to be exploited by means of mills and waterwheels, that could be used in many manufacturing processes.

Besides being used for heating, wood and charcoal provided over 5〇 percent of the energy required for economic activities despite the small size of many workshops, as Paolo Malanima has shown.28 The example of ironworking is particularly interesting and it has been calculated that at the end of the fifteenth century 2 cwt of mineral ore and 25 m3 of wood were still required to obtain half a hundred-weight of iron. In this period only a few countries had begun to use coal, which had been mined in England and central Europe since as early as the thirteenth century. Its use was limited to a few areas such as Liege where the first blast furnaces were located, and was of no real importance to the economy for at least another two centuries.

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Geographical and economic expansion

New horizons A particularly significant aspect of the second half of the fifteenth century was the widening of geographical horizons, and that the era of the great explorations and territorial discoveries coincided almost exacdy with a period of demographic growth. An important consequence was the search for sea routes berween Europe and Asia, and the colonization of new lands in the west. Over the next century Europe would benefit from a greatly increased availability of resources of food and precious metals, though at the same time the Mediterranean would lose the central position it had gained in trade, and in particular its monopoly of the spice trade.

Two countries on the Atlantic Ocean, Portugal and Spain, were to play the leading role in this expansion, though ultimately they did not succeed in taking full advantage of the gains they had made, or of the new wealth they had conquered, as we shall see when we examine the sixteenth century. The areas of central, eastern and northern Europe would not be involved to any significant extent in the prosperity of the sixteenth century, partly because the most important trade routes were changing, but also because of the dynastic and religious wars that diverted energy away from economic activities. Only later, in the seventeenth century, would

The Economy in the Fifteenth Century I 137 the Low Countries, England and northern France ultimately become the area of Europe deriving the greatest benefit from the economic changes associated with the great discoveries.

Portugal Portugal was a small and relatively poor country that in due course came to dominate a vast maritime empire in Asia, Africa and America, achieving a considerable feat in the context of European expansion during this period. By 1515 the Portuguese already held sway over the Indian Ocean.

Portugal’s territorial borders had become firmly established by the fifteenth century, but the country was still sparsely populated, with a limited number of small towns and a largely subsistence economy, with the main exception of fishing and saltworks in the coastal areas. Despite its sparse population, it was not totally self-sufficient in food products, especially in cereals, and it had to import corn as well as manufactured products. Besides salt and fish it also exported a few Mediterranean products such as oil, wine, fruit, cork and hides.

The explanation for the great Portuguese expansion overseas lay in the knowledge built up from designing ships and developing navigation techniques. These skills were part of the shrewd policy pursued by two members of the reigning family； first the kings younger son, Prince Henry, known as *the Navigator1 (1393-1460), and second King John II, who ascended the throne in 1481. Henry set about encouraging the explorations of the African coast, with the ultimate aim of reaching the Indian Ocean. By 1415 the Portuguese had already ventured ashore in Morocco and

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occupied Ceuta, a small fortress and important Christian outpost in Arab territory, which acted especially as a strategic base for a country that was aiming at commercial expansion. Henry set up a study centre, as it were, in his castle on the Sagres promontory in the extreme south of Portugal, where he gathered together astronomers, geographers, cartographers and navigators of every nationality. This continued a strong tradition dating back to the previous century, when the Portuguese crown collaborated with Genoan navigators and Italian merchants in several ventures of exploration. Almost every year from 1418 until his death, he organized expeditions during which seamen mapped the coasts and currents with painstaking precision, and updated the already known portolans.29 They also rediscovered and colonized the Adantic islands of Madeira and the Azores, as well as the Canaries (later ceded to Spain), established trading relations with the indigenous chiefs along the African coast, and had no qualms about searching for gold and slaves. Henry did not live long enough to realize his greatest ambition, and at his death the Portuguese navigators had sailed only a short way south of Cape Verde. But the scientific and explorative work that had been carried out under his patronage laid the foundations for subsequent discoveries.

138 I World Economic Development

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After his death the impetus to exploration was lost through lack of royal support, but apart from this there was competition from the lucrative trade in ivory, gold and slaves that Portuguese merchants were carrying on with the indigenous kingdom of Ghana. When King John II came to the throne in 1481 exploration was revived once again, and in the space of a few years his navigators had almost reached die extreme southern tip of Africa. Eventually, in 1488, Bartholomew Diaz sailed round the Cape of Good Hope, which he had named the Cape of Storms. The next year, after crossing the Mediterranean, Pedro de Covilhao reached the Red Sea by land and went on to explore the west coast of India. The next voyage he made paved the way for Vasco da Gama, who reached Calicut by sailing round Africa between 1497 and 1499. Many ships and men were lost during this expedition because of disease, mutiny, storms and other difficulties, but the ships that did come back were laden with spices that more than compensated for the heavy cost of the voyage. Once they had seen the size of the profits, the Portuguese, in as litde as ten years, and using military force as necessary, managed to oust the Arabs from the Indian Ocean and organize fortified trading posts as far afield as the fabulous Spice or Moluccan Islands. In 1513 one of their ships anchored at Canton in southern China, and by the mid-sixteenth century they had also established trade and diplomatic relations with Japan.

During the first decades of the sixteenth century the Portuguese continued to strengthen and expand their setdements in Asia. They did not, however, push towards the interior of these regions, but confined themselves to controlling the sea routes. These routes were already completely transforming the geography of exchange between Europe and Asia, and the limits of the economic interests of the Old Continent were reaching farther and farther eastward.

The Spanish economy and the New World The other country that played a leading role in European expansion was Spain, but in this case it was westward. Economic conditions in Spain created their own particular problems and there were also serious difficulties relating to internal unity.30 The varied nature of the territory gave rise to difficulties and conflicts. There were fertile coastal regions to the east and south, mountainous areas to the north and in other parts of the country, and a high plateau area known as the meseta that embraced the central part of the peninsula. In the field of agriculture the Arab and Moorish peoples, who had populated Andalusia before the Christian reconquest, had left a considerable heritage. They had been excellent market gardeners and had brought the art of irrigation to a high level, but the religious fervour of the Spanish sovereigns led to this legacy being wasted. At the same time as many Muslims were already leaving the country, and in the same year as the reconquest of the kingdom of Granada and the discovery of America 140 I World Economic Development

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by Columbus, they also ordered the Jews, who were skilled artisans and traders, to be expelled from the

kingdom.

The productivity of Spanish agriculture was among the lowest in western Europe. One of its main

problems derived from the conflict between the peasants and the large landowners. The land had remained

intact as a result of particular property laws such as the fideicommissum^ and was largely given over to sheep rearing. Wool had a very profitable outlet on the international market, because of the strong demand from the

textile centres, especially in the Mediterranean area. The unique practice of transhumance was widespread

among shepherds, who moved their flocks between the summer mountain pastures and the winter quarters on

the lower plains. It was unique because of the enormous distances that had to be covered, and the way it was

organized, not to mention the royal protection it enjoyed. The sheep farmers formed a corporation known as

the Company of the Mesta and were a powerful lobby at court. Putting a tax on the migrating flocks at

strategically located toll stations was an easy matter. Wool was a valuable goods item that brought money,

unlike many agricultural crops, and it could be easily taxed when it was exported. In exchange for paying

higher taxes, the Mesta was granted special privileges, including the right to unlimited grazing on common

land, to the detriment of agriculture.

Spanish expansion was perhaps more fortuitous, and less concerned with seeking new economic horizons

for trade, than that of Portugal. Cameron has succinctly described how in 1483 or 1484, when the ships sent by

John II of Portugal were still opening up routes along the African coast, a Genoese named Columbus, who had

served in the Portuguese navy and married a Portuguese woman, petitioned the king to finance an expedition

over the Adantic to reach the east by sailing westwards.32 The proposal was not altogether an unusual one, since

there was already a widely held belief that the earth might be spherical. John II had already authorized privately

financed expeditions westwards, but resources were being concentrated on the more realistic project of sailing

round Africa. Columbus’s proposal was consequently rejected. However, Columbus would not admit defeat and turned instead to the Spanish sovereigns Ferdinand and Isabella. However, they were involved in war

against die Arabs, and did not chink the enterprise was feasible. The English and French sovereigns thought

likewise； finally, in 1492, to celebrate the victory over the Moors at Granada, Isabella of Castile agreed to finance

his expedition. On 12 October that year, after sailing for over two months, he reached the islands that were to be

called the West Indies, since it was thought he had actually reached Asia. Columbus called the indigenous

people Indians, though their evident poverty caused him dismay. He sailed back to Spain, and the following

year returned with a much larger and

The Economy in the Fifteenth Century I 141

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better equipped expedition of seventeen ships and l,5〇〇 men, taking cattle and other animals to start the real work of colonization.

New conflicts on the seas and the Treaty of Tordellisas At the close of the fifteenth century there were thus two states up against each other on the seas. Both were perhaps convinced they had reached the same rich Eastern markets, but by opposite routes：

As soon as Columbus arrived back from the first expedition, Ferdinand and Isabella turned to Pope Alexander VI so that a demarcation line1 could be drawn confirming Spanish rights over the lands that had just been discovered. This ideal line was to be drawn between the two poles, at a longitude of 100 leagues (about 330 miles) west of the Azores and Cape Verde. It was to divide the non-Christian world into two halves for the purpose of farther explorations, with the western part being reserved for the Spaniards, and the eastern part for the Portuguese. A year later, in 1494, when the Treaty of Tordillas was being drawn up, the King of Poirtugal persuaded the Spaniards to mark out a new line that was to lie about 210 miles farther west of the 1493 line. This seems to point to the fact that the Portuguese already knew of the existence of the New World, since the area of South America bulging eastwards, which would form the bridgehead, and later become Brazil, was in the Portuguese hemisphere in the second treaty. In 15〇〇, during the first great Portuguese trading expedition after the return of Vasco da Gama, Pedro de Cabral headed straight for this area and claimed for Portugal the territory on which he landed, before continuing for India.

In the meantime explorers from other countries were following in the footsteps of Columbus. John Cabot, an Italian at the court of Henry VII of England, undertook a voyage in 1497 with financial backing from a number of Bristol traders, and reached the island of Newfoundland and Nova Scotia. The following year he explored the northern coastline of North America with his brother； but the results were considered so economically insignificant that the king compensated them with a mere £ 10. At the beginning of the next century, French merchants financed another Italian, Verrazzano, to search for a western route to the Indies. Ten years later the Frenchman Jacques Cartier carried out the first of three voyages that would lead him to discover and explore the St Laurence river. All this marked the beginning of a process of liberation from the restrictions of medieval knowledge towards a new and different geographic and economic outlook.

As Cameron has also observed,33 the most dramatic and significant aspect of European expansion—the premises of which were laid down in the fifteenth century—was the transfer of European culture, and the way it modified non-Western cultures, even leading to their extinction. The economic changes, whether quantitative in terms of the amount of goods circulating, 142 I World Economic Development or qualitative in terms of new products and markets, need to be seen against the cultural, social and political repercussions that these events were to have over the following centuries.

NOTES ___________________________________________________ 1. F. Braudel, Civilta materiale, economia e capitalismo, vol. Ill, I tempi del mondo, Turin, 1982, pp. 5-5〇.

2. Braudel considered that a slightly modified model could also be applied to the next two centuries.

3. neirinterporsi del mercante tra produttore e consumatore, grazie alia enorme distanza spaziale e temporale che, per certi

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merci, separava i luoghi di approwigionamento da quelli di vendita* M. Cattini, Lagenesi della societa modema contemporaneay

Parma, 1992, pp. 170-1.

4. Spices form the great exception to F. Braudel s self-sufficiency, model.

5. Phocaea had been the source of this substance until the fall of Constantinople in 1453 when it was replaced by Tolfa, near

Rome. Alum was used as a mordant in dyeing textile fibres, and in the tanning of leather.

6. The next section of this chapter explains how, in an economic system based only on metal currency, the possibility of

transacting business without it reduced the need to have it in circulation； this was a great advantage, since obtaining the

precious metal usually involved long and hazardous journeys. The trade fairs were precisely where the bill of exchange

originated; this was an instrument of credit used throughout Europe and acted as a draft in a foreign currency deferring

payment in time and space, whether to settle a business deal or grant a loan. It enabled trading houses to expand their

range of business and to operate more efficiently.

7. Allowing for defence requirements, in the fifteenth century the average crew-load ratio was one sailor for every four to

five tons.

8. The right of a feudal lord. (Translators note.)

9. This was a /，>», which was made up of twenty 似/"，•，each of which consisted of twelve 心;

10. The hypothesis formulated by the English financier Thomas Gresham in the sixteenth century that bad money drives

good money out of circulation. (Translators note.)

11. Florence had over thirty banking houses in 1470.

12. According to Cipolla, the other two ills became more common or were worsened because of war; famine resulted from the

destruction and pillaging of crops and cattle by the passing armies, while epidemics were often the result of the poor state

of health and sanitary conditions of the armies, and spread more rapidly among a malnourished population.

13. C.M. Cipolla, Storia economica delletapreindustrialey Bologna, 199〇, pp. 13-17 and 171-84.

14. For example, in England the mortality rate was over 20 percent of the population. In some Italian cities over

three-quarters of the inhabitants died. During epidemics and famines, there was an increase in the number of deaths but

there was also a decrease in the number of births, so the two results were compounded.

The Economy in the Fifteenth Century I 143 15. P. MAdin\m3iy Economiapreindustriale. Mille anni: dalIXalXVIIIsecolo, Milan, 1995, pp. 19-20.

16. Genoa, Milan, Venice and Florence had almost 100,000 inhabitants each.

17. Paris (almost 100,000), London, Cologne and Barcelona were among the most important.

18. F. Mauro, L'Europa delXVIsecolo. Aspetti economici, Milan, 1974, pp. 138-48.

19. There are some anomalies. Mining really belongs to the primary sector, but is normally considered a secondary

activity; transport, which is often included in the secondary sector, is a service (considered a tertiary activity).

20. In particular WW. Rostow, The World Economy. History and Prospect, Austin x, 1978, p. 778, and S. Kuznets, Economic

Growth of Nations. Total Output and Production Structure, Cambridge, 1971, p. 14

21. The heart of a large medieval estate was the interior courtyard, or curtis, which by its very nature was closed* with

respect to the economy of the period. {Translator s note)

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22. For instance copper was found only in Sweden and Germany, tin in Cornwall and Ireland, lead in Austria and

Hungary.

23. F. Braudel, Civilta materiale, III, pp. 5-5〇.

24. R.S. Lopez, 4Market expansion: the case of Journal of Economic History, 24,1954, pp. 445-54.

25. C.M. Cipolhy Allegro ma non troppoy Bologna, 1988.

26. C.M. Cipolla, Storia economica, pp. 130-1.

27. It is noteworthy that even in the fifteenth century he was still not specialized: he was a merchant-entrepreneur as

regards textiles, but was also banker, insurer, dealer in spices, metals and grains.

28. P. Malanima, Economiapreindustrialey pp. 84-91.

29. Precise nautical charts of the coasts. {Translators rioted)

30. The last Arab territorial outpost, the Caliphate of Granada, fell only in 1492. Though Isabella of Castile and

Ferdinand of Aragon had been joined in marriage in 1476 the two kingdoms continued to be ruled separately,

sometimes following different policies, until their grandson Charles came to the throne.

31. A type of arrangement in a will whereby the heir was obliged to pass on the entire inherited property, or a part of

it. {Translator s note)

32. R. Cameron, Storia economica delmondo, Bologna, 1993, pp. 158-65.

33. Ibid.fpA67.

144 I World Economic Development

Reading "Europe Before Asia?" by Kenneth Pomeranz has been excluded from the digital version

of this book due to publisher copyright restrictions.

To read the article in full, please refer to the print version

of "World Economic Development", published by Cognella, Inc in 2016.

Topic Five Questions

185

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1. Explain the impact of the Hanseatic League and the Champaign Fairs on European trade.

2. Describe European population flows 1200-1500.

3. Contrast Portuguese and Spanish overseas exploration.

4. Provide five detailed ways in which the Chinese economy compared favorably to that of Western Europe in the pre-modern era.

5. Explain Kenneth Pomeranz s explanation for the industrialization of Western Europe, particularly Britain, before Asia, especially China. In particular, explain how differential

factor endowments and having to simultaneously meet the fol- lowing needs played a role：

food, fuel (for both warmth and eventually as a source of energy), clothing, and building

materials (wood vs. iron).

Suggested Supplemental Reading North, Douglass C., and Robert Paul Thomas. aAn Economic Theory of the Growth of the Economic

History Review 2?>, no. 1 (April 1970): 1-17. Nunn, Nathan. KThe Long-Term Effects of Africas Slave Trades.^ The Quarterly Journal of Economics, Vol.

123, Issue 1 (February 2008): 139-76.

Topic Six

THE FIRST INDUSTRIAL REVOLUTION

Britain’s Revolution New Processes and Economic Transformation

Peter N. Stearns

efore the eighteenth century the most advanced economies in the world featured a combination of craft

manufacturing (its most skilled components based in cities) and a large labor force committed to

agriculture. Most production, both manufacturing and agricultural, was based on manual household labor, with

larger village groups combining for certain operations like harvesting and road building. The use of slave crews for

the commercial production of key agricultural goods like sugar and tobacco had spread, particularly in the

Americas, though there were no major changes in technology. Several societies had developed sophisticated craft

skills for the production of luxury cloth, metal goods, and other items. China, Japan, India, the Middle East

(including North Africa), and western Europe stood at the forefront in terms of artisanal technology and the vital

capacity to produce iron and iron products. Africa had a well-established ironworking tradition, and metallurgy

and armaments manufacturing were advancing in Russia by 1700.

West European technology had gained ground from the fifteenth century onward. Western production of

guns, based on earlier skills in ironworking developed initially for the production of great church bells, provided a

crucial military edge, particularly in naval conflicts. Western metallurgy generally led the world by the sixteenth

century. During the seventeenth century, growing dominance in world trade spurred the growth of textile

production in many parts of western Europe, and here, too, technological refinements occurred that made the

West effectively an international leader. Western biases concerning the rest of the world began to take on a

technological cast, with scorn for the many peoples slow to imitate Western developments. A Western missionary

in the seventeenth century described how, in his opinion, the Chinese

Peter N. Steams, "Britain's Revolution: New Processes and Economic Transformation," Industrial Revolution in World History, pp. 21-39. Copyright © 2006 by Perseus Books Group. Reprinted with permission.

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B

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could not be persuaded ato make use of new instruments and leave their old ones without an especial

order from the Emperor to that effect. They are more fond of the most defective piece of antiquity than

of the most perfect of the modern, differing much in that from us who are in love with nothing but what

is new."

With all these developments, however, Western technology remained firmly anchored in the basic

traditions of agricultural societies, particularly in terms of reliance on human and animal power.

Agriculture itself had scarcely changed in method since the fourteenth century. Manufacturing, despite

some important new techniques, continued to entail combining skill with hand tools and was usually

carried out in very small shops. Western production methods were not decisively superior to those in

places like China and India. The most important Western response to new manufacturing opportunities

involved a great expansion of rural (domestic) production, particularly in textiles but also in small metal

goods. Domestic manufacturing workers used simple equipment, which they usually bought

themselves, and relied on labor from the household. Many combined their efforts with farming, and in

general their skill levels were modest. The system worked well because it required little capital; rural

householders invested a bit in a spinning wheel or a hand loom ， and an urban-based capitalist

purchased the necessary raw materials and, usually, arranged for sale of the product. Output expanded

because of the sheer growth of worker numbers, not because of technical advancement； indeed, the low

wages paid generated little incentive for technical change.

Western Europe in 1700 was an advanced agricultural society, with an unusually large commercial

sector and a great deal of manually operated manufacturing. The region was developing a certain

fascination with machines but most decidedly was not industrialized.

Three changes began to combine during the eighteenth century to accelerate manufacturing and

ultimately generate the worlds first industrial revolution. They affected much of western Europe, but

particularly Britain, where the revolution first took shape.

New agricultural methods came into use in the late 1700s. Peasants in many parts of Europe,

including Ireland, France, and Prussia, began to grow potatoes, a New World crop long regarded with

suspicion. Potatoes offered several advantages over the grains Europeans had traditionally relied upon

as staple food： Higher caloric value could be produced from smaller and sometimes less fertile plots of

land, and for many decades potatoes were less subject to periodic diseases than were grains. Increasing

adoption of the potato supported the beginnings of rapid population growth in Europe by the 1730s.

Britains population, for example, doubled between 1750 and 1800, and that of France rose by 5〇 percent.

The potato also freed a percentage of rural labor for work in other areas, again because of its caloric

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roughly the same time, farmers in Holland began to develop new drainage systems by which swampland could be converted to agricultural use, and they introduced nitrogen-fixing crops that enabled diem to keep fields in use every year rather than resting them every third year to regain chemical fertility. With less fallow land and more land in use overall, food production expanded, and this expansion also contributed to population growth and to the release of new workers for other potential work activities.

Although agricultural improvements took shape in various places, they received enthusiastic support in Britain, where aristocratic landlords were particularly interested in new and more rewarding production for market sales. Draining of marshes added cultivable land in eastern England. Innovators like <tTurnip>，Townshend spread the word about using nitrogen-fixing crops to increase production by eliminating fallow land. As in other parts of Europe, increased food supplies spurred British population growth and reduced the percentage of the labor force required in agriculture.

This was the context in which what some historians have called protoin-dustrialization began to intensify in several areas. Domestic manufacturing systems spread as more workers became available, and population growth and new consumer interests created new markets, particularly for textiles. Many rural workers began to farm only part time, taking orders for thread and cloth from urban merchants at other times. This capitalist system generated growing production. Though the workers involved used traditional methods based on manual labor and cooperation of the family in a household operation, they began to see themselves as different from peasants_more interested in urban fashions, for example, which created additional markets.

Another set of changes provided a context for new technologies. Massive strides in European science, in an already active commercial economy, encouraged attention to new devices in the manufacturing field. A host of scientific societies took shape that combined researchers with merchants and manufacturers and led to excited discussions about down-to-earth technological possibilities. Advances in chemistry helped trigger the discovery of new techniques for manufacturing and glazing pottery in eighteenth-century England. New scientific knowledge about the behavior of gases set a context for considering the possibility of harnessing steam to provide a moving force to replace unreliable water and wind as power sources. The first steam engine was invented by a French refugee in Holland in the late 1600s； several Dutch scientists discussed the prospect of propelling a boat by steam. Around 1700 the engine was improved in England by Thomas Newcomen, who applied it to drainage pumps for coal mines. A steam truck was invented in France in the 1760s, though it was never put to use. The engine was perfected in the 1760s by James Watt, a Glasgow craftsman who produced scientific

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instruments, and could be applied to industrial use. In a poem written in 1789, the English scientist

Erasmus Darwin (grandfather of the evolution-theory biologist Charles) ecstatically praised the engine s

possibilities：

Soon shall they arm, unconquer’d steam! afar Drag the slow barge, or drive the rapid carp; Or on wide-waving wings expanded bear Theflying chariot throughthefieldsof air. —Fair crews triumphant, leaning from above, Shall wave their handkerchiefs as they move; Or warrior bands alarm the gaping crowd, And armies shrink beneath the shadowy cloud.

Along with changes in agricultural production and a stream of new inventions and attendant

intellectual enthusiasm came additional shifts in England's domestic manufacturing system, initially

beneath the surface. The nation was already a leader in world trade. It had a growing population by the

1730s, and the public was expressing interest in more fashionable clothing_an early manifestation of

new consumer tastes. This setting prompted a handful of domestic producers to think about expanding

their operations, in a gradual shift that proved to be the forerunner of a new organization of

manufacturing labor. For example, the Halifax area in Yorkshire in the late seventeenth century was a

significant center for the production of wool cloth by local artisans in the countryside who often

combined their manufacturing with farming. Output from each worker was low, though the profits

could provide some useful supplementary income. Even substantial farmers put their hand to the loom

from time to time or used family members as workers. In the 169〇s a few workers began buying more

wool than they could handle themselves； they hired others to work the wool at home for them and,

without abandoning their own labor at first, were on the route to becoming manufacturers. By the next

generation, these same manufacturing families, a minority of the wool workers in the region overall,

were beginning to separate themselves socially from their employed labor. They were no longer willing

to share a beer； they were thinking of their workers as a class apart. One of them wrote in 1736, during a

trade depression, aI have turned ofFlaid off a great many of my makers and keep turning off more

weekly." His ^makers" clearly, had become disposable subordinates in the process of production, and

a traditional manufacturing system was beginning to yield to a more structured hierarchy.

By the 1730s several of these strands of change were beginning to combine in England.

Protoindustrialization meant that, although the total number of agricultural workers grew, 192 I World Economic Development

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even as aristocratic landlords consolidated their holdings and sponsored more efficient methods, the percentage of a rapidly growing population employed in agriculture declined. Market opportunities for manufacturing production rose, however, despite frequent slumps, through population growth, expanding international trade, and the growing appetite for con- sumer goods like fashionable clothing. As more and more workers and small businesses began expanding their operations by hiring wage workers, the profile of a new manufacturing middle class began gradually to emerge. Finally, new technology began to be developed for the sector that most obviously invited it： the domestic production system. In 1733 an English artisan, James Kay, invented the flying shuttle, a new kind of loom for weaving cloth that automatically moved thread horizontally through a frame when activated by a foot pedal. This machine was nothing fancy, and no new power was involved, but one worker with a child as assistant could now do the work of two adults. Inventions for automatically winding fiber to make thread followed in the 1760s. New opportunity and evolving attitudes on the part of the growing manufacturing class, plus the excitement surrounding technological change and the resultant encouragement to invention, were pushing the traditional production system well beyond its former bounds.

By the 1760s, then, several key ingredients of the industrial revolution had been assembled in England, after several decades of protoindustrial changes within the domestic manufacturing system. New entrepreneurs were ready to manipulate workers in novel ways. Inventions increased the number of industrial processes handled automatically. The manufacturing sector and its labor force were growing steadily. Then came a usable steam engine, which by the 1770s could be hooked up to some of the semiautomatic inventions already devised for manual textile workers. Because steam power was concentrated and could not be transmitted over long distances, workers had to be assembled near the engines to do their work； small factories had to replace household production sites. This final change, too, was developing rapidly in certain key sectors by the 1770s. Britains industrial revolution was under way.

Britain Becomes the Workshop of the World The initial explicit stages of the world s first industrial revolution—as opposed to the previous preparatory decades—involved a number of elements. Rapid innovation transformed several sectors of industry, with new technology and organization at the core of change. Without this innovation, the industrial revolution could not have been identified. At the same time, many branches of the economy were affected only slightly, and thus some overall measurements of industrialization remained modest. (It is for this reason that some scholars, failing to look at the longer-term picture, dislike the term industrial revolution.) Within the innovative sectors,

Britain’s Revolution I 193

I R I S H S E A

390 - 800 〇 Town connected with persons per water transport system

□ Expanding port

Narrow canal 〇 Expanding town

Broad canal ：• Coalfields

pjvers « Iron ore mining

e Copper mining

_ Lead mining

Salt mining

Slate mining

N O R T H S E

A

MAP 6.1 The Beginning of the Industrial Revolution: Great Britain, c. 1750-1820

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1 3 1 / 2 3 4

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intense misery pervaded the experience of many of the human beings involved； the industrial revolution was built on the backs of exploited labor. Finally, as the revolution caught on, it inevitably brought in its wake further change in both technology and business practices. Most of these developments occurred during decades when Britain nearly monopolized the new processes, winning a growing world role on the strength of its industrial lead.

The cotton industry commanded the central role in Britain s early industrialization. Cotton, as a fiber, had characteristics relatively easy to mechanize； it broke less often than wool and, particularly, linen. Further, cotton was a new product line in Europe, more open to innovation. It had been widely used in India, and an Asian market for cotton cloth already existed. In England, however, its novelty facilitated the introduction of new machines, though the raw fiber had to be imported. Workers were displaced indirectly by the rise of cotton because traditional linen production declined. The lack of a large established labor force in cotton obviated the need to prompt many traditional workers to change their ways direcdy, and this fact limited resistance. At the same time, cotton had great appeal as a product： It could be brightly colored for a population increasingly eager to make a statement through clothing, and it was easily washed, so appealed to people who were developing more stringent notions of personal cleanliness. Cotton was in demand, and this demand invited new techniques to produce the cloth in quantity.

