Bocconi Economic History notes, part 2

SARA$TACCONE$$

1

ECONOMIC'HISTORY''TOPIC'4:'THE'INDUSTRIAL'REVOLUTION''

ALLEN,' R.' C.' [2009];' The' industrial' Revolution' in' Miniature:' The'Spinning' Jenny' in' Britain,' France,' and' India,' Journal' of' Economic'History,'Vol.69'No.4,pp.901W927'

'The$spinning$jenny$helps$explain$why$the$Industrial$Revolution$occurred$in$Britain$rather$ than$ in$ other$ countries;$ in$ fact$wages$were$ exceptionally$ high$ relative$ to$capital$ prices$ in$ Britain$ and$ Britain$ was$ the$ only$ country$ where$ it$ as$ worth$incurring$the$costs$of$developing$the$spinning$jenny.$$Ashton$ used$ the$ words$ of$ a$ schoolboy$ to$ define$ the$ Industrial$ Revolution.$ This$schoolboy$ said:$ About$1760$a$wave$of$ gadgets$ swept$over$Engalnd$but$why$ in$England?$The$answer$to$this$question$found$by$Allen$in$this$article$is$based$on$the$case$study$of$the$spinning$jenny.$$The$ spinning$ jenny$was$ invented$by$ James$Hargreaves$ in$Lancashire$ in$ the$midQ1760s$but$it$was$used$in$a$profitable$way$only$in$England.$$The$reasons$found$to$explain$the$Industrial$Revolution$are$the$following:$$ Political$ structure$ (that$ created$ a$ favorable$ climate$ for$ investment$ that$made$the$Industrial$Revolution$possible)$ Inventiveness$ back$ to$ culture$ ($ Max$ Webers$ theory:$ Calvinism$ made$protestants$ particularly$ rational$ and$ oriented$ towards$ economic$achievement$ $ French$ were$ poor$ enterpreneurs$ who$ failed$ to$ adopt$British$technology).$We$ can$ sum$ up$ that$ good$ law$ and$ good$ culture$ may$ have$ been$ necessary$conditions$for$the$Industrial$revolution$but$they$were$not$sufficient.$$This$ article$ argues$ that$ Britain$ had$ a$ highQwage$ economy$ that$ increased$ the$demand$ for$ technology$ that$ substituted$ capital$ for$ labor$ in$ fact$ the$ famous$inventions$ of$ the$ Industrial$ Revolution$ were$ invented$ in$ Britain$ because$ they$generated$ enough$ profit$ to$ make$ the$ cost$ of$ developing$ and$ perfecting$ them$worthwhile.$(In$France$and$India,$the$rate$of$return$to$inventing$British$technology$was$too$low$to$justify$the$necessary$R&D).$$Allen$ investigated$ a$ sequeences$ of$ problems$ related$ to$ the$ invention$ of$ the$spinning$ jenny$ in$order$ to$ find$an$answer$ to$ the$ initial$ question$ (why$ Industrial$revolution$in$England?);$$1. Inventions$ like$ the$ spinning$ jenny$ are$ examples$ of$ Edisons$ dictum$ that$invention$ is$ 1%$ inspiration$ and$ 99%$perspiration..$ Only$ in$ this$way$we$can$understand$why$they$were$made$by$focusing$on$the$incentives$to$do$the$hard$ work$ of$ development$ rather$ than$ concentrating$ on$ the$ sources$ of$inspiration.$$2. How$ did$ the$ inventions$ affect$ the$ input$ requirements$ of$ production?$Techniques$ like$ the$ spinning$ jenny$ were$ biased$ and$ increased$ capital$requirements$ while$ reducing$ labour$ requirementshence$ the$ incentive$ to$adopt$the$new$techniques$was$greater$where$wages$were$highest$relative$to$capital$costs.$$3. Englad$stood$apart$from$the$rest$of$the$world$in$having$relative$wages$and$that$ is$ why$ british$ technology$ was$ adopted$ initially$ in$ Britain$ and$ not$elsewhere.$$

SARA$TACCONE$$

2

4. Since$ invention$was$basically$R&D,$ it$ generates$ expenses$ and$Britain$was$the$ only$ place$ in$ which$ new$ technologies$ generated$ profits$(profitsinvestment$ in$ R&Dnew$ technologies,$ it$ was$ a$ perpetual$circle)$$ $$HOW'THE'SPINNING'JENNY'WAS'INVENTED''To$ understand$ what$ was$ involved$ in$ inventing$ the$ jenny,$ first$ we$ consider$ the$spinning$wheel$which$was$repleaced$by$the$spinning$jenny.$$The$two$fundamental$operations$in$spinning$wheel$were$drawing$and$twisting.$$The$spinning$jenny$was$an$example$of$local$learning$(=studying$existing$practice$in$an$effort$to$modify$it$ in$order$to$reduce$costs).$Hargreaves,$the$inventor$of$the$spinning$jenny,$ in$1764$was$inspired$by$seeing$how$a$spinning$wheel,$which$had$toppled$over$on$its$side,$continued$to$rotate$and$spin$automatically;$he$had$tried$to$operate$several$wheels$simultaneously$by$holding$all$of$ the$threads$ from$each$ in$his$left$hand$but$that$proved$impossible$with$horizontal$spindles.$$The$ spinning$ jenny$ had$ a$ row$ of$ spindles$ on$ one$ side$ and,$ on$ the$ other$ side,$ a$parallel$ row$ of$ pins.$ The$ rowings$ were$ wound$ on$ these$ pins$ and$ each$ roving$extended$across$the$jenny$to$the$opposite$spindle.$The$spindles$were$spun$by$belts$from$ a$ single$ wheel.$ Between$ the$ spindles$ and$ the$ pins$ was$ a$ sliding$ bar$ with$clamps$that$could$grasp$the$rovings$and$draw$them$out.$Twist$was$then$imparted$by$turning$the$spindles,$and$finally,$ the$yarn$was$wound$onto$the$spindles$as$the$sliding$bar$was$pushed$towards$them.$At$the$same$time,$the$sliding$bar$pulled$out$more$roving,$and$the$sequence$was$repeated.$$Hargreaves$ needed$ several$ years$ to$ perfect$ the$ jenny$ in$ fact$ it$ said$ that$ it$ was$invented$ in$ 1767.$ At$ first,$ Hargreaves$ was$ supplied$ with$ accomodation$ in$Ramsclough,$a$remote$village$in$Lancashire,$and$he$was$economically$supported$by$Robert$Peel.$$Not$few$were$the$troubles$for$the$two$men,$in$fact$their$machines$ware$destroyed$several$times.$$When$Hargreaves$moved$to$Nottigham,$he$found$a$new$joiner$that$became$his$new$financier;$ Thomas$ James.$ In$ 1770$ Hargreaves$ patented$ the$ jenny$ but$ he$ didnt$succeed$ in$ enforcing$ his$ rights$ because$ his$ attorney$ had$ earlier$ sold$ jennies$ in$Lancashire.$$Improvements$in$the$jenny$were$rapid$in$the$1770s.$The$wheel$was$changed$from$an$horizontal$to$a$vertical$orientation,$and$the$treadle$that$turned$it$was$repleaced$by$ a$ simpler$ handQoperate$ device.$ A$ roller$ was$ introduced$ that$ allowed$ the$number$ of$ spindles$ to$ be$ increased$ to$ as$ many$ as$ operator$ could$ turn.$ A$ 24$spindles$ became$ the$ standard$ design$ for$ the$ jennies$ (1775).$ By$ 1780,$ a$ 120$spindles$ jenny$was$ built,$ although$80$ spindles$ became$ a$ standard.$ This$mode$ of$production$ was$ cheaper$ but$ these$ improvements$ were$ accomplished$ without$patenting$and$were$affected$by$collctive$invention.$$The$ simplicity$ in$ bulding$ the$ spinning$ jenny$ was$ an$ important$ image$ of$ the$Industrial$ Enlightenment$ (Mokyr);$ this$ movement$ involved$ the$ collection$ and$dissemination$of$descriptions$of$ technical$processes$ through$publications$as$well$as$ professional$ meetings$ and$ informal$ discussions$ involving$ leading$manufacturers$and$scientists$in$provincial$associations,$universities$and$the$Royal$Society.$Mokyr$believes$this$vanguard$of$ industrial$progress$was$ limited$to$a$ few$

SARA$TACCONE$$

3

thousand$people$that$were$mainly$from$the$upper$classes.$Even$if$Hargaves$doesnt$fit$this$model,$he$doesnt$invalidate$the$Industrial$Enlightenment$model.$$Hargreavers$ experience$ is$ much$ more$ consistent$ with$ the$ democratic$ view$ of$invention$ propouned$ by$ Zorina$ Khan$ and$ Khan$ and$ Ken$ Sokoloff,$ in$ fact$ they$believed$ that$ inventors$were$drawn$ from$across$ the$ social$ spectrum,$with$many$coming$from$humble$backgrounds.$$$THE'BIAS'OF'TECHNOLOGY'AND'THE'INCENTIVES'TO'INVENT'It$ had$ been$ noticed$ that$ the$ spinning$ jenny$ cuts$ costs$ only$ for$ the$ highQwage$country.$$If$ we$ recongnize$ that$ invention$ involves$ costs,$ we$ can$ also$ see$ that$ invention$depends$ on$ factor$ prices.$ Clearly,$ if$ it$ was$ not$ worthwhile$ to$ use$ the$ invention$when$ there$were$ no$ R&D$ costs(as$ in$ the$ low$wage$ economy),$ theres$ even$ less$incentive$ when$ R&D$ costs$ would$ be$ incurred.$ Conversely,$ there$ are$ two$possibilities$in$the$highQwage$economy:$1. The$R&D$project$is$worth$undertaking$$its$profitable$to$invent$the$jenny.$2. Market$size$affects$the$propensity$to$invent.$Explicitly$ recognizing$ that$ inventions$ can$ be$ biased$ and$ that$ they$ require$ R&D$expenditures$ to$ realize$ them$ is$ one$way$ to$ show$ that$ factor$ prices$mattered$ for$invention.$By$ influencing$ the$profitability$of$R&D$projects,$ they$could$affect$both$the$bias$and$the$pace$of$technical$change.$$$FACTOR'PRICES'IN'EUROPE'AND'INDIA''To$apply$the$aboveQmentioned$approach$to$the$spinning$jenny,$we$must$compare$the$prices$of$capital$and$labor$in$England,$France$and$India;$$

England$stands$out$as$the$country$with$expensive$labor$and$cheap$capital,$and$ that$ explains$ why$ Enlish$ producers$ took$ up$ their$ jenny$ so$enthusiastically.$ Wages$ in$ France$ were$ lower$ than$ wages$ in$ England$ but$ the$ low$ wage$earned$ by$ workers$ in$ France$ was$ not$ matched$ by$ low$ consumer$ goods$prices$hence$French$purchasing$power$was$lower.$$ The$data$respecting$wages$and$prices$in$India$are$much$less$complete$than$those$ for$Europe;$ indian$wages$were$ too$ low$ to$purchase$ the$ standard$of$living$enjoyed$by$english$workers.$$English$wages$were$ high$ relative$ to$ both$ consumer$ and$ producers$ goods$ prices$because$England$had$a$more$advanced$economy$than$France$or$India$in$the$midQeighteenth$century.$Five$factors$increased$the$demand$for$labour:$$1. Larger$ firms$ realized$ internal$ economies$ of$ scale$ through$ the$ division$ of$labour$(as$emphasized$by$Adam$Smith)$$2. England$ was$ more$ urbanized$ than$ the$ other$ countries$ and$ cities$ raised$productivity$through$external$economies.$3. The$growth$of$London$also$lead$to$the$expansion$of$the$coal$industry$$4. Agriculture$was$more$productive$than$on$the$continent$$5. The$spinning$jenny$was$not$alone$in$fact$seventeenth$and$earlyQeighteenthQcentury$ increases$ in$ the$wage$ led$to$ inventions$that$ increased$the$capitalQlabour$ratio.$(as$was$noticed$by$Bentley)$Early$modern$England$ experienced$ an$ ascending$ spiral$ of$ progress$ in$which$ the$rise$ in$ the$ wage$ induced$ the$ invention$ and$ use$ of$ machines$ that$ raised$ labor$productivity.$The$rise$ in$productivity$raised$the$wage$even$more$and$the$process$

