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The History of Foreign Exchange

Author(s):Einzig, Paul
Reviewer(s):Officer, Lawrence H.

Published by EH.NET (January 2006)

Classic Reviews in Economic History

Paul Einzig, The History of Foreign Exchange. London: Macmillan, 1962. xvi + 319 pp. (second edition, 1970, xxi + 362 pp.)

Review Essay by Lawrence H. Officer, Department of Economics, University of Illinois at Chicago.

The History of Foreign Exchange: A Provocative Classic

Paul Einzig (1897-1973) was both a financial journalist and an author of scholarly works. (A brief, excellent biography of Einzig is Tether, 1986.) Einzig was a prolific writer in both the popular press and academic realms. For two decades, he contributed a regular, ?Lombard Street,? column for the Financial News (London). Later, he provided a weekly column in the Commercial and Financial Chronicle (New York). Because of his popular writings, academic economists have a tendency to discount Einzig?s contributions to economics as a discipline. This reviewer feels compelled to refute that tendency.

Using a strict definition of ?book? — excluding pamphlets, revised editions, works with similar titles, translations from English into other languages, volumes written solely in a non-English language, reports to governments or commissions, working papers, works that are in only a handful of libraries, and unpublished manuscripts — this reviewer counted carefully (from the WorldCat database) that Einzig was the author of fifty-seven different books — a phenomenal number. Of this total, one is Einzig?s autobiography and at most a half-dozen could be construed as political treatises (judging by title). This leaves fifty volumes as primarily economic in content. No doubt, some of these volumes were written in haste and some are not particularly technical. On the other side, Einzig?s books contain only his own writings; not one is an edited volume.

It is instructive to count also the number of books produced by the seven other authors of 2006 Classic Reviews series. Allowing for edited as well as authored volumes (but excluding works edited by others, and to which the author of interest merely contributed one or more chapters), the number of books attributed to each of the eight authors is listed below.

Number of Books Attributed to Author

?

Source: WorldCat. See text.

Certainly, Einzig?s total number of books is phenomenal in comparison to any of the other authors. In fact, incredibly, Einzig?s number of books exceeds even the total number of the other seven authors. True, the table is purely quantitative, not qualitative, in nature. And, true, unlike the other authors Einzig was strictly a writer by profession. Nevertheless, by any standard, Einzig was a prolific book author indeed.

Further, Einzig published articles in professional economics journals, even though he was not an academic economist. The JSTOR database lists nineteen articles authored by Einzig — eighteen in the Economic Journal and one in the Journal of Finance. These numbers are exclusive of book reviews; JSTOR lists twelve by Einzig, of which six are in the Economic Journal and one in the Economic History Review.

The point of the above discussion is that, although Einzig was neither an academic professor nor a government economist, he should be taken seriously as an astute observer of contemporary economic events, as an applied-economic theoretician, and as an economic historian. One of his best books in the first category is International Gold Movements (1929, 1931) — invaluable to historians of the interwar gold standard. His best work in the second category is The Theory of Forward Exchange (1937), still useful to researchers of interest-rate parity. Among other virtues, that book contains an excellent discussion of selection of variables to test the theory, as well as data still used in scholarly studies. In the third category, paramount is The History of Foreign Exchange, the anatomy (including publication history) of which is shown in Table 2.

Anatomy of The History of Foreign Exchange

St. Martin?s Press

St. Martin?s Press

?

Listing edition in catalogue. Source: WorldCat.

a Reprint, with alterations.

b Japanese translation, by Asao Ono and Shunzo Muraoka.

Einzig states, in the preface to the first edition of the History, that his purpose is to produce ?a single book … that would cover the entire history of Foreign Exchange in all its main aspects from its origins to our days? (p. xi in the second edition — all references in this review are to that edition). He remarks that nobody before had produced such a treatise. It is fair to say that neither has anybody since done so. There have been many books on the entire history of money as such, rather than of foreign exchange, and a variety of books on foreign exchange for particular currencies over a lengthy period of time or for a variety of currencies over a particular era — but no one other than Einzig has produced a history of the foreign-exchange characteristic of currencies for purportedly all currencies (of interest) and for all eras. From probable international bills of exchange in Babylonia (twenty-first century B.C.), to U.S. borrowing in the Eurodollar market (late 1960s), Einzig succeeds admirably in conveying the flavor of foreign exchange.

To cover systematically experience of such breadth, Einzig divides his book into chronologically based sections, as shown in Table 2. Part I deals with the Ancient Period (primarily Greece and Rome, though also earlier civilizations), Part II the Medieval Period, Part III the Early Modern Period (sixteenth to eighteenth centuries), Part IV the Nineteenth Century (to World War I), Part V 1914-1960, and Part VI (added in the second edition) the 1960s. To provide breadth systematically for each of these six eras, Einzig instills discipline on his research and writing by dividing each Part into four chapters: (1) foreign-exchange markets and practices, (2) exchange rates, including crises and trends, (3) foreign-exchange theory, and (4) exchange-rate policy. This schema greatly enhances the value of the volume as a reference work. Part I includes an introductory chapter, on the origins of foreign exchange; and the book includes a general introduction and a general conclusion (the latter largely rewritten in the second edition).

Each chapter in Parts I-V (but not Part VI) contains endnotes, which are purely bibliographical. There is also an excellent bibliographical essay, termed ?a selected bibliography? — and, in the second edition, this bibliography is extended to incorporate the 1960s. Again the book is presented excellently as a reference volume. This characteristic is helped by a good ?index of names,? but the subject index could have been more extensive.

The author?s ambitious and unique goal, the tremendous research effort (aided by the author?s proficiency in several languages), and the systematic presentation of the research results all make The History of Foreign Exchange a classic in economic history. The caliber of the journals that reviewed the History is indicative of that judgment. Of the five top general journals in economics 1960s vintage (American Economic Review, Economic Journal, Journal of Political Economy, Quarterly Journal of Economics, and Review of Economics and Statistics), the three that reviewed books (the first three stated) did in fact review the History. Two of the top three journals in economic history at the time (Journal of Economic History, and Economic History Review) reviewed the book. It is not surprising that the third, Explorations in Entrepreneurial History (the predecessor of Explorations in Economic History), did not review the History, because of the then-narrow orientation of the journal. (As for the Journal of European Economic History, it did not commence publication until 1972.) Among major economics journals that engaged in book reviews, only Kyklos elected not to review the History. On the other side, American Historical Review, perhaps the top general-history journal, did conduct a review.

These reviews, together with several others in outlets not specializing in history, are listed and summarized in Table 3. The caliber of some reviewers is unusually high: the economic historians J. R. T. Hughes, L. S. Pressnell, and Raymond de Roover; and the international-economics specialist Arthur I. Bloomfield. Most reviewers had very positive things to say about the History; but they did not withhold criticism.

Reviews of The History of Foreign Exchange

Note: All reviews are of the first edition, except the 1971 Choice review.

The most negative evaluation is that of L. S. Pressnell, whose positive assessments are few, and even these are negative assessments in disguise. Einzig did not hesitate to respond to reviewers? criticisms that he viewed as unfair or based on incorrect facts. He had written a rejoinder to a review of his Primitive Money (1949), this review appearing in the anthropological journal Man. The editor of the journal published Einzig?s (1949) rejoinder in condensed form, and, incredibly, wrote a reply to Einzig?s rejoinder (rather than having the reviewer reply)!

Einzig responded to Pressnell?s criticisms, in the preface to the second edition of the History, stating, quite correctly, that Pressnell?s review ?amounted to little more than a list of attacks, wasting very little time or space on trying to justify, explain or illustrate his criticisms? (p. viii). Einzig gleefully, and again correctly, castigates Pressnell for associating paper credit with inflation/deflation in Ancient Rome, whereas in fact there was no paper money and inflation took the form of coinage debasement. Einzig then writes:

Long-suffering authors have seldom the opportunity to answer their critics, which is a pity because, by drawing attention to flagrant instances of ill-informed criticisms such as the one denounced above, they might be able to raise the standard of criticism. Being a hard-hitting critic myself it is not for me to object to being hit hard — provided my critic knows what he is talking about.

In fairness to Einzig, he did meet the criticism of some reviewers that ?the chapters dealing with modern developments were ?too sketchy?? (p. vii), by producing a second edition with the addition of Part VI. However, Einzig disagreed with the criticism that ?the chapters dealing with earlier periods were unnecessarily long,? and therefore did not condense these chapters (or otherwise alter them substantively) in the second edition. The present reviewer agrees with this decision; for the existing literature on foreign exchange is heavily oriented to recent periods. Einzig?s work on earlier periods fills a definite void.

Turning to this reviewer?s impressions of the History, consider each Part in order. For the Ancient Period, there is lack of everything: data, writings on theory, definitive information about markets and about rationales for policy. Einzig acknowledges that he has ?to make bricks with very little straw? (p. 7). There is much conjecture on Einzig?s part, albeit his presentation generally makes sense. He shows knowledge of both the classical literature and modern treatises on these times, and does as much as he can with snippets of information.

Einzig?s definition of a true foreign-exchange transaction (involving coins of both domestic and foreign parties) is acceptance by tale rather than by weight. He suggests that this first occurred in the fifth or sixth century B.C. As for the use of bills of exchange in foreign-exchange transactions, Einzig speculates that this could have arisen even earlier. There is discussion of depreciation and debasement of coinage, including the observation that the debasement of Roman coins had the effect of India ceasing to accept them. Einzig emphasizes that foreign trade was inflexible and, in particular, inelastic with respect to the exchange rate. He notes that exchange-rate information for this era is not only scarce but also complicated, due to the existence of trimetallism (three monetary metals: copper, silver, gold) and symmetallism (electrum: gold/silver alloyed coins).

Einzig is careful not to overstate the role of foreign exchange in theory and policy. Debasement of coinage in Rome was generally done to finance budget deficits rather than to correct balance-of-payments deficits. The same is true for Greek devaluations and debasements. The purchasing-power-parity (PPP) theory of exchange rates cannot be discerned in Ancient writing. The reason given again is the inelasticity of foreign trade, with tremendous differences in prices of goods across countries (due to both high transport costs and high profit margins). On the other side, exchange control was the policy of Sparta and of Egypt (under Ptolemaic and Roman rule), with Plato the intellectual champion of such a policy. Exchange control existed in the Roman Empire in connection with the accumulation of exchange as tribute to be transferred to Rome.

Considering the Medieval Period, Einzig observes that ?manual exchange? (exchange of domestic for foreign coin) began to give way to bills of exchange in an evolutionary process. He makes much of the fact that international bills (because they involved exchange risk) were a means of circumventing the anti-usury laws of the Church. He is impressed with medieval foreign-exchange theorizing, which arose in the context of whether exchange rates concealed interest, and discerns a variety of theories (or harbingers of theories) of exchange-rate determination in the Scholastic writings: demand and supply, exchange risk, cost-of-production, money-supply, balance-of-payments, and PPP. Exchange control over bills was less strict and less pervasive than over coins, because the Church required freedom of transferring funds emanating from Papal collections.

For the Early Modern Period (sixteenth-eighteenth centuries), Einzig provides a good discussion of the gradual transition from medieval to modern practices. He notes that Thomas Gresham (of ?Gresham?s Law? fame) made the first known computation of a specie point (the English gold-import point from Flanders) in 1558. Einzig outlines the history of the British, French, Dutch, German, Spanish, Swedish and Russian exchange rates (each relative to other currencies) during this period. The Early Modern Period witnessed the first true exchange-rate theorizing, meaning ?a deliberate analysis of cause and effects of Foreign Exchange movements and the role of Foreign Exchange in the economic system? (p. 138). Salamancan (Spanish) writers of the sixteenth and seventeenth centuries are credited with the money-supply theory and the purchasing-power theory of the exchange rate; but (as Einzig states) it is unclear whether they meant the entire money supply (coinage) in circulation or the supply merely in the foreign-exchange market for the purchase of foreign bills. The Salamancans did not develop the balance-of-payments (or trade-balance) theory of the exchange rate; this was done by English writers, such as Gresham and Mun.

The Malynes-Misselden-Mun controversy is judged to be ?one of the most important controversies in the history of Foreign Exchange theory? (p. 142); but only one page is devoted to this controversy. Malynes, who here had a speculation theory of the exchange rate, lost the debate; Mun?s view that the exchange rate and specie flows depended on the trade balance became preeminent. Yet elsewhere Malynes theorized the price specie-flow mechanism, but Einzig does not acknowledge this accomplishment. Nor does Einzig mention that ?Malynes has all the ingredients for the PPP theory and comes ever so close to exhibiting the theory for both fixed and floating rates? (Officer, 1982, p. 258). Schumpeter (1954, p. 737) also judges that ?Purchasing-Power Parity theory, or some rudimentary form of it … can … certainly be attributed to Malynes.?

Regarding policy in the Early Modern Period, Einzig mentions various alternatives to exchange control:

1. A uniform tax on exchange transactions — temporarily imposed in England in 1586, after exchange control was abandoned. Not noted by Einzig, the idea was resurrected (but not implemented) during the period of ?dollar surplus? in the 1960s.

2. Official pegging of exchange rates. This was done by fixing the price of foreign coins in domestic coins. The pegging was adjustable, that is, the price was changed periodically.

3. Official intervention in the foreign-exchange market, for example, by requiring exporters to sell their foreign exchange to the government at unfavorable rates. This is actually a form of exchange control. Creation of an exchange equalization account, that would have enabled intervention similar to the Bretton Woods system and the managed float that followed it, was advocated by Gresham and others, but did not occur.

4. Altering mint parities. This was often done to induce a net inflow of specie, rather than to affect exchange rates as such.

5. Changing or suspending seigniorage on coinage. This affected specie points and therefore the exchange-rate spread. Once seigniorage was abolished (as in England in 1666), this policy lost its mechanism.

Regarding the Nineteenth Century, Einzig writes that ?the advanced paper currency inflation in France during the Revolution and the fluctuation of the inconvertible pound during the period of suspension may be regarded as the first meaningful experience in Foreign Exchange movements under inconvertible paper currency systems? (p. 171). This statement is incorrect on two counts:

First, nothing is said about the experience of China, where paper was invented and paper money first issued. At times, paper money circulated together with coined money, and at times the paper money was inconvertible. It is known that Chinese coins circulated in foreign countries in the fifteenth century and probably earlier (see, for example, Bernholz, 2003, p. 56). There must have been implications for exchange rates, if only for ?manual exchange? (domestic for foreign coin). True, little if any information on such foreign exchange exists. Yet that deficiency did not stop Einzig from making conjectures about foreign exchange in the Ancient Period!

Second, several pages are devoted to the Bank Restriction Period (the inconvertible pound in 1797-1821, also called ?the bullionist period?), in both empirical (exchange value of the pound) and theoretical (bullionist-controversy) aspects. Indeed, Einzig writes: ?the so-called ?bullionist? controversy … was probably the most important Foreign Exchange controversy for all time? (p., 202). However, he makes no reference at all to an earlier ?bullionist period,? the Swedish inconvertible paper currency and floating exchange rate of 1745-1776. China was the first country to introduce paper money; but Sweden was the first to issue banknotes. In fairness to Einzig, the Swedish experience was not generally known until ?rediscovered? by Eagly (1963, 1968, 1971). Nevertheless, Einzig could have incorporated this important experience in the second edition of the History, but he chose not to do so.

This reviewer also takes exception to Einzig?s view that ?technical devices? to discourage the outflow or encourage the inflow of gold were undertaken predominantly by countries (such as France and Germany) other than the three (Britain, the United States, Holland) that ?with really narrow gold points were … on a really effective gold standard? (p. 173). Regarding the latter three countries, Einzig states only that the Bank of England adopted such devices during the Boer War, and mentions nothing about U.S. use of these policies. In fact, both the Bank of England and U.S. Treasury engaged in extensive ?direct manipulation? of gold points for much of the classical gold-standard period (see Clark 1984; Officer 1986, 1996, chapter 9).

For the period 1914-1960, Einzig reports the great change in foreign-exchange policy: from minimal government interference with free foreign-exchange markets over the century since the end of the Napoleonic Wars, to official intervention the rule rather than the exception. Exchange control, which had lapsed into disuse, was resurrected. Correspondingly, PPP theory had been almost entirely forgotten during the century of relative stability of the major exchange rates. Now the theory was restated, with great vigor and dogmatism, by Gustav Cassel. Supported by major economists, such as John Maynard Keynes (who later withdrew his support) and A. C. Pigou, the theory would never again be ignored.

Discussion of the 1960s, reluctantly included by Einzig as an additional part in the second edition of the History, is not particularly impressive, in part because a single decade does not warrant the space given to it in a study stretching over several millennia. Einzig compares the only occasional and isolated foreign-exchange crises of the 1815-1914 century to the multitude of crises decade after decade since. The prevalence of foreign-exchange crises continues to this day!

In his concluding chapter, Einzig predicts that an abandonment of the fixed-rate system of Bretton Woods (which was often discussed in the literature, but had not yet happened at the time of his writing) would only be temporary. ?It would not take very long for most Governments to realise the grave disadvantages of the currency chaos resulting from their ill-advised decisions to de-stabilise their exchanges. Sooner or later they would return to the system of stability, as their forerunners did each time they were forced to abandon it in the past? (p. 348). Einzig expresses that view from the perspective of four thousand years of exchange rates! The creation of the euro — fixed exchange rates par excellence, which replaced multiple national currencies with one supranational currency — provides partial validation of Einzig’s prediction. Time will tell whether the present float, or rather managed float, between the various currencies of the developed world (euro, dollar, yen, pound, etc.) will also be succeeded by a renewed fixity of exchange rates. That event would make Einzig’s prediction impressive indeed. Einzig was well-known as a proponent of fixed as distinct from floating exchange rates; but his prediction that any lapse from fixed rates would only be temporary is a positive statement, not a normative one.