By the 1730s a series of inventions began to shift cotton manufacturing increasingly toward a factory system. The flying shuttle, designed originally to improve hand weaving, was refined over another thirty years sufEciendy in accuracy to make possible the application of nonhuman power. Edmund Cartwright patented a power loom in 1785; his description of his procedures revealed the new kind of thinking being applied to technical issues： KIt struck me that as plain weaving can only be three movements which were to follow one another in succession, there would be little difficulty in producing them and repeating them.” Indeed, mechanization involved isolating parts of the production process that could be accomplished through highly standardized, accurate motion and then applying to such motion equipment that could be linked to power sources. Weaving turned out to be among the more complicated stages to mechanize, and Cartwright s loom had to undergo substantial improvements before, by around 1800, it could be widely used.

More impressive developments occurred in the preparatory phases of making cotton. About 1764 James Hargreaves invented a spinning jenny device, which mechanically drew out and twisted the fibers into threads—though this advance, too, was initially applied to handwork, not to a new power source. Carding and combing machines, to ready the fiber prior to spinning, were developed at about the same time. Then, in 1769, Richard Arkwright developed the first water-powered spinning machine; it twisted and wound threads by means

Britain’s Revolution I 195 of flyers and bobbins operating continuously. These first machines were relevant only for the cheapest kind of thread, but other inventions by 1780 began to make possible the spinning of finer

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cotton yarns. These new devices also could be powered by steam engines as well as waterwheels. The basic principles of mechanized thread production have not changed to this day, though machines grew progressively larger, and a given worker can now tend a far greater number of spindles. Other inventions pertinent to the industrialization of cotton production included new bleaching and dying procedures (in the 1770s and 1780s) and roller printers for cloth designs, which replaced laborious block printing by hand —another new method that increased production a hundredfold while reducing workers' skill requirements.

Cotton production by the 179〇s was advancing with extraordinary rapidity. New machines required a factory organization, for the power could not be transmitted widely. Workers had to be removed from their homes and clustered around the new machines, and cotton spinning was entirely concentrated in factories by the 179〇s. Because mechanical weaving lagged, this initial industrialization spurred a massive expansion of domestic looms； the thread produced was distributed from huge warehouses in die new factory centers such as Manchester. Power weaving came into general use in the Manchester area only after 1806, then began the full conquest in cotton after 1815 _to the immense distress of the hundreds of thousands of workers who had been drawn into the surrounding countryside to do the weaving. There were massive fortunes to be made in the industry. Robert Owen, a store assistant, began his Manchester factory in 1789 by borrowing £100, and by 1809 he was in a position to buy out his partners in his New Lanark Mills for £84,000 in cash—this in a country where only about 4 percent of the population earned more than £200 per year.

Sales of manufactured cotton goods soared, for with the new machines not only did output increase, but prices plummeted. Exports were essential, and by 1800 approximately four pieces of cotton cloth were sold abroad for every three disposed of at home. As late as 1840 cotton continued to provide about half the entire value of British exports. Continental Europe was a major market, but it consumed only about a third of Britains export production in this field. Latin America was seized by British cotton exports after Spanish rule was cast off early in the nineteenth century. By 1820 the impoverished continent was buying a quarter as much cotton cloth from Britain as was Europe, and by 1840 the figure had risen to a full half. India and Southeast Asia were deindustrialized by a combination of British factory competition and colonial policy as machine products beat out hand labor； cotton imports from Britain rose by l,5〇〇 percent between 1820 and 1840. Africa was another major market. Of the major nations, only China held out, until its economy was forced open in the early 1840s.

Until about 1840, Britains industrial revolution consisted primarily of changes in the cotton industry, its massive results being expanding production and world outreach, but other 196 I World Economic Development

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developments were vital as well. Mechanization of wool spinning and weaving was well under way by

1800, impeded only by the higher cost and greater fragility of wool fiber. New machines and procedures

were introduced into beer brewing； the big factories established included the great Guinness brewery

in Dublin. Pottery manufacturing concentrated important developments in industrial chemistry during

the late eighteenth century, and new methods reduced the work required in processes such as glazing

and cutting. Several of these innovations created major health hazards for the workers involved—new grinding methods, for example, tthath proved very destructive to mankind, occasioned by the dust

suckled into the body which... fixes so closely upon the lungs that nothing can remove it”一 but productivity per worker expanded immensely, to the benefit of new pottery magnates such as Josiah

Wedgwood. In the 1830s new printing presses were developed that could be powered by steam engines

and thus greatly expanded production in such fields as daily newspapers. A few commercial bakeries

also introduced important new methods.

The most striking mechanical strides outside the growing textile sectors occurred in metallurgy and

mining. During the eighteenth century British manufacturers learned to produce coke from coal (by

heating and concentrating it in special ovens) and to use coke instead of wood-derived charcoal for

smelting iron ore. Coke production, in turn, depended on advances in furnace design and steam

blasting (introduced by John Wilkinson in 1776). As coke supplies grew, furnace design for smelting

and refining iron was also reconsidered； the result was larger furnaces and higher output per worker.

Henry Cort s reverberatory furnace for refining iron (developed in 1784) saved fuel but above all

increased productivity by l,5〇〇 percent. Steam-powered machines to roll metal, replacing manual

hammering, soon followed. The iron industry began to expand rapidly. Britain had produced 25,000

tons of pig iron in 1720； by 1796 the figure was 125,000 and by 1804 was 250,000 tons.

The growth of the iron industry had two further consequences. Coal mining surged to provide the

fuel for iron smelting and for steam engines generally. Major advances in work merfiods at the coal face

did not develop, though there were important improvements in tim- bering mine pits to allow deeper

shafts. Transportation from the coal face did demand attention. Wooden and metal rails were laid down

to facilitate carts of coal being pulled by horses or people ； soon after 1800 experiments with

steam-driven engines to pull the carts began. At the same time, the number of miners increased rapidly

because this vital industry remained extremely labor-intensive.

At the other end of iron production, machine building expanded steadily. Inventions of new

equipment, from spinning machines to the steam engine, did not always translate readily into

production methods beyond the prototypes. Twelve years passed, for example, between Watt s

construction of a working model engine (1765) and usable cylinders that could be widely

Britain’s Revolution I 197

manufactured. Before 1800 machine building was scattered in small shops and was performed with

hand methods, and even after this date the industry long demanded highly skilled workers laboring

with relatively little sophisticated equipment of their own. But attention in France and the new United

States to the manufacturing of guns led to the development of precise patterns for designing machine

parts, so that these parts could be interchangeably used on a given machine. Several machines were

designed to bore and turn the machine pieces, and their industrial use gradually spread in Britain (and

the United States and western Europe) during the early decades of the nineteenth century.

Headed by advancements in the cotton industry, Britains early industrial revolution featured

dramatic new methods that subsequently generated improved productivity and more standardized

products in a host of industries. Heavy industry_mining and metallurgy_gained ground rapidly, though

the importance of the labor force and the total product long lagged behind textiles. Vast numbers of

new workers were drawn into factories and mines. Some of these people were relatively unskilled, for

many of the new processes required only modest training compared with older methods, but some, as in

machine building, applied extensive skills to new products. Developments were not uniform： Many

production branches, as in the manufacturing of brass and other small metal goods, were scarcely

touched, though they often expanded because of growing demand. Nor was progress steady: Great lags

often intervened, as in mechanical weaving, between the initial devices and their widespread

applicability. Britain’s industrialization was a revolution, but it neither occurred overnight nor was tidily packaged.

The revolutionary quality, however, showed through in a host of ways. Urban growth was one of

these. Cities of various sorts exploded in Britain in the late 1700s and early 1800s, the result of

burgeoning banking operations, growing port activities, and so on. The bi^est expansion, however,

occurred in the factory centers as factories located near energy sources and a large labor force

accumulated to facilitate factory operations. Manchester, Britains cotton capital, grew from a modest

town of25,000 in 1772 to a metropolis of367,232 by 1851. Leeds, Birmingham, and Sheffield, centers of

textiles or metalwork, grew by 40 percent between 1821 and 1831 alone. Britains industrialization

revolutionized where many people lived by drawing work increasingly into the big-city context (and of

course by making agriculture more efficient, thus less labor-intensive). During this period the majority

of British families changed their residence and much of their framework of daily life as they shifted from

reliance on agriculture to involvement with industry.

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Industrialization Exacts a Price The industrial revolution, even in its early phases, prompted major changes in business scale. Many

operations started small ； because initial textile machinery, in particular, was not costly, many

small-scale innovations could draw on a wide array of available business talent. But there was obvious

challenge. Traditional textile equipment for a home manufacturing operation cost a fraction of what

was required to set up an early factory： By the 1780s British textile mills were valued at £3,000-£4,000,

many times the £25 cost of a good hand loom. The first multistoried factory powered by steam,

established in 1788, was valued at £13,000; its steam engine alone, large for the time at thirty

horsepower, cost £l,5〇〇. Plants for metallurgy and mining operations were more expensive still.

Businesses did not immediately have to adopt radically new methods of capital formation and

management systems, but the pressure to innovate was quite real. Many firms were established as

partnerships because necessary capital was unavailable otherwise. Many factories, launched under the

eye of an ever-present owner, had to generate a small bureaucracy when it became clear that directing

the labor force, providing the necessary technical expertise, arranging for the purchase of raw materials,

and selling the goods simply escaped the capacity of any one individual. Borrowing arrangements

became steadily more elaborate, although abundant capital kept interest rates fairly low in early British

industry. Family firms had to branch out to hire outsiders to participate in more specialized

management structures. And although massive profits were possible—Robert Owens achievement was replicated in a host of cases as a new class of wealthy factory owners began to emerge in the 1820s_the

possibility of failure was very real as well. Sales recessions were frequent, particularly in industries like

cotton that depended on exports. Poor harvests reduced income at home and cut deeply into industrial

sales. Significant economic crises occurred at least once a decade； a particularly severe recession

followed the end of the Napoleonic Wars in 1815. Workers suffered most in these catastrophes as

unemployment soared, but many manufacturers collapsed financially as well.

The early industrial revolution in Britain was built on the backs of cheap labor driven mercilessly

hard. In rural areas, the standard of living fell for many workers, who were pressed both by population

growth and by competition from machine-made goods that cut into branches of domestic

manufacturing. Many rural women, for example, lost their manufacturing income when spinning was

mechanized. With less land available for small farmers, less supplementary employment, and

competitive pressure on agricultural wages, stark misery spread in many agricultural districts. Although

hand weavers enjoyed some real prosperity before 1800, when thread production soared but mechanized

weaving had yet to take hold, their pay began to plummet thereafter. By 1811 wages were down

one-third from their 1800 levels, and by 1832,

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when hand weaving in cotton was dying out in Britain, they had fallen by a full 60 percent. Industrialization was not entirely to blame for this collapse_population pressure and displacement of small farmers by aristocratic landlords played a role—but there can be no doubt of the massive hardships involved. Further, although the worst misery was centered in areas remote from the factories, the widespread deterioration also cut into the standard of living of industrial workers, who faced a growing amount of potential competition for jobs.

In the factories proper, however, wages in some sectors held up somewhat better, for new workers had to be drawn in. Mining wages, for example, seemingly improved in Britain s early industrial revolution. Skilled workers, needed to set up and maintain the new machines, also did well, often winning long-term contracts and other benefits. On the other hand, many employers, desperate for workers but desperate also to keep costs down to protect their expensive investments and allay their fears of business failure, looked for labor shortcuts. This search was the inspiration for hiring groups of orphans from London and other large towns, who were shipped in droves to the factory centers in return for employer provision of food and barracks housing. Extensive use of child and female labor was not in itself novel—families had always depended on work by all members to survive—but use of children and young women specifically because of the low wages they could be pressed to accept reflected the pressures of early industrial life and unquestionably constrained the nascent working class in the factories. To be sure, factory-produced goods such as clothing and utensils fell in price, but there were drawbacks，too: Urban housing often was costlier than its preindustrial rural counterpart, and food costs fluctuated. Historians of Britain s industrial revolution have debated the standard- of-living question for many decades without definitively agreeing about whether conditions grew worse or better. Certainly there was variety, and factory workers were not the worst-paid group in the British population. Certainly also, however, particularly before about 1819, there was widespread suffering in the factory cities, where few workers were able to afford much above a bare subsistence even as more of their employers grew fat from the fruits of the new industry.

Other pressures added to the burdens on the new factory workers. No regular provision for illness or old age cushioned industrial life, and factory workers, unlike many small farmers, had no plot of land to fall back on for at least a modest food supply if their strength began to fail. The frequent economic slumps often caused unemployment rates, even for skilled workers, to soar as high as 60 percent for several months or even a year, and food prices often went up in these periods. Not surprisingly, many workers, even those capable of improving their earnings, found industrial life extremely unpredictable, even nerve-wracking, and in the worst slumps, death rates rose in the factory centers. Furthermore, and again even for workers whose 200 I World Economic Development pay might have increased modestly, the industrial revolution cut into leisure time. The labor force was prodded to work harder than its preindustrial counterpart, and work hours inched up as employers sought to maximize use of the expensive machinery. Some textile factories drove their workers sixteen hours a day, Saturdays included. Traditional festival days, when rural workers had taken time off, came under attack as the new factories fined workers for unauthorized absences. Finally, factory jobs exposed many workers to new physical clangers: dust from textile fibers,

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accidents in the coal mines, and maimings by the fast-moving_usually unprotected_machinery. The early industrial revolution depended on the need that growing numbers of workers had for

jobs in order simply to survive. Necessity, not attraction, lay at the root of the formation of Britain s new factory labor force. Relatively low pay —declining pay in some circumstances— helped subsidize the investment in new machinery and supported the gains that motivated successful entrepreneurs, and increased work time contributed to growing output along with the machines themselves. And although the misery was worst in the early decades of industrialization_real wages and urban health conditions began to improve in the 1820s or at least in the 1830s—and although debate continues about exactly how bad things were, there is no doubt that desperately hard work and scant reward constituted key ingredients in the early industrialization process in Britain.

Not surprisingly, conditions of early manufacturing generated serious protest among many British workers, though labor organization was illegal and poverty limited the resources available for protracted struggle. Many workers struck or rioted against cuts in pay or high food costs. Beyond these specific efforts, a number of factory hands articulated a larger sense of the exploitation to which they were, in their judgment, subject and about the gap that had opened between them and the factory masters. A Manchester cotton spinner in 1818 condemned his employers for their ^ostentatious display of elegant mansions, equipages, liveries, parks, hunters and hounds.... They are literally petty monarchs, absolute and despotic, in their own particular districts； and to support all this, their whole time is occupied in contriving how to get the greatest quantity of work turned off with the least expense.M The spinner also excoriated the “terrible machines” that had so worsened die quality of work as compared with preindustrial life. Some workers did far more than talk. In a series of riots between 1810 and 1820 hand workers attacked and destroyed the textile equipment that threatened their jobs or at least their accustomed wages. These Luddite workers claimed inspiration from a mythical leader, Ned Ludd, whose office was supposedly in Sherwood Forest, and they pointed to a world of work in which skills would be valued, workers treated as equal producers rather than factory ^hands^ and machines outlawed. Their efforts failed, as did more ambitious unionization attempts in textiles and mining during the 1820s and early

Britain’s Revolution I 201 1830s. But the resentment of the new working class that the factories had assembled could scarcely be denied. The industrial revolution created a new division between the directors of manufacturing, the owners, and the workers they sought to control. To many observers, this was one of the essential and deeply troubling features of the wider industrial revolution. A middle-class traveler to Manchester in 1842, W. Cooke Taylor, put it this way in a published travel account：

a stranger passes through the masses of human beings which have accumulated round the mills and print works ... he cannot contemplate these ^crowded hives，>

without feelings of anxiety and apprehensions almost amounting to dismay. The population, like the system to which it belongs, is NEW； but it is hourly increasing in breadth and strength. It is an aggregate of masses, our conceptions of which clothe

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themselves in terms that express something portentous and fearful... as of the slow rising and gradual swelling of an ocean which must, at some future and not distant time, bear all the elements of society aloft upon its bosom, and float them Heaven knows whither. There are mighty energies slumbering in these masses. . . . The manufacturing population is not new in its formation alone； it is new in its habits of thought and action, which have been formed by the circumstances of its condition, with little instruction, and less guidance, from external sources.

Change Generates Change By the 1820s, then, Britain s industrial revolution had introduced new technologies in cotton and other textiles, in pottery and metallurgy, and in aspects of coal mining. It had generated an unparalleled export surge that brought Britains achievement home to peoples almost around the world. It had destroyed several traditional manufacturing sectors at home and abroad. It had introduced factory organization to many branches of production and had prompted a massive growth in British cities. It had created a dynamic new business class and an even more novel, as well as more numerous, working class. Even in a society already heavily commercial, with an important manufacturing sector, it had fundamentally altered the framework of social and economic life.

And the revolution would not stop. Innovations were not constant, but they recurred. Existing machines became more refined； the number of spindles on a cotton-spinning machine, for example, increased periodically, and the increase gready heightened production per worker. The number of workers in major industries grew inexorably. So did the average size of factories and firms, their growth permitting greater specialization of labor and more bureaucratic management. These developments brought innovation in business practices and 202 I World Economic Development

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labor conditions beyond what the initial industrial revolution had required. A measure of the persistent change was output： In 1830 Britain produced about 24 million tons of coal, four- fifths of the worlds total； by 1870 the figure was 110 million, still half of all the coal mined around the world. British pig iron production was 700,000 tons in 1830; thirty years later it had more than quintupled, to almost 4 million tons. Raw cotton imports rose sixfold in the twenty years after 1830; in this period also, the average productivity per worker doubled. All this meant steadily rising exports. By 1870 British exports exceeded those of France, Germany, and Italy combined, and they were three times the level of exports by the United States. Rising output boosted industrial profits, which provided additional capital for still further changes, and began to permit some definite if modest improvements in the standard of living of most workers even as income inequality continued to increase.

The ongoing industrial revolution in Britain involved more than expansion from an earlier base. It also meant radical new directions. A new breakthrough in metallurgy in 1856 brought changes greater in many ways than those previously created by the use of coke and coal. Henry Bessemer (along with inventors in other countries) worked on the problem of removing chemical impurities, in particular carbon, from raw iron (called pig iron). The conventional procedure demanded extremely labor-intensive operations, as highly skilled workers called puddlers stirred molten ore to remove the carbon. After repeated experimentation, Bessemer found that altered furnace design could accomplish the same results automatically； a blast of compressed air passed through the molten iron would extract the carbon. Not only were labor costs reduced, but the Bessemer converter made possible the construction of much larger blast fUrnaces, another huge productivity gain. Finally, the same procedures enabled industry to use the controlled reintroduction of carbon to make steel, a much tougher metal than iron but previously extremely expensive to manufacture. An industry already transformed was transformed anew, in a pattern that would be repeated often as the industrial revolution proceeded.

The most dramatic extension of industrialization in Britain after the initial decades occurred in the field of transportation. As output grew, pressure on transportation facilities inevitably increased: Goods had to be carried to market, raw materials to the places of manu- facture. Improved roads and, especially, the spate of canal building helped, but inventors— aware from prior industrial experience that concerted experiments could produce dramatic results—looked for more genuine innovation. Initiatives with rail transport had already begun in the coal mines； the first steam engine for hauling coal out of the mines on tracks was introduced in 1804. In 1821 a group of inventors and entrepreneurs chartered a railway line between Darlington, a mining center, and the port of Stockton. Some of the wagons were pulled on rails by horses, but locomotives were also developed, under the guidance of George Stephenson. The first full-scale locomotive was unveiled in 1825, but its frequent breakdowns

Britain's Revolution I 203 almost resulted in cancellation of any further experiments. An improved model featuring a larger

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boiler that could produce greater heat was tested in 1827 and put to regular use just a few months later. With this success established, a more ambitious rail line was opened in 1829 between the cotton port of Liverpool and the great factory center in Manchester. A contest was set up for locomotive design, and one model attained a speed of twenty-eight miles per hour—an achievement marred, however, by a breakdown before the test was completed. More reliable models operated at about sixteen miles per hour, and this speed was sufficient to launch a spate of railway building in Britain and, soon, elsewhere.

Developed at about the same time were steam-driven ships (the first transadantic steamship lines opened in 1838), and these and railroads, plus faster communication via the newly invented telegraph, truly revolutionized the conveyance of goods, people, and information. More bulk could be transported over longer distances at greater speed than ever before. This result of industrialization also generated additional change. Labor recruitment could reach out more widely. Coal and iron (and soon steel) production had to expand simply to meet the demand generated by railroad construction and operation. The industrial revolution was beginning to feed itself, sprouting new branches to deal with the opportunities presented by prior developments. This same acceleration inevitably attracted attention elsewhere to the wonders of Britains achievement. A growing number of countries judged the power of Britain s transformation not only in economic but also in military terms, and this dual interest was yet another spur to the ongoing momentum of the revolution.

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New Causes Why Did the Industrial Revolution Happen, and Why Did It

Happen in Eighteenth-Century Britain?

Peter N. Stearns

xplaining the industrial revolution is a challenge to analysts of history. New kinds of debates have surfaced recently, particularly through attempts to take a more global approach.

Identifying the factors that caused the industrial revolution is vital not simply as a historical exercise but as the basis for understanding the complexity of the challenges awaiting societies that tried to establish an industrial revolution even after Britain showed the way. The variety of developments that combined to create the first industrial revolution had somehow to be replicated, though not necessarily in identical fashion. This same daunting variety helps explain why a number of regions have not managed to launch full-scale industrialization to this day. Complex causes persist as a factor in world affairs.

Not surprisingly, historians have offered different emphases. Occasionally, industrialization is presented as flowing from a few dramatic inventions and from some new thinking about the economy, notably Adam Smiths market-oriented theories issued in 1776 that stressed the importance of vigorous economic competition free from government controls as a means of generating innovation and growing prosperity. Inventions were involved, of course—but why did they occur ? And why did Britain produce more inventions than other countries (followed, in the formative decades of industrialization, by France and the United States) ? New economic theories helped produce some policies favorable to industrialization, but these did not cause it； they came too late, and they affected too few people. Any explanation of the industrial revolution must account for new behaviors on the part of literally thousands of people： the entrepreneurs who gradually moved toward a factory system, the workers who staffed the factories, the investors who provided the capital, the consumers who eagerly accepted the

Peter N. Steams, "New Causes: Why Did the Industrial Revolution Happen, and Why Did It Happen in Eighteenth-

Century Britain?>, Industrial Revolution in World History, pp. 41-52. Copyright © 2006 by Perseus Books Group. Reprinted with permission.

machine-made products. A number of powerful factors had to combine to generate a change as substantial as even the early phases of industrialization.

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For die industrial revolution to occur, considerable investment funds were required —the new machines were expensive, far costlier than any manufacturing equipment previously devised, even in die very small factories that characterized much early industry. Also needed was access to raw materials, including textile fibers, but particularly coal and iron, the sinews of the industrial revolution. Government interest in supporting economic innovation was a factor, and various kinds of specific government policies helped. Of major importance was an available labor force that did not have more agreeable employment options, for although some workers might be attracted to the industrial life because of high pay for their particular skills, the excitement of innovation, and greater independence from traditional family and community controls, most workers entered factories because they had little choice. Finally, industrialization, particularly in its first manifestation in Britain, required an aggressive, risk- taking entrepreneurial spirit that would drive businesses to venture into innovation. All these ingredients must be considered in connection with the causes of the industrial revolution. To be sure, recent reminders also affect analysis, reminders of how gradual the process was—how factory firms developed often as part of a very slow, multigenerational evolution from domestic manufacturing operations to a new willingness to organize and subordinate manufacturing labor. The industrial revolution need not be explained as a dramatic single eruption or a rapid, coordinated set of changes； early steps in industrialization help account for later ones, as the revolution rippled out from the minority of the population initially involved. Still, the challenge of explaining the process remains considerable.

Several basic factors were generally widespread in northwestern Europe by the eighteenth century； others were more particular to Britain. A large seam of coal ran from Britain through Belgium and northern France to the Ruhr valley in Germany, and the most intense early industrialization developed along this coal seam. Iron ore deposits also existed in western Europe, in some cases close to the coal sources. Without these raw materials—and especially coal as the energy source for smelting metal and powering the steam engine_early industrialization would have been impossible. "Western Europe also liad abundant wool and，through already established colonial trade, initial access to cotton (grown in the southern colonies of British North America and in parts of Asia).

The key resources, which had, of course, been sitting in the ground for many millennia, facilitated the industrial revolution by their presence, but they did not cause it. Far more important was the impact of the scientific revolution in western Europe during the seventeenth century. Few scientific discoveries directly affected early industrial technology, though the work on gases and chemicals was relevant, particularly to Watts work on the steam engine； 206 I World Economic Development

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the fuller marriage of science and industry occurred only after the 1830s, when the industrial revolution

was already well advanced. Science did, however, help persuade people that nature could be rationally

understood and controlled. It promoted an outlook attuned to change and generated widespread new

interest in technical experiments. Definitions of science, from the pens of such experimenters as

Francis Bacon in England, had urged its application to material conditions. It was no accident, then,

that a vast refocusing of Europe s intellectual orientation preceded the industrial revolution itself.

Europe's commercialization also helped set the context for the industrial revolution. Many

Europeans were familiar with production for the market or were accustomed to buying some of the

goods they needed rather than manufacturing every subsistence item locally. Habits of this sort were

obviously essential to the industrial revolution, during which they were greatly extended. Like the

scientific revolution, the expansion of commercial activities in the seventeenth century formed a vital

precondition for industrialization. Through the domestic manufacturing system, direct links followed

from commercial endeavors more generally. Further, during the eighteenth century Europe s

increasing commercial system generated important changes in banking. England and several other

countries established national banking systems, which facilitated nationwide marketing and thus

expanded the opportunities for manufacturing and sales.

Commercial experience as a factor should not be overly stressed, however. Even in business-

minded Great Britain, the new banks rarely lent money to industrial firms； they focused on merchant

and real estate operations. Nor did many established merchants become involved in the early

factories. Factories were regarded as risky and dirty, and respectable people, even in the business

community, kept some distance. Early industrialists most commonly came from artisanal or

manufacturing backgrounds, though the collaboration of individual merchants and landlords,

particularly in the expensive operations of metallurgy, was vital. Commercial experience and

commercial institutions prepared the industrial revolution, but some gaps remained to be filled before

striving industrialists linked up with the existing commercial operations.

Another vital ingredient of Europe s industrial context—this one also taking shape before the industrial revolution but gaining ground steadily immediately before its advent_involved Europe s

growing role in world trade. From the late fifteenth century onward, west European countries,

ultimately headed by France, the Netherlands, and Britain, had won increasing control over

international commerce. European ships and merchant companies dominated international trade,

even in some cases in which exchanges did not directly involve Europe at all. Increasingly, a hierarchy

emerged in the international economy, in which Europeans acquired minerals and agricultural goods

from other areas (including their colonies in the Americas, India, and elsewhere) and in return sold

manufactured products, including fine

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furniture, cloth, and metal goods such as guns. Because Europeans could price their goods to include the cost of processing, they were in general able to profit from the exchange. Not all parts of the world actively engaged in trade with western Europe at this point, but parts of eastern Europe (which sent grain, furs, and timber supplies), the Americas (precious metals, sugar, and tobacco), and India and Southeast Asia (spices, tea, and gold) added steadily to western Europe's wealth. The active slave trade that Europeans ran between Africa and the Americas was another source of profit.