SARA$TACCONE$$

4

continued.$ The$ inventions$ of$ the$ industrial$ revolution$were$ the$ culmination$ of$ a$century$and$a$half$of$economic$growth.$$$WHY'THE'ENGLISH'ADOPTED'THE'SPINNING' JENNY'AND'THE'FRENCH'AND'INDIANS'DID'NOT''The$jenny$was$taken$up$very$rapidly$in$England$but,$as$we$can$image,$the$situation$was$very$differet$ in$ India$and$France.$ (theres$no$record$ that$ the$ jenny$was$ever$considered$in$India).$$The$historical$question$is$whether$it$was$equally$profitable$for$French$and$English$spinners$to$buy$jennies.$$It$was$used$in$Enlgand$because$it$was$profitable$and$that$profit$was$a$measure$of$its$ social$ utility.$ The$ social$ utility$ (total$ profit)$ is$ the$ product$ of$ the$ number$ of$pounds$spun$and$the$profit$per$pound,$so$total$profit$depended$on$the$size$of$the$market$as$well$as$the$reduction$in$unit$costs.$$The$profit$generated$by$the$jenny$i$salso$a$measure$of$the$income$that$Hargreaves$could$hope$to$realize$by$patenting$ it.$Hargreaves$did$get$a$patent$but$he$was$not$able$to$defend$his$rights.$$There$was$no$point$in$inventing$the$jenny$in$either$France$or$India$because$it$was$not$used$in$those$countries$even$when$it$was$avaible,$so$the$social$rate$of$return$to$inventing$it$would$have$been$negative.$$So$the$difference$among$the$three$countries$has$to$be$ found$ in$the$differences$ in$the$national$economic$ocnditions.$ $CONCLUSION'Focusing$on$the$artisans$is$more$promising$than$focusing$on$the$upper$classes$in$understanding$ Englands$ ascendancy,$ since$ many$ of$ the$ inventions$ of$ the$Industrial$Revolution$originated$from$below.$$The$question$is$whether$Englands$distinctiveness$should$be$attributed$to$a$unique$trajectory$ of$ cultural$ development$ uninfluenced$ by$ economic$ incentives$ or$whether$ it$ should$ be$ seen$ as$ an$ endogenous$ response$ to$ the$ opportunities$presented$by$the$economy$(as$was$deeply$underlined$in$the$article).$$Englands$ price$ structure$ created$ unique$ incentives$ to$ develop$ machines$ that$substituted$ capital$ for$ labor:$ they$ were$ profitable$ to$ be$ used$ in$ Britain$ and$unprofitable$ elsewhere.$The$ costs$of$ the$ inventions$were$balanced$by$ economic$benefits$(high$incomes).$$The$ story$ of$ the$ jenny$ illustrates$ another$ feature$ of$ technology$ and$ economic$development;$in$the$modern$world,$much$technology$is$developed$in$rich$countries$and$proves$highly$profitable$there.$This$technology$is$much$less$profitable$in$poor$countries$ and$ is$ consequently$ much$ less$ used.$ The$ reason$ is$ that$ technology$developed$in$rich$countries$reflects$their$factor$prices$and$embodies$that$influence$in$a$high$capitalQlabor$ratio.$This$factor$proportion$makes$their$use$uneconomic$in$lowQwage$economies$like$France$and$India.$The$unexpected$conclusion$is$that$the$Industrial$Revolution$was$the$consequence$of$the$highQwage$economy,$not$its$cause.$$ $$$

SARA$TACCONE$$

5

$$$$$$TOPIC'5:'THE'FIRST'WAVE'OF'GLOBALIZATION''

Daudin,'G.,'M.'Morys'and'K.H.'ORourke' [2010];' Globalization,'1870W1914,' in' Broadberry,' S.' and' K.' ORourke,' K.' (eds.);' The' Cambridge'Economic' History' of' Modern' Europe,' Vol' II' (Cambridge' University'Press)'The$period$from$1870$to$1914$is$the$central$period$for$globalization.$$NineteenthQcentury$ globalization$ involved$ increasing$ transfers$ of$ commodities,$people,$ capital,$ and$ ideas$ between$ and$ within$ continents.$ The$ most$straightforward$ measure$ of$ integration$ is$ simply$ the$ growing$ volume$ of$ these$international$ flows$ ,$ pheraps$ scaled$ by$measures$ of$ economic$ activity$ $ (ex.$ The$ratio$ of$ commodity$ trade$ to$ GDP,$ or$ the$ number$ of$ migrants$ per$ head$ of$population).$Another$measure$is$the$cost$of$moving$goods$or$factors$of$production$across$borders$and$this$cos$twill$show$up$in$international$price$gaps.$Because$it$is$less$ easy$ to$ measure$ integration$ in$ the$ international$ markets$ for$ ideas$ and$technology,$ these$ flows$ are$ often$ not$ discussed$ in$ economists$ accounts$ of$globalization,$but$they$are$sufficiently$important$to$be$briefly$considered$here.$$

'TRADE,'1870W1914'European$international$trade$in$current$values$grew$at$4.1$percent$a$year$between$1870$and$1913,$as$against$16.1$percent$percent$a$year$between$1830$and$1870.$In$1990$prices,$European$international$trade$grew$at$6.8$percent$a$year$with$growth$being$particularly$high$in$Belgium,$Germany,$Switzerland$and$Finland.$$$

$$Price$evidence$also$shows$impressive$international$integration$during$this$period.$$International$trade$grew$for$many$reasons:$$

SARA$TACCONE$$

6

International$freight$rates$declined$steadily$as$a$result$of$constant$technical$improvments$and$the$growth$in$the$use$of$faster$and$more$regular$steamships,$especially$after$the$opening$in$1869$of$the$Suez$Canal$(which$could$only$be$used$by$steamships);$$ The$reduction$of$internal$transport$costs$through$the$development$of$railroads$was$crucial$(and$it$let$the$cost$of$shipping$decrease);$railroads$were$particularly$important$in$large$countries$such$as$Russia;$ Pace$between$the$main$powers$between$1871$and$1914$promoted$trade$in$fact$the$development$of$European$formal$and$informal$empires$increased$extraQEuropean$trade$through$the$reduction$of$trade$barriers,$the$inclusion$of$colonies$in$currency$unions$and$the$better$protection$of$(European)$property$rigths.$Meanwhile$the$gradual$spread$of$the$gold$standard$dampened$exchange$rate$fluctuations$and$reduced$uncertainty$in$trade.$$

$$Falling$transport$costs$implied$increasing$potential$market$integration,$but$politicians$always$had$the$option$of$muting$or$even$reversing$this$via$protectionist$polices.$$As$regards$the$pattern$of$trade,$Europe$as$a$whole$was$a$net$exporter$of$manufactures$and$a$net$importer$of$primary$products,$although$this$masks$important$differences$among$regions.$At$one$extreme$lay$the$UK,$massively$dependent$on$imported$food$and$raw$materials$paid$for$with$exports$of$manufactures$and$services.$The$rest$of$northwest$Europe$had$a$similar$but$less$extreme$specialization.$$Estern$and$southern$Europe,$however$despite$growing$industrialization,$still$exported$primary$products$and$imported$manufactures.$The$overall$European$deficit$in$commodity$trade$was$partly$balanced$by$net$exports$of$services.$$ $CAPITAL'FLOWS,'1870W1914'International$capital$market$integration$was$extremely$impressive$during$this$period.$Europe$was$the$worlds$banker$and$those$regions$with$good$access$to$European$capital$and$abundant$resources$such$as$the$USA,$Canada,$Argentina,$and$Australia$prospered$most$between$1870$and$1913.$There$was$also$a$smaller$but$still$important$transfer$of$capital$from$the$western$European$core$to$the$more$peripheral$economies$of$south,$central$and$eastern$Europe.$Europe$as$a$whole$dominated$foreign$investment.$$Therere$different$measures$of$integration:$$

SARA$TACCONE$$

7

Obstfeld$and$Taylor:$capital$market$integration$has$traced$out$a$UQshape$over$the$past$150$years$with$late$nineteenthQcentury$integration$being$followed$by$interwar$disintegration$and$a$slow$move$towards$reintegration$in$the$late$twentieth$century.$ Feldstein$and$Horioka:$international$capital$mobility$breaks$the$link$between$domestic$savings$and$domestic$investment,$as$domestic$savings$can$be$invested$abroad$and$domestic$investment$can$be$financed$externally.$Consequently,$the$weaker$the$relationship$between$domestic$savings$and$domestic$investment,$the$higher$is$international$capital$mobility.$The$UQshaped$pattern$emerges$yet$again$from$the$data.$$ Flandreau$and$Zumer:$they$look$at$bond$spreads$between$peripheral$economies,$whether$in$Europe$or$elsewhere,$from$some$5$percent$in$1870$to$only$1$percent$in$1914.$$Capital$market$integration$was$not$a$continuous$process;$a$first$wave$of$financial$integration$came$to$an$end$with$the$Baring$crisis$of$1891.$Capital$receded$dramatically$for$roughly$a$decade$before$massive$foreign$lending$resumed$again$around$the$turn$of$the$century.$$What$explain$late$nineteenthQcentury$capital$market$integration?$$$ The$absence$of$military$conflict$among$the$main$lending$countries$between$the$FrancoQPrussian$War$and$the$First$World$War$certainly$helped$create$and$stabilize$an$atmosphere$conducive$to$foreign$lending.$$ Marxists$have$long$argued$that$late$nineteenth$century$capital$exports$and$imperialism$are$only$two$sides$of$the$same$coin:$excessive$saving$at$home,$generated$by$a$highly$unequal$distribution$of$income,$required$outlets$in$underdeveloped$countries,$as$domestic$investment$would$have$been$subject$to$Marxs$law$of$the$falling$rate$of$profit.$(this$idea$prompted$Lenin$to$delcare$imperialism$to$be$the$highest$stage$of$capitalism).$$ The$contention$of$a$connection$between$empire$and$capital$exports$was$subsequently$discredited;$Ferguson$and$Schularick$argued$that$countries$in$the$British$Empire$benefited$from$their$colonial$status$through$substantially$reduced$interest$rates.$There$are$doubts$about$the$fact$that$colonial$affiliation$mattered$for$the$size$and$the$direction$of$capital$flows.$$$ Bordo$and$Rockoff:$gold$standard$$goldi$s$seen$as$having$promoted$global$financial$integration$in$two$ways:$1)it$eliminated$exchange$rate$risk;$2)it$signaled$that$the$government$would$pursue$conservative$fiscal$and$monetary$policies,$which$assured$potential$investors$that$returns$were$reasonably$safe.$$Economic$fundamentals$have$to$be$considered$as$the$main$determinant$in$explaining$the$size$and$direction$of$flows.$$over$50%$of$British$capital$exports$went$to$areas$of$recent$settlment$where$natural$resources$could$be$exploited$and$not$to$where$labour$was$cheap.$$ Flandreau$and$Zumer:$sound$fiscal$policies$ Clemens$and$Williamson:$railroads$had$to$make$the$food$produced$in$the$New$World$land$accessible$to$European$consumers.$They$argued$that$British$capital$exports$went$to$countries$with$abundant$supplies$of$natural$resources,$immigrants,$and$young,$educated$urban$populations.$They$also$

SARA$TACCONE$$

8

find$that$the$gold$standard$and$empire$promoted$foreign$investment,$supply$and$demand.$$$$MIGRATION,'1870W1914'Its$in$the$area$of$migration$that$the$late$nineteenth$century$was$most$impressively$globalized,$even$compared$with$today.$At$the$beginning$of$the$century,$intercontinental$migration$was$dominated$by$slavery$and$it$was$followed$by$free$immigration$which$inflow,$twenty$yearsa$later,$was$more$than$four$times$as$high$as$the$slave$flow.$$In$addition$to$these$transoceanic$migrations,$there$were$significant$migrations$within$Europe.$The$casuses$of$this$mass$migration$are$by$now$well$understood:$$ 1. The$New$Wold$was$endowed$with$a$higher$landQlabor$ratio$than$Europe.$$Hence$the$gains$from$migration$were$potentially$enormous$and$once$the$new$steam$technologies$had$lowered$the$cost$of$travel$sufficiently,$mass$emigration$became$inevitable.$$$2. What$determined$the$timing$of$emigration$streams$from$different$European$countries?$Hatton$and$Williamson$argued$that$EM$(European$Migration)$is$a$downwardQsloping$function$relating$emigration$rates$from$a$given$European$economy$to$home$wage$rates;$as$home$wage$rise,$emigration$rates$should$fall,$ceteris$paribus.$$3. Rising$fertility,$structural$transformation$and$falling$transport$costs$thus$increased$emigration$rates,$initially$in$the$richer$economie$sas$living$strandards$rose$across$the$continent.$This$emigration$was$initially$selfrenforcing,$as$a$result$of$the$friends$and$relatives$effect:$all$these$factors$led$to$EM$shifting$rightwards.$But$eventually,$the$emigration$function$stabilized,$and$when$this$happened,$emigration$became$selfQlimiting:$by$lowering$labor$supply$at$home,$it$pushed$up$real$wages$and$economies$thus$moved$up$their$EM$schedules,$experiencing$lower$migration$rates$can$be$explained$on$economic$grounds$alone$without$appealing$to$cultural$behaviour$in$either$country.$$'TRADE'IN'KNOWLEDGE,'1870W1914'Economic$globalization$includes$technological$transfers$and$the$deepending$of$other$intellectual$exchanges.$In$Europe$and$in$the$Atlantic$world,$technologies$had$been$circulating$for$a$long$time;$textile$mills$around$the$world$used$similar$machines$often$imported$from$Britain.$$Europe$was$internally$exchanging$new$technologies,$diffusing$them$and$receiving$new$technologies,$mainly$from$the$United$States.$$Several$new$factors$increased$the$speed$and$the$reach$of$technological$transfers:$

