Lecture 9: The First Globalization

Three definitions of globalization; authors, years

Soft: when the old world became connected to the Americas through Manila in 1571 - Flinn, Giráldez, 2004

Hard: the integration of markets across space in the 19th century (1870-1914) - O’Rourke, Williamson, 2004

General: reversible process of political, social, economic, and cultural integration, characterized by a rapid and easy transfer of goods, capital, knowledge, and people; based on technology and political choices

Preconditions to the hard/first globalization

• IR → cheap production of household items

• Rapid population growth → continous growth in demand for commodities

• Transport innovations → decrease in transportation costs, faster to transport people and goods

• Communication: increased, became faster

• International capital and foreign exchange markets: London, Paris, Amsterdam, Frankfurt stock exchanges

Pillars of the hard/first globalization

1. Economic integration

2. Technology

3. Trade policies

4. International monetary system

5. Imperialism

Economic integration: cause, causes of cause

Stronger international trade and financial ties during the 19th century, due to:

1. Spread of industrialization from England to Europe; technological progress

2. Higher demand for natural resources in industrial production → increased exports and imports

3. Advances in transport and communication: faster/cheaper to move goods/share information

4. Population growth and mass migration: development of the international labor market

5. Increase in foreign direct investment → helped finance industrialization in late-industrializing countries

Economic integration: price fluctuations

In pre-industrial economies: influenced by local/regional phenomena, often natural factors with repercussions on crop yield/precious metal supply

With industrialization: linked to demand fluctuations, “state of trade”

With globalization (econ. int): propagate more rapidly, have a cyclic nature

1. price convergence

2. synchronization of national economies → systemic crises

3. increase in international mobility of goods/labor/capital

Economic integration: movement of capital - factors, forms

Factors:

• Prolonged period of peace

• Gold standard

• Presence of raw materials in target countries

Forms:

• Portfolio investments (in stocks, bonds)

• Foreign direct investments (in multinationals)

Economic integration: movement of capital - base, reason, actors

Gold, foreign exchange: investors expected higher returns abroad
Actors: foreign exchange market; stock/bond markets; central banks; private/joint stock markets; private/joint stock investment banks → expanded in the 19th century→ Golden Age of Global Capitalism

Golden Age of Global Capitalism dates, author, year

1896-1914 (Frieden, 2006)

Transport and communication: consequences of innovations

• Intensified trade and financial flows

• Caused a decline in transport costs

• Helped create a quick, extensive, reliable national (eventually international) market

Transport and communication: innovations

• Trains/steam navigation

• Suez/Panama Canals (1859-69; 1881)

• Telegraph (1840), transatlantic cables (1860), telephone (1870) → price convergence

Trade policies: England shift, causes (authors, works, years, ideas)

Mercantilism → protectionism → mid-19th century, free trade

Influenced by authors:

• Adam Smith, The Wealth of Nations, 1776

• John Stuart Mill, Principles of Political Economy, 1848

• David Ricardo, On the Principles of Political Economy and Taxation, 1817

Key idea - optimal allocation of resources through:

• Comparative advantage

• Division of labor, international division of labor

• Market free of artificial barriers

Trade policies: timeline of British protectionism

1815: establishment of Corn Laws - banned or heavily taxed grain imports
1839: establishment of the Anti-Corn Law League - but maintained because Napoleonic Wars made agriculture very profitable, land-owners well-represented in parliament
1845: famine in Ireland
1846: Corn Laws repealed
1849: Navigation Acts repealed

Trade policies: France-England free trade timeline

1803-1815: Napoleonic Wars (highly protectionist)
1851: radical shift towards free trade - Napoleon III
1860: Cobden-Chevalier Treaty/Anglo-French Treaty

Trade policies: Cobden-Chevalier key points, consequences

1. France lifted restrictions on English goods; established tariffs could not exceed 30% of the good’s value

2. Great Britain eliminated tariffs on manufactured goods, greatly reduced tariffs on foodstuff

3. Most-favoured-nation clause: most favorable trade and tax conditions compared to past and future agreements with other countries

Consequences: 10% increase in international trade per year (in and out of Europe); increase in competition → more efficiency demanded

