”The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth. . . . He could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages. . . . He could secure . . . cheap and comfortable means of transit to any country or climate without passport or other formality.”
The author of this passage was not writing about today’s world of globalization, mail order shopping and day trading. Rather, he was the great British economist John Maynard Keynes, and he was looking back on the decades before World War I, which many economists now refer to as ”an earlier golden age of globalization.”
The volume of trade, measured as a share of income and gross domestic product, ”was comparable to what one observes now,” said Jeffrey Williamson, a professor of economics at Harvard University who is one of a growing number of scholars who have been studying the earlier globalization for clues to our own time. He continued: ”The barriers to trade were much lower than they were until very recently. It was a liberal environment, and there was a hell of a lot of trade.”
In fact, writes Michael Bordo, an economist at Rutgers University, before 1914 foreign assets accounted for fully 20 percent of the collective gross domestic products of the world and declined to as low as 5 percent in 1945, only reaching their pre-World War I levels in 1985. Recently, he says, they reached a peak of 57 percent.
In some ways, the level of economic integration was greater then than now. ”Before World War I, half of British savings were invested overseas, far more than the U.S. or any European country now does,” Mr. Bordo said in an interview. ”Levels in Germany, France, Belgium and the Netherlands weren’t far off.”
There were no passports and virtually no restrictions on immigration, making for perhaps the biggest migration in human history. J. Bradford DeLong, an economist at the University of California at Berkeley, writes that one-seventh of the world’s working-age population moved from one country to another between 1870 and 1925, when immigration barriers became increasingly strict.
This early experiment in trade liberalization ended with a cataclysmic world war, and that has provoked lively debate. Harold James, a historian at Princeton University and the author of a new book, ”The End of Globalization,” said in an interview that increased competition in trade and unfettered immigration stimulated the growth of nationalism, aggravating tensions beween countries leading up to World War I.
Most economists argue that, on the contrary, liberal trade was a central feature of a time of relative peace and prosperity. But both sides agree that there was a growing backlash to early globalization starting in the early 20th century that led to high tariffs, barriers to trade and immigration, all of which contributed to the Great Depression. ”History shows that globalization can plant the seeds of its own destruction,” Mr. Williamson and his co-author, Kevin O’Rourke, write in ”Globalization and History.”
In a growing body of books, articles and symposium papers, scholars are re-examining what some have called this ”earlier golden age of globalization” while asking questions about the global present and future. Are there substantial differences between then and now? Are there built-in limits to globalization? The gap between rich and poor nations has grown significantly in the last two centuries: did the liberalization of trade aggravate the problem or create widely shared wealth?
The first era of globalization, like today’s, was ushered in by a series of technological breakthroughs. The invention of the steamship and the railroad in the mid-19th century drastically reduced the cost of transportation, while the laying of the first trans-Atlantic telegraph cable in 1866 and the invention of the telephone made it possible to track overseas investments.
”The biggest revolution was the dramatic improvement in transportation costs,” Mr. Williamson of Harvard said in a telephone interview. Suddenly it became cheaper to ship wheat thousands of miles from places like Australia or Canada than for Europeans to produce it in their own backyards. At the same time, workers left densely populated Europe, attracted by the cheap land and high wages in the sparsely populated areas of North and South America and Australia.
During this period of relative peace, European governments opened themselves to overseas trade. In 1846 Britain repealed the Corn Laws, which heavily taxed imported grain, and lowered tariffs on foreign goods. In 1871 Germany joined Britain in adopting the gold standard, and within a decade most major economies followed suit, creating the financial framework for a global trade network. By pegging their currencies to gold, the countries protected investors against fluctuations in the local currency, making foreign investments extremely attractive.
The parts of the world that participated in this vast experiment in classic economic theory were greatly transformed. Europe sent much of its surplus labor to populate the New World and provided the capital to build its infrastructure. The bargain on balance proved mutually beneficial, at least to the countries that were part of the new market. The economies of the United States, Canada, Australia and Argentina grew enormously, but their success had indirect benefits back in Europe. Wages rose in many parts of Europe as the labor pool became smaller, and living standards in the poorer countries of Europe like Ireland and Norway gradually rose.
But Barry Eichengreen, another economist at Berkeley, and others argue that pre-World War I globalization differed from today’s in important ways that should give policy makers pause.
”Foreign investment is riskier in today’s world of floating currency exchanges than in the days of the gold standard,” Mr. Eichengreen said in an interview. Foreign governments were committed to redeeming their local currency with fixed amounts of gold and had to maintain a high degree of fiscal and monetary discipline to keep this pledge. Today countries may devalue their currency to make it cheaper for local companies to export their goods, but the value of foreign investments may also be reduced.
This technical change is part of a larger political change, the economists say, with nations wanting to take back control of monetary policy. In the age of imperialism, keeping foreign investors happy was of paramount importance. When the Egyptian government faced bankruptcy in the late 19th century, the British government bombed the port of Alexandria and installed a new government in Cairo.
Meanwhile the autocratic governments of the 19th century could maintain stringent monetary policies even if it meant doubling unemployment, because few countries allowed more than a small percentage of their citizens to vote.
”As long as the right to vote was still limited to middle and upper-class males, those rendered unemployed when the central bank raised its discount rate and tightened monetary policy had little voice in politics,” Mr. DeLong of Berkeley wrote in a recent history of 20th-century economics.
The late 19th century saw the gradual expansion of the franchise, and the rigid but efficient system of the gold standard fell apart during the era of mass politics. Today governments fear riots and internal unrest more than the blandishments of the International Monetary Fund.
These political changes were, at least in part, stimulated by the new world of trade. For although Mr. Williamson argues that trade’s overall effect was beneficial, it did, in the short run, create winners and losers, and the losers began to raise their voices politically. ”The arrival of cheap foreign labor drove down wages in the U.S. and elsewhere, and falling agriculture prices hurt landowners in Europe,” Mr. Williamson said, leading to calls for commodities tariffs and immigration limits. ”We feel that the world was better off over time because of trade, but elections are not held worldwide; they are held country by country.”
It is one of the paradoxes of globalization that the changes it brought helped stimulate the growth of the national politics that ended it. In other words, the wild fluctuations in prices, employment and wage levels that came with being part of an international system created a demand for a social safety net as well as demands for protection and a halt to immigration.
Dani Rodrik, a professor of economics at the Kennedy School of Government at Harvard, has built on Mr. Eichengreen’s work to formulate what he terms the ”political trilemma of the world economy.” In an e-mail interview, Mr. Rodrik said, ”We can have at most two out of the following three: a) high degrees of international economic integration, b) nation-states and c) mass politics.” In the 19th century, you had economic integration and nation-states but relatively little mass politics.
The European Union has responded to this trilemma by eliminating the power of nation-states to adjust their own monetary policy and creating a new Europe-wide currency and political authority. But whether other countries will be willing to lose elements of national control and identity is far from clear. ”I think the European case is an exception. It’s a reaction to the wars of the 20th century,” Mr. Bordo said. ”Other countries attach a lot of weight to monetary and political sovereignty.”
Mr. Rodrik is more optimistic, predicting in a recent paper the emergence of what he calls, ”global federalism in which the reach of markets, jurisdictions and politics are each truly and commensurately global.”
Others are struck by how stubborn the forces of national and regional identity and how slow the growth of world trade has been, despite its obvious economic logic. ”I think it will be gradual,” Maurice Obstfeld, another Berkeley economist, said in an interview. ”Investors hold a puzzling small share of their portfolios in foreign equities. There are still great differences in prices in different markets. Integration has a long way to go.”
– August 11, 2001
Published at The New York Times