Migration$was$easy$ Imperialism$allowed$European$enterpreneurs$to$invest$overseas,$taking$advantage$of$low$wages,$with$no$fear$of$expropriation$by$hostile$governments$ The$decline$in$transport$and$communication$costs$helped$the$diffusion$of$ideas,$new$goods,$and$machines.$$more$and$more$technoogy$was$embedded$in$machines$rather$than$individual$knowQhow,$even$if$training$

SARA$TACCONE$$

9

was$still$necessary.$$Due$to$many$political$restrictions,$several$firms$set$up$production$in$foreing$countries$and$transformed$themselves$into$multinationals$during$this$period.$$ Creation$of$scientific$and$technical$organizations$(such$as$the$Institution$of$Naval$Architects)$$We$dont$have$to$forget$that$science$was$seen$as$one$of$the$weapons$in$the$struggle$between$European$nations.$Although$governments$increased$formal$technical$cooperation$by$creating$global$institutions(International$Telegraph$Union,$Universal$Post$Union,$Red$Cross)$$joined$by$European$and$nonQEuropean$nations.$$$Another$form$of$rising$globalization$was$the$growing$number$of$international$exchanges$and$competitions$(first$World$Fair,$1876$in$Philadelphia;$first$Venice$Biennale,$1895;$modern$Olympics,$1896;$first$five$Nobel$prizes,$1091).$$Labor$movements$were$increasingly$globalized$as$well.$$$

GLOBALIZATION'AND'FACTOR'PRICE'CONVERGENCE''Weve$to$understand$how$the$booming$commodity$trade$and$mass$migration$from$the$Old$World$to$the$New$influenced$the$income$distribution$within$and$between$countries.$$$According$to$HeckscherQOhlin$logic,$the$landQabundant$and$laborQscarse$New$World$should$have$exchanged$food$and$raw$materials$for$European$manufactured$goods$and$trade$should$have$led$to$the$wageQrental$ratio,$w/r,$converging$internationally$hence$9n$the$New$World$economies,$where$w/r$was$high,$w/r$should$have$declined$as$farmers$exported$more$and$manufacturing$suffered$from$foreign$competition.$While$in$landQscarce$European$economies,$where$w/r$was$low,$it$should$have$increased$as$workers$were$hired$by$expanding$manufacturing$industries$and$land$rents$were$undermined$by$cheap$food$imports.$These$predicts$hold$good$for$the$late$nineteenth$century.$The$increase$was$less$pronunced$in$protectionist$economies$and$this$suggests$a$link$between$trade$and$factor$price$trends,$which$is$confirmed$by$both$econometric$evidence$and$CGE$simulations.$Another$thing$that$has$to$be$taken$into$consideration$is$that$these$wageQrental$ratio$trends$implied$that$European$income$distribution$was$becoming$more$equal$since$landowners$were$typically$better$off$than$unskilled$workers.$$Declining$transport$costs$were$good$for$European$workers$because$cheaper$transport$meant$cheaper$food$and$higher$real$wages.$$$Migration$was$the$dimension$of$globalization$that$had$the$greatest$impact$on$European$workers$living$standards$during$this$period.$$Emigration$lowered$the$baor$force$(1870Q1910)$by$45%$in$Ireland,$39%$in$Italy$and$24%$in$Norway$and$researches$showed$that$living$standards$in$these$economies$rose$more$rapidly$than$in$Britain.$$Both$econometric$and$simulation$studies$show$that$emigration$was$an$important$source$of$living$stardand$convergence$for$countries$such$as$Ireland.$Taylor$and$Williamson$find$that$emigration$(1870Q1910)$raised$Irish$wages$by$32%,$Italian$by$28%$and$Norwegian$by$10%.$$

SARA$TACCONE$$

10

International$real$wage$dispersion$fell$by$28%$between$1870$and$1910,$reflecting$a$convergence$of$poorer$countries$on$the$rich$but$in$the$absence$of$the$mass$migrations$international$real$wage$dispersion$would$have$increased$by$7%;$the$results$suggest$that$more$than$all$(125%)$of$the$real$wage$convergence$between$1870$and$1910$was$attributable$to$migration.$Mass$migration$accounted$for$all$of$the$Irelands$and$Italys$convergence$on$the$United$States,$and$for$the$65Q87%$of$their$convergence$on$Britain.$$$CAPITAL'FLOWS,'PERIPHERAL'DEVELOPMENT,'AND'CORE'WELFARE'Assuming$identical$production$functions$with$capital$and$labor$as$the$only$inputs,$lower$wages$in$the$European$periphery$should$have$been$due$to$lower$capitalQtoQlabor$ratios,$which$should$have$implied$higher$returns$to$capital.$$Sweden$is$one$of$the$few$cases$for$which$we$have$relatively$reliable$data;$capital$imports$after$1870$served$to$make$the$Swedish$capital$stock$50%$bigger$than$it$would$have$been$in$their$absence,$increasing$Swedish$real$wages$by$25%.$These$results$cannot$be$easily$replicated$for$other$countries$in$the$European$periphery;$AustriaQHungary,$the$largest$periperal$economy$in$preQ1914$Europe,$seems$to$have$enjoyed$substantial$capital$imports$but$a$recent$recontruction$of$the$AustoQHungarian$balance$of$payments,$by$contrast,$concluded$that,$over$the$period$1880Q1913,$AustriaQHungary$exported$rather$than$imported$capital.$Similar$uncertainty$are$valid$also$for$Italy,$Spain$and$Portugal.$$$The$question$to$which$weve$to$find$an$answer$is:$why$was$the$European$periphery$not$able$to$attract$more$capital$from$the$European$core?$Capital$usually$flows$to$rich$rather$tha$to$poor$countries,$despite$the$fact$that$wages$are$lower$in$poor$countries$(Lucas$paradox).$$Three$explanations$have$been$offered$for$this$phenomenon:$$1. Lower$labor$productivity$in$the$European$periphery$can$potentially$explain$why$capital$did$not$flow$there;$2. NonQadherence$to$gold$may$have$dissuaded$foreign$investors$3. It$may$simply$be$that$these$contries$were$not$attractive$to$investors$as$the$landQabundant$New$World.$$$Another$question$to$which$weve$to$find$an$answer$is:$what$were$the$effects$of$capital$flows$on$welfare$levels$in$the$capitalQexporting$countries?$$As$investors$preferred$foreign$investment$opportunities$to$domestic$ones$based$on$their$relative$profitability,$capital$exports$should$have$been$beneficial$to$the$core$countries$lowering$GDP$(output)$but$raising$GNP$(income).$But$there$were$some$problems$$because$the$1931$Macmillan$Report$claimed$that$the$City$of$London$systematically$discriminated$against$domestic$borrowers,$preferring$instead$to$invest$overseas.$This$situation$let$another$problem$rise;$could$Britain$have$done$better$by$retaining$more$savings$in$the$domestic$economy?$Research$has$shown$that$entrepreneurs$had$strong$internal$sources$of$funding$and$easy$access$to$local,$provincial$financing.$Rather,$what$was$missing$was$the$highly$skilled$workQforce$required$to$take$full$advantage$of$the$opportunities$offered$by$the$Second$Industrial$Revolution.$$IMPERIALISM'AND'EUROPEAN'WELFARE'

SARA$TACCONE$$

11

One$of$the$driving$forces$behind$imperialism$was$the$influence$of$European$traders,$who$saw$in$political$control$a$way$to$facilitate$their$economic$exchanges$with$African$and$Asian$producers$and$consumers.$Some$industrialists$also$believed$that$the$creation$of$a$reserved$market$would$be$a$suitable$answer$to$international$competition,$and$they$managed$to$convince$certain$politicians.$$Its$not$certain$whther$empires$represented$a$net$benefit$for$the$European$powers;$weve$to$focus$on$the$British$Empire$because$it$was$the$largest$and$the$only$that$controlled$economically$advanced$settler$colonies.$According$to$Davis$and$Huttenback,$private$British$investment$in$the$empire$after$1880$yielded$higher$returns$than$investment$in$the$domestic$economy,$but$smaller$returns$than$investment$in$foreign$countries.$$To$determine$the$effect$of$empire$on$European$economic$welfare,$its$crucial$to$decide$on$the$appropriate$conterfactual;$analyzing$the$data$Edelstein$showed$that$the$benefits$of$empire$for$UK$may$have$been$somewhere$between$0.4%$and$6.8%$of$its$GDP$in$1913.$Edelstain$assumed$that$there$would$have$been$no$redirection$of$trade$to$compensate$for$lower$imperial$demand$but$they$do$not$take$into$account$any$impact$of$empire$in$facilitating$emigration$from$the$UK.$$Even$if$global$economic$effect$of$empires$was$small,$they$may$have$had$an$important$redistributive$role;$certainly$the$military$and$state$apparatus$benefited$everywhere,$while$there$was$an$obvious$cost$to$taxpayers.$On$the$whole,$the$European$benefits$from$imperialism$were$small$and$uncertain.$$$ $ PERSSON,'K.'G.'[2010];'An'Economic'History'of'Europe,'ch.'9''

'INTERNATIONAL'MONETARY'REGIMES'IN'HISTORY''WHY'IS'AN'INTERNATIONAL'MONETARY'SYSTEM'NECESSARY?'Countries$must$be$able$to$convert$their$currencies$if$trade$is$not$to$be$restricted$to$barter;$hence$the$need$for$an$international$monetary$system.$$There$are$several$advantages$in$an$international$monetary$system$and$these$advantages$can$be$understood$by$considering$the$wellQknown$national$income$accounting$identity:$$national$production$=$C+$I+$government$consumption$+$net$X$$Hence$production,$or$aggregate$supply,$in$an$economy$must$be$equal$to$aggregate$demand,$because$national$saving$is$defined$by$the$difference$between$income$(production)$and$consumption.$$$savings=production$$consumption$$government$consumption$Net$exports$=$savings$$investment$$This$identity$must$hold$for$every$economy.$$A$current$account$deficit$(=negative$net$exports)$implies$that$the$country$is$borrowing$from$the$rest$of$the$world$to$finance$investment,$whereas$a$current$account$surplus$implies$that$it$is$investigating$aborad.$The$desirability$of$this$depends$on$whether$investments$are$more$profitable$at$home$or$abroad.$Clearly,$if$there$isnt$an$international$monetary$system$and$trade$is$balanced,$then$the$net$exports$are$equal$to$zero$and$domestic$investment$is$constrained$by$domestic$