Europe's role in preindustrial world trade set up the industrial revolution in several ways. Growing amounts of commercial experience developed through the trading companies, and new technologies relating to shipbuilding and warfare received impetus. Governments were encouraged to pay attention to the importance of fostering trade, though this attention at times led to heavy-handed efforts at control. Trade leadership helped stimulate a taste for new products. Growing interest in cotton cloth originated first from trade with India, particularly in Britain. The British government then sought (from the 1730s onward) to encourage cotton manufacturing at home and to prevent undesirable dependence on foreign manufacturing by banning cotton imports ； this ban had the additional effect of reducing India's economic vitality and opening India to British goods. At the same time, Britain used its holdings in India and particularly the southern colonies in North America to provide raw cotton for its new textile branch. Above all, foreign trade, including colonial trade, expanded the markets for European manufacturing and thus contributed direcdy to one of the obvious reasons to seek more productive technologies. Trade also provided capital through the growing wealth of many business and landowning groups. Thus, Europe’s industrial revolution, which was to have such dramatic effects on the wider world, stemmed in great part from Europe's ability to draw disproportionately on world resources.

Three Approaches: Minimal, Western, and Global Three approaches currendy vie for attention in explaining the industrial revolution, though they overlap to some extent.

The first approach, and the most recent, urges that Europe, even including Britain, was not very different from other leading manufacturing centers like China and India； therefore, a causation scheme that relies heavily on European distinctiveness is off the mark. This view again follows from historians1 growing realization that China and India benefited hugely from the world economy of the sixteenth and seventeenth centuries, earning huge profits in US. silver for their exports. Just like Europe, in broad outline, China had a strong merchant sector, widely sought manufactured exports, and much available labor. So why did Europe 208 I World Economic Development industrialize first? Simply because of its colonies, which provided cheap raw materials, new capital, and some additional spur to export manufacturing for colonial markets, plus the sheer accident that British coal mines, unlike the Chinese mines, flooded easily and so encouraged the invention and use of the steam engine to pump out water. It turned out that the engine had widerapplicabilityaswell.

This comparative explanation deserves consideration, particularly when the industrial revolution is regarded as a global event. It may seem somewhat barebones in accounting for such a huge

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economic change. It also does not explain Chinas slowness in copying Europe s new industrial lead, though other factors may enter here.

The second explanation is more familiar, and in emphasizing really distinctive Western qualities, it is almost a polar opposite of the minimalist approach. Even in this argument, Western distinctiveness no longer rests on some once-cherished staples, like Adam Smiths economic theories, which urged market competition rather than state regulation, or even a special entrepreneurial ethic, though these may still merit some consideration. Rather, in this view attention goes to governments eager to encourage economic growth as part of military competition, and thus willing to improve infrastructure (initially, roads and canals) and banking facilities while backing merchant activities as well. It stresses the surge of new consumerism that flowed through western Europe in the seventeenth and eighteentli centuries, whicli created new eagerness for goods like cheap but fashionable clothing and tableware. Stylish clothing, indeed, became so important that theft rates soared in the eighteenth century, a sure sign of a growing market for less expensive, but eye-catching, machine-made goods like colorful cotton cloth. The Western distinctiveness approach also credits the scientific revolution, not only in contributing knowledge that aided new inventions like "Watt’s improved steam engine, but in creating a wider approval of greater control of the environment and a wider expectation of progress in this world, rather than in heaven.

The final pattern of explanation places particular emphasis on Europe's position in the world as the basic source of the industrial revolution, but in contrast to the explanation by the minimalists it emphasizes the special importance of European commercial power and global exploitation. From world trade, including the slave trade, Europe gained new levels of capital essential to take risks on new inventions. From world trade, supplemented by an increasingly commercial domestic economy, Europeans developed a growing middle class, from which most of the new industrialists would emerge, and a taste for pleasurable goods that would feed the expanding consumer markets. From world trade, Europeans learned about the appeal of cotton cloth (from India) or porcelains (from China), which spurred efforts to generate factory substitutes back home. From world trade Europeans learned the profits to be made in selling processed goods globally, while seeking cheap raw materials in

New Causes I 209 return. And if this imbalance could be enhanced by special measures, like British efforts to discourage Indian cotton production in favor of Britain s nascent industry, so much the better. The industrial revolution, in this model, emerged from the exploitative advantages Europe was already gaining in the worlds markets, and of course it would extend the possibility of exploitation even further in the nineteenth century. The emphasis is on the global context of the industrial revolution and also on the special position Europe had already achieved in this context, which explains both industrialization and the West s long (though not permanent) leadership in the whole process.

All three approaches have analytical merit. They can, of course, be combined to some degree.

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But a certain amount of choice, particularly between seeing the industrial revolution as a global economic result from the outset and viewing it as the product of some special Western combination, is essential. The debate, in other words, stimulates a more precise assessment of historical factors, but it ultimately requires some reasoned prioritization.

Trigger: Why the Eighteenth Century? All the factors pushing for the industrial revolution accelerated by the eighteenth century： The results of new science began to create a wider oudook； the Enlightenment, as an intellectual movement, brought new interest to technical progress and more discussion of the most effective economic policies； the growth of consumer expectations encouraged new markets； and Europe s world trade position improved steadily as well, particularly with new moves into India. The rapid expansion of domestic manufacturing gave some workers new spending money and growing urban contacts, which promoted new kinds of purchases and prepared an industrial labor force. Growing global trade helped build up domestic capital and provided further evidence of wider markets for manufactured goods.

Capping these developments, and arguably providing a final push, were the effects of a true population explosion, coming after several decades, in the seventeenth century, of demographic stagnation. Food was crucial. The lack of major agricultural changes in Europe between the late Middle Ages and the 169〇s was ironic, given Europe's commercial advance. By the 169〇s, this anomaly had begun to yield, the result being an agricultural basis for further economic change, via population growth. After long hesitations because the goods were not mentioned in the Bible, west Europeans began to grow calorie-rich New World crops, headed of course by the potato. Again, larger world history fed industrialization. Further, with the Dutch leading, new methods of draining and fertilizer expanded the available land and fertility. With more food came more people.

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Rapid population growth resulted from new food supplies and other developments such as a

temporary lull in major plagues. There was also a pause in the most devastating kinds of warfare

between 1715 and 1792. Increased population pushed workers to seek new, even unpleasant, kinds

of jobs, provided growing markets for inexpensive manufactured goods, and prodded even some

prosperous families to seek economic innovation. An eastern French family, the Schlumbergers,

was a case in point. In the 1760s the head of the family ran an artisan shop, producing cloth but

displaying no particular business dynamism. He had twelve children； that all of them lived to

adulthood was somewhat unusual but illustrative of the impact of population growth in a

single-family context. Simply in order to provide for his brood in the accustomed respectable

middle-class fashion, Schlumberger had to expand his textile operations, hiring domestic

manufacturing workers and then tentatively introducing some powered equipment. His children,

building on their father s example, became dynamic industrialists in the early nineteenth century,

creating large textile and machine-building factories and sponsoring the first local rail line.

Population upheaval promoted economic dynamism in a number of ways and at various levels of

the initial industrialization process in western Europe.

Britain as a Special Case Finally, why was Britain, among the several areas of western Europe in whicli relevant changes

had been taking shape, in the vanguard? Within the larger west European context, there were

several special features in Britain. Population growth was extremely rapid in the eighteenth

century. Its effects, in freeing the available labor from agriculture, were magnified by major

agricultural changes. British landlords successfully pried land away from smallholding farmers

through the governments Enclosure Acts. These required farmers to enclose their fields, usually

by planting hedges, but the expense was beyond many small farmers, who had to sell out to the

landlords. British agriculture became dominated by large estates, and although these employed

many workers, they did not absorb a growing population as readily as peasant- dominated

agriculture proved able to do elsewhere. Thus, there were hungry workers eager for new options.

The enclosed estates, in turn, increased agricultural market production, providing food for

growing cities.

British artisans were also unusual. Most urban artisans in western Europe belonged to guilds,

which tried to protect members1 working conditions by limiting new technology and preventing

any employer from creating undue inequality or threatening wage rates by hiring too many

workers. Guilds were ideal for a relatively stable economy, but they definitely inhibited both rapid

labor mobility and changing techniques. Britain had once boasted a guild system, but it had

virtually disappeared by the eighteenth century. The result was twofold: Employers had

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unusual freedom to bring new workers into established branches of production, and they were at liberty to tinker with new methods—perhaps the most important single source of Britain s lead in inventions.

Britains extensive international trade provided capital and markets and also supplies of vital materials such as cotton. The British aristocracy was more favorable to commerce than its counterparts on the European continent； some British landlords directly participated in setting up new mines and manufacturing, and tolerance for commercial development was high. The British government favored economic change. Tariff regulations in the eighteenth century, such as the barriers to the importation of cotton cloth from India, spurred new industries. Other laws that discouraged the export of new machinery or designs impeded rapid imitation elsewhere of British gains. Laws made the formation of new companies relatively easy and officially banned combinations of workers—what we would call unions—and this ban, in turn, constrained protest. During the eighteenth century a number of local governments began to build better roads, and then a wave of canal building developed at the end of the century. The new infrastructure facilitated the movement of both raw materials and finished goods. At the same time, the British government did not attempt to regulate manufacturing extensively. Other European governments, though often eager to promote economic growth, tended to control manufacturing with regulations about product quality, techniques, and some working conditions. The British state was less interventionist. This was not always an advantage, as we shall see in other industrialization cases, but it may have served well in setting a favorable framework for the first industrial revolution.

Simple luck in terms of natural resources also aided Britain. It had excellent holdings in coal and iron, which were often located quite close together. The island nation had not only coastal waterways but good navigable rivers, which further facilitated the transport of the two materials that were so vital to early industrialization but were extremely heavy and costly to move over land. Britain was also running low on timber supplies by the early eighteenth century and had to search for alternative fuels, notably coal. This necessity, in turn, spurred industrial development, from the adaptation of the initial steam engine for mine pumping to the use of coal for smelting iron.

Finally, Britain apparently provided an optimal setting for producing individuals inclined to taking risks in business. Good market opportunities and an extensive preindustrial manufacturing system formed part of this framework. New ideas about science and material progress spread more rapidly in Britain than in most other European countries. relatively small government meant limited chances for success by seeking bureaucratic jobs. Furthermore, Britain tolerated a number of Protestant religious minorities such as the Quakers, though this indulgence was incomplete: Protestants who were not members of the established Anglican 212 I World Economic Development church could not attend universities or gain government employment. This ambivalent situation encouraged members of these minorities, eager to demonstrate Gods favor, to seek opportunities in business. Certainly the Protestant minorities produced a disproportionate number of early manufacturers, who were stimulated by a belief that disciplined work, frugality, and economic

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drive were pleasing in the sight of God, and who were eager to get ahead where the chances lay—through entrepreneurial initiative.

In sum, Britain concentrated many of the changes developing generally in western Europe and added an array of special factors ranging from flukes of nature to new forms of callous manipulation of agricultural labor. Quite possibly the more general shifts taking place throughout Europe would have generated an industrial revolution elsewhere by the early nineteenth century ； the uniqueness of the British combination should not be exa^erated. Nevertheless, the fact was that Britain came first and that its leadership can be explained.

New Causes I 213 For at least a half century the nations effective monopoly on the industrial revolution was

scarcely challenged. British industry enabled the country to hold up against the much larger population of France during the wars of the French Revolution and the Napoleonic era. By the 1830s Britain’s industrial lead was so obvious, and its related need and ability to export cheap machine-made manufactured goods were so great, that the government changed its basic tariff policy. Britain became a pioneer in free trade, allowing imports of food and raw materials that helped keep prices (and wages) down while relying on manufacturing exports to balance the trade exchange and even to show a tidy national profit.

Britain was indeed pouring manufactured goods into the markets of the world. Machine- made textiles cut into customary production not only in Latin America but also in Germany. British iron products undersold traditional charcoal-smelted metal in France. Here, obviously, was a rude challenge. But here also was an opportunity. Britains success in industrialization added another ingredient to the changes taking place in western Europe. Continental businesses and governments began to wake up to the possibility of copying British machine design and factory organization, realizing they must stir themselves lest they be engulfed in a British industrial tide. The industrial revolution began to spread.

For after Britain took the industrial lead, the whole question of causation takes on a different cast： The British model, and British success (including military success against Napoleons forces), became causes in their own right for societies ready and able to recognize the message. Still, however, the analytical challenge is not over. For some societies imitated quickly, a fact suggesting that they had conditions very similar to those spurring industrialization in Britain or that they could supply alternative spurs. Other societies did not or could not follow up so readily, because they were defined by different economic, political, and cultural factors. In fact, the next industrial revolutions extended the phenomenon in the West alone； only later would some other societies follow suit (though often with impressive results), in a process that remains globally

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uneven to the present day.

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Topic Six Questions

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1. Explain the importance of the following innovations to British industrialization： the Newcomen steam pump, which led to the Watt steam engine, and Henry Cort s reverberatory furnace.

2. Explain the impact of the following inventions on the British textile industry： the Flying Shutde, the Spinning Jenny, and the Power Loom.

3. Provide five benefits to British living standards during early industrialization.

4. Provide five negative consequences to British living standards during early industrialization.

5. Provide five explanations for why Britain industrialized first.

Topic Seven

THE SECOND INDUSTRIAL REVOLUTION AND THE GROWTH OF THE WORLD ECONOMY

The Economic Development of Europe in the Nineteenth Century (IV)

The revolution in transport and communications

Giovanni Luigi Fontana

Roads and canals Important technical discoveries that could be qualified as true inventions, and a combination of innovations that improved their performance revolutionized the ways in which goods, people and information travelled, over short and long distances. At the end of the eighteenth century, the speed of travel was still conditioned by the use of animal power or by navigation along rivers, canals and coasts. This limited the chances of extending productive activities and increasing exchanges. The railway, the steamship and telegraphy opened up a new era, as much in transport over land and sea as in communications. The new means of transport did not bring about the industrial revolu- tion, which had begun before they appeared, but they had the effect of considerably speeding it up and continually expanding it. In 1815, it took forty hours to travel from Paris to Calais in a stagecoach； in 1914, a fast train took three hours and fifteen minutes. Heavy sailing ships, which were conditioned by wind directions and strengths, and sailed only when the captain thought fit, were replaced, in the second half of the nineteenth century, by regular steam services that transported people and valuable goods to different continents at much higher speeds. Thanks to telegraphy and a network of underwater cables, people in business and commerce could communicate almost in real time1, from one hemisphere of the earth to the other. After the triumph of the train and the establishment of steamships, in the nineteenth and twentieth centuries, the automobile was to herald the revival of the high road, while in 1914 aviation was preparing to become more than just a sports feat.1 Since it enabled the factors of production to be transferred, and the finished products to be distributed practically anywhere, transport was not only a commercial means of exchange, but itself also became part, and an important part, of the means of production.2

Giovanni Luigi Fontanta, "The Economic Development ofEurope in the Nineteenth Century (IV): The Revolution in Transport and Communications," An Economic History of Europe: From Expansion to Development, ed. Antonio Di Vittorio, pp. 208-221. Copyright © 2006 by Taylor & Francis Group. Reprinted with permission.

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Numerous connections can be established between the transformation of transport and economic development. The theory that the market was the driving factor and regulator of the economic system *began to be developed just when the revolution in transport and communications was taking place, which in the middle decades of the nineteenth century, transformed the traditional relationship of man with space and the very dimensions of the planet'3 However, right from the very start of the industrial revolution, the changes taking place in the sector were being felt. Indeed, one of the main prerequisites of the British industrial revolution was the construction of a dense nenvork of canals that made it possible to cut the cost of transporting raw materials and finished products by about three-quarters of the cost of transporting them overland. Until the 1840s the main investments were channelled into canals and the road network. In England the road nerwork, with all its branches, reached even the remotest village. After the end of the seventeenth century, road maintenance was transferred from the parishes, which made use of the corvee system, to toll trusts. By the mid-eighteenth century, 3,400 miles of turnpike roads were in the care of trusts. Capital was private and the revenue from the local trusts was often insufficient to cover expenses. By the early nineteenth century only 6 percent of the roads were in good condition. At any rate, 3,873 trusts managed 20,000 miles of turnpike roads in 1829 and in 1836 they reached their maximum extent of22,000 miles, by which time the railways were beginning to compete with the roads and canals.

In many parts of Europe, only the major roads were kept in good condition, primarily to make it easier to move troops. The rest of the road system was given over to local authorities for their maintenance； but the local authorities had neither the financial resources nor the technical expertise required for keeping this up. France was the European country with the best network of communications. Finance came from public sources, and in the second half of the eighteenth century, although the network was particularly extensive, considerable progress was made in building new roads. Improvement in the road networks owed much to new systems of construction, such as those of the Corps des Ponts et Chaussees； this was set up in 1716 by the French to train engineers and manage road works, and was followed thirty years later by the Ecole of the same name. The Telford and McAdam techniques of construction also gradually spread all over Europe. In France, in the early nineteenth century, much of the 33,000 km network of trunk roads was started. The continual movement of troops made it necessary to build routes imperiales, not only in France, but also in the north of Italy, Belgium and Germany.

Road building continued from 1815 to the middle of the century. Except in the northern states, Italy had to wait until unification before the road nerwork was improved. Investment in road infrastructure came to a stop after the 185〇s, and only when the automobile was invented did a new phase of investment guarantee the construction of a basic system for the mass transport of the twentieth century. The cost of overland transport decreased two to four times as

220 I World Economic Development a result of doubling the draught power of the horse： its performance increased even further with the construction of lighter carriages to replace the heavy coaches. With the advent of the railway, horse transport fell into disuse for long distances, while for short journeys it continued to be the main means until the early twentieth century.

Rivers and internal waterways had always been the most convenient, and least cosdy, route for trade, despite the difficulties of transport upstream, which was often very erratic and inconsistent.

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Barges took three to six days to go down the Rhine, from Strasbourg to Mainz, a distance of220 km, but a month in the opposite direction. There was a great need for internal transport to be developed and modernized. On the one hand, this was because of the increase in maritime traffic, resulting from reduced transport costs and greater safety on the routes, and on the other hand, because of the increase in population, especially the urban population, that created a greater demand for inexpensive bulk goods. This demand could be met only by improving inland navigation. During the mercantilist period, great canals had been constructed in France, such as the one linking the Loire and the Seine, or the Languedoc canal that linked the Atlantic with the Mediterranean. They were also built in Spain, the Netherlands, Germany and Sweden, but especially in Britain, where river navigation was the natural complement not only to road, but also to coastal, transport. Between 1669 and 1749, more than 200 parliamentary measures were passed for improving internal communications, and over the next seventy years, £17 million were spent on building 2,000 miles of navigable waterways.4 These were spontaneous initia- tives promoted by local entrepreneurs. In Britain, during the first forty years of the nineteenth century, the construction of canals intensified. In continental Europe, canal construction was developed to a lesser degree than in Britain and the United States.

In 1812, the first European steamship, the Comet, made its appearance on the Clyde. By 1830, there were 315 British steamships with an overall capacity of 33,5 〇〇 tons. British-built steamboats, with iron hulls to reduce the risk of fire, had already been at work on the Seine, the Rhone, the Loire and the Rhine for some time. To prevent the performance of the new boats from being affected by the seasonal variation in water level, impressive works to reconstruct the riverbanks were carried out, among which the most challenging project was to regulate the course of the Rhine. In France, especially in the thirty-five years between the fall of Napoleon and the Second Empire, the areas that were mainly involved were the industrial areas； new canals, such as the Saint-Quentin, built in 1810, were dug to link the coal-bearing regions to the urban markets, or to connect waterways carrying heavy traffic, like the Rhone-Rhine in 1834. Germany was behind with the building of canals, and 6,600 km of canal were built between 1873 and the First World War. The canals generally experienced growing competition from the railways, but the ultimate triumph of the railways was due not to any advantages in costs, but to better organization, to speed and to the versatility of the service, except in a few

The Economic Development of Europe in the Nineteenth Century (IV) I 221

areas like the Rhine valley, which had die advantage of an abundance of waterways. On the other

hand, dry countries like Spain gained great advantages from the railway, and for all these reasons,

no other innovation of the nineteenth century was so successful.

The advent and development of the railways The railway was the outcome of a combination of factors that had already existed before the

nineteenth century： the rails used in mine galleries and ports, and to supplement canals in the

British coal-bearing basins, trolleys and steam-powered machines. It became autonomous with

the invention of the locomotive (1825), which was the most important invention in nineteenth

century transport. After the introduction of the tubular boiler, the engineer George Stephenson

(1781-1848) developed the Liverpool to Manchester line (1826-1829) in the heart of a great industrial

area； it demonstrated the cost-effectiveness of the railway for the transport of both goods and

passengers, with most of the technical problems being empirically solved at the same time.

Subsequently, technical development followed two directions： seeking to achieve high speeds,

and seeking to obtain the maximum energy to enable mass transport.

The first objective was achieved very rapidly and in 1835 a locomotive exceeded 100 kph. By

the end of the century, journey speeds (excluding stops) had risen from 60 kph to 75 kph for

French expresses, 40-55 kph for ordinary trains, while goods trains made do with a speed of 20-30

kph, which, however, was five to seven times faster than that of the horse-drawn wagon. In order to

achieve the second objective, the weight and adhesion of locomotives was increased, the number

of axles was doubled, and rolling stock, mounted on bogies, became longer. By 1865, a train could

transport 200 tons and by 1900 as much as 2,5〇〇 tons.5 Steel replaced iron and cast iron, and in the

1860s rail strength and wagon capacity increased. Continual refinements improved the

performance of the railway. These included fuel economies made possible by compound boilers in

1876, and superheating ； better safety with the compressed air brake of 1868 ； gauge

standardization and progress in management techniques. Natural obstacles were also surmounted

： bridges, viaducts and nmnels enabled the railways to go across rivers, valleys and through

mountains. In order to exploit traffic in northern Italy to their advantage, the German railways

financed the boring of the St. Gotthard tunnel through the Alps (1872-1882), while their French

competitors did likewise with the Simplon tunnel (1898-1906).

The expansion of the railways was exceptional： the 7,200 km that existed throughout the

world in 1840 had risen to 925,000 km by 1906. Until then, the problem of having to finance projects

on such a huge scale had never arisen, hence the diversity of solutions that were adopted, which

ranged from private and public initiatives, to a combination of both. At the beginning of the

rwentieth century, 70 percent of the railway lines in the world belonged to 222 I World Economic Development

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private capitalist firms, the remaining 30 percent to the state. However, by 1914 the capitalist model that regarded the railways as a wholly private concern and that predominated in the nineteenth century was to be found in only a few countries.6 In Europe branch lines considerably reduced the profitability of investment, and thus at the start of the century, state ownership of the railways was preferred.

The railways reached their maximum density in the North Adantic area. As Table 7.1 shows, it was in Great Britain chat the railway system was conceived and adopted relatively quickly, in order to free traffic from the monopolistic exploitation of the canal owners. In 1835 alone, Parliament authorized investments of £15 million, more than had been spent on all the canals. This was a new, high-technology sector and it attracted investors. In England, it did not represent a factor for future economic development so much as an essential tool for sustaining the industrialization that was already under way. In short, the railways were a consequence of development, rather than a cause. There were thus no problems of finance or inadequacies in die mechanical and metallurgical industry to contend with. The British state could assume a marginal role in financing and constructing the network, even though changes in the laws on capital companies (1825) enabled large enterprises to be set up with extensive

The Economic Development of Europe in the Nineteenth Century (IV) I 223 share ownership. Similarly to what happened with the canals, the privately financed railways increased throughout the country without any co-ordination, until a special body was set up to

Table 7.1 Construction cost of the railway network between 1830 and 1906

Country Cost (£ millions)

United States 3,036

Great Britain 1,294

Germany 740 France 707

Russia 626 Habsburg Empire 468

India 266 Canada 262 Italy 205

Argentina 139

Australia 137 Belgium 87

Switzerland 59 Sweden 51

Source: J. HefFer and W. Serman, IIXIXsecolo. 1815-1914: dalle rivoluzioni agli imperialismi, (ed.) S. Zaninelli, Milan, 1998, p. 54.

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co-ordinate the traffic in 1842. In Britain, the railway spread to meet the demand for transport in a country that was already

industrial. In the United States, which was second in the race to build railways, it spread to meet the demands of agriculture, which in its turn brought about rapid industrialization.7 In short, instead of being a mere complement to the economic development already under way, as in Great Britain, in the United States, Belgium, France and Germany the construction of the railway network took on an important modernizing role. It motivated the engineering industry, stimulated ad hoc financing systems, and in the case of the United States_given the colossal size of the network_large-scale management systems； it heralded the subsequent development of the scientific organization of labour.

Belgium had always been one of the first to adopt British innovations, but being a country of limited size, the state took on the initiative of creating continental Europe s first network. The decision was also intended to underline the advantages of the country s newly won independence (1830), as was also the case with Italy later. Instead of the spontaneous development that took place in England, an organic system of transport was planned through state intervention, which provided the capital for its construction. The development of national ironworks and heavy engineering industries soon provided the materials to replace imports from Britain； between 1835 and 1842,559 km of railway lines were built that linked the kingdom s wealthiest provinces together. The task of completing the secondary lines was left to private companies； these were initially British (9〇〇 km between 1845 and 1846) then Belgian, but they were successful only where the state could act as guarantor. The average cost of construction per mile (£16,500) was about half the British cost. In 1870, Belgium had about 3,000 km of railways (Table 8.2). Starting from this period, the state began buying back the private network at a low price, and by 1914 it owned 95 percent of the total network. It could thus charge very low fares, and grant workers special season tickets, but it did not earn any great revenue. A similar model of development took place in Germany, and later in Russia.

Germany invested heavily in building and developing its railway nerwork. The German states, and France, were the only other European areas involved in the pioneering stages of railway building (pre-185〇). Around 1840, in the German areas, as well as in France, there were about 450 km each of lines in the mining districts and suburbs. Ten years later, Germany had 5,856 km of railway while France had only 2,915. In France the real take-off came during the Second Empire (1852), once the hostility of those advocating the completion of the canals had been overcome. In the German areas, steam navigation on the Rhine and the rivers west of the Elbe delayed the start of the railway, but in 1839 the Leipzig to Dresden line was opened, 224 I World Economic Development

followed by lines transversely connecting the northsouth navigable river valleys. By 1847, the Rhine

and Berlin lines already reflected the supremacy of Prussia.

The construction of the German railway system did not follow a standard formula. It relied on

government and private initiative, as well as on the heavy investment of foreign capital. Like the

American railways, those in Germany were built on spartan5 lines, with average costs of only £11,000

per mile, to which the lower cost of land also contributed. Locomotives initially came from the United

States and Britain, but by 1843 domestic production already accounted for over half the demand.

Initially governments avoided investing in railways, but since they could not fail to notice their military

and political role, they took advantage of loans and bonds, in order to take control of a large number of

companies. By 1860, the state was running 55 percent of the Prussian network (see Table 7.2).8

In France before 1850, investment in the railway system was limited. Because it was impossible to

finance it publicly in such a large country, the prevailing system was to grant temporary concessions to

private industry, under state control. A law in 1842 provided for roles to be shared. The government

would decide on the structure of the network, and assume responsibility for the purchase of land and

infrastructure, including ballast, bridges, tunnels and stations；

The Economic Development of Europe in the Nineteenth Century (IV) I 225

1 6 0 / 2 3 4

Table 7.2 Extent of the railway network, 1840-1913 (km)

Year Great Britain

France Belgium Germany Italy Habsburg

Empire Russia Europe

United States

World 1840 2,390 410 334 469 20 144 0 2,700 4,500 7,200

1850 9,757 2,915 854 5,856 620 1,357 501 23,100 14,400 37,600

1860 14,603 9,167 1,729 11,089 2,404 2,927 1,626 51,000 49,000 106,000

1870 20,000 15,544 2,897 18,876 6,429 6,112 10,731 101,300 85,400 205,200

1880 25,060 23,089 4,112 33,838 9,29〇 11,429 22,865 162,700 149,900 365,500

1890 27,820 33,280 4,526 42,869 13,629 15,523 30,595 208,000 249,700 566,900

1900 30,070 38,109 4,562 51,678 16,429 19,229 53,234 257,900 292,200 707,500

1910 32,184 40,484 4,679 61,209 18,090 22,642 66,581 321,600 358,400 925,300

1913 32,623 40,770 4,776 63,378 18,873 44,800 70,156 — 400,197 —

Source: adapted from J. HefFer and W. Serman, IIXIXsecolo. 1815-1914: dalle rivoluzioni agli imperialism^ (ed.) S. Zaninelli, Milan, 1998, p. 54; P. Toninelli, Lo sviluppo economico modemo dalla rivoluzione industriale alia crisi energeticay 1750-1973. Venice, 1996, p. 612; V. Zamagni. Dalla rivoluzione industriale allintegrazione europeay Bologna, 1999, p. 51.