Einzig was well-known as a proponent of fixed as distinct from floating exchange rates; but his prediction that any lapse from fixed rates would only be temporary is a positive statement, not a normative one.

Einzig observes, with disdain, the ?obscurantist presentation? of modern foreign-exchange theory and the widening gap of this theory from foreign-exchange policy. He writes: ?No contribution to Foreign Exchange Theory expressed in terms of mathematical economics has added anything of substance to the subject that could not have been added to it without the use of mathematics? (p. 322). This statement is not quite the same as the more-common view that ?any legitimate theory that is expressed mathematically can also be exposited verbally.? Einzig is consistent, for there is not one mathematical symbol in the History!

If there is any general weakness of the History, it is the absence of tables and charts of exchange rates, mint parities, and specie points. Einzig is aware of this limitation; he writes:

There is everything to be said for compiling continuous series of exchange rates for all the important exchanges in the principal Foreign Exchange markets, at least from the 16th century, but preferably also for the late Medieval Period. The material is there, in public records and business archives. But to make it accessible is a task that only some well-endowed research department could undertake. (p. xii)

It is fair to say that economic historians have performed much work of this nature since the publication of the History.

The History of Foreign Exchange has great limitations as well as great strengths. It is an impressive, but also a controversial and provocative, work. Undoubtedly, though, it deserves to be called a classic.

References:

Bernholz, Peter. Monetary Regimes and Inflation: History, Economic, and Political Relationships. Cheltenham: Edward Elgar, 2003.

Clark, Truman A. ?Violations of the Gold Points, 1890-1908.? Journal of Political Economy 92 (October 1984): 791-823.

Eagly, Robert V. ?Money, Employment and Prices: A Swedish View, 1761.? Quarterly Journal of Economics 77 (November 1963): 626-36.

Eagly, Robert V. ?The Swedish and English Bullionist Controversies.? In Robert V. Eagly, ed., Events, Ideology and Economic Theory. Detroit: Wayne State University Press, 1968: 13-31.

Eagly, Robert V., editor, The Swedish Bullionist Controversy. Philadelphia: American Philosophical Society, 1971.

Einzig, Paul. International Gold Movements. London: Macmillan, first edition, 1929, second edition, 1931.

Einzig, Paul. Primitive Money in Its Ethnological, Historical and Economic Aspects. London: Eyre and Spottiswoode, 1949.

Einzig, Paul. ?Primitive Money: A Rejoinder? (with Editor?s Reply). Man 49 (November 1949): 132.

Einzig, Paul. The Theory of Forward Exchange. London: Macmillan, 1937.

Officer, Lawrence H. ?The Purchasing-Power-Parity Theory of Gerrard de Malynes.? History of Political Economy 14 (Summer 1982): 256-59.

Officer, Lawrence H. ?The Efficiency of the Dollar-Sterling Gold Standard, 1890-1908.? Journal of Political Economy 94 (October 1986): 1038-73.

Officer, Lawrence H. Between the Dollar-Sterling Gold Points: Exchange Rates, Parity, and Market Behavior. Cambridge: Cambridge University Press, 1996.

Schumpeter, Joseph A. A History of Economic Analysis. New York: Oxford University Press, 1954.

Tether, C. Gordon. ?Einzig, Paul.? In Lord Blake and C. S. Nicholls, eds., The Dictionary of National Biography. Oxford: Oxford University Press, 1986.

Lawrence H. Officer is Professor of Economics at the University of Illinois at Chicago and Editor, Special Projects, EH.Net. He is a specialist in international economics and monetary history. His recent journal publications include ?The U.S. Specie Standard, 1792-1932: Some Monetarist Arithmetic,? Explorations in Economic History (2002) and ?The Quantity Theory in New England, 1703-1749: New Data to Analyze an Old

Question,? Explorations in Economic History (2005). Officer is a recurrent contributor to the ?How Much Is That?? section of EH.Net.

Copyright (c) 2006 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net; Telephone: 513-529-2229). Published by EH.Net (January 2006). All EH.Net reviews are archived at http://eh.net/BookReview.

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative

Commerce and Politics in Hume’s History of England

Author(s):Wei, Jia
Reviewer(s):Berdell, John

Published by EH.Net (October 2017)

Jia Wei, Commerce and Politics in Hume’s History of England. Woodbridge, UK: Boydell and Brewer, 2017. xi + 209 pp. $99 (hardback), ISBN: 978-1-78327-187-0.

Reviewed for EH.Net by John Berdell, Department of Economics, DePaul University.

 
Janet Wei brings David Hume’s accomplishments as a historian out of the shadows in this important investigation of Hume’s History of England. It is often remarked that Hume appeared in library card catalogue as “David Hume, the historian.” Also that he considered himself to be living in a time and place uniquely interested in history. (Hence, his purported aspiration to fill the vacant “post of honor” reserved for history in the English Parnassus.) According to Wei, Hume’s unique contribution to eighteenth century historiography lies in the interplay between his Scottish background and his cosmopolitan understanding of the emergence of commercial society across Europe. Wei finds it telling that unlike so many Scots historians of the time, Hume was not drawn to adumbrate a stages account of history, but rather to develop narratives that maintained a lively understanding of the role of chance and unforeseen events in human affairs. She underlines the fact that Hume’s history is so often paradoxical and ironic. This is part of Hume’s contribution to eighteenth century historiography, but Wei places great weight on the “innovative fabric of causation” that binds together Hume’s intertwined narratives of the rise of English liberty and commerce. Hume’s distinctive political economy informs his historical narrative of England’s emergence as a trading nation and it becomes intertwined with a narrative of the shifting balance between authority and liberty that originates in his political science.

Wei divides her book into two unequal parts. The first considers Hume’s historical account of England’s national character, or what Montesquieu called its “spirit.” The analysis centers on the interactions between the rise of English commerce and English liberty — and more particularly the proposition that for Hume the English state was largely the result of “a particular approach to colonial trade.” The second part focuses on public finance and the preservation of English liberty. Wei’s conclusion finds Hume increasingly pessimistic about that preservation because, rightly understood, England’s liberty rested upon a delicate balance between liberty and authority, which was increasingly destabilized by the fiscal demands of Britain’s empire.

Readers of Hume’s Essays will be familiar with his proposition that foreign commerce stimulated the economic development of England, indeed all of early modern Europe. Adam Smith popularized Hume’s thesis when he asserted that “For a pair of diamond buckles perhaps, or for something as frivolous and useless, they exchanged the maintenance, or what is the same thing, the price of the maintenance of a thousand men for a year, and with it the whole weight and authority which it could give them.” Wei shows us that what this gained in rhetorical flourish it lost in historical detail. While the growth of foreign commerce was essential to the erosion of noble power, the deliberate policy and legislation of Henry VII, amplified by the depredations of the War of the Roses, are central to Hume’s account of the formation of a centralized system of justice. Hume is shown to reject Harrington’s view that Henry was mistaken in his efforts to deliberately weaken noble power. Wei also emphasizes the fact that for Hume the growth of foreign trade was the product of considerably more deliberation and policy than the simple influx of luxuries found in his Essays. Hume approved of Henry VII’s and Elizabeth’s imposition of duties on foreign merchants and successfully encouraging English merchants and navigation to take their place. Although the contrast to Smith is not emphasized, Hume’s account of how foreign trade contributed to English liberty importantly includes the growth of its navy, and hence its ability to defend itself against its continental rivals. This was drawn from the strength of its colonial trade. These are not observations that sit easily with stale portrayals of Hume as the first great anti-mercantilist. There are innumerable interesting subthemes running through the first part of this book, but the central thesis must surely be Hume’s relentless attempt to undermine the Whig ideology that England’s freedoms had an ancient Saxon origin, while simultaneously undermining the Tory view that kings ruled by divine right. Contrary to the Tory view, it was commerce that slowly transformed feudal anarchy, and the jurisdiction of nobles, into a powerful Tudor monarchal absolutism. Contrary to the Whig view Parliament actively contributed to Tudor power since Tudor monarchs were the only feeble source of civil liberties in that dark age. All this would change under the Stuarts as the continued growth of commerce emboldened Parliament to rein in monarchal power, and to provide civil liberties an independent and more secure footing in an independent legal establishment.

The second part of the book focuses on the role of public finance in determining the balance between Parliament and monarch — between Hume’s great principles of liberty and authority. The balance hung upon control over tax revenues and the need to fund the navy. Here Wei makes good use of a burgeoning literature (from D.P. O’Brien among others) that puts Britain’s public finances, and imperial aspirations into European context. Istvan Hont, who tragically could only supervise the early phases of this thesis, has emphasized the fact that Hume was acutely aware of the instability lurking in England’s delicate political balance. Wei provides considerable new detail to Hont’s thesis by following the twists and turns of Hume’s account of English political “opinion,” and the increasingly uncompromising republican and monarchical “spirits.” Along the way she makes a short but powerful case that Hume should be seen as a supporter of unlimited religious toleration — rather than as an advocate for an established church as is usually taught. Her concluding thoughts on Hume’s increasing conservativism regarding the prospects for England’s public liberty should be contrasted with other accounts, such as those of Andrew Sabl and David Wootton, as Hume’s politics are notoriously difficult to situate on a anything resembling a liberal-conservative spectrum. When Hume was unable to simultaneously undermine both of the prominent party ideologies of his day, he would alternately adopt their positions: all in an effort to force his readers to think things through for themselves. Wei’s careful identification of Hume’s contributions to historiography certainly contributes a great deal to our understanding of how and why he did so.

References:

Sabl, A. (2012). Hume’s Politics: Coordination and Crisis in the History of England. Princeton,
Princeton University Press.

Wootton, D. (1993). David Hume, “The Historian.” The Cambridge Companion to Hume. Edited by D. Norton. Cambridge: 281-312.

 

John Berdell is the author of International Trade and Economic Growth in Open Economies: The Classical Dynamics of Hume, Smith, Ricardo and Malthus (Edward Elgar, 2002) and articles on Cantillon, Hume, Smith and most recently John Law: “The Structure and Stability of John Law’s early Land Bank Proposals,” forthcoming, Oeconomia.

Copyright (c) 2017 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (October 2017). All EH.Net reviews are archived at http://www.eh.net/BookReview.

Subject(s):History of Economic Thought; Methodology
Geographic Area(s):Europe
Time Period(s):18th Century

Anthropologists in the Stock Exchange: A Financial History of Victorian Science

Author(s):Flandreau, Marc
Reviewer(s):Attard, Bernard

Published by EH.Net (September 2017)

Marc Flandreau, Anthropologists in the Stock Exchange: A Financial History of Victorian Science. Chicago: University Press of Chicago, 2016. xix + 421 pp. $105 (cloth), ISBN: 978-0-226-36044-7.

Reviewed for EH.Net by Bernard Attard, School of History, Politics and International Relations, University of Leicester.

 
Marc Flandreau, a financial historian and professor at the Graduate Institute of International Studies and Development in Geneva, has written a book about white-collar crime, science and power in mid-Victorian Britain. He argues that the often fraught relations between knowledge, truth and value meant that the incentives to exploit and commercialize scientific knowledge for private gain were as great for the Victorians as they are today. Victorian anthropology thus serves as a metaphor for the wider dilemma facing social science and Flandreau’s ambition becomes nothing less than to write a book “about modernity and its birth” (p. xv). At the heart of his study is the conjuncture in the 1860s and early 1870s of the foreign loan boom on the London Stock Exchange, the institutionalization of anthropological science and what Flandreau views as the reconstruction of British imperial policy. These are connected by a large cast of characters (including Flandreau’s white-collar criminals); by their often occluded links with the British state; and, above all, by the great mid-nineteenth century expansion of the capital market and its pervasive impact on Victorian society.

It will already be evident that this is no ordinary book of economic history. In fact, it is not written as economic history at all, or certainly not the kind concerned with quantification and model testing. This is not a criticism but merely a signal to the readers of this review. In both research method and discursive practice, Flandreau self-consciously uses the techniques and craft of the historian rather than the social scientist. The narrative form has been chosen to discover his particular truths. Where Flandreau remains distinctively a financial historian is in choosing the tools of financial economics to analyze the ways in which Victorian anthropological knowledge was created, appropriated and turned into value on the Stock Exchange through the creation of financial securities that could be puffed, sold, shorted and otherwise manipulated. The problem of value, Flandreau asserts, is “at the heart of the social sciences” (p. xi), which are never disinterested. Throughout, however, the analysis is grounded in the painstaking accumulation of qualitative evidence and the moral vision of Anthony Trollope’s great contemporary novel about white-collar crime and corruption The Way We Live Now, written in 1873 and serialized in 1874–75.

The foregoing explains the subtitle of Flandreau’s book: “A Financial History of Victorian Science.” Anthropologists figure in the main title because at the heart of his story is the brief career of the Anthropological Society (colloquially known as “the Cannibal Club”), which broke away from the Ethnological Society of London in 1863 and then merged back into it to form the Anthropological Institute in 1871. By coincidence or design (the particular conjuncture matters most to Flandreau) the attacks on the reputation of the Anthropological Society which led to its ultimate demise happened almost simultaneously with the formation of the Corporation of Foreign Bondholders in early 1869, itself an amalgamation of several smaller bodies. Just as significantly, they occurred when upstart part-time or quasi anthropologists were becoming increasingly disruptive as orchestrators of public opinion and promoters of financial schemes associated with parts of the world, notably Central America and Africa, about which they claimed special knowledge. Most notoriously, these individuals were mixed up in some of the hopelessly grandiose ventures, like the Honduran interoceanic “ship-railway,” that were eventually investigated by the 1875 Select Committee on Foreign Loans. For Flandreau, however, his characters were not simply representative of the diverse interests and activities of the British upper-middle class but engaging in a deliberate and carefully staged traffic between the Victorian learned societies and the Stock Exchange as a result of which scientific truths were established, manipulated and turned to commercial advantage. Flandreau is thus also seeking to recast the history of Victorian anthropology and reinstate several relatively forgotten and sometimes disreputable figures. In his version, the rivalry of the Anthropological and Ethnological Societies was not, as conventionally understood, a contest between alternative versions of anthropological science: the one racist, sexist and possibly bankrolled by the American South (the Anthropologicals); the other concerned exclusively with the disinterested pursuit of scientific truth (the Ethnologists). Rather, it was a struggle over the ownership of anthropological knowledge (and thus the value that could be extracted) between insiders and outsiders in Victorian society, i.e. social groups whose status and access to power differed considerably. The final merger of the two societies and creation of the Anthropological Institute is interpreted as a successful bid by the political and scientific establishment to reassert control over the creation, uses and abuses of anthropology after the various disturbances — scientific, financial and imperial — with which members of the Cannibal Club had been associated.

This is a rough summary of a complex and sometimes convoluted argument whose many threads Flandreau assiduously follows. His method is the piecing together of apparently isolated fragments of information to discern patterns, correspondences and connections, some of which are candidly speculative. For those with a general interest in Flandreau’s work but who only want the gist of his argument, the Preface (also containing his apologia), Introduction (“The Stock Exchange Modality”) and Conclusion (“Catharsis: The Displayed and the Hidden”) will be sufficient. The Introduction, in particular, sets out Flandreau’s arguments about the “stock exchange modality” — best summed up in his own words as “the ‘art of puff’ or the promotion of bubbles” (p. 8) — as a form of knowledge, and “brokerage” as a Jungian archetype which connects the never disinterested efforts of the anthropologists to what went on more obviously in the Stock Exchange. In fact, Flandreau describes the stock exchange modality as his book’s “true subject” (p. 4) and the source of its contemporary relevance.

Otherwise the meat of the book is in 11 chapters, each comprising several short sections. The first (“Writing about the Margin”) is a conspectus of what follows, introducing the key characters, institutions and themes. The emphasis here is on the connected worlds of Victorian science and finance. Chapter Two (“Rise of the Cannibals”) presents Flandreau’s reinterpretation of the origins of the Anthropological Institute and the rivalry between its two predecessors. Chapter Three (“Anthropologists without Qualities”) investigates the social origins of the Anthropological Society and therefore the sociology of Victorian science itself. By doing so, it also seeks to rehabilitate the Cannibals from the allegation that they were peculiarly racist and sexist, arguing that they were not conspicuously more so than their rivals. Chapter Four (“The Ogre of Foreign Loans”) turns attention to the foreign loan boom of the 1860s and early 1870s. Here the learned societies contributed by lending their authority to the dubious assertions of financiers and promoters. Chapter Five (“The Learned Society in the Foreign Debt Food Chain”) switches to the anthropologist as entrepreneur and white-collar criminal, taking as its model George Earl Church, a U.S. citizen and sometime vice-president of the British Royal Geographical Society, who promoted an abortive Bolivian railway in the early 1870s and a government loan which soon went into default.