SARA$TACCONE$$

12

saving.$Without$a$functional$international$monetary$system,$trade$is$restricted$and$foreing$investment$is$impossible.$$$HOW'DO'POLICYMAKERS'CHOOSE'THE'INTERNATIONAL'MONETARY'REGIME?'Historically,$it$was$believed$that$commodity$currencies$and$fixed$exchange$rates$were$essential$to$a$functional$international$monetary$regime.$Commodity'money$is$fixed$in$value$relative$to$some$particular$commodity$and$this$implies$that$currencies$based$on$the$same$commodity$were$fixed$in$value$in$relation$to$each$other.$$However$floating$exchange$rates$dominate$and$all$different$currencies$are$all$floating$against$each$other.$In$the$late$twentieth$century$there$was$a$move$to$fiat$currencies$$where$the$value$depends$solely$on$the$order,$fiat,$of$the$government$$and$the$automatic$link$between$currencies$broke$down.$The$reason$for$the$dominance$of$floating$exchange$rates$in$todays$world$is$the$changing$in$priorities$of$policymakers.$$Fixed$exchange$rates$provide$some$advantages$because$international$traders$are$not$subjected$to$unexpected$changes$in$exchange$rates$and$do$not$need$to$factor$this$uncertainty$into$the$price$they$demand$for$their$goods.$Lowering$the$interest$rate$increases$the$range$of$profitable$investments$in$the$economy$and$will$stimulate$investment$and$thus$increase$aggregate$demand$and$hence$production.$Under$a$fixed$exchange$rate$regime,$monetary$policy$is$geared$towards$ensuring$that$the$currency$maintains$some$fixed$value$against$other$currencies$or$a$certain$commodity.$If$the$CB$lowers$i,$investors$will$sell$the$domestic$currency$and$buy$higherQyielding$foreign$assets.$If$the$demand$for$domestic$currency$is$lowered,$$its$value$will$tend$to$depreciate$against$other$currencies,$and$this$is$not$allowed$in$a$fixed$exchange$rate$system.$$But$to$be$sure$about$the$fact$that$this$phenomenon$is$always$true,$weve$to$take$into$consideration$the$role$of$arbitrage;$speculators$respond$to$the$lower$return$return$to$domestic$capital$by$moving$assets$out$of$the$country$an$thus$impacting$on$the$exchange$rate.$However$if$capital$controls$are$in$place,$this$will$be$impossible.$By$limiting$the$movement$of$capital$between$countries,$also$trade$will$be$penalized$and$thus$capital$controls$may$be$unattractive$in$the$sense$that$they$limit$trade.$From$this$we$can$deduce$that$fixed$exchange$rates$can$only$be$combined$with$monetary$autonomy$at$the$expense$of$unrestricted$capital$mobility$as$well$as$unrestricted$capital$mobility$can$only$be$combined$with$monetary$autonomy$at$the$expense$of$a$fixed$exchange$rate$regime.$This$is$the$open$economy$trilemma$described$by$Obstfeld$and$Taylor).$$$A$monetary$union$is$the$extreme$form$of$a$fixed$exchange$rate,$where$exchange$rates$are$abolished$altogether.$$$The$trilemma$is$a$convenient$way$to$understand$the$history$of$international$monetary$regimes.$$$Dont$forget$that$worldwide$fixed$exchange$rate$systems$are$a$thing$of$the$past.$$INTERNATIONAL'MONETARY'REGIMES'IN'HISTORY'THE'INTERNATIONAL'GOLD'STANDARD'

SARA$TACCONE$$

13

The$history$of$international$monetary$system$can$be$seen$as$a$gradual$realization$that$fixed$exchange$rates$are$not$necessary,$although$a$political$attachment$to$them$remains$in$and$between$certain$countries.$$Gold$had$been$used$as$money$since$ancient$times$but$when$countries$started$to$fix$their$currencies$ahgainst$gold$in$a$more$institutionalized$way$(in$the$nineteenth$century)$their$currencies$automatically$became$fixed$against$each$other.$$$The$gold$standard,$as$an$institution,$emerged$in$Britain$in$1819$with$the$Resumption$Act$which$both$resumed$and$institutionalized$the$practice$of$exchanging$currency$notes$for$gold$on$demand$at$a$fixed$rate.$The$history$of$the$emergence$of$the$gold$standard$shows$that$it$is$politics$as$well$as$economics$that$determines$monetary$policy.$Emerging$states,$such$as$the$United$States$and$Germany,$were$quick$to$form$their$own$monetary$unions.$We$can$talk$about$a$more$general$spirit$of$internationalism$in$the$globalized$world$of$the$late$nineteenth$century$led$to$attempts$at$international$monetary$union$with$the$Scandinavian$Monetary$Union$from$1875$and$the$Latin$Monetary$Union$(LMU)$from$1865.$$$France$saw$the$LMU$as$the$nucleus$of$an$international$system$based$on$the$franc$and$Paris$and$one$consequence$was$that$the$LMU$was$based$on$a$bimetallic$standard$ratger$than$the$british$gold$standard.$$$Despite$their$political$significance,$monetary$unions$are$not$particularly$economically$important$in$a$world$of$fixed$exchange$rates$and$by$1870s$all$the$countries$were$basing$their$currencies$on$gold$and$this$implied$fixed$exchange$rates.$$The$rules$of$the$game$of$the$gold$standard$depended$on$the$law$and$practice$of$individual$countries$but$the$more$important$and$the$most$common$were:$$$ 1. The$currency$should$be$freely$convertible$to$gold$at$a$set$price$or$mint$parity,$2. There$should$be$no$barriers$to$the$flow$of$capital,$3. Money$should$be$convertible$on$request$to$gold,$and$thus$backed$by$gold$reserves.$$$However$small$deviations$in$the$exchange$rate$were$possible$due$to$the$transport$and$transaction$costs$involved$in$shipping$gold$hence$arbitrage$will$only$take$place$as$long$as$the$gains$from$it$outwigh$the$costs.$$$Governments$under$the$gold$standard$took$on$the$whole$a$laissez$faire$attitude$towards$economic$policy.$Hume$described$the$priceQspecieQflow$mechanismwhereby$the$glod$standard$should$automatically$ensure$balance$of$payments$equilibrium.$He$imagened$a$situation$whereby$gold$was$flowing$into$Britain$from$abroad,$thus$causing$British$prices$to$rise$in$relation$to$those$abroad$hence,$as$the$British$demand$for$foreign$goods$increased$and$demand$for$british$goods$decreased,$gold$would$start$flowing$abroad$again$and$equilibrium$would$be$restored.$However,$if$Britain$was$enjoying$a$trade$surplus,$traders$would$accumulate$an$excess$of$foreign$currency;$they$would$present$this$to$foreign$banks$for$gold,$which$would$then$flow$into$Britain$and$be$exchanged$for$British$currency$

SARA$TACCONE$$

14

by$British$banks.$The$money$supply$and$the$price$level$in$Britain$would$increase$and$this$will$restore$the$equilibrium$in$the$same$way$as$before.$$$CBs$were$$more$worried$about$gold$losses$thn$gold$gains.$CBs$often$practised$sterilization$of$gold$inflows,$thus$preventing$them$from$entering$the$money$supply.$$This$enable$them$to$build$up$excess$of$gold$reserves,$without$affecting$the$money$supply.$$$Nevertheless,$despite$the$above$mentioned$deviations$from$the$rules$of$the$game,$the$gold$standard$lasted$many$decades$because$of:$ Commitment$deviations$from$the$gold$standard$would$be$followed$by$a$return$to$the$original$parity$ $confidence$$people$believed$that$exchange$rates$would$remain$fixed,$so$all$the$speculation$went$in$the$direction$of$maintaining$the$fixed$exchange$rates$ symmetry$no$one$country$have$an$overwhelming$influence$on$price$levels.$$$Although$$the$gold$standard$ensured$price$stability$over$longer$periods,$for$shorter$periods$there$were$uniform$rates$of$inflation$or$defleation$across$countries.$$$

THE'INTERWAR'PERIOD'The$interwar$years$were$to$see$the$end$of$the$gold$standard$both$for$political$and$economics$reasons.$$During$the$First$World$War,$the$gold$standard$was$suspended$but$after$the$war,$some$governments$financed$reconstruction$by$printing$even$more$money$and$this$led$to$inflation,$often$on$massive$scale.$When$governments$were$in$this$situation,$they$prioritized$a$return$to$gold.$$$Deflation$can$be$painful$for$economies,$because$wages$do$not$normally$fall$so$labour$becomes$relatively$expensive$and$output$declines.$$$By$1929$the$US$was$trying$to$slow$its$overheated$economy$through$monetary$contraction$and$France$was$ending$an$inflationary$period$with$a$return$to$gold.$Both$France$and$US$were$sterilizing$gold$inflows$and$absorbing$the$worlds$gold,$to$the$extent$that$they$ended$holding$70%$of$global$supply.$As$a$consequence,$the$other$countries$were$forced$to$restrict$their$money$supply;$this$contraction$and$the$Wall$Street$Crash$of$1929$led$to$the$Great$Depression$of$1930s.$$Eichengreen$has$demonstrated$that$the$gold$standard$played$a$large$part$in$prolonging$and$worsening$the$Depression$in$fact$countries$refused$to$provide$liquidity$because$they$needed$to$protect$their$gold$reserves.$In$addition,$many$countries$that$had$previously$been$forced$to$rely$on$American$loans$were$forced$to$introduce$currency$controls$$currency$controls$+$very$low$capital$mobility$=$decline$in$world$trade.$$$In$1931$UK$left$the$gold$standard$and$it$was$soon$followed$by$other$countries.$These$nations$early$devalued$to$about$60%$of$their$1929$exchange$rate$and$recovered$faster$from$the$Great$Depression.$$

SARA$TACCONE$$

15

Devaluation$implied$an$increase$in$inflation,$which$reduced$product$wages$(that$is$the$wage$cost$relative$to$the$price$of$the$product),$and$real$interest$rates$(because$nominal$wages$were$constant$while$devaluation$permitted$producers$to$increase$prices).$$$Countries$that$left$the$gold$standard$early$enjoyed$a$faster$recovery.$$$The$international$gold$standard$relied$on$fixed$exchange$rates$and$free$capital$mobility$and$thus$could$not$survive$in$a$world$where$monetary$policy$became$crucially$important.$$$THE'BRETTON'WOODS'SYSTEM'The$reaction$to$Great$Depression$was$disastrous.$Protectionism$increased$hence$restrictions$were$imposed$on$capital$flows$and$countries$general$became$more$autarkic.$$$In$July$1944,$44$countries$signed$the$Article$of$Agreement$of$the$International$Monetary$Found$(IMF)$at$Bretton$Woods.$$The$British$representative,$Keynes,$hoped$to$design$a$system$whereby$exchange$rates$could$be$fixed$and$monetary$policy$applied$without$trade$restrinctions$being$necessary.$They$designed$the$Bretton$Woods$System$as$a$dollar$exchange$standard:$$

the$dollar$was$fixed$against$the$price$of$gold:$$35$an$ounce$ member$countries$held$reserves$in$gold$or$dollar$assets,$with$the$right$to$sell$dollars$to$the$US$Federal$Reserve$for$gold$at$the$official$price.$These$reserves$were$to$guard$against$shortQterm$swings$in$exchange$rates,$without$a$link$to$the$monetary$supply$as$they$had$had$under$the$gold$standard$ all$currencies$were$fixed$in$value$against$the$dollar,$giving$NQ1$exchange$rates.$$$This$system$was$very$similar$to$the$gold$standard$but$the$important$difference$led$to$the$freedom$of$countries$to$use$monetary$policy.$Hence,$according$to$the$trilemma,$capital$movements$must$be$restricted$by$requiring$convertibility$of$currencies$only$on$the$current$account$(for$goods$and$services)$and$not$on$the$financial$account$(for$financial$assets).$$$The$Bretton$Woods$System$aimed$to$ensure$flexibility$for$countries$that$were$experiencing$current$account$deficits$and$this$implies$two$things:$$1. the$IMF$would$control$a$pool$of$gold$and$currencies$from$member$countries$which$it$could$lend$to$memebers$that$were$experiencing$current$account$deficits,$but$where$contractionary$policy$would$cause$unemployment.$(memebers$taht$borrowed$from$the$IMF$would$be$supervised$by$the$IMF)$2. parities$were$adjustable$hence$if$the$balance$of$payments$was$in$fundamental$disequilibrium,$countries$could$devalue$against$the$dollari$f$they$suffered$permanent$adverse$international$shifta$in$the$demand$for$their$products.$$

SARA$TACCONE$$

16

The$flexibility$of$the$system$was$one$of$the$causes$of$its$instability;$speculators$found$ways$by$borrowing$from$abroad,$by$delaying$payment$for$goods$or$lending$by$forewarding$money$in$advance.$$$The$downfall$of$the$Bretton$Woods$System$was$its$assymetry$in$fact$only$the$USA$had$the$freedom$to$set$its$interest$rate$and$use$monetary$policy;$the$other$nations$had$to$use$monetary$policy$to$tie$their$currencies$to$the$dollar.$$However$in$1960s$Democratic$administrations$expanded$welfare$spending$and$got$involved$in$the$Vietnam$War$with$the$result$that$budget$deficits,$expansionary$monetary$policies$and$inflation$doubled.$Inflation$continued$over$time$and$gold$convertibility$eas$abandoned$in$1973$destroying$the$Bretton$Woods$System.$The$possibility$of$combining$monetary$freedom$with$fixed$exchange$rates$depend$crucially$on$the$ability$to$avoid$destabilizing$speculation.$$$THE'WORLD'OF'FLOATING'EXCHANGE'RATES'Floating$exchange$rates$were$initially$seen$as$a$temporary$measure$but$after$the$collapse$of$Bretton$Woods$System,$countries$soon$lost$interest$in$an$international$fixed$exchange$rate$system,$since$floating$exchange$rates$turned$out$to$be$compatible$with$free$capital$flows$and$trade.$$$The$new$exchange$rate$orders$were$regional$rather$than$truly$international$however,$even$at$a$regional$level,$the$stability$of$European$system$was$difficult$to$maintain$without$defections$and$frequent$exchange$rate$adjustments.$$$In$the$EMS$(European$Monetary$System)$Germany$was$the$conductor$of$monetary$policy;$many$countries$pegged$their$currencies$to$the$German$mark$because$Germany$had$a$reputation$for$low$infaltion$but$they$had$to$obey$to$the$German$monetary$policy.$$$$A$monetary$union,$such$the$european$one$in$2002,$deprives$domestic$governments$of$monetary$autonomy$and$the$independent$European$Central$Bank$has$adopted$an$explicit$inflation$target.$The$coordination$of$fiscal$policies$when$needed$is$the$crucial$difference$with$the$Bretton$Woods$System.$This$coQordination$has$mainly$aimed$at$setting$ceilings$on$public$debt$and$borrowing,$and$even$that$has$not$been$easy$to$accomplish.$$$ $TOPIC'6:'THE'WORLD'BETWEEN'WARS''