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concessionary companies were responsible for the rolling stock, work force and organization of services under a system of contracts that were revised several times because of deficits in the running costs. British and French capital only gradually came to be invested in what seemed to be a sector too closely controlled by government policies and requirements. In 1848, France had only 1,800 km of railway, but by 1870 over 15,000 km. In 1878, the state bought back 2,600 km, but by 1908 the whole western network was in deficit.

In the first half of the nineteenth century, in other countries, there was no lack of isolated initiatives； often the railway had been limited to connecting the capital with the sovereigns summer residence.

The twenty-year period between 1850 and 1870, which saw the construction of the European continental and North American nenvorks, has been defined as the *Golden Age of the railway' In Europe 5〇 , 〇 〇 〇 miles of new lines were built, compared with the 15,000 that had been operating in mid-century. The greatest development was in France, with 9,3〇 〇 miles at an investment of 7 billion francs, thanks to capital being raised by the Credit Mobilier, owned by the Pereire brothers. State guarantees to pay the interest on railway company bonds enabled it to catch up with Germany —in 1869 both had about 17,000 miles of track —and to rival Britain as regards quality of equipment and rolling stock. The lower availability of coal stimulated French engineers to adopt energy-saving solutions, such as double expansion locomotives, which placed their railways at the cutting edge in Europe. In the Baltic area, in eastern and Mediterranean Europe, the railway era really started only after 1850. In Italy, the railway system was developed on the initiative of the government in the period after unification. Before unification, projects were very limited and mainly concentrated in the north of the country. The most important line was from Milan to Venice. The ruling class of the new kingdom of Italy saw the construction of a railway system as a fundamentally important condition for the consolidation of national unity, and the modernization of the country. However, because of the poor state of Italian industry, construction was achieved only by depending heavily on foreign countries for capital, as well as for fixed and rolling stock. Its meagre commercial success was moreover a heavy burden on the country’s balance of payments.9 In 1865, the net- work was privatized and concentrated in four mixed groups, with the intervention of foreign companies. The difficulties in this arrangement created a crisis in die system and, under the 1885 convention, led to a reorganization on French lines, whereby the national network was shared between three companies. From this period, better links with the iron and engineering sectors were created, which reduced the need for foreign help. The network continued to be extended； at the same time it created even greater disparity between the areas that were linked to it and those that were not. In 19〇 5, the whole system was finally nationalized.10 Other coun- tries1 experiences reflected their own particular political and financial circumstances. In the 226 I World Economic Development Austro-Hungarian Empire, the state set up partnerships with foreign investors，while in Spain and Russia, foreign investment was seen as the best way to acquire new technologies.

The railways revolutionized the transport system： they caused the disappearance of the stagecoach, and limited traffic on the roads to the short hauls, and thus formed a complement to

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the railroads. The waterways were still used for heavy bulk goods, but no longer for transporting passengers and mail. The railways could reach areas that the waterways could not. In the last twenty years of the century —the third phase of railway building—the branch nerwork in Europe was completed； the great international connections in Europe were created by means of the Alpine tunnels. Meanwhile transcontinental lines were also being built in North America, Asia and Latin America. By 1890, there were 208,000 km of track in Europe, compared with 51,000 km in 1860. The number of passengers had risen from 340 million to 1,750 million annually. In the United States there were l,75〇 railway companies； thirty of them ran 66 percent of the network of 167,000 miles, which exceeded the European network by 25 percent.

Berween 1883 and 1893, in the United States, the first coast-to-coast line was followed by another three, and by one in Canada. They were the main means of opening up the North American continent. The colonization of new territories, and the consolidation of anti-Chinese tsarist influence in Asia and the north Pacific, were made possible by over 6,000 km of the Trans- Siberian line (1891-1903). In the wave of European colonial, and imperial, expansion and with the support of British, French and German capital and technology, railways started to traverse Latin America, China, Africa and the Middle East. They were part of a whole network, which was connected to Europe by means of the ports. *In the nine-teenth-century collective imagination, when compared to the means of transport of seventy years earlier, the powerful and fast locomotives of the end of the century gave the measure of the break with the previous world/11

Maritime transport The application of steel and iron, as well as technological improvements in the use of steam engines, also enabled great progress to be made in maritime transport. But the breakthrough for the steamship was more gradual than for the railways. The reason for this was not only the slow development of new technology for reducing fuel consumption and weight, but also competition from the sailing ships, which during the eighteenth century and the first half of the nineteenth, had gready increased their speed and manoeuvrability. The four-masted clipper had evolved from the schooner, and was the pinnacle of sailing technology. It had a lower tonnage (3,000-5,000 tons) than other sailing ships, but it was faster, since it could reach fifteen knots, 300 nautical miles a day, and thus was very useful over long distances. Berween

The Economic Development of Europe in the Nineteenth Century (IV) I 227 1849 and 1875, it was used on the routes to India, the Pacific and Australia, without fear of competition from the steamship. By 1860, it was taking twelve to fourteen days to cross the Adantic and about eighty from Liverpool to Melbourne, from Canton to New York and from San Francisco to New York. In 1869, the clipper was affected by the opening of the Suez Canal. This shortened journeys to India and Oceania, and changed the routes to the less windy inland seas. A number of sailing ships then started to adopt innovations that had been introduced on steamships ： an iron hull and small steam engines to mechanize various operations such as the windlass,

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winch and capstan. Until 1850, steam power brought progress to river rather than sea navigation. Initially, the

steamship was in operation on the short sea routes. In 1818, the first sea connections were made on the Irish Sea and in 1821 between Dover and Calais. In the 1820s, they were started across the North Sea, the Baltic and the Mediterranean, with the transport of mail and passengers. From London to Calais it took twelve hours, and from Naples to Leghorn thirty-six. In 1838, the 没 厂 /奶，a steamship with side paddle wheels and boilers working on distilled water, made the first crossing of the Adantic entirely by steam. In 1840, the Great Western began regular mail steamer services, using mixed propulsion; in 1843, the •加 . 《 adopted the propeller, which required the use of gears to multiply the low number of revolutions of the engines.

In the middle of the century, the steamship still had sail rigging and resorted to mixed propulsion, to navigate in the event of engine failure. It was around 1860 that significant progress was made. Iron, and steel after 1879, was used to replace wood in the construction of the hulls, and reduced expenses for maintenance and wear. The propeller eventually replaced the paddle wheel. Double, and later triple, expansion compound engines (in 1869 and 1874 respectively) drastically reduced the working costs and the amount of coal that needed to be stored in the holds, while the amount of space for passengers and goods increased. Around 1880, auxiliary sails disappeared. Boilers with triple, and later quadruple, expansion led to greater cost-efFec- tiveness, and enabled the tonnage and average speed of iron ships to be increased. Furthermore, steam was a labour-saving innovation, since crew numbers could be reduced.

In the 189〇 s, the tonnage of steamships ultimately surpassed that of sailing ships, but between 1860 and 1865 the sailing ships had a monopoly of traffic in passengers and emigrants to the United States, as well as the carriage of luxury goods. At the beginning of the twentieth century, steamships finally achieved supremacy. The first ones were built for the mixed transport of both goods and passengers, but later they became specialized. Merchant ships started to specialize even further, with vessels being dedicated to specific forms of transport, such as petroleum or frozen meat. In 1870, the first oil tankers connected the United States and Europe, and subsequently came to play an increasingly important role in international traffic.

228 I World Economic Development

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Parallel to all these transformations, the maritime trade experienced unexpected rates of growth during the nineteenth century, initially with the construction of clippers, then of steamships. Predominance in shipbuilding, and sea power, remained a key element in British economic supremacy, at least until the First World War. In 1914, despite German and French competition, the merchant fleet was still one of the main sources of revenue for the United Kingdom. Whereas, at the end of the eighteenth century, Great Britain had a quarter of European shipbuilding capacity, a century later it was building more than half the ships in Europe. In 1875, the British had 1.9 million tons of steamships, against 4.2 million tons of sailing ships. In 1885, when the capacity of a single steamship equalled that of six sailing ships, Britain had 4 million tons of steamships, against 3.4 million tons of sailing ships. By 1890, the British had 5 million tons of steamships, which was 73 percent of world tonnage； in Germany, 1.3 million tons of ships, out of 1.9 million tons, were of steel. Conversely, Norway, which like Canada and Italy had a large fleet of wooden ships, still had 1 million tons of sailing ships out of the total of 1.5 million tons.12

The new enterprises, based on the management of steamship lines, specialized in transport. Before the nineteenth century, there had been no regular ocean-going navigation service. In 1818, for the first time, American ship owners started a line with sailing ships setting sail from New York and Liverpool on fixed days, introducing a regular and punctual service that reduced uncertainty in the business field. This system was imitated by the steamship companies. They were subsidized by the government for postal services, and thus secured more profitable traffic.

Maritime navigation immobilized less capital than the railways, but it gave rise to significant investments in rebuilding ports and opening inter-oceanic canals. One of the most important projects of the whole nineteenth century was the opening of the Suez Canal, linking the Mediterranean with the Red Sea. 162 km long, and planned by Ferdinand de Lesseps, it was built between 1859 and 1869, after numerous technical, financial and diplomatic problems had been overcome. The duration of journeys between the countries of the North Atlantic, South East Asia and the Far East was considerably shortened. De Lesseps also planned a canal across the isthmus of Panama, but a combination of setbacks brought the enterprise (1881-1889) to a standstill. It was taken up again by the United States, with financial backing from the government, and finally completed in 1914.

The economic consequences Means of transport can carry out a ‘passive， function, namely the movement of goods and people, and an active1 one, which is the promotion and multiplication of development.13 By reducing costs, they free resources that can be channelled towards other consumer products,

The Economic Development of Europe in the Nineteenth Century (IV) I 229 and sustain economic growth.14 The cost of transport can determine whether the movement of goods is hindered or boosted. One of the greatest economic outcomes of the transport revolution was the fall in maritime freight costs, and the steady reduction of railway tariffs. Lower freight costs came about

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because of increased competition； they seem to have been more a feature of the first half of the nineteenth century than the second, and therefore applied to sailing ships rather chan steamships. But by 1910, freight tariffs were on average eight times lower than in 1820. Railway tariffs also decreased throughout the century. Lower transport costs made it much easier for people to travel； they gready facilitated contacts and exchanges, as well as economic and social relations. The market for agricultural products could be opened up to a larger extent, and become more specialized. Manufacturing industries could obtain supplies of raw materials and essential intermediate goods more regularly and more cheaply, and could send their products everywhere. Cities could receive food produce, consumer goods and fuel more easily.

Economic geography was transformed. In the last twenty-five years of the nineteenth century, thanks to regular low-cost sea transport, the flow of American corn to Europe upset the cereal-producing economy of Europe. Marginal units of production, once protected by distance and geographical circumstances, were critically affected. Separate and exclusive economies increasingly lost the advantages deriving from their position. Furthermore, modern transport methods were an essential means not only for the rapid colonization of the American west, and the Argentinean pampas, but also for the opening up of Eurasian Siberia.

In general, the railways facilitated the integration of national and international markets, and the more rational allocation of economic resources. The construction of national railway networks triggered off a chain of transformations thanks to backward and forward linkages with other sectors of the economic system. Among the backward linkages was the mobilization of credit for financing investment. Since the railway sector was highly capital-intensive, it boosted forms of international co-operation between bankers and financiers； this was the case with the construction of the skeleton Italian railway system between 1860 and 1870, where English and French capital and technology predominated. The stock markets carried on a lively trade in railway bonds and shares, which were the principal shares of the time. During the Second Empire, the Paris market became the major centre for investment in the railways. Intense rivalry between the Pereire brothers and the Rothschilds over the financing of railway construction in the Mediterranean and Danube areas further enlivened the Paris market. In the face of competition from the financiers of Paris, Brussels and Vienna, London turned its attention to frontier countries, such as Australia, South Africa, India and Egypt, where the interests of the British Empire were considerable.

230 I World Economic Development Though to different degrees, and at different times, the railways played a driving role in economic

development, since they involved a whole series of industries upstream in the production cycle. In particular, thanks to the multiplier effect of the investments, they propelled the construction industry, the iron and engineering industries (for infrastructure), and the services sector (for overall management). The forward linkages included market expansion, growth in the agricultural and food sectors, and the greater mobility of raw materials. But the labour market, company organization and the mechanization of office work also experienced far-reaching innovations thanks to the railways.

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Hundreds of thousands of people worked on building the national railway lines. They were the first great capitalist enterprises, with many delicate and complicated problems to solve ； complex management techniques were developed, and the railways provided one of the earliest areas of employment for professional managers. The American railways were the first great enterprises with a multi-divisional structure, in which an articulated managerial hierarchy planned and co-ordinated the movement of trains； it also organized the traffic between the different operating units, and created a separation between company ownership and management. Innovative accounting techniques were adopted to deal with accounts relating to passengers, goods, fares, routes, timetables and cost effectiveness. By the end of the nineteenth century, new mechanical punch card systems were being used that were capable of rapidly processing enormous quantities of data.

The telegraph and the globalization of information Finally, the nineteenth century also saw important improvements in systems for spreading news and information. For over three centuries, the descendants of Francesco Tasso from Bergamo, who had run the postal services for the Venetian Republic and later the Habsburg Empire, had gradually extended the nerwork to all the countries of the continent, by establishing themselves at the main courts of Europe. At the end of the eighteenth century, regular stagecoach services linked the main cities of Europe. In 1830, it took forty-five hours to get from London to Edinburgh at an average speed of 14 kph. French stagecoaches covered 200 km in a day, with 1.4 tons of goods and sixteen passengers and their luggage. In Prussia, it took forty hours to go from Berlin to Breslau, a distance of300km.15

At that time, information travelled at the speed of horses. During the French Revolution (1792), the physicist Claude Chappe introduced the optic telegraph. By sending signals between positions that were visible to the eye, it was possible to send 8,464 words in code form； when visibility was good, a signal took twelve minutes to travel 300 km. Initially it was used for military purposes and by the police, but from 1830 its use was extended to business communications. Between 1830 and 1840, in Britain and France, the first lines serving the

The Economic Development of Europe in the Nineteenth Century (IV) I 231 railways and the stock exchange were started，and later direct connections between the lines helped to spread a network of systems.

With the advent of fast transport systems like the railways, the information required for managing them needed to travel at even faster speeds. Several researchers devoted their energies to this, working independently. Cooke and Wheatstone developed discoveries that had been made earlier. The most original contribution, however, was made by Samuel Morse, an American, in 1835, who made a series of improvements to his telegraphic apparatus. His relay system sent back a signal automatically, by means of a code with a maximum of four impulses to distinguish each letter, which greatly extended its range and achieved high speeds of transmission. After 1843, different cities and continents were able to

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communicate with each other almost in real time1, which meant hours and minutes rather than months and days, and once cables had been laid across the sea bed the world market was unified. British enterprises played a decisive role in laying the cables； in 1851 the first one was laid under the Channel, in 1866 cables crossed the North Adantic, in 1872 they reached the Far East, and in 1874 Latin America. By 1902, when the two coasts either side of the Pacific were joined, the round-the-world network was complete. In 1914, 280,000 km out of the 516,000 km of underwater cables that had been laid down were controlled by British companies, both private and public. This was a powerful factor in confirming London, the capital of England, as the centre of the world market.

The effects of the symbiosis between telegraph and railway were thus extended to the financial market, and the ‘railway mania’ of 1840-1850 enormously extended the activities of the London stock exchange, giving rise to a dozen exchanges in the provinces that were linked to each other thanks to the telegraph1.16 In the 1860s, in the main European countries, despatches from the stock exchange were far ahead of any others. The international telegraphic communication service called for measures to harmonize regulations and standardize technology, and was the first to do so, even preceding the railways and postal service. The first interconnections (Prussia-Austria, in 1849; France-Belgium in 1850) were followed in 1855 by the West European Telegraphic Union (between France, Belgium, Switzerland, the Kingdom of Sardinia and Spain). Ten years later, once the Morse code had been universally adopted in 1858, this led to the International Telegraphic Union, the first supranational administrative and technical organization. As regards the telegraph, in certain cases, finance first came from public sources and then passed into private hands (the United States) or vice versa. In Britain, in order to make up deficiencies and keep tariffs down the domestic network passed to the state； in Europe, it was the first case of the nationalization of a public service aimed at correcting distortions in the market.

232 I World Economic Development Half a century after the appearance of the telegraph, the advent of the telephone, an invention of

uncertain paternity, speeded up and intensified the spread of information even further. Its appearance on the economic scene came about in 1877 because of the initiative of Bell. In 1879, the telephone transmitted 100 to 200 words a minute, instead of the fifteen to twenty of the telegraph, without any need for an operator. For the whole of the nineteenth century, it remained an eminendy American innovation, limited to the world of business, since the usefulness of an apparatus within a network is based on the number and type of other users connected1 2 3 4 5 6 7 8 9 10.17 Its use did not extend to private

1 J. HefFerand W. Serman,1815-1914-Dallerivoluzioniagliimperialismi^. 51.

2 C. Wilson, ‘Transport as a factor in the history of economic development: in A. Vannini Marx (ed.)， Trasporti e

sviluppo economico. Secoli XII-XVIII, Florence, 1973, pp. 313-21.

3 comincio ad essere elaborata proprio quando si compiva quella rivoluzione dei trasporti e delle comunica- zioni

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communication until the end of the century. By 1900 it served 6 percent of households in the United States, but its main application was still limited to business. Finally, the way was paved for the invention of the radio and the creation of a system of mass communication by the first radio transmissions made by Guglielmo Marconi (1874-1937)，in 18%.18

NOTES

che nei decenni centrali dell’Ottocento trasform6 il tradizionale rapporto dell’uomo con lo spazio e le dimensioni

stesso del pianeta*. C. Pavese, *1 trasporti e le comunicazioni,, in P. Toninelli (ed.), Lo sviluppo economico moderno, p.

301.

4 Ibid., p. 306.

5 J. HefFer and W. Serman, IlXIXsecolo 1815-1914, p. 52.

6 Ibid., p. 55.

7 L. Girard, trasporti* in H.J. Habakkuk and M. Postan (eds), Storia economica Cambridge, vol. VI, La rivoluzione

industriale e i suoi sviluppiy Turin, 1974.

8 C. Pavese, I trasporti e le comunicazioni, p. 318.

9 G. Guderzo, *A proposito dello sviluppo ferroviario in Italia dal 1850 al 1914. Aspetti geografici. economici e

sociologici* Bollettino della Societapavese di storiapatriay I-IV, 1972-1973, pp. 1-34.

10 V. Zamagni, Terrovie e integrazione del mercato nazionale nellltalia postunitaria,, in Studi in onore di G. Barbieriy vol.

Ill, Pisa, 1983, pp. 1635-49; S. Fenoaltea, *Le costruzioni ferroviarie in Italia, 1861-1913*, Rivista di storia economica,

n.s., I, 1984, I, pp. 61-94; R. Lorenzetti (ed.), La questione ferroviaria nella storia cTItalia. Problemi economici^ sociali, politici

e urbanisticiy Rome, 1989; A. Giuntini, Contributo alia formazione di una bibliografia storica sulle ferrovie in Italia, Milan, 1989.

The Economic Development of Europe in the Nineteenth Century (IV) I 233

11. ‘NelTiminaginario collettivo ottocentesco le potenti e veloci locomotive di fine secolo, raffrontate ai mezzi di

trasporto di settantanni prima, fornivano la misura della rottura con il mondo precedente* C. Pavese, I trasporti e le

comunicazioni, pp. 320-1.

12. Ibid., p.326.

13. F.O. Voight, *1 compiti della moderna scienza dei trasporti* Rivista internazionale di economia dei trasporti, I,1974,pp. 263

fF.

14. P.L. Spaggiari, Trasporti, mobilita e sviluppoy Parma, 1985; C. Pavese, I trasporti e le comunicazioni, p. 302.

15. C. Pavese, I trasporti e le comunicazioni, p. 310.

16. la railway mania degli anni 1840-1850 amplio enormemente lattivita della Borsa di Londra facendo sorgere una

dozzina di borse in provincia che comunicavano grazie al telegrafo’. TfeV/” p. 326.

17. perche un apparecchio in rete e utile in ragione del numero della tipologia degli altri utenti collegatil Ibid., p. 329.

18. These were sent from Poldhu, in Cornwall, England, (translators note)

234 I World Economic Development

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235

The Economic Development of Europe in the Nineteenth Century (V)

International Exchanges and Monetary Systems

Giovanni Luigi Fontana

Europe and the world economy The network of international exchanges played a fundamental role in European economic development. By the start of the modern era, the European continent (particularly the Atlantic powers of Spain, Portugal, England and Holland) was at the centre of a dense network of international trade with the Americas, Asia and the coastal areas of Africa, and during the nineteenth century international trade experienced prodigious growth. With the revolution in transport, the entire world became a single market, where men, goods, capital and ideas became more mobile than they had ever been before. By 1913, the value of the international trade in goods was twenty-five times greater than it had been in 1820, and Europe dominated international exchange； more than three-fifths of world trade was carried out by eight nations. By far the greatest role was played by Great Britain, which in 1800 controlled 36 percent of world trade, 27 percent in 1840, and 23 percent in 1873; even in 1914 it still controlled about 14 percent. Until the 1880s, France was in second place, though a long way behind the leading country； however, at the beginning of the rwentieth century, it was overtaken by Germany and the United States.

The development of exchange, which continued even during the protectionist period, but at a slower rate, led to an increasingly complex international economy, which remained firmly linked to the gold standard, because of the predominance of British trade and the stability of the pound sterling. During the nineteenth century, trade relations that already existed were further consolidated, while in other areas new links and balances were being formed. In the

Giovanni Luigi Fontanta, "The Economic Development of Europe in the Nineteenth Century (V): International Exchanges andMcmetaxy Systems: ■Economic History of[Europe: From 五 xpansion to Devehpment，ed. Antonio'Di Vittorio, pp. 222-238. Copyright © 2006 by Taylor & Francis Group. Reprinted with permission.

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period between 1815 and the First World War, international trade and financial relations were intensified as a result of a number of factors which had a decisive influence.1

First, there was the technological progress that went with the British industrial revolution and the industrialization of the continent. The British cotton sector, for example, became totally dependent on imports of the raw material from Asia and the Americas, while, in the opposite direction, textile products, iron, steel, chemical and engineering products found new markets outside Europe. However, while on the one hand, technological innovation led to an increase in the international trade for low cost manufactured products, on the other, it led to production being imitated, with imported goods being replaced by goods produced domestically.

Second, there was a heavy increase in the natural resources used in manufacturing processes, and the flows of imports and exports within Europe, as well as to North America and the Third World areas increased considerably. Next, there was the revolution in transport and communications, which we have already analysed. In 1873,27 million tons of goods were transported by steamship, but by 1898 this had increased to over 63 million tons. Commercial relations and political links were further consolidated by a series of projects like the Suez Canal (1869), the canal linking Rotterdam and the North Sea (1872), and the Panama Canal (1914), which also drastically reduced the cost of transporting goods to and from transoceanic destinations.

A further factor was the marked growth in world population. As we have already seen, the population of the planet rose from 9〇 〇 million in 1800 to around 1.6 billion in 1900. European population growth led to unprecedented movements of people, which strengthened the economic, social and cultural links between different continents. There was greater mobility of labour than previously. Emigration caused salaries and incomes in the countries of emigration and immigration to converge.2 Demand for consumer goods increased, as did the trade in products manufactured in Europe. The Old Continent increasingly came to depend for its food on produce from outside Europe. Imports of wheat are a case in point, and this will be discussed later in connection with European trade policies.

Finally there was the accumulation of capital. While England was largely self-sufficient as regards its supply of capital, the same could not be said of other European, or non-European, economies. The process of capital accumulation by the Tollower1 countries was rapid, and large amounts of foreign investment were attracted by high growth performance.

The triumph of free trade and the development of international trade The development of international trade had been limited by high transport costs, by people s low purchasing power and by the poor variety of goods, but in the course of the nineteenth century it experienced an exceptional increase. Between 1820 and 1913, world exports 236 I World Economic Development increased thirty-three times,3 and the period of free exchange between 1842 and 1873 was when the highest rate of growth was recorded. From the 1870s until the First "World "War, when protectionism increased, the volume of international trade continued to rise, but more slowly. Its impact on GDP was greater in smaller countries with more specialized products； in

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larger countries its impact was weaker. Furthermore trade became more multilateral. * Countries did not need to balance exports and imports with each trading partner, because balance could be achieved in the aggregate, thus allowing greater flexibility in the use of world resources.14

Fluctuations in trade are normally conjunctural, or related to the customs policies of differ- ent countries. Britain was the first country to break with the mercantilist tradition contested by the classical school, and by David Ricardo in particular. Nineteenth century liberal economic thought argued that after the natural barriers to trade and commerce berween countries had been removed, it then became necessary to eliminate the artificial barriers, in other words the duties and prohibitions on imported and exported goods. International free trade allowed the principle of the specialization of labour to be extended, which increased the overall productivity of the international economic system and brought about a more efficient use of resources. It was also a powerful factor for modernization, since on the one hand, strategic raw materials and advanced technology could be imported, and on the other, manufactured products, even of inferior quality, could be exported to neighbouring areas, enabling the industries in the follower countries to become consolidated.

Economic change in the nineteenth century took place against a background of constant debate between free trade supporters, who rejected customs barriers, and protectionists, who argued in favour of the need for them, if only for a certain period. The advantages and disadvantages of protectionism have been one of the most debated and controversial issues among economists and economic historians ever since. There is, however, general agreement 'that excessive protectionism has only negative effects, while more modern theories of commercial strategy justify a moderate degree of temporary protection combined with stronger competitivity ，.5 The fact remains that no country, not even Great Britain, achieved industrial development where there was complete freedom of trade. The countries that were more favourable towards free trade were smaller ones like Holland and Denmark that gained greater benefits from international trade. During the nineteenth and twentieth centuries, the largest countries, like the United States and Russia, were also the most protectionist； like the newly unified Germany, they sought to promote the development of industrial sectors that were still in an embryonic state by focusing on the potential of the domestic market.

During die seventeenth and eighteenth centuries, most European countries, as we have seen, embraced mercantilist theories； trade relations with other states were based on a positive trade balance, and, for the economy to prosper, exports had to exceed imports. This meant that

The Economic Development of Europe in the Nineteenth Century (V) I 237 the state had to intervene to provide protection from the influx of foreign goods, and subsidize exports of national products. Fiscal motives went hand in hand with economic concerns, and in many European countries, customs and excise duties accounted for an important percentage of the total revenue from taxation.

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In Britain during the second half of the eighteenth century, new ideas about the economic and commercial relations between states started to be formulated. The intellectual climate of the Enlightenment and the industrial revolution led to a general review of the trading policies that had hitherto been pursued. Three important works laid down the theoretical foundations of free trade ： The Wealth of Nations by Adam Smith (1776), On the Principles of Political Economy and Taxation by David Ricardo (1819) and Principles of Political Economy by John Stuart Mill (1848). Adam Smith argued that the wealth of nations could be increased through the more efficient allocation of resources. Ricardo formulated the *law of comparative costs1, and demonstrated the advantages of specialization and the international division of labour1, whose aim was to optimize resources. Another argument in common was that optimization could be achieved only by abolishing artificial barriers, since the 'invisible hand1 of the market brought about the optimal allocation of factors and production.

