Book Summary - Global Capitalism: Its rise and fall in the 20th century, Jeffry Frieden, Dispense di Storia Economica

Scarica Book Summary - Global Capitalism: Its rise and fall in the 20th century, Jeffry Frieden e più Dispense in PDF di Storia Economica solo su Docsity! ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 1 In June 1815, three hundred thousand troops converged near Brussel for the battle that was to end Napoleonic Wars. Forces of Britain, Prussia, Austria, Russia, and the Netherland gathered against the French to determine which great power would have controlled the world. On June 18, 1815 the defeat of the French was clear, Napoleon was defeated, and the age of British supremacy began. This victory was the culmination of 300 years of absolutist monarchy and of its economic order. - Rulers supported their military machines with an economic system called mercantilism, which they used to manipulate their economies for military advantage. - After 1815 the combination of British supremacy, French defeat, and power balance in Europe calmed the incessant conflicts that afflicted the area for centuries . Opponents of mercantilism focused on the extinguishment of the corn laws , which were taxes imposed on the imports of grain during the Napoleonic Wars, which main aim was to increase the domestic price of grain. - British farmers were however eager to maintain restrictions on agricultural imports; o The import of foreigner grain would have doom British prices because of the increase in competition - Free traders though focused on the benefits of accessing cheap and inexpensive goods, especially the cheap food that the repeal of corn laws would have brought Farmers and Free trades had a few periods of fights, but ultimately free traders won. This happened mostly because of the change in the electoral system that took place in that period, which reduced the power of farmers and increased that of the cities and their middle class. As Britain liberalized trade, many of its costumer and suppliers followed suit. In 1860 France joined Britain in a sweeping commercial treaty that freed trade between them and drew most of the rest of Europe in this direction, Germany, while also moving towards unification, in 1871 created a similar free trade among themselves, which later on got opened to the rest of the world. Over the course of the 1800s the trade of the advanced countries grew twice to three times as fast as their economies, - By the end of the century the trade was seven or eight times as large as a share of the world economy at the beginning of the century - Transportation and Communications advanced dramatically as well o By the late 1800s, in fact, telegraphs, telephones, steamships, and railroads fundamentally changed the speed and cost of carrying cargo overland. The steamship revolutionized oceangoing shipping, reducing the Atlantic crossing time, from over a month in 1816 to less than a week ▪ As a reference, before the mid-1800s most goods traded internationally were valuable, light, and not perishable. This because it would have costed the same 40$ to ship an iron bar oversea as it did to buy it brand new. The old order preserved by force of arms at Waterloo was gone and replaced by a new global capitalism. Markets, not monarchs, were the dominant force. And news raced around the world by telegraphs and telephones in minutes, not weeks or months as it used to be back in the days. The gold standard became the most powerful organizing principle of global capitalism during the 19th century. - Almost every country was running on a bimetallic standard, using both gold and silver, the UK were the only one which were adopting just the use of gold. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 2 - Centuries of shared gold and silver came to an end in the 1870s, where new silver discoveries drove down the price of silver and made the existing rate of exchange between the two metals unstable, in this positions governments had to decide: o To change the exchange rate o To choose between using just gold or silver As a result of the 1870s silver crisis most of the world industrial nations decided to join the gold standard. - Gold standard means that a county is backing up their paper currency with its reserve of gold, and its thus promising its currency-holders to interchange, at a fixed rate, paper money with gold. - This allowed changes in the aspects of the international trade scene: o Provides stability and predictability of the currency system; ▪ As the value of a currency is tied to a fixed amount of gold ▪ Also allows for the reduce of uncertainty in international trades, as the value of a currency is more comparable and exchangeable • “They seemed as stable as multiplication tables” ▪ It allowed bankers to be sure about debts being paid in gold equivalents or about earning profits in gold-baked securities/currencies o Encourages fiscal responsibility; ▪ By limiting the ability of governments to print money and thus create artificial inflation o Provides a natural economic limit to credit expansion; ▪ By preventing excessive borrowing and resulting in more sustainable economic growth ▪ The gold standard was considered to have a self-regulating behavior o Creation of international financial journalism ▪ And thus allowing the world to understand what was happening in the other part of the world the day after a certain fact happened Thanks to these changes and of the international adoption of the gold standard, international investment soared: - Citizens of rich countries invested huge portions of their savings abroad, especially in bonds (thanks to the high yields thar were offered by developing and more ‘riskier’ countries) and stocks Not everyone welcomed economic integrations, in fact, with the opening of the world economy and the application of new transportation technologies, cheap New World 1 grain flooded the world market. The dramatic fall in farm prices devasted many rural areas in the Old World 2 and caused near-starvation conditions from Scandinavia to Sicily. New factory techniques made craftsmen obsolete, and advanced agricultural productivity made farmers redundant. - Technological development caused a remarkable increase in the productivity of just about everything - These trade and development technologies that increased aggregate income could also ruin millions of farmers and workers o Some of the improvements happened in the area of weapons of mass destructions which full potential would have been shown only after 1913, o This advancement in the technological developed even further open wider the between rich and poor nations, that thus brought to a new round of colonialism conquests Great depression of 1873-1896 contributed to the dissatisfaction with free trade and the gold standard - It had been characterized by a constant decline in prices caused by pessimism and uncertainty o E.g. American farms prices declined by more than 1/3, mining prices by ½, but construction costs remained stable for the entire period In this period the United States raised a wall of protectionist behaviors around its domestic market, meanwhile Germany, the second-largest economy increased tariffs on many goods. - Great Britain and the Low Countries almost alone continued to stand for free trade 1 New World, is generally used to refer to the United States 2 Old World, is generally used to refer to Europe, Asia, and Africa ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 5 Staying on the gold standard meant could be difficult and might require overriding political resistance. - Investors knew that a government willing and able to overcome opposition to gold was also likely to honor its foreign debts even in the face of domestic protests The gold standard symbolized financial rectitude because it required governments to fit their economic policies to global economic pressures. The gold also acted as a metallic regulator to impose wage and price retains. David Hume was the first to identify the regulatory process in the late 1750s, it was called price-specie flow mechanism. - Any gold standard country that spent more than it earned would be forced by operation of the gold standard to reverse course (i.e. Reduce wages and spending) and moving back to equilibrium. - Governments on gold had to privilege international ties over domestic demands, imposing austerity and wage cutes on unwilling populations In order to adhere to gold. This made the gold standard a litmus test that international investors used to judge the financial reliability of international governments. All these factors permitted the world’s economies to become more and more tightly integrated as the golden age progressed. The use of railroads and steamships, both in place by 1870, expanded much more rapidly thereafter. The invention of the refrigeration also made the transportation of perishable products possible for the first time, and thus allow third world countries to start exporting their main goods (Argentina – chilled beef, Honduras – bananas). All these developments reduces dramatically the time and expense to het goods to the market. In the twenty years before 1914 the cost of oceangoing shopping to Britain dropped by 1/3, while the price of the shipped goods rosed by one third on average. The world trade went thus from under 8$Billion in 1896 to over 18$Billions in 1913, even corrected with inflation, this parameter was more than doubling. In the meanwhile, worldwide telegraphy meant that information’s could be transmitted from any area of the world to investments housed and traders in London, Paris, and Berlin. By 1913 overseas investors owned 1/5 of the Australian economy and fully ½ of the Argentine. By the early 1900w investments abroad accounted from ¼ to 1/3 of wealth of the major powers. International immigration also rose, in the first decade of the century outmigration amounted to 3% of the population of Great Britain, Italy, and Sweden. On the eve of WWI, huge shares of population of the world’s most rapidly growing economies were immigrants (almost as many people left their native lands in Asia as left Europe). The reversal of the great deflation of 1873-1896, technological development, and general macroeconomic stability all contributed to the rapid pace of global economic integration before 1914. Countries that joined this golden age global economy remade themselves in line with their newfound positions in the world market. Each region specialized in what it did best. Britain managed investments, ran the world’s banking and trading systems, and supervised insured world shipping lines. - Argentina, South Africa, and Australia used British capital and German machinery to open new farms and mines o The founding will thus have been sent back to Germany to be worked into machinery and some profits shared with Britain as interests on their investments Countries and groups within regions became more and more specialized, they cut back on economic activities they were less good at to concentrate on those at which they were particularly good. - In the early eras countries tried to reach self-sufficiency, but now decided to focus more on producing and exporting what they did best and trade the rest - As a result, the industries of eastern Europe flooded the market with machineries and equipment to work farms and run mines, European investors provided capitals to finance massive constructions projects in which equipment was deployed. o Investors could by bonds (high yields) or stocks of foreign countries and business and monitor their progress with ease - Global capitalism made thus specialization possible ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 6 Adam Smith, in 1776 made specialization the centerpiece of its argument. He and his fellows argued against the mercantilists, that self-sufficiency was foolish and that a greater divisions of labour made countries wealthier. - In a famous example Smith pointed out that an individual pin maker working alone could make at best 20 pins a day, however, if the manufactories was divided into about 18 different steps, each done by one or two specialized workers, the pin factory could have reached a daily production of 48.000 pins a day. o This would have been making each employee 240x more efficient than what it was by working in a non- specialized environment Productivity refers to the amount produced by one unit of labour with the other factors of production -especially land and capital – at its disposal. The productivity in the USA was much more high than the one in Germany or Italy, this not because American worked more than their fellow Italians, but because, in 1993, there were three times more machinery per worker than in Britain, the economic leader of that era. The classical economists emphasized that specialization required access to large markets. Adam Smith, in fact, argued that the restriction of market size would have retarder economic growth. This happened during mercantilism ages (1756), which tried with all its forces to limit access to the market. The international division of labour of the decades before WWI transformed whole continent, extraordinary new agricultural and mineral areas were drawn into the world at once, floding Europe with raw materials. Inexpensive and innovative industrial goods poured out of Europe’s factories and into parts of the world that had always relied on handicrafts. Capitalist searched for places where their money would have been profitable, eschewing one more railroad line or power plant in England for a bold new project in Kenya. - A country with excess labour could send emigrants to areas of recent settlement, or it could employ the cheap labour in factories to produce manufacturers to send to these areas. - Migration of capitals happened also towards those countries which had higher yields on their treasury securities - Economic integration and specialization made both the Old World and the New more efficient At the end of the century, the people, factories, and land produced more, incomes rosed and the economies were growing. Without access to migration across counties and oceans, farmers would have been stuck on untenable farms, without access to a world market their products, sound African miners and Australian ranchers would had no place to sell, insure and manage, and above all, London wouldn’t have become the economic nerve center of the world, but rather only of a small island. The golden age’s abandonment of mercantilism seamed amply justify, it, in fact, brought a period of rejection of the ex-pervasive government and its control on the economy. Free trade, capital movements, and immigration reduced state control. - Certainly, governments stepped in quite frequently and forcefully, to enforce private property rights of investors and traders - The order and the ideology of those days though believed and presumed that a government did little but safeguard the operations of the markets, yet there were stresses and strains under the surface of pre-1914 global capitalism. One source of tension was the subjugation of the poor nations and people, also, another problem was that not everyone benefitted from global economy integrations. Many traditional societies stagnated or fell apart. - Economic integration put tremendous pressure on those whose goods were not able to compete with the new world leaders. Consumers no longer needed European grain, Latin American money, Chinese artisans, and Indian musicians. - Those on the losing side of specialization and economic integration were less willing to accept a hands-off government that did nothing to ease their suffering. The decades preceding WWI provided evidence that the market and the international economy were powerful engines of prosperity and even of peace. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 7 Keynes’ observation that social and economic life had experienced an internationalization which was nearly complete in practice does capture the essence of global capitalism before WWI. For decades the world economy was essentially open to the movements of people, money, capital, and goods: capitalism was global, and the globe was capitalist. The international economic system of the golden age ran like a London gentlemen’s club, members supported one another when necessary to keep the club running smoothly and induct new applicants that met their standards, which were commitment to: - Economic openness; - Protection of properties across border; - Gold Standard; - Limited government intervention in the macroeconomy. Many Europeans assumed that there would always be a broad economic, political, and intellectual support for international economic integration, but, with the aid of hindsight we know that the golden age of globalization was no the new natural order of things. - The demand of memberships turned out to be too taxing for most nations, including some of its founding members Before 1914 almost everyone agreed that governments should privilege their international economic ties. Foreign economic commitments were more important than dealing with industrial unemployment or farm distress. - Most of them argued that the substantial government intervention in the market would interfere with the natural operations of the gold standard - They believed that the unemployment compensation, aid to troubled farmers, and extensive social programs for poor would impede the adjustments required by the gold standard o Such programs would keep wages and prices from falling as necessary to keep economic balance Governments were important, though, because they controlled the nation’s currency, trade, and international financial relations, as well as enforcing property rights at home and abroad, and otherwise secure the benefits of the global economy to theirs citizens. - Industrialized and poor countries did everything feasible to prove their international economic integrity but little to manage their domestic economy Example of specialization If England produces cloth more efficiently than it produces wine, than English cloth would be much more cheaper compared to England’s wine. If Portugal, on the other hand, was specialized in the production of wine and not the production of cloth, the two countries should open up to trade and buy abroad what is cheaper so that each of the two countries could focus on what it could make more cheaply. Competitive advantage applies the principle of specialization to countries: like people nations should do what they do best, regardless of how well the others do these things. - To say that an individual shall specialize in what he does best say nothing about how the individual’s skills compare with other’s skills The farm family wants to maximize the imports it buys and thus need to earn more, and the best way to earn is to produce what it produces most efficiently. By the 1850s Great Britain, the breeding ground for classical economic theory, and enthusiastically embraced free trade, the gold standard, free capital movements, and free migrations. The rest of the world followed suit over the next sixty years, with varying degrees of enthusiasm. In 1846, right before its international debut repealed the country’s major agricultural tariffs, the Corn Laws. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 10 Allowing free import of wheat into Europe in 1900 would certainly have made economies more efficient, forcing the closure or conversion of inefficient farms. It was important to European international bankers who wanted America and Russia to export their way out of debt (they were using wheat as a way of repaying debts). - Free grain trade would have lowered costs of food o Which was one of the reasons why socialists worker movements and many urban employers favored liberalizing trade in farm goods - Cheaper grain though would have made things even harder for farmers in Europe and caused a lot of problems for their close-knit7 communities. - All things considered thus, European farmers would have much preferred less imported grain and more ruined bankers Manufacturers in nations in the early stages of industrialization were the second largest protectionist group, especially in countries being on late development. - Manufacturers insisted that they would have flourished only if they were sheltered from the already established industrial powers (especially the UK) - This cry for infant industries protection was heard almost everywhere, even in some relatively rich countries o It was a desperate call for tariffs for embryonic manufacturing sectors until they were big and strong enough to compete with the already harsh competition of other countries o Industries demanded trade barriers most stridently in countries where the industry was battling to establish itself, such as in the New World. ▪ All of them argued that national industry would have grown slowly – if at all – if they had to compete with the British or the Germans ▪ Protectionists succeeded in many instances • Austria-Hungary, France, Germany, and Italy and other marginal grain producers had tariffs at around 40% in wheat on the eve of WWI • For comparison Continetal ecomies had average tariffs of between 12 and 18 percent in 1913, Trade protections in the US and the other area of recent European settlement tended also to be very high. o Tariffs too increased almost everywhere overe the decades before 1914 By the turn of the century more and more Chinese, were questioning the the imperial system insularity. It was not until the very eve of WWI (with the eruption of a national revolution in 1911 8) that it appeared a clear probability that the nation would turn towards economic integration. On the other hand, in America protectionism was dominant, they were not extreme in their views: - They were happy with American farmers and miners selling all they could abroad, and foreginers to invest in what in wanted in the US - But they insisted in on reserving most of the national market for manufactured goods to themselves In comparison, countries with small industrial potential were more likely to avoid trade protectionism, as the benefits of the free trade were greater for countries with limited home markets. This also happened with the very poor developing countries, some of them were unable to resist the attempts of Europe to forcefully open their markets, because, after all, they had all little to protect and nothing to loose. Lastly, colonies, had little to no choice and were forced into allowing free trade with metropolitan countries. - Dutch and British colonies were forced to follow British and Dutch free trade dictates, with some exceptions o Britain self-governing territories (Canada, Australia, South Africa, and New Zealand )had effective independence and pretty much determined their own trade stance. In these cases the choice was for more protection than British free trade would have allowed On the eve of WWI, world trade was nearly twice nearly twice as important to the world economy as it had been forty years later 7 A group of people who have strong bonds and are closely connected to one another. They often share common interests, values, and traditions, and may live in the same area or have close relationships with one another. 8 It was a series of uprisings and protests that culminated in the overthrow of China’s last imperial dynasty. The revolution represented a major turning point in Chinese history, ending centuries of imperial rule and paving the way for modernization. However, it also led to a period of political instability and conflict in China, as various groups vied for power and influence in the new government. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 11 Proponents of the international gold standard were as busy, and as committed, as free traders. Joining the powerful financial interests were the firms that managed world trade, shipping insurance, and allied activities. Most of the export-oriented manufacturers of Europe were part of the global gold bloc9, for a stable payment system permitted a flourishing world market for their goods. Supporters of alternative monetary systems started to spread, especially the ones supporting a silver-backed currency or a pure paper currency. Many important countries rotated on and off gold, only after prices started to raise in 1896 did memberships in the system became almost universal. - A government committed to a gold-baked currency could not use monetary policies, such as devaluating or lowering interest rates, to deal with domestic economic difficulties - The rules of the Gold Standard required government to give up active monetary policies, even when they were justified by local conditions The principal adversaries of gold were those who would gain most from a devaluation, or from a relaxation of monetary conditions, in most cases a devaluation could: - Rise prices of farms and mining products; - Reduce the real burden of debts; - Bring down unemployment; - Give economic stimulus (by printing more money) to allow the economy to rise again. Gold Standard though made all this impossible, being on gold eased access to foreign markets, capitals, and investment opportunities but restricted their abilities to react to national economic conditions. Thus, the benefits of currency predictability and access to foreign capital had to be weighted against the costs of giving up one of government’s most powerful policy tools. - It is still difficult, to this day, to evaluate golds international economic advantages against domestic economic sacrifices - These decisions were also in a bitter conflict because the principal beneficiaries of the gold standard were typically not those who paid the price of compliance Gold supports had also to keep fighting the battle of standards, it was them against farms which wanted a depreciated currency. In developing countries landowners and miners dominated many of these oligarchic nations, and allowed the pursing of the interests of the primary sector, meaning that as long as the Great Depression lasted, these countries were more off than on gold. On the other hand, in developed and industrialized countries pro-gold interest were quite important because of the international trade capabilities that it allowed a country to have. Despite difficulties of adherence to the gold standard, almost every major nation was on gold for decades before WWI. In the 1840s free trades tried to repeal the Corn Law recognized the importance of trade policy in the United States. Richard Cobden politician who supported free traded complained that with the creation of protectionist policies, the UK would have offered inducements to spread themselves out from the cities. Every nation drawn into world trade soon had powerful interest groups pushing to consolidate commercial integrations, typically in alliance with powerful interest abroad. Great Britain, in that period, was at the epicenter of the world trade, it, in fact, accounted for one-third of all international trade. - The unwavering British commitment to free trade also meant similar policies in Belgium, the Netherlands, and other small European nations. - A free trade in Britain, also meant a free trade baseline for the commercial relations of the world greatest empire 9 The gold bloc were seven countries led by France that stuck to the gold standard monetary policy during the Great Depression, even though many other countries abandoned it (Belgium, Luxembourg, the Netherlands, Italy, Poland, and Switzerland) ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 12 Even if German policies were protectionists, bankers and entrepreneurs could use London as a ‘middle-man’ to commercialize globally their products, thus the trade with or through London allowed international traders to lend, borrow, and export basically everywhere in the world. - In established economies the frequent contacts between countries were strong and thus all of them had shared interests in sustaining the global economic order - The same thing happened in borrowing economies, where they had every reason to safeguard a monetary and financial order that gave them access to European capital The gold standard rested on implicit and explicit cooperation among the major financial and monetary powers, and, in times of serious difficulties the Central Banks worked together in cooperation to avoid too serious dislocations of the system The choice of the Gold Standard was not merely based on its staying power, but rather the positioning of the United Kingdom - We choose Gold not because gold is gold, but because Britain is Britain - Gold, in fact, brough facilitated access to the Britain financial assets and connections - The international trade of Great Britain also allowed developing nations to grow, and thus gave them a good reason to follow undoubtedly the British lead By the 1890s a virtuous circle was at work in international trade, money and finance. As world trade grew, more exporting group arose and exports became more important for them. - The wider the variety of products on the market, the greatest the attractiveness of the market itself Eventually, even manufacturers took advantage of the open world trading system, between 1890 and 1910 the proportion of American manufacturers for whim exports were more than 5% of the output rose dramatically from one-quarter to nearly two- thirds. - By the 1910 there were powerful pressures to loosen the country’s near embargo on manufacturers imports - The shift was reflected in American politics, as the free trade Democrats gained strengths and even protectionist Republicans moderated their stance o When in 1912 the Democrats won the presidency and congress one of their first step was to reduce American tariffs dramatically While free trade and the gold standard were the two most obvious distinguishing marks of pre-WWI global capitalism, the movements of capital and people also influenced the economic order. Countries sending capitals and people, and countries receiving them had little to no interest in stopping such relation. - To have a measure, the average rate of return on British investments abroad was 50 to 75% than what it was in the investor home country; - This was also an important metrics for the railroad sector which accounted for half of all British foreign investments, as a comparison, British-owned railroads were earing their owners twice as much as what the one in Britain did. Before 1914 Britain was running on a trade deficit equal to 6% of the gross domestic product, a sum that was countered and more by net earnings overseas investments by 7%10. This lead supporters such as Winston Churchill11 during 1910 election campaign to wax enthusiastic about Britain’s international investments: “They give to the capital of the county a share in the new wealth of the whole world which is gradually coming under the control of scientific development.” Wages in the countries immigrants went to, were dramatically higher than in the countries they came from. - In 1910 wages in the US and Canada were about three times as high as in Italy and Spain - Their countries of origin had little reason to oppose their leaving, since it reduced economic and social pressures on overcrowded land. It also held out the hope of remittances12 from immigrants who sent money back to those left behind Newly developing countries were starved from capital, then as now. 10 The UK, despite having a trade deficit (spending more money than what they had), the country’s earnings from overseas investments exceeded the deficit by 1% 11 Winston Churchill was a British statesman, army officer, and writer who served as the Prime Minister of the United Kingdom from 1940 to 1945 and again from 1951 to 1955. 12 the action of sending money in payment or as a gift ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 15 - Meanwhile new inventions made a new range of household machines possible o Allowing families to have electric lighting, sewing machines and eventually automobiles and radios o The US were the leading country in the production of machinery for mass production, and especially in household appliances In that period the United States were also chronically short in labour, meaning that - Domestic servants were too expensive even for the middle class - Women were more likely to have a job, differently from Europe o These conditions allowed the US to create a market for appliances to reduce housework chores and to free labour of other things The initial burst of energy in the industry came ten years before WWI (1904) - The phenomenon was merely American, since Europe did not join the automotive industry since the 1920s - As a measure, there were about 160.000 vehicles in the world in 1905, half of them being American - In 1913 that number rose to 1.7M making the US account for nearly three quarter of the total o The main company driver of this revolution was Ford, that, thanks to mass production lines was able to boost production in the time period 1910 to 1916 from 34.000 to 730.000 yearly produced cars and thus dropping the cost from $700 to $300 ▪ As a comparison, an average American salary in the 1910 would have been able to afford the Ford Model T with 1.5y of work, but thanks to the drop in prices, it now was able to achieve it within only 6 months of work In those years the average plant size grew dramatically in chemical, machinery, and engineering products. Economies of scale started to become more and more important in these complex manufactures tan they had been in sectors typical of the first industrial revolution. The new consumer durables were expensive products that people would buy to use for years, so that their reputation and reliability were crucial to the survival of the industry. - Brand name and recognition of brands thus started to take a leap in the modern industry, which created the natural tendency of corresponding the biggest market share to the best few players allowing some primordial state of monopoly. - British manufactures, with their older industries and production plans, started to having problems to chatch up with the fast growing American and Continental companies. o The new type of industrialization relied heavily on an open world economy, the international diffusion of new technologies depended the most on global integration Sweden, an example of the central role of economic integration in the second wave of international development - The country was one of the poorest ones in Europe in the 1870s, but the rapidly growth of other economies increased dramatically the request in the market for Sweden goods, this launched Sweden industrialization via the fueling of foreigners investments witch financed nearly 90% of government borrowing o These loans helped directly or indirectly to build communication systems, railroads, utilities and port facilities Although the challengers of British manufacturing were relying on the access to overseas markets, supplies, capital, and technology but also tended to use trade barriers to protect their interests. - In fact, many industrials who regarded themselves as firm economic internationalists also strongly supported trade protection for their own industries o Americans were much more protectionist than their German or Japanese counterparts The best-known early theoretician of industrialization by protection was Friedrich List, which regarded free trade as an ultimate goal but yet argued that temporary trade protections were necessary to equalize relations between major powers. - The system of protection can be justified solely and only for the purpose of the industrial development of the nation ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 16 Protectionist argued that no country had industrialized without protective barriers, the United Kingdom, for example, removed mercantilist control on trade only after achieving industrial prowess. The argument that early stages industries needed government subsidy and protection was evenly accepted by both of the parties. Whatever theory preached, in practical political terms, manufacturers in most late-industrializing countries wanted protection and were powerful enough to get it. - The Russian government, for example, imposed one of the most high tariff in modern history, 84% on manufacturer goods, nearly double what the United States were adopting around 44% o The very high levels of protections tended to create and defend monopolies o High trade barriers also contributed to foreign ownership of the industry ▪ As European businesses were unable to commerce with Russia, most of them decided to jump directly inside their economy and open local shops, going thus around barriers The Russian industry had two distinguishing features: - Large scale and heavy foreign ownership o About 40% of industry was foreign-owned, and more than 40% of workers were in in factories of more then a 1.000 employees ▪ This unusually high proportion of industrial labour force concentrated in very large plants facilitated the activities of the revolutionary groups that organized the Russian proletariat in the years before and during WWI Japan had much more moderate trade barriers than Russia, by most estimate, they had tariffs which were roughly the same as those of continental Europe. - The country relied heavily on exports of simple manufacturing products - Yet manufacturing was protected and subsidized by the government, and the economic result were striking Trade protection had some troubling effects: - By raising prices, protections transferred income from consumers to producers o A tariff on shoes makes shoes more expensive, to the benefit of shoes manufacturers and the detriment of those who wear shoes o This effect is a distributional one, taxing consumers to enrich the producers - Protection deflected the economy from its comparative advantage o By making protected activity artificially profitable, trade protection diverted resources to inefficient users ▪ A shoe tariff leads a country to produce more shoes than it should, given its comparative advantage o This effect reduces efficiency, diverting resources from more to less productive users Tariffs were also associated with cartels, informal or formal combinations among large corporations. As trade barriers protected local firms from foreign competition, national firms agreed not to compete against one another, in order to keep prices high. Heavily cartelized and strongly protected, continental industries were similar. - The German government restricted imports of iron and steel, even though German firms were among the world’s most efficient. This allowed the biggest firms to create formal and fully legal cartels to keep prices high. The winners and losers from protection frequently fought bitter political battels, American farmers resisted a trade policy that forced them to sell their wheat and cotton at world prices, but buy their agricultural machinery and clothing at prices above 40% of world levels. Trade protection harmed consumers - Industries paid more for supplies - And households paid more for food, clothing and other necessities. It is also important to notice that production was diverted towards the protected industries regardless of their efficiency. - Both the US and Germany would have industrialized even without barriers, and yet, would have been fine with smaller and less heavy industries Overall, while infant industries protection was common in the decades before WWI, it did not fundamentally interfere with the overall openness of the international economy. Barriers to imports proliferated, but they were highly targeted rather than broadly applied. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 17 Trade grew extremely rapidly in all countries, including the most protectionist. In 1913 all major nations were exporting far more of what they produced, and importing far more than what they consumed. - All of them though, were willing to bend the rules of free trade if a quick profit or quick industrialization were available By the 1980s Europeans and others were opening up large areas of recent settlement to agriculture, mining, and other exploitation. They held natural resources whose extraction did not become economically feasible until the recent exploration, migration and technological change. - Once the possibilities were real, people rushed to turn the natural potential of these lands into hard cash - The regions of recent settlement differed from the rest of the world: o They were very sparsely populated, in some case, the preexisting population had been expelled or exterminated Many of the British foreign society, unlike many other developing areas, were generally politically stable and legally predictable - Wealth was a national fixation and property was nearly sacrosanct European level of agricultural productivity allowed the areas of recent settlement to pay European-style wages and therefore attract European immigration. As a result, European immigrants clustered in the high productivity areas with living standards higher than in their countries of origin. - In these open spaces they achieved levels of output and income per person that generally surpassed those of Europe - High levels of income in turn provided large home markets for local foods Buenos Aires and Rio de Janeiro, started to grow into cities with more than a million people, and some of their inhabitants took advantage of local prosperity to set un manufacturing industries, especially those which were processing local primary products. Uruguay’s on the other hand, starting from the 1870s started to grow very rapidly on the basis of farm and ranch exports to EU - Hundreds of immigrants from all across Europe started to converge into the country - Uruguay’s new political system was remanded in line with its newfound wealth o Battle, president which served twice as president in 1903-1915 introduced ▪ Eight-hours a day working hours ▪ Progressive labour regulation ▪ Free universal education ▪ Comprehensive public health system ▪ Legal divorce and extensive women’s rights - Uruguay soon became the first modern welfare state and all of it was possible thanks to the new standard of living that the country lucrative export of farming and ranching economy was able to give The areas of recent settlement had the right domestic characteristics to take advantage of the opportunity presented by transportation and communication advances, and they turned in an extraordinary performance in the years before WWI. - In 1896 these settlements produced 80M bushels of wealth, around one-sixth of European production - In 1913 this number rose to 483M and accounted for more than all European production combined o By those years Canada, Australia, and New Zealand were producing per person more than Europeans fellows ▪ And the population was one quarter larger than Europeans’ ▪ By any measure, these countries experienced a remarkable economic development Other resource-rich areas of the world also developed rapidly, like the area of recent settlement. - These areas were typically tropical or semitropical and were already involved in international trade - Their economic activity received a strong push, or pull, from technological advances and global growth - It is also true to say that such success stories have been overshadowed by the many failures, such as China, of the dramatic expansion of the colonialism that took place in the same time span ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 20 Many trust members were, like Leopold, single-minded in wringing value out of their possessions, they extracted whatever resources they could in self-contained enclaves15 of copper and gold mines. Often, when the facilities needed workers, as in Congo, the colonial authorities imposed forced labour on local residents, these enclaves after all were just little more than organized theft. - Local resources were taken away, with no wealth, no technology or training left behind In the modern cases, the colonial power assigned control of a promising region to a commercial concessionaire, who’s goal was to maximize profits, and not develop the local economy. When a small group of Europeans colonized areas with large indigenous populations there was the same potential for abuse as in the cases of unvarnished colonial pillage (i.e. Europeans had the possibility to mistreat and take advantage of the local populations, just like the unkind actions of colonial exploitation) Another type of colonialism was the settler colonialism, which refers to a type of colonialism in which a foreign group of settlers establishes a new permanent community in a colonized territory. - Unlike other forms of colonialism that primarily exploit resources or control territories, settler colonialism involves the intentional displacement of indigenous populations and the establishment of a new society based on the settlers' culture, institutions, and governance. - It often involves the acquisition of land through force or treaties, leading to profound and lasting impacts on the indigenous peoples, their cultures, and their rights. - It also involved giving land to Europeans to farm cash crops that the indigenous population did not grow, many settlers were successful at commercial agriculture only because of subsidy from the authorities In order to get 6.000 Europeans to settle in Kenya by 1913, the British had to give away land for next to nothing near a new railroad, expel thousands of locals and induced through economic policies the Africans to work for the settlers. - There were some qualified successes, in which settlers managed to develop productive farms - However, even the most vibrant settler society were based on colonial policies that reserved economic benefits to the settlers, if equals rights were thus been extended to the rest of the population, the privileged position of the former would have been competed away by Arabs or Africans willing to work harder for less o Settlers opposed to brining local populations into the colonial system o Eventually, imperial powers wanted to encourage involvement by the locals into the colonial system, but settlers firmly opposed because this would have caused a reduction in their special privilege ▪ Settlers opposition to local inclusion n the colonial system often blocked broad-based economic integration and general economic development ▪ When settlers blocked democratization thy also blocked the economic and social development The mercantilists had forced colonies to buy and sell in mother country markets, overcharging the colonies for what they bought and underpaying them for what they sold. - Mercantilists sometimes also blocked or discouraged local manufacturing Some great powers also forced independent developing countries to sign unequal treaties that provided industrial nations with preferential treatment. - So, while imperial power manipulated their trades with poor nations, they also insisted in their colonial to participate in the international economy, this because getting the resources of the colony in the market often required active local involvement in the production activities The opposite case was though happening for territories that were conquered for non-economic purposes, where the rulers did too little to allow colonial access to international markets. - In this regard, the inadequate provision of economic opportunities to colonial subjects was a major failing of most of the powers 15 Self-contained enclaves refer to geographically isolated areas or territories that are surrounded by the territory of another country or entity, often maintaining a separate political or administrative status, and serving as distinct pockets of governance within a larger jurisdiction. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 21 Colonialism hindered development to the extend that it impeded the colonies’ economic integration with the rest of the world, or impeded the ability of colonial subjects to participate in this process. Anticolonial activists charged that the great powers threw the colonies into merciless global economy waters, subjecting poor nation sto the constraints of world markets. This accusation is misguided in two ways - First, the most noxious and objectionable colonial rulers used restrictions on trade, not free trade, to drive resources from their colonies - Second, engagement with world markers typically increased colonial economic growth dramatically When given the possibility, peoples of poor regions vigorously pursued the possibility of enrichment held out by global capitalism, the colonies that grew faster, in fact, where the ones whose governments were most effective at smoothing pathways to and from global international markets. Colonialism was just one among a number of factors that affected growth in the developing world, and it was not always a negative one. The economic polices of a nation’s rulers were the main determinant of its economic development, economic growth required investments, and easy contact with domestic and overseas customers, as well as access to foreign capitals and technology. One requirement of economic growth was economic infostructure, services that facilitate economic activity. - Farmers needed transportation to bring machinery in and out of the crops - Information about techniques and markets, and credits - Subtler political and legal conditions, especially secure property rights - Education to enhance worker skills o Literacy also had a direct effect on productivity Misrule was thus the principal barrier to economic growth. And thus, its characteristic signs were - Absence of adequate transportation and communication - Scarcity of banks - Popular mistrust of national currency - Absence of clear government commitment to a dependable economic environment - Lack of commitment to improve the quality of human life and labor o Traditional rules also did not wanted to protect investors as it may have restricted their government prerogatives, hence the lack of private property rights were another sign of clear of misruling Why did ruling classes condemn their societies to stagnation? In the colonies the answer might be that imperialist rulers were uninterested in local economic conditions, but many of the development failures were politically independent, and its age to presume that most rulers would prefer their societies economies to grow rather than to decline The most striking failures to develop were China, the Ottoman Empire, and India. The world three oldest civilizations. - Ruling classes in the three countries feared that economic growth could provoke social changes that would make them ungovernable - The rules were primarily concerned with the stability of their social orders, and economic growth might well have destabilized them o Encouraging the emergence of a flourishing private sector meant committing government to respect the rifts of their subjects in unaccustomed ways - None of the three governments made real efforts to overcome the secular inertia until the late 19th century o Traditionalism impeded modernization ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 22 In the Chinese, case, denying the nation a revolution in transportation simply to refuse foreign access to it, implied that the threat to government influence outweighed the opportunity for economic growth, imperial powers thus were more important than China’s development. - It was not until the Boxer Rebellion16 of 1899-1900 that China embarked on a program to build railroads, mostly because it saw the potential of moving troops faster internally New social and economic forces only came to the fore by revolution in China too, the Imperial Government Reform program was timid, and in 1911 a coalition of insurgent army officers and civilian opponent brought down the monarchy. - A republic was declared the following year in 1912 - Warlords then, divided China into regional fiefdoms, leaving the nation nearly defenseless o The result was nearly 40 years of civil war and invasions, calamity after calamity demonstrating to which extend the imperial system had left the country unprepared for the modern age Entrenched interests could impede economic development even where the weight of history was not heavy, those who depended on captive workers had little interest in facilitating the transition to of the masses to a new economic order. In contrast, elites that did not need masses of cheap labour could profit from a general increase in prosperity, by acting as bankers or merchants to thriving small farmers, taking up lucrative export-import trade, or intermediating between foreigners and locals. Large farms (Sugar and Cotton) were more efficient than small ones, and small independent farmers (Coffee and Rice) could not compete with plantation owners. The economic and political orders reinforced the position of wealthy landowners and merchant classes with little reason to improve the quality of government, infostructure and schooling. Results were often perverse. Some new crops created new plantation economies on largely vacant land, dominated in both cases by foreign corporations that employed landless workers often imported from other poor regions expressively for that purpose. - In Brazil, landowners relied formally on slave to keep their estate running o Plantation owners also worked hard to keep farmworkers were they were - San Paulo, on the other hand, had a vibrant agricultural economy based on coffee, there farmers were working on their own acres and if they happened to be working for others they were paid decent wages at market rate The entrenched-based government were rarely willing to encourage socioeconomic development, the natural tendency of most governments and elites was thus for existing rulers to use the resource boom to consolidate their rule, but not extend the benefits of development to the rest of the population. There were as many reasons for stagnation, decline and failure to develop in the poor regions of the world as here were unique societies in these regions. Rational people pursing their own interests obstructed development and destroyed the economic prospects of their countrymen. 