FEINSTEIN,'C.H.,'P.'TEMIN,'and'G.'TONIOLO'[2008],'The'World'Economy'between'the'World'Wars'(Oxford'University'Press),'ch.1W2'$

'1.1 MODERN'ECONOMIC'GROWTH'IN'A'TWENTIETHWCENTURY'PERPESCTIVE'The$years$between$the$two$world$wars$were$politically$and$economically$turbolent.$$To$analyse$these$years,$weve$to$start$by$placing$interwar$years$in$the$context$of$modern$economic$growth.$$During$the$first$part$of$the$nineteenth$century,$and$in$some$regions$for$long$after$that,$the$standard$of$living$of$the$average$peasant$family$in$the$most$advanced$areas$of$western$Europe$and$North$America$had$far$more$in$common$with$the$standard$of$living$of$their$medieval$ancestors$serving$on$feudal$manors$than$with$their$postQSecond$World$War$greatQgrandchildren.$$$The$large$majority$of$people$living$outside$of$western$Europe$and$the$so$called$European$overseas$offshoots$survived$on$an$amount$of$resources$possibly$30$to$50%$lower$than$those$avaible$to$the$masses$

SARA$TACCONE$$

17

in$the$areas$of$the$world$where$an$industrial$revolution$of$some$kind$had$sparked$the$transformation$of$the$daily$life$of$ordinary$people$for$which$Simon$Kuznets$coined$the$term$modern$economic$growth.$$$Kuznets$showed$that$those$countries$in$which$modern$economic$growth$occurs$experience$a$number$of$similar$quantitative$developments$related$to$the$longQrun$rates$of$growth$of$aggregate$and$sectoral$production,$consumption$and$saving$patterns,$and$structural$chages$in$the$economy.$$$The$main$features$of$the$modern$economic$growth$are$the$following:$$ Acceleration$in$the$growth$of$population$and$consumption;$ A$rise$in$savings$and$investments$ratios;$ A$shift$in$the$composition$of$GDP$away$from$agriculture;$$ Tremendous$increase$in$the$international$movement$of$goods,$services,$and$factors$of$production.$$$In$the$early$part$of$the$nineteenth$century,$modern$economic$growth$had$spread$all$over$Europe$and$in$the$US$but$it$was$only$after$the$Second$World$War$that$industrialization$and$GDPQgrowth$acceleration$became$an$increasingly$common$feature$of$the$other$countries,$particularly$in$Asia.$$$The$years$between$the$two$World$Wars$are$years$of$longQterm$economic$growth.$However$divergence,$rather$than$convergence$towards$the$productivity$leaders,$has$tended$to$characterize$the$longQrun$growth$process$of$the$world$economy,$at$least$until$the$1980s$(except$for$Japan).$$Rates$of$growth$also$differed$over$time,$beyond$the$normal$cyclical$fluctuations,$suggesting$that$in$each$given$period,$factors$such$as$technology,$institutions,$and$economic$polices$affected$the$world$economy$in$different$ways.$$$

1.2 SOME'QUANTITATIVE'FEATURES'OF'THE'INTERWAR'YEARS''The$slowdown$in$the$worlds$real$per$capita$growth$between$1913$and$1950$provides$the$background$to$the$present$history.$$To$analyze$the$various$aspects$of$the$international$economy$during$the$interwar$years,$its$useful$to$discuss$a$few$stylized$facts$that$are$prominent$features$of$the$aggregate$quantitative$changes$between$1913$and$1950;$$1. The$slowdown$in$economic$activity$affected$individual$areas$in$quite$different$ways,$$2. The$overall$slowdown$was$the$result$of$quite$satisfactory$rates$in$the$1920s$and$of$dismal$economic$performance$in$the$1930s,$3. Far$from$keeping$pace$with$output$trends,$international$trade$declined$in$real$terms$4. High$and$structural$unemployment$was$the$shocking$new$phenomenon$of$those$years$$5. Labor$productivity$increased$more$rapidly$than$in$1890Q1913.$$Slower'Growth'The$reduction$in$the$growth$of$real$per$capita$GDP$between$1870$and$1913$and$between$1913$and$1950$characterized$Western$Europe,$United$States,$Latin$America,$Japan,$China$and$India.$$$The$Soviet$Union$in$the$1930s$provided$a$striking$contrast$to$the$dismal$performance$of$most$of$the$market$economies.$$$$

$$$

SARA$TACCONE$$

18

THE'GLOBALIZATION'BACKLASH'$The$distribution$of$international$trade$and$the$sharp$reduction$in$the$crossQborder$movements$of$factors$of$production$are$known$as$"globalization$backlash".$$$International$movements$of$goods,$services,$capital,$and$labor$typically$depend$on$two$sets$of$factors:$$$1)$technology$Q$which$reduces$transport$and$communication$costs$and$hence$created$increasingly$favorable$conditions$for$crossQborder$economic$integration$2)$institutions$(domestic$and$international)$Q$that$may$favor$or$hinder$international$economic$integration$$$For$what$concerns$institutions,$we've$to$divide$between$international$and$domestic$ones;$continuous$tension,$misunderstandings$and$lack$of$cooperation$characterized$international$relations$resulting$in$the$creation$of$an$institutional$environment$inimical$to$trade$add$to$the$cross$border$movement$of$people.$On$the$domestic$front,$countries$were$busy$erecting$tariff$and$nontariff$walls,$limiting$immigration$and$minutely$regulating$international$financial$transactions.$$$Europe$was$largely$responsible$for$the$dramatic$fall$in$international$trade$growth$during$the$Great$War$and$the$interwar$years;$in$the$1930s$the$volume$of$the$Western$European$exports$actually$declined.$$$(TABELLA)$$$An$important$factor$that$has$to$be$mentioned$while$taking$into$consideration$this$period,$is$that$forced$migration$increased.$$$CrossQborder$capital$flows$reached$an$all$time$peak$in$1913.$They$became$a$casualty$of$the$Great$War$and$remained$depressed$in$the$following$two$decades,$characterized$as$they$were$by$administrative$controls$on$crossQborder$monetary$transactions$(=exchange$controls)$and$by$uncertainty$future$exchange$rates.$$THE'RISE'IN'UNEMPLOYMENT'$High$unemployment$rates,$stand$out$in$collective$memories$as$the$most$deeply$felt$economic$feature$of$the$interwar$period.$$$Comparing$unemployment$over$time$and$across$countries$is$a$daunting$task$however$there$senses$to$be$some$consensus$among$scholars$that$unemployment$before$the$First$World$War$was$shorter$average$duration$than$that$experienced$after$1918.$$What$can$be$noticed$is$that$exceptionally$high$unemployment$rates$stand$out$as$a$feature$of$1930s$while$unemployment$in$the$1960s$was$exceptionally$low.$$$PRODUCTIVITY$CONTINUES$TO$IMPROVE$$While$the$number$of$unemployed$rose,$availed$evidence$shows$that$product$per$hour$worked$by$those$who$retained$their$jobs$continued$to$increase.$$$There$are$three$plausible$reasons$for$this$phenomenon:$$1)$1920s$and$1930s$were$rich$in$technological$innovations$(such$as$the$combustion$engine,$the$assembly$line$and$the$electrical$network$and$motor)$2)$continuation$of$the$prewar$trend$of$extending$elementary$and$secondary$education$to$an$evenQlarger$number$of$people$and$of$investing$in$higher$education$$3)$it$may$be$a$consequence$of$unemployment$itself.$$$Whatever$caused$this$constant$improvement,$it's$important$for$two$reasons:$$1)it$reinforces$the$by$that$slow$growth$and$depression$were$manQmade$rather$than$natural$phenomena;$2)it$(partly)$explain$the$extraordinary$growth$rates$of$the$years$after$the$Second$World$War.$$$OUTPUT'GROWTH:'BELLIGERANTS'AND'NEUTRALS'$Given$the$lenght$and$the$complexity$of$the$period$taken$into$consideration$(1913Q1950),$growth$rates$were$the$result$of$participation$or$neutrality$in$one$or$both$world$wars,$the$speed$of$respective$recoveries,$

SARA$TACCONE$$

19

monetary$and$exchangeQrate$polices,$semiQplanned$fascist$economies,$and$other$factors.$Two$of$the$fastestQgrowing$countires,$Sweden$and$Switzerland,$remained$neutral$during$both$the$First$and$the$Second$World$Wars.$$$While$in$the$period$from$1913$to$1929$are$taken$into$consideration$countries$that$partecipated$in$the$Great$War;$the$results$show$that$neutral$outperform$all$winners$while$the$winners$(except$for$UK)$do$better$than$the$cores$of$the$two$preQ1918$cenral$empires$that$were$defeated$in$the$war$and$lost$significant$parts$of$their$territories.$$$The$third$element$taken$into$consideration$is$the$adherence$to$the$gold$standard$until$1935Q1936;$the$countries$that$left$gold$definitely$outperform$the$memebers$of$the$gold$bloc$and$Switzerland.$$$To$understand$the$slowdown$in$modern$economic$growth$experienced$in$the$period$of$our$study,$its$appropriate$to$explore$first$and$foremost$the$effects$of$the$war$and$of$illQadvised$economic$polices.$$1.3 TWO'PROPOSITIONS'ABOUT'INTERNATIONAL'ECONOMIC'ORGANIZATION''STRUCTURAL'IMBALANCES'AND'THE'END'OF'THE'EMPIRE''The$traditional$explanation$for$the$depth$and$persistence$of$widespread$postwar$difficulties$is$the$problem$of$structural$imbalance$within$and$between$countries.$The$origins$of$this$dislocation$are$found$in$the$changes$in$the$composition$of$production$and$demand$resulting$from$the$wartime$disruption$of$international$trade,$from$the$geopolitical$effects$of$the$Treaty$of$Versailles,$and$from$the$postwar$changes$in$technology$and$patterns$of$demand.$$$Although$the$effects$of$these$changes$are$not$always$clearly$spelled$out,$they$may$be$taken$to$relate$particularly$to$a$misallocation$of$resources$that$was$responsible$for$the$high$rate$of$unemployment$in$Europe$in$1920s$and$that$also$made$the$adjustment$process$longer$and$more$costly.$$$Conflict$in$Asia$both$within$China$and$between$China$and$Japan$impeded$economic$growth$and$prosperty$there.$The$collapse$of$the$Chinese$Empire$was$not$as$closely$tied$to$the$war$as$was$the$collapse$of$the$empires$nearer$to$the$actual$conflict.$China$was$doubly$disadvantaged$by$having$inexperienced$leaders$at$home$and$an$aggressive$Japan$on$its$doorstep.$$$POLITICS'AND'ECONOMICS'''A$lack$of$leadership$by$governments,$CBs,$and$international$institutions$in$the$operation$of$restoring$the$gold$standard$and$in$international$economic$policy$making$has$been$noted$by$Brown$and$Kindleberger.$$$The$diminished$political,$military$and$financial$status$of$the$UK$meant$that$London$was$unable$to$acta$s$sole$conductor$of$the$international$orchestra$while$the$US$was$not$yet$willing$to$take$over$this$role,$despite$the$enormous$improvement$in$its$international$standing.$$$The$specific$financial$manifestation$of$the$lack$of$leadership$was$that$there$was$no$country$able$and$willing$to$stabilize$the$global$monetary$environment$and$this$lack$was$compounded$by$the$absence$of$international$cooperation$between$the$US,$Britain,$France$and$Germany$and$the$major$nations$to$coordinate$their$domestic$economic$polices.$$Eichengreen$suggested$lack$of$cooperation$as$a$central$feature$of$the$entire$period,$manifested$particularly$in$the$attempt$of$each$of$the$main$powers$to$secure$for$itself$a$disproportionate$share$of$the$worlds$limited$stocks$of$monetary$gold.$Prior$to$the$colapse$of$the$gold$standard$in$1931,$their$uncoperative$behaviour$involved$the$imposition$of$tight$monetary$polices$by$both$countires$in$deficit$and$in$surplus;$this$added$to$the$deflationary$pressures$on$the$world$economy$and$increased$the$vulnerability$of$the$weak$currencies.$$$The$shortcomings$of$the$interwar$adjustment$mechanism$are$explained$by$the$unwillingness$of$central$banks$to$operate$the$gold$standard$according$to$the$rules$of$the$game$under$which$all$movements$in$gold$should$have$been$fully$reflected$in$compensating$chaanges$in$domestic$money$supplies.$The$main$reason$for$this$tendency$to$neutralize$changes$in$gold$and$foreignQexchange$reserves,$rather$than$allowing$them$to$influence$internal$monetary$conditions,$was$that$postwar$governemnts$were$no$longer$willing$to$give$