However, in international competition the state only apparendy adopted a stance of nonintervention, and the various governments attempted to achieve a natural equilibrium，of economies by means of trade agreements. Free trade was conceived and embraced particularly by strong economies, like that of Britain, while countries that were becoming industrialized adopted protectionism. During the upheavals of the French Revolution, the application of free trade theories met with considerable difficulties. Although the 1786 Eden Treaty between France and England，for the abolition of a number of customs duties, is considered the first step towards free trade, war expenses led to an increase in customs tariffs in line with mercantilist theories. Strong sectors, protected by these barriers, gained positions of privilege，which they were reluctant to lose when peace returned, and after 1815 protectionism increased once more. Manifestoes in support of protectionism included the ■ 撕 如 5*吻 by the American Alexander Hamilton (1791) 2nd Das nationale System derpolitischen Oekonomie by the German Friedrich List (1837). These writers questioned whether free trade could be adopted as an absolute principle； whether or not it was appropriate to apply protectionism had to be evaluated according to a country s level of economic development. List argued that free trade benefited countries that were already developed, while it prevented others from becoming industrialized. Thus the transition from an agricultural economy to a new industrial one could occur only with the aid of a protectionist system. These theories, which were also supported by the American Henry Charles Carey (1793-1879), gained particular acceptance in the United States. On the New Continent protectionism continued to be applied in association with the political theories 238 I World Economic Development of Monroe. Protectionism was adopted by the United States during the Civil "War, and until 1913 its industry was among the best protected from competition. In 1833, Germany adopted the Zollverein, a customs union that formed a type of common market ，with customs duties between the German principalities being abolished in favour of a common tariff for foreign countries. The Zollverein was created under the auspices of Prussia, and initially linked twenty-five of the thirty-nine confederate states. In 1851-1852 the North Sea principalities became part of it, but Austria remained excluded. The customs unification of *Little Germany1 was the forerunner of the solution that was adopted in 1871 with political unification.

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The fall in prices caused an increase in duties on specific products. Governments were preoccupied with lowering direct taxation, and thus tended towards raising customs duties on consumer goods. A typical case of this type of legislation was the Corn Laws； they were a complicated system of duties on imported corn that the British introduced during the Napoleonic Wars, when the price of corn had risen rapidly. In order to protect home producers, a duty system was imposed, with duties varying according to the home price of corn. This helped to protect the interests of the large landowners, who saw to it that prices were kept high. The economic and social costs fell on the less prosperous classes； but they also indirectly affected the industrial interests of the nation, through higher wages. The Corn Laws made it almost impossible to import cereals from abroad because of the imposition of customs duties, and led to increases in bread prices during the subsistence crises that were triggered off. Partial attempts to attenuate them, such as the sliding scale (1824-1826), made practically no impact on the protectionist system. In 1839 the Manchester industrialist Richard Cobden (1804-1865) formed the Anti-Corn Law League, and organized campaigns against the government for the repeal of the Corn Laws. Cobden argued how British industry depended on weather conditions that affected harvests； a poor harvest led to an increase in the price of bread, which brought about a decrease in the consumption of other products, and this resulted in unemployment, as well as a fall in British imports and exports. In dealing with the economic crisis of 1839-1842 and the Chartist revolt, Robert Peel (1789-1850) sided with the Manchester programme； in his governments budget of 1842, he reduced customs duties and reintroduced income tax. The 1846 subsistence crisis in Ireland led him to finally repeal the Corn Laws； it was a victory for industrial interests over protectionism, particularly of the agricultural classes. The Whigs continued to dismantle the mercantilist system until the ultimate triumph of free trade in 1860. The fact that Britain was at the peak of its economic power and political prestige led others to follow its example, and the first to do so was the France of Napoleon III.

Changes to the economic situation could come about only if the whole context of exchange regulations could be redefined, and the 1860 Cobden-Chevalier trade agreement berween Great Britain and France is to be understood in this light. The agreement stipulated that

The Economic Development of Europe in the Nineteenth Century (V) I 239 Britain should remove all customs tariffs on imports of French goods, with the exception of wine and brandy, which were considered luxury goods; France was committed to reducing tariffs on British goods, and 30 percent was to be the maximum rate that could be imposed. The significance of this agreement extended far beyond the two nations direcdy involved. It was an innovation that liad exceptionally far-reaching consequences for the ftiture of European trade relations. The so-called most favoured nation clause meant that the effects of the agreement could be extended to other countries by only one of the two signatory nations. France, for example, negotiated a series of agreements with Belgium (1862), the Zollverein (1862), Italy (1864), Switzerland (1864), Spain (1865), Holland (1865), Scandinavia (1865) and Austria (1866). As a result of the most

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favoured nation clause, Great Britain came to enjoy the benefits of special privileges that France negotiated with the states with which it had signed a trade agreement. This meant that during the twenty years after 1860, free trade experienced a chain development that involved the majority of European nations.

Return to protectionism After the 1870s, in several countries there was a return to protectionism. To understand this change it is necessary to consider a number of factors that transformed the economic and political landscape of Europe in the last quarter of the century：

1. The achievement of considerable levels of industrial development led the entrepreneurial classes in several European countries to seek protection from increasing competition.

2. In the field of agriculture, imports of low-priced corn, especially from the United States and Russia, caused large landowners to advocate protectionism.

3. The economic crisis that affected the whole of Europe from 1873 made competition on the national and international markets considerably more difficult, and even many industrialists favoured a move towards protectionism.

4. The triumph of nationalism and imperialism changed the climate of international relations. The Austro-Prussian and Franco-Prussian Wars of 1866 and 1870 created a series of political conflicts that led to the First World War. In the complex interaction of politics and economics, there was an increasingly close connection berween protectionism and policies of‘international prestige’.

5. Colonial enterprise led to a series of diplomatic clashes over the division of territory, especially in Africa. Territorial expansion outside Europe became a burden on the taxation systems of the majority of European nations.

6. With important nations abandoning free trade positions, chain reactions were created and led to a general drive towards protectionism.

240 I World Economic Development

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All these factors breathed new life into protectionist interests that had never fully disappeared. After the 1870s, other European countries were led to adopt protectionism by the agricultural crisis that had developed because of competition from American and Russian grain； its arrival on the European markets was an effect of the increase in steamship navigation. The conditions were created for a coalition of interests between landowners, who were penalized by lower agricultural prices, and industrialists, who were affected by falls in consumption. This was the case in Germany, where tariffs on national products were adopted by Bismarck between 1879 and 1881 ； the decision was also dictated by political and fiscal advantages, and the system was developed, in a more moderate form, under Kaiser Wilhelm II (1888-1918). Trade agreements ensured the economic predominance of Germany over the agricultural countries of central and eastern Europe. Italy followed a similar route. In the pre-unification period, exports of agricultural raw materials and semi-finished products (especially silk) had been outweighed by imports of industrial manufactures, thus creating an adverse trade balance. Protectionism was applied in all the states, with the exceptions of the Grand Duchy of Tuscany, and the Kingdom of Sardinia from 1834.6 The free trade position of the ruling class of the new Kingdom of Italy was closely linked with its foreign policy, as the 1863 Italo-French trade agreement showed. The transition to protectionism was gradual and not without difficulties； conflicts arose between ideologies, in international relations, and in differing interests in different sectors of the national economies. The post-unification ruling class in Italy held that some European countries should develop the primary sector, while others should maintain, or achieve, dominant positions in the secondary sector, in accordance with the theory of international specialization. Between 1861 and 1876, the historical right wing governments applied free trade policies； however, the new left wing government saw the need to accelerate industrialization through a more active role of the state with a semiprotection- ist5 policy, such as the 1878 customs tariff.7 In 1887 came the turning point as regards tariffs (the svolta tariffaria)^ though they were applied only in trade agreements with individual foreign countries. They were tenaciously supported by an agrarian-industrialist coalition led by the foremost industrialist of the day, the wool entrepreneur and senator Alessandro Rossi of Schio.9 The Italian case is interesting because of its international repercussions. Hitherto France had been the trading partner of Italyexcellence, exporting industrial products and importing citrus fruits, silkworms and a range of fruit and vegetable produce. During the four years between 1888 and 1892, there was a tariff war1 between France and Italy, during which tariffs were continually being raised. France did not stabilize its tariffs until 1892, when the TarifFe Meline was applied. However, they were still lower than they had been in the first half of the century, since the most favoured nation clause set them at the lowest rate and eliminated any discrimination.

The Economic Development of Europe in the Nineteenth Century (V) I 241 By 1914 the whole of Europe had returned to varying degrees of protectionism. The free trade

group was reduced to the nations of north-western Europe with the most developed trade. Great

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Britains economic interests worldwide enabled it to remain particularly open to free trade； the British economy thus became the pivot on which the whole economic system of international exchange turned.

Colonialism The return to protectionism came at the same time as important political changes. Countries like Britain had considerable colonial experience； with its maritime development in the seventeenth and eighteenth centuries, Britain had created a series of areas of influence, free ports, and possessions, particularly in America and Asia. On the other hand, for France, the eighteenth century had marked the loss of its overseas possessions to Britain, and in the first decades of the nineteenth century Spain and Portugal had lost their colonies in South America. Meanwhile, industrialization in Europe brought about the need to expand markets for both finished products and raw materials, and Britain had started a new type of imperialism based on the occupation of vast areas of the globe. At the end of the nineteenth century, its empire stretched from Nigeria to South Africa, from India, Burma and Australia to Canada. Other European nations also set out on the same path； berween 1830 and the end of the nineteenth century, France occupied part of Saharan Africa (initially Algeria, Tunisia, Morocco), equatorial Africa, Madagascar and Indochina. Since German interests were more focused on Europe, German colonialism was more restricted, and it was purely for political reasons that Bismarck launched into colonial enterprises. Belgian colonialism was also restricted, while Portuguese and Spanish colonialism was on the decline. Italian colonialism, with the occupation of Eritrea (1885), Somalia (1887-89) and later Libya (1912), was ultimately to fail.

Colonialism was a complex phenomenon and in the long term had many different aspects. From the economic point of view, which was not always uppermost, the colonies were markets for goods, capital and raw materials, and also as an outlet for growing populations, but these elements did not always equally apply to all the European colonies. There was as much difference in their political and economic links as there was in the types of colonies. Great Britain was the only European country that had close economic ties with its colonies. In 1854, about 55 percent of British foreign investment was in continental Europe, in 1870 it was no more than 30 percent, and in 1914 barely 8 percent. On the other hand, in 1854, investments in the colonies and dominions, including India, accounted for no more than 20 percent of total foreign investment, in 1870 it amounted to 45 percent, and by 1914 as much as 65 percent. These figures appear all the more astonishing in view of the fact that in the same period French 242 I World Economic Development investment in the colonies amounted to 4-9 percent of all foreign investment. These figures perhaps substantiate the opinion that there was a connection between British economic decline ，and over-commitment to typical products of die first industrial revolution. Since such products could be absorbed by colonial markets, Britain had less interest in converting to products that were typical of the second industrial revolution. In the long run, capital that could be used for important processes of technological innovation at home went to the colonies； but it also created a state of immobility in production because of its unsophisticated markets.10

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The international economy With the expansion of European international trade, the international economic situation was taking shape. Taking 10。as the total volume of exports from European countries in 1913, in 1820 the index was barely 5, and in 1870 it was about 30. European trade thus witnessed unprecedented development both in developed countries and in those outside Europe. Table 7.1 shows Britain s clear supremacy throughout the nineteenth century. Although new powers like Germany and the United States had achieved considerable levels of industrialization by the end of the century (with Germany even surpassing Great Britain), the role of British trade still predominated. In 1914, Great Britain still controlled about 14 percent of world trade. These were unparalleled results. Between 1840 and 1860, there was a three-fold increase in the

Source: adapted from A. Maddison, Dynamic Forces in Capitalist Development. A Long-run Comparative View, Oxford, 1991, pp. 311 -15.324-6.

The Economic Development of Europe in the Nineteenth Century (V) I 243 quantity of cotton traded worldwide, while that of sugar doubled in the thirty years between 1840 and 1870. Wool, cocoa, indigo, wood, corn, rubber, seed and even guano were at the centre of a dense network of worldwide trade.

Europe was at the centre of the world system, with about two-thirds of all exports and imports of raw materials and finished products (Tables 7.2 and 7.3). Table 7.2 shows how Great Britain accounted for a decreasing influx of raw materials, while Table 7.3 shows a decrease in the UK share of finished products. A new non-European producer, the United States, was becoming more and more important. However, the industrial role of the United States, which in the twentieth century was to be fundamental, was still not apparent； in 1880, around 80 percent of its exports went to Europe, and in 1913 Europe still accounted for about 60 percent of exports from the United States. Yet developments in America were being closely watched, and there were those

Table 7.1 Value of exports, 1820-1913 ($ million at 1913 prices)

Country 1820 1840 1860 1880 1900 1913 Exports as % of GDP in 1913

Great Britain 73 189 579 1,052 1,497 2,555 20.9

Germany — 106 240 549 1,097 2,454 17.5

France 56 86 260 578 818 1,328 13.9

Italy 35 —

251 312 485 12.0

Belgium 16 29 87 224 386 717 50.9

Holland

—

166 267 413 38.2

United States 31 97 229 833 1,733 2,380 6.1

Japan — — — 22

92 315 12.3

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who predicted its future role on the world scene.11 The system of international relations just described can be seen in terms of a core- periphery1

model in which Europe at its centre firmly controlled the whole system, but saw most of its trade being carried on within its own boundaries. Indeed, it has been observed that the importance of the periphery1 in the development of the core5 of the system should not be overestimated. Between 1830 and 1910 (Table 7.4), about 80 percent of the exports from European countries found buyers' markets within Europe itself. Although this percentage was considerably lower for Great Britain (about 40 percent), the fact remains that Europe was the centre of production and consumption regardless of economic events in other countries. In this case, it was the periphery that needed Europe, in order to start commercial and industrial development.

244 I World Economic Development

Table 7.2 Distribution ofworld trade in raw materials, by continent, 1876-1913 (%)

Area

1876-1880

1896-1900

1913

Areas Exports Impo rts Exports Imports Exports

Great Britain 30 3 26 4 19 6

Continental Europe 50 43 55 46 55 40

North America 7 16 8 19 11 17

Rest ofworld 13 38 10 32 14 37

World 100 100 100 100 100 100

Source: A.G. Kenwood and A.L. Lougheed, The Growth of the International Economy, 1820-1990. London and New York, 1992, p. 86.

Raw materials Foodstuffs Manufactures

Table 7.4 Changes in the structure of foreign trade (%)

Great Britain

The Economic Development of Europe in the Nineteenth Century (V) I 245

1 8 0 / 2 3 4

Area

1876-80 1896-1900

1913

Import! > Exports Imports Exports Imports Exports

Great Britain 9 38 10 31 8 25

Continental Europe 31 57 33 57 40 56

North America 8

4 10

7 12 11

Rest of world 52 1 47 5 40 8

World 100 100 100 100 100 100

Table 7.3 Distribution ofworld trade in finished products, by continent, 1876-1913 (%)

Source: A.G. Kenwood and A.L. Lougheed, The Growth of the International Economy y 1820-199〇y London and New York, 1992. p. 86.

Years Imports Exports Imports Exports Imports Exports

1854-56 53.7 7.1 39.1 6.8 7.1 86.1

1890-92 40.2 14.1 43.0 4.9 16.8 80.9

1911-13 42.5 17.6 37.7 6.4 19.9 76.1

France (exports)

Years

Raw materials

Agric. products Manufactures

1837-46

4.3

21.8 73.9

1867-76

10.0

38.0 52.0

1887-96

11.9

33.9 54.3

1907-13

14.6

27.4 58.1

Continued

Germany

Source: Y.A. TonineWi. {eA) Lo sviluppo economico moderno dalla rivoluzione industriale alia crisi energetica， 1750-1973. Venice, 1997, pp. 620-1.

Years Imports Exports Imports Exports Imports Exports Imports Exports

1880-82 35.2 14.5 33.6 21.1

19.1 16.0 12.1 48.5

1890-92 36.6 15.8 37.0 14.6

16.5 15.6 10.0 54.0

1911-13 42.5 15.4 34.0 10.1

14.8 21.1 8.7 53.4

Italy

Raw materials Foodstuffs

Semi-finished Manufactures

Years Imports Exports Imports Exports Imports Exports Imports Exports

1881-83 12.7 12.7 20.6 32.5

29.5 29.5 15.4 15.4

1890-92 32.4 16.1 24.6 28.5

22.2 42.2 20.8 13.2

1911-13 37.2 14.3 19.7 29.3

19.9 24.9 23.2 31.5

United States

Raw materials Foodstuffs

Semi-finished Manufactures

Years Imports Exports Imports Exports Imports Exports Imports Exports

1821 5.5 60.8 10.9 3.9

7.3 9.8 56.4 5.9

1858-60 12.4 66.2 13.8 4.8

8.3 4.0 47.8 11.9

1890-92 23.1 36.1 18.4 17.9

14.9 5.3 26.6 15.0

1911-13 35.0 33.3 12.5 5.7

18.6 16.1 22.7 30.9

Japan (exports) Years

Primary products

Light industry

Heavy industry

1874-80

47.1

45.3

7.6

1901-10

14.4

70.7

14.9

Raw materials Foodstuffs Semi-finished Manufactures

Germany

246 I World Economic Development

1 7 9 / 2 3 4

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The growing European industrial powers created financial relations that appeared to be just as complex. Until 1850, as in the case of the construction of the railway system, the foreign investment of most European countries was on the continent itself, while in the second half of the century, capital was increasingly exported on a world scale. European industrialization had created wealth that was destined to find new uses. Great Britain, especially, had had trading and financial links with different trading partners, at least since the end of the seventeenth century, which led, on the one hand, to the investment of surplus capital abroad, and on the other to the refinement of various financial mechanisms for die efficient circulation and use of capital. The great expansion in international trade, with Great Britain as the uncontested leader, could not have taken place without the development of systems of financing.

The whole world market came to be regulated from London, which was the chief port and depot for raw materials and goods. Share and bond markets, foreign currency markets, central banks, private and commercial banks, brokers and other financial agents were the instruments of unprecedented financial expansion； at the heart of the system was the City. In the eighteenth century, about three-quarters of its operators, who were initially merchants and later merchant bankers, were already of foreign origin. London established its financial role with the nineteenth century, and with British industrial development, not only in Europe but also in the world. Bills of exchange were setded through the intermediation of merchant bankers； these were private bankers such as Baring, Rothschild, Schroeder, Hambro, Lazard and Peabody, who granted credit for short-term acceptance. The discount bankers intermediated between the banks holding credit and those seeking to place their assets. Neither Paris nor Berlin had such a specialized and well informed financial market. The supremacy of the pound sterling reinforced the efficiency of the London market； the quality of its services played a fundamental role in the equilibrium of the British balance of payments.

However, it was difficult to find a clear distinction between short and long-term transactions. Profits from trading activities might remain abroad in countries that were becoming industrialized as investments in the form of production activities, normally with higher returns than in the already industrialized countries； they could also be invested in the national debt, as for example in American government bonds. Such mechanisms help to explain the phenomenal growth of foreign investment during the nineteenth century. In 1855, foreign investment worldwide was £420 million; fifteen years later it had readied £1.3 billion, increasing to £4.7 billion in 1900; by 1914, it was £9.5 billion. On the eve of the First World War, Great Britain still accounted for 43 percent of world investment, and was investing the equivalent of 7-9 percent of its GDP overseas. Following some way behind was France, with 20 percent, then Germany, with 13 percent, and Belgium, Holland and Switzerland with 12 percent. Foreign investment of the United States was still very modest, at only 7 percent (Figure 7.1).12

The Economic Development of Europe in the Nineteenth Century (V) I 247

Europe was thus not only the worlds greatest investor, but of all the continents it was also the

greatest recipient of investments (Figure 7.2). Throughout the century, almost all the countries of

Europe depended on investment from other European countries to a greater or lesser degree. In 1914,

the Balkan countries of Russia and Turkey were the greatest recipients of capital in Europe； it came

especially from France, Germany and Holland. For Russia, foreign capital was fundamental in the

construction of the railway system, but also for financing the military and naval policies of the tsarist

government. Foreign investment in Scandinavia was important for the renewal of its economies and

the development of industrialization.

248 I World Economic Development

1 8 3 / 2 3 4

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There were different reasons for the outflow of capital to non-European countries. Canada, Australia and New Zealand were seen as new centres for the development of European-style social and cultural models, but especially as models ofproduction and consumption. Investment, particularly of British capital, in Latin America was channelled towards Argentina, Brazil and in part Mexico. On the Asian continent, China, Japan and especially India, at the time part of the British Empire, received substantial investments, while most foreign investment in Africa was concentrated in South Africa.

The balance of payments and the gold standard With the aggressive expansion of international markets for goods, labour and finance, a true international economy took shape, and each country was forced to focus on its balance of payments account. This was the means whereby records of all payments made abroad could be matched against all payments received from abroad. Depending on their stage of development, countries had different types of balances of payment. By definition, the balance of payments is in a state of balance； if there is an imbalance, whether it is a surplus or a deficit, this is indicated in the balance on current account. It is an algebraic calculation of the visible trade balance (imports and exports of goods), the invisible trade balance (services, freight, insurance, tourism, banking), remittances from emigrants, and finally interest and dividends. A surplus is offset by exporting capital, in order to restore balance, and adjustments do not generally produce negative effects on the domestic economy. If there is a deficit, the country has to restore balance, either by drawing on reserves in the interim, by borrowing, or by intervening on internal economic variables. This is where one has to start in order to understand how the first successful international system of payments in history actually worked. First, the balance of payments of the predominant country, Great Britain, will be examined (Tables 7-5-6).

In the nineteenth century, the trade balance of the United Kingdom was constantly in deficit. Thus, the exportation of manufactures did not make it possible to accumulate capital that had been exported overseas. Emigrants transferred more capital abroad than they remitted to their families in Europe. Invisible services, such as revenue from the merchant fleet, banking, insurance and transport, enabled a surplus on the balance of trade in goods and services to be made (as in 1815-1835， 1855-1875， 1910-1914), as well as a decrease in the deficit (1835-1855, 1890-1905), in the years when the export of goods was held back by protectionism or competition. The steady growth in foreign investments considerably increased the surplus of revenue from interest and dividends； it even sufficed to bring about a permanent surplus in the balance of payments. Thus during the nineteenth century, the British balance of payments was never in deficit.13 This was one of the main strengths of the

The Economic Development of Europe in the Nineteenth Century (V) I 249

pound sterling, and it became the benchmark currency in the international monetary system. The gold standard1, as it was known, was created in order to cope with the great increase in commercial and financial relations between different states. Where several different currencies were involved, an efficient currency exchange market needed to be created, and the solution was found in a monetary system that could provide a unit of account into which all the currencies could be converted.

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Table 7.5 International trade balance of Great Britain, 1816-1850 (£ million, period values)

Period Imports Exports

Import/export balance

Services Capital

Overall balance

1816-20 49.3 40.3 -9.0 14.5 1.7 7.2

1821-25 45.4 37.3 -8.1 14.2 4.2 10.3

1826-30 48.7 35.9 -12.8 10.6 4.6 2.4

1831-35 53.6 40.5 -13.1 14.1 5.4 6.4

1836-40 73.6 49.6 -24.0 18.6 8.0 2.6

1841-45 71.0 54.0 -17.0 15.4 7.5 5.9

1846-50 87.7 60.9 -26.8 22.0 9.5 4.7

Source: A.H. Imlah, Economic Elements in the Pax Britannica. Studies in British Foreign Trade in the Nineteenth New York, 1969.

Table 7.6 Industrial income，investments and public expenditure, England and continental Europe, 1800-1910

Year

Income produced by industrial sector

Investments (as % of State expenditure (as %

England Europe England Europe England Europe

1800 19.8 22.0 7.9 12.6 15.3 7.4

1840 31.5 25.2 10.5 14.4 7.9 7.0

1870 33.5 31.3 8.5 17.2 4.8 6.3

1890 33.6 32.8 7.3 18.6 5.9 5.9

1910 31.8 34.4 7.0 19.5 8.2 5.7

Source: N.F.R. Crafts, ‘La recente storia quanritativa deUa rivoluzione industriale’， 及 如 r/ 这 3 (1989).

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During the nineteenth century, for internal exchanges there was a gradual move towards replacing metal money with banknotes. The use of gold and silver coins had meant that the nominal value of the coin was also a real value, and with the expansion of banking practices, the growing use of banknotes had caused a discrepancy between nominal and real value. Banknotes did not hold real value, but the bank that had issued them was committed to converting the nominal value into gold or silver. The issuing bank therefore had to hold a quantity of precious metal as a sufficient reserve to ensure convertibility of the paper money into precious metal at a fixed parity； this had to be kept equal to a specific amount of the reserve of precious metal, initially established by usage, and later by law. This link between precious metal and circulating paper money meant that, in order to increase the amount of money in circulation, new reserves had to be acquired； at the same time, if there was a decrease in precious metal the amount of circulating paper money had to be reduced. Since at any one time, the reserve of metal was not sufficient to convert all the banknotes in circulation, it was a fiduciary system, based on proper adherence to the rules of the game. If not, there could have been a rush on the banks to convert the notes； this would have led to the collapse of the system, and to a state of forced circulation of the banknotes. The system thus required strict discipline, in the issue of fiduciary money, as well as in the balance of payments. If a country was in deficit, and had to pay its deficit in gold, it needed to restrict growth, or decrease its money supply, so that internal prices would fall and demand would slow down. Imports would thus decrease, but exports could be increased, since they regained their competitiveness. In this way balance was restored automaticallyIn a situation where there was a surplus on the balance of payments, the reverse happened. However, it could happen that countries with a surplus preferred to increase their reserves and not obey the rules of the game ； in that case there was an increase in the amount of money in circulation, with the consequent sterilization1 of gold. The whole burden of re-adjusting fell on the country with a deficit, sometimes forcing it to leave the gold standard and let its own currency fluctuate.

Observing that the system was thrown into crisis by wars and by the internal difficulties of individual countries, some scholars have argued that the gold standard was what made periods of great international stability possible, and not the gold standard that generated stability, even though that was one of its strengths.14 Moreover, a fixed exchange system indissolubly links the monetary and fiscal policies of member countries to those of the leader country through the complex interplay of action and reaction, and if it is to function well, the entire international monetary system requires stable and secure leadership. The pound sterling was synonymous with stability, while the franc experienced rwo periods of forced circulation, berween 1848 and 1850 and from 1870 to 1877, while the dollar fluctuated between 1862 and 1878. The nineteenth century showed remarkable monetary stability and the major currencies did not suffer any permanent loss of their purchasing power. However, it was the pound sterling

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The Economic Development of Europe in the Nineteenth Century (V) I 251 that inspired unconditional confidence； nobody anywhere else had been able to secure such absolute convertibility. The only great market for international credit was the City, and bills of exchange could be transacted there at the best conditions possible. This is why, after 1880, states increasingly included foreign currency in their exchange reserves； this was essentially the pound sterling, which was preferred to gold, since it also guaranteed interest.

In the nineteenth century, the monetary base on which the exchange value of products was fixed was normally a precious metal. Some countries adopted bimetallism, using gold and silver ； others adopted monometallism, either only silver or only gold. Until the 1870s, these systems meant that the world could be divided into three monetary zones. The first included countries that had adopted gold monometallism, and their systems were based solely on gold； of these countries Great Britain was the most important. In 1821, Parliament re-established the free convertibility of banknotes, which had been in forced circulation during the war against France ； notes issued by the Bank of England were unlimited legal tender and until 1914 could be freely exchanged for gold. The second monetary zone was made up of countries using the silver standard, mainly countries lying on the shores of the Pacific and Indian Oceans. The third zone comprised the countries that had adopted bimetallism. Their system was based on gold and silver, and a ratio between the rwo metals was fixed by law； in France the ratio had been 1:15.5 since 1803. Bimetallism was inconvenient with regard to one aspect in particular： if there was variation in the price ratio between the two metals, the higher-priced metal had to be sold, and quantities of the lower priced one bought until parity of price berween the two metals was re-established. This was the aim of the Latin Monetary Union. The Union had been set up by France in the 1860s and 1870s, and apart from France, also involved Belgium, Switzerland, Italy (between 1865 and 1866) and later Spain, Serbia and Romania. But it was doomed to fail because of the influx of silver after the discovery of new deposits.