16 The Boxer Rebellion was a violent anti-foreign and anti-Christian uprising in China during the late 19th century, led by a secret society known as the Boxers, aiming to expel foreign influences and restore traditional Chinese values. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 25 o The US financial credibility was, in fact, depending on its full participation in the club of rich nations, whose member cards was the gold standard. ▪ J.P Morgan and his colleagues fought harshly to keep the US on gold, they even arranged a series of international loans to allow the US to defend the dollar when it came under attack on currency markets and to keep it tied to gold The conflict over gold was typical of the frictions that affected the classic world economy before 1914, - On one hand, such participation typically required sacrifices o In the case of gold standards, first-class financial citizenships was available only to those countries willing to subordinate the needs of their domestic economies to their commitment to gold - On the other, to be on gold meant giving up the ability to ‘devalue to improve’ a country competitive positioning o Thus giving up the ability to stimulate the economy in had times by lowering interest rates or printing money, it meant privileging international standing of your currency over the state of the domestic economy So long as the world economy grew, the tension between national and global concerns could be managed, it would not always be thus though. As the labor movement grew, it too came to represent a challenge to the established order. It was not that workers opposed global economic integration—in fact in many countries labor unions and Socialist parties strongly supported free trade—but that the demands of labor clashed with the classical liberal system’s reliance on flexible wages and minimal government. - i.e. the more workers, the more strong labor unions become and thus the more capacity they had to demand for fair wages and more protection Unions were present but less powerful also in France and southern Europe, despite variations, labor unions were a prominent part of the economic and political landscape in every industrial country. - Thanks to the latter, many male workers gained the vote right in the decades before 1914 Workers and their organizations sometimes engaged international economic policy issues, especially where labour was hostile to free immigration and free trade, such as North America and European settlement (poor labour countries), where restricting immigration was near the top of labor’s wish list. - This because the flow from low-wage Europe of people would depress wages incredibly The most important goal of European trade policies was to protect farmers, and agricultural protection made food more expensive for workers. As the working class share of the population grew, workers needed a cushion against unemployment. Farmers, in bad economic times, could always fall back upon their land, and crops to eat, whereas workers in big cities, in the absence of their job, had no way of gathering food. - Labor’s central concern was thus the protection against unemployment o Mutual aid societies, with the grow in numbers of workers, created their own unemployment insurance o By 1913 many European towns and regions had unemployment compensation programs The growing organization of workers into unions had already restricted business control over wages, the new social programs of governments continued in restricting it further. Labour unions aimed to provide workers with guaranteed earnings, meaning that there would have been a reduction in the flexibility of wages and working hours. Political actions were also put into place to protect workers from capitalism. In recession periods the economy brought to the reduction of wages, and production prices, their impacts on profits were thus mitigated and thus downturns quickly overcome. - The reduction in wages gave the employers little to no reason to put into place layoffs, but, with the come into place of labour unions it all became more difficult The most common way to trim an economy to sustain its gold parity (exchange rate) was to push down wages, and the limitations that labour unions out upon employers ability to reduce them complicated enormously the market process that sustained the gold standard. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 26 The economic achievements of the late 19th and early 20th century were impressive, bit this stage of development of global capitalism did not end well. The gold standard fell apart, never again to be restored, global consensus on the movements of goods, capitals, and people was rejected or seriously questioned as country after country closed its borders to trade, to immigrations and investments. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 27 The steepest economic decline in modern history led to trade and currency wars and financial hostilities. The generally free movements of goods, capitals, and people among countries gave way to the aggressive closure of borders and markets. Within countries, sociopolitical calm shattered into bitter conflict. Only towards the end of the golden age did the working classes gain the concerns of those outside the economic and political elite. Before 1914 the benefits of international economic growth were available only to some of the people some of the time. War among the European powers was no surprise, in fact, geopolitical tensions had been high for several years before 1914. And by the time the war ended late in 1918, its consequences were more important than its causes. World War One forced all Europe to depend on American capitals, market, and technology and to look to it for political leadership. The change of the United States after WWI was perhaps one of the most dramatic transformations of economic history. - The US was best positioned to meet the demand for food and armaments. In less than three years of official US neutrality (August 1914 to April 1917) in which years export more than doubled and the country trade surplus was running five times more than the one in pre-war conditions The allies paid for their oversees purchases by selling what they could: goods, gold, and eventually foreign investments - The foreign investment case was especially to be connected to the UK, whose investors had large holdings of American stocks and bonds o The British ran out of things to sell long before they satisfied their war needs. They would have liked to borrow the money but the US, since the beginning of the war, had decided that loans to belligerents were inconsistent with their neutrality. o By summer of 1915, the US, under the Allais pressures along with their willingness of profitability of wartime sales the administration of Wilson decided to change policies, ▪ The US Treasury Secretary explained to the Wilson administration that Allied trades were important: “To maintain our prosperity we mist finance it. Otherwise it may stop and that would be disastrous” o In that same year private and public loans flooded Europeans markets ▪ By October 1915 JP Morgan started to re-invest in Europeans and British loans. Totally they brough back to WS around $2.6B in bonds of Allies, this sum was double the outstanding debt of the US government ▪ By the entrance of the US in WWI, the American government had already made nearly $10B in government-to-government loans. These loans eventually caused two controversies: • Accusations that they were meant to rescue the debts American bankers had arranged • Charges and countercharges among Europeans and Americans over o The moral responsibility of the war, and the o American insistence that the paid were paid in full, in money, whereas many Europeans believed they had already been paid in full, in blood. ▪ From 1914 to 1919 America changed from being the world’s biggest debtor to its biggest lender • As a counterpart, Germany and British economies did not get back to their pre-war sized until 1925 The US leadership caused by all these loans and interests in European countries made president Wilson the main controller of the Paris Peace Conference Agenda17, and while the war raged, Wilson administration listed its famous 14 points. - The United States had an overwhelmingly influence on the Paris Peace Conference o French and Belgians insisted on a substantial indemnity to be compensated by Germany on the loss of wealth and life that the war fought in their territories had caused ▪ Many Europeans and Americans believed that such requests were exorbitant and perhaps uncollectable, and that they would have only inflamed further conflicts 17 The Paris Peace Conference Agenda was a comprehensive plan for addressing the aftermath of World War I, encompassing issues such as territorial boundaries, reparations, and the creation of the League of Nations. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 30 The American absence was a major weakness of the post world economy, Keynes identified how the interwar international and domestic political economies had changed from the Victorian ideals20 to which most government aspired. His principal point was that India modification of the gold standard, was actually an improvement, allowing for scientific management of monetary conditions. The Indian system thus became less rigid and allowed room for government interventions and stimulus to respond properly to local conditions. On trade policy, Keynes’ views were strictly liberal, the stated against tariff reforms in 1910: The tariff reform case rest on the principle of making things relatively scarce, to those who are concerned with making these things, this is no doubt advantageous. But it causes an amount of distress more than equivalent elsewhere. Keynes's economic ideas on free trade emphasized the benefits of unrestricted international trade in promoting economic growth and specialization, which could lead to increased overall welfare. He argued against the imposition of trade barriers such as tariffs and quotas, as they could hinder economic efficiency and reduce consumer welfare. Keynes also expressed objections to the orthodox economic theories prevalent during his time, particularly the classical theory of markets automatically achieving equilibrium and full employment. Regarding the gold standard, Keynes criticized its rigidity and argued that it constrained monetary policy and hindered a country's ability to manage its domestic economy effectively. He advocated for more flexible exchange rates and active government intervention to stabilize economies and promote economic growth. American isolationism left the world economy without the political engagement of its leading members. As long as the rest of the world could tap American capital and American markets, the world kept growing. The institutional and other other infostructure that had helped stabilize the world economy before 1914 was gone. An apparently endless stream of dollars seemed a reasonable substitute. 20 Encompassed principles of free trade, fiscal prudence, economic liberalism, and a commitment to industrial progress, all with the goal of fostering economic growth, stability, and national prosperity. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 31 On April 30,1939 after years of planning and construction, Franklin D Roosevelt opened the New York World’s Fair in Flushing, Queens. The fair world of tomorrow was a spectacular exhibition of scientific and industrial advancement. Sixty nations had pavilions at the New York Fair, it displayed technological wonders, products, and processes that blogged the minds of the more than 50M people who visited it in the summer of ’39 and ’40. - New uses of electivity were displayed, Albert Einstein also switch the switch for the first use of fluorescent streetlights - The exposition could not escape the military and economic realities of 1939. In every leading economy expect for the German, labour productivity grew more than rapidly from 1913 to 1950 than what it did in the forty years before WWI. New products and industrial processes were the most important sources of rapid productivity growth from 1914 to 1939. - The use of electricity in production supplanted other forms of energy, as electric power grinds were nationalized and improved. New steel alloys and new ways of refining petroleum were developed. Before WWI about one tenth of the finished goods American consumer bought were consumer durables, by 1929 the proportion was one quarter. Almost all the increase was in motor vehicles and such home appliances as radios and refrigerators. - The airplane industry was as well at the center of the world consumers, it became more and more affordable and used. - The motor vehicle, on the other hand, provided unprecedented individual mobility o Automobile production became the centerpiece of modern economies. The motor vehicle industry was soon the largest in every major developed country o The auto industry though, was not as central in western Europe as it was in the US, it was still the most important industry in all the major economies The automobile industry highlighted the managerial and organizational innovations that created the modern corporations. Many of the productivity advances between 1914 and 1939 would have been impossible without the new kinds of companies that developed along with new technologies and products. The new economies of scale were obvious in automobiles, the most important were realized when Ford introduced a moving assembly line in 1913. The assembly line installed in Ford’s production plan in 1913 reduced the time necessary to make a model T chassis from over twelve man-hours to ninety minutes. What new types of organization did was implementing the separations of management from ownership. - Faily owned companies declined in favor of companies owned by anonymous shareholders and run by professional managers. - Auto corporations were also vertically integrated, bringing together successive strategies in production and distribution o This vertical integration meant that an automaker may have had divisions to mine iron ore or coal, smelt steel, build parts, design and assemble automobiles, send them out in the country via company-owned railroads, advertise and sell them to the general public o Automobiles industries were thus leaders in mass production, mass distribution and vertical integration o Automobile companies were also overseen by corporate headquarters that specialized in being corporate headquarters, not in the production of automobiles itself The United States started being dominated by increasingly large, diversified, and vertical integrated corporations, as a counterpart, the era of inventors fades and slowly got replaced by corporate research and development. - Research and development were integrated primarily in those industries where the modern corporations prevailed, for the reason to bring science into the firm were to the reasons to bring in other components parts of the industrial process. - In other countries: ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 32 o British companies, on the other hand, tended to be slower to adopt new forms, perhaps because long- standing relationships between customers and suppliers in the oldest industrial nations were enough. o France companies were also slower than American corporations, this because of the backwardness of the country’s consumer markets and financial systems. - But by the eve of WW2 all the major industrial economies were dominated by very large, diversified, and integrated corporations. During the classical era, capital flowed out of western Europe in enormous quantities: - Most of it was in the form of loans, in which foreign government simply got money to use on whatever it chose. o Controls of the investments, simply, stayed in the hands of the borrowers - No foreign investment before WWI was in manufacturing, it was typically in raw material and agriculture, or in utilities and railroads American vertically integrated corporations expanded their horizons abroad, introducing the Manufacturing Multinational Corporation (MNC) - Multinational corporations (MNCs) engage in business activities across national borders, operating in multiple countries, They establish subsidiaries or branches in different countries to expand their market reach and capitalize on global business opportunities. - MNCs engage in international trade, importing and exporting goods and services across borders. They invest in foreign countries, establishing factories, offices, or other facilities to produce goods or deliver services locally. The final decline of backward agriculture in the developed world was another source of rapid productivity increases, before WWI about a third of the working population was farmers, by the end of WW2 though this proportion felt under one-sixth. The rise of the new machines, including farm machinery and the automobile, was intricately linked to the modernization of agriculture. The mechanization of American agriculture dramatically increased the ability of a few workers. - The full mechanization of American farming and the advent of the automobile age brought traditional rural life in the US to an end, in Europe, on the other hand, the results were much less severe - This industrialization process shifted the European and North American labour from where it was redundant to where it was needed Technological and organizational changes also affected social structures and politics in the industrial countries. As industry shifted towards very large companies, labour strength grew - Larger plans and firms were generally easier to unionize, both because the concentration of people made union organizing more effective and because large corporations could not call upon the personalistic ties with employees. o Larger corporations tended to be less hostile to unionization than smaller-scale and older industries Firms got bigger and bigger, and controlled their markets more and more. It was only natural that their workers would try to follow suit to gain control over their working conditions. WWI and Great Depression of the 1930s gave an enormous push to growth of labour movements. - The departure of millions of young men to the front made labour scarce, thus allowing the one which remain to have a greater leverage on their employees - Almost every socialist movements supported its country war effort and, during or after the war, rewarded with enlargement of the scope of permissible labour activity and with supportive government programs ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 35 From the middle of 1929 throughout the early 1930 congress worked on the Smooth-Hawley Tariff Act24, which promised to raise substantially American trade barriers. - Within few months other countries also began rising their own trade barriers, whether for their own reasons or revenge But economies did not recover, and unemployment kept rising, in 1933, the fifth year of downturn, American unemployment was at 25 percent. - The American economic collapse was one of the worst in the world, but other countries were not far behind - The downturn fed on itself, in large part throughout what economy professor Fisher called debt deflation25 o During the 1920s, in fact, there had been a huge increase in lending, even many consumer had come to relay on installment credit to purchase the new consumer durables, debtors could not service their debt when incomes collapsed and debt obligations remained constant ▪ By the beginning of 1934, in an average American city, over one third of mortgages holders were behind on their payments o Distress was especially prominent among people or countries that specialized in raw materials and farm goods, whose prices had fallen 2/3x than other goods Support for liquidationism was not based only on moral and intellectual appeal, businessmen had self-serving reasons to justify layoffs and wage cutting. - Among businesses that relied on large sums of labour orthodoxy was especially present, for which the reduction of costs was crucial - Firms in more capital-intensive lines, were less sensitive to labour costs The reward for enduring all these rigors was supported to be that eventually the wave of deflation and bankruptcies would create the conditions for its reversal and recovery. The generally self-equilibrating mechanism of pre-1929 business cycles was broken. Why thus weren’t the old solution working? - Reduced flexibility of prices and wages meant that the postwar economy was not responding as before to slump - Oligopolist firms26 that cut back on sales while keeping resources prices high produced less than they otherwise would o Unions that held out for higher wages at the expense of lower employment restricted the supply available for jobs, unemployment remained high in almost every country even as real wages stayed steady or even rose o Real wages, which refer to the purchasing power of wages or income adjusted for inflation, tended to increase or stay constant in oligopolist industries (finance, manufacturing, and utilities) ▪ But they saw a noticeable downturn in competitive sectors such as farming and construction The ability of many firms and unions to resist price and wage cuts kept factories more idle and unemployment higher than otherwise, but also provided better wages and earnings to the labor and capital that were in these privileged sectors, Deflation was not the solution and might have been part of the problem: - Fascist regimes encouraged corporations to cartelize to keep prices from collapsing - Social democratic government, on the other hand, brought labour and capital together to hammer our agreements and to prop up wages and prices. American new dealers railed against cutthroat competitors27 and used new laws and regulatory agencies to facilitate corporate and labour organizations that they hoped would reverse the deflation. - In many cases, government themselves organized markets against deflation, such as by launching agricultural programs to keep farm prices high The deflation damage was done by the time governments got involved. For nearly five years after the depression began, many prices, especially of primary product, collapsed. 24 Refers to the protectionist legislation passed in 1930, named after Senator Reed Smoot and Representative Willis Hawley, which significantly raised import duties on a wide range of goods, ultimately contributing to a decline in international trade and exacerbating the effects of the Great Depression. 25 An economic phenomenon where a high level of debt, combined with falling prices and asset values, leads to a vicious cycle of debt repayment difficulties, reduced spending, and further deflationary pressures, potentially exacerbating economic downturns. 26 Refer to a market structure characterized by a small number of dominant firms that possess significant market power, often leading to interdependence among them and the potential for collusion, strategic behavior, and limited competition within the industry. 27 Businesses or individuals who engage in fiercely aggressive and ruthless tactics to gain a competitive advantage in the marketplace, often disregarding ethical boundaries and resorting to predatory pricing, aggressive marketing, or other strategies that may harm competitors or the overall market environment. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 36 Deflation and the prolonged depression triggered financial and currency panics that started moving around the world. - Shocks were carried from country to country by skittish investors shifting money from one market to another o When investors took out money from a country they had to convert it into gold first - The proliferation of bankruptcies raised the specter of bank failures, and when depositors pulled their money out, they turned fear into reality o In six months, eighteen national banking systems had faced the financial abyss, effects of financial failures were profound ▪ By the end of 1933 half of the American financial institutions that were in place in 1929 were gone ▪ Impacts were not only felt by bankers, but it also alarmed lenders that stopped supplying funds to almost all borrowers Attempts to stop deflation and raise prices were blocked by government commitments to the gold values of their currencies, countries on gold thus had to let prices do their course - Gold retarded a government response to the crisis, and it also sped the transmission of the financial shocks. Sometimes, in the case of Belgium, these countries had to higher rates in order to higher yields and entice investors to continue to hold assents in the franc-Belgian government bonds. Countries with weak financial systems were also particularly likely to collapse under the stain of financial and currency attacks. Depositors would not keep money in banks in danger of closing, so a run on the banks developed at the first sign of difficulties. - As a nation’s banks threatened to collapse, people scrambled to get their money out of the country; nobody wanted to leave funds in a financial system in the process of disintegration. - No amount of austerity and no interest rate increases would attract money back to the currency of a country in the throes of a bank panic, and rumors that the currency would be taken off gold and devalued accelerated the rush to cash in stocks, bonds, and money for gold or a reliable currency. The vicious circle fed on itself, as expectations of a devaluation could cause a bank panic, while bank panics triggered devaluations. President Hoover attempted to help hold off disaster by proposing on June 20, 1931, to allow war debtors to suspend payments on their obligations to the U.S. government for a year. - Europe’s savers though were gripped by the fear that bank failures would strike the continent’s leading economy and force Germany off gold. They were right. Attempts to gather support from the French and British by the Germans were complicated by political hostilities. - Before the French would help the Germans deal with the financial crisis, they insisted on further reparations payments and disarmament. - In July 1931 the German government closed its banks and suspended the convertibility of the currency into gold and foreign exchange. o The exchange rate was kept officially steady, but it was now virtually impossible to exchange the German currency for gold, dollars, or anything other than German goods. o German decisions tumbled Europe, that in little or no time saw their results on the United Kingdom The pound fell by nearly one-third to the dollar in a couple of months, and as sterling dropped, a host of other countries followed Britain off gold and most of these countries also imposed substantial berries to trade - Britain abandoned nearly a century of free trade, om February 1932 the National Government imposed tariff protection, that were then loosen to special empires and trading partners - After decades resisting protectionism, the United Kingdom established an o Imperial block that shared preferential trade relations, and o A sterling bloc that shared depreciated currencies By the end of 1932 effectively only two groups of countries were left on gold - The United States - A French-centered bloc that included Italy, France, Belgium, Luxemburg, and Switzerland ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 37 Still the economic situation deteriorated. At the end of 1932 world trade was are barely one-third its 1929 levels. International financial markets were almost completely inactive and the world’s leading trading nations had turned towards protectionism - Yet many voiced kept calling for a reaffirmed commitment to gold French and its gold bloc neighbors did not give up their attachment to gold until 1936, more than seven years after the slump had begun. Money started poring out of American banks, and being converted to gold, both for fears or for speculations. The FED reacted by setting interest rated higher of 3.5% in one week to keep the money into the country. - Without the commitment to gold, the FED could have lowered interest rates, stimulating the economy by making borrowing, spending, and investment easier. - Instead, it shackled the gold standard requirements, the world most important central bank imposed even more austere and restrictive monetary policies The American election of 1932 saw Franklin D. Roosevelt win the presidency, and as soon as it came into session, Congress took up measures to force the dollar off gold. It seemed clear that one way or another, the dollar would have had to be devaluated. Once Roosevelt took office, he closed the nation’s banks, and announced emergency measures to stabilize the financial system. - For three months did the Roosevelt administration push the dollar down, so that it dropped against the sterling from 3.42$ to its original exchange rate of 4.86$ By 1933 the world economy wad dead in the water. Economic activity in every country was down by unprecedented amounts and economic warfare waged across Europe and the Atlantic: - War debts were repudiated - Trade wars declared - Competitive devaluations - Controlled exchange rates - Reparations denied All of this fed into an atmosphere of desperation, political polarization, and mutual recrimination. Keynes watches with approval while the United Kingdom went off gold, a move he called most blessed event. He may have lost the battles of the 1920a over Versailles monetary policies, and the British return to gold, but the spectacular failures of the world economy started to prove him right. - Many economist like Keynes challenged the gold standard George Warren, an economist that had long being studied the correlation od USD valuation towards farm prices, believed – for the wrong reasons – that reducing the gold value of the dollar would have helped and made farm prices move up again. They way this would have been done was through the abandonment of the gold standard and the artificial devaluation of the dollar. He indeed was right, the US government, freed from constraints of the gold standard, was able to expand the money supply, raise prices, and put the economy back on track. - The monetary base (dollars in circulation) in the first year that the dollar was devalued was expanded to 12%, and kept up at this growth until 1937, by which time the money supply was nearly 50% higher than in 1933 o With more money in circulation prices rosed continually, and the reversal of the deflation was instrumental in bringing the economy out of the depression. Deficit spending played little to no role o The actual recovery in the US was due to the relaxation of monetary policies - Deflation kept to plague the nations that kept their currencies on gold As the new policies were adopted, a gradual recovery started in 1934, and continued until 1937 - The Roosevelt administration led the British and the French in September 1936 to a tripartite monetary agreement, which committed the three governments to mutually support one another’s currencies o This agreement was an attempt to build a modified international monetary system without the gold standard as it base o This agreement allows the countries, and the one which entered later, to reduce tariffs in returns for reduction proffered by other countries, American trade barriers started finally to go down ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 40 With the world markets and their local representatives in disarray, the autarkies turned away from international competition and toward the use of national resources to meet national demands. The Nazis needed Schacht (Hjalmar Horace Greeley Schacht) to bolster their ties to Germany’s business leaders; Schacht and his business supporters needed the Nazis to address the country’s economic problems. - The architect and engineer of Nazi economic nationalism was the son of progressive internationalist parents - He and other liberals believed that only an alliance between the moderate business classes and moderate socialists could save Germany: “A middle class Left which will throw in its lot with the organized workers in the coming Coalition Government” o Schacht democratic party occupied a crucial position in the democratic Weimar Republic By November 1923 the German inflation had reached its high point, communist revolutionaries threatened to take power in several German states and regions, and Adolf Hitler’s Nazis attempted a coup in Munich. On November 13th, 1923 Schacht became Germany’s commissioner for the national currency - Two days later the presses were stopped - A new rentenmark was announced o This new German currency was backed by real property and was exchangeable for the old marks at the rate of 1Trillion Marks to one o The mark value held steady for the first time in years o He obtained foreign support for the mark stabilization o He made the government raise taxes and cut spending to help avoid a return to deficit spending - By spring 1924 the German’s hyperinflation was over Schacht knew that the Germany economy could not fully revive until the reparations issue was untangled, so he helped renegotiate the August 1924 Dawes Plan28 to regularize German’s international financial position and allow the country access to foreign capitals. Schacht became disillusioned with traditional solutions during the Great Depression and eventually aligned himself with the Nazis, believing that Hitler could be tamed and used to implement a conservative program to address the country's economic emergency. Soon Hitler was chancellor, appointed by conservatives who saw him as a last resort, and as more election loomed, Schacht served as a crucial intermediary between sympathetic businessmen and the Nazis. - He then proceeded to collected 3M marks for the Nazi and their allies, who won the March 5th election - Two weeks later Hitler appointed Schacht president of the Reichsbank o Schacht was never a member of the Nazi party and did not share many of its principles o Despite its orthodox origins, Schacht shared some important ideas with Hitler ▪ He saw the western powers as exploitative ▪ He believed that the government needed to use centralized power to restart the economy without rekindling inflation ▪ He was also an easy anti-Semite, though he abhorred the vulgarity of the Nazi and their violent anti- Semitism In 1933 both Hitler and Schacht agreed that the overwhelming need of the moment was to stimulate the economy and reduce unemployment. - Their economic priority was to end the grinding unemployment that had made the left powerful and attractive in the first place, Hitler made its goal clear, and the both designed the so called Schacht Plan29 to o Rebuild the economy and Avoid inflationary markets, as well as o Restore order in the country foreign trade and permit rearmament 28 was an international financial agreement enacted in 1924 to address Germany's reparation payments following World War I by restructuring its debt and providing loans for economic recovery. 29 economic in the early 1930s to address Germany's financial crisis, which ultimately involved restructuring the country's debt and implementing strict fiscal policies. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 41 Schacht effectively ended unemployment within three years - Half a million jobs were created by sending Germans to do community chores and farm work - Another half a million jobs were created by sending Germans to build roads, repair bridges and help with public work o General public spending increased from 1929 at 16% to 1934 to 23% Nazi also helped their political support bases, they gave - Tax and loan relief, - Price support to farmers and government contracts to small businesses By 1933 the economy was essentially at full employment, and in 1937 and 1938 labour shortages began to surface. Schacht also used the regime’s political power to implement a form of autarky that became known as Schachtian economics. - Government enforced tight control on the use of foreign currencies and on Germans’ taking their money abroad. - All payments on the country’s foreign debts were suspended. - A system of multiple exchange rates were put into place, offering better currency prices to favored industries and foreign allies. (they increased the spread) o The capital and exchange controls kept as much money at home as possible, allowing the Nazi government to channel financing to public works, industrial development, and rearmament. - They built a trade network in eastern and central Europe in order to prepare the country’s sphere of influence The Hitler’s government had centralized political power and financial resources, but Schacht and its fellow businessmen had supported autarky as a way to focus on national growth, but were, in fact, contrary to the long-term separation from the world economy. - Hitler’s polices in those years began to exaggerate o They did not have any intention on rebuilding tights with the west o They reduced businessmen and Schacht influence over the monetary policies o And slowly consolidated power as well as social consensus Like Germany, the other autarkies promoted national production for national use, especially industrial growth. Everywhere, the turn inward was justified as necessary to modernize the economy; - Italy analogous goal was to strengthen industry to avoid dependence on hostile foreigners and eventually to provide the wherewithal for reassertion of their military capabilities. The autarkies pursued industrial modernization by making industrial investments exceptionally profitable, raising prices industries received and lowering the costs it paid. - The autarkies turned the internal terms of trade in favor of industrial investment o Expensive manufactured consumer goods and low wages translated into lowering living standards for workers Subsidizing industry at the expense of traditional economic activities required a complex range of follow-on-policies: - Higher prices for industry required strict controls on foreign trade to keep out cheaper competitors - Government imposed high tariffs, quotas and restrictions or outright prohibitions on foreign goods o Existing multinational were subject to stringent regulations, forcibly sold off to local investor or by he government o Them, along with foreign companies, were prohibited from sending profits home, and were forced to hire more local citizens and assessed higher taxes Governments defaulted on their debts, they imposed strict control on capital movements as well as currency trading, in order to force private investor to retain and invest capitals into the country. Governments also forced overseas earnings to be surrendered back at home. Germany was one of the most important dictatorship of he Right wings there were prevailing in western Europe, in which, between 1920 and 1936 a wave of “Righties” ideologies and government started to afflict the continent. - The first set came as a reaction of the social unrest of the years after WWI ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 42 - The second, came with the depression Only western Europe was untouched, although several western European countries had notable homegrown fascist movement by the end of 1941. - The fascist and neofascist regimes counted on enthusiastic support from the New Right, drawn from the urban lower- middle classes and small farmers The two most important fascist regimes, Germany and Italy, were larger and more developed than other fascist lands. But in both countries fascists preached hatred of left-wing labor, foreign bankers, and domestic business with strong foreign ties. - Germany export industry and finance had been one of the bases of the Weimar Republic, in alliance with the Socialists and with the support of the Anglo-American loans and diplomacy The fascist typical base was among farmers, small businessman, handicraft workers, and white-collar functionalities (they were two-thirds of the voters but less the one-third of the German population) - They yearned for an earlier era in which they had had privileged position and saw modern industry and labor as the cause of their social dislocation, but fascists understood that they could not rule without big businesses and large landowners and sought their support and cooperation o Both in Germany and Italy, in fact, much of fascism’s mass appeal was due to its anti-capitalist rhetoric, but both of the government made peace with big businesses and land owners - Supporters were tight together by heathered of the powerful socialist movements that had emerged from WWI Right governments had to consolidate their hold on power, most of them took over amid economic distress and social unrest, and spent their initial years on emergency footing, dealing with both. - Social unrest was way: it was repressed, often brutally, as labour union and Left parties were outlawed and their leaders jailed, exiled or murdered - Economic distress, on the other hand, was solved by putting in place a economic engineer of recovery: o The new dictatorship used reflation, deficit finance, new taxes, and spending simultaneously to reward their mass followers in cities and countryside to jump-start stagnant economies In Italy, as in other countries where dictators took power in the 1920s, the economic problems were less immediate and severe, Italy’s fascists filled in marches, distributed lands to farmers, raised the salaries of public employes and redoubled public construction projects, they indeed used violence to achieve economic goals. The fascists also stimulated economic recovery by signaling to the business community that its troubles were over, no more strike waves, no more Bolshevik threat, no more political instability. - And thus, all this gave capitalists strong reasons to catch up on a back-log of profitable investments - Fascist were implacable opponents of o Foreign and domestic standard-bearers o Gold standard orthodoxy ▪ The pursuit of new paths was a point of pride rather then a difficult break from tradition ▪ This allowed them to try out program after program until they figured out what worked Having addressed the immediate crisis, fascist rulers turned to their long-term goal: - Unquestioned political control; - Accelerated industrial development; - Autarky; - Military expansion; - Controlled media image of the government o Independent political organizations were liquidated and replaced with easy controlled channels by which citizens may have expressed their opinions Economic policies shifted from crisis management to remaking society, often in ways that troubled the business allies of the fascists. In fact, as the 1930s wore on and the fascists implemented their programs, much of the traditional business communities found itself farther and farther from power. - But as fascist economics took hold, the ability of the business community to resist them declined. All available wealth was thrown into investments for industrialization, modernization, and militarization. - They gave primacy to heavy industries, not to consumer goods production ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 45 The government of India’s ability to address domestic concerns was hampered by its commitments to its British overseers. This helped set India on a course that eventually led to independence - Where colonial political economies were weaker or colonia rulers more hostile, the result was even more polarized and conflictual - Colonial rulers, on the other hand, were rarely willing to speed industrial development in regions they regarded as ill suited to modern manufacturing o The result was often the eruption of rebellions with a radial and nationalist tinge The depression effects on the developing countries was quite mixed than in the industrial world, where hardly a positive trend could be discerned. - Urban society and modern industry grew rapidly, which then lead to the creation of new groups and classe, which consequentially would lead to more democracy and, in some case, colonies independence The interwar implosion of the international economy drove most of the world’s nations inward. - The Soviet regime raced to modern industrial growth with brutal single-mindedness and central planning, trampling its rural population in the process. - Governments in central, eastern, and southern Europe invoked a new fascist ideal as they stamped out o Labour; o The Left; o And eventually all opposition in the march toward militaristic self-reliance. The global economy in the 1930s offered little more than the promise that international integration might eventually make people and societies better off in a world restored. But eventually, fascism, communism, and nationalist government provided jobs, industrial development, modernization, and, less tangibly, national pride and cohesion. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 46 In 1933 Keynes wrote: The international but individualistic capitalism in the hands of which we found ourselves after the war is not a success. Yet the industrial democracies, unable to develop an alternative, floundered through the first years of the Depression. Many in the industrialized democracies were drawn to German or Soviet model to replace the market system and to autarkic economic nationalism to replace reliance on the world economy. The democracies began to find an alternative in the middle 1930s: - Parties of the Left came to power, with working classes and agrarian as base of their support o They enacted more interventionist economic policies, expanded social programs, and increased government spending o They rebuilt cooperative economic ties among the democratic states The new alternatives was social democracies, the modern social democratic welfare state would not truly be constructed until after WW2, but by the late 1930s its foundations were in place in western Europe and North America. Social democracy was a new social and political order, governments backed by coalitions of workers and farmers took responsibility for: - Macroeconomic management - Social insurance - Social security - Labour rights The first pillar of social democracy in Sweden was countercyclical demand management: government commitment to alleviate the business cycle. Social democratic government went further, attempting to reduce the amplitude an frequency of cyclical downturns in general, to maintain full employment. They used: - Monetary policies to keep prices from falling or rising too much - Fiscal policies to sustain the economic activities The Sweden government pioneered active monetary management, after the Conservative government took the currency of gold in 1931 in which economist recommended an active monetary policy to keep consumer prices steady where they were at the time of the September 1931 devaluation. - Sweden’s labour-based government, with unemployment at 25% needed to do more than just lower interest and wait for the recovery, in particular : unions demanded government efforts to put the jobless at work. o Thus, between 1933 and 1935 the Social Democrats implemented emergency and public works that employed an average of sixty thousand workers and gave another 35k cash assistance. o They also implemented social insurance The government adopted unemployment insurance in 1934 and mandated universal participation in a national health insurance program a few years later. - They instituted old age pensions and eventually made housing grants and subsidies for the poor The social democrats had kept their promise to mitigate the social effects of a market economy. The Swedish social democratic effect relied on an alliance with the Agrarian party, the so called cow trade. - Before this, the free trade labor movement and the protectionist farmers were at loggerheads o Workers wanted access to cheap imported food and farmers wanted access to low-wage labour - During the depression the government signed a deal: o They would have gave Agrarians tariff and price support for dairy products, and in return they wanted the support the social democrats prolabor policies ▪ The Swedish working class pay the price necessary to guarantee workers in agriculture and small farmers to tolerate living standards In the 1936 elections, the Swedish population made it clear that the Left was going to dominate politics for the foreseeable future. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 47 Democrats were now allied with one traditional antagonist, farmers, and in peace with another, big businesses. Social democracy had arrived. But across the Atlantic a different political configuration led to similar outcomes - Roosevelt run for presidency in 1932, on a platform that accused Hoover of insufficient commitment to orthodox economic policies. He complained that the republicans were not balancing the federal budget - Once he got in office, Roosevelt reversed himself and abandoned traditional austerity o He took the dollar off gold and devaluated - Within 100days the Roosevelt administration adopted emergency programs to regulate industrial prices, support agriculture, and build and manage large public works. The New Deal included job-creating government programs, social insurance, labour rights, and federal agencies and programs The New Deal government focused on reducing unemployment and providing social insurance. In march 1935 Congress approved its largest peacetime allocation ever, almost five billion dollars were put for unemployment relief. Other billion dollars went to cash relief to the indigent who could not work. - And a few months later Congress passed the Social Security Act, the country’s first national social insurance system Roosevelt poured billions of dollars into farm debt relief, cash payments, and price support. These programs saved almost 200.000 Americans farm families from foreclosure and assisted millions more in less dramatic ways. - New deal programs were motivated by pressing political imperatives, bot by a conscious desire to engage in deficit spending o In the mist of the worst economic crisis in the nation’s history, New Deal governments ran deficits of only 3- 4% of GDP - Given the commitment of the Roosevelt administration to balance the budget, most of this increase was financed by higher taxes, the administration became slightly more tolerant to deficits after 1937-1938 recession, which was probably worsen by budget-balancing efforts. The labour movement had become an integral part of the New Deal Democratic coalition, and the business community was resigned to its influence. The federal government dramatically increased its role during the New Deal. The federal government expanded its regulation of everything, from banking and monetary policies to electric utilities and social insurance. The New Deal remade a highly decentralized political economy, with low levels of social insurance and limited labour rights into a new federal government committed to demand management, national social programs, public works, and a place for labor in collective bargaining in politics. - Most industrial nations moved in the same direction, as in Denmark and Norway - In France, on the other hand, a Popular Front took power in dramatic circumstances The Communist, sobered by the Fascists threat and by Hitler’s recent election in the neighboring Germany dropped their previous hostility with he Socialist and proposed a common ground, the resulting popular front was, a reflex of instinctive defense - The popular front swept the 1936 elections, a day after Blum30 took office, he brought together business and labor representatives to hammer out Matignon agreement31 o Within two months the Popular Front government enacted 133 laws o The Left government reformed the central bank, put in place massive public work and new agricultural support, and mandated unemployment insurance, a new collective bargaining system ▪ Forty-hours workweek ▪ Two weeks PTO o And, although the Popular Front ruled for less than two years, it had a lasting effect both on legislation and on the political position of labor By the late 1930s the alternative to fascism and communism was in place: 30 Léon Blum was a prominent French politician and statesman, known for his leadership as the Prime Minister of France during the Popular Front government in the 1930s and for his contributions to socialist and democratic movements. 31 signed in 1936, was a landmark social and political accord in France between the government led by Léon Blum and major trade unions, which resulted in significant labor reforms, including the establishment of the 40-hour workweek, paid vacations, and increased wages for workers. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 50 As the industrial world turned toward social democracy, it also attempted to rebuild more open and cooperative international economic relations. This was the case for several reasons: - Labor and socialist movements in many advanced countries had long been free traders, in part to ensure cheap food and other consumption products to urban workers - Most of the business supporters of social democracy were in technologically advanced, internationally competitive industries, for which protectionism was to be repudiated - As the decade wore on, it became obvious that the western democracies would need to work together against the fascist autarkies At the depth of the depression of 1932, low countries agreed to reduce tariffs among themselves and proceeded into half them in a five years period. South was the principal supporter of free trade. Secretary of state Cordell Hull (United States, Tennessee), who fervently supported free trade for years, in summer 1934 - Had its Hull’s Reciprocal Trade Agreement Act passed by Congress, the act allowed the US president to negotiate tariff reductions of up to fifty percent with other countries without Congress approval o Within give years, the US had signed twenty trade agreements covering sixty percent of national imports By the eve of World War Two the industrial democracies were committed on paper to reducing trade barriers, but WW2 intervened before further progress could be made. - As the French Popular Front government prepared to take the franc off gold in 1936, it consulted with the British and Americans to avoid a new round of competitive depreciations - Within a few months the three signatories to the Tripartite Monetary Agreement, now joined by Belgium, Switzerland and the Netherlands, had extended the arrangement to provide for the stabilization of their currencies values o This was not a return to the old gold standard, but something new, based on government commitments to help defend one another’s currencies with only a limited link to gold The depression destroyed the stablished order. The pre-1930 system was based on internationalist gold standard orthodoxy, limited government role in the economy, and the political predominance of business. The calamity of the 1930s swept away the classical order’s commitment to the international economic and to the market. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 51 The Western Allies began to plan the peacetime economic order as soon as war broke out. In fact American postwar planning began long before the United States entered the conflict. But during WW2, Western leaders were fearing that the peace settlement would recapitulate the disasters that followed WW1 - They left nothing to chance: International negotiations determined the shape of the world’s economic system, and governments wrote the rules of the global economic game. The most important task for those who wanted to lead the post-world towards greater economic integration was to ensure that the US was engaged. - Leon Fraser (president of New York’s Fist National Bank) insisted as early as the 1940 that there was no reason to delay tackling three principal evils: economic nationalism, trade barriers, and war An official American view coalized over the course of the war both Congress and the population. Leading government and business circles came to focus on three components of the postwar order: - Freer trade - International monetary stability - Recovery of international investment Secretary of state Hull, who dominated the administration trade policies, pushed the president to negotiate tariffs reduction under the terms of Hull’s Reciprocal Trade Agreement Act of 1934. - The free traders were bucking a century of American protectionism, and in many corporate quarters support for trade barriers persisted - But the enthusiasm for trade liberalization had grown, and by the end of the war it became popular o Free trade policies were now in American’s interest Many American companies had used their technological edge to become exporters and foreign investors. This expanded support for freer trade from its traditional farm export base. And as the war dragged on, it became obvious that Americans would not face much foreign competition. - Given this change in situation, many protectionist industrials changed their minds once they saw hoe much they would have gained from trade liberalization American free traders saw the British Empire’s preferential system as the greatest injury, in a commercial way, that has been inflicted on this country. Even businessmen and politicians sympathetic to the British cause were enthusiastic about using the wartime emergency to pry open empire markets. In March 1941, Congress agreed to a lend-lease agreement32. This agreement allowed the US to lend military and related equipment’s to allies, on the fiction that it would be returned once used. But landing military equipment is like lending chewing gum, you don’t get it back. The plan promised to avoid the war debts that had bedeviled the settlement of WWI, new Allied debts to the US would be forgiven more or less automatically. In 1941 president Roosevelt and Prime Minister Winston Churchill announced the Atlantic Charter33 starting joint war aims. - Shortly after the US entered the War, the two countries signed a comprehensive lend-lease agreement that committed them both 32 policy enacted during World War II in which the United States provided military aid and supplies to allied nations, without immediate payment, to support their war efforts against the Axis** powers. **[Axis Powers] were a military alliance during World War II consisting of Germany, Italy, and Japan, who sought to establish their dominance and expand their territories through aggressive warfare and conquest. 33 The Atlantic Charter was a declaration issued in 1941 by the United States and United Kingdom, outlining their shared goals and principles for a post-World War II world, including self-determination, disarmament, and the promotion of free trade and international cooperation. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 52 Implications were clear: the age of imperialism ended. Within a year American and British planners began to design an International Trade Organization to manage the reduction of trade barriers. Starting in 1940 British and American treasuries drafted proposal for postwar international monetary relations and global investments. Most wanted to continue the international monetary cooperation established in the late 1930s, under the Tripartite Monetary Agreement among the western allies. Politically sensitive bankers, aware that a simple return to gold was unlikely, were willing to settle for a modified dollar standard. Not coincidentally, the dollar standard would have given American international bankers a privileged position in international financial markets. By the early 1944 Keynes and White had hammered out a compromise between the international stability of a gold-dollar standard and the national flexibility of managed currencies. - Countries would join a IMF – International Monetary Fund, contribute gold and their own currency to the common fund, and link their currencies to gold at a fixed rate. o The fund will then proceed at lending them money in hard times, and currency values could be changed if economic conditions warranted. o The Keynes-white plan balanced the objectives of the American and British government: ▪ Currency stability with flexibility ▪ Gold backing without rigidity - Both Keynes and White anticipated that government would restrict short-term capital flows to stabilize their currencies because they believed that the detrimental effect of speculative investments outweighed the benefits of free capital movements o Despite their antipathy to short-term speculative investments, Keynes and White wanted to ensure that long- term productive investments would flow to regions that needed it. o The war-torn countries of Europe and Asia needed massive loans to rebuild their infostructure, and two things had impeded this sort of investment in the past ▪ International finance, which often embroiled in diplomatic disputes ▪ Reluctance of lenders to fund large projects, such as railroads and ports This problem was, once again, solved by Keynes and White with the creation of the International Bank for Reconstruction and Development (world bank) backed by the governments of the major financial powers. - The bank could borrow on private markets at low interest rates and relend to projects that would facilitate other private investments in the borrowing country At he beginning of July 1944, nearly a thousand delegates from forty countries finalized the plans for the IMF and World Bank. The resulting Bretton Woods System was unique. Before the war in pacific ended, the US Congress approved the Bretton Woods Agreements Act over the opposition from isolationists and few international bankers. In march 1946, with Europe and Asia in shambles, the inaugural meetings of the IMF and the World Bank were held in Georgia. Keynes and White had written down the ground rules for the new economic order, the two principal Bretton Woods institution defined the capitalist world economy in the 25y after WW2. - The major significance of Bretton Woods was the death blow it represented in victory over the economic isolationism of the prewar period and the serious threats that with military victory this country would gain revert to economic nationalism. The Bretton Woods plan proved irrelevant to the immediate task of rebuilding the economies of the former warring nations. The world most terrible war had been more destructive of economies and societies that anyone had anticipated. Meanwhile the US and the rest of the Western Hemisphere basked in prosperity, American and European economies changed fundamentally. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 55 The devastation was unimaginably greater in Central and Eastern Europe, the Soviets continued to exact reparations Cold War or no. In the same period Hungary experienced the worst inflation in the world by the end of 1945. - And while the Hungarian hyperinflation was extreme, many Eastern European countries experienced traumatic collapses of their economies. - Most of the region had gone down the path of autarky and government control of the economy before 1939 o Wartime conditions had led to a further centralization of state ownership and control of the economy With the liberation, new authorities took over properties belonging to Germans, war criminals, and collaborators, further expanding the state sector. Postwar confiscations also changed the agrarian structure. - Millions of ethnic German farmers were expelled, and their farmlands were taken, their land was then distributed to the region’s poor or landless peasants By 1946, with few Communist policies in place, Eastern and Central European economies were already dominated by state-run industry and utilities and aggressively reformed agriculture. - Communist leaders said that these countries would follow a new “people’s democracy,” neither Soviet-style socialism nor Western capitalism o Soviet-style socialism is characterized by state ownership, central planning, and limited individual freedoms, o Western capitalism is based on private ownership, market competition, and individual liberties By 1948 the “people’s democracies” were heading toward Soviet-style centralization. - Governments nationalized most remaining large private enterprises - Set up central planning systems that put a premium on heavy industrial development - And restricted international trade. In January 1949, a few months after the Marshall Plan, the Soviet Union and its allies in Eastern Europe created the Council for Mutual Economic Assistance (CMEA - Comecon). - It was a counterweight to the Western alliance, but it played little economic role; - Autarkic economic policy limited the possibility of any mutual economic assistance. The Soviets reduced or eliminated remaining reparations payments and established some preferential trading arrangements - Most of the region’s trade was on a strictly bilateral country-to-country basis and limited in volume and effect. - The USSR encouraged its allies to pursue the Soviet-style path of autonomous industry-led economic development. Despite serious farm problems, living standards seem to have recovered, and central planning was no longer a Russian oddity but a worldwide alternative to market capitalism: the Communist part of the world was a new economic pole. - Soviet-style socialism seemed to deliver rapid growth, egalitarianism, and social improvements. In the golden age of global capitalism: - ruling classes pushed and pulled their societies toward domestic and international markets - They were little concerned for policies to ameliorate the poverty of the world’s majority. - Proponents of this orthodoxy argued that global economic openness was inconsistent with policies to mitigate domestic poverty. The fascist movements of the interwar period accepted this argument and acted on the principle that neither economic integration nor social reform was desirable. - They rejected both the international economy and social reform in pursuit of nationalist autarky. Out of the liberal thesis and its fascist antithesis came a postwar synthesis, predicated on the conclusion that both liberalism and fascism had been wrong. There were two strikingly different versions of this synthesis, West and East. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 56 Both rejected fascism’s abandonment of social reform and embraced social change, but: - The West believed that liberalism had been wrong about the incompatibility of global capitalism and the market with social reform37. o The West aimed to prove that economically integrated market economies could adopt equitable social policies, that economic openness could go along with the new social democratic welfare states. - The East’s Communists that liberalism had been right about the incompatibility of integration and reform, that social change meant rejecting global and national markets. o Central planning aimed to prove that the demands of poor people and poor countries for equity and development could be met only by separating from world markets and by eliminating markets more generally. CHAT GPT SUMMERY - In the golden age of global capitalism, ruling classes prioritized domestic and international markets over addressing poverty. - Fascist movements rejected economic integration and social reform, advocating for nationalist autarky. - Postwar synthesis emerged, rejecting both liberalism and fascism. - The West believed that market economies could adopt equitable social policies alongside economic openness. - The East's Communists believed that integration and reform were incompatible, and social change meant embracing communism. 37 refers to the coexistence or compatibility of market-based economic systems with policies aimed at addressing social issues and improving societal welfare ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 57 Between 1945 and 1973 the “First World” of rich democratic welfare states coalesced. In 1961 these countries formalized their club as the Organization for Economic Cooperation and Development (OECD). The industrial West rebuilt its political economies on the basis of compromise among nations, classes, parties, and groups. The US removed most of its trade barriers but accepted European and Japanese protection, governments pulled down barriers to cross-border trade and investment but protected weaker firms, while Socialist and Conservatives worked together to build the modern welfare states. The postwar compromises grew out of the agreements signed at Bretton Woods in 1944, the Bretton Woods system maintained the sprit of the Bretton Woods Agreements: - The Bretton Woods System delivered the goods: o Economic growth o Low unemployment o Stable prices The of the most dramatic success stories of this system was, indeed, Japan - The Japanese government supported manufactures with tax breaks, subsidies, cheap loans, and other assistance - The domestic market grew spectacularly after decades of crisis and war in the 1950s - The government also encouraged firms to produce for export, especially with a very weak yen that made the country’s goods highly competitive and thus made it extremely profitable for Japanese companies to sell overseas The farther behind countries started, the more quickly they caught up. After the European belligerents had rebuilt their industrial facilities by the early 1950s, they turned to adopt new technologies: - Few of the interwar advances in products and production of the 1920s and 1930s had been put into place outside North America, and in the former, the Automobile was the most important one. - Europeans quickly caught up with other new consumer durables - Western Europe and Japan, on the other hand, caught up between 1948 and 1973 mostly because a big share of their population Left the farming industry o In countries with modern agriculture, by 1950 farmers were typically 10% of the labour force ▪ Over the next twenty years or so, farm populations shrank well below that threshold ▪ Labor moved out of unproductive agriculture into more productive manufacturing and services ▪ International trade and investments also catalyzed the latter growth, from 1913 to 1950 world trade and investments stagnated, and government reinforced this trend by building barriers to foreign goods and companies ▪ But after the end of WW2, these economies had access to dynamic world trading systems, and foreign corporations were eager to invest in Europe and in Japan America’s international position had changed fundamentally: - Before World War Two the US had been inhospitable to foreign goods and generally uninterested in foreign markets, - Now it sucked in imports from the rest of the world and exported enthusiastically: o Companies in Europe and Japan could sell what they produced in the American market and buy the most modern capital equipment and supplies from the United States o The industrial world now had access to American capital, primarily in the form of foreign direct investment. Jean Monnet, French brandy sales man, was central to one remarkable Bretton Woods–era development: Western Europe’s creation of a common market. - Monnet had an exporter’s belief in economic internationalism - He had close contact with the American’s most important international financial and political figures - He consulted frequently with official and financial America, advising the Roosevelt administration on lend-lease and American bankers on international affairs ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 60 It was this problem that led Keynes and the other architects of Bretton Woods to want controls on short-term international investments, but at the same time it had to be treated precautionary because they did not want to restrict the ability of companies to invest in other markets. - However, they did want to make it difficult or impossible for investors to speculate on interest rate differences among countries with flows of what was branded “hot money.” - Thus, the Bretton Woods system presupposed o capital controls o taxes o prohibitions on moving money across borders for “speculative” purposes. - The Europeans had a solid array of such measures, relaxed but not removed after the 1950s The Bretton Woods monetary compromise kept currency values stable and currency markets open to encourage trade and long- term investment, but it imposed barriers to financial flows to permit governments to follow their chosen policies. The monetary stability of the 1950s and 1960s contributed to the growth of international trade and investment, while national governments were able to pursue macroeconomic policies in line with national conditions. Long-term international investment took directions not foreseen by the founders of the system. - The International Bank for Reconstruction and Development (World Bank) had been expected to lend heavily to Europe and Japan for the reconstruction of basic infrastructure and to do the same for the developing and colonial world. o This would help allow private investment flow around the world. o The World Bank’s reconstruction mission was displaced by the Marshall Plan and the unexpected rapidity of the postwar recovery. ▪ After fifteen years of relative inactivity, it did begin to lend to developing countries ▪ For centuries foreign loans were the principal form international investment took. International investment did grow, but in the form of multinational corporations. Such foreign direct investment (FDI) - In the 1920s and 1930s many American corporations had exploited their competitive position by setting up (or buying) facilities in other countries (strategic investments) - And by 1950 American multinational corporate investment was twice as large as portfolio investment in foreign loans and stocks o The kinds of direct investments being made were also relatively new o American corporations had more than three times as much invested in Latin America than in Europe, mostly in mines, farms, oil wells, and utilities. o In every industrial country the largest corporations were heavily multinational ▪ whether because they owned a lot abroad or because they were owned by foreign companies International investment boomed after WW2 for the same reasons trade grew so rapidly: economic growth, monetary stability, reductions in barriers, general government support. - This investment took the form of FDI for somewhat more complex reasons: o The rise of mass production and mass consumption in many industries o The proliferation of multinational corporations after World War Two was the persistence of trade barriers ▪ Many American industrial firms had strong export sales to foreign markets ▪ But, as firms abroad adopted new products and processes, local competition increased, and sometimes governments raised trade barriers to keep American and other foreign goods out ▪ American companies had to choose between • forgoing the protected market and setting up a factory in it and producing locally for local consumption and thus implementing tariff jumping behaviors • leaving the market untouched and not benefitting form the increase in spending These tariff-jumping multinationals were especially prevalent in Europe. The result was the world’s second-largest market. No major international company could ignore the Common Market, but EEC tariffs were a substantial impediment. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 61 - By 1968 in the automobile industry there were no tariffs on cars sold among members of the EEC, but the Common Market’s common external tariff of 17.6 percent on passenger cars brought in from outside was a nearly prohibitive tax on imports. Whatever the interests involved, international investment succeeded in tying the industrialized world together more tightly than it had been since 1914. Bretton Woods allowed the sweeping liberalization of international trade and investment to coexist with a sweeping extension of the public sector While the extent and coverage of the Swedish system were broader than most, the rest of the industrial capitalist world was in line with the Swedish pattern The rapid growth made possible by postwar integration allowed governments to extend existing programs and create new ones with little controversy. This was reinforced by the fact that wealthier societies tend to be more generous with their social policies, Economic openness was associated in the minds of many with arguments that global economic imperatives required recession, bankruptcies, wage cutting, and layoffs. A social safety net promised to reduce the uncertainties of global markets; it could cushion the austere downside of economic integration It is no coincidence that the small European countries led in implementing the social democratic welfare state. Where protectionism was not a viable option, capitalists, farmers, and workers agreed on government programs to protect the victims of world market forces The new consensus reflected the domestic social democratic compromises of the 1930s and their international variants at Bretton Woods. It brought socialist labor together with the business and middle classes to support a reformed market economy. The social democratic welfare state was an integral part of the Bretton Woods system. It facilitated political agreement, especially between labor and capital, on the desirability of international economic integration. During the 1950s and 1960s the industrialized West navigated a middle road. The new order combined internationalism with national autonomy, the market with the social, prosperity with social stability and political democracy. It allowed both international economic openness and controls on short-term investment, protection for agriculture, and such preferential trading arrangements as the European Common Market The result was a blend of active markets and aggressive governments, big business and organized labor, conservatives and socialists. This order oversaw the most rapid rates of economic growth and most enduring economic stability in modern history ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 62 India’s independence, when the new government assumed power from the British, it confronted: - the bloodshed of partition - economic stagnation - generalized poverty Yet Nehru and his colleagues saw this new start as a singular opportunity, and the formula they decided to adopt was economic nationalism. Developing countries closed themselves to foreign trade and pursued rapid industrialization. - The newly independent colonies followed suit, keeping out foreign goods and often foreign capital to build up independent national economies Latin American countries were isolated from the world economy from 1930 until the early 1950s, industries grew to satisfy local demand, and the export farming and mining sectors shrank - By the late 1940s the principal Latin American countries were industrial and urban Latin America repeated a trajectory followed by other nations that shifted from being free trade primary exporters to protectionist industrializers. The colossus to the north was the most prominent example: - The United States started as an exporter of raw materials and importer of manufactures, and its cotton- and tobacco- exporting South battled its protectionist manufacturing North for decades. - Eventually urban industry prevailed, and American economic policy turned against farmers and miners to support protected industries. o The result was rapid industrialization, the consolidation of the national market, and maybe even a spur to nationalist solidarity. In the 1950s Latin America moved from an emergency response to the collapse of world markets to a conscious effort to restrict foreign trade. This policy, known as import-substituting industrialization (ISI), aimed to substitute domestic industrial production for goods that had previously been imported. The principal method was to make domestic manufacturing more profitable. - The barriers made many manufactured imports prohibitively expensive; in some cases, imports were simply forbidden. - Governments also provided subsidies and incentives to industry. Governments manipulated the currency to provide cheap dollars to manufacturers so they could buy foreign equipment and inputs. Sometimes there were different exchange rates for different products, so that dollars were expensive to buy imports that competed with local producers, but cheap for local producers who wanted to buy machinery abroad. Latin American governments took over much of the industrial plant. - They ran the railroads, shipping lines, telephone networks, electric power systems, and other parts of the infrastructure; in this they were like much of Western Europe. - Latin America’s governments also owned many of the region’s steel mills, mines and smelters. The public sector accounted for one-quarter to one-half of all investment in the region’s economies, Supporters of this public- sector expansion believed that private investment could or would not finance basic industries; - These policies spurred impressive industrial development. o From 1945 to 1973 Mexico’s industrial production quadrupled Industrialization was largely financed at the expense of the primary exporting sectors. Latin America certainly was different from the developed world in 1973. The years from 1914 to 1945 affected the rest of the developing world as they did Latin America, and a few years after the end of World War Two almost all of colonial Asia was independent. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 65 In 1959 and 1960 Khrushchev visited the United States, and by that time Soviet-style socialism was firmly in place in more than a dozen countries with over a third of the world’s people. The world’s most populous country, China, was socialist, as well as India, the second most populous country. And the both of them were allied with the Soviet Union. - Communist movements were powerful all over the developing world and in some Western Europeans countries Within five years of the end of WW2, socialism stretched from the center of Europe to the Pacific. The Cold War led to rapid imposition of the Soviet model in Central and Eastern Europe. - These commonalities were formalized with the 1949 creation of the Council for Mutual Economic Assistance (CMEA, or Comecon), which was meant to be a socialist counterpart to the Bretton Woods order. The Chinese Revolution alone more than tripled the population living under communism. - These three nations were much less developed than the other socialist countries, and much more rural. - They carried out extensive land reforms, expropriating most of the land held by wealthy landlords and distributing it to poor and landless peasants. The Asian Communist regimes also embarked on ambitious state-led industrialization programs After Stalin died in March 1953, the socialist world’s orderly forward march broke apart, and national paths separated. These different trends in economic policy were matched by a growing schism between the two Communist giants. - Economic and social reforms swept the USSR and both Central and Eastern Europe The most immediate source of tension was popular dissatisfaction. Riots broke out among workers in Berlin in June 1953. Discontent spread throughout Eastern Europe and could not simply be ascribed to ant proletarian counterrevolutionaries. - The USSR and its local allies quickly suppressed the revolts. The poor quality of life of the average citizen was the principal source of popular discontent. - The Soviets reorganized agriculture as well: o Between 1953 and 1965 the government raised agricultural prices, and collective farm earnings went up by more than 1/3 in a few years. The new emphasis on improving the quality of life of the populace had dramatic and quick results: From 1953 to 1957 real waged in Eastern Europe rose by between 30 and 60 percent, and discontent tailed off. - Government neglect of farming had led the supply of foods to stagnate - Farm prices were set so low that farmers had little incentive to produce Economic growth remained strong and improved conditions in the cities and countryside. People were able to buy consumer goods beyond bare necessities. The conditions of the 1960s reflected informal political and economic compromises. - Socialist governments were supported by the party members and industrial managers who ran these societies. - Higher wages and favored access to services privileged the urban working class. - Farmers, professionals, and others were allowed to make decent livings so long as they accepted the leading role of the Communist Party The changes of the 1950s improved living standards, but governments in the Soviet Union and Eastern Europe knew there were still problems with their economies. The Soviets seemed to realize that the forced march methods of the 1930s were poorly suited to the problems of the more advanced industrial economy that had emerged by the 1950s. Rapid industrialization had relied on extreme centralization with disciplinary threats to managers. - The two most pressing structural economic problems were overcentralization and a lack of incentives ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 66 Another problem was that of incentives: - The Soviets had never relied entirely on exhortation and ideological ardor to motivate workers and managers, but they had not used economic rewards very extensively. - They feared that rewarding results would lead to substantial inequalities among people and regions o Also, it was not clear how to measure success in a centrally planned system. o Prices were set centrally, so the profitability of a firm depended mostly on pricing decisions o If planners tied rewards to quantitative measures, factories would turn out large quantities of goods with little regard to quality. Most Soviet analysts believed that while crude forms of central planning may have been appropriate for economic growth of the 1930s and 1940s, they were no longer. Because the economy was rudimentary, the planners could easily measure and asses the goods produced. But without further and stronger incentives, managers and workers were unlikely to take risks to increase productivity. - In the 1960s reformers started using marketlike forms to reward enterprises, managers and workers. Firms were allowed to keep some of their profits and distribute them to managers and workers, in bonuses or in kind (welfare) The Soviets also began to rethink their international economic ties, accepting that the USSR “has been wasting time and effort reinventing processes and commodities that had previously been developed in other advanced countries.” and as a result they increased foreign trade dramatically - Political obstacles often impeded the Soviet and Eastern European Reform Most of the people living under socialism were driven in a very different direction as the People’s Republic of China moved toward extreme methods of Communist-style modernization. They created enormous farm communes to accelerate progress from capitalism to communism, politicized all aspects of economic policy, and curtailed ties with the rest of the world. - From the middle 1950s until the middle 1970s, China went down the path of ever-greater urban and rural radicalism. o The Chinese Communists who took power in 1949 faced conflicting demands The Communist Party also had support from the urban working class and shared with the rest of the Third World the desire to industrialize rapidly. But pro industrial policies typically implied antiagricultural measures, so that urban and rural interests were likely to clash. The first few years after the revolution were dedicated to reconstruction and reform. - The first five-year plan, from 1952 to 1957, set the country on a Soviet-style path. - Planners gave heavy industry half of total investment, despite the fact that it was a minuscule share of the economy. Originally farmers were left on their own, but at least there were no attempts to drain massive resources from the villages to the cities. The rural population was so enormous that modest agricultural taxes yielded enough money for industry, and Soviet aid also helped fund the new industrial capacity. But how could they get the resources for rapid economic change? Mao and his supporters tried to increase farm production with major changes in agricultural organization. In October 1955 the party suddenly began a big push for collectivization. - Chinese collectivization appeared smooth and relatively problem-free. - Each new collective farm was generally organized to coincide with one traditional village - Mao had hoped that a reorganized peasantry would increase farm output so much that there would be plenty to allow farm incomes to rise and to fund industrial investment, new infrastructure, and better living standards. In the winter of 1957–1958 the government organized the collective construction of irrigation and other waterworks. These drew appeared a great success; the Chinese boasted of building the equivalent of three hundred Panama Canals in a year. The Great Leap Forward nearly took the country over a cliff. - The huge communes were much too large for meaningful farming. - Peasants who could get food and other services for free had little reason to work and much incentive to eat, so consumption went up while production went down. - Food production was down precipitously, and the country’s transport and distribution systems were in disarray. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 67 The government returned to more modest forms of agricultural organization. - The Cultural Revolution39 (1966-1976) tore the country apart in factional conflict, including armed battles between supporters and opponents of one or another political tendency. - Once the Cultural Revolution cooled off, from 1968 to 1973, the economy grew again by one-third The ups and downs were the result of fundamental tensions in Chinese society. - Attempts to spur economic growth increased inequalities among regions, groups, and classes, which clashed with the Communists’ goals and with the interests of some of their important supporters. Nonetheless, in the early 1970s the Chinese government had some important achievements. Economic growth had not been anything like that of its East Asian capitalist neighbors, but it also had not been as slow as that of capitalist India. Social conditions had improved. China’s example inspired many in Africa and Asia. The willingness of a small, backward country to confront the American superpower raised the stock of socialism in the developing world, for many in the Third World resented America’s perceived neglect of or hostility to the cause of economic development. By the early 1970s many African and Asian countries had allied themselves either with the Soviet Union or with China and espoused general approval. - The socialist experience that most captured the imagination of the developing world, however, took place in the most unlikely of spots: Cuba The Cuban Revolution gave socialism a toehold off the shore of the world’s capitalist powerhouse - Cuba had been a U.S. dependency since American troops defeated the Spanish in 1898. - The corruption of the country’s political leaders was palpable. Apart from tourism, the island depended on a sugar sector much of which was owned by Americans and relied on privileged access to the American market. o Dependence on the United States may have enriched many Cubans, but it did not alleviate the grinding poverty of many others. Fidel Castro and his thousand or so fighters entered Havana (Cuba’s capital) on January 1, 1959, without opposition, for the brutality of dictator Fulgencio Batista had, after 25 years of misrule. Cuban supporters of Castro shared a common desire for: - National independence - Economic growth - Diversification away from sugar - Reduction in inequality o When the government eventually tried to reduce foreign dependence and inequality, it ran up against powerful American interests, and the only alternative source of support seemed to be the USSR. By 1961 the Cuban government had: - Carried out a major land reform - Nationalized most of the private sector - Begun to adopt central planning - Allied itself with the Soviet Union Measures to reduce inequalities among groups and regions dampened growth, both because they left many producers with little incentive to work and because they drove hundreds of thousands of skilled Cubans to emigrate. By 1970, after ten years of twists and turns in policy, the Cuban government had settled into a local variant of Soviet central planning that attempted to balance these goals. Socialism certainly had costs in political and economic liberty, but there were virtually no democracies in the non-Communist developing world either. The socialist nations had chosen equity and economic diversification at the expense of specialization and rapid growth. 39 The Cultural Revolution was a socio-political movement in China that lasted from 1966 to 1976, characterized by mass mobilization, political purges, and widespread social upheaval under the leadership of Mao Zedong. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 70 o When the united states dominated the world economy, nobody questioned the reliability of the US dollar, but as the American share of the economy shrank, the divergence of American monetary conditions from those of its partner became untenable ▪ Investors around the world began to doubt the US government’s commitment to its exchange rate ▪ The Bretton woods system could survive a devaluation now and again, but that did not apply to the dollar: the Bretton Wood system was based on gold-backed dollar, and the US government was finding it hard to maintain the value of the currency against the gold Trouble first came in 1959 and 1960, when an American payments deficit led to a loss of confidence in the dollar - The Federal Reserve raised interest rates in order to increase foreign demand for dollars, which drove the U.S. economy into a recession - For the first time since the 1930s American monetary policy subordinated national goals to international ones o In this case, by enduring a recession in order to defend the dollar - As the 1960s continued, the problem was made more pressing by the two wars the country was fighting: o The Vietnam War o Large increase in social spending known as the War on Poverty Lyndon Johnson and Richard Nixon40 resorted to deficit spending. - This drove inflation in the United States appreciably higher than in most of its partners, the result was o A “real appreciation” of the dollar o An artificial strengthening of the American currency The dollar’s exchange rate was being held constant, while American prices rose: this meant that foreigners could buy less with their dollars. Bretton Woods rules required people around the world to accept dollars as if they were worth one thirty-fifth of an ounce of gold. The real appreciation of the dollar had advantages to Americans, but it threatened Bretton Woods. - The monetary system depended on a dollar that was “as good as gold,” but the inflationary erosion of the dollar’s real value made foreigners reluctant to hold the currency as it lost purchasing power. - Instead foreigners used unreliable dollars to buy reliable gold The major financial powers worked together to try to protect the dollar, selling gold and buying up dollars to raise the currency’s price. The United States, on their end imposed: - capital controls - taxes on American foreign investments - stem the outflow of dollars But there were too many people wanting to get rid of too many dollars - the only lasting solution was to impose austerity on the US economy and restore the purchasing power of the dollar, this would have brought American prices down and raise American interest rates high enough to attract foreigners back to dollars o Neither measures were acceptable to Nixon in the run-up of the 1972 election o The Bretton Woods monetary order collapsed for political, non technical reasons. - The original gold-dollar system was politically attractive because it stabilized currencies to promote trade and investments If domestic prices rose, to make a currency overvalued, they needed to be brough back down by raising interest rates, cutting government spending and reducing consumption. Banks, corporations and investors that would lose from a change in the currency value supported, obviously, austerity. On the other hand, workers and corporations whose job and profits would be cut to fit the currency opposed propping up an exchange rate that had little impact on them. - Untied states voters would never put international monetary order above domestic prosperity. o The US government was simply unwilling to trim its economy to fit its currency commitments under the Bretton Woods system and chose instead to bring the system to an end 40 Lyndon B. Johnson and Richard Nixon were both Presidents of the United States, with Johnson serving from 1963 to 1969, and Nixon serving from 1969 to 1974. Johnson is known for his "Great Society" domestic programs and his escalation of the Vietnam War, ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 71 The same political factors that challenged the monetary system also threatened international trade and investment. Postwar trade liberalization had a particularly great impact on Western Europe and Japan, which emerged from thirty years of protectionism ready to take advantage of world and American markets. The rise of Japan as an export power was especially striking. - In 1950 the country exported less than one-twelfth as much as the United States. - By 1973 Japanese exports were more than half those of the United States As more European and Japanese steel and clothing came into the United States, American producers fought for protection. - GATT members had agreed not to raise nonagricultural tariffs, so those who wanted shelter from foreign competition found other means: o One was to accuse the foreign seller of dumping41, countries could impose special taxes on goods that were found to be dumped. Antidumping complaints were often simply protectionist demands. o Convince producers to restrict their own sales, as the United States did in 1968 by getting Japanese and European steelmakers to limit exports to the American market. ▪ These policies were called Voluntary Export Restraints (VERs) ▪ Export restraints limited supply, so they kept the American price of the good high; this was the reason American manufacturers wanted to keep imports out. ▪ The higher American price allowed foreigners as well as Americans to sell their goods for higher prices in the American market. In the end, even foreign producers could charge more money per unit on lower volume. Hence, the VERs created a cartel between American and foreign producers to keep American prices higher than world market prices. These new nontariff barriers (NTBs) —antidumping suits, VERs, etc.— did not reverse the effects of the earlier liberalization, but they did hint that the balance of political forces was shifting in favor of the new protectionism. There was a similar backlash against foreign direct investment. For many years after World War Two, multinational corporations (MNCs) were generally in favor, this because they were typically in advanced industries. - Unlike old-style international lending, foreign direct investment (FDI) did not create obligations for national policy makers; there was no government guarantee that the foreign company would make money. - In developing countries, large foreign corporations could have a powerful and unwelcome impact on local politics. o U.S.-based International Telephone and Telegraph Company (ITT) in Chile demonstrated the threat. o ITT first tried to keep Socialist Salvador Allende from being elected president in 1970 and, when this was unsuccessful, participated in a series of plots to try to overthrow him. Many countries began restricting multinational corporations in the 1960s. And many developing countries, on the other hand, allowed FDI only if the foreign company - did not compete with local firms - shared ownership with local investors - brought in important new technologies - and agreed to reinvest most of its profits Conflict over domestic economic issues also began to rise in the industrialized world. One reason for the increase in labor-capital conflict was that for 20 years wages had lagged behind growth in productivity and in economic activity. By the late 1960s there was a decade of accumulated complains ready to burst into protest, inflation was heating up in Europe as it had in the United States, and workers were trying to make up lost ground. - Workers demanded protection against inflation, but unions were often bound by commitments to management, so the protests regularly were against both management and union leaders who insisted on holding to previous contracts The breakdown of the Bretton Woods monetary system itself in the late 1960s and early 1970s, demonstrated that opinion was increasingly divided on how far global economic integration should go. 41 selling the product below its cost of production in order to corner a market ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 72 While the developed capitalist world reconsidered its march toward the international economy, the developing world was questioning the wisdom of protectionist industrial development. - Import-substituting industrialization (ISI) had many successes, but many undesirable effects. o ISI caused chronic problems with the balance of trade and payments. o Import substitution was supposed to reduce reliance on world trade, but every nation needed to import something not available locally. ▪ The more a country industrialized, the more it needed these imports. ▪ But countries needed to export to earn money to buy imports, and ISI was strongly biased against exports. ▪ Trade protection and overvalued exchange rates raised domestic prices and made exports less competitive, and export taxes discouraged foreign sales. ▪ The industrializing countries were unable to export enough to buy the imports they needed and often required loans from international investors and WTO The typical ISI economy went through periodic balance of payments crises: the faster the economy grew, the more it needed imports; but exports could not keep up with imports, and so the country ran out of foreign currency. And as a countermeasure governments would: - Restrict imports to essentials - Raise interest rates to bring money into the country and keep it at home - Devaluate the currency to raise the price of imports and make exports more attractive o Hence reducing the country’s purchasing power The result was usually a deep recession. ISI countries also tended to run substantial budget deficits and inflation, which made these crises worse, and these budget deficits were usually covered by printing money. ISI economies had been caught in a vicious cycle of balance of payments deficits, budget deficits, inflation, and recession. The Brazilian pattern was repeated all over the developing world: payments crises, inflation, social unrest, then military coup, repression, and austerity. ISI also seemed to have nasty effects on poverty and income distribution. - The industrial bias against agriculture worsened rural poverty in societies that were heavily rural. - Masses of farmers migrated to the cities to look for jobs in the new industries. But import-substituting growth was very capital-intensive: o The government subsidized investment, so industrialists used lots of capital and not much labor. - Most of the farmers who flooded into the cities found that they could not get the jobs industrialization had promised. ISI countries ended up with “dual” economies: - Modern, capital-intensive industries with skilled, well-organized workers earning relatively high wages - Low informal-sector wages, with a mass of struggling farmers and urban poor frozen out of the modern economy, consigned to subsistence wages, and excluded from the social protections modern-sector workers received. The inward-oriented industrializing nations could not take part in the trade boom of the Bretton Woods period. The East Asian export-oriented model seemed to avoid some of ISI’s problems. - They specialized in labor-intensive manufactures for export, and their firms needed all the cheap labor they could get, so plenty of jobs were created. - The need to keep goods competitive on world markets made it essential to keep inflation under control. - These benefits had costs. The East Asian exporters did not develop dualistic economies with high modern-sector and low informal-sector wages, but they were forced to keep all wages low, often with labor repression, to make their exports cheap. - Their exchange rates were undervalued to maintain competitiveness, depressing the purchasing power of the local working and middle classes. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 75 After 1973 the accumulated tensions of the postwar era came to a head. - Growth in the advanced capitalist countries slowed to half its postwar rate for over a decade - Unemployment doubled and tripled, as more people pounded pavements in Western Europe and North America than at any time since the 1930s. Nationalists Internationalists Free Marketeers Interventionists Economic Focus National Global Market Government Prioritization National interests Global cooperation Market efficiency Government intervention Trade Protectionism Free trade Free trade Managed trade Regulation Strong regulation Harmonized standards Minimal regulation Extensive regulation Market Dynamics Controlled market Open market Free market Managed market Wealth Redistribution Focus on domestic wealth Focus on global development Relies on market mechanisms Focus on social justice Government Role Central planning Facilitator and regulator Limited role Active role Dictatorships democratized, democracies collapsed; socialists took power in traditionally conservative countries, conservatives displaced socialists in others. - The balance of power shifted away from those committed to the global economy toward those who wanted to limit or roll back international economic integration. - The 1970s and early 1980s looked ominously like the 1930s, an antechamber to autarky and even military hostility, as relations between the United States and the Soviet Union deteriorated. Governments tried to invigorate their economies once the Bretton Woods monetary straitjacket was removed. As international finance revived boom times in the industrial economies increased demand for the agricultural goods and raw materials that the Third World exported, and their prices soared. In 1973 OPEC broke off talks with the oil companies, and its Arab members doubled the price of oil to more than $5/barrel, two months later OPEC doubled it again - OPEC could quadruple the price of one of the world’s most important commodities for several reasons: o There were few readily available substitutes for oil, so price increases did not reduce consumption very much. o OPEC’s core members controlled a very large share of the world’s oil ▪ They also did not need to sell oil quickly and could hold it off the market to keep prices high. ▪ An additional source of power was the solidarity of OPEC. The oil producers were powerful, and consumers were helpless, oil shocks themselves accounted for only onequarter of the inflationary surge of the period. With oil more expensive, consumers had less to spend on other things: demand for them fell If Bretton Woods had still been in place, the need to sustain fixed exchange rates would have forced most governments to restrain or reduce other prices, probably by raising interest rates, adding further to the recessionary impact of OPEC. - With most currencies floating, however, governments were free to “accommodate” the price hikes by increasing the money supply to allow the oil shock to translate into price rises without forcing austerity. The world financial system was hit by the two biggest bank failures since the Depression. - Some of this was due to the OPEC shock, which was the equivalent of a tax on oil consumers, equal to about 2 percent of the GDP of the industrial countries. - But the effect was magnified by the great uncertainty that ensued ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 76 In Sweden in 1975 the Social Democrats proposed the novel Meidner Plan43. This would have allocated some of each company’s profits to a union-controlled fund as shares in the company, giving labor unions partial ownership of the entire private sector. - Within a couple of decades most firms in Sweden would be owned by unions. This social strife changed the political landscape of the industrial world: In February 1974, British Conservatives were voted out of power. Despite the galloping inflation, governments avoided serious austerity measures that would worsen already tense class and social relations. Even though it was clear that loose monetary policies were not easing recessionary conditions, only continuing to fuel inflation. - A second round of OPEC oil shocks in 1979 and 1980 reinforced the belief that the world economy was out of control or at least beyond the control of the advanced capitalist countries. Governments created millions of jobs in the public sector and pumped billions of dollars into struggling economies. - By 1983 governments were accounting for one-fifth of all jobs, so budget deficits crept up to cover as much as one-fifth of total public spending in some countries, approaching 10 percent of their economies. Governments started borrowing in part because interest rates were falling behind inflation, so that borrowers effectively got free money from investors. - It was relatively painless to finance social programs with borrowed funds so long as money was available at interest rates below inflation (negative real interest rates). - However, inflation and deficit financing were not permanent solutions to the economic difficulties. o The government of Italy failed to bring the budget and inflation under control. To make matters worse, most developing nations were oil importers and faced much more expensive oil import bills. - The first oil shock added about $30B to the import bill of non-OPEC developing countries; the second oil shock, almost $50B. - Foreign borrowing allowed the more advanced developing countries to survive, they were now known as newly industrializing countries (NICs). o The NICs took tens of billions a year from banks and bondholders on the offshore markets. o Developing country debt created a strange triangle: ▪ The oil price explosion gave OPEC members far more money than they could spend, and they deposited much of it into the world’s financial markets. ▪ International bankers were eager to lend OPEC’s “petrodollars,” and among the principal users of these funds were the nonoil developing countries which needed to pay for more expensive oil. Shortly, the vicious cycle that got created consisted in an increase in expenditure from NICs countries towards OPEC countries, which deposited money in central banks in the main financial centers in the world that subsequentially lent the money back to NICs countries to sustain their expenditures. - The export achievements of the borrowers increased trade conflict in the OECD. - The world descended into ever-greater polarization. East-West geopolitical competition heated up. The USSR was also threatened by the eruption of new strikes in Poland, which eventually led to the recognition of the first independent labor union in a Communist country. International financial markets were just as unsettled. The Carter administration tried to stimulate the economy but succeeded only in undermining confidence in the U.S. dollar, which dropped by one-third against the yen and the deutsche mark. - The members of the European Union, in what appeared a desperate attempt to protect themselves from the crisis, launched a European Monetary System (EMS) to manage their currencies jointly and avoid the panic afflicting the dollar. - The world faced difficult times from 1973 until the early 1980s. o Growth slowed, prices rose, recessions hit, and unemployment grew. Governments in the advanced capitalist world threw money that they printed or borrowed into social spending, unemployment benefits, subsidies to businesses, and public job creation. Governments in the better-off developing countries threw money that they borrowed abroad into redoubled industrialization drives. 43 aiming to gradually transfer ownership of companies to workers through the creation of employee-controlled funds, with the goal of reducing income inequality and increasing workers' influence in the economy. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 77 Both strategies helped avoid further strife. Neither strategy was sustainable. On August 6, 1979, the United States turned from crisis and polarization toward transformation and resolution. Paul Volcker head of the Federal Reserve calmed financial markets by changing the tenor of economic policy in the United States. - Volcker committed the American central bank to do whatever was necessary to bring inflation down. - The Federal Reserve pushed short-term interest rates up from about 10% to 15% and eventually above 20%. o He kept American interest rates at these extraordinarily high levels for almost three years, until late 1982. - This drove the economy into two successive recessions: o Reduced manufacturing output and median family income by 10% o and raised unemployment to nearly 11% - The Volcker shock got inflation below 4 percent, and it stayed roughly this low or lower for the next 20 years. In the words of one economist, this was “perhaps the most important monetary policy action since the catastrophic failure of the Federal Reserve to resist the monetary collapse of the 1930s.” - Volcker’s massive shock to the economy pushed real (after-inflation) short-term interest rates up from near or below zero to 10%. The knowledge that inflation had stopped meant that firms could not raise prices at will and had to control wages. - In addition, the increase in the cost of borrowing forced companies to economize on other costs, such as labor. - The real wages of American workers did not begin rising for ten years, in 1993. High interest rates quickly spread to the rest of the advanced capitalist countries. - American Interest rates started to draw capital from all over the world. - Governments had a choice, they could keep interest rates low, allow money to flow out, and avoid the recession. o This would force the national currency to decline in value as investors sold it off and also implied that inflation would continue. o Such a course, however, would put governments at odds with bankers and investors, who abhorred both devaluation and inflation. Country after country fell into line with the United States, putting in place what German Chancellor bitterly called “the highest real interest rates since the birth of Christ.” Growth slowed, and unemployment rose everywhere. The debtor nations of the developing world continued to need to borrow billions. But the Volcker interest rate hikes pushed the base lending rate to which Third World commercial debts were pegged from 10 to 20% in two years. In summery, the following three factors increased the need for foreign money even as it became less available - Interests rate increases - Oil price hikes - Recession in the OECD As a measure, in the last half of 1981 Latin America borrowed a billion dollars a week, mostly to pay off previous debt. In summer 1982 the carousel stopped, the most recent round of developing country borrowing came to a sudden, shuddering halt. As in a bank panic, when lenders worried that poor country governments might not repay them, they stopped lending. - This left developing country governments without a financial cushion, and in desperation they stopped payments to their creditors, thus scaring international bankers even further. - The more countries ran out of money, the less bankers lent, and the less bankers lent, the more countries ran out of money. o By 1983 developing countries were formally renegotiating their debt, and a dozen more were in serious trouble. A debtor would go to the International Monetary Fund to plan a program of macroeconomic stabilization and economic adjustment. The IMF and the debtor would agree on: - targets for inflation, government spending, budget deficits. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 80 - Five years later Mexico joined in, and in 1994 the North American Free Trade Agreement (NAFTA) went into effect. Over the next ten years NAFTA removed virtually all barriers to the movement of goods, capital, and services among the three countries: The result was the gradual creation of a single North American market, although immigration was excluded from this liberalization. At the same time, the world’s third-largest trading bloc was formed in South America. - Between 1985 and 1990 Brazil and Argentina negotiated a trade area that eventually included Uruguay and Paraguay as full members: The Southern Common market was in place in 1994. As with the EU and NAFTA, governments and businesses in Brazil and Argentina were eager to combine their markets to provide a larger home base from which to compete on world markets, members also hoped to attract more foreign investment. With regional integration the antechamber to broader liberalization, in 1994 the long-stalled trade negotiations of the Uruguay Round Agreement Act (URAA) (the 8th cycle of negotiation) were concluded. - The Uruguay Round also created a new institution, the World Trade Organization, to replace the GATT. - The WTO, unlike the GATT, is a permanent organization with powers of its own, largely to mediate trade disputes. o Its founding consolidated the open trading system. As trade was liberalized, governments of developed countries also removed the last barriers to the free flow of money and capital, and many developing countries reduced controls on cross-border investment. Developing and transitional nations integrated into international markets and reduced government involvement in their domestic markets. By the middle 1990s the heavily indebted countries had worked for a decade to overcome the crisis that began in 1982, and now they regained access to foreign loans. - Free trade and the WTO, financial integration, and the emergence of the emerging markets reflected the consolidation of a new economic reality Governments and managers had to worry much more than before about how their actions would be interpreted by domestic and foreign investors, who could be skittish and fickle. International competition weakened some major banking systems. - The savings and loan crisis in the United States was an early example: small financial institutions made very risky loans as they struggled to compete with larger international counterparts. - Eventually the savings and loan industry disintegrated, requiring an infusion of at least $200B in taxpayers’ money. The developing country debt crisis of the early 1980s turned out to be only a hint of how quickly and completely modern financial markets could turn from euphoria to collapse. - The new round of crises focused on exchange rates, and began with a currency market attack on European monetary unification. Since about 1985 most of the members of the European Union had held their currencies fixed against the deutsche mark. - But even as more European nations signed up for the Economic and Monetary Union (EMU) and a common currency, the apparently stable monetary arrangement collapsed. o When Germany unified, the country’s monetary authorities were concerned that massive government spending on its east would lead to inflation, so it raised interest rates quickly and steeply. o This forced other European countries whose currencies were tied to the deutsche mark to raise their interest rates as well, a move that shoved them into a recession made in Germany. In the summer of 1992 currency traders began anticipating that Britain and Italy would not maintain their currencies’ pegs to the deutsche mark: - Investors sold off their holdings of these currencies, which only intensified speculation that the pound and the lira would be devalued. - The British and Italian governments were forced to bump interest rates up The European crisis was short-lived, and the region’s economies rebounded after they had delinked from German monetary policy. The damage to monetary unification was repaired quickly and effectively. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 81 In August 1994, as the new government took office in December, currency traders sensed they could take a “one-way bet” against the peso: - If it was devalued, they won, and if it wasn’t, they didn’t lose. - As the speculators sold off the currency, the government spent billions, but a few days before Christmas 1994 it floated the peso, which promptly sank. o Yet another government had been forced to devalue its currency. o Mexico, unlike Europe, was hit by a banking crisis because of the currency collapse. ▪ The devaluation of the peso triggered mass bankruptcies as the real cost of dollar debts. ▪ The next round of currency and financial crises was the most dramatic. Most of the countries of East Asia, especially Korea, Thailand, Malaysia, and Indonesia were target of the speculations In 1997 the East Asian economies were booming. Their apparently endless potential drew in foreign money. - By 1996 and early 1997 though exports were lagging, inflation was rising, and banks were taking on more and more debt. Soon investors began to anticipate devaluations and started selling off East Asian currencies. - Despite assurances from governments, the IMF, and other international financial leaders, investors continued to get out of Asia. The world’s financial leaders saw the Latin American, East Asian, Russian, Turkish, and other crises of the 1990s as threats to the international economic order. - Taxpayers were being forced to bail out foolish investors and bad governments, but financial leaders insisted on the need for a quick response to avoid financial contagion. - Goods and money moved around the world faster than ever before and in much greater quantities. - The global capitalism of the start of the century had returned. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 82 In summer and early fall of 1997 Malaysia faced the gravest economic crisis in its history. Trouble had started when the currency of Thailand came under speculative pressures in early summer. - On July 2, after months of desperate measures, the Thai authorities devalued the currency. By September 1997, when the World Bank and IMF held their annual meeting in Hong Kong, all of East and Southeast Asia was overwhelmed in a financial and economic crisis that threatened decades of economic progress. - “The currency traders have become rich, very very rich through making other people poor” After a severe recession the Malaysian economy began growing again. Despite the capital and currency controls, Malaysia continued to rely heavily on the international economy. Innovations in transportation and telecommunications shrank the costs of international exchange. - Supertankers and containers cheapened oceangoing shipping; goods that had been prohibitively expensive to ship across the Pacific or Atlantic were now common cargo. - The introduction of jumbo jets (1970) transformed flying from a luxury to an ordinary expense for many in the industrialized world. - Satellites and fiber-optic cables reduced the cost of long-distance communication to a fraction of former rates. o The Internet gave hundreds of millions of computer users instantaneous access to information from around the world. The most striking technological advances of the last quarter of the twentieth century were in microelectronics. The vast research and development and related requirements of the high technology industries meant that profitability required extremely large-scale production or distribution, typically only available by taking advantage of global markets. - The new inventions had their most powerful globalizing impact on finance. - Massive computing power and inexpensive telecommunications made it easier and faster to move money around the world and harder for governments to control these flows. Technological change alone could not secure national commitments to world markets; continued growth in the world economy was important to global integration. But even during the troubled 1970s and 1980s, international finance and trade grew faster than national economies. - New technologies and flourishing international trade and finance were not sufficient, to confront entrenched ideologies, political positions, and interests. In the 1980s, however, a new ideological wave swept the world. Monetarists44 rejected the loose monetary policies of the 1970s, when governments allowed inflation to grow for fear that the alternative - high unemployment - would be worse. - They argued that inflation itself was corrosive and called for a new government commitment to bring inflation down. - Anti-inflationary verve was linked to a belief that economic problems should be dealt with by getting the government out of the economy, rather than by imposing more government macroeconomic management. The new view urged governments to privatize or deregulate large portions of the economy. Governments in the industrialized world sold off hundreds of businesses they had long owned—a trillion dollars’ worth of privatization happened during the 1990s - By the end of the 1990s the industrial economies were freer of government control than they had been since the 1930s. This triggered an extraordinary consolidation of large private firms. Deregulation and privatization were both cause and consequence of technical change and global economic integration. - The most commonly deregulated or privatized industries were finance, telecommunications, transportation, these had experienced major technological advances or big increases in the importance of global markets, or both. The new point of view, variously called free market, neoliberal, or orthodox, or else Washington consensus embraced - Anti-inflationary austerity, - Tax and spending cuts, 44 Monetarists advocate for the control of the money supply by central banks as a means to stabilize the economy and manage inflation. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 85 South Korea was one of the world’s poorest countries in the early 1960s. - No other society in the world had industrialized in depth as fast. - By 1996, 30 years after the beginning of Korea’s transformation, the OECD had recognized the Korean reality and made the country a member of this international club of rich nations. Taiwan, Singapore, and Hong Kong grew roughly as fast, or even faster. The global capitalism of the end of the twentieth century, like that of the fifty years before World War One, offered powerful incentives to people, groups, companies, and countries. Production became global in the last quarter of the twentieth century, as corporations outsourced the components needed to make a product to factories in many nations. The products that entered world trade were increasingly international in both origin and market. Export-led Growth on the edge of Europe and Asia. - Whether globalized production was organized inside or outside the networks of multinational corporations, factors of production flowed away from less profitable and toward more profitable places and uses. - Companies from dozens of countries scrambled for low-cost loans to expand their operations. This continual reallocation of production led to heightened specialization among countries and regions. - Goods previously made in one country could now be divided into a dozen parts, with each part manufactured in a different nation. Firms could disaggregate production into minute components and fine-tune their investments to take advantage of the benefits of many disparate locations. - Global production allowed companies to reduce their costs and gave developing countries opportunities to occupy profitable economic niches. - Globalizing forces pushed and pulled different parts of the world into an ever-finer division of labor. o Areas with high levels of education specialized in headquarters operations, research and development, and related activities. The growth of industry in the developing nations of the south paralleled the experience of an earlier era led to impressive economic growth in many areas of the New World. - The rapidly growing regions flooded the developed world with cheap farm products and raw materials. This helped the European and North American industries that used the cheap manufactured imports and consumers, but it wreaked havoc with traditional industry in Western Europe and North America. - Both processes were the inevitable effects of specialization in an integrated international economy. - European agriculture declined in the earlier era just as Western European and North American industry declined in the later period. In Spain, Portugal, Greece and Ireland economic and social conditions were extremely low by European standards, and they had some of the worst poverty in the allegedly industrial world. - All four countries began to modernize their economies around 1960. They shifted gears with more difficulty than Ireland, for they had fascist economic legacies to overcome. - But once their dictatorships were gone, they turned toward European integration. - All four countries attracted many multinational corporations and banks and eventually played host to some 10.000 affiliates and subsidiaries of foreign corporations. This pace of growth was possible only with access to the markets and capital of Europe and the world. - National firms were freed from the constraints of small home markets, now able to sell to hundreds of millions of Europeans, if not to the entire world. - Access to foreign capital made it possible to finance investments that local capitalists could not or would not. o Industries specialized and productivity advanced, leading to some of the most rapid growth on record. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 86 South Korea and Taiwan started from almost nothing in the middle 1950s, after their devastating civil wars. - In the late 1960s both countries began to encourage their capitalists to produce industrial goods for foreign, especially American, consumers. They used many techniques to push exports: o Cheap loans and tax breaks to exporters; o A very weak currency to make Korean and Taiwanese products artificially cheap. By the late 1970s South Korea and Taiwan were flooding world markets with toys, clothing, furniture, and other simple manufactures. The two countries borrowed heavily, using the money to build up their industrial base. - Soon South Korea and Taiwan were selling sophisticated mid-market industrial products. The path of export-oriented industrialization meant opening to the world economy, drawing in foreign investment and loans, and producing for foreign markets. It meant wholehearted integration into the global division of labor, but within a few years the new strategy had been adopted by almost every country in the Third World. Thailand, Malaysia, the Philippines, and Indonesia, four heavily agrarian countries, had failed to industrialize with import substitution. While their governments continued to back national businesses, even continuing to protect them from foreign competition, these governments abandoned ISI in favor of export-led industrialization. - In a matter of years all four became major industrial exporters. China’s shift was far the more important because it involved the world’s most populous nation. The Chinese government: - Returned farmland to private farmers - Removed the central government from most economic activities - Set up special zones for export production - And welcomed foreign corporations. The Chinese growth explosion was closely linked to its embrace of the world economy. In Chile the economy came crashing down during the debt crisis46, but after 1985 the military regime returned to its path of economic integration. In 2000 it was the richest country in Latin America: this growth was driven by Chile’s ties to the rest of the world economy. - The new globalist Chile took advantage of long-distance transport and communications to specialize in some unusual product niches. Within ten years the rest of Latin America followed Chile’s example and moved into world markets and investment policies after 1985. During the 1990s domestic policy change and the formation of NAFTA transformed Mexico from a self-contained, import- substituting country to a free-wheeling, free-trading integral part of the North American economy. Cardoso became Brazil’s finance minister in 1993. Cardoso’s Marxism was revolutionary. While Cardoso agreed that developing countries’ options were limited, he argued that they had more room to maneuver than the hard-liners believed. - He believed that governments could create local capitalist economies that were not simple appendages of the American Empire. Events soon gave Cardoso the opportunity to test his theory that the right government with the right policies could cure some of the ills of underdevelopment. By the early 1980s economic mismanagement had driven Brazil into chronic hyperinflation and crisis, even the country’s business elite seemed eager for change. Meanwhile the Brazilian political system was collapsing. The first civilian government did not resolve the country’s economic problems, allowing Cardoso to became foreign minister in 1992, then finance minister in 1993. He entered government at a critical juncture: - Inflation was over 2,000%, - Manufacturing production had dropped nearly 20% in 3years, 46 period of economic turmoil in Chile characterized by high levels of external debt and financial instability, typically associated with difficulties in servicing or repaying the debt obligations ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 87 - And Brazil’s trade was stagnant. A succession of government plans to rein in the crisis had failed, and the country’s characteristic optimism was in short supply. As finance minister Cardoso in 1994 introduced yet another plan, this one called the Real Plan, named for the new currency pegged at one real to the dollar. - The plan succeeded where others had failed largely because Cardoso was willing to impose austerity where others had not. Inflation came down quickly, and the economy remained strong. - It was a comprehensive economic stabilization program implemented in 1994 to combat hyperinflation and stabilize the country's economy. The plan included measures such as: o Currency devaluation, fiscal discipline, monetary policy reforms, and structural adjustments to restore confidence, control inflation, and promote economic growth. o The Real Plan is credited with successfully stabilizing the Mexican economy and laying the groundwork for future economic reforms. Cardoso was elected president of Brazil. And once in power, he pushed on with his economic reforms, reduced trade barriers, deepened the country’s commitment to the Mercosur customs union47 (Southern Common Market) with Argentina, Paraguay, and Uruguay, and sold off a hundred billion dollars’ worth of public enterprises, including flagship electric power, telecommunications, steel, and railroad companies. Within four years inflation was down below 10 percent, Brazil’s trade had doubled, and the economy was growing. It was though too early to tell if the Marxist professor’s hypothesis—that good government and globalization could lead to economic development—was confirmed. After the Berlin Wall fell, it was common to wonder whether the formerly Communist nations of Central and Eastern Europe could ever be on track to catch up economically with the West. - It was hard to compare living standards in a centrally planned economy with those in a market economy. The Central Europeans (and perhaps the Balts) nonetheless began to catch up with Western Europe in several ways. - Politically, with the consolidation of democracy and of European-style social welfare states. - Institutionally, as the legal and political ground-work was laid for capitalism. And finally, these countries entered the economic orbit of the EU. They reoriented their economies away from the Soviet Union and its allies and threw themselves enthusiastically into the Western European single market. - The more advanced Central European nations implemented European policies and prepared for full membership in the European Union. o They searched out ways to take advantage of their geographical and economic characteristics to attract foreign investment and to sell their products in Western markets. ▪ Still, skeptics doubted the ability of people in Central Europe to adapt to a capitalist social order with which only the elderly had any personal experience. Political stability, reform progress, skilled and cheap labor, and active business communities made them attractive to multinational corporate investment. - This was true both for companies that wanted access to the growing Central and Eastern European consumer markets and for those that wanted to use the transition countries as platforms to produce cheap exports for sale in the West. Western European companies were especially eager to buy up existing factories or set up new ones in Central Europe to improve their global competitive position. And finally, in 1990, when the Berlin Wall came down, few would have anticipated that by 2000 the Central European nations would be integral to the European Union’s economy. 47 The aim of Mercosur is to promote free trade and economic cooperation among member countries by eliminating tariffs and other trade barriers, harmonizing regulations, and facilitating the movement of goods, services, and capital within the bloc. It also seeks to enhance political and cultural integration in the region ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 90 While the economic experiences of Latin America and the former Soviet bloc were disappointing, those of some other parts of the developing world were truly disastrous. The real economic catastrophes were mostly in sub-Saharan Africa and the Middle East. Portions of the developing world spun downward into abject poverty and despair. The enthusiasm and optimism of newly independent Africa in the 1960s collapsed into unprecedented failure, as most of these countries ended the century poorer than they had been at independence. - These impoverished African nations took many paths to economic retrogression. o Some scholars argue that climate and disease make the tropics particularly inhospitable to modern economic activity. While others emphasize the difficulties of poor natural transportation compounded by bizarre boundaries the colonial powers imposed. Economic failures were more commonly causes of civil war and government breakdown than their result; the rulers’ inability to provide the basic needs of their people led to the collapse of their rule. What produced the developmental disasters of the late twentieth century? External events and uncontrollable internal strife were debilitating, but failures of government, not force of circumstance, produced the collapses. Kenneth Kaunda led the Zambian people to independence and ruled for nearly thirty years after liberation. - Despite his political effectiveness during the struggle for liberation and an apparently sincere dedication to his people’s well-being, he presided over a catastrophic economic failure. After federation in 1953 Kaunda became the ANC’s secretary general. Eventually he found himself at odds with more moderate groups in the ANC and led a breakaway Zambia African National Congress (ZANC). - Arrested again by the British in 1959, Kaunda emerged from prison to lead a new United National Independence Party (UNIP). During the first ten or so years of the country’s independent existence, the new government implemented Zambian control of Zambian society with increasing confidence. Kaunda evinced a balanced approach to economic development: - The major aim of their economic development plan is to make the economy less dependent on minerals whilst ensuring that economic advance is spread as widely as possible. o This could not be done by holding back mineral developments because they needed the mineral output to earn foreign exchange. But Zambia, like most developing countries in the late 1960s, turned away from foreign ownership of raw materials production. He promoted Humanism as Zambia’s guiding philosophy. The founder of Zambian Humanism did not believe in state central planning, however the goal was “to remove foreign domination of our economic life by acquiring control of most major means of production and services while, at the same time, establishing a firm foundation for the development of genuine Zambian business.” Copper money allowed the Kaunda government to solidify a political support base of businessmen, mine workers, government employees, and city dwellers generally. - In 1972 Kaunda decreed that henceforth the country would be a single-party state with his UNIP in command. The party leadership: - Isolated and expelled opposing factions - And consolidated control over the political system Kaunda’s success began to fade even as he consolidated his single-party state. Stagnant copper prices meant stagnant government revenues, and soon the Kaunda administration’s network of supporters began to disintegrate as the government lost the financial resources to hold it together. As copper earnings declined, the Kaunda administration needed to reduce what it gave miners, government workers, and other recipients of government largess. In October 1985, with the economy collapsing and the government under pressure from the IMF and World Bank, Kaunda turned toward economic reform. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 91 - The government freed many prices, - Removed controls on the currency, - Restrained the wages of public employees, - Laid off some government workers, - And reduced subsidies that kept the price of food. Meanwhile the already unsettled political life of the country was made even more volatile as the country fell victim to the AIDS epidemic that was sweeping Africa. - By 1991 1/3 of all pregnant city women tested were HIV-positive, as were an estimated 1/5 of all adult Zambians. - Not only had Kaunda’s government overseen the collapse of the country’s economy, but it was also presiding over the horrible deaths of large portions of the nation’s population. Zambia was hardly alone in its economic collapse or in the political sources of its tribulations. - Protracted and systematic misrule led many countries to fall behind the rest of the world. - Governments actively discouraged producers in Africa from doing what they did well, for political reasons. In an attempt to move away from the agrarian past and present, rulers discriminated against agriculture and favored manufacturing. Governments taxed industrious farmers on fertile land, driving many of them out of farming. - Tanzania provided sad examples of the punishments inflicted on agriculture and the failures of industrialization. Nyerere (President of Tanzania), intent on transforming the country’s traditional economic base, tried a number of innovative rural initiatives. But these measures could not overcome the extraordinary antiagricultural bias of the government’s development policies, which severely depressed the return to farming. - This was an unnecessary disaster for a country that was more than 90 percent rural. The colonial political economies had relied on exporting primary products to the mother country. The desire to industrialize Tanzania or Ghana was understandable, but government attempts to do so bled farmers dry. - Farm prices were kept low to supply cheap food to workers, while prices of urban products and services were high. The Nigerian electric power grid was so inadequate that the country’s small manufacturers spent on average three times as much buying their own power generators as they did on all their other capital equipment and machinery combined. - Nearly threequarters of Ghana’s formal labor force was employed by the government. From the middle 1970s until the end of the century sub-Saharan Africa was the only region of the world to experience negative growth in virtually every dimension. - Country after country in sub-Saharan Africa collapsed economically under the weight of terrible policies and terrible politicians. - Governments everywhere were concerned about their survival. But during the disastrous decades of postcolonial sub- Saharan Africa, rulers’ desire for political survival seemed the principal obstacle to the survival and prosperity of Africans. The consequences of economic collapse were felt most immediately and most keenly by the weakest. - The most striking result of the socioeconomic breakdown of sub-Saharan Africa was an AIDS epidemic comparable to medieval plagues. The disease spread with extraordinary speed during the 1990s. - By the end of the century nearly 30M Africans had been infected with HIV. Sub-Saharan Africa, although the world’s most strikingly miserable region, was not alone. - In dozens of countries elsewhere in the developing world, people’s livelihoods deteriorated considerably over the last two decades of the century. o Most had already been poor and ended the century even poorer. o Economic collapse led to crumbling nutrition, health care, and education, as well as bitter political conflicts, including civil wars and genocides. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 92 The development failures entailed massive human suffering. - The amounts of money necessary to end this deprivation were, by industrial country standards, trivial. - An estimate showed that $80B dollars a year would provide every inhabitant of the developing world with basic food needs, health care, education, water, and sewers. The moral implications of grinding poverty in the poorest countries, growing wealth in the rich countries, and tiny levels of aid are not unambiguous. In many instances, humanitarian aid did not reach its intended beneficiaries, ending up instead in the pockets of the Third World rich, confirming the common charge that government was taxing poor people in rich countries to benefit rich people in poor countries. - There was also evidence that giving humanitarian aid to incompetent, governments could reduce the governments’ efforts to improve. Only sustained economic development could ultimately solve these problems: - At the end of the twentieth century four hundred million people in the region stretching from Egypt to Pakistan and from Central Asia to Somalia were living in conditions of economic stagnation and social deprivation. - These conditions bred sentiments and fed into violent movements, whose most common theme was a rejection of Western economic and cultural integration. Successful economic development was desirable not only on moral and humanitarian grounds but as a means to help resolve some of the world’s most difficult political and military problems. - However, social and political realities were powerful obstacles to developmental success in many parts of the world, and even governments attempting to rectify their situation found the international diplomatic and economic environment highly constraining, even hostile. - While much of the world’s population leaped toward modern economic growth other hundreds of millions of people fell farther behind as the century came to an end. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 95 According to trade theory, trade reduces the wage differences between rich and poor countries because wages in poor countries rise and wages in rich countries decline. - Integrating the economies of poor and rich countries means that workers in rich countries are now in direct competition with workers in poor countries. The real wages of unskilled American workers stagnated or declined for most of the latter part of the twentieth century. - Throughout the 1990s labor unions, students, and other activists mobilized against the threat that economic integration would erode wages and social policies and formed the new anti-globalization movement that erupted in the 1999 Battle of Seattle. The GATT ruled against American attempts to ban imports of tuna caught with nets that might trap dolphins. The WTO prohibited European restrictions on the import of hormone-fed beef. Previously the GATT and WTO, Group of Seven51, and other international economic institutions had been virtually unknown. - Now millions of people were taking to the streets to protest features of world trade law or to reform the bureaucratic nature of trade tribunals that only a handful of people had even heard of a decade earlier. - Many in the developing world agreed with the anti-globalizers that global capitalism undermined national autonomy. Most egregiously, Americans, Europeans, and Japanese stepped up colossally expensive programs to protect and subsidize their own farmers, then preached the wonders of the marketplace to developing countries. - Northern farm protection closed off markets to farmers elsewhere, while the dumping of surplus products on world markets drove world prices down. Dissatisfaction with the world order was compounded by the fact that even in some of the more successful countries, the fruits of success were unevenly distributed. The Battle of Seattle was largely irrelevant to the actual business of the WTO ministerial meeting that was being protested; the meeting collapsed because of disagreements among member states, not because of street demonstrations. - As the twenty-first century began, it could not be taken for granted that political winds would continue to favor globalization. Financial stability and political protest underscored tensions between the international and the national, the market and the social. The new national businessmen wanted national governments to secure and supervise national markets; they got much of what they wanted from modern central government. What could be done to alleviate the tensions between global capitalism and global politics? The system’s supporters argued that the solution was to bring politics in line with markets. - Critics of globalization also focused on the divergence between global markets and politics. - National governments had ceded power to the WTO and the IMF or had had this power seized from them by international markets. The world economy needed to be brought back in line with political needs: o national and global political structures must reflect the interests of the world’s peoples and assert authority over global markets Both supporters and critics of globalization identified a gap between international markets and national politics, on the other. - Both believed that worldwide economic problems required worldwide political solutions. But they favored different routes to resolve the conflict: o Globalizers wanted international politics to facilitate the operation of the international economy. o Anti-globalizers, on the other hand, wanted international politics to restrict, counteract, or alleviate the effects of the international economy. History showed that support for international economic integration depended on prosperity. If global capitalism ceased to deliver growth, its future would be in doubt. 51 Informal forum comprised of seven major advanced economies: Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. Originally formed as the Group of Six in 1975, it expanded to include Canada in 1976. ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 96 The Olympic showcase of Chinese dynamism was also an advertisement for global capitalism. The countries used its access to the world’s capital, technology, and markets to grow more rapidly than any other nation ever, and to lift hundreds of millions of people out of poverty and into the world middle class. It was a triumph of integration into the world economy, a demonstration that machinery of modern capitalism could work economic miracles. Three weeks later, the finely tuned machinery of global capitalism began to haywire. The summer of 2008 may well have been the high-water mark of the second age of global capitalism. Global capitalist euphoria gathered speed during the 1990s. The Cold War was over, and the West had won. - After the brief seatback of 1992-93 currency crisis. Most of the member states of the EU sped towards Economic and Monetary Union with a single market and a common currency. - International financial markets became even more tightly integrated, moving billions around the world in microseconds, as country after country reduced its financial regulations The General Agreement on Tariffs and Trade (GATT) was revised and expanded into a new World Trade Organization (WTO) with greater powers and more members, China soon after moved to be implemented in a full membership in the WTO On September 11, 2001 the terrorist attacks on the World Trade Center and the Pentagon launched a confrontation between Islamic fanaticism and the West. - The world recovered from the turn-of-the-century recession by 2002, and adjusted to new geopolitical realities The United States was central to this evolution of the world economy, leading the way in depending upon loans and imports from the rest of the world. Despite the 2001 recession and the terrorist attacks of 9/11 the country entered the new century in reasonably good economic shape. By 2000, the government had a surplus of $236B, and the congressional budget office estimated that the national debt would have been paid off by 2006 - But in 2001, the newly elected president Bush continued the path of its predecessor Reagan, by enchanting substantial tax cuts between 2001 and 2004, driving the national federal budget to a $413B deficit in 2004 - The fiscal stimulus of Bush II gave tax cuts to the taxpayer, allowing them to spend on foreign courtesy - The government was able to finance the deficit by relatively low costs by emitting Treasury securities that were snapped up as fast as the Treasury was able to issue them o The Chinese government bought another large share of the federal debt, as a way to hold on to its dollar and keep the Chinese currency from rising in value o Foreigners lent trillions of dollars to the US, allowing thus the Bush administration to cut taxes without cutting spending, and thus stimulate consumption by American taxpayers ▪ American monetary policies contributed alongside American fiscal policy to fuel foreign lending and American consumer spending With inflation approaching 3% a year, this meant that borrowers could get ‘negative real interest rates’, this, to the eyes of the masses, was an interesting deal that many decided to take. American households rushed to borrow at the historical low interest rates. - Consumer took out a trillion dollar in new consumer credit, and spent some of it to buy imports, including from China, which had entered the World Trade Organization in 2001. But most American borrowed to buy a home, refinance a mortgage, or invest in real estate, because it seemed like a no lose proposition. - As a result banks pushed mortgages out as fast as they could, so that a family could borrow virtually the entire cost of a home, anticipating that it would soar in value - Much of this financial engineering ended up in a murky shadow banking system full of complex securities whose riskiness was hard to gauge and sometimes purposely obscured o American mortgage lending averaged 2 trillion a year between 2002 and 2006 ECONOMIC HISTORY | Global Capitalism: Its rise and fall in the 20th century UCSC 3st Term Final Exam Notes V.1 97 Where did all the money for mortgages come from? Every year from 2001 to 2007, the United states borrowed between half a trillion and a trillion dollar from the rest of the world. - For every borrower there was a lender, American debts were matched by other countries credits, just as American trade deficits were matched by other currency surpluses. - Foreigners did much of their landing by buying complicated variants of American mortgage-backed securities, which drew foreigners, and the entire international financial system, into the American housing bubble. The creation of the euro 1999 made it easier for banks in the slow growing parts of the eurozone to lend to the growing countries of the European periphery, Now all twelve members of the eurozone had a common central bank and a common monetary policy, the unholy trinity was their most and common problem, governments must have choose two out of three of the following: - Stable currency - Financial integration - Independent monetary policy The euro was the ultimate in a stable currency market, and the eurozone was one integrated financial system with free capital movements. These meant that no country in the eurozone could have had independent monetary policy. - The European Central Bank (ECB) had to set interest rate for a booming Spanish economy, in which prices were rising fast, and for a stagnant Germany economy, in which prices were stable or even falling. But by 2007 there were signs that the situation was unstable period well placed observers, including those at the International Monetary Fund and the Bank of international settlements, expressed concern that the United states, the United Kingdom, and the European borrowers we're following a well known script that was unlikely to end well: - They borrowed abroad to finance consumption, rather than to increase productive investment - And if previous experience with foreign borrowing was of any guide, borrowing that did not increase the debtors productive capabilities was a formula for trouble Danger signals proliferating, why did governments not work to avoid calamity? Governments found it hard to reign in a boom simply to fend off the abstract possibility of a crash. Bankers, on the other hand, had self-interested reason to keep the party going. American housing prices began to fall rapidly in the summer of 2007. - Over the next year and a half, they dropped by about a third, burning up $5 trillion in home equity. - As the economy slowed, and financial problems become apparent, the republican president democratic house and senate agreed on 150 billion fiscal stimulus, passed in February 2008 o Financial system was in freefall just days later, on September 15, Lehman Brothers, with assets of over 600 billion filed for bankruptcy. If Lehman was broke how could any bank be safe? And if the bank weren't safe, how could financial markets be trusted? A day after the Lehman brother bankruptcy filing, the American International Group (AIG), one of the world's largest insurance firms, with more than a trillion dollar in assets, became the next financial behemoth to plead to be rescued. - AIG had insured hundreds of billions of dollars in mortgage-backed investments, and so many of them went bad that the issuer could not cover its losses At that point, the world's financial system was experiencing the modern equivalent of a bank run. - Today's banks don't depend so much on money borrowed from depositors as on money borrowed from short term investors who hold their paper. Many of these obligations mature overnight. o Mohammed El-Erian, one of America's leading financial analysis. Call this wife and told her to go to the bank and take out as much cash as she could, he was not sure that the bank would have opened the next day. Ben Bernanke, the first academic economist to had the Federal Reserve, became chairman of the Fed in 2006, he eventually recognized the need for aggressive actions to avoid a breakdown of the Americans and global financial system was needed.