SARA$TACCONE$$

20

unconditional$support$to$external$equilinrium$and$the$defense$of$the$reserves,$due$to$increased$political$cost$of$the$necessary$measures.$$$Democratic$electorates$increasingly$required$that$governments$should$attach$greater$weight$to$internal$stability$of$prices$and$incomes.$$$The$inability$of$the$powers$to$cooperate$was$dramatically$symbolized$at$the$World$Monetary$Conference$in$the$summer$of$1933,$where$the$governments$decided$to$abandon$the$gold$standard$and$allowed$the$dollar$to$depreciate.$$$Since$also$global$political$relations$were$rapidly$deteriorating,$the$decade$witnessed$an$epidemic$of$competitive$currency$depreciation;$extended$resort$to$exchange$controls;$the$rise$of$protectionism,$bilateralism,$import$quotas$and$other$barriers$to$trade;$and$the$development$of$hostile,$noncooperating$trade$and$currency$blocs.$$$Even$whene$leaders$acted$responsabily$and$cooperation$was$tried,$problems$arose$from$the$hold$that$oldQfashioned$political$and$financial$idiologies$exerted$on$policyQmakers.$$$THE'LEGACY'OF'THE'FIRST'WORLD'WAR'''

2.1 THE'ECONOMICS'OF'TOTAL'WAR''The$First$World$War$marked$the$true$watershed$between$the$nineteenth$and$twentieth$centuries.$The$late$nineteenth$century$was$characterized$by$a$relatively$weelQfunctionating$international$payment$system$based$on$the$gold$standard.$London$played$a$pivotal$and$stabilizing$role$and$the$leading$central$banks$cooperated$as$necessary$and$there$was$almost$perfect$mobility$of$factors$of$production,$reflected$in$largeQscale$movements$of$labour$and$capital$from$Europe$to$the$New$World.$Commercial$treaties$mitigated$the$impact$of$tarifss$on$international$commodity$trade,$stimulated$by$rapidly$falling$transportation$costs.$$$The$war$itself$was$a$major$economic$revolution.$When$the$governemnts$realized$that$the$concept$at$the$basis$of$the$shortQwar$theorem$$(any$modern$war$was$bound$to$be$brief$given$the$limited$resources$avaible$and$the$disruption$in$economic$and$social$life$that$a$war$would$create)$started$to$be$unreliable,$$they$rapidly$started$to$organize$the$total$war.$$$Germanys$central$planning$of$the$supply$of$raw$materials$and$their$distribution$to$companies$working$for$the$government$turned$out$to$be$particularly$effective$and$it$was$accompained$by$an$industrial$reorganization$that$more$often$than$not$entailed$compulsory$cartelization.$This$situation$implied$the$fact$that$small$industry$was$sacrificed$to$the$needs$of$industrial$giants.$$In$Britain$we$assisted$to$the$creation$of$the$Ministry$of$Munitions$in$1915$and$it$supervised$private$business$and$supplemented$their$efforts$with$direct$investments$when$needed.$$In$many$areas$this$colossal$productive$effort$was$coupled$with$an$acceleration$of$technical$progress$bith$in$products$and$production$processes$even$because$the$workforce,$subject$to$military$discipline,$was$scientifically$organized.$$$With$rthe$total$war$society,$particulary$in$the$countryside,$was$deeply$changed$by$the$departure$of$almost$all$acceptable$men$and$their$replacement$by$women,$children$and$older$workers.$Meanwhile$in$the$trenches$men$learned$ways$of$organizing$large$numbers$of$people$for$political$purposes.$$$From$a$political$point$of$view,$the$political$change$came$when$the$mass$movements$overwhelmed$the$government$leading$to$fundamental$political$changes;$in$Germany$the$Kaiser$abdicated$and$was$replaced$by$a$republic,$the$AustroQHungarian$Empire$collapsed$into$a$set$of$small$countries,$the$Russian$Empire$was$taken$over$by$the$Bolsheviks,$the$Ottoman$Empire$collapsed$but$only$Turkey$and$Egypt$emerged$as$independent$countries.$However$the$Japanese$Empire$emerged$stronger$from$the$war;$Tokyos$almost$costless$alliance$with$the$Entente$allowed$it$to$make$some$territorial$gains$and$to$consolidate$its$colonial$holdings$and$its$commmercial$influence$in$Asia.$$$One$of$the$reason$of$the$demise$of$the$various$empires$had$to$do$with$the$fact$that$farmers$felt$hardQpressed$and$reluctant$to$sell$food$and$this$led$to$acute$food$scarcity$in$the$cities$and$abundant$food$in$the$countryside$with$no$market.$Lack$of$food$is$a$classic$source$of$civil$unrest$and$the$inevitable$result$was$revolution.$$

SARA$TACCONE$$

21

$In$the$international$economy,$the$war$brought$about$two$major$developments:$$1. The$displacement$of$the$agricultural$sector$in$the$belligerent$countries$led$to$lifting$of$import$duties$in$order$to$gain$access$to$the$cheapest$overseas$supplies;$2. Financial$cooperation$was$undertaken$by$the$Entente$powers$in$the$form$of$interQAllied$loans$$(Britain$lent$to$its$financially$weaker$allies,$France,$Italy$and$Belgium.$Later$USA$provided$war$loans$to$all$the$European$countries$fighting$against$the$central$empires).$$ As$a$result,$the$allies$exhange$rates$could$be$pegged$at$politically$acceptable$levels$and$hard$$ currency$was$made$avaible$to$buy$overseas$supplies,$mostly$in$the$home$markets$of$creditor$$ countries$themselves.$$$2.2 THE'ECONOMIC'CONSEQUENCES'OF'THE'WAR'

'In$the$international$arena,$the$period$between$the$Armistice$of$November$11,$1918,$and$the$crisis$of$1923Q1924$that$led$to$some$kind$of$stabilization$was$one$of$the$great$upheaval.$The$war$left$a$permanent$scar$on$international$relations$that$made$cooperation$much$more$difficult$for$many$years$to$come.$$$Unsettled$domestic$and$international$conditions$played$a$major$role$in$generating$an$unstable$international$economic$environment.$$'THE'TWO'EXOGENOUS'SHOCKS''The$war$caused$a$major$disruption$of$the$real$economy,$both$on$the$demand$side$and$on$the$supply$side;$heroic$efforts$were$made$to$increase$productive$capacity$in$warQrelated$industries$such$as$engineering,$iron$and$steel,$and$shipbuilding.$$The$second$exogeous$shock$occurred$when$much$of$the$productive$capacity$in$warQrelated$industries$became$superflous$once$the$war$ended$and$the$relocation$of$$physical$assets$and$labor$to$pacetime$production$was$not$easy$to$be$managed.$$Another$difficulty$was$related$to$the$fact$that$not$few$changes$occurred$in$the$world$markets$during$the$war;$in$fact$countries$like$USA$and$Japan$invaded$the$European$markets$to$support$the$inability$of$European$manufacturers$during$the$war$hence$imports$from$Europe$were$substituted$by$domestic$production$(particularly$in$nonQEuropean$countries).$$Also$the$end$of$Empires$has$to$be$taken$into$cosideration;$large$markets$were$replaced$by$tariff$barriers$that$restricted$the$flow$of$goods.$$$A'MORE'RIGID'ECONOMIC'ENVIRONMENT''In$the$postwar$labor$market,$wage$flexibility$was$diminished$as$many$more$decisions$were$centrally$negotiated$in$a$greatly$extended$process$of$collective$bargaining.$$$In$the$good$markets$there$was$a$similar$tendency$toward$reduced$flexibility$of$property$incomes$and$prices.$The$war$contributed$to$this$tendency$by$causing$an$increase$in$government$intervention$in$economic$life,$the$formation$or$strengthening$of$trade$associations$and$cartles,$and$the$imposition$of$numerous$controls.$$$The$war$accellerated$the$trend$toward$larger$business$units.$In$the$extremely$difficult$cirumstances$of$1920s,$many$firms$looked$to$collusion,$cartels,$and$the$exercise$of$monopoly$powers$to$excape$the$consequences$of$increasing$competition$for$shrinking$markets.$$$A'WEAKER'FINANCIAL'STRUCTURE'''The$war$and$its$aftermath$gave$rise$to$unprecedent$needs$for$revenue;$in$all$countries,$note$issues$and$bank$credits$were$expanded$by$immense$amounts,$with$little$or$no$attempt$either$to$raise$taxes$or$to$borrow$from$public$on$the$scale$needed$to$offset$the$additional$demand$on$resources$generated$by$the$enormous$military$expenditures.$$After$the$war,$finance$ministers$faced$the$need$to$service$the$internal$public$debts$as$well$as$external$demands$for$payments$of$war$debts$and$reparations.$$'

SARA$TACCONE$$

22

A'FRAGILE'INTERNATIONAL'MONETARY'SYSTEM''The$classic$gold$standard$was$an$early$casualty$of$the$conflict;$within$a$few$months$of$the$declaration$of$war,$almost$all$European$CBs$suspended$gold$payments.$During$the$war,$the$powers$of$the$Entente$developed$their$own$payment$system$but$once$the$war$was$over,$cooperation$ceased.$$$

2.3 THE'ECONOMIC'CONSEQUENCES'OF'THE'POSTWAR'SETTLEMENTS'''THE'SHOCK'OF'ECONOMIC'RESTRUCTURING'AND'SOCIAL'UNREST'

'During$the$war,$as$much$as$30Q40%$of$the$belligerentss$GDP$was$directly$or$indirectly$controlled$by$the$state.$While$supplies$to$the$army$came$to$be$direct$responsability$of$the$governments,$the$rest$of$the$economy$was$to$a$great$extent$subject$to$various$forms$of$state$supervision.$Forms$of$administrative$controls$on$prices,$wages,$capital$and$foreignQexchange$markets$were$introduced$more$often$than$not.$$The$return$to$pacetime$economic$organization$and$production$entailed$a$huge$process$of$resource$reallocation$that,$not$only$required$a$long$period$of$time$but$also$met$with$the$resistance$of$the$vested$interests$that$had$been$created$by$the$war.$$$Businessmen$and$industrialists$were$devided$between$those$who$favored$an$immediate$return$to$a$laissez$faire$economy$and$those$who$asked$for$a$slow$return$to$normality$with$strong$state$help$in$the$process.$$$Whatever$the$pace$was$to$be,$industrial$restructuring$implied$the$closing$of$a$number$of$plants;$capital$for$the$creation$of$factories$that$would$meet$consumers$demand$was$scarce$at$home$and$unlikely$to$come$from$foreign$sources.$The$result$was$unemployment.$At$the$same$time,$householders$were$frustated$by$the$fall$in$the$real$value$of$the$wartime$savings.$$The$combinations$of$these$two$conditions$produced$a$short$but$deep$recession$between$1920$and$1921.$$$Social$unrest$was$the$main$postwar$problem.$The$almost$universal$explosion$of$workingQclass$struggles$and$protests$after$the$war$can$be$primarly$attributed$to$two$factors:$$1. Powerful$growth$of$the$organization,$strenght$and$solidarity$of$the$working$class;$2. The$Russian$revolution$exercised$considerable$influence$on$workingQclass$movements.$'$The$economic$impact$of$social$developments$differed$according$to$the$realtive$weakness$of$the$economies$and$of$the$governments$that$emerged$from$the$war.$$'THE'ECONOMIC'CONSEQUENCES'OF'THE'PEACE'TREATIES''Peace$treaties$were$signed$in$1919$,$various$aspects$of$these$treaties$were$to$be$a$cause$of$severe$disturbance$to$postwar$trade$and$production;$$1. The$way$in$which$the$political$map$of$central$and$eastern$Europe$was$redrawn$disrupted$longQstanding$economic$relations$and$created$new$barriers$to$trade$2. The$attempt$to$hold$Germany$responsible$for$the$war$by$imporing$huge$demand$for$reparations$for$the$losses$suffered$by$the$victorious$powers$became$a$major$cause$of$political$antagonism$and$economic$discord.$$$In$deciding$on$the$changes$to$the$map$of$central$and$eastern$Europe,$the$victorious$powers$were$primarly$guided$by$the$principle$of$national$selfQdetermination,$not$by$economic$considerations.$Foreign$trade$was$affected$by$the$new$frontiers,$with$significant$consequences$both$for$the$development$of$the$region$and$for$the$overall$performance$of$the$international$economy.$This$process$of$border$adjustments$and$state$formation$failed$to$reconcile$and$satisfy$all$the$conflicting$interests$and$aspirations$involved,$leaving$behind$a$permanent$residue$of$social$and$national$resentments.$$$The$dismemberement$of$the$Dual$Monarchy,$the$splitting$off$of$partes$of$the$German$and$Russian$empires$and$the$latters$autarkic$evolution$all$represented$a$major$shock$to$the$international$economy.$$These$developments$caused$widespread$resource$misallocation,$resulting$in$lower$output$and$higher$prices.$$$THE'END'OF'FINANCIAL'SOLIDARITY'AMONG'THE'ALLIES''$