Chapter Six (“Acts of Speculation”) explores the notion of good faith (bona fide) and the rituals involved in testing it. For Flandreau, far more than the gentility of Cain and Hopkins’ “gentlemanly capitalists,” a person’s bona fides was the basis of reputation and trust — one of the “technologies of trustworthiness” — in both Victorian science and the Stock Exchange. Chapters Seven and Eight (“Wanderlust: The Upbringing of a Victorian Racist” and “Salt-Water Anthropology”) follow the career of Bedford Clapperton Pim, naval officer, anthropologist, entrepreneur, conservative Member of Parliament and (in Flandreau’s account) white-collar criminal. Pim’s history exemplifies the “interestedness of science.” Anthropology allowed him to create a form of property which he used to launch his grandiose transportation schemes in Central America. In his hands, it becomes one of the “micro-technologies of globalization.” Chapter Nine (“The Violence of Science”) turns attention to British imperialism and the role of the Anthropological Society in orchestrating public opinion against the Liberal government over its non-interventionist policy during the Abyssinian hostage affair of 1864–68. For Flandreau it is an instance of how the learned societies were becoming powerful constituents of public opinion whose influence was discerned and responded to by politicians like the Conservative Benjamin Disraeli, who had past experience in stock exchange promotion and present connections with individuals like Pim. Chapter Ten (“The Man Who Ate the Cannibals”) shifts the story to Hyde Clarke, an engineer, occasional statistician and writer on business cycles, promoter and anthropologist, whose attack on the Anthropological Society in the Athenaeum in 1868 was instrumental in its ultimate demise. Clarke’s actions are represented here as a bear speculation modelled on the techniques of the Stock Exchange, while Clarke himself, who came to be Secretary of the Corporation of Foreign Bondholders, is characterized as a “fixer” whose social utility derived from performing this function in a variety of contexts.

Finally Chapter Eleven (“Subject Races”) draws together the many threads of the narrative. Here Clarke’s raid on the Anthropological Society and the formation of the Corporation of Foreign Bondholders shortly after in February 1869 are interpreted as part of a bipartisan effort by the Victorian state to take back control of the management of foreign loans and even imperial policy itself from the kinds of persons — delinquent consuls and naval officers as well as stock exchange operators — whose bona fides were manufactured by bodies like the Anthropological Society. It was the assertion of the establishment over the insurgents and incomers, and at its core was “a redefinition of what constituted the contours of good and bad in both finance and anthropology” (p. 261). In this the Liberal politician, banker and scientist, John Lubbock, who served in senior positions in both the Anthropological Institute and the Corporation, is seen as a pivotal figure.

This is a necessarily inadequate summary of a densely written and closely argued text. The scale of the problem confronting any reviewer will be evident. This is a book about criminality, Victorian science, the foreign loan boom and British imperialism, all within the same field of vision. It is by turns hugely ambitious, challenging, exasperating and deeply personal. Specialists will no doubt have something to say about the various subjects it straddles. For this reviewer it appeals most directly as an exploration of two connected things: the culture of mid-Victorian financial capitalism and the ramifying impacts in the wider culture, society and politics of the rise of a rentier society. Above all, however, it should encourage us to look at the apparently familiar with fresh eyes.

 
Bernard Attard is a Lecturer in Economic History at the University of Leicester. His most recent publication, “Imperial Central Banks? The Bank of England, London & Westminster Bank, and the British Empire before 1914,” appeared in Olivier Feiertag and Michel Margairaz (eds), Les banques centrales et l’État-nation (Paris: Presses de Science Po, 2016).

Copyright (c) 2017 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (September 2017). All EH.Net reviews are archived at http://www.eh.net/BookReview.

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Social and Cultural History, including Race, Ethnicity and Gender
Geographic Area(s):Europe
Latin America, incl. Mexico and the Caribbean
Time Period(s):19th Century

The Oxford Handbook of Banking and Financial History

Editor(s):Cassis, Youssef
Grossman, Richard S.
Schenk, Catherine R.
Reviewer(s):Neal, Larry

Published by EH.Net (July 2017)

Youssef Cassis, Richard S. Grossman, and Catherine R. Schenk, editors, The Oxford Handbook of Banking and Financial History. Oxford: Oxford University Press, 2016. xviii + 537 pp., $160 (hardcover), ISBN: 978-0-19-965862-6.

Reviewed for EH.Net by Larry Neal, Department of Economics, University of Illinois at Urbana-Champaign (emeritus).

The global financial crisis that began in 2007-08 and continued to rattle the Eurozone countries after 2010 has certainly been good for the market for financial history.  The Oxford Handbook of Banking and Financial History is clearly a response to these events.  In their introductory chapter, the editors set out their ambitious agenda, which is to deal with the individual parts of our modern complex financial system and trace how each has evolved over time.  Each chapter ends with some insight into how the current turmoil in global banking and finance might affect part of the global financial system. This broad-ranging approach is very much in keeping with current analysis by policy economists, who have become very sensitive to how our financial system intertwines banks, which specialize in particular niches of the economy; shadow banks, which innovate to find new niches; money markets, which deal with short-term finance; capital markets, which provide long-term finance; and regulators, who attempt to oversee the operation of the financial system for the interest of the public (or the government).  The editors’ goal is to provide anyone concerned with a particular aspect of the financial system an authoritative treatment by an acknowledged expert that is clearly written for the non-specialist combined with a useful bibliography to follow up particular aspects.

The Oxford Handbook is organized into four parts: Part I, Thematic Issues, deals explicitly with the problems that the editors confronted at the outset: how have historians approached the issues in financial history (Youssef Cassis); how have economists dealt with the issues that interest them (John D. Turner); and how have policy makers tried to apply lessons from history for promoting economic development (Gerard Caprio, Jr.).  To pay due attention to historical contingency, economic analysis, and policy relevance in each of the following chapters is, indeed, a daunting task for each author.

Part II, Financial Institutions, takes up these challenges by separating out several categories of distinctly different institutions, a useful distinction too often overlooked in practice and one that illustrates nicely the complexity of any financial system.  Youssef Cassis’s “Private Banks and Private Banking” begins with the initial role models for banks, from their origins in kinship networks in Renaissance Italy to today’s Swiss managers of private wealth.  Gararda Westerhuis’s “Commercial Banking: Changing Interactions between Banks, Markets, Industry, and State” follows by dealing with the nineteenth-century spread of industrialization globally, which led to the rise of universal banks.  By the end of the twentieth century, however, it appeared that commercial banks might be in “a state of terminal decline.” (See Raghuram Rajan, 1998, “The Past and Future of Commercial Banking Viewed through an Incomplete Contracts Lens,” Journal of Money, Credit, and Banking. 30(3), 524.)  The financial crisis of 2008 led many observers to push for a separation of investment and commercial banking once again in the interest of financial stability.  Westerhuis goes on to distinguish the motives for establishing market-based systems (U.S. and England) versus bank-based systems (Germany and Japan).  She posits that the two paths diverged early on due to the differences in government control over banks and then the role played by banks in financing industrialization for follower countries, such as Germany and Japan.  Oddly missing from her overview is any consideration of the experience of Scottish banking, which developed joint-stock banks with national branches early in the eighteenth century.  Only after the financial crisis of 1825 did the English care to look seriously at the Scottish example for improving their commercial banking system!  Further, joint-stock banks did not disappear in the U.S. during the “free banking” period as she asserts. While they were confined within state boundaries, limitations on branching within a state varied considerably.  The wide range of experiments undertaken by various states has stimulated a growing and interesting literature among U.S. scholars, largely omitted from her bibliography.

Caroline Fohlin’s “A Brief History of Investment Banking from Medieval Times to the Present” takes up the most challenging role of banks, how to transform short-term liabilities into long-term assets.  Rather than taking specific organizational forms, she prefers to analyze investment banks as a set of services that help finance the long-term capital needs of business and governments. After briefly looking at merchant banks from medieval times to the early nineteenth century, this loose definition requires her to take up individual countries one by one during the nineteenth century.  Sections follow that deal with England, the European continent, Belgium and the Netherlands, France, Germany, Austria and Switzerland, Italy, Japan, and the United States. Each section highlights the differences in organizational structures created to accomplish basically the same goals, helping governments promote industrialization.  The twentieth century presents more interesting differences, essentially due to the ways various governments regulated, deregulated, and then re-regulated from the 1920s to the present.  She concludes, “even well-known investment banking names that have endured over the centuries bear little resemblance to their ancestors” (p. 159).

Christopher Kobrak’s “From Multinational to Transnational Banking” takes up the complex transformations of the world’s leading banks by size as they successively internalized their international operations.  The availability of huge advances in information technology combined with increasing opportunities for re-allocating domestic savings across foreign investments provided the basis for the growth of today’s megabanks.  Oddly, however, Kobrak takes as archetypes of the new transnational bank two of the worst performers after 2008 — Deutsche Bank and Citibank.  Relying on their respective annual reports in 2007-2010, he touts each of them as “market players” rather than staid fiduciary agents, lauding their scale and scope of activities that are only vaguely related to financial intermediation associated with banks “lending long, while borrowing short.” He dispassionately notes that three-quarters of Deutsche Bank’s two trillion euros in assets in 2007 were securities held for trading, and 40 percent were financial derivatives (p. 183), without disparaging the obvious omission of fiduciary responsibility. Citibank, similarly, by 2007 had “invested huge resources in creating an internal market, in essence warehousing securities and derivatives to build hedged positions and for future sale” (p. 182). All these intra-bank holdings of assets and liabilities enabled such banks to make a lot of money by proprietary trading that remained unobserved by regulators or by publicly accessible financial markets.  He refrains from criticizing the model developed by these two megabanks, each of which has suffered huge losses and justified public acrimony since 2008, confining himself to the anodyne remark that “megabanks may be forced, as they have many times in the past, to find an intertwined institutional and organizational adaptation more sustainable in the modern social order” (p. 185)!

R. Daniel Wadhwani’s “Small-Scale Credit Institutions: Historical Perspectives on Diversity in Financial Intermediation” concludes Part II by lumping together a motley assortment of credit cooperatives, savings banks, industrial banks, pawn shops, and savings and loans associations.  Wadhwani argues their cumulative size makes their impact on their respective economics arguably as great or greater than that made by the commercial, investment, and public banks dealt with in the previous chapters.  Their common origin across many cultures and through past millennia he finds in the ubiquitous presence of ROSCAs (rotating savings and credit associations).  Beginning with small kinship groups desiring to pool their limited resources to enable individual members to acquire a desired goal, perhaps a piece of land, a dwelling, livestock, or even the means to migrate somewhere else for employment, ROSCAs often provide a basis for transition to the more modern forms of intermediation.  These include savings banks, credit cooperatives, and savings and loans, with each evolving quite differently depending on local circumstances.  Critical to their evolution historically is the role of government, whether as regulator (restricting competition), competitor (postal savings banks), or customer (providing sovereign debt as risk-free asset).  The theoretical economic bases for their evolution and persistence are robust, both for their monitoring capability and for their local knowledge of investment possibilities.  Nevertheless, Wadhwani calls attention to more post-modern “theories” that favor the creation of supportive narratives when cultures confront changes in economic regimes.

Part III, Financial Markets, begins with Stefano Battilossi’s “Money Markets,” which emphasizes the importance of access to outside liquidity for banks when they face unanticipated shocks either for increased loans or increased withdrawals of deposits.  Further, Battilossi argues that a key lesson learned by banking theorists and practitioners in the nineteenth century, namely that money markets are essential for a smooth working of the economy but are inherently unstable, was lost over the course of the twentieth century.  The success of the Bank of England in stabilizing the money market at the center of the global economy of the nineteenth century, he argues, was due to a complex combination of close monitoring by the Bank of England and cartel complicity by the major joint-stock banks, each with extensive branching networks domestically and overseas.  U.S. efforts to imitate the British example after creation of the Federal Reserve System in 1913 failed due to irreconcilable differences in institutional structures between the two banking systems and their respective central banks.  It took over a century and a half for the Bank of England to learn how to avoid being a dealer of last resort, a role that the Federal Reserve System in the U.S. had to undertake in the 2008 crisis, and which it has not yet been able to relinquish.  Readers are left to draw the implications for the future of the global financial system for themselves!

Ranald C. Michie’s “Securities Markets” lays out convincingly and clearly the importance of securities markets for a successful financial system.  Divisibility and transferability of a security expands greatly the potential customer base, adding the virtue of diversity in demands for liquidity among the creditors as well.   He distinguishes clearly between “Primary Securities Markets” and “Secondary Securities Markets,” showing their interdependence in layman’s terms.  “Stock Exchanges” provide the effective linkage between the two levels of markets, but fall prey in turn to problems either of monopoly pricing or government repression. His exposition of the underlying theory of securities markets provides the structure for his narrative that follows. From “Early Developments in Securities Markets,” which only mentions briefly the roles of informal markets in the speculative booms of 1720, Michie insists on focusing on the nineteenth century, starting with the London Stock Exchange in 1801.  It’s unfortunate that he ignores recent work on the Amsterdam stock market, (e.g., Lodewijk Petram, The World’s First Stock Exchange, New York: Columbia University Press, 2014), or early work by this reviewer on the precedents for the London Stock Exchange (Larry Neal, The Rise of Financial Capitalism, New York: Cambridge University Press, 1990).  Committed to the importance of formal structures for modern stock exchanges, however, Michie takes up their rise in the advanced capitalist economies of the nineteenth century and then their eclipse from 1914 to 1975.  Thanks to the exigencies of war finance from World War I through the Cold War, stock markets seemed to “appear somewhat irrelevant in a world dominated by governments and banks” (p. 253)  “The Era of Global Banks” did not come to an end in 2008, however, but what had ended was the “self-regulation that had contributed so much to the attractions of stocks and bonds to governments, businesses, and investors through the reduction or elimination of counterparty risk and price manipulation and the certainty that sales and purchases could be made as and when required” (p. 258).  Big banks are bad once again!

Moritz Schularick’s “International Capital Flows” is the most quantitative and instructive of the chapters, as he summarizes succinctly in nine brief tables and one graph, the levels of international capital flows over the nineteenth and twentieth centuries, their size relative to Gross Domestic Product, and the main sending countries and main receiving countries over time.  In sum, rich countries invested in poor countries in the nineteenth century, when international capital flows were highest relative to GDP, and the rich continued to invest in poor countries even when capital flows were severely constrained during the period 1914-1975.  But after the collapse of Bretton Woods, when international capital flows rose sharply once again, the result has been for poor countries to invest in rich countries.  Further, when capital does flow suddenly to emerging economies, financial crises often follow when the flow tapers off, undoing whatever economic advance may have occurred.

Youssef Cassis’s “International Financial Centres” concludes the coverage of financial markets by analyzing the recurring features of international financial centers that lead to their persistence over time.  The physical layout of the dominant cities, the combination of functions they perform (government, communications, education, as well as trade and finance), and their organization may change as the technology of transport, communications, and information change, but, Cassis argues, the network externalities created by the concentration of so much expertise in one location make the existing centers hard to replace.

Part IV, Financial Regulation, takes up the most vexing questions for policy makers, starting with Angela Redish’s “Monetary Systems.”  Redish begins with the complexity of metallic currencies with coins minted in varying combinations of copper, silver, and gold in early modern Europe, and deftly reviews the causes that concerned European policy makers as they sought to maintain coins with fixed legal tender values, whether minted in any or a combination of the three precious metals.  Basically, their concerns were the same as today, “whether nominal change can have real consequence for the balance of trade or level of economic activity?” (p. 327).  Redish goes on to trace out the academic literature that has dealt with the Emergence of the Gold Standard, the Latin Monetary Union, the Cross of Gold, the Classical Gold Standard, and the Good Housekeeping Seal of Approval, highlighting the controversies that have arisen under each rubric.  Next, she divides the End of the Gold Standard into the First World War and the Interwar Period, Bretton Woods and European Monetary Arrangements, and the End of Bretton Woods and the Rise of the Euro.  Reproducing faithfully the graph produced by Eichengreen and Sachs to show that countries that stayed committed to the gold standard after 1929 suffered in terms of industrial production relative to those that devalued, she doesn’t point out that the outliers of Germany and Belgium are readily explained by mistaking their formal exchange rate regimes with the ones they followed in practice (Germany using bilateral trade agreements to increase industrial exports while keeping the nominal exchange rate fixed, and Belgium reducing its nominal exchange rate while being forced to maintain existing trade agreements with France).  She concludes with a brief discussion of both inflation targeting under fiat currency regimes and the rise of crypto currencies such as Bitcoin, Her conclusion is merely that “money is information, a method to enable multilateral clearing of myriad transactions.  It would be surprising if the digital revolution did not lead to a revolution in how this information is managed” (p. 339).

Forrest Capie’s “Central Banking” takes up the baton passed on by Redish to provide a brief synopsis of the issues confronting central banks as they have increasingly taken control of the supply of money over the past two or more centuries.  Monetary stability, their prime responsibility, can be assessed in terms of price stability, but financial stability, which has become a major concern, he notes is more difficult to assess, much less to sustain.  Central bank independence, however defined, does seem to correlate with monetary and price stability, which shows that policy lessons have been learned successfully on that score.  Continued independence of central banks, however, hinges very much on attaining and then sustaining financial stability.  This task, very much underway now among the world’s central banks, 174 at last count, may require expanding their role to include financial regulation as well as oversight of the banking system.