Great Britain, on the other hand, had preferred monometallism. In 1717 it had already been established that a golden guinea was worth 21^ ； in 1774, payments in silver coin had been limited to a maximum value of £25, and in 1816 to only £2. After 1821, when the Bank of England resumed conversion of banknotes into precious metal, gold effectively became a standard for the currency. Problems with using a system of bimetallism, and continual fluctuations in the value of silver, ultimately led to silver being excluded as a measure of account； since both gold and silver are also raw materials, their prices are determined by supply and demand. Until around 1870 there was no variation in either the mint ratio or the trading ratio, but then they started increasingly to diverge, to the disadvantage of silver. Between 1860 and 1890, the production of silver increased as normal in the United States and Mexico, while the production of gold, which had increased enormously after the discoveries in California (1848) and Australia (1851)，slowly started to dwindle.

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In 1873, the new country of Germany decided to put a new coin into circulation； this was the gold mark, and it replaced the silver thaler. The reason for the decision was compatibility with the pound sterling. However, this alignment of gold reserves created an imbalance in trade relations, and the bimetallism countries gradually adopted gold monometallism, so that they would not lose their gold reserves, or be swamped with silver, which was considered poor coin. This was the case of France and the Latin Monetary Union after 1876, and the United States in 1900; it came after long and vexed political debate. Very soon the majority of European and non-European nations adopted the gold standard following recommendations laid down at the Monetary Congress of Paris in 1876. When it became part of the gold system, Italy gained an acceptable level of monetary tranquillity, and it reinforced the basis for development at the end of the century； this was an important result after the monetary crisis that had hit the country in 1866. The negative results of the war against Austria had led the government to stop converting banknotes into precious metal, in order to meet unavoidable state expenditure.

At the start of the twentieth century, gold finally ousted silver, despite the fact that the production of silver was rapidly increasing, with the discovery of new mines after 1890 in the Transvaal, Australia, the Klondike and Siberia. The adoption of the gold standard was associated with British supremacy in international trade, and for the whole of the nineteenth century, because of British predominance in trade, international exchanges were based on the gold standard. Not only was it used for fixing the value of all currencies to gold, but it put British sterling at the centre of the system, and effectively made it a unit of international conversion.

NOTES

1. A.G. Kenwood and A.L. Lougheed, The Growth of the International Economy, 1820-1990, London and New York, 1992.

2. A.M. Taylor and J.G. Williamson, 'Convergence in the Age of Mass Migration*, European Review of 2, pp. 1977,27_63; T.J. Hatton and J.G. 'Williamson，‘What drove the mass migrations

from Europe in the late nineteenth century?*, Population and Development Review, 1994, pp. 1-27. 3. They were to increase a further sixteen times between 1913 and 1992.

4. *1 paesi, cioe, non avevano bisogno di bilanciare esportazioni e importazioni con ogni singolo partner commerciale, perche le compensazioni si potevano efFettuare sullaggregato, permettendo in questo modo

maggiore flessibilita di uso delle risorse mondiali.' V. Zamagni, Dalla rivoluzione industriale alt integrazione europea, Bologna, 1999. p. 117.

The Economic Development of Europe in the Nineteenth Century (V) I 253

5. sul fatto che un protezionismo troppo elevato ha efFetti solo negativi, mentre le piu moderne teorie del commercio

strategico danno qualche giustificazione a una moderata protezione temporanea accompagnata da un rafForzamento

delle capacita competitive,. Ibid., p. 118.

6. L. Trezzi, 4I modi del coinvolgimento nello sviluppo economico europeo,, in S. Zaninelli (ed.), LOttocento economico

italianoy Bologna, 1993.

7. P. Pecorari, IIprotezionismo imperfetto. Luigi Luzzatti e la tariffa doganale del 1878, Venice, 1989.

8. E. Del Vecchio, La via italiana alprotezionismo, 5 vols, Rome, 1979-1980; A. Cardini, Stato liberale e protezionismo in Italia,

Bologna, 1981.

9. Amongothers: S. Lanaro, ^azionalismo e ideologia del blocco corporativo-protezionista in Italia* Ideologte, 2, 1967; id.,

^Mercantilismo agrario e formazione del capitale nel pensiero di Alessandro Rossiy ̂ uademi storici, 5, 1971; L. Avagliano,

Alessandro Rossi e le origini dell Italia industrialy Naples, 1970; G. Are, Alle origini dell Italia industriale, Naples, 1974; G. L.

Fontana (ed.), Schio e Alessandro Rossi, Imprenditorialitay politicay cultura epaesaggi sociali delsecondo Ottocento, 2 vols, Rome,

1985-1986

10. L.E. Davis and R.A. Huttenbacky Mammon and the Pursuit of Empire. The Economics of British Imperialism, Cambridge, 1988.

11. E. Rossi, Gli Stati Uniti e la concorrenza Americanay Florence, 1884.

12. See also C. H. Feinstein, P. Temin and G. Toniolo, The European Economy between the Wars, Oxford, 1998.

13. J. HefFer and W. Serman, IIXIX secolo, 1815-1914. Dalle revoluzioni agli imperialismiy ed. S. Zaninelli, Milan, 1998, pp. 65-6.

14. B. Eichengreen (ed.), The Gold Standard in Theory and History y London, 1985; V. Zamagni, Dalla rivoluzi- one industriale,^.

124-6.

254 I World Economic Development

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Reading "You Need Money to Make Money" by David Landes has been excluded from the digital version

of this book due to publisher copyright restrictions.

To read the article in full, please refer to the print version

of "World Economic Development", published by Cognella, Inc in 2016.

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Topic Seven Questions

273

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1. Explain the impact of railroads on economic development.

2. Explain the impact of steamboats on economic development.

3. Explain the impact of telegraphs on economic development. 4. What were the Corn Laws ? How were they finally repealed ? What were the major

provisions of the Cobden-Chevalier (Anglo-France) Treaty?

5. Give five detailed reasons for European return to protectionism.

6. Describe the trade flows of the late nineteenth century. Describe the flows of international investments.

7. Explain the benefits and drawbacks of the International Gold Standard.

THE STOCK MARKET CRASH AND THE GREAT DEPRESSION

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The Stock Market Boom and Crash of 1929 Revisited

Eugene N. White

n trying to explain the 1987 stock market crash，many analysts drew obvious but vague comparisons with the events of 1929. Newspapers published a chart, reproduced in Figure 1，

showing the bull market of the 1920s superimposed on the 1980s. The degree of similarity between the two periods up to the crash was striking. Yet while analysts noted this close correspondence, they drew few inferences from it. Comparisons proved difficult because the crash of 1929 had received little scholarly attention since Galbraiths The Great Crash 1929 (1954).

This paper will sort through many of the hypotheses offered to explain the 1929 boom and bust. Most of the factors cited by historians played trivial or insignificant roles. The central issue is whether fundamentals or a bubble drove the bull market upwards. An econometric resolution of this question is unlikely，for reasons that Flood and Hodrick explain in dieir contribution to this symposium. However, the qualitative evidence assembled in this paper favors the view that a bubble was present in the 1929 market.

The Conventional Wisdom Galbraiths classic book still provides the most commonly accepted explanation of the 1929 boom and crash. He argues that a bubble in the stock market was formed during the rapid economic growth of the 1920s. Galbraith emphasizes the irrational element—the mania—that induced the public to invest in the bull market. The rise in the stock market, according to Galbraiths account (1954 and 1988, pp. xii-xiii), depended on ttthe vested interest in euphoria [that] leads men and women, individuals and institutions to believe that all will be better, that they are meant to be richer and to dismiss as intellectually deficient what is in conflict with that

Eugene N. White, "The Stock Market Boom and Crash of 1929 Revisited, o f E c o n o m i c Perspectives, vol. 4, no. 2, pp. 67-83. Copyright © 1990 by American Economic Association. Reprinted with permission.

277

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□ 1926-1930 + 1984-1988

Figure 1 Common Stock Indices

Source: The index for the 1980s is Standard and Poors 5〇〇. The data for the 1920s is found in the Board of Governors of

the Federal Reserve System (1943).

conviction.” This eagerness to buy stocks was then fUeled by an expansion of credit in the form of brokers' loans that encouraged investors to become dangerously leveraged.

Galbraith and other writers, like Kindleberger (1978), are vague about the causes of the halt in the market, believing that almost any event could have triggered irrational investors to sell. Instead, they focus on the inevitability of the bubble s collapse and suggest several factors that could have exploded public confidence and caused prices to plummet. The vertical price drops on Black Thursday, October 24, and Black Tuesday, October 29, forced margin calls and distress sales of stocks, prompting a further plunge in prices. When the stock ticker ran late, investors panicked and sold their holdings. In the following weeks and months, the market bounced downwards erratically, propelled by and perhaps propelling the depression.1

While Galbraiths book makes for compelling reading, there remain many unanswered questions. There is little discussion about how much fundamentals contributed to the bull market and what might have triggered the speculative mania. The argument about easy credit in the form of broker s loans seems strange at a time when the Federal Reserve was pursuing a tight money policy. Furthermore, little has been done to identify the precise role of external events in provoking the collapse. To address these questions, it is necessary to begin with a brief overview of the changes during the 1920s that set the stage for the stock market boom.

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The New Economy and Stock Market of the 1920s After World War I and a postwar recession, the stability and prosperity of the 1920s appeared extraordinary to contemporary observers. From 1922 to 1929, GNP grew at an annual rate of 4.7 percent and unemployment averaged 3.7 percent (U.S. Department of Commerce, 1975, Vol. I, p. 135 and 226). Part of this growth may be attributed to the emergence oflarge-scale commercial and industrial enterprises that took advantage of new continuous process technologies. Coordination by the emerging system of modern management, as described by Chandler (1977), produced more efficient vertically-integrated enterprises that captured economies of scale and scope.

The financial needs of these new enterprises altered the face of American capital markets. Regulations imposed on commercial banks in the nineteenth century severely limited their ability to provide large long-term loans, and firms turned to financing their investments out of retained earnings and bond and stock issues.2 The market for industrial securities, which first emerged in the 1880s, came of age in the 1920s, as both old and new corporations issued equities to finance new plant and equipment.

Commercial banks did purchase more bonds, but they could not legally trade or acquire equities. To circumvent this restriction, they set up wholly-owned securities affiliates, which permitted them to enter all aspects of investment banking and the brokerage business. Peach (1941) found that the number of affiliates grew rapidly from 10 in 1922 to 114 in 1931. These affiliates attracted many new customers and became big distributors of stocks and bonds, enabling them to become underwriters. By 1930, commercial banks' security affiliates had obtained roughly half the bond originations. By moving into investment banking through their affiliates, commercial banks were thus able to continue servicing the needs of their corporate customers (White, 1986).

While the securities affiliates catered to a broader clientele than most traditional brokerage houses, many small investors might still have shied away from buying securities, lacking sufficient capital to purchase a diversified portfolio of stocks. This obstacle was eliminated by the investment trusts, which served the same function as mutual funds do today.3 According to Carosso (1970), investment trusts grew from about 40 in 1921 to over 75〇 in 1929.

The growth of the securities market, assisted by the establishment of investment trusts and securities affiliates, allowed firms to substitute stocks and bonds for commercial bank loans. This development began well before the stock market boom, but the pace of change accelerated in the 1920s with the rapid growth of modern industrial enterprise. During this decade, banks found their traditional role as intermediaries sharply reduced.4 In response, they sought to increase their fee income by offering new financial services, including trusts and insurance ("White, 1984). Most importantly, they increased their role as brokers between the saving

The Stock Market Boom and Crash of 1929 Revisited I 279 public and industry. Banks were familiar with their borrowers and conditioned to monitor their

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activities. However, many of the new investors they served lacked experience in buying stock and monitoring firms, thus creating a favorable condition for a bubble.5

Frederick Lewis Allen (1931) and Galbraith see the stock market bubble beginning in March 1928. This first upward tick is registered in the index of common stocks in Figure 1. In the months of April and May, this index increased 15 percent. In his influential account of the stock market, Allen dates the boom as beginning on Monday, March 5. In the aggregate indices, there is nothing extraordinary about this date. Allen’s reason for selecting this day is the five point rise in General Motors' stock, which by the end of the week had increased 7 percent. Other stocks shared this excellent week, most notably RCA, which rose almost 14 percent.

Allen attributes the initial sharp rise in March to the purchases by big bullish speculators， but this increase can be justified by economic developments. The economy had been in a recession until late 1927. When business picked up, the stock market responded. General Motors was attractive because Ford (still a private company) had shut down to retool for the Model A. With its more advanced management and organization, GM was able to take advantage of this opportunity, increasing production and sales and seizing the leading position in the industry. Its management exuded confidence. At the end of the month, GM s president predicted its price would rise from 180 to 225, and he promised to return to stockholders 60 percent of earnings.6

The other stock that dominated the New York Exchange was RGA, the purveyor of a new teclmology. RGA’s sales were growing by 5〇 percent each year. Its prospects, which looked excellent as the economy recovered, were reaffirmed by the release of the company's 1927 annual report in early March 1928. RCA stock was thus quite attractive, but not because it promised to pay high dividends like General Motors. The company had never paid a dividend, nor would it pay one for many years to come. The only reason to buy RCA in the short-run or even the medium-run was the belief that its business would continue to thrive and the price of its stock would increase in the hope of dividends in the distant future. Expectations of dividends from RCA had to be extremely diffuse.

Many other prominent companies that did not pay dividends caught the public s attention, too. These included Radio-Keith-Orpheum, the Aluminum Company of America, and the United Aircraft and Transport Corporation.7 Like RCA, these firms used new, developing technologies. The proportion of firms not paying dividends was also high among public utility holdings companies. These included the Commonwealth and Southern Corporation, Electric Bond and Share and the North American Company. The electric utility industry was undergoing a remarkable transformation in the 1920s where consolidation and expansion gave firms great economies of scale in production and transmission. This was another frontier industry with potentially high but uncertain returns.

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The attraction of utilities，stocks is revealed in Figure 2 which shows indices for industrials, railroads, and public utilities. The boom in utilities far outstripped industrials, while the relatively stable, established railroads languished. Although previous writers have not concerned themselves with the prominence of public utilities and high-tecli stocks, they were a central feature of the bull market.

The Role of Fundamentals in the Bull Market of the 1920s Although most historians believe that the 1920s bull market was a bubble and concede only a small role for real factors, some contemporary observers attributed most of the market s rise to fundamentals. At the height of the market in August 1929, when many began to fear that there was excessive speculation, Charles Amos Dice (1929) of Ohio State University argued that the higher prices in the stock market were the product of economic fundamentals. Even after the crash in December 1929, Irving Fisher (1930) of Yale retained his conviction that the rise in stock prices was justified and wrote, aMy own impression has been and still is that the market went up principally because of sound, justified expectations of earnings, and only partly because of unreasoning and unintelligent mania for buying/5

The Stock Market Boom and Crash of 1929 Revisited I 281 Both Dice and Fisher believed that earnings and dividends would continue to grow rap- idly

because of great economic improvements they saw in the economy. These changes—the systematic application of science to industry, die development of modern management techniques, and mergers that gained economies of scale and scope—are the same ones that economic historians have emphasized to explain growth in the ’20s. Thus, although Galbraith ridiculed Dice and Fisher in the aftermath of the crash, their views cannot be dismissed lightly.

The convictions of Fisher and Dice have more recently found support in the work of Sirkin (1975). He believes that the high stock prices and high price-earnings ratios were a consequence of the expected rapid growth of earnings. Assuming that a price-earnings ratio of 15 would have been normal, Sirkin calculated that earnings would have had to grow at 9 percent for another 10 years in order for the peak P/E ratio of 20.4 to have been warranted. Since 9 percent was the average growth rate for 1925-1929, Sirkin concluded that there was no “speculative orgy.”

The argument for a fundamental explanation of the stock market boom holds that the rise in stock prices would have been justified by continued economic growth if policy blunders by the Federal Reserve and the Congress had not plunged the economy into a depression. However, given the normal duration of business cycles, it seems unlikely that the boom could have been sustained that long. Furthermore, it is by no means evident that it was appropriate for the public simply to extrapolate from the growth rate of the past few years.

In analyzing the role of fundamentals, researchers have only had annual data, yet this hides some of the key developments of 1928-1929. Quarterly earnings are not available, but White (1989)

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created a new quarterly index of dividends for the firms in the Dow-Jones Index from 1922 to 1930. In Figure 3, this index and the Dow-Jones Industrial Index are graphed. This figure reveals the remarkable change that overtook the stock market. From 1922 to 1927 dividends and prices moved together, but while dividends continued to grow rather smoothly in 1928 and 1929, stock prices soared far above them.

The behavior of prices and dividends seems to imply that managers did not share the public s enthusiasm. Investors might have bid up stock prices based on an extrapolation of a few years1 earnings growth, but managers did not increase dividends as quickly. The failure of dividends to keep pace with stock prices does not, however, necessarily imply the existence of a bubble, as it is generally believed that managers are hesitant to increase dividends unless they perceive a permanent rise in earnings. Yet, the available evidence suggests that many managers did not believe that their earnings would rise sufficiently fast to justify the prices of their stock.8 Some executives were alarmed enough to warn the public. In 1928, A. P. Giannini, head of Bancitaly (the future Bank of America) stated that the high price of his banks stock was unwarranted, prompting a sharp drop. Patterson (1965) has identified other companies where

282 I World Economic Development the management publicly stated that the stock was overvalued, notably Canadian Marconi and Brooklyn Edison.

A change in fundamentals may have initiated the boom, but fundamentals probably did not sustain it. The continued disappointment of unrealized dividends and public statements of some managers did not slow the rise in stock prices. This leaves the greater part of the boom to be explained. One favored candidate is easy credit.

Credit and the Stock Market Boom Many economic historians believe that the expansion of brokers1 loans helped to create the bubble.9 Kindleberger argues that stock market credit was a key element in generating the mania. Galbraith sees the ability to purchase stock on margin as a great speculative lure. A buyer needed only to provide a fraction of the required funds, borrow the rest and enjoy the full capital gain less the interest on the borrowed funds. Even Irving Fisher believed that ability to borrow money encouraged “unwise speculation.”

It is easy to understand the presumption that a credit expansion fueled the stock market boom by looking at Figure 4. This graphs an index of the New York Stock Exchange s brokers' loans and an index of stock prices. These two indices are almost indistinguishable, especially

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for the period of the boom. While this coincidence may seem convincing, it is hard to understand how credit to buy stock could have been easy when credit in general was tight in the second half of the 1920s. The Federal Reserve pursued a contractionary policy beginning in January 1928, with open market sales and a rise in the discount rate from 3/4 to 5 percent. By Hamilton s (1987) measurement, money was tight during the whole course of the boom. In 1928 and 1929, high-powered money and the consumer price index fell and Ml grew only slightly in 1929.

The Federal Reserve s tight money policy during these years was a consequence of its fears about the flow of credit to the stock market. The Federal Reserve had always been concerned about excessive credit for speculation. Its founders were influenced by the real bills doctrine and had hoped the new central banks discounting activities would channel credit away from “speculative” and towards “productive” activities.10 Although there was general agreement on this issue, the stock market boom created a severe split over policy.

The Federal Reserve Board believed that ^direct pressure" could be used to rechannel credit away from speculation. To curb stock market speculation, the Board wanted member banks making loans on securities to be denied access to the discount window. The Federal Reserve Bank of New York contended that the Federal Reserve could not refuse to discount otherwise

284 I World Economic Development eligible assets for its individual members and that it was impossible to control credit selectively. It argued that speculation could only be reduced by raising the discount rate. Between February 1929 and August 1929, the directors of the Federal Reserve Bank of New York frequently voted to raise the discount rate, only to be turned down by the Board, which reaffirmed its policy of direct pressure.

Looking at the rapid growth of brokers' loans in 1929, the Federal Reserve Board was understandably frustrated and angry, but it was not because its member banks failed to comply. Loans to brokers by New York member banks on their own account reached a peak at the end of December 1927, and then declined. Loans made by these banks on account for out-of-town banks also grew slowly during the boom. The rapid growth occurred in loans from private investors, corporations and foreign banks in Europe and Japan, which quickly substituted for bank loans.

Historians acknowledge this flexibility of credit, and Kindleberger identifies the rising supply of brokers1 loans from non-bank sources as responsible for fueling the boom. This interpretation, however, ignores the rise in the interest rates on brokers1 loans. Figure 5 shows the movements in the discount rate, the commercial paper rate and the two rates for brokers1 loans. After moving together with the other two rates for 1926 and 1927, the call and time Figure 5 Interest Rates Source: Board of Governors of the Federal Reserve System (1943).

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rates increased sharply. Although the differentials were not constant for the whole boom, they remained very large, suggesting that it was the rising tide of speculation that demanded funds, not any independent creation of credit.11

The interest rate differentials also suggest that lenders no longer regarded brokers1 loans as very safe and insisted on a substantial premium. This is buttressed by Smiley and Keehns (1988) finding that margin requirements began to rise sharply in October 1928, soon reaching historic levels. While borrowers may have been quite sanguine about the rise in the market, lenders did not completely share their optimism.

Brokers1 loans did not contribute to the stock market boom. Instead, the demand for credit to buy stock pulled funds into the market, forcing a major reallocation of credit in the money and capital markets.12 As the call rate rose, there was a sharp decline in commercial paper. In September 1927, $600 million in commercial paper was outstanding. By September 1929, according to the Board of Governors of the Federal Reserves Banking and Monetary Statistics (1943, pp. 465-466), it had declined to $265 million. Ivan Wright (1929) discovered that commercial banks provided more loans and discounts to firms that had previously relied on the commercial paper market. These firms’ former lenders moved into the call market from which banks had been discouraged by the Federal Reserve. The growth in the new issues of domestic stock increased dramatically, while issues of domestic bonds and notes declined from $3183 million in 1927 to $2078 million in 1929 and foreign securities fell even more from $1338 million to $673 million. This evidence reaffirms the independent character of the stock market bubble, whose demand for fimds and new issues forced major changes in other financial markets.

Testing for A Bubble in the Stock Market If loans to buy stock were not cheap and the role of earnings and dividends was restricted, the surge in stock prices requires an alternative explanation. The surviving candidate is that a bubble appeared in the stock market. Although a large literature has explored the existence of bubbles in financial markets, the econometric identification of bubbles is elusive.13 A large literature has explored existence of bubbles in financial markets. The models consider the possibility that the price of a stock may not reflect simply its market fundamentals—that is, the expected present value of all future dividends—but may also include some bubble element. Flood and Hodrick provide an exposition of the basic model in this journal. As they and Hamilton (1986) have pointed out, the problem with bubble tests is that they specify a set of market fundamentals and then ascribe any leftover price movements to a bubble. Thus, one may perceive a bubble only because the model was not correctly specified.

286 I World Economic Development

In addition to this problem, these empirical tests have relied on annual data for stock prices and

dividends. Annual data maybe sufficient to detect long-term bubbles, but they will not pick up the

1928-1929 boom and bust. Furthermore, the data employed is all a^regate. As Figure 2 showed, not all

stocks were caught up in a wave of speculation. Railroad stocks were excluded from the boom, while

utilities were the favorites of speculators. Fisher s equally weighted stock price index (1966) reached

its peak in February 1929, indicating that the majority of stocks on the New York Exchange did not

fully participate in the boom. Thus, a^regate annual data may not capture a possible bubble in

1928-1929, even if the model is correcdy specified.

Although dividend data for this period is almost exclusively annual, price data is more abundant.

Using the daily and monthly Dow Jones Industrials index, Santoni (1987) and Santoni and Dwyer

(1989) have performed runs tests and Box-Pierce tests on the estimated autocorrelations for the period

of the boom. They found that prices followed a random walk and that there was no evidence for the

market feeding on itself; however, as Blanchard and Watson (1982) and Shiller and Perron (1985) have

shown, the power of these tests can be very low.

While it may be currently impossible to determine econometrically whether a bubble was present

in the 1928-1929 stock market, considerable qualitative evidence suggests that the necessary

conditions were present. Blanchard and Watson (1982) posit that bubbles are likely to appear when

fundamentals become difficult to assess. Although they believe that bubbles are unlikely in blue chip

stocks, the stock market of the 1920s had characteristics favorable to the emergence of bubbles.

Fundamentals became difficult to judge because of major changes in industry. In automobiles, there

was an abrupt shift from the dominance of the proprietary Ford Motor Go. to the more modern

General Motors. While investors had every reason to expect earnings to grow, they lacked the means

to evaluate easily the fUture path of dividends. RCA was also a highly successful firm in a new

industry whose technology was rapidly changing. Not only were RC As prospects uncertain but the

absence of any dividend record left investors with little to judge fundamentals. Other high-tech firms

and utilities, with no history of dividends and possibly brilliant futures, became favorites in the boom

even though their fundamentals were difficult to assess.

The overall sophistication of investors was weakened by the influx of new people into the market.

Since the turn of the century, the demands of industrial finance and regulation had reduced the role of

commercial banks and increased the need to sell stock to the general public. Even before the boom

began, many people who had never bought stock before entered the market. One identifiable group of

new investors was women (McMullen, 1930), whom brokers catered to with special programs and

even their own rooms to watch the ticker tape. Womens magazines carried articles on how to buy

stocks, including John Raskob s famous interview

The Stock Market Boom and Crash of 1929 Revisited I 287

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204 / 234

(Crowther，1929) entitled “Everybody Ought to be Ricli.” While these changes are not easy to quantify, they do provide qualitative evidence on the existence of conditions that enhanced the likelihood of a bubble appearing in the stock market.

The speculative urge that had propelled the market upwards began to falter in the autumn of 1929. The decline and then sudden plunge of the market has been well-chronicled, but the number and variety of explanations for the crash have left its causes unclear.

Causes of the Crash The students of 1929 have had a tendency to minimize the importance of any single factor precipitating the crash. They treat the demise of the bull market as an endogenous collapse of expectations. Galbraith and Kindleberger argue that the stock market was inherently unstable and anything could have shattered the public s confidence. Yet something did convince investors that their expectations of future price increases were no longer justified. Contemporary pundits offered many explanations, including the excessive issues of new stock, decisions by government regulators, the Smoot-Hawley tariff, foreign stock markets, and declining brokers' loans. This section considers each of these and finds them to be minor or irrelevant factors in the crash. Instead, the downturn in the business cycle, made more severe by tight credit, prompted a revision in expectations.

The rising stock market made it attractive for companies to issue new stock. In 1927, $ 1474 million of new preferred and common shares were issued. By 1929, this reached $5924 million, with over $1 billion of shares issued in September. As in other bubbles, where speculation began with a nearly fixed supply of an asset, rapid price rises called forth significant additions to the supply. Fred I. Kent (Fisher, 1930, pp. 48-49) su^ested that the issue of new securities overwhelmed the market. But while these increases were large, they were modest in comparison to the total supply. The value of the stocks listed on the New York exchange alone was $89.7 billion on September 1. In response to this increment in supply, prices might have sagged but not collapsed. New stock issues were, at most, a small contributing factor to the crash.

Utilities were among the high-flying stocks of 1929. Some pundits claimed that Massachusetts1 refusal on October 11 to allow Boston Edison to split its stock sent a threatening signal to the market. Regulators denied the request on the grounds that it would encourage further speculation, and they began a rate inquiry. If the crash began in the utilities because of this announcement, there was no sign of anticipation or reaction in the Dow Jones indices. The index for utilities and the index for industrials dropped by the same proportion, under 1 percent on that day. While the regulatory decision was upsetting to the Boston Edison stockholders, it must be considered an irrelevant factor in the crash.