SARA$TACCONE$$

23

The$war$had$been$tremendously$demanding$of$Europes$resources,$both$human$and$economic.$In$various$part$of$the$continent,$particularly$in$the$defeated$countries,$food$emergencies$developed$that$could$be$addressed$only$with$considerable$difficulty,$given$the$lack$of$foreign$exchange$to$pay$for$agricultural$imports.$In$other$areas,$reconstruction$required$considerable$amounts$of$capita$$$Finance$was$needed$all$over$Europe$to$carry$on$the$reallocation$of$resources$from$warQrelated$production$to$peacetime$production.$In$these$circumstances,$the$European$countries,$most$notably$Britain$and$France,$argued$in$favour$of$a$soft$landing.$This$would$have$meant$a$continuation$of$financial$assistance$from$the$USA$and$a$slow$relaxation$of$wartime$controls$on$exchange$reates$and$on$the$international$economy$more$generally.$$$France$demanded$the$imposition$of$very$harsh$conditions$on$Germany;$France$also$insisted$that$the$reimbursment$of$their$debts$to$USA$and$Great$Britain$must$be$linked$to$the$actual$receipt$of$reparations$from$Germany.$The$two$sets$of$requests$were$not$mutually$consistent;$if$the$aim$was$international$solidarity$to$rebuild$the$European$economy,$then$everyone$should$have$been$required$to$pay$a$price$for$the$success$of$the$cooperative$effort$buti$f,$on$the$other$hand,$the$aim$was$equitable$justice,$then$there$was$no$reason$to$establish$a$link$between$debts$and$reparations.$$$The$USA$did$not$respond$adequately$to$its$newly$acquired$responsability$as$world$leader;$the$leaders$of$the$USA$lacked$the$necessity$insight$to$understand$where$the$long$term$interests$of$the$country$actually$lay.$The$Victory$Loan$Act$(March$1919)$authorized$the$government$to$open$credit$to$foreign$countries$only$for$the$purchase$of$goods$directly$or$indirectly$belonging$to$the$government,$and$of$grains$the$price$of$which$was$guaranteed$by$the$United$States.$$$One$of$the$features$of$the$postwar$shock$was$the$immense$turmoil$in$the$world$markets$for$forign$exchange.$$$REPARATIONS''Keynes$was$the$first$to$condemn$reparations$as$economically$irrational$and$politically$unwise;$he$argued$that$it$was$not$sensible$to$cripple$Germany$economically$because$much$of$Europes$preQ1914$welfare$had$depended$on$German$economic$growth.$From$Keynes$point$of$view,$reparations$were$vincictive,$insane,$and$unworkable.$$$In$March$1921,$the$German$failure$to$fulfill$part$of$those$preliminary$requests$prompted$Allied$troops$to$occupy$the$towns$of$Dussendorf,$Duisberg,$and$Ruhrhort$on$the$east$side$of$the$river$Rhine.$One$month$later,$the$London$Schedule$of$Payments$for$the$first$time$formally$established$Germanys$reparation$obligations.$$It$was$not$until$1924$that$an$greement$was$reached$that$created$the$preconditions$for$a$reasonably$stable$system$of$international$payments,$allowing$private$capital$to$flow$into$Germany.$' '' ''TOPIC'7:'POST'WAR'GROWTH'''

EICHENGREEN,'B.'[2008];'The'European'Economy'since'1945'(Princeton'University'Press),'ch.2,'''

MAINSPRINGS'OF'GROWTH''From$the$analysis$of$Europes$economic$growth$from$1820$to$2000,$we$noticed$that$Western$Europe$grew$more$than$twice$as$fast$from$1950$through$1973$as$it$did$over$the$whole$of$the$nineteteenth$and$twentieth$centuries$(data$coming$from$the$analysis$of$the$GDPs).$The$exceptional$nature$of$the$golden$age$is$clear.$$The$same$broad$patterns$are$evident$in$Peripheral$Europe$(Greece,$Ireland,$Portugal,$Spain$and$Turkey,$so$classified$because$they$were$relatively$poor$countries$at$the$start$of$the$golden$age)$and$this$is$also$a$clear$evidence$of$the$fact$that$these$peripheral$countries$had$the$tendency$to$catch$up$with$Western$Europe$leaders.$$$In$contrast,$the$tendency$in$Eastern$Europe$was$different;$in$fact$by$the$middle$of$the$twentieth$century,$this$region$had$fallen$behind$both$the$Western$European$core$and$the$Western$European$periphery.$$

SARA$TACCONE$$

24

There$was$an$accelleration$after$1950$but$there$wasnt$the$tendency$to$catch$up$with$western$European$leaders$and$the$growth$of$per$capita$GDP$remained$slower$than$in$the$West.$$$Its$important$to$take$into$consideration$also$the$comparison$with$the$USA;$data$tell$us$that$Western$European$output$and$living$standards$fell$significantly$below$those$of$the$USA$in$the$first$half$of$the$twentieth$century.$On$the$eve$of$the$Great$Depression,$output$per$capita$was$less$than$twoQthird$of$USA$levels$and$after$the$Worl$War$II,$the$gap$among$the$two$parts$became$bigger.$Although$the$golden$age$was$global,$the$accelleration$between$1950$and$1973$was$even$faster$in$Western$Europe$than$in$the$USA$but$in$this$period$Europe$succeded$in$eliminating$40%$of$the$initial$postQWorl$War$II$gap.$$$To$define$the$situation$for$the$period$since$1973,$weve$to$make$some$important$differences$because$if$output$and$productivity$are$measured$by$GDP$per$capita,$then$the$final$quarter$of$the$twentieth$century$appears$as$a$period$of$relative$stagnation.$European$GDP$per$capita$in$2003$was$still$only$72$per$cent$of$USA$levels$buti$f$we$consider$GDP$per$hour$worked,$reflecting$the$shortening$of$the$work$year$in$Europe$in$the$final$quarter$of$the$twentieth$century,$$European$and$USA$productivity$continued$to$converge$through$the$easrly$1990s,$when$European$GDP$per$workerQhour$stabilized$in$the$range$of$90$to$95%$of$USA$levels.$$$Another$important$comparison$with$the$usa$has$to$be$made$by$taking$into$account$the$growth$of$output$with$the$growth$of$physical$capital,$the$growth$of$human$capital$and$technical$change.$$USA$was$the$technological$leader$in$1950$and$all$fifeteen$European$countries$converged$to$a$greater$or$lesser$extent$in$the$second$half$of$the$century.$Obviously,$the$sources$were$different$in$fact$throughout$Europe,$the$physical$capital$stock$per$worker$grew$faster$than$in$USA;$average$levels$of$human$capital,$derived$from$average$years$of$schooling,$also$grew$more$quickly$in$about$twoQthirds$of$European$countries.$$$PROBING'DEEPER''$Which$are$the$economic$factors$that$can$explain$in$a$clearer$way$the$situation?$$

CatchQup$and$convergence:$$$Catch&'up$refers$to$the$rapid$growth$achieved$by$reversing$the$loss$of$output$and$destruction$of$capacity$caused$by$World$War$II$(hence$by$rebulding$the$capital$stock$and$expanding$employment).$$by$1948$industrial$production$matched$the$levels$of$ten$years$earlier$$to$some$extent,$the$rapid$growth$of$the$golden$age$represented$a$simple$return$to$normalcy$(but$remember$that$normalcy,$whether$construed$narrowly$in$terms$of$the$steadyQstate$capitalQlabor$ratio$or$more$broadly$as$the$resumption$of$stability$and$growth,$could$not$be$taken$for$granted.)$However$catchQup$required$higher$than$customary$levels$of$investment$in$fact$a$striking$feature$of$the$1950s$and$1960s$is$the$rise$in$investment$rates$continentQwide.$$gross$fixed$investment$as$a$share$of$GDP$rose,$on$average,$by$5%$$but$what$delivered$high$levels$of$investment$in$the$postwar$period?$And$why$Europe$was$not$equally$successful$in$translating$capital$accumulation$into$rapid$growth$after$1973?$$Convergence$refers$to$the$additional$growth$achieved$by$closing$the$efficiency$gap$that$had$opened$up$visQQvis$the$USA.$By$the$end$of$the$nineteenth$century,$the$USA$had$assumed$a$significant$lead$in$GDP$per$capita$by$harnessing$its$endoements$of$land$and$resources$and$pioneering$massQproduction$methods.$It$had$created$a$unified$internal$market$on$a$scale$unmatched$anywhere$in$the$world$and$for$this$reason$it$was$able$to$develop$the$multidivisional$corporation,$an$organization$from$capable$of$exploiting$economies$of$scale$by$ensuring$that$integrated$producers$had$reliable$suppliers$of$raw$materials$and$economic$access$to$dispersed$local$markets.$(In$fact$American$corporations$cut$production$costs,$leading$to$their$emergence$as$worldQclass$exporters$and$giving$a$further$fillip$to$the$development$of$the$American$system$of$mass$production.)$$evidence$of$the$situation:$the$gap$in$GDP$per$person$between$Europe$and$the$USA$rose$from$25%$(in$1870)$to$more$than$40%$(in$1913).$This$was$due$to$the$fact$that$three$decades$of$low$investment$had$not$been$conducive$to$Europes$assimilation$of$massQproduction$methods.'

'$ The$growth$of$intraQ$and$extraQEuropean$trade$was$one$of$the$features$of$the$1950s$and$1960s$$ that$stands$in$sharp$contrast$with$the$preceding$decades;$in$fact$trade$integration$removed$$ market$size$as$a$constraint$on$the$adoption$of$new$technologies.$The$Code$of$Liberalization$of$the$$ Organization$for$European$Economic$Cooperation$(OEEC),$the$General$Agreement$on$Tariffs$and$