Harold James’s “International Cooperation and Central Banks” makes an interesting argument that central banks in their pursuit of the goal of monetary stability naturally tend to cooperate with other central banks internationally, but without need for formal mechanisms.  Cooperation can then be merely discursive, as it was during the classical gold standard.  Financial crises, however, often do call for international cooperation, but cooperation is difficult, perhaps impossible, to sustain given the priority of strictly national policy concerns.  Large countries, needed to make cooperative efforts successful, are the most reluctant to join in cooperative efforts.  His examples cover episodes during the classical gold standard, the interwar period, the brief Bretton Woods period, and the ongoing travail of the euro-system, which he concludes is “the global test case for both the possibilities and the limits of central bank action” (p. 391). In an interesting aside, he explains why the Bank for International Settlements was resuscitated to manage the European Payments Union in the 1950s.  Top U.S. officials were wary of using the newly-established International Monetary Fund because its staff were largely protégés of Harry Dexter White, then under suspicion as a possible Russian agent!

Catherine Schenk and Emmanuel Mourlon-Droul’s “Bank Regulation and Supervision” develops a sub-theme to the arguments presented by Harold James, namely the recurring problems of regulatory competition, moral hazard, and regulatory capture.   Essentially, “[r]eputation and private information are key bank assets in a market with information asymmetry, but this complicates the ability to engage in transparent prudential supervision” (p. 396).  The U.S. stands out for having the most complicated and unwieldy array of conflicted regulatory agencies, summarized in Table 17.1.  The authors conclude, as do Charles Calomiris and Stephen Haber (Fragile by Design: The Political Origins of Banking Crises and Scarce Credit, Princeton, NJ: 2014), that it is no accident that Canada and the UK, with more coherent approaches to bank regulation have had fewer banking crises.  Much of the remaining chapter focuses on China and the successive efforts of China’s rulers to establish, then regulate, a banking system to enable industrialization and modernization, concluding, perhaps prematurely, that China managed to reduce the problem of non-performing loans after their peak in 2000.  The difficulties of deciding where to locate the regulator of the banking system are highlighted by tracing the successive efforts of the U.S., then the UK to find an ex post regulatory solution to the problems of recurring financial crises.  The efforts of the Basel Committee, established after the collapse of the Bretton Woods System, are described in the context of the European Union’s efforts to move toward regulatory cooperation within a more limited scope of international cooperation.  Prospects for success on that score are still very much in doubt.

Laure Quennouelle-Corre’s “State and Finance” takes a step back to look at the origins of the ongoing dilemma for the Eurozone of the interaction between governments’ sovereign debt and financial fragility of their banks.  The recurring differences between France and the other members of the European Union form the backdrop for his rambling notes on the interactions of private and public financial institutions, ending with the observation that France alone has had to deal with the European Union’s pro-market ideology versus the French tradition of state intervention.

Part V, Financial Crises, opens with Richard Grossman’s “Banking Crises,” which reprises the standard story of boom-bust cycles, exacerbated when new opportunities for speculative investments open up (first globalization after 1848; second globalization after 1979; post-war adjustments after WWI) but then moderated under strict regulation (capital controls, interest rate restrictions from 1945-71).  In his perspective, the Eurozone crisis fits the boom-bust pattern first described by D. Morier Evans in 1859 (The History of the Commercial Crisis, 1857-58, and the Stock Exchange Panic of 1859, New York: Augustus M. Kelley, 1969).

Peter Temin’s “Currency Crises: From Andrew Jackson to Angela Merkel” takes up the international aspect of the boom-bust paradigm by extending it into national decisions about setting the exchange rate with foreign trading partners and possible investors. To bolster his long-standing conviction that most, if not all, banking crises are really currency crises at heart, he lays out in detail the open macro-economy model developed by Trevor Swan. Swan’s diagram relates a country’s domestic level of production to its real exchange rate.  Internal balance is maintained if production rises with the real exchange rate, while external balance requires the real exchange rate to fall when production increases. The model leads to dire consequences for a country if it does not succeed in maintaining both internal balance (matching domestic investment with domestic supplies of savings) and external balance (matching capital account flows with offsetting trade balances) simultaneously.  Either excessive inflation or long-term unemployment occurs whenever imbalances are sustained due to misguided government policy.  Banking crises then arise as the necessary outcome of such policy failures by governments. The historical evidence to support Temin’s argument starts with Andrew Jackson and the crisis of 1837 in the U.S., continues through the Great Depression in the U.S. in the 1930s, not to mention the concurrent crisis in Germany, and concludes with the ongoing Eurozone crisis, all basically due to misguided political leaders, as named in his sub-title.

Juan H. Flores Zendejas’s “Capital Markets and Sovereign Defaults: A Historical Perspective” concludes the Oxford Handbook.  The first global financial market, arising with the collapse of the Spanish Empire in Latin America after the Napoleonic Wars, saw various devices to cope with the recurring problem of governments defaulting on the sovereign bonds they issued for whatever reason, usually to fight a war or quell a revolution.  Flores recounts the success of the London Stock Exchange in bringing governments to heel if they wanted access to British savers. The monitoring capabilities of the leading merchant bankers, especially the Barings and Rothschilds, put their imprimatur on bonds issued through their firms.  Twentieth century regulatory restrictions on these leading investment banks by their host governments, however, have limited the effectiveness of their “branding” and their intrusive follow-up in monitoring the finances of their customer governments.  Flores casts some doubt as well on the effectiveness of the Council of Foreign Bondholders in the nineteenth century.  He could also have challenged the effectiveness of international financial control committees that served as the model for the League of Nations Financial Commission after World War I if he had cited the recent work of Coskun Tuncer (Sovereign Debt and International Financial Control, The Middle East and the Balkans, 1870-1914, London: Palgrave Macmillan, 2015).  Flores concludes in general that governments that avoided defaulting in times of general crisis did so because they had been excluded from the earlier expansion of international credit.

All in all, the editors did get the compilation in print still in time to be useful for anyone concerned with how the ongoing financial crisis of the early twenty-first century will play out.  Specialists in each topic, however, may be disappointed in the necessary brevity of treatment, not to mention absence of references to their own work, particularly if they worry most about the future of the U.S. financial system.

Larry Neal is the author of A Concise History of International Finance: From Babylon to Bernanke, Cambridge: Cambridge University Press, 2015

Copyright (c) 2017 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (July 2017). All EH.Net reviews are archived at http://www.eh.net/BookReview.

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):General, International, or Comparative
Time Period(s):18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

The Economic History of Mexico

The Economic History of Mexico

Richard Salvucci, Trinity University

 

Preface[1]

This article is a brief interpretive survey of some of the major features of the economic history of Mexico from pre-conquest to the present. I begin with the pre-capitalist economy of Mesoamerica. The colonial period is divided into the Habsburg and Bourbon regimes, although the focus is not really political: the emphasis is instead on the consequences of demographic and fiscal changes that colonialism brought.  Next I analyze the economic impact of independence and its accompanying conflict. A tentative effort to reconstruct secular patterns of growth in the nineteenth century follows, as well as an account of the effects of foreign intervention, war, and the so-called “dictatorship” of Porfirio Diaz.  I then examine the economic consequences of the Mexican Revolution down through the presidency of Lázaro Cárdenas, before considering the effects of the Great Depression and World War II. This is followed by an examination of the so-called Mexican Miracle, the period of import-substitution industrialization after World War II. The end of the “miracle” and the rise of economic instability in the 1970s and 1980s are discussed in some detail. I conclude with structural reforms in the 1990s, the North American Free Trade Agreement (NAFTA), and slow growth in Mexico since then. It is impossible to be comprehensive and the references appearing in the citations are highly selective and biased (where possible) in favor of English-language works, although Spanish is a must for getting beyond the basics. This is especially true in economic history, where some of the most innovative and revisionist work is being done, as it should be, by historians and economists in Mexico.[2]

 

Where (and What) is Mexico?

For most of its long history, Mexico’s boundaries have been shifting, albeit broadly stable. Colonial Mexico basically stretched from Guatemala, across what is now California and the Southwestern United States, and vaguely into the Pacific Northwest.  There matters stood for more than three centuries[3]. The big shock came at the end of the War of 1847 (“the Mexican-American War” in U.S. history). The Treaty of Guadalupe Hidalgo (1848) ended the war, but in so doing, ceded half of Mexico’s former territory to the United States—recall Texas had been lost in 1836. The northern boundary now ran on a line beginning with the Rio Grande to El Paso, and thence more or less west to the Pacific Ocean south of San Diego. With one major adjustment in 1853 (the Gadsden Purchase or Treaty of the Mesilla) and minor ones thereafter, because of the shifting of the Rio Grande, there it has remained.

Prior to the arrival of the Europeans, Mexico was a congeries of ethnic and city states whose own boundaries were unstable. Prior to the emergence of the most powerful of these states in the fifteenth century, the so-called Triple Alliance (popularly “Aztec Empire”), Mesoamerica consisted of cultural regions determined by political elites and spheres of influence that were dominated by large ceremonial centers such as La Venta, Teotihuacan, and Tula.

While such regions may have been dominant at different times, they were never “economically” independent of one another. At Teotihuacan, there were living quarters given over to Olmec residents from the Veracruz region, presumably merchants. Mesoamerica was connected, if not unified, by an ongoing trade in luxury goods and valuable stones such as jade, turquoise and precious feathers. This was not, however, trade driven primarily by factor endowments and relative costs. Climate and resource endowments did differ significantly over the widely diverse regions and microclimates of Mesoamerica. Yet trade was also political and ritualized in religious belief. For example, calling the shipment of turquoise from the (U.S.) Southwest to Central Mexico the outcome of market activity is an anachronism. In the very long run, such prehistorical exchange facilitated the later emergence of trade routes, roads, and more technologically advanced forms of transport. But arbitrage does not appear to have figured importantly in it.[4]

In sum, what we call “Mexico” in a modern sense is not of much use to the economic historian with an interest in the country before 1870, which is to say, the great bulk of its history. In these years, specificity of time and place, sometimes reaching to the village level, is an indispensable prerequisite for meaningful discussion. At the very least, it is usually advisable to be aware of substantial regional differences which reflect the ethnic and linguistic diversity of the country both before and after the arrival of the Europeans. There are fully ten language families in Mexico, and two of them, Nahuatl and Quiché, number over a million speakers each.[5]

 

Trade and Tribute before the Europeans

In the codices or deerskin folded paintings the Europeans examined (or actually commissioned), they soon became aware of a prominent form of Mesoamerican economic activity: tribute, or taxation in kind, or even labor services. In the absence of anything that served as money, tribute was forced exchange. Tribute has been interpreted as a means of redistribution in a nonmonetary economy. Social and political units formed a basis for assessment, and the goods collected included maize, beans, chile and cotton cloth. It was through the tribute the indigenous “empires” mobilized labor and resources. There is little or no evidence for the existence of labor or land markets to do so, for these were a European import, although marketplaces for goods existed in profusion.

To an extent, the preconquest reliance on barter economies and the absence of money largely accounts for the ubiquity of tribute. The absence of money is much more difficult to explain and was surely an obstacle to the growth of productivity in the indigenous economies.

The tribute was a near-universal attribute of Mesoamerican ceremonial centers and political empires. The city of Teotihuacan (ca. 600 CE, with a population of 125,000 or more) in central Mexico depended on tribute to support an upper stratum of priests and nobles while the tributary population itself lived at subsistence. Tlatelolco (ca 1520, with a population ranging from 50 to 100 thousand) drew maize, cotton, cacao, beans and precious feathers from a wide swath of territory that broadly extended from the Pacific to Gulf coasts that supported an upper stratum of priests, warriors, nobles, and merchants. It was this urban complex that sat atop the lagoons that filled the Valley of Mexico that so awed the arriving conquerors.

While the characterization of tribute as both a corvée and a tax in kind to support nonproductive populations is surely correct, its persistence in altered (i.e., monetized) form under colonial rule does suggest an important question. The tributary area of the Mexica (“Aztec” is a political term, not an ethnic one) broadly comprised a Pacific slope, a central valley, and a Gulf slope. These embrace a wide range of geographic features ranging from rugged volcanic highlands (and even higher snow-capped volcanoes) to marshy, humid coastal plains. Even today, travel through these regions is challenging. Lacking both the wheel and draught animals, the indigenous peoples relied on human transport, or, where possible, waterborne exchange. However we measure the costs of transportation, they were high. In the colonial period, they typically circumscribed the subsistence radius of markets to 25 to 35 miles. Under the circumstances, it is not easy to imagine that voluntary exchange, particularly between the coastal lowlands and the temperate to cold highlands and mountains, would be profitable for all but the most highly valued goods. In some parts of Mexico–as in the Andean region—linkages of family and kinship bound different regions together in a cult of reciprocal economic obligations. Yet absent such connections, it is not hard to imagine, for example, transporting woven cottons from the coastal lowlands to the population centers of the highlands could become a political obligation rather than a matter of profitable, voluntary exchange. The relatively ambiguous role of markets in both labor and goods that persisted into the nineteenth century may perhaps derive from just this combination of climatic and geographical characteristics. It is what made voluntary exchange under capitalistic markets such a puzzlingly problematic answer to the ordinary demands of economic activity.

 

[See the relief map below for the principal physical features of Mexico.]

image1

http://www.igeograf.unam.mx/sigg/publicaciones/atlas/anm-2007/muestra_mapa.php?cual_mapa=MG_I_1.jpg

[See the political map below for Mexican states and state capitals.]

image2

 

 

Used by permission of the University of Texas Libraries, The University of Texas at Austin.

 

“New Spain” or Colonial Mexico: The First Phase

Mexico was established by military conquest and civil war. In the process, a civilization with its own institutions and complex culture was profoundly modified and altered, if not precisely destroyed, by the European invaders. The catastrophic elements of conquest, including the sharp decline of the existing indigenous population, from perhaps 25 million to fewer than a million within a century due to warfare, disease, social disorganization and the imposition of demands for labor and resources should nevertheless not preclude some assessment, however tentative, of its economic level in 1519, when the Europeans arrived.[6]

Recent thinking suggests that Spain was far from poor when it began its overseas expansion. If this were so, the implications of the Europeans’ reactions to what they found on the mainland of Mexico (not, significantly in the Caribbean, and, especially, in Cuba, where they were first established) is important. We have several accounts of the conquest of Mexico by the European participants, of which Bernal Díaz del Castillo is the best known, but not the only one. The reaction of the Europeans was almost uniformly astonishment by the apparent material wealth of Tenochtitlan. The public buildings, spacious residences of the temple precinct, the causeways linking the island to the shore, and the fantastic array of goods available in the marketplace evoked comparisons to Venice, Constantinople, and other wealthy centers of European civilization. While it is true that this was a view of the indigenous elite, the beneficiaries of the wealth accumulated from numerous tributaries, it hardly suggests anything other than a kind of storied opulence. Of course, the peasant commoners lived at subsistence and enjoyed no such privileges, but then so did the peasants of the society from which Bernal Díaz, Cortés, Pedro de Alvarado and the other conquerors were drawn. It is hard to imagine that the average standard of living in Mexico was any lower than that of the Iberian Peninsula. The conquerors remarked on the physical size and apparent robust health of the people whom they met, and from this, scholars such as Woodrow Borah and Sherburne Cook concluded that the physical size of the Europeans and the Mexicans was about the same. Borah and Cook surmised that caloric intake per individual in Central Mexico was around 1,900 calories per day, which certainly seems comparable to European levels.[7]

Certainly, the technological differences with Europe hampered commercial exchange, such as the absence of the wheel for transportation, metallurgy that did not include iron, and the exclusive reliance on pictographic writing systems. Yet by the same token, Mesoamerican agricultural technology was richly diverse and especially oriented toward labor-intensive techniques, well suited to pre-conquest Mexico’s factor endowments. As Gene Wilken points out, Bernardo de Sahagún explained in his General History of the Things of New Spain that the Nahua farmer recognized two dozen soil types related to origin, source, color, texture, smell, consistency and organic content.  They were expert at soil management.[8] So it is possible not only to misspecify, but to mistake the technological “backwardness” of Mesoamerica relative to Europe, and historians routinely have.

The essentially political and clan-based nature of economic activity made the distribution of output somewhat different from standard neoclassical models. Although no one seriously maintains that indigenous civilization did not include private property and, in fact, property rights in humans, the distribution of product tended to emphasize average rather than marginal product. If responsibility for tribute was collective, it is logical to suppose that there was some element of redistribution and collective claim on output by the basic social groups of indigenous society, the clans or calpulli.[9] Whatever the case, it seems clear that viewing indigenous society and economy as strained by population growth to the point of collapse, as the so-called “Berkeley school” did in the 1950s, is no longer tenable. It is more likely that the tensions exploited by the Europeans to divide and conquer their native hosts and so erect a colonial state on pre-existing native entities were mainly political rather than socioeconomic. It was through the assistance of native allies such as the Tlaxcalans, as well as with the help of previously unknown diseases such as smallpox that ravaged the indigenous peoples, that the Europeans were able to place a weakened Tenochtitlan under siege and finally defeat it.

 

Colonialism and Economic Adjustment to Population Decline

With the subjection first of Tenochtitlan and Tlatelolco and then of other polities and peoples, a process that would ultimately stretch well into the nineteenth century and was never really completed, the Europeans turned their attention to making colonialism pay. The process had several components: the modification or introduction of institutions of rule and appropriation; the introduction of new flora and fauna that could be turned to economic use; the reorientation of a previously autarkic and precapitalist economy to the demands of trade and commercial exploitation; and the implementation of European fiscal sovereignty. These processes were complex, required much time, and were, in many cases, only partly successful. There is considerable speculation regarding how long it took before Spain (arguably a relevant term by the mid-sixteenth century) made colonialism pay. The best we can do is present a schematic view of what occurred. Regional variations were enormous: a “typical” outcome or institution of colonialism may well have been an outcome visible in central Mexico. Moreover, all generalizations are fragile, rest on limited quantitative evidence, and will no doubt be substantially modified eventually. The message is simple: proceed with caution.

