Universitat Pompeu Fabra

Economic and Business History

LESSON 5:
THE FIRST GLOBALIZATION

Anna Sol
 Contents
The diffusion of the Industrial Revolution
Increase in international trade and
international movements of factors
The international monetary system: the gold
standard system
 Diffusion of the
Industrial Revolution
The diffusion of the Industrial Revolution
technologies was a slow and uneven process.
We can observe a double trend:
Convergence with the leader country in a group of
countries that today are considered developed
countries.
Divergence of a group of countries that today are
considered underdeveloped countries, developing
countries or Third World countries.
 Diffusion of the
Industrial Revolution
The industrial leader country (UK) developed a
group of technologies according to its resources
endowment and its relative prices.
The first circle of diffusion of industrialization was
composed of close countries in terms of
institutions, factor endowment and transport
costs.
First comers:
France, Germany, USA, Switzerland, Belgium.
Late joiners:
Italy, Spain, Austria-Hungary, Russia, Japan, Sweden,
Denmark, the Netherlands.
 Follower countries
Disadvantages:
Higher barriers of entrance.
Lower initial capacity of saving.
Different resources endowment and relative
prices of factors.
Lower know-how and human capital endowment
Advantages:
Adaptation to existent technologies may foster an
improvement in efficacy.
More ability to take advantage of opportunities
and discontinuities of technological change.
 The British climacterium
Between 1870 and 1914 United Kingdom
experienced a climacterium period.
British productivity growth decelerated.
British industry tended to search new markets
for its old products instead of innovation with
new products and processes.
Investment effort reduced while capital
exports to other countries increased.
 Colonialism and imperialism
Colonial expansion started in the 16th century,
but arrived to its maximum in the 19th century.
Many regions with natural resources were
incorporated to the new international labour
division, focused on industrialized countries
that demanded raw materials and food an
needed markets to sell their industrial
products.
 Colonialism and imperialism
Although USA independency and Spanish
colonies in Latin America emancipation
reduced the number of countries subjected to
colonialist dominium, colonial dominium was
maintained.
Many independent countries were subjected
to an informal tutelage.
 Imperialism Age
In 1880 a new race for colonial dominium
started.
1885: Conference of Berlin:
Expansion of all coastal colonies.
In 1914, 10 countries dominated most of the
World.
Difficulties & opportunities for follower
countries: Peripheral countries
Peripheral countries: countries affected by the
mobilization of resources demanded by exporting
countries.
Disadvantages:
Tendency to disconnection between modern
exporting sectors and the rest of traditional economy.
Infrastructures to export and not to integrate internal
market.
Advantages: ?
Responses:
Colonial dominium or informal external dependencies
hindered effective responses by the local public
power.
 The First Globalization
Great increase in international trade (increase
in trade was much higher than the increase in
production).
Great increase in international movements of
labour.
Great increase in international movements of
factors.
 Increase in international trade
Free trade theories assume that market
enlargement can become a mechanism of
economic development.
Specialization according to comparative
advantages would intensify trade flows between
countries with different and complementary
factor endowment:
Adam Smith: Absolute advantage.
David Ricardo: Comparative advantage.
However, during the 19th century, increase in
exchanges took place between countries with
similar factor endowment and factor costs.
 Increase in international trade
International trade between 1820 and 1914
was unequal depending on countries and
products.
Europe was predominant both in volume and
in profits.
Europe exported industrial goods and the rest
of the World exported agrarian products.
 Increase in international trade
2/3 of Latin American trade went to Europe
(this proportion was even higher with Asia and
Africa).
Peripheral countries specialized in the
exportation of a reduced number of agrarian
products. External dependence increased.
This often led to impoverishing growth,
because they were trapped in a vicious circle
of reduction in relative prices (deterioration of
terms of trade)
International movements of factors
International movements of capitals.
Unequal advance of the industrialization process.
Increase in the saving capacity in some countries
and increase in investment opportunities in
others.
International movement of labour.
Differences in wages.
 Consequences of the First
Globalization
Globalization increased inequality in both sides of
the Atlantic.
External openness increased opportunities
(expansion of relative high productivity sectors)
and also inequality (because firm closures or
disappearance of low relative productivity sectors
in Old Europe).
In New Europes emigration increased
opportunities (frontier expansion) and also
inequality because of labour supply growth and
labour segmentation.
 Consequences of the First
Globalization
Inequality generated social conflicts, uprisings and anti-
liberal movements.
Some movements were xenophobic, racist, imperialist
or just violent.
Social and communist movements emerged.
Democratic movements: France was the first country to
establish suffrage for all adult men (1848).
Other countries had to wait until the 20th century.
Women obtained right to vote between 1907 and
1971.
 The end of the First Globalization
Globalization, in part, destroyed itself.
European tariffs to agrarian imports were
adopted as a response to the reduction in
agrarian income.
In the New World controls on immigrations
were used to fight against the growing
inequality that massive immigration had
generated (or was believed to had generated).
First World War.
 The Gold Standard System
International monetary system during the 19th
century.
Currencies convertible to gold at a fixed parity.
Each currency had a fixed parity to all the
other currencies.
It is a fixed exchange rate system with
currencies convertible to gold.
 The creation of the
Gold Standard System
Between 1820 and 1914, GDP grew fast and
trade grew even faster.
It was necessary to increase the means of
payment in order to confer liquidity to the
system.
The amount of money needed in an economy
depends on the volume of transactions, price
level and velocity of circulation of money
(equation of exchange).
 The creation of the
Gold Standard System
At the end of the 18th and beginning of the 19th
century, the use of paper money became general.
During the 19th century a new credit system able to
multiply the amount of money was created: bank
money.
To solve the problem of reliability, any form of fiduciary
money had to be convertible in gold and silver.
In the 19th century, a monetary system based in
banking money convertible to gold emerged.
The system required the existence of a central bank.
The central bank had the role to regulate the system
establishing a fixed conversion value of the national
paper currency to gold.
 Advantages of the
Gold Standard System
Fixed exchange rate system provided:
Stability of exchange rates: reduction in transaction
costs in international trade.
Stability of internal prices: differential of inflation
could erode international competitiveness of a
country.
This system favoured a great increase in
movements of goods and factors during the First
Globalization.
But, what happens if the legal parity is different
to the market parity?
 Adjustment mechanisms in the
Gold Standard System
David Hume: An international monetary
system based on gold would adjust
automatically through movements of gold.
However, in a World based on bank money,
adjustment would take place through interest
rates (investment, consumption and
aggregated demand): Deflationary adjustment
mechanism.
This regime of monetary policies entailed the
sacrifice of the internal equilibrium to the
external equilibrium.
 Real functioning of the
Gold Standard System
Theory forecasted divergent movements
between prices and interest rates, according
to the outcome of the trade balance.
In reality, price levels evolved in a similar way
in all countries.
Interest rates, instead of diverging, tended to
move together following the Bank of England.
 Real functioning of the
Gold Standard System
The adjustment, instead of being automatic, lied
in the cooperation between central banks and
the disciplined observance of the rules of the
Bank of England.
The real functioning was based on the sterling
pound and the surplus of the British balance of
payments, since it financed World trade and
investment.
The proper functioning of the Gold Standard
system ended when the British leadership ended.