SARA$TACCONE$$

25

$ Trade$(GATT),$and$the$Common$Market$were$powerful$motors$for$the$expansion$of$Europes$$ trade.$''$ Technological$transfer$proceeded$apace;$a$growing$share$of$technological$progress$was$science$$ based,$facilitating$the$spread$of$new$knowledge;$new$communications$technologies$eased$the$$ dissemination$of$information.$The$internationalization$of$business$deepened$commercial$$ contracts,$multinational$corporations$operated$production$facilities$in$multiple$European$$ countries.$''$ On$the$other$hand,$technology$transfer$requires$that$the$acquiring$economy$have$the$capacity$to$$ assimilate$foreign$knowledge$and$postQWorld$War$II$Europe$was$singularly$well$positioned$from$$ this$point$of$view$nut$the$problem$was$education.$$In$the$countries$of$continental$Europe,$$ education$and$training$were$heavily$vocational.$Europes$educational$system$was$tailored$to$a$$ situation$where$the$task$was$to$assimilate$existing$techniques$rather$than$to$create$new$ones.$The$$ principal$exception$was$the$UK,$where$higher$education$tended$to$be$of$a$general$nature$and$there$$ the$convergence$of$productivity$to$USA$levels$proceeded$more$slowly.$$$$ Another$growth$that$has$to$be$emphasized$is$the$growth$of$labor$force;$from$1947$thrugh$1950,$$ nearly$one$million$of$persons$moved$from$Eastern$to$Western$Europe.$$The$modern$industrial$$ sector,$which$was$the$locus$of$learning$effects$and$productivity$spillovers,$could$grow$rapidly$by$$ tapping$these$elastic$labor$supplies.$With$the$consolidation$of$small$farms$and$the$adoption$of$new$$ agricultural$technologies,$workers$could$move$from$Southern$to$Northen$Europe$and$from$farm$to$$ city$without$depressing$food$supplies.$This$permitted$the$industrial$and$service$sectors$to$grow$$ more$rapidly$than$the$economy$as$a$whole.$$$ Symbolic$of$labors$newfound$militancy$were$the$stikes$and$political$demonstrations$of$the$hot$$ summer$of$1968;$with$the$breakdown$of$wage$discipline,$the$share$of$profits$in$gross$national$$ product$(GNP)$began$to$fall$and$with$declining$profits$came$declining$investment,$reflecting$the$$ reduction$in$the$rate$of$return$on$new$capital.$$$ Cyclical$stability'$ Steady$growth$meant$steady$sales,$heightening$the$porfitability$and$actrativness$of$investment.$$$ The$early$1970s$saw$the$breakdown$of$the$Bretton$Woods$System$of$pegged$but$adjustable$$ exchange$rates;$this$was$a$shock$to$confidence$and$a$threat$to$the$growth$of$trade.$European$$ countries$sought$to$replace$Bretton$Woods$whit$a$series$of$locally$formed$substitutes$but$not$until$$ the$1980s$did$these$efforts$succeed$in$restorign$a$modicum$of$currency$stability.$In$addition,$1973$$ saw$the$first$oil$shock$resulting$from$price$increases$by$the$OPEC.$This$supply$shock$was$a$$ challenge$for$a$set$of$policy$instruments$designed$to$manage$aggregate$demand.$Statistical$studies$$ point$to$an$increase$in$the$magnitude$and$dispersion$of$aggregate$demand$disturbances$after$the$$ early$1970s,$Europe$may$have$simply$been$lucky$in$the$1950s$and$1960s.$$$

INSTITUTIONAL'FOUNDATIONS'OF'THE'GOLDEN'AGE''One$explanation$for$the$high$investment,$rapid$export$growth$and$wage$moderation$that$sustained$the$golden$age$is$a$set$of$institutions$singularly$well$suited$to$the$growth$imperatives$of$the$day.$European$societies$now$developed$neocorporatist$structures$(tripartite$governing$institutions$involving$government,$management,$and$labor)$to$restrain$wage$growth$and$plow$profits$into$investment.$Those$arrangements$were$intended$to$prevent$a$repetition$of$earlier$events$and$in$this$they$succeeded;$this$time$wage$increases$did$not$suqeeze$profitability.$$$Postwar$governments$supported$the$neocorporatist$bargain;$they$asked$unions$to$limit$wage$demands$in$order$to$make$profits$avaible$for$modernization$and$capacity$expansion$and$provided$assurances$that$labor$would$share$fully$in$the$eventual$increase$in$incomes.$The$challenge$was$to$reassure$workers$that$management$would$in$fact$invest$the$profits$that$accrued$as$a$result$of$their$restraint.$$$The$postwar$period$turned$out$differently$because$cooperation$between$capital$and$labor$was$cemented$by$a$series$of$institutional$bargains.$A$first$set$of$institutions$allowed$the$parties$to$monitor$one$anothers$compliance$with$the$terms$of$their$agreement.$(Germanys$coQdetermination$law,$which$placed$worker$representatives$on$the$supervisory$boards$of$large$firms$similar$systems$were$developed$also$in$other$countries).$$

SARA$TACCONE$$

26

$A$second$set$of$institutions$created$rewards$and$penalities$to$encourage$cooperation$and$a$parallel$set$of$public$programs$bonded$labor.$$$Many$elements$of$the$postwar$social$market$economy$originated$in$this$perioda$s$part$of$the$effort$to$more$firmly$bind$capital$and$labor$to$cooperate.$But$if$wage$restraint$by$one$union$resulted$mainly$in$higher$investment$and$employment$growth$elsewhere,$since$profits$originating$in$any$one$sector$could$finance$investment$economyQwide,$the$incentive$to$defect$from$the$agreement$could$prove$irresistible.$The$solution$was$to$coordinate$wage$bargains$across$firms$and$sectors.$$In$Germany,$the$unions$adopted$a$followQtheQleader$approach;$bargaining$was$centralized$in$the$hands$of$trade$union$federations$and$employers$associations,$and$governments$used$their$influence$to$harmonize$the$terms$of$the$bargains$reached$by$unions$and$employers$at$the$branch$level.$$Swedish$arrangements$were$prototypical;$the$SAF,$the$federation$of$emloyers$associations$and$the$LO,$the$umbrella$organization$of$blueQcollar$workers,$meta$t$the$outset$of$the$annual$wage$round.$After$they$reached$a$framework$agreement,$negotiations$between$branch$unions$and$employers$commenced;$the$terms$of$the$LOS/SAF$negotiation$were$designed$to$reconcile$the$workers$desire$for$wage$increases$with$the$restraint$necessary$to$sustain$profitability$and$employment.$They$provided$a$recognized$norm$for$wage$settlements.$Through$the$first$half$of$the$1960s,$the$LO/SAF$norm$guided$even$private$whiteQcollar$and$publicQemployee$negotiations;$in$fact$the$SAF$encouraged$compliance$bby$its$memeber$associations$and$individual$employers$by$issuing$warnings,$chastising$those$who$hesitated$to$comply,$and$threatening$to$fine$employers$who$offered$wage$increases$in$excess$of$the$authorized$norm$while$the$LO$enjoyed$considerable$but$not$complete$control$over$its$member$unions.$$$Internationally,$the$institutions$of$regional$integration$worked$to$solve$a$second$set$of$coordination$problems$that$hampered$the$recontruction$of$Europes$trade;$in$1947,$UK$restored$currentQaccount$convertibility,$reserves$immediately$hemorrhaged$out$of$the$country$and$controls$on$merchandise$transactions$were$reimposed$after$barely$a$month.$European$countries$understood$that$they$needed$to$work$together$in$opening$their$economies$and$to$find$a$more$gradual$approach$to$restoring$currentQaccount$convertibility$since$given$the$difficulty$of$competing$in$US$markets,$the$only$way$to$gain$access$to$markets$in$neighboring$European$countries$was$by$opening$the$current$account.$European$countries$had$to$move$together$down$the$road$to$currentQaccount$convertibility$if$they$were$to$move$that$way$at$all.$The$European$Payments$Union$(EPU),$established$in$1950,$helped$to$coordinate$their$response;$the$members$accepted$the$OECCs$Code$of$LIberalization,$which$committed$them$to$remove$import$controls$at$a$predetermined$pace.$Membership$entitled$a$participating$country$to$credits$from$its$EPU$parterns$with$which$to$finance$temporary$trade$deficits.$The$US$provided$both$political$and$financial$support$for$this$copoperative$undertaking.$$$The$European$Coal$and$Steel$Community$(ECSC)$established$in$1951,$addressed$the$special$problems$of$heavy$industry.$Leadership$came$from$France$in$the$persons$of$the$foreign$minister$Robert$Schuman$and$his$adviser$Jean$Monnet$but$also$in$this$case,$America$lent$critical$support.$The$role$of$the$community$was$the$one$of$monitoring$production$and$investment$decisions$in$the$six$founding$member$states$but$it$also$was$an$anticipation$of$the$European$Commission,$the$European$Parliament,$the$Europeam$Council$and$the$European$Court$of$Law$(through$the$creation$of$the$Common$Assembly,$the$High$Authority,$a$Council$of$Minister$and$an$High$Court).$$$The$most$enduring$transnational$institution$was$the$European$Union$and$it$was$essential$to$sustain$the$growth$of$Europes$trade,$in$fact$over$the$second$half$of$the$twentieth$century,$intraQEuropean$rade$grew$even$faster$than$Europes$trade$wit$the$rest$of$the$world.$We$can$say$that$this$represented$a$reconstitution$of$the$continents$natural$trade$pattern$$the$tendency$for$European$countries$to$trade$disproportionately$with$their$neighbors$owing$to$low$transport$and$communication$costs.$The$growth$of$trade$allowed$countries$to$restructure$along$exportQoriented$lines$and$another$important$thing$is$that$the$increase$of$the$market$facilitated$the$adoption$of$USQstyle$massQprodiuction$methods.$$$However$conditions$that$limited$the$growth$of$real$wages$limited$the$appreciation$of$real$exchange$rates;$we$had$an$undervaluation$phenomenon,$except$for$Belgium$and$France$which$stabilized$at$levels$rgar$produced$no$improvment$in$competitivness$relative$to$1938.$$Undervaluation$and$export$growth$were$especially$dramatic$in$Germany,$reflecting$the$favorable$rate$at$which$the$mark$was$stabilized$in$1948$and$further$devaluation$in$1949$and$because$wage$and$price$

SARA$TACCONE$$

27

inflation$did$not$exceed$the$growth$of$labor$productivity$in$the$1950s,$the$favorable$competitive$position$tended$to$persist.$$$Competitive$labor$costs$allowed$Europe$to$shift$resources$into$manufacturing,$where$learning$effects$and$productivity$spillovers$were$strong;$they$allowed$producers$to$lengthen$production$runs$and$exploit$economies$of$scale$and$scope.$With$European$interest$rates$linked$to$those$in$the$United$States,$rapid$growth$did$little$to$drive$America$up.$Thus,$the$interpretation$of$Europes$growth$as$investmentQled$and$exportQled$are$two$sides$of$the$same$coin$but$its$necessary$to$keeo$in$mind$the$important$role$of$institutions$that$facilitated$the$removal$of$barriers$to$trade.$$$Domestically,$the$postwar$period$saw$a$political$settlment$that$strengthened$the$hand$of$centerQleft$and$centerQright$parties.$The$neocorporatist$bargain$in$which$labor$and$capital$accepted$lower$current$incomes$in$return$for$higher$future$living$standards$was$easier$to$sustain$when$there$was$little$risk$that$come$future$government$would$renege$on$the$agreement.$$Internationally,$the$GATT$system$of$trade$liberalization$and$the$Bretton$Woods$System$of$pegged$but$adjustable$exchange$rates$encouraged$the$expansion$of$Europes$trade.$The$Interantional$Monetary$Fund$was$established$to$lend$support$and$money$if$discolations$arose$along$the$way.$$$INSTITUTIONS'AND'HISTORY''Growth$required$institutions$capable$of$addressing$coordination$problems$that$cannot$be$solved$at$arms$lenght$and$this$meant$coordinatin$bargaining$across$sectors$and$coordinating$trade$liberalization$across$countries.$$$The$new$postwar$european$generation$was$predisposed$to$an$european$integration$as$a$solution$to$the$continents$economic$and$political$problems$but$one$critical$factor$in$this$situation$was$the$attitude$of$the$US$since$their$troops$were$still$stationed$in$Europe$and$because$of$the$Marshall$Plan.$The$Truman$Doctrine$encouraged$European$integration$in$order$to$create$a$bulwark$against$the$Soviet$threat$and$to$foster$the$European$market$for$US$exports.$In$response$to$the$disastrous$consequences$of$its$pressure$on$the$UK$to$restore$currentQaccount$convertibility$in$1947,$the$US$provided$350$million$dollars$of$Marshall$Plan$money$fot$the$EPU$and$encouraged$the$development$of$the$ECSC,$putting$aside$worries$that$regional$initiatives$could$lead$to$a$Fortress$Europe.$$$On$the$European$continent,$where$industrialization$had$begun$later$than$in$Britain,$governments$had$always$played$an$active$role$in$helping$to$surmount$the$obstacles$to$modern$economic$growth$and$preventing$countries$from$falling$behind$their$industrial$rivals$with$potentially$dangerous$security$consequences.$Between$1914$and$1918,$governments$had$brought$together$unions$and$management$to$negotiate$economyQwide$wage$agreements$and$avert$work$stoppages$that$might$have$disrupted$the$war$effort.$$The$Russian$Revolution$futher$encouraged$Western$European$Governments$to$incorporate$labor$movements$into$processes$for$overseeing$the$operation$of$the$economy,$partly$in$order$to$head$off$more$extreme$solutions$suggested$by$the$more$radical$returning$servicemen.$$$Mancur$Olson$stated$that$periods$of$rapid$growth$typically$follow$major$distruptions,$such$as$war,$that$clear$away$the$inheritance$of$vested$interests$and$restricitve$institutional$arrangements$clogging$the$operation$of$economic$system.$In$Olsons$model,$its$the$absence$of$a$historical$legacy$rather$tham$its$existence$that$is$the$precondition$for$a$rapid$growth.$However$compelling$this$general$theory$of$economic$success,$its$hard$to$see$how$it$applies$to$postwar$Europe$in$fact$the$war$removed$from$European$scene$neither$Frances$influential$farm