288 I World Economic Development

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In most explanations of the Great Depression, the passage of the Smoot-Hawley tariff is regarded as a key factor in disrupting the international economy. Fisher (1930) believed that anticipation of the tariff contributed to the crash, while Jude Wanniski (1978) gives the tariff sole responsibility for the market s collapse. If the tariff was a key factor, it should have especially hurt the export industries through decreased foreign demand by the operation of the foreign trade multipliers and foreign tariff retaliation. Nontradeables and import-competing industries would not have sustained the same injury and might have benefited. After identifying industries as exporters, import-competing or nontradeables, White (1990) finds that the stocks of all groups declined approximately the same percentage at the time when the tariffs passage was assured. There is thus no evidence to support of the view that the Smoot-Hawley tariff significandy contributed to the crash.14

The failure in Great Britain of the business and financial empire of Clarence Hatry on September 20,1929, has been cited by Galbraith, Patterson, and Fisher as an important shock to first the London and then the New York market. Fisher based his argument on his own stock price indices that showed London prices fall sharply and in advance of New Yorks. However, this drop does not square with the broad mondily index published by The Bankers，Magazine (1931). This index is depicted in Figure 6 along with indices for the New York and Berlin exchanges. By October 18, after Hatry and before the Wall Street plunge, the index had fallen 2.8 percent. This is far less than the drop Fisher found and hardly alarming, given larger earlier declines. Furthermore, American Railway stocks accounted for almost half of the 2.8 percent fall. The London market simply reacted to the New York market.

In comparison to the worldwide bull markets of the 1980s, foreign stock markets in the 1920s often moved independently of New York, as seen in Figure 6. There was no boom in the Berlin market, which began falling in early 1928. The German decline stemmed partly from the reduction in post-World War I American lending, as investors turned their sights on New York, and partly from the tight monetary policies of the Reichsbank. The weak stock prices in European markets before October 1929 were more a consequence of the stock market boom than a cause of its demise. The Federal Reserve s tight monetary policy forced Great Britain and Germany to raise their discount rates to counter short-term capital’s attraction to New Yorks high interest rates (Clarke, 1967). For months, the New York Fed had wanted a higher discount rate to tame the stock market. Finally the Board allowed it to raise its discount rate from 5 percent to 6 percent on August 9. As Hamilton (1987) has shown, falling prices made real rates much higher in 1929. Responding to a deterioration in their balance of payments, the British increased their bank rate again in September.

This general rise in interest rates did not have any immediately observable effects on brokers1 loans. Weekly reports of brokers1 loans show that they peaked on October 9 at $3941

The Stock Market Boom and Crash of 1929 Revisited I 289

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million and then fell to $3823 million on October 23. This decline was not a signal of some catastrophe, as there had been larger temporary drops before. As in the months during the boom, brokers1 loans responded rather than drove the stock market s decline.

The inadequacy of these explanations leads back to the question whether any abrupt change in dividends or earnings might have set off the crash. The aggregate figures give no hint of new developments. The quarterly dividends of the Dow-Jones industrials show healthy increases in late 1929, rising 12.8 percent in the third quarter and 11.6 percent in the fourth. The first drop of 6.3 percent appears only in the initial quarter of 1930.

However, there was evidence of an oncoming recession. In the absence of any quarterly earnings, the Federal Reserve s index of industrial production may be used as a proxy. This first dropped in July 1929.15 In August and September, some of the Federal Reserve’s other indices began to fall. This mixed news and rising real interest rates, at home and abroad, spelled an incipient recession； and it was all that was necessary to cause stockholders to revise their expectations.

The market drifted downwards in early October. As the volume of trading rose, brokerage firms were swamped, margin calls became more frequent and the ticker began to run behind. When prompt reporting of prices became impossible, investors lost track of their position.

290 I World Economic Development Panic selling began on Black Thursday and Black Tuesday. The vertical price drops forced margin calls on impaired accounts and led many others to liquidate their holdings. Although the frenzied selling occasionally abated, the market could not be talked up by bankers or by big investors1 purchases of stock.

A more widespread financial crisis threatened as out-of-town banks and other lenders withdrew their loans to brokers. New York city banks stepped into the breach and quickly increased their loans. They were encouraged by the Federal Reserve Bank of New York, which made open market purchases and let its members know that they could borrow freely at the discount window. The direct financial effects of the crash were thus confined to the stock market. The New York Feds prompt action ensured that there were no panic increases in money market rates and no threat to the banks from defaults on security loans.

This intelligent policy was the doing of the New York Fed； and, as Friedman and Schwartz (1963) have chronicled, the Board disapproved and censured New York. In spite of the recession, the Board maintained its tight money policy. The continued decline in the stock market after October 1929 in Figure 1 reflects the economy s policy-aggravated slide into depression. This contrasts the markets recovery in 1988 when no recession was in the making and the Board recognized the importance of monetary ease.

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Conclusion The technological and stmctural changes in industry in the 1920s promised higher earnings and dividends. While these developments created a stock market boom, they also made fundamentals more difficult to evaluate, thus setting the stage for a bubble. The October panic can be traced to early signs of a recession that made the dissonance between dividends and stock prices clear. When panic selling began, intervention by the Federal Reserve Bank of New York prevented a collapse of the financial system. This response was appropriate, but the same cannot be said for earlier attempts to halt the market. Instead of allowing the stock market bubble to expand and burst of its own accord, the Federal Reserve s policies helped to push the economy further into a recession. Fear of a new speculative fever led the Federal Reserve Board to oppose easier monetary policy after the crash； hence, the tentative revival of the economy in 1930 was not assisted.

Although economists are generally skeptical about policy makers' ability to learn from history, the Federal Reserve did not make the same mistakes in 1987. In the months prior to the crash, the Fed was not preoccupied with speculation. When the collapse came, it followed the example of the New York Fed in 1929 and prevented a spillover to the banking system. Afterwards, it refocused its attention on general economic conditions. Spectacular as the crash of 1987 was, there was no reason for it to precipitate a second Great Depression.

The Stock Market Boom and Crash of 1929 Revisited I 291

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The author wishes to thank Lawrence Fisher, James D. Hamilton, Hugh Rockoff, Anna J. Schwartz, Joseph Stiglitz, and Barrie A. Wigmore for helpful comments.

REFERENCES Allen, Frederick Lewis, Only Yesterdayy An Informal History of the Nineteen-Twenties. New York: Harper and

Row, 1931. The Bankers, Magazine, London, 1929-1931.

Blanchard, Olivier J., and Mark W. Watson, aBubbles, Rational Expectations, and Financial Markets^

In Wachtel, Paul, ed., Crises in the Economic and Financial Structure. Lexington: D. C. Heath and Co., 1982, pp. 295-316.

Board of Governors of the Federal Reserve System, Banking and Monetary Statistics. Washington, D.C.: U.S. Government Printing Office, 1943.

Campbell, John Y., and Robert J. Shiller, wStock Prices, Earnings and Expected Journal of Finance, July 1988,43,661-676.

Carosso, Vincent P., Investment Banking in America, A History. Cambridge: Harvard University Press, 1970. Chandler, Alfred D.,Jr., The Visible Hand: The Managerial Revolution in American Business. Cambridge: Harvard

University Press, 1977.

Clarke, Stephen V. O., Central Bank Cooperation, 1924-1931. New York: Federal Reserve Bank of New York, 1967.

Commercial and Financial Chronicle, New York, 1928 and 1929.

Currie, Lauchlin, aThe Decline of the Commercial Quarterly Journal of Economics, August 1931, 4Sy 698-709.

Crowther, Samuel, ^Everybody Ought to be Rich,w Ladies7 Home Journal, August 1929. Diba, Behzad T” and Herschel I. Grossman, “Explosive Rational Bubbles in Stock Prices?”

Economic Review, ]\int 1988, 78, 520-530. Dice, Charles Amos, New Levels in the Stock Market. New York: McGraw-Hill, 1929. Eichengreen, Barry, “The Political Economy of the Smoot-Hawley Tariff，NBER Working Paper,

August 1986.

Federal Reserve Bulletin, May 1931.

Field, Alexander J., aAsset Exchanges and the Transactions Demand for Money,w American Economic Review, March 1984, 77,43-59.

Fisher, Irving, The Stock Market Crash—and After. New York: Macmillan, 1930. Fisher, Lawrence, KSome New Stock-Market Journal of Business, 1966,39, 191-225.

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Friedman, Milton, and Anna J. Sc\m^nzyA Monetary History of the United States, 1867-1960. Princeton: Princeton University Press, 1963.

Galbraith, John Kenneth, The Great Crash 1929. Boston: Houghton Mifflin Company, 1954 and 1988.

Hamilton, James D., ^Monetary Factors in the Great Journal of Monetary Economics, 1987, 19, 145-169.

Hamilton, James D., KOn Testing for Self-Fulfilling Speculative Price Bubbles^ International Economic i? ^Vw ； ,Octoberl986,27,545-552.

Kindleberger, Charles P., Manias, Panics and Crashes: A History of Financial Crises. New York: Basic Books, 1978. Kleidon, Allan W., w Variance Bounds Tests and Stock Price Valuation Models,w Journal of Political Economy, October 1986,

94, 953-1001. Mankiw, N. Gregory, David Romer, and Matthew D. Shapiro, KAn Unbiased Reexamination of Stock Journal of Finance,

]\Ay 1985, 9y 677-689. Marsh, Terry A., and Robert C. Merton, ^Dividend Behavior for the Aggregate Stock Journal

of Business, 1987, 60, 1-40. McMullen, Frances D., “Women and the Ticker Tape _A Year after the Crash,w The Womens Journal, November 1930. Neal, Larry D., aHow the South Sea Bubble Was Blown Up and Burst.,> In White, Eugene N., ed., Crises and Panics: The

Lessons of History. Homewood: Dowjones-Irwin, 1990. New York Stock Exchange, Year Book, 1930-1931, New York, 1931. Patterson, Robert T., The Great Boom and Panic, 1921-1929. Chicago: Henry Regnery Company, 1965. Peach, W. Nelson, The Security Affiliates of National Banks. Baltimore: Johns Hopkins Press, 1941. Pierce, Phyllis, ed., The Dow Jones Averages, 1885-1985. Homewood: Dowjones-Irwin, 1986. Romer, Christina, “The Great Crash and the Onset of the Great Depression,” NBER Wbrking Paper, June 1988.

Santoni, Gary, aThe Great Bull Markets 1924-1929 and 1982-1987: Speculative Bubbles or Economic Federal Reserve Bank of St. Louis Review, November 1987, 69, 16-29.

Santoni, Gary, and Gerald P. Dwyer, Jr., aBubbles vs Fundamentals: New Evidence from the Great Bull Markets.^ In

White, Eugene N., ed., Crises and Panics: The Lessons of History. Homewood: Dow Jones/Irwin, 1989. Shiller, Robert J., KDo Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends^9 American

Economic Review, June 1981, 71, 421-436. Shiller, Robert J., and Pierre Perron, ^Testing the Random Walk Hypothesis: Power versus Frequency of Obstv\2Xion^

Economic Letters, 1985,18, 381-386.

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Sirkin，Gerald, “The Stock Market of 1929 Revisited: A Note,” i?⑶Summer 1975,

44, 223-31. Smiley, Gene, and Richard H. Keehn，“Margin Purchases, Brokers’ Loans and the Bull Market of the Business and

Economic History, 1988,7/^ 129-142. U.S. Department of Commerce, Historical Statistics of the United States, Colonial Times to 1970, Washington, D.C.: U.S.

Government Printing Office, 1975.

Wanniski, Jude, The Way the World Works. New York: Basic Books, 1978. West, Robert Craig, Banking Reform and the Federal Reserve, 1863-1923. Ithaca: Cornell University Press, 1977. Wigmore, Barrie A., The Crash and Its Ajiermath. Westport: Greenwood Press, 1985. White, Eugene N•，“Banking Innovation in the 1920s: The Growth of National Banks’ Financial Services,^ Business and

Economic History, 1984,13, 92-104. White, Eugene N., aBefore the Glass-Steagall Act: An Analysis of the Investment Banking Activities of National

Banks,w Explorations in Economic History, January 1986,23, 33-55. White, Eugene N” “When the Ticker Ran Late: The Stock Market Boom and Crash of 1929.” In White, Eugene N., ed.,

Crises and Panics: The Lessons of History. Homewood: Dowjones/Irwin, 1990. Wright, Ivan, wLoans to Brokers and Dealers for Account of OzhtiSy Journal of Business, April 1929,2, 117-36.

NOTES ______________________________________________ 1. For the effects of the crash on the depression, see Friedman and Schwartz (1963, pp. 305-308, 334-342) and Romer

(June 1988).

2. National banks were prohibited from lending more than 10 percent of their capital and surplus to one customer. The effect of this regulation on banks* lending capacity was amplified by strict federal and state limits on branch banking that

restricted banks* ability to grow.

3. Investment trusts were primarily institutions that sold securities to the public and used the proceeds to invest in stocks and bonds. There were two main types: management trusts where managers had discretion over the portfolio and fixed

trusts where the portfolio could not be changed.

4. Commercial loans as a percentage of total earning assets of national banks fell from 58 percent in 1920 to 37 percent in 1929 (Currie, 1931).

5. This appears to have happened in other asset market bubbles. A new group of less sophisticated investors also became active during the South Sea Bubble (Neal, 1990).

6. Commercial and Financial Chronicle, March 24,1928, Vol. 126, p. 1988. Other automobile companies and suppliers ranked among the most heavily traded stocks and contributed to a lesser extent to the rise in the stock market indices.

294 I World Economic Development 7. Wigmore (1985) offers a detailed description of the performance of individual firms and industries. 8. Marsh and Merton (1987) have offered a model of the dividend behavior for the aggregate stock market. When White

(1990) applied this model and forecast dividends for the 1929 boom, he found that the expected dividends differed

little from the actual dividends, suggesting that stock prices should not have soared.

9. When an investor bought stock on margin, his broker usually paid the difference by contracting a broker s loan from a bank that was collateralized by the stock. Call loans were the most important type of brokers* loans. These loans had

a daily call option and floating interest rate. Of lesser importance were time loans that had a fixed maturity and interest

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rate.

10. The real bills doctrine asserted that banks should invest primarily in short-term commercial bills that represented actual production. The Federal Reserve Act attempted, in part, to implement this doctrine by limitin g the types of

assets that were eligible for discounting at the Federal Reserve banks. See West (1977).

11. A simple econometric model of the market for brokers, loans (White, 199〇) finds no evidence for a supply- side shift that could have fueled speculation.

12. The stock market boom also had a powerful effect on the demand for money, via the demand for transactions balances to buy stocks. Field (1984) has shown that this caused money markets to tighten further as the boom

progressed, misleading the Federal Reserve as to the actual effect of its policies.

13. See Diba and Grossman (1988), Campbell and Shiller (1988) and the related literature on stock market volatility, including Shiller (1981), Mankiw, Romer and Shapiro (1985), and Kleidon (1986).

14. The assumption that the Smoot-Hawley tariff played a key role in beginning the Great Depression has recently been challenged by Eichengreen (1986). He finds that the direct and feedback effects of the tariff on the American economy

were small and its stimulus to new foreign tariffs was slight. Eichengreen believes that the only way in which the tariff

contributed to the depression was by increasing the American balance of payments surplus, thereby putting additional

strain on other countries, ability to adjust under the gold standard. His work suggests that the market had even less

reason to consider the passage of the Smoot- Hawley tariff singularly bad news.

15. The peak of the business cycle has been dated from August 1929. The decline in all the Federal Reserves indices came only when the October figures were published after the crash.

The Stock Market Boom and Crash of 1929 Revisited I 295

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The Nation in Depression

Christina D. Romer

he economic cataclysm of the 1930s was an international phenomenon experienced by countries in all parts of the globe. Countries as diverse as the United States, Germany, Chile,

and Japan all experienced significant depressions in the 1930s. Thus， the title of Charles Kindleberger s classic book The World in Depression (1973) captures an important feature of the Great Depression. These international aspects，especially the importance of the gold standard in causing the downturn and transmitting depression from one country to another, have been emphasized in recent years in excellent books by Peter Temin (1989) and Barry Eichengreen (1992). These books have rightly received widespread attention and have successfully changed the focus of much analysis of the Great Depression from the United States to the world economy.

While such a change from American provincialism is surely healthy and warranted, adopting an international perspective on the Great Depression risks losing sight of the many ways in which the U.S. depression differed in timing and severity from depressions elsewhere. More important, it may obscure the many uniquely American causes of Americas Great Depression.

This paper examines the ways in which the U.S. experience during the 1930s resembled that of other countries in some regards, and fundamentally differed in other aspects. I also evaluate the evidence on the causes of the Great Depression in the United States and the sources of the eventual recovery. I suggest chat the path of American output and unemployment before 1931 can be explained quite well with only domestic factors. Even after 1931, international factors affected American economic conditions mainly through their impact on American policy decisions. In many ways the broad conclusion of this paper is summarized

Christina D. Romer, "The Nation in T>Q^KSSIO\\" Journal of Economic Perspectives, vol. 7, no. 2, pp. 19-39. Copyright © 1993 by American Economic Association. Reprinted with permission.

well in another classic book on the interwar era. In Economic Survey, 1919-1939, Arthur Lewis states (1949, p. 52)：

It is clear that the centre of the depression was the United States of America, in the sense that most of what happened elsewhere has to be explained in terms of the American

T

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contraction, while that contraction is hardly explicable in any but internal terms.

Comparative National Experiences The experiences of various countries during the 1930s is a well-worked topic.1 This section uses annual data on industrial production for 24 countries to illustrate many salient features of the individual national experiences. I focus on industrial production because this series is often the most accurately measured national indicator of macroeconomic health.2 Furthermore, many other series that one might think are more representative of a business cycle, such as the unemployment rate or real GNP, are very highly correlated with industrial production.

The Great Depression started in most countries at around the same time. This can be seen in Figure 1, which shows industrial production in five major countries between 1927 and 1937. In annual data, the peak in industrial production occurred in 1929 for 13 of the 22 countries for which a peak can be identified.3 Seven countries peaked in 1930 and two peaked in 1931. The only country to peak in 1928 was Poland, which was a fairly minor industrial country.4 The countries in which

production peaked in 1929 include most of the major industrial producers,

298 I World Economic Development such as the United States, Canada, Germany, Japan, and the United Kingdom. France and Sweden were the largest industrial countries to peak in 1930.

Based just on industrial production, there is little in the timing of the onset of the Great Depression to set the United States apart from the 12 other countries tied for first place. If one wanted to argue that the United States was in some sense earlier than the others, the series to analyze would be some indicator of building activity. Construction was the first sector to weaken in the United States and it weakened sooner here than elsewhere. Of the 11 countries for which the League of Nations provides data on building permits or some other indicator of building plans, only the United States and Belgium peaked in 1928.5 Planned construction did not turn down in countries such as Germany, France, and the United Kingdom until 1929 or later.

While the early downturn in construction is one way in which the onset of the Depression in the United States differed from other countries, more important differences involve the immediate severity of the Great Depression in the United States and the peculiar composition of the decline in American output. For most countries, the first year of the Great Depression was a fairly ordinary bad year. Table 1 shows the distribution of the percentage fall in industrial production between 1929 and 1930. The median decline in output for the 15 countries experiencing a decline was just over 9 percent. Industrial production in the United States, in contrast, declined 21 percent in the first year of the Depression. Thus, the Depression was agreatM in the United States sooner than elsewhere.

Another feature of the American experience in 1930 was that the initial fall in industrial production was more concentrated in consumer goods and less concentrated in investment goods than in many other countries. For example, the ratio of the percentage fall in the production of investment goods to the percentage fall in the production of consumption goods was just over two

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for the United States, but close to three for Canada and over four for Germany.6 In the United Kingdom, however, the decline in industrial production in 1930 was even more skewed toward consumption goods than in the United States.

As the Great Depression dragged on through 1931 and 1932, nearly all countries experi- enced a significant depression. However, there was again substantial variation in the peak to trough amplitude across the countries for which the League of Nations collected industrial production data.7 In this contest the United States was a clear loser, with a peak to trough fall in industrial production of 62 percent. Only Poland also experienced a fall in production of this magnitude. The experiences of all of the countries are shown in Part B of Table 1. As can be seen, Canada, Czechoslovakia, and Germany experienced peak to trough declines in output approaching that of the United States. On the other hand, several major industrial countries, including the United Kingdom, Japan, and Sweden, experienced remarkably mild downturns.

The Nation in Depression I 299

Table 1 Distribution of the Percentage Change in Industrial Production

A. 1930 Percentage Change Countries

5.1 to 10% Denmark, South Africa, New Zealand 0.0 to 5% Chile, France, Greece, Norway, Sweden

-0.1 to -5% Estonia, Romania -5.1 to-10% Finland, Hungary, Italy, Japan, Netherlands, UK

-10.1 to-15% Belgium, Czechoslovakia, Germany -15.1 to-20% Austria, Canada, Poland

-20.1 to -25% USA

B. Peak to Trough Percentage Change -0.1 to-10% -10.1 to-20%

-20.1 to -30%

-30.1 to -40%

-40.1 to -50%

-50.1 to -60%

-60.1 to -70%

Countries Greece, Japan, New Zealand

Denmark, Romania, Sweden, UK

Chile, Estonia, Finland, Hungary, Norway

Belgium, France, Italy

Austria, Netherlands

Canada, Czechoslovakia, Germany

Poland, USA

Sources and Notes: The data on industrial production for 24 countries are from the League of Nations (1936, Appendix II, Table 2, p. 142 and 1938, Table 1, p. 44). The data for 1925 to 1929 are converted to a 1929 base to be consistent with later data. The Soviet

Union is excluded from all parts because it did not experience any fall in output during the 1930s. South Africa is excluded from

Parts B and C because the data for 1931 and 1932 are missing.

For example, the peak to trough decline in industrial production in the United Kingdom was less than a third as large as that in the United States. France had a reasonably large peak to trough fall in production of just over 40 percent, but between the peak in 1929 and the absolute trough in 1935 there was a significant recovery in 1933.

The timing of the trough in industrial production, on which the preceding amplitudes are based, is remarkably similar across countries. Of the 22 countries for which a trough can be identified, 15 reached their lowest point in 1932. Figure 1, which shows industrial production in the five largest industrial producers, shows that the United States, Germany, and the United

300 I World Economic Development

2 1 5 / 2 3 4

C. 1933

Percentage Change Countries 15.1 to 20% USA 10.1 to 15% Denmark, Finland, France, Germany, Japan, Netherlands, Romania

5.1 to 10% Chile, Greece, Hungary, Italy, UK 0.0 to 5% Austria, Belgium, Canada, Estonia, New Zealand, Norway, Poland, Sweden

-0.1 to - 5% —5.1 to-10%

Czechoslovakia

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Kingdom are among the countries that have a trough in 1932. Japan, along with Chile, Finland, New Zealand, and Norway, hit bottom earlier, in 1931. Czechoslovakian industrial production reached its lowest point in 1933 and French industrial production, as just mentioned, did not reach its absolute minimum until 1935. Production in all of the remaining countries reached its lowest level in 1932.

Based on these turning points, there is no evidence that the United States was particularly unusual in the duration of the declining phase of the Depression； most of the industrial world turned around at roughly the same time. The United States was somewhat unusual, however, in the strength of the initial recovery. As can be seen in Part C of Table 1, industrial production in 1933 grew faster in the United States than in any other nation, though France, Germany, and Japan were all close behind. U.S. growth slowed noticeably in 1934, but then surged again in 1935 and 1936.

The composition of the growth of industrial production during the early recovery in the United States was also somewhat different from that of many other countries. While the initial downturn had been skewed toward a fall in the production of consumer goods, the initial upturn in the United States was skewed toward an increase in the production of investment goods. According to League of Nations statistics, the output of investment goods in the United States rose 42 percent in 1933, while the output of consumer goods rose 10 percent, a ratio of more than four to one. In Japan and the United Kingdom, in contrast, production of investment goods rose only about twice as fast as production of consumption goods, and in France production of investment goods grew less rapidly than production of consumption goods. Germany had a composition of production growth that was similar to that of the United States.

While various countries began their recoveries at roughly the same time, there was much variation in when each economy was (in some sense) fully recovered. A crude measure of the date of recovery is simply the year in which industrial production reached its pre-Depression peak. This occurred in 1932 for New Zealand； 1933 for Japan, Greece, and Romania； 1934 for Chile, Denmark, Finland, and Sweden； 1935 for Estonia, Hungary, Norway and the United Kingdom； 1936 for Germany； and 1937 for Canada, Austria, and Italy. The United States, Belgium, Czechoslovakia, France, the Netherlands, and Poland did not recover before the end of the sample in 1937.8 This comparison su^ests that the United States was not only among the first countries to slip into depression, but also among the last to recover.

Causes of the American Depression Documenting the timing and severity of the Great Depression in the United States and abroad is more straightforward than explaining what caused the national and international collapse.

The Nation in Depression I 301 Not surprisingly, an experience as devastating and complex as the Great Depression has many different causes. Fornmately, the source of the Great Depression is a topic that has generated a

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vast literature and many fruitful conclusions. This section argues that the path of output and employment in the United States in the 1930s is, contrary to common perception, very well understood. I also suggest that, at least up until the start of the third year of the American Depression, domestic factors were the prime cause of the drastic decline in American output.

Framework At the broadest conceptual level, the Great Depression in the United States can be analyzed quite well with the simple aggregate supply-aggregate demand model familiar to introductory economics students. Between 1929 and 1933, a series of shocks caused aggregate demand to decline repeatedly in the United States. These declines in aggregate demand moved the economy down along an upward-sloping aggregate supply curve. The net result was both progressively worsening unemployment and deflation.

There is substantial disagreement among scholars about why and when the U.S. aggregate supply curve became upward sloping, though nearly all agree that wages and prices were far from perfecdy flexible in the 1920s and 1930s. Some studies of price flexibility conclude that wages and prices have been sticky since the turn of the twentieth century, implying that the only thing unique about the Great Depression was the size of the shocks (Allen, 1992； Schultze, 1981； Gordon, 1980). Other studies, using different data and different specifications, find that wages and prices did not become less flexible until around the time of the Great Depression (Sachs, 1980; Mitchell, 1985; O’Brien, 1989). For example, O’Brien argues that nominal wages became particularly rigid in 1929 and 1930 because firms were mistakenly convinced that maintaining wages would be good for business. He su^ests that this belief had its origins in the bankruptcies of the early 1920s and President Hoover s oratory. Other factors often cited as explanations for increased rigidity after World War I are the rise of internal labor markets, which replaced day-to-day wage agreements with set pay scales, and the increasing size and market power of American corporations, which broke the lockstep relationship between costs and prices.9

There is also substantial disagreement about whether more wage and price flexibility would have prevented aggregate demand movements from having the large real effects that they had in the 1930s. In the conventional textbook model a fall in wages and prices raises real balances, lowers interest rates, and thus stimulates investment. The rise in investment serves to coun- teract at least some of the fall in demand. Tobin (1975) and De Long and Summers (1986) suggest that this traditional model is too simplistic because it ignores the effect of deflation 302 I World Economic Development on expectations. Since the expected real interest rate is what matters for investment decisions, deflation, which generates expectations of further deflation, could in fact depress aggregate demand further by raising real rates. Proponents of the debt-deflation hypothesis, first enunciated in the context of the Great Depression by Irving Fisher (1933), add that unanticipated deflation, by raising the real value of existing debt, raises the risk of default and depresses the economy by limiting credit availability.

Despite this debate on the role of deflation, the fact that prices and wages were not perfecdy

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flexible in the 1920s and 1930s means that movements in aggregate demand had real effects. Thus, the discussion about the causes of the Great Depression in the United States has rightly focused on the source of the collapse in aggregate demand in the late 1920s and early 1930s. The evidence suggests that domestic spending shocks related to the stock market crash were crucial in the first year of the Depression, while monetary shocks were important in later years. The later monetary shocks were partly the result of slavish adherence to the gold standard and pardy due to the peculiarities of American financial institutions and policies.