Trade policies: Cobden name, claim to fame, idea

Richard Cobden, a leader of the Anti-Corn Law League
Free trade can help secure permanent peace between nations

Trade policies: great deflation expanded definition, explanations

Period between the 1870s and the early 1890s characterized by a sustained price drop in industrialized economies; brought commercial and industrial expansion to a halt; started in the real estate sector in Europe; the banking and railways sector were the most hit in the US

Explanations:

1. Increase in international competition due to int. treaties

2. Overproduction

3. Large influx of non-European primary goods to Europe due to lower prices/transport costs

Trade policies: Great deflation consequences

• Free trade lost supporters

• Agrarian and industrial interests aligned: both demanded tariffs: farmers affected by agricultural imports from overseas; industrialists wanted to allow infant industries to grow without having to worry about foreign competitors

• Did not stagnate international trade

• Separation into blocs: free trade defended by Great Britain, Belgium, Denmark, Netherlands; protectionism by Germany, France, Italy, Austria-Hungary, Russia

Trade policies: protectionism caused by Great Deflation timeline

1879: Bismarck approved a new tariff law - protectionism for both industry and agriculture
1881: France introduces industrial protectionism (tariff on certain manufactured goods, somewhat agriculture)
1892: France introduces (stronger) agricultural tariff

Gold standard definition, time

International monetary system used between 1870-1900 where a country’s currency value is tied to a fixed quantity of gold

Gold standard: first adopter, reasons for international adoption

English monetary system, imposed due to the importance of

• English goods in world trade

• English capital in international flows

• English banks around the world

• The pound as an international payment system

Gold standard adoption timeline

1871: (partially due to the 5 billion franc indenmity post Franco-Prussian War) - Germany introduces the gold mark/establishes the Reichbank as the central bank and only issuing agency
betwen 1873-1878: Netherlands, Switzerland, Belgium
1880s: France, Italy - but remain under bimetallism in theory
1890s: Russia, Japan
1900: USA

Characteristics of the gold standard

1. Money supply is determined by national gold reserves: less flexibility to deal with shocks

2. Monetary authority fixes the currency’s value in gold: either by defining the weight of gold coins OR fixing the price of gold in terms of the currency

3. Monetary authority maintains the fixed price by being willing to buy/sell gold at the mint price

4. No restrictions on owner, use, purchase, sale or exports of gold

5. Elimination of risks associated to international trade → increase in trade, int. capital investments

Gold standard: rebalancing

Considered an almost automatic rebalancing system: money supply depends on gold reserves, which depends on balance of payments → Gold Standard adjusts BoP imbalances

Gold Standard: durability, reasons

Lasted about 40 years because it ensured long-term price stability and similar price movements across participating countries, through

• Symmetry: no single country had excessive influence over price levels (prices depend on gold supply/demand)

• Confidence: people expected exchange rates to stay fixed → system was rebalanced due to this speculation

• Commitment: if a country deviated from the gold standard, it returned to parity following the deviation

Risks of the gold standard

1. Core vs peripheral countries’ experience: smooth adjustment vs recessions and BoP crises when facing supply shocks

2. Fixed exchange rate → transmission of business cycle and financial crises

3. High resource costs

4. Gold supply could be insufficient to prevent long-run deflation

5. Gold supply/demand shocks could cause periodic swings in the world price level

6. Lack of cooperation between countries

Gold standard: monetary policy trillema, authors, year

Obstfeld and Taylor, 2004: a country can only pursue two out of three - fixed exchange rates, free capital mobility, autonomous monetary policy

Causes and consequences of migration during globalization

Causes: demographic transition, transport revolution; removal of legislative barriers
Consequences:

• slowed down decrease in wages at departure country/increase at destination country

• relief in demographic pressure for departure countries

• remittances increase departure country purchasing power → support the domestic market

• formation of an international labor market

Imperialism: explanations

• Search: for raw-material-supplying markets; for an industrial production outlet; for a demographic surplus outlet

• Helped establish and protect multinational businesses’ operations abroad (enterprise competition)

• Need to invest surplus capital

• Politics/ideology: imperialism as an element of national identity; as a symbol of European power/superiority