The Europeans did not seek to take Mesoamerica as a tabula rasa. In some ways, they would have been happy to simply become the latest in a long line of ruling dynasties established by decapitating native elites and assuming control. The initial demand of the conquerors for access to native labor in the so-called encomienda was precisely that, with the actual task of governing be left to the surviving and collaborating elite: the principle of “indirect rule.”[10] There were two problems with this strategy: the natives resisted and the natives died. They died in such large numbers as to make the original strategy impracticable.

The number of people who lived in Mesoamerica has long been a subject of controversy, but there is no point in spelling it out once again. The numbers are unknowable and, in an economic sense, not really important. The population of Tenochtitlan has been variously estimated between 50 and 200 thousand individuals, depending on the instruments of estimation.  As previously mentioned, some estimates of the Central Mexican population range as high as 25 million on the eve of the European conquest, and virtually no serious student accepts the small population estimates based on the work of Angel Rosenblatt. The point is that labor was abundant relative to land, and that the small surpluses of a large tributary population must have supported the opulent elite that Bernal Díaz and his companions described.

By 1620, or thereabouts, the indigenous population had fallen to less than a million according to Cook and Borah. This is not just the quantitative speculation of modern historical demographers. Contemporaries such as Jerónimo de Mendieta in his Historia eclesiástica Indiana (1596) spoke of towns formerly densely populated now witness to “the palaces of those former Lords ruined or on the verge of. The homes of the commoners mostly empty, roads and streets deserted, churches empty on feast days, the few Indians who populate the towns in Spanish farms and factories.” Mendieta was an eyewitness to the catastrophic toll that European microbes and warfare took on the native population. There was a smallpox epidemic in 1519-20 when 5 to 8 million died. The epidemic of hemorrhagic fever in 1545 to 1548 was one of the worst demographic catastrophes in human history, killing 5 to 15 million people. And then again in 1576 to 1578, when 2 to 2.5 million people died, we have clear evidence that land prices in the Valley of Mexico (Coyoacán, a village outside Mexico City, as the reconstructed Tenochtitlán was called) collapsed. The death toll was staggering. Lesser outbreaks were registered in 1559, 1566, 1587, 1592, 1601, 1604, 1606, 1613, 1624, and 1642. The larger point is that the intensive use of native labor, such as the encomienda, had to come to an end, whatever its legal status had become by virtue of the New Laws (1542). The encomienda or the simple exploitation of massive numbers of indigenous workers was no longer possible. There were too few “Indians” by the end of the sixteenth century.[11]

As a result, the institutions and methods of economic appropriation were forced to change. The Europeans introduced pastoral agriculture – the herding of cattle and sheep – and the use of now abundant land and scarce labor in the form of the hacienda while the remaining natives were brought together in “villages” whose origins were not essentially pre- but post-conquest, the so-called congregaciones, at the same time that the titles to now-vacant lands were created, regularized and “composed.”[12] (Land titles were a European innovation as well). Sheep and cattle, which the Europeans introduced, became part of the new institutional backbone of the colony. The natives would continue to rely on maize for the better part of their subsistence, but the Europeans introduced wheat, olives (oil), grapes (wine) and even chickens, which the natives rapidly adopted. On the whole, the results of these alterations were complex. Some scholars argue that the native diet improved even in the face of their diminishing numbers, a consequence of increased land per person and of greater variety of foodstuffs, and that the agricultural potential of the colony now called New Spain was enhanced. By the beginning of the seventeenth century, the combined indigenous, European immigrant, and new mixed blood populations could largely survive on the basis of their own production. The introduction of sheep lead to the introduction and manufacture of woolens in what were called obrajes or manufactories in Puebla, Querétaro, and Coyoacán. The native peoples continued to produce cottons (a domestic crop) under the stimulus of European organization, lending, and marketing. Extensive pastoralism, the cultivation of cereals and even the incorporation of native labor then characterized the emergence of the great estates or haciendas, which became a characteristic rural institution through the twentieth century, when the Mexican Revolution put an end to many of them. Thus the colony of New Spain continued to feed, clothe and house itself independent of metropolitan Spain’s direction. Certainly, Mexico before the Conquest was self-sufficient. The extent to which the immigrant and American Spaniard or creole population depended on imports of wine, oil and other foodstuffs and textiles in the decades immediately following the conquest is much less clear.

At the same time, other profound changes accompanied the introduction of Europeans, their crops and their diseases into what they termed the “kingdom” (not colony, for constitutional reasons) of New Spain.[13] Prior to the conquest, land and labor had been commoditized, but not to any significant extent, although there was a distinction recognized between possession and ownership.  Scholars who have closely examined the emergence of land markets after the conquest—mainly in the Valley of Mexico—are virtually unanimous in this conclusion. To the extent that markets in labor and commodities had emerged, it took until the 1630s (and later elsewhere in New Spain) for the development to reach maturity. Even older mechanisms of allocation of labor by administrative means (repartimiento) or by outright coercion persisted. Purely economic incentives in the form of money wages and prices never seemed adequate to the job of mobilizing resources and those with access to political power were reluctant to pay a competitive wage. In New Spain, the use of some sort of political power or rent-seeking nearly always accompanied labor recruitment. It was, quite simply, an attempt to evade the implications of relative scarcity, and renders the entire notion of “capitalism” as a driving economic force in colonial Mexico quite inexact.

 

Why the Settlers Resisted the Implications of Scarce Labor

The reasons behind this development are complex and varied. The evidence we have for the Valley of Mexico demonstrates that the relative price of labor rose while the relative price of land fell even when nominal movements of one or the other remained fairly limited. For instance, the table constructed below demonstrates that from 1570-75 through 1591-1606, the price of unskilled labor in the Valley of Mexico nearly tripled while the price of land in the Valley (Coyoacán) fell by nearly two thirds. On the whole, the price of labor relative to land increased by nearly 800 percent. The evolution of relative prices would have inevitably worked against the demanders of labor (Europeans and increasingly, creoles or Americans of largely European ancestry) and in favor of the supplier (native labor, or people of mixed race generically termed mestizo). This was not of course what the Europeans had in mind and by capture of legal institutions (local magistrates, in particularly), frequently sought to substitute compulsion for what would have been costly “free labor.” What has been termed the “depression” of the seventeenth century may well represent one of the consequences of this evolution: an abundance of land, a scarcity of labor, and the attempt of the new rulers to adjust to changing relative prices. There were repeated royal prohibitions on the use of forced indigenous labor in both public and private works, and thus a reduction in the supply of labor. All highly speculative, no doubt, but the adjustment came during the central decades of the seventeenth century, when New Spain increasingly produced its own woolens and cottons, and largely assumed the tasks of providing itself with foodstuffs and was thus required to save and invest more.  No doubt, the new rulers felt the strain of trying to do more with less.[14]

 

Years Land Price Index Labor Price Index (Labor/Land) Index
1570-1575 100 100 100
1576-1590 50 143 286
1591-1606 33 286 867

 

Source: Calculated from Rebecca Horn, Postconquest Coyoacan: Nahua-Spanish Relations in Central Mexico, 1519-1650 (Stanford: Stanford University Press, 1997), p. 208 and José Ignacio Urquiola Permisan, “Salarios y precios en la industria manufacturer textile de la lana en Nueva España, 1570-1635,” in Virginia García Acosta, (ed.), Los precios de alimentos y manufacturas novohispanos (México, DF: CIESAS, 1995), p. 206.

 

The overall role of Mexico within the Hapsburg Empire was in flux as well. Nothing signals the change as much as the emergence of silver mining as the principal source of Mexican exportables in the second half of the sixteenth century. While Mexico would soon be eclipsed by Peru as the most productive center of silver mining—at least until the eighteenth century—the discovery of significant silver mines in Zacatecas in the 1540s transformed the economy of the Spanish empire and the character of New Spain’s as well.

 

 

 

Silver Mining

While silver mining and smelting was practiced before the conquest, it was never a focal point of indigenous activity. But for the Europeans, Mexico was largely about silver mining. From the mid- sixteenth century onward, it was explicitly understood by the viceroys that they were to do all in their power to “favor the mines,” as one memorable royal instruction enjoined. Again, there has been much controversy of the precise amounts of silver that Mexico sent to the Iberian Peninsula. What we do know certainly is that Mexico (and the Spanish Empire) became the leading source of silver, monetary reserves, and thus, of high-powered money. Over the course of the colonial period, most sources agree that Mexico provided nearly 2 billion pesos (dollars) or roughly 1.6 billion troy ounces to the world economy. The graph below provides a picture of the remissions of all Mexican silver to both Spain and to the Philippines taken from the work of John TePaske.[15]

page16

Since the population of Mexico under Spanish rule was at most 6 million people by the end of the colonial period, the kingdom’s silver output could only be considered astronomical.

This production has to be considered in both its domestic and international dimensions. From a domestic perspective, the mines were what a later generation of economists would call “growth poles.” They were markets in which inputs were transformed into tradable outputs at a much higher rate of productivity (because of mining’s relatively advanced technology) than Mexico’s other activities. Silver thus became Mexico’s principal exportable good, and remained so well into the late nineteenth century.  The residual claimants on silver production were many and varied.  There were, of course the silver miners themselves in Mexico and their merchant financiers and suppliers. They ranged from some of the wealthiest people in the world at the time, such as the Count of Regla (1710-1781), who donated warships to Spain in the eighteenth century, to individual natives in Zacatecas smelting their own stocks of silver ore.[16] While the conditions of labor in Mexico’s silver mines were almost uniformly bad, the compensation ranged from above market wages paid to free labor in the prosperous larger mines  of the Bajío and the North to the use of forced village  labor drafts in more marginal (and presumably less profitable) sites such as Taxco. In the Iberian Peninsula, income from American silver mines ultimately supported not only a class of merchant entrepreneurs in the large port cities, but virtually the core of the Spanish political nation, including monarchs, royal officials, churchmen, the military and more. And finally, silver flowed to those who valued it most highly throughout the world. It is generally estimated that 40 percent of Spain’s American (not just Mexican, but Peruvian as well) silver production ended up in hoards in China.

Within New Spain, mining centers such as Guanajuato, San Luis Potosí, and Zacatecas became places where economic growth took place rapidly, in which labor markets more readily evolved, and in which the standard of living became obviously higher than in neighboring regions. Mining centers tended to crowd out growth elsewhere because the rate of return for successful mines exceeded what could be gotten in commerce, agriculture and manufacturing. Because silver was the numeraire for Mexican prices—Mexico was effectively on a silver standard—variations in silver production could and did have substantial effects on real economic activity elsewhere in New Spain. There is considerable evidence that silver mining saddled Mexico with an early case of “Dutch disease” in which irreducible costs imposed by the silver standard ultimately rendered manufacturing and the production of other tradable goods in New Spain uncompetitive. For this reason, the expansion of Mexican silver production in the years after 1750 was never unambiguously accompanied by overall, as opposed to localized prosperity. Silver mining tended to absorb a disproportional quantity of resources and to keep New Spain’s price level high, even when the business cycle slowed down—a fact that was to impress visitors to Mexico well into the nineteenth century. Mexican silver accounted for well over three-quarters of exports by value into the nineteenth century as well. The estimates vary widely, for silver was by no means the only, or even the most important source of revenue to the Crown, but by the end of the colonial era, the Kingdom of New Spain probably accounted for 25 percent of the Crown’s imperial income.[17] That is why reformist proposals circulating in governing circles in Madrid in the late eighteenth century fixed on Mexico. If there was any threat to the American Empire, royal officials thought that Mexico, and increasingly, Cuba, were worth holding on to. From a fiscal standpoint, Mexico had become just that important.[18]

 

“New Spain”: The Second Phase                of the Bourbon “Reforms”

In 1700, the last of the Spanish Hapsburgs died and a disputed succession followed. The ensuring conflict, known as the War of Spanish Succession, came to an end in 1714. The grandson of French king Louis XIV came to the Spanish throne as King Philip V. The dynasty he represented was known as the Bourbons. For the next century of so, they were to determine the fortunes of New Spain. Traditionally, the Bourbons, especially the later ones, have been associated with an effort to “renationalize” the Spanish empire in America after it had been thoroughly penetrated by French, Dutch, and lastly, British commercial interests.[19]

There were at least two areas in which the Bourbon dynasty, “reformist” or no, affected the Mexican economy. One of them dealt with raising revenue and the other was the international position of the imperial economy, specifically, the volume and value of trade. A series of statistics calculated by Richard Garner shows that the share of Mexican output or estimated GDP taken by taxes grew by 167 percent between 1700 and 1800. The number of taxes collected by the Royal Treasury increased from 34 to 112 between 1760 and 1810. This increase, sometimes labelled as a Bourbon “reconquest” of Mexico after a century and a half of drift under the Hapsburgs, occurred because of Spain’s need to finance increasingly frequent and costly wars of empire in the eighteenth century. An entire array of new taxes and fiscal placemen came to Mexico. They affected (and alienated) everyone, from the wealthiest merchant to the humblest villager. If they did nothing else, the Bourbons proved to be expert tax collectors.[20]

The second and equally consequential change in imperial management lay in the revision and “deregulation” of New Spain’s international trade, or the evolution from a “fleet” system to a regime of independent sailings, and then, finally, of voyages to and from a far larger variety of metropolitan and colonial ports. From the mid-sixteenth century onwards, ocean-going trade between Spain and the Americas was, in theory, at least, closely regulated and supervised. Ships in convoy (flota) sailed together annually under license from the monarchy and returned together as well. Since so much silver specie was carried, the system made sense, even if the flotas made a tempting target and the problem of contraband was immense. The point of departure was Seville and later, Cadiz. Under pressure from other outports in the late eighteenth century, the system was finally relaxed. As a consequence, the volume and value of trade to Mexico increased as the price of importables fell. Import-competing industries in Mexico, especially textiles, suffered under competition and established merchants complained that the new system of trade was too loose. But to no avail. There is no measure of the barter terms of trade for the eighteenth century, but anecdotal evidence suggests they improved for Mexico. Nevertheless, it is doubtful that these gains could have come anywhere close to offsetting the financial cost of Spain’s “reconquest” of Mexico.[21]

On the other hand, the few accounts of per capita real income growth in the eighteenth century that exist suggest little more than stagnation, the result of population growth and a rising price level. Admittedly, looking for modern economic growth in Mexico in the eighteenth century is an anachronism, although there is at least anecdotal evidence of technological change in silver mining, especially in the use of gunpowder for blasting and excavating, and of some productivity increase in silver mining. So even though the share of international trade outside of goods such as cochineal and silver was quite small, at the margin, changes in the trade regime were important. There is also some indication that asset income rose and labor income fell, which fueled growing social tensions in New Spain. In the last analysis, the growing fiscal pressure of the Spanish empire came when the standard of living for most people in Mexico—the native and mixed blood population—was stagnating. During periodic subsistence crisis, especially those propagated by drought and epidemic disease, and mostly in the 1780s, living standards fell. Many historians think of late colonial Mexico as something of a powder keg waiting to explode. When it did, in 1810, the explosion was the result of a political crisis at home and a dynastic failure abroad. What New Spain had negotiated during the Wars of Spanish Succession—regime change– provide impossible to surmount during the Napoleonic Wars (1794-1815). This may well be the most sensitive indicator of how economic conditions changed in New Spain under the heavy, not to say clumsy hand, of the Bourbon “reforms.”[22]

 

The War for Independence, the Insurgency, and Their Legacy

The abdication of the Bourbon monarchy to Napoleon Bonaparte in 1808 produced a series of events that ultimately resulted in the independence of New Spain. The rupture was accompanied by a violent peasant rebellion headed by the clerics Miguel Hidalgo and José Morelos that, one way or another, carried off 10 percent of the population between 1810 and 1820. Internal commerce was largely paralyzed. Silver mining essentially collapsed between 1810 and 1812 and a full recovery of mining output was delayed until the 1840s. The mines located in zones of heavy combat, such as Guanajuato and Querétaro, were abandoned by fleeing workers. Thus neglected, they quickly flooded.

At the same time, the fiscal and human costs of this period, the Insurgency, were even greater.[23] The heavy borrowings in which the Bourbons engaged to finance their military alliances left Mexico with a considerable legacy of internal debt, estimated at £16 million at Independence. The damage to the fiscal, bureaucratic and administrative structure of New Spain in the face of the continuing threat of Spanish reinvasion (Spain did not recognize the Independence of Mexico (1821)) in the 1820s drove the independent governments into foreign borrowing on the London market to the tune of £6.4 million in order to finance continuing heavy military outlays. With a reduced fiscal capacity, in part the legacy of the Insurgency and in part the deliberate effort of Mexican elites to resist any repetition Bourbon-style taxation, Mexico defaulted on its foreign debt in 1827. For the next sixty years, through a serpentine history of moratoria, restructuring and repudiation (1867), it took until 1884 for the government to regain access to international capital markets, at what cost can only be imagined. Private sector borrowing and lending continued, although to what extent is currently unknown. What is clear is that the total (internal plus external) indebtedness of Mexico relative to late colonial GDP was somewhere in the range of 47 to 56 percent.[24]

This was, perhaps, not an insubstantial amount for a country whose mechanisms of public finance were in what could be mildly termed chaotic condition in the 1820s and 1830s as the form, philosophy, and mechanics of government oscillated from federalist to centralist and back into the 1850s.  Leaving aside simple questions of uncertainty, there is the very real matter that the national government—whatever the state of private wealth—lacked the capacity to service debt because national and regional elites denied it the means to do so. This issue would bedevil successive regimes into the late nineteenth century, and, indeed, into the twentieth.[25]

At the same time, the demographic effects of the Insurgency exacted a cost in terms of lost output from the 1810s through the 1840s. Gaping holes in the labor force emerged, especially in the fertile agricultural plains of the Bajío that created further obstacles to the growth of output. It is simply impossible to generalize about the fortunes of the Mexican economy in this period because of the dramatic regional variations in the Republic’s economy. A rough estimate of output per head in the late colonial period was perhaps 40 pesos (dollars).[26] After a sharp contraction in the 1810s, income remained in that neighborhood well into the 1840s, at least until the eve of the war with the United States in 1846. By the time United States troops crossed the Rio Grande, a recovery had been under way, but the war arrested it. Further political turmoil and civil war in the 1850s and 1860s represented setbacks as well. In this way, a half century or so of potential economic growth was sacrificed from the 1810s through the 1870s. This was not an uncommon experience in Latin America in the nineteenth century, and the period has even been called The Stage of the Great Delay.[27] Whatever the exact rate of real per capita income growth was, it is hard to imagine it ever exceeded two percent, if indeed it reached much more than half that.

 

Agricultural Recovery and War

On the other hand, it is clear that there was a recovery in agriculture in the central regions of the country, most notably in the staple maize crop and in wheat. The famines of the late colonial era, especially of 1785-86, when massive numbers perished, were not repeated. There were years of scarcity and periodic corresponding outbreaks of epidemic disease—the cholera epidemic of 1832 affected Mexico as it did so many other places—but by and large, the dramatic human wastage of the colonial period ceased, and the death rate does appear to have begun to fall. Very good series on wheat deliveries and retail sales taxes for the city of Puebla southeast of Mexico City show a similarly strong recovery in the 1830s and early 1840s, punctuated only by the cholera epidemic whose effects were felt everywhere.[28]

Ironically, while the Panic of 1837 appears to have at least hit the financial economy in Mexico hard with a dramatic fall in public borrowing (and private lending), especially in the capital,[29] an incipient recovery of the real economy was ended by war with the United States. It is not possible to put numbers on the cost of the war to Mexico, which lasted intermittently from 1846 to 1848, but the loss of what had been the Southwest under Mexico is most often emphasized. This may or may not be accurate. Certainly, the loss of California, where gold was discovered in January 1848, weighs heavily on the historical imaginations of modern Mexicans. There is also the sense that the indemnity paid by the United States–$15 million—was wholly inadequate, which seems at least understandable when one considers that Andrew Jackson offered $5 million to purchase Texas alone in 1829.

It has been estimated that the agricultural output of the Mexican “cession” as it was called in 1900, was nearly $64 million, and that the value of livestock in the territory was over $100 million. The value of gold and silver produced was about $35 million. Whether it is reasonable to employ the numbers in estimating the present value of output relative to the indemnity paid is at least debatable as a counterfactual, unless one chooses to regard this as the annuitized value on a perpetuity “purchased” from Mexico at gunpoint, which seems more like robbery than exchange.  In the long run, the loss may have been staggering, but in the short run, much less so. The northern territories Mexico lost had really yielded very little up until the War. In fact, the balance of costs and revenues to the Mexican government may well have been negative.[30]

Whatever the case, the decades following the war with the United States until the beginning of the administration of Porfirio Díaz (1876) are typically regarded as a step backward. The reasons are several. In 1850, the government essentially went broke. While it is true that its financial position had disintegrated since the mid-1830s, 1850 marked a turning point. The entire indemnity payment from the United States was consumed in debt service, but this made no appreciable dent in the outstanding principal, which hovered around 50 million pesos (dollars).  The limits of debt sustainability had been reached: governing was turned into a wild search for resources, which proved fruitless. Mexico continued to sell of parts of its territory, such as the Treaty of the Mesilla (1853), or Gadsden Purchase, whose proceeds largely ended up in the hands of domestic financiers rather than foreign creditors’.[31] Political divisions, if anything, terrible before the war with the United States, turned catastrophic. A series of internal revolts, uprisings and military pronouncements segued into yet another violent civil war between liberals and conservatives—now a formal party—the so-called Three Years’ War (1856-58). In 1862, frustrated by Mexico’s suspension of foreign debt service, Great Britain, Spain and France seized Veracruz. A Hapsburg prince, Maximilian, was installed as Mexico’s second “emperor.” (Agustín de Iturbide was the first). While only the French actively prosecuted the war within Mexico, and while they never controlled more than a very small part of the country, the disruption was substantial. By 1867, with Maximillian deposed and the French army withdrawn, the country required serious reconstruction. [32]

 

Juárez, Díaz and the Porfiriato: authoritarian development.

To be sure, the origins of authoritarian development in nineteenth century Mexico were not with Porfirio Díaz, as is often asserted. Their beginnings actually went back several decades earlier, to the last presidency of Santa Anna, generally known as the Dictatorship (1853-54). But Santa Anna was overthrown too quickly, and now for the last time, for much to have actually occurred. A ministry for development (Fomento) had been created, but the Liberal revolution of Ayutla swept Santa Anna and his clique away for good. Serious reform seems to have begun around 1870, when the Finance Minister was Matías Romero. Romero was intent on providing Mexico with a modern Treasury, and on ending the hand-to- mouth financing that had mostly characterized the country’s government since Independence, or at least since the mid-1830s. So it is appropriate to pick up with the story here. Where did Mexico stand in 1870?[33]

The most revealing data that we have on the state of economic development come from various anthropometric and cost of living studies by Amilcar Challu, Aurora Gómez Galvarriato, and Moramay López Alonso.[34] Their research overlaps in part, and gives a fascinating picture of Mexico in the long run, from 1735 to 1940. For the moment, let us look at the period leading up to 1867, when the French withdrew from Mexico. If we look at the heights of the “literate” population, Challu’s research suggests that the standard of living stagnated between 1750 and 1840. If we look at the “illiterate” population, there was a consistent decline until 1850. Since the share of the illiterate population was clearly larger, we might infer that living standards for most Mexicans declined after 1750, however we interpret other quantitative and anecdotal evidence.

López Alonso confines her work to the period after the 1840s. From 1850 through 1890, her work generally corroborates Challu’s. The period after the Mexican War was clearly a difficult one for most Mexicans, and the challenge that both Juárez and Díaz faced was a macroeconomy in frank contraction after 1850. The regimes after 1867 were faced with stagnation.

The real wage study of by Amilcar Challu and Aurora Gómez Galvarriato, when combined with the existing anthropometric work, offers a pretty clear correlation between movements in real wages (down) and height (falling). [35]

It would then appear growth from the 1850s through the 1870s was slow—if there was any at all—and perhaps inferior to what had come between the 1820s and the 1840s. Given the growth of import substitution during the Napoleonic Wars, roughly 1790-1810, coupled with the commercial opening brought by the Bourbons’   post-1789 extension of “free trade” to Mexico, we might well see a pattern of mixed performance (1790-1810), sharp contraction (the 1810s), rebound and recovery, with a sharp financial shocks coming in the mid-1820s and mid -1830s (1820s-1840s), and stagnation once more (1850s-1870s). Real per capita output oscillated, sometimes sharply, around an underlying growth rate of perhaps one percent; changes in the distribution of income and wealth are more or less impossible to identify consistently, because studies conflict.

Far less speculative is that the foundations for modern economic growth were laid down in Mexico during the era of Benito Juárez. Its key elements were the creation of a secular, bourgeois state and secular institutions embedded in the Constitution of 1857. The titanic ideological struggles between liberals and conservatives were ultimately resolved in favor of a liberal, but nevertheless centralizing form of government under Porfirio Diáz. This was the beginning of the end of the Ancien Regime. Under Juárez, corporate lands of the Church and native villages were privatized in favor of individual holdings and their former owners compensated in bonds. This was effectively the largest transfer of land title since the late sixteenth century (not including the war with the United States) and it cemented the idea of individual property rights. With the expulsion of the French and the outright repudiation of the French debt, the Treasury was reorganized along more modern lines. The country got additional breathing room by the suspension of debt service to Great Britain until the terms of the 1825 loans were renegotiated under the Dublán Convention (1884). Equally, if not more important, Mexico now entered the railroad age in 1876, nearly forty years after the first tracks were laid in Cuba in 1837. The educational system was expanded in an attempt to create at least a core of literate citizens who could adopt the tools of modern finance and technology. Literacy still remained in the neighborhood of 20 percent, and life expectancy at birth scarcely reached 40 years of age, if that. Yet by the end of the Restored Republic (1876), Mexico had turned a corner. There would be regressions, but the nineteenth century had finally arrived, aptly if brutally signified by Juárez’ execution of Maximilian in Querétaro in 1867.[36]

Porfirian Mexico

Yet when Díaz came to power, Mexico was, in many ways, much as it had been a century earlier. It was a rural, agrarian nation whose primary agricultural output per person was maize, followed by wheat and beans. These were produced on haciendas and ranchos in Jalisco, Guanajuato, Michoacán, Mexico, Puebla as well as Oaxaca, Veracruz, Aguascalientes, Chihuahua and Sonora. Cotton, which with great difficulty had begun to supply a mechanized factory regime (first in spinning, then weaving) was produced in Oaxaca, Yucatán, Guerrero and Chiapas as well as in parts of Durango and Coahuila. Domestic production of raw cotton rarely sufficed to supply factories in Michoacán, Querétaro, Puebla and Veracruz, so imports from the Southern United States were common. For the most part, the indigenous population lived on maize, beans, and chile, producing its own subsistence on small, scattered plots known as milpas. Perhaps 75 percent of the population was rural, with the remainder to be found in cities like Mexico, Guadalajara, San Luis Potosí, and later, Monterrey. Population growth in the Southern and Eastern parts of the country had been relatively slow in the nineteenth century. The North and the center North grew more rapidly.  The Center of the country, less so. Immigration from abroad had been of no consequence.[37]

It is a commonplace to see the presidency of Porfirio Díaz (1876-1910) as a critical juncture in Mexican history, and this would be no less true of economic or commercial history as well. By 1910, when the Díaz government fell and Mexico descended into two decades of revolution, the first one extremely violent, the face of the country had been changed for good. The nature and effect of these changes remain not only controversial, but essential for understanding the subsequent evolution of the country, so we should pause here to consider some of their essential features.

While mining and especially, silver mining, had long held a privileged place in the economy, the nineteenth century had witnessed a number of significant changes. Until about 1889, the coinage of gold, silver, and copper—a very rough proxy for production given how much silver had been illegally exported—continued on a steadily upward track. In 1822, coinage was about 10 million pesos. By 1846, it had reached roughly 15 million pesos. There was something of a structural break after the war with the United States (its origins are unclear), and coinage continued upward to about 25 million pesos in 1888. Then, the falling international price of silver, brought on by large increases in supply elsewhere, drove the trend after 1889 sharply downward. By 1909-10, coinage had collapsed to levels previously unrecorded since the 1820s, although in 1904 and 1905, it had skyrocketed to nearly 45 million pesos.[38]

It comes as no surprise that these variations in production corresponded to sharp changes in international relative prices. For example, the market price of silver declined sharply relative to lead, which in turn encountered a large increase in Mexican production and a diversification into other metals including zinc, antinomy, and copper. Mexico left the silver standard (for international transactions, but continued to use silver domestically) in 1905, which contributed to the eclipse of this one crucial industry, which would never again have the status it had when Díaz became president in 1876, when precious metals represented 75 percent of Mexican exports by value. By the time he had decamped in exile to Paris, precious metals accounted for less than half of all exports.

The reason for this relative decline was the diversification of agricultural exports that had been slowly occurring since the 1870s. Coffee, cotton, sugar, sisal and vanilla were the principal crops, and some regions of the country such as Yucatán (henequen) and Durango and Tamaulipas (cotton) supplied new export crops.

 

Railroads and Infrastructure

None of be of this would have occurred without the massive changes in land tenure that had begun in the 1850s, but most of all, without the construction of railroads financed by the migration of foreign capital to Mexico under Díaz. At one level, it is a well-known story of social savings, which were substantial in Mexico because the terrain was difficult and the alternative modes of carriage few. One way or another, transportation has always been viewed as an “obstacle” to Mexican economic development. That must be true at some level, although recent studies (especially by Sandra Kuntz) have raised important qualifications. Railroads may not have been gateways to foreign dependency, as historians once argued, but there were limits to their ability to effect economic change, even internally. They tended to enlarge the internal market for some commodities more than others. The peculiarities of rate-making produced other distortions, while markets for some commodities were inevitably concentrated in major cities or transshipment points which afforded some monopoly power to distributors even as a national market in basic commodities became more of a reality. Yet, in general, the changes were far reaching.[39]

Conventional figures confirm conventional wisdom. When Díaz assumed the presidency, there were 660 km (410 miles) of track. In 1910, there were 19,280 km (about 12,000 miles). Seven major lines linked the cities of Mexico, Veracruz, Acapulco, Juárez, Laredo, Puebla, Oaxaca. Monterrey and Tampico in 1892. The lines were built by foreign capital (e.g., the Central Mexicano was built by the Atchison, Topeka and Santa Fe), which is why resolving the long-standing questions of foreign debt service were critical. Large government subsidies on the order of 3,500 to 8,000 pesos per km were granted, and financing the subsidies amounted to over 30 million pesos by 1890. While the railroads were successful in creating more of a national market, especially in the North, their finances were badly affected by the depreciation of the silver peso, given that foreign liabilities had to be liquidated in gold.

As a result, the government nationalized the railroads in 1903. At the same time, it undertook an enormous effort to construct infrastructure such as drainage and ports, virtually all of which were financed by British capital and managed by “Don Porfirio’s contactor,” Sir Weetman Pearson.  Between railroads, ports, drainage works and irrigation facilities, the Mexican government borrowed 157 million pesos to finance costs.[40]

The expansion of the railroads, the build-out of infrastructure and the expansion of trade would have normally increased output per capita. Any data we have prior to 1930 are problematic, and before 1895, strictly speaking, we have no official measures of output per capita at all. Most scholars shy away from using levels of GDP in any form, other than for illustrative purposes.  Aside from the usual problems attending national income accounting, Mexico presents a few exceptional challenges. In peasant families, where women were entrusted with converting maize into tortilla, no small job, the omission of their value added from GDP must constitute a sizeable defect in measured output. Moreover, as the commercial radius of Mexican agriculture expanded rapidly as railroads, roads, and later, highways spread extensively, growth rates represented increased commercialization rather than increased growth. We have no idea how important this phenomenon was, but it is worth keeping in mind when we look at very rapid growth rates after 1940.

There are various measures of cumulative growth during the Porfiriato. By and large, the figure from 1900 through 1910 is around 23 percent, which is certainly higher than rates achieved during the nineteenth century, but nothing like what was recorded after 1940. In light of declining real wages, one can only assume that the bulk of “progress” flowed to the recipients of property income. This may well have represented a reversal of trends in the nineteenth century, when some argue that property income contracted in the wake of the Insurgency[41].

There was also significant industrialization in Mexico during the Porfiriato. Some industry, especially textiles, had its origins in the 1840s, but its size, scale and location altered dramatically by the end of the nineteenth century. For example, the cotton textile industry saw the number of workers, spindles and looms more than double from the late 1870s to the first decade of the nineteenth century. Brewing and its associated industry, glassmaking, became well established in Monterrey during the 1890s. The country’s first iron and steel mill, Fundidora Monterrey, was established there as well in 1903. Other industries, such as papermaking and cigarettes followed suit. By the end of the Porfiriato, over 10 percent of Mexico’s output was certainly industrial.[42]

 

From Revolution to “Miracle”

The Mexican Revolution (1910-1940) began as a political upheaval provoked by a crisis in the presidential succession when Porfirio Díaz refused to leave office in the wake of electoral defeat after signaling his willingness to do so in a famous pubic interview of 1908.[43] It was also the result of an agrarian uprising and the insistent demand of Mexico’s growing industrial proletariat for a share of political power. Finally, there was a small (fewer than 10 percent of all households) but upwardly mobile urban middle class created by economic development under Díaz whose access to political power had been effectively blocked by the regime’s mechanics of political control. Precisely how “revolutionary” were the results of the armed revolt—which persisted largely through the 1910s and peaked in a civil war in 1914-1915—has long been contentious, but is only tangentially relevant as a matter of economic history. The Mexican Revolution was no Bolshevik movement (of course, it predated Bolshevism by seven years) but it was not a purely bourgeois constitutional movement either, although it did contain substantial elements of both.

From a macroeconomic standpoint, it has become fashionable to argue that the Revolution had few, if any, profound economic consequences. It seems as if the principal reason was that revolutionary factions were interested in appropriating rather than destroying the means of production. For example, the production of crude oil peaked in Mexico in 1915—at the height of the Revolution—because crude oil could be used as a source of income to the group controlling the wells in Veracruz state. This was a powerful consideration.[44]

Yet in another sense, the conclusion that the Revolution had slight economic effects is not only facile, but obviously wrong. As the demographic historian Robert McCaa showed, the excess mortality occasioned by the Revolution was larger than any similar event in Mexican history other than the conquest in the sixteenth century. There has been no attempt made to measure the output lost by the demographic wastage (including births that never occurred), yet even the effect on the population cohort born between 1910 and 1920 is plain to see in later demographic studies.  [45]

There is also a subtler question that some scholars have raised. The Revolution increased labor mobility and the labor supply by abolishing constraints on the rural population such as debt peonage and even outright slavery. Moreover, the Revolution, by encouraging and ultimately setting into motion a massive redistribution of previously privatized land, contributed to an enlarged supply of that factor of production as well. The true impact of these developments was realized in the 1940s and 1950s, when rapid economic growth began, the so-called Mexican Miracle, which was characterized by rates of real growth of as much as 6 percent per year (1955-1966). Whatever the connection between the Revolution and the Miracle, it will require a serious examination on empirical grounds and not simply a dogmatic dismissal of what is now regarded as unfashionable development thinking: import substitution and inward-oriented growth.[46]

The other major consequence of the Revolution, the agrarian reform and the creation of the ejido, or land granted by the Mexican state to rural population under the authority provided it by the revolutionary Constitution on 1917 took considerable time to coalesce, and were arguably not even high on one of the Revolution’s principal instigators, Francisco Madero’s, list of priorities. The redistribution of land to the peasantry in the form of possession if not ownership – a kind of return to real or fictitious preconquest and colonial forms of land tenure – did peak during the avowedly reformist, and even modestly radical presidency of Lázaro Cárdenas (1934-1940) after making only halting progress under his predecessors since the 1920s. From 1940 to 1965, the cultivated area in Mexico grew at 3.7 percent per year and the rise in productivity in basic food crops was 2.8 percent per year.

Nevertheless, the long-run effects of the agrarian reform and land redistribution have been predictably controversial. Under the presidency of Carlos Salinas (1988-1994) the reform was officially declared over, with no further land redistribution to be undertaken and the legal status of the ejido definitively changed. The principal criticism of the ejido was that, in the long run, it encouraged inefficiently small landholding per farmer and, by virtue of its limitations on property rights, made agricultural credit difficult for peasants to obtain.[47]

There is no doubt these are justifiable criticisms, but they have to be placed in context. Cárdenas’ predecessors in office, Alvaro Obregón (1924-1928) and Plutarco Elías Calles (1928-1932) may well have preferred a more commercial model of agriculture with larger, irrigated holdings. But it is worth recalling that one of the original agrarian leaders of the Revolution, Emiliano Zapata, had an uneasy relationship with Madero, who saw the Revolution in mostly political terms, from the start and quickly rejected Madero’s leadership in favor of restoring peasant lands in his native state of Morelos.  Cárdenas, who was in the midst of several major maneuvers that would require widespread popular support—such as the expropriation of foreign oil companies operating in Mexico in March 1938—was undoubtedly sensitive to the need to mobilize the peasantry on his behalf. The agrarian reform of his presidency, which surpassed that of any other, needs to be considered in those terms as well as in terms of economic efficiency.[48]

Cárdenas’ presidency also coincided with the continuation of the Great Depression. Like other countries in Latin America, Mexico was hard hit by the Great Depression, at least through the early 1930s.  All sorts of consumer goods became scarcer, and the depreciation of the peso raised the relative price of imports. As had happened previously in Mexican history (1790-1810, during the Napoleonic Wars and the disruption of the Atlantic trade), in the medium term domestic industry was nevertheless given a stimulus and import substitution, the subsequent core of Mexico’s industrialization program after World War II, was given a decisive boost. On the other hand, Mexico also experienced the forced “repatriation” of people of Mexican descent, mostly from California, of whom 60 percent were United States citizens. The effects of this movement—the emigration of the Revolution in reverse—has never been properly analyzed. The general consensus is that World War II helped Mexico to prosper. Demand for labor and materials from the United States, to which Mexico was allied, raised real wages and incomes, and thus boosted aggregate demand. From 1939 through 1946, real output in Mexico grew by approximately 50 percent. The growth in population accelerated as well as the country began to move into the later stages of the demographic transition, with a falling death rate, while birth rates remained high.[49]

 

From Miracle to Meltdown: 1950-1982  

The history of import substitution manufacturing did not begin with postwar Mexico, but few countries (especially in Latin America) became as identified with the policy in the 1950s, and with what Mexicans termed the emergence of “stabilizing development.” There was never anything resembling a formal policy announcement, although Raúl Prebisch’s 1949 manifesto, “The Economic Development of Latin America and its Principal Problems” might be regarded as supplying one. Prebisch’s argument, that a directed change in the composition of imports toward capital goods to facilitate domestic industrialization was, in essence, the basis of the policy that Mexico followed. Mexico stabilized the nominal exchange rate at 12.5 pesos to the dollar in 1954, but further movement in the real exchange rate (until the 1970s) were unimportant. The substantive bias of import substitution in Mexico was a high effective rate of protection to both capital and consumer goods. Jaime Ros has calculated these rates in 1960 ranged between 47 and 85 percent, and between 33 and 109 percent in 1980. The result, in the short to intermediate run, was very rapid rates of economic growth, averaging 6.5 percent in 1950 through 1973. Other than Brazil, which also followed an import substitution regime, no country in Latin America experienced higher rates of growth. Mexico’s was substantially above the regional average. [50]

[See the historical graph of population growth in Mexico through 2000 below]

page39

Source: Essentially, Estadísticas Históricas de México (various editions since 1999; the most recent is 2014)

http://dgcnesyp.inegi.org.mx/ehm/ehm.htm (Accessed July 20, 2016)

 

But there were unexpected results as well. The contribution of labor to GDP growth was 14 percent. Capital’s contribution was 53 percent, and the remainder, total factor productivity (TFP) 28 percent.[51] As a consequence, while Mexico’s growth occurred through the accumulation of capital, the distribution of income became extremely skewed. The ratio of the top 10 percent of household income to the bottom 40 percent was 7 in 1960, and 6 in 1968. Even supporters of Mexico’s development program, such as Carlos Tello, conceded that it probable that it was the organized peasants and workers experienced an effective improvement of their relative position. The fruits of the Revolution were unevenly distributed, even among the working class.[52]

By “organized” one means such groups as the most important labor union in the country, the CTM (Confederation of Mexican Workers) or the nationally recognized peasant union, the CNC, both of which formed two of the three organized sectors of the official government party, the PRI, or Party of the Institutional Revolution that was organized in 1946. The CTM in particular was instrumental in supporting the official policy of import substitution, and thus benefited from government wage setting and political support. The leaders of these organizations became important political figures in their own right. One, Fidel Velázquez, as both a federal senator and the head of the CTM from 1941 to his death in 1997. The incorporation of these labor and peasant groups into the political system offered the government both a means of control and a guarantee of electoral support. They became pillars of what the Peruvian writer Mario Vargas Llosa famously called “the perfect dictatorship” of the PRI from 1946 to 2000, during which the PRI held a monopoly of the presidency and the important offices of state. In a sense, import substitution was the economic ideology of the PRI.[53]

Labor and economic development during the years of rapid growth is, like many others, a debated subject. While some have found strong wage growth, others, looking mostly at Mexico City, have found declining real wages. Beyond that, there is the question of informality and a segmented labor market. Were workers in the CTM the real beneficiaries of economic growth, while others in the informal sector (defined as receiving no social security payments, meaning roughly two-thirds of Mexican workers) did far less well? Obviously, the attraction of a segmented labor market model can address one obvious puzzle: why would industry substitute capital for labor, as it obviously did, if real wages were not rising? Postulating an informal sector that absorbed the rapid influx of rural migrants and thus held nominal wages steady while organized labor in the CTM got the benefit of higher negotiated wages, but in so doing, limited their employment is an attractive hypothesis, but would not command universal agreement. Nothing has been resolved, at least for the period of the “Miracle.” After Mexico entered a prolonged series of economic crises in the 1980s—here labelled as “meltdown”—the discussion must change, because many hold that the key to relative political stability and the failure of open unemployment to rise sharply can be explained by falling real wages.

The fiscal basis on which the years of the Miracle were constructed was conventional, not to say conservative.[54] A stable nominal exchange rate, balanced budgets, limited public borrowing, and a predictable monetary policy were all predicated on the notion that the private sector would react positively to favorable incentives. By and large, it did. Until the late 1960s, foreign borrowing was considered inconsequential, even if there was some concern on the horizon that it was starting to rise. No one foresaw serious macroeconomic instability. It is worth consulting a brief memorandum from Secretary of State Dean Rusk to President Lyndon Johnson (Washington, December 11, 1968) –to get some insight into how informed contemporaries viewed Mexico. The instability that existed was seen as a consequence of heavy-handedness on the part of the PRI and overreaction in the security forces. Informed observers did not view Mexico’s embrace of import-substitution industrialization as a train wreck waiting to happen. Historical actors are rarely so prescient.[55]

 

Slowing of the Miracle and Echeverría

The most obvious problems in Mexico were political. They stemmed from the increasing awareness that the limits of the “institutional revolution” had been reached, particularly regarding the growing democratic demands of the urban middle classes. The economic problem, which was far from obvious, was that import substitution had concentrated income in the upper 10 per cent of the population, so that domestic demand had begun to stagnate. Initially at least, public sector borrowing could support a variety of consumption subsidies to the population, and there were also efforts to transfer resources out of agriculture via domestic prices for staples such as maize. Yet Mexico’s population was also growing at the rate of nearly 3 percent per year, so that the long term prospects for any of these measures were cloudy.

At the same time, growing political pressures on the PRI, mostly dramatically manifest in the army’s violent repression of student demonstrators at Tlatelolco in 1968 just prior to the Olympics, had convinced some elements in the PRI, people like Carlos Madrazo, to argue for more radical change. The emergence of an incipient guerilla movement in the state of Guerrero had much the same effect. The new president, Luis Echeverría (1970-76), openly pushed for changes in the distribution of income and wealth, incited agrarian discontent for political purposes, dramatically increased government spending and borrowing, and alienated what had typically been a complaisant, if not especially friendly private sector.

The country’s macroeconomic performance began to deteriorate dramatically. Inflation, normally in the range of about 5 percent, rose into the low 20 percent range in the early 1970s. The public sector deficit, fueled by increasing social spending, rose from 2 to 7 percent of GDP. Money supply growth now averaged about 14 percent per year. Real GDP growth had begun to slip after 1968 and in the early 1970s, in deteriorated more, if unevenly. There had been clear convergence of regional economies in Mexico between 1930 and 1980 because of changing patterns of industrialization in the northern and central regions of the country.  After 1980, that process stalled and regional inequality again widened. [56]

While there is a tendency to blame Luis Echeverria for all or most of these developments, this forgets that his administration coincided with the First OPEC oil shock (1973) and rapidly deteriorating external conditions. Mexico had, as yet, not discovered the oil reserves (1978) that were to provide a temporary respite from economic adjustment after the shock of the peso devaluation of 1976—the first change in its value in over 20 years. At the same time, external demand fell, principally transmitted from the United States, Mexico’s largest trading partner, where the economy had fallen into recession in late 1973. Yet it seems reasonable to conclude that the difficult international environment, while important in bring Mexico’s “miracle” period to a close, was not helped by Echeverría’s propensity for demagoguery, of the loss of fiscal discipline that had long characterized government policy, at least since the 1950s. The only question to be resolved was to what sort of conclusion the period would come. The answer, unfortunately, was disastrous.[57]

 

Meltdown: The Debt Crisis, the Lost Decade and After

In contemporary parlance, Mexico had passed from “stabilizing” to “shared” development under Echeverría. But the devaluation of 1976 from 12.5 to 20.5 pesos to the dollar suggested that something had gone awry. One might suppose that some adjustment in course, especially in public spending and borrowing, would have occurred. But precisely the opposite occurred. Between 1976 and 1979, nominal federal spending doubled. The budget deficit increased by a factor of 15. The reason for this odd performance was the discovery of crude oil in the Gulf of Mexico, perhaps unsurprising in light of the spiking prices of the 1970s (the oil shocks of 1973-74, 1978-79), but nevertheless of considerable magnitude. In 1975, Mexico’s proven reserves were 6 billion barrels of oil. By 1978, they had increased to 40 billion. President López Portillo set himself to the task of “administering abundance” and Mexican analysts confidently predicted crude oil at $100 a barrel (when it stood at $37 in current prices in 1980). The scope of the miscalculation was catastrophic. At the same time, encouraged by bank loan pushing and effectively negative real rates of interest, Mexico borrowed abroad. Consumption subsidies, while vital in the face of slowing import substitution, were also costly, and when supported by foreign borrowing, unsustainable, but foreign indebtedness doubled between 1976 and 1979, and even further thereafter.

Matters came to a head in 1982. By then, Mexico’s foreign indebtedness was estimated at over $80 billion dollars, an increase from less than $20 billion in 1975. Real interest rates had begun to rise in the United States in mid-1981, and with Mexican borrowing tied to international rates, debt service rapidly increased. Oil revenue, which had come to constitute the great bulk of foreign exchange, followed international crude prices downward, driven in large part by a recession that had begun in the United States in mid-1981. Within six months, Mexico, too, had fallen into recession. Real per capital output was to decline by 8 percent in 1982.  Forced to sharply devalue, the real exchange rate fell by 50 percent in 1982 and inflation approached 100 percent. By the late summer, Finance Minister Jesus Silva Herzog admitted that the country could not meet an upcoming payment obligation, and was forced to turn to the US Federal Reserve, to the IMF, and to a committee of bank creditors for assistance. In late August, in a remarkable display of intemperance, President López Portillo nationalized the banking system. By December 20, 1982, Mexico’s incoming President, Miguel de la Madrid (1982-88) appeared, beleaguered, on the cover of Time Magazine framed by the caption, “We are in an Emergency.”  It was, as the saying goes, a perfect storm, and with it, the Debt Crisis and the “Lost Decade” in Mexico had begun. It would be years before anything resembling stability, let alone prosperity, was restored. Even then, what growth there was a pale imitation of what had occurred during the decades of the “Miracle.”

 

The 1980s

The 1980s were a difficult decade.[58]  After 1981, annual real per capita growth would not reach 4 percent again until 1989, and in 1986, it fell by 6 percent. In 1987, inflation reached 159 percent. The nominal exchange rate fell by 139 percent in 1986-1987. By the standards of the years of stabilizing development, the record of the 1980s was disastrous. To complete the devastation, on September 19, 1985, the worst earthquake in Mexican history, 7.8 on the Richter Scale, devastated large parts of central Mexico City and killed 5 thousand (some estimates run as high as 25 thousand), many of whom were simply buried in mass graves. It was as if a plague of biblical proportions had struck the country.

Massive indebtedness produced a dramatic decline in the standard of living as structural adjustment occurred. Servicing the debt required the production of an export surplus in non-oil exports, which in turn, required a reduction in domestic consumption. In an effort to surmount the crisis, the government implemented an agreement between organized labor, the private sector, and agricultural producers called the Economic Solidarity Pact (PSE). The PSE combined an incomes policy with fiscal austerity, trade and financial liberalization, generally tight monetary policy, and debt renegotiation and reduction. The centerpiece of the “remaking” of the previously inward orientation of the domestic economy was the North American Free Trade Agreement (NAFTA, 1993) linking Mexico, the United States, and Canada. While average tariff rates in Mexico had fallen from 34 percent in 1985 to 4 percent in 1992—even before NAFTA was signed—the agreement was generally seen as creating the institutional and legal framework whereby the reforms of Miguel de la Madrid and Carlos Salinas (1988-1994) would be preserved. Most economists thought its effects would be relatively larger in Mexico than in the United States, which generally appears to have been the case. Nevertheless, NAFTA has been predictably controversial, as trade agreements are wont to be. The political furor (and, in some places, euphoria) surrounding the agreement have faded, but never entirely disappeared. In the United States in particular, NAFTA is blamed for deindustrialization, although pressure on manufacturing, like trade liberalization itself, was underway long before NAFTA was negotiated. In Mexico, there has been much hand wringing over the fate of agriculture and small maize producers in particular. While none of this is likely to cease, it is nevertheless the case that there has been a large increase in the volume of trade between the NAFTA partners. To dismiss this is, quite plainly, misguided, even where sensitive and well organized political constituencies are concerned. But the legacy of NAFTA, like most everything in Mexican economic history, remains unsettled.

 

Post Crisis: No Miracles

Still, while some prosperity was restored to Mexico by the reforms of the 1980s and 1990s, the general macroeconomic results have been disappointing, not to say mediocre. The average real compensation per person in manufacturing in 2008 was virtually unchanged from 1993 according to the Instituto Nacional De Estadística  Geografía e Informática, and there is little reason to think the compensation has improved at all since then. It is generally conceded that per capita GDP growth has probably averaged not much more than 1 percent a year. Real GDP growth since NAFTA according to the OECD has rarely reached 5 percent and since 2010, it has been well below that.

 

 

Source: http://www.worldbank.org/en/country/mexico (Accessed July 21, 2016). The vertical scale cuts the horizontal axis at 1982

 

For virtually everyone in Mexico, the question is why, and the answers proposed include virtually any plausible factor: the breakdown of the political system after the PRI’s historic loss of presidential power in 2000; the rise of China as a competitor to Mexico in international markets; the explosive spread of narcoviolence in recent years, albeit concentrated in the states of Sonora, Sinaloa, Tamaulipas, Nuevo León and Veracruz; the results of NAFTA itself; the failure of the political system to undertake further structural economic reforms and privatizations after the initial changes of the 1980s, especially regarding the national oil monopoly, Petroleos Mexicanos (PEMEX); the failure of the border industrialization program (maquiladoras) to develop substantive backward linkages to the rest of the economy. This is by no means an exhaustive list of the candidates for poor economic performance. The choice of a cause tends to reflect the ideology of the critic.[59]

Yet it seems that, at the end of the day, the reason why post-NAFTA Mexico has failed to grow comes down to something much more fundamental: a fear of growing, embedded in the belief that the collapse of the 1980s and early 1990s (including the devastating “Tequila Crisis” of 1994-1995, which resulted in a another enormous devaluation of the peso after an initial attempt to contain the crisis was bungled)  was so traumatic and costly as to render event modest efforts to promote growth, let alone the dirigisme of times past, as essentially unwarranted. The central bank, the Banco de México (Banxico) rules out the promotion of economic growth as part of its remit—even as a theoretical proposition, let alone as a goal of macroeconomic policy– and concerns itself only with price stability. The language of its formulation is striking. “During the 1970s, there was a debate as to whether it was possible to stimulate economic growth via monetary policy.  As a result, some governments and central banks tried to reduce unemployment through expansive monetary policy.  Both economic theory and the experience of economies that tried this prescription demonstrated that it lacked validity. Thus, it became clear that monetary policy could not actively and directly stimulate economic activity and employment. For that reason, modern central banks have as their primary goal the promotion of price stability” (translation mine). Banxico is not the Fed: there is no dual mandate in Mexico.[60]

The Mexican banking system has scarcely made things easier. Private credit stands at only about a third of GDP. In recent years, the increase in private sector savings has been largely channeled to government bonds, but until quite recently, public sector deficits were very small, which is to say, fiscal policy has not been expansionary. If monetary and fiscal policy are both relatively tight, if private credit is not easy to come by, and if growth is typically presumed to be an inevitable concomitant to economic stability for which no actor (other than the private sector) is deemed responsible, it should come as no surprise that economic growth over the past two decades has been lackluster.  In the long run, aggregate supply determines real GDP, but in the short run, nominal demand matters: there is no point in creating productive capacity to satisfy demand that does not exist. And, unlike during the period of the Miracle and Stabilizing Development, attention to demand since 1982 has been limited, not to say off the table completely. It may be understandable, but Mexico’s fiscal and monetary authorities seem to suffer from what could be termed, “Fear of Growth.” For better or worse, the results are now on display. After its current (2016) return to a relatively austere budget, it remains to be seen how the economic and political system in contemporary Mexico handles slow economic growth. For that would now seem to be, in a basic sense, its largest challenge for the future.

[1] I am grateful to Ivan Escamilla and Robert Whaples for their careful readings and thoughtful criticisms.

[2] The standard reference work is Sandra Kuntz Ficker, (ed), Historia económica general de México. De la Colonia a nuestros días (México, DF: El Colegio de Mexico, 2010).

[3] Oscar Martinez, Troublesome Border (rev. ed., University of Arizona Press: Tucson, AZ, 2006) is the most helpful general account in English.

[4] There are literally dozens of general accounts of the pre-conquest world. A good starting point is Richard E.W. Adams, Prehistoric Mesoamerica (3d ed., University of Oklahoma Press: Norman, OK, 2005). More advanced is Richard E.W. Adams and Murdo J. Macleod, The Cambridge History of the Mesoamerican Peoples: Mesoamerica. (2 parts, New York: Cambridge University Press, 2000).

[5] Nora C. England and Roberto Zavala Maldonado, “Mesoamerican Languages” Oxford Bibliographies http://www.oxfordbibliographies.com/view/document/obo-9780199772810/obo-9780199772810-0080.xml

(Accessed July 10, 2016)

[6] For an introduction to the nearly endless controversy over the pre- and post-contact population of the Americas, see William M. Denevan (ed.), The Native Population of the Americas in 1492 (2d rev ed., Madison: University of Wisconsin Press, 1992).

[7] Sherburne F Cook and Woodrow Borah, Essays in Population History: Mexico and California (Berkeley, CA: University of California Press, 1979), p. 159.

[8]Gene C. Wilken, Good Farmers Traditional Agricultural Resource Management in Mexico and Central America (Berkeley: University of California Press, 1987), p. 24.

[9] Bernard Ortiz de Montellano, Aztec Medicine Health and Nutrition (New Brunswick, NJ: Rutgers University Press, 1990).

[10] Bernardo García Martínez, “Encomenderos españoles y British residents: El sistema de dominio indirecto desde la perspectiva novohispana”, in Historia Mexicana, LX: 4 [140] (abr-jun 2011), pp. 1915-1978.

[11] These epidemics are extensively and exceedingly well documented. One of the most recent examinations is Rodofo Acuna-Soto, David W. Stahle, Matthew D. Therrell , Richard D. Griffin,  and Malcolm K. Cleaveland, “When Half of the Population Died: The Epidemic of Hemorrhagic Fevers of 1576 in Mexico,” FEMS Microbiology Letters 240 (2004) 1–5. (http:// femsle.oxfordjournals.org/content/femsle/240/1/1.full.pdf, accessed July 10, 2016.) See in particular the exceptional map and table on pp. 2-3.

[12] See in particular, Bernardo García Martínez. Los pueblos de la Sierrael poder y el espacio entre los indios del norte de Puebla hasta 1700 (Mexico, DF: El Colegio de México, 1987) and Elinor G.K. Melville, A Plague of Sheep: Environmental Consequences of the Conquest of Mexico (New York: Cambridge University Press, 1997).

[13] J. H. Elliott, “A Europe of Composite Monarchies,” Past & Present 137 (The Cultural and Political Construction of Europe): 48–71; Guadalupe Jiménez Codinach, “De Alta Lealtad: Ignacio Allende y los sucesos de 1808-1811,” in Marta Terán and José Antonio Serrano Ortega, eds., Las guerras de independencia en la América Española (La Piedad, Michoacán, MX: El Colegio de Michoacán, 2002), p. 68.

[14] Richard Salvucci, “Capitalism and Dependency in Latin America,” in Larry Neal and Jeffrey G. Williamson, eds., The Cambridge History of Capitalism (2 vols.), New York: Cambridge University Press, 2014), 1: pp. 403-408.

[15] Source: TePaske Page, http://www.insidemydesk.com/hdd.html (Accessed July 19, 2016)

[16]  Edith Boorstein Couturier, The Silver King: The Remarkable Life of the Count of Regla in Colonial Mexico (Albuquerque, NM: University of New Mexico Press, 2003).  Dana Velasco Murillo, Urban Indians in a Silver City: Zacatecas, Mexico, 1546-1810 (Stanford, CA: Stanford University Press, 2015), p. 43. The standard work on the subject is David Brading, Miners and Merchants in Bourbon Mexico, 1763-1810 (New York: Cambridge University Press, 1971) But also see Robert Haskett, “Our Suffering with the Taxco Tribute: Involuntary Mine Labor and Indigenous Society in Central New Spain,” Hispanic American Historical Review, 71:3 (1991), pp. 447-475. For silver in China see http://afe.easia.columbia.edu/chinawh/web/s5/s5_4.html (accessed July 13, 2016). For the rents of empire question, see Michael Costeloe, Response to Revolution: Imperial Spain and the Spanish American Revolutions, 1810-1840 (New York: Cambridge University Press, 1986).

[17] This is an estimate. David Ringrose concluded that in the 1780s, the colonies accounted for 45 percent of Crown income, and one would suppose that Mexico would account for at least about half of that. See David R. Ringrose, Spain, Europe and the ‘Spanish Miracle’, 1700-1900 (New York: Cambridge University Press, 1996), p. 93; Mauricio Drelichman, “The Curse of Moctezuma: American Silver and the Dutch Disease,” Explorations in Economic History 42:3 (2005), pp. 349-380.

[18] José Antonio Escudero, El supuesto memorial del Conde de Aranda sobre la Independencia de América) México, DF: Universidad Nacional Autónoma de México, 2014) (http://bibliohistorico.juridicas.unam.mx/libros/libro.htm?l=3637, accessed July 13, 2016)

[19] Allan J. Kuethe and Kenneth J. Andrien, The Spanish Atlantic World in the Eighteenth Century. War and the Bourbon Reforms, 1713-1796 (New York: Cambridge University Press, 2014) is the most recent account of this period.

[20] Richard J. Salvucci, “Economic Growth and Change in Bourbon Mexico: A Review Essay,” The Americas, 51:2 (1994), pp. 219-231; William B Taylor, Magistrates of the Sacred: Priests and Parishioners in Eighteenth Century Mexico (Palo Alto: Stanford University Press, 1996), p. 24; Luis Jáuregui, La Real Hacienda de Nueva España. Su Administración en la Época de los Intendentes, 1786-1821 (México, DF: UNAM, 1999), p. 157.

[21] Jeremy Baskes, Staying AfloatRisk and Uncertainty in Spanish Atlantic World Trade, 1760-1820 (Stanford, CA: Stanford University Press, 2013); Xabier Lamikiz, Trade and Trust in the Eighteenth-century Atlantic World: Spanish Merchants and their Overseas Networks (Suffolk, UK: The Boydell Press., 2013). The starting point of all these studies is Clarence Haring, Trade and Navigation between Spain and the Indies in the Time of the Hapsburgs (Cambridge, MA: Harvard University Press, 1918).

[22] The best, and indeed, virtually unique starting point for considering these changes in their broadest dimensions   are the joint works of Stanley and Barbara Stein: Silver, Trade, and War (2003); Apogee of Empire (2004), and Edge of Crisis (2010), All were published by Johns Hopkins University Press and do for the Spanish Empire what Laurence Henry Gipson did for the First British Empire.

[23] The key work is María Eugenia Romero Sotelo, Minería y Guerra. La economía de Nueva España, 1810-1821 (México, DF: UNAM, 1997)

[24] Calculated from José María Luis Mora, Crédito Público ([1837] México, DF: Miguel Angel Porrúa, 1986), pp. 413-460. Also see Richard J. Salvucci, Politics, Markets, and Mexico’s “London Debt,” 1823-1887 (NY: Cambridge University Press, 2009).

[25] Jesús Hernández Jaimes, La Formación de la Hacienda Pública Mexicana y las Tensiones Centro -Periferia, 1821-1835  (México, DF: El Colegio de México, 2013). Javier Torres Medina, Centralismo y Reorganización. La Hacienda Pública Durante la Primera República Central de México, 1835-1842 (México, DF: Instituto Mora, 2013). The only treatment in English is Michael P. Costeloe, The Central Republic in Mexico, 1835-1846 (New York: Cambridge University Press, 1993).

[26] An agricultural worker who worked full time, 6 days a week, for the entire year (a strong assumption), in Central Mexico could have expected cash income of perhaps 24 pesos. If food, such as beans and tortilla were added, the whole pay might reach 30. The figure of 40 pesos comes from considerably richer agricultural lands around the city of Querétaro, and includes as an average income from nonagricultural employment as well, which was higher.  Measuring Worth would put the relative historic standard of living value in 2010 prices at $1.040, with the caveat that this is relative to a bundle of goods purchased in the United States. (https://www.measuringworth.com/uscompare/relativevalue.php).

[27]The phrase comes from Guido di Tella and Manuel Zymelman. See Colin Lewis, “Explaining Economic Decline: A review of recent debates in the economic and social history literature on the Argentine,” European Review of Latin American and Caribbean Studies, 64 (1998), pp. 49-68.

[28] Francisco Téllez Guerrero, De reales y granos. Las finanzas y el abasto de la Puebla de los Angeles, 1820-1840 (Puebla, MX: CIHS, 1986). Pp. 47-79.

[29]This is based on an analysis of government lending contracts. See Rosa María Meyer and Richard Salvucci, “The Panic of 1837 in Mexico: Evidence from Government Contracts” (in progress).

[30] There is an interesting summary of this data in U.S Govt., 57th Cong., 1 st sess., House, Monthly Summary of Commerce and Finance of the United States (September 1901) (Washington, DC: GPO, 1901), pp. 984-986.

[31] Salvucci, Politics and Markets, pp. 201-221.

[32] Miguel Galindo y Galindo, La Gran Década Nacional o Relación Histórica de la Guerra de Reforma, Intervención Extranjera, y gobierno del archiduque Maximiliano, 1857-1867 ([1902], 3 vols., México, DF: Fondo de Cultura Económica, 1987).

[33] Carmen Vázquez Mantecón, Santa Anna y la encrucijada del Estado. La dictadura, 1853-1855 (México, DF: Fondo de Cultura Económica, 1986).

[34] Moramay López-Alonso, Measuring Up: A History of Living Standards in Mexico, 1850-1950 (Stanford, CA: Stanford University Press, 2012);  Amilcar Challú and Auroro Gómez Galvarriato, “Mexico’s Real Wages in the Age of the Great Divergence, 1730-1930,” Revista de Historia Económica 33:1 (2015), pp. 123-152; Amílcar E. Challú, “The Great Decline: Biological Well-Being and Living Standards in Mexico, 1730-1840,” in Ricardo Salvatore, John H. Coatsworth, and Amilcar E. Challú, Living Standards in Latin American History: Height, Welfare, and Development, 1750-2000 (Cambridge, MA: Harvard University Press, 2010), pp. 23-67.

[35]See Challú and Gómez Galvarriato, “Real Wages,” Figure 5, p. 101.

[36] Luis González et al, La economía mexicana durante la época de Juárez (México, DF: 1976).

[37] Teresa Rojas Rabiela and Ignacio Gutiérrez Ruvalcaba, Cien ventanas a los países de antaño: fotografías del campo mexicano de hace un siglo) (México, DF: CONACYT, 2013), pp. 18-65.

[38] Alma Parra, “La Plata en la Estructura Económica Mexicana al Inicio del Siglo XX,” El Mercado de Valores 49:11 (1999), p. 14.

[39] Sandra Kuntz Ficker, Empresa Extranjera y Mercado Interno: El Ferrocarril Central Mexicano (1880-1907) (México, DF: El Colegio de México, 1995).

[40] Priscilla Connolly, El Contratista de Don Porfirio. Obras públicas, deuda y desarrollo desigual (México, DF: Fondo de Cultura Económica, 1997).

[41] Most notably John Tutino, From Insurrection to Revolution in Mexico: Social Bases of Agrarian Violence, 1750-1940 (Princeton, NJ: Princeton University Press, 1986). p. 229. My growth figures are based on the INEGI, Estadísticas Historicas de México, 2014) (http://dgcnesyp.inegi.org.mx/cgi-win/ehm2014.exe/CI080010, Accessed July 15, 2016).

[42] Stephen H. Haber, Industry and Underdevelopment: The Industrialization of Mexico, 1890-1940 (Stanford, CA: Stanford University Press, 1989); Aurora Gómez-Galvarriato, Industry and Revolution: Social and Economic Change in the Orizaba Valley (Cambridge, MA: Harvard University Press, 2013).

[43] There are literally dozens of accounts of the Revolution. The usual starting point, in English, is Alan Knight, The Mexican Revolution (reprint ed., 2 vols., Lincoln, NE: 1990).

[44] This argument has been made most insistently in Armando Razo and Stephen Haber, “The Rate of Growth of Productivity in Mexico, 1850-1933: Evidence from the Cotton Textile Industry,” Journal of Latin American Studies 30:3 (1998), pp. 481-517.

[45]Robert McCaa, “Missing Millions: The Demographic Cost of the Mexican revolution,” Mexican Studies/Estudios Mexicanos 19:2 (Summer 2003): 367-400; Virgilio Partida-Bush, “Demographic Transition, Demographic Bonus, and Ageing in Mexico, “ Proceedings of the United Nations Expert Group Meeting on Social and Economic Implications of Changing Population Age Structures. (http://www.un.org/esa/population/meetings/Proceedings_EGM_Mex_2005/partida.pdf) (Accessed July 15, 2016), pp. 287-290.

[46] An implication of the studies of Alan Knight, and of Clark Reynolds, The Mexican Economy: Twentieth Century Structure and Growth (New Haven, CT: Yale University Press, 1971).

[47] An interesting summary of revisionist thinking on the nature and history of the ejido appears in Emilio Kuri, “La invención del ejido, Nexos, January 2015.

[48]Alan Knight, “Cardenismo: Juggernaut or Jalopy?” Journal of Latin American Studies, 26:1 (1994), pp. 73-107.

[49] Stephen Haber, “The Political Economy of Industrialization,” in Victor Bulmer-Thomas, John Coatsworth, and Roberto Cortes-Conde, eds., The Cambridge Economic History of Latin America (2 vols., New York: Cambridge University Press, 2006), 2:  537-584.

[50]Again, there are dozens of studies of the Mexican economy in this period. Ros’ figures come from “Mexico’s Trade and Industrialization Experience Since 1960: A Reconsideration of Past Policies and Assessment of Current Reforms,” Kellogg Institute (Working Paper 186, January 1993). For a more general study, see Juan Carlos Moreno-Brid and Jaime Ros, Development and Growth in the Me3xican Economy. A Historical Perspective (New York: Oxford University Press, 2009). A