The Start of Recession The U.S. economy was clearly cooling off in the summer of 1929, as shown by the monthly data on U.S. industrial production in Figure 2. Seasonally-adjusted industrial production peaked in

The Nation in Depression I 303 July 1929 and declined slowly between July and October 1929 (falling 3 percent over three months). The source of this slowdown is almost surely the tightening of Federal Reserve policy in 1928. Hamilton (1987) shows that the Federal Reserve began contractionary open market sales of securities in January 1928. This policy did not result in a drastic decline in the money supply because banks greatly increased their borrowing at the discount window. According to Hamilton (p. 149), banks undertook this heavy borrowing because the boom on the stock market led to enough of an increase in the demand for loans that K banks found it profitable to replace unborrowed reserves with borrowed reserves despite the sharply higher cost of doing so."

The interaction of the open market sales and the increased demand for money and brokers' loans caused by the stock market boom (documented by Field, 1984) led to a significant increase in both nominal and real interest rates. Figure 3 shows that the nominal commercial paper rate rose from 4.0 percent in the fourth quarter of 1927 to 5.5 percent in the fourth quarter of

304 I World Economic Development 1928. The realized real interest rate—calculated by subtracting the change in the producer price index over the following quarter (at an annual rate) from the commercial paper interest rate_rose even more steeply, from 5.6 percent in the fourth quarter of 1927 to 9.5 percent in the fourth quarter of 1928. Regression estimates of the expected real interest rate (that is the nominal rate less expected inflation), which are given in Figure 3, also show a substantial rise in real short-term rates.10

This rise in interest rates is enough to explain why the economy was slipping into a recession in the middle of 1929. The industries that started to decline first were those that were typically thought to be interest-sensitive. For example, as discussed previously, building permits for new

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construction in the United States peaked in 1928 and then declined 21 percent between 1928 and 1928. New automobile registrations peaked in November 1928, rebounded slightly in the spring of 1929, and peaked for the last time in July 1929.11

The monetary explanation for the onset of recession in the United States is more plausible than alternative explanations that stress the fact, evident in Figure 1, that Germany and the United Kingdom experienced a minor recession in 1928 before rebounding somewhat in 1929. Such a recession abroad could have affected the U.S. economy by depressing our exports. However, American exports continued to rise between 1928 and 1929, suggesting that this effect was not present. Furthermore, at their highest, U.S. real exports in the mid-1920s were only a little over 6 percent of real GNP.12 Therefore, even a large fall in American exports would have been unlikely to depress the U.S. economy greatly.

The likely importance of monetary tighmess in mid-1929 suggests that a domestic policy decision was the cause of the onset of the recession that eventually became the Great Depression. However, this policy decision could certainly have had international roots. Hamilton (1987) and Temin (1989) both suggest that the change in Federal Reserve policy came at least partly in response to an outflow of U.S. gold to France because of an undervaluation of the French franc. Thus, adherence to the gold standard was to some degree responsible for the change in monetary policy. As Hamilton notes, however, protection of the gold standard could not have been the only motivation of the Federal Reserve because the monetary stringency continued even after gold inflows began in 1929. Hamilton s (p. 148) view is that <cthe major factor influencing monetary policy during 1928-1929 was surely the stock market." This view is echoed by Friedman and Schwartz (1963, p. 290), Temin (1989, pp. 22-23), and Eichengreen (1992, p. 217). By all these accounts, the Federal Reserve hoped to stem the stock market boom by raising interest rates.

While adherence to the gold standard was probably not the main factor behind the change in U.S. monetary policy in 1928, it was a crucial factor in determining the response of other

The Nation in Depression I 305 countries. Eichengreen (1992) su^ests that because the gold stocks of most European countries were already low by the mid-1920s, the increase in the U.S. interest rates, which drew gold to the United States, forced many countries to tighten their monetary policies along with the United States. Thus, the roughly contemporaneous cooling off of most of the world economy can be understood as a feedback effect from U.S. monetary policy aimed at stemming the American stock market boom.

The Onset of the Great Depression The recession that started in the United States in the summer of 1929 became suddenly worse following the stock market crash in October 1929. Between October and December 1929,

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industrial production declined nearly 10 percent, and by the end of 1930 the Great Depression had started in earnest in the United States. Indeed, the decline in output during the first 18 months of the Depression was almost as large as in most previous and subsequent recessions in their entirety. For example, the fall in industrial production from the peak in July 1929 to December 1930 was 37 percent, while the peak to trough decline for the recession of 1921 was 40 percent and for that of 1938 was 39 percent. As discussed above, this was not true of most other countries； the rest of the world experienced much milder drops in industrial output in the first year of the Great Depression.

The source of this sharp decline is almost surely not contractionary monetary policy. The monetary contraction in 1928, though significant, was not large by historical standards. For example, while the nominal commercial paper rate rose IVi percentage points berween 1927 and 1928 (fourth quarter to fourth quarter), it rose nearly three percentage points between 1919 and 1920. Realized real rates, which rose just under four percentage points between 1926 and 1928, rose an unbelievable 140 percentage points between 1919 and 1920 because of an enormous drop in producer prices. Furthermore, immediately following the stock market crash, the Federal Reserve Bank of New York bought large amounts of government bonds, thus increasing the stock of high-powered money. Both nominal and real interest rates fell substantially between the fourth quarter of 1929 and the first quarter of 1930; for example, the nominal commercial paper rate fell from 6.25 percent to 4.88 percent over this interval and the regression estimates of the expected real commercial paper rate given in Figure 3 fell 9.1 percentage points. Real rates surged up again in the second quarter of 1930, but are not consistendy high until after the banking panic in October 1930. Thus, it is hard to see how monetary conditions, working through conventional channels, could have caused the nasty turn that the depression took in late 1929.

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Sources and Notes: The data on real GNP and its components are from Kendrick (1961, Table A-IIa, pp. 293-295). The table shows the decomposition of the change in GNP for all years between 19〇〇 and 1942 in which GNP declined.

The rows may not sum to one because of rounding.

The onset of the Great Depression in the United States following the stock market crash was led by a collapse in domestic consumption spending. As discussed above, consumer spending played a larger role in the fall in output in the United States between 1929 and 1930 than in many other countries. Temin (1976) points out that consumer spending in the United States declined much more in 1930 than in either 1921 or 1938, the rwo other significant interwar recessions. Table 2 shows the composition of the decline in real GNP in the United States in every year in which GNP fell berween 1900 and 1942. While Temins comparison of 1930 to 1921 and 1938 clearly overstates the peculiarity of 1930, it is certainly true that consumption accounted for a much larger fraction of the decline in real GNP in 1930 than in most previous or subsequent recessions. Indeed, the only years of GNP decline outside the Depression when consumption was nearly as important were 1917, when the United States was participating in World War I, and 1908, another year of substantial stock market volatility.

Table 2 also re-emphasizes how unimportant net exports were to the onset of the Great Depression in the United States. The fall in net exports in 1930 accounted for just 2 percent of the total decline in real GNP. This is much smaller than the contribution of net exports in

The Nation in Depression I 307

Table 2 Decomposition of the Change in GNP in the United States in Recessions Fraction of the Change in GNP Accounted for by:

Year Change in

GNP Consumption

Inventory Investment

Fixed Investment

Net Exports

Government Purchases

1904 -1.3 -0.76 0.66 0.83 0.26 0.01 1908 -8.6 0.56 0.24 0.35 -0.05 -0.10

1914 -7.9 0.12 0.23 0.63 0.09 -0.08

1917 -2.4 0.66 0.74 0.74 0.26 -1.40

1920 -1.1 -2.92 -1.71 -0.68 1.44 4.88

1921 -2.4 -1.95 2.56 0.51 0.43 -0.56

1930 -9.3 0.46 0.24 0.38 0.02 -0.10 1931 -6.2 0.38 0.03 0.62 0.06 -0.09

1932 -15.8 0.50 0.20 0.26 0.01 0.04

1933 -3.0 0.66 0.04 0.19 0.09 0.03 1938 -5.5 0.22 0.94 0.38 -0.26 -0.28

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the three recessions just before the Great Depression.13 This suggests that the international downturn had little feedback effect on the U.S. economy through American exports.

The most likely source of the precipitous drop in American consumption following die stock market crash in 1929 is the crash itself. In a previous paper, I showed that the stock market crash in October 1929 and the subsequent gyrations of stock prices through the middle of 1930 generated tremendous uncertainty about future income； the stock price movements did not necessarily make consumers and investors pessimistic about the future, only highly uncertain (Romer, 1990). This uncertainty is clearly reflected in the forecasts made by contemporary analysts. Not only was there more variation across forecasts of future income immediately following the Great Crash, but the analysts expressed great uncertainty about their forecasts and speculated that consumers and businessmen felt the same way.

The effect of this uncertainty was that consumers and producers immediately cut their spending on irreversible durable goods as they waited for additional information about the future. This effect is seen most clearly in the fact that department store sales and automobile registrations declined precipitously in November and December 1929, while grocery store sales and ten-cent store sales actually rose； this is exacdy what one would expect if consumers were shying away from irreversible goods but had not substantially changed their point estimates of future income. The role of the stock market crash in causing the decline in consumer purchases of durable goods is also seen in regressions of the output of consumer durables on total output, lagged output, wealth, and stock market volatility (Romer, 1990, p. 610). The coefficients from such regressions suggest that stock market volatility has a significant negative effect on the output of consumer durables and that the tremendous rise in volatility in late 1929 and early 1930 can more than account for all of the fall in the production of consumer durables in 1930.14 In addition to its effect through uncertainty, the stock market crash may also have depressed consumer spending by decreasing wealth (Temin, 1976) and by shifting households1 balance sheets toward illiquidity (Mishkin, 1978).

This discussion suggests that both the initial recession in the United States in the summer of 1929 and the acceleration of the decline in late 1929 and 1930 are ultimately attributable to the stock market boom and bust of the late 1920s. The stock market boom is the prime explanation for why the Federal Reserve was pursuing tight monetary policy starting in 1928. The stock market crash is the prime source for the collapse in durable goods purchases starting in November 1929. Pointing to the stock market, of course, only pushes back the mystery one level. However, the research discussed by White (1990) suggests that the boom and bust of stock prices can best be described as a bubble that burst. Since bubbles are, almost by defini- tion, inexplicable events, the stock price swing is legitimately viewed as an exogenous shock.

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Furthermore, since the stock market boom and crash were, to a first approximation, a uniquely American phenomenon, the onset of the Great Depression in the United States had uniquely American roots.

The Worsening of the Great Depression If the American Great Depression was severe by late 1930, over the next two years it became horrific. As Figure 2 shows, after recovering slightly at the start of 1931, industrial production in the United States tumbled steadily from April 1931 until July 1932. Over this 15-month period, industrial production declined nearly 43 percent； by July 1932, the index of industrial production stood at less than half of its peak value in July 1929. Unemployment increased at a rate one would expect given the fall in output； by 1932, the unemployment rate stood at over 24 percent. Prices also behaved as one would expect if the fall in output were caused by a decline in aggregate demand： the producer price index declined by slightly over 40 percent between July 1929 and July 1932.

The source of the continued decline in production in the United States was almost surely a series of banking panics. Beginning with a first minor wave of panics in the fall of 1930, Friedman and Schwartz (1963) document four waves of banking panics in the United States. The second wave occurred in the spring of 1931, the third in the fall of 1931, following Britain s abandonment of the gold standard, and the fourth in the winter of 1933, around the time of Roosevelts inauguration. Over the four years from 1930 to 1933, more than 9〇〇〇 banks suspended operations and depositors and stockholders lost roughly $2.5 billion (Friedman and Schwartz, 1963, p. 351), the equivalent of 2.4 percent of nominal GNP in 1929.

The impact of these banking failures took many forms. First, the bank failures had a direct impact on the money supply. As depositors became nervous about die safety of banks, the ratio of deposits to currency fell dramatically. This greatly reduced the money multiplier, with the implication that a given stock of high-powered money could then support a mucli smaller total money supply. Because the Federal Reserve did nothing to increase die stock of high-powered money, the money supply declined sharply.15 For example, Ml (currency plus demand deposits) declined 28 percent between July 1929 and July 1932. The realized real interest rates given in Figure 3 show that real rates were very high in 1931 and 1932. This is what one would expect if the monetary contraction generated substantial deflation and nominal rates were bounded by zero. Regression estimates of the expected real rate also averaged over 10 percent in these two years. Such high real interest rates are no doubt part of the reason that fixed investment plummeted during this phase of the Great Depression.

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The bankingpanics almost surely also affected the economy in ways unrelated to interest rates. For example, Temin (1976) finds that pessimism had replaced uncertainty among consumers and businessmen by the end of 1929. The financial upheaval surely contributed to this pessimism and is likely to have further depressed consumer spending and investment. The financial panics also disrupted the intermediation function of banks. Bernanke (1983) points out that banks are an important source of funds for small businesses that cannot issue stocks or bonds. When a particular bank fails, all of the long-term relationships and information about local small borrowers accumulated by the bank are lost. It becomes more expensive for another bank to loan to one of the failed bank’s customers, because it has to learn all over again which firms are prudent and which are unreliable. Bernanke finds that this rise in the “cost of credit intermediation” caused by bank failures was important in 1931 and 1932 and explains much of the deepening of the Great Depression in the United States during this time. The disruption of intermediation presumably worked through credit rationing of small borrowers and the related decline in investment.

Having argued that the banking crises of 1931 and later were a crucial cause of the deepening and sustaining of the Great Depression in the United States, the obvious questions are what caused the financial panics and why did the Federal Reserve do so litde to contain them. The cause of Federal Reserve inaction is the easier of the two questions to answer. Friedman and Schwartz stress ineptitude and fear as the main culprits (1963, pp. 371,407-19). They believe that certainly up through October 1930, the Federal Reserve could have stepped in with expansionary open market operations which would have raised output and put banks on a firmer footing. In particular, they argue that the U.S. gold supply was such that the Federal Reserve could have pursued a unilateral expansionary monetary policy without running into a serious constraint from the gold standard. The Federal Reserve failed to act, Friedman and Schwartz argue, because of a fear that monetary expansion would reignite speculation on the stock market, and because a power vacuum on the Board of Governors led to deadlock and indecision.

After mid-1931，it is harder to make the argument that the Federal Reserve was uncon- strained by the gold standard. When Britain abandoned the gold standard in September 1931, the United States experienced a serious outflow of gold because there was widespread speculation that the U.S. would be forced to devalue soon as well. Eichengreen argues that in this situation the Federal Reserve had no choice but to raise interest rates in hopes of stemming the gold drain (1992, pp. 293-98). Friedman and Schwartz disagree, arguing that the Federal Reserve was in a very strong position to withstand the gold outflow because of its still large gold reserves and its legal power to suspend gold reserve requirements if they should become binding (1963, p. 396). At the very least, Friedman and Schwartz suggest, the Federal Reserve could have been more

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willing to discount bills brought to them by member banks at the higher interest rate than they actually were, thereby allowing banks experiencing runs to get much needed cash.

Whatever ones view of the pressure that the gold standard ultimately put on the Federal Reserves ability to respond to the financial panics in 1931, there is little doubt that the Federal Reserve could have done something to stop the first wave of panics in late 1930. If one believes that the panics built on one another through the effect on income and the effect on expectations, then a different decision by the Federal Reserve in the fall of 1930 might have prevented the later panics that so decimated the U.S. financial system. In this case, one would have to say that American policy mistakes in 1930 played a crucial role in determining the course of output not just in 1930, but in later years as well.

Uniquely American factors are also important for explaining why the United States was so prone to financial panics in the first place. Bernanke and James (1991) point out that many countries in the world experienced financial crises in the 1930s. However, the source of the financial fragility in the United States was quite different from that of other countries. For example, the organization of American banking, with its emphasis on small, undiversified banks, made the American financial system particularly susceptible to local shocks and unable to withstand runs. More important, the great expansion of agricultural lending during World War I left the American farm sector unusually heavily in debt. When deflation started in 1930, farmers were the first to default, and this sent undiversified rural banks into failure (Chandler, 1970, pp. 53-66). The unique conjunction of undiversified banking and a particularly large increase in agricultural indebtedness in the 1920s made the financial panics in the United States both more severe and more persistent than in other countries. Again, the American problems of 1931 and 1932 stem from peculiarly American roots.

Sources of the American Recovery In the spring of 1932, the Federal Reserve adopted a noticeably expansionary monetary policy, largely under the threat from Congress that if it did nothing the legislature would intervene. The behavior of expected real interest rates shown in Figure 3 and the path of industrial production shown in Figure 2, suggest that this monetary expansion lowered real interest rates and generated a noticeable recovery in real output in the United States. Industrial production rose 12 percent in the four months between July and November of 1932, However, this monetary expansion ceased when Congress adjourned in July and the Federal Reserve was able to return to its policy of caution. In early 1933, the final wave of banking panics pushed the economy back into depression. Only in April 1933 did the American recovery begin in earnest.

The Nation in Depression I 311 The recovery of the United States from the Great Depression has been alternatively described

as very fast and very slow. It was very rapid in the sense that the growth rate of real output was

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very large in the years between 1933 and 1937 and after 1938. Monthly industrial production increased by 79 percent between the trough in March 1933 and the peak in July 1937. As shown in Table 1, annual industrial production in 1933 actually increased faster in the United States than in any other country. This expansion was not limited to industrial output. Real GNP grew at an average rate of nearly 10 percent per year in the four years between 1933 and 1937, and again in the three years between the recession of 1938 and the outbreak of World War II in the United States in December 1941.

The recovery was nevertheless slow in the sense that the fall in output in the United States was so severe that, despite these impressive growth rates, real GNP did not return to its pre- Depression level until 1937 and its pre-Depression growth path until around 1942. This fact leads to the frequently heard statement that the American Depression did not end until the outbreak ofWorld War II.

The war, however, was not the main source of the American recovery, at least not in the way that is typically thought. In another paper, I find that the U.S. economy began recovering in 1933 primarily because of huge increases in the money supply (Romer, 1992). Soon after taking office, Roosevelt, using emergency powers granted to him by the Congress, allowed the dollar to depreciate substantially. A new lower price for the dollar was fixed by law in January 1934. This devaluation greatly increased the nominal value of existing American gold stocks. The Treasury could have ignored the increase in the nominal value of its gold reserves and left the money supply unchanged. Instead, the Treasury issued gold certificates equal to the amount of the increase in gold reserves and deposited them at the Federal Reserve. As the government spent the money, these gold certificates were converted into Federal Reserve notes, which are a component of the monetary base. As a result, high-powered money in the United States increased 12 percent between April 1933 and April 1934.

Devaluation also brought with it a large inflow of monetary gold from abroad as foreigners traded gold for the now less expensive dollars. After 1934, gold continued to flow to the United States because of political unrest in Europe. Hitler s increasing belligerence caused Europeans to want to invest in American assets, which required that they buy dollars with gold. The Treasury could have sterilized this gold inflow by borrowing the dollars to trade for the gold. Instead, the Treasury paid for the gold with deposits at the Federal Reserve, and then replenished its account by issuing gold certificates. As a result, high-powered money increased another 40 percent between April 1934 and April 1937.

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This increase in high-powered money led to an increase in Ml of almost the same amount： Ml increased 49 percent berween April 1933 and April 1937. That Ml did not increase by more than the base is evidence that the money supply was growing during the mid- 1930s because of policy decisions and political events in Europe, rather than because of endogenous changes in the money multiplier caused by the recovery itself. Temin and Wigmore (1990) argue that, even before the money supply actually increased, devaluation helped to spur recovery by signalling the switch to a more expansionary monetary regime. They suggest that devaluation immediately stimulated purchases of farm equipment and other capital goods by generating expectations of future monetary ease, inflation, and real economic growth.

After 1934 the huge increases in the American money supply had exactly the effect on the U.S. economy that a traditional aggregate supply-aggregate demand model would lead one to predict. Figure 3 shows that real interest rates plummeted in response to the gold inflows. This came about because nominal rates fell slighdy and actual and expected inflation rose substantially (the producer price index rose at over 8 percent per year between January 1933 and January 1937). This fall in real interest rates was followed fairly quickly by a recovery of interest-sensitive spending, such as construction spending and consumer purchases of durable goods. This effect can be seen in the fact that the American recovery, more than in other countries, was led by a surge in the output of investment goods. One piece of evidence that su^ests a causal link between the fall in interest rates and the surge in particular types of spending in the United States is the fact that American consumer spending on durable goods turned around before consumer spending on services. This indicates that some factor that affected only durables purchases, such as a fall in interest rates, was initiating the recovery.16

That increases in the money supply generated the recovery suggests that movements in aggregate demand were as important for ending the Great Depression in the United States as they were for causing it. However, there is an obvious question about whether the increase in the U.S. money supply during the recovery should be considered an accident caused by international developments or the predictable result of conscious American policy. The right interpretation, I believe, is a mixture of both. The political upheaval in Europe that caused gold to flow to the United States was clearly an international shock. Indeed, there is a very real sense in which the tension leading up to the outbreak of World War II in Europe did help to end the AmericanDepressionbycausingtheU.S.moneystocktogrow.

On the other hand, Johnson (1939) shows that the Roosevelt administration consciously chose to devalue and not to sterilize the subsequent gold inflows, precisely because it wanted to increase the money supply and cause inflation. In this way, the international gold flows may simply have provided a convenient way for the executive branch to bypass the overly cautious

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Federal Reserve. In the absence of such gold flows, Roosevelt and the Congress would quite possibly have used the threat of amending the Federal Reserve s operating procedures to force the Federal Reserve to increase the money supply. However, devaluation was clearly impor- tant in any case, because no country could pursue a wildly expansionary monetary policy for a sustained period and still maintain a fixed exchange rate. Thus, as argued by Eichengreen and Sachs (1985), the decision to abandon the old gold parity was a crucial precondition for recovery.

Conclusion The American Depression was unique in many ways. While many countries experienced a depression at roughly the same time as the United States, the onset of decline and the subsequent rebound were much more extreme in the United States than elsewhere. The overall depth of the Great Depression was also larger in the United States than in any country other than Poland. Finally, the American Depression was initiated by a fall in consumption and ended by a rise in investment to a degree that was quite different from the experience of many other industrial countries.

The picture that I have painted of the American Great Depression is one that stresses the importance of national, rather than international, a^regate demand shocks； the experience of the United States during the 1930s differed in important ways from that of other countries because the American experience had many uniquely American roots. The United States slipped into recession in mid-1929 because of tight domestic monetary policy aimed at stem- ming speculation on the U.S. stock market. The Great Depression started in earnest when the stock market crash in the United States caused consumers and firms to become nervous and therefore to stop buying irreversible durable goods. The American Depression worsened when banking panics swept undiversified and overextended rural banks and the Federal Reserve failed to intervene. Finally, the American Depression ended when the Roosevelt administration chose to increase the money supply tremendously after 1933.

Most of these shocks contain an international element, in one way or another. The tight monetary policy of 1928 was partly aimed at stopping a gold outflow. The Federal Reserve was less able to respond to financial panics in 1930 because expansionary monetary policy would have led to a serious loss of gold. Increasing the money supply after 1933 was very simple because capital flight from Europe brought billions of dollars worth of gold to the United States. Although these international complications were present, they were not decisive. At each stage of the Great Depression, it was ultimately American shocks and American policy decisions that determined the path of American output and employment.

314 I World Economic Development I am grateful to Barry Eichengreen，Maurice Obslfeld，Martha Olney，David Romer，Carl Shapiro, Joseph Stiglitz

，and Timothy Taylor for helpful comments and suggestions. Funding from the National Science Foundation and the Alfred P. Sloan

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Foundation is also gratefully acknowledged.

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NOTES _____________________________________________ 1. In addition to Kindleberger (1973) and Lewis (1949), Eichengreen (1992) and Eichengreen and Sachs (1985)

point out crucial similarities and differences in the experience of various countries during the Great Depression.

2. The industrial production data reported by the League of Nations were typically compiled by government agencies in Ae individual countries. As a residt, the quality of the series differs subst 咖 idly from one country to

another. The American series, which is from the Board of Governors of the Federal Reserve System, is among

the more comprehensive and reliable national indexes.

3. No peak or trough can be identified for the Soviet Union, because it grew continuously through the Great Depression, or for South Africa, because the data for 1931 and 1932 are missing.

4. In the League of Nations index of world industrial production, Poland gets a weight of 2.1 percent, while the United States gets a weight of 31.1 percent. The weights assigned to the other countries in the top five are:

Germany, 17.5 percent; United Kingdom, 12.9 percent; France, 10.1 percent; and Japan, 5.9 percent (League of

Nations, 1932, p. 47).

5. The building activity data are from the League of Nations (1936, Appendix II, Table 3, pp. 154-155). In this comparison I only include countries for which the data reflect permits or some other indicator of planned, rather

than completed, construction.

6. These composite indexes of the production of investment goods and current consumption goods are from the League of Nations (1938, Appendix III, Table 2, pp. 124-25). This comparison quite likely understates the

peculiarity of the behavior of American consumption in 1930 because the consumption series indexes include

mainly nondurables, while an unusually large fraction of the initial decline in consumption in the United States

was in durable goods.

7. The peaks and troughs refer to the actual highs and lows in the annual data on industrial production. For most countries there was no ambiguity in these dates because there was a single high followed by a single low.

However, for France, the observations for 1929 and 1930 were the same and there was an intervening

The Nation in Depression I 317

peak in 1932 before the absolute trough in 1935; 1930 and 1935 were chosen as the turning points. For Romania,

there was a local peak in 1929 and a local trough in 1930 before the absolute extremes in 1931 and 1932; 1931 and

1932 were chosen as the turning points.

8. The League of Nations data are not kept on the same basis after 1937. Using the modern Federal Reserve Board

index of industrial production (the Leagues American statistics are based on an early version of this index),

industrial production in the United States returned to its 1929 level in 1937, but then fell again in 1938.

9. Jacoby (1985) discusses the rise of internal labor markets and Alfred Chandler (1977) documents the fundamental

change in the structure of American business around Wbrld War I.

10. These estimates are derived from a regression of realized real interest rates on current and lagged values of the

growth rate of industrial production, the inflation rate, the nominal commercial paper rate, the growth rate of Ml

relative to normal, and quarterly dummy variables. Under the assumption of rational expectations, the fitted

values of the regression provide estimates of expected real interest rates. See Romer (1992) for a complete

description of this estimation.

11. The automobile registration data are from Standard Statistics (1930, p. 182). I seasonally adjust this series by

regressing the logarithm of registrations on eleven monthly dummy variables, a constant, and a linear trend.

12. The series on real exports is constructed by ratio splicing the index of the quantity of total U.S. domestic exports

from the Bureau of the Census (1975, Series U225, pp. 891-92) onto real exports in 1982 dollars from the Bureau of

Economic Analysis (1986, Table 1.2, p. 6) in 1929. Real GNP in 1982 dollars is constructed by ratio splicing the

Kendrick real GNP series (1961, Table A-IIa, p. 294) onto the BE A series in 1929.

13. This result also holds if one examines exports rather than net exports. Real exports accounted for just under 10

percent of the decline in real GNP in 1930. In 1914 they accounted for 11 percent of the fall in GNP; in 1917 they

accounted for 51 percent; and in 1921 they accounted for 53 percent.

14. Only part of the rise in volatility in late 1929 and early 1930 was due to the Great Crash itself. The repeated surging

and plummeting of stock prices between November 1929 and June 1930 also increased volatility tremendously. In

Romer (1990) I show that overall stock price volatility was much higher in 1929 and 1930 than it was following the

stock market correction in October 1987. This difference in volatility is large enough to explain why the real

effects were so much smaller in 1988 than in 1930.

15. Indeed, in October 1931 the Federal Reserve deliberately raised the discount rate and as a consequence lowered

the money supply substantially further.

16. The monetary expansion and the concurrent restructuring of the banking system could also have stimulated

construction and investment through increased credit availability.

318 I World Economic Development

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Topic Eight Questions

319

1. What was the role of fundamentals in the boom market of the 1920s? What was the role of a bubble?

2. Why did Christina Romer title her reading ttThe Nation in Depression，? Why did she focus on the United States?

3. Describe die changes to each of the components of GNP during the 1930s: con- sumption, investments, net exports, and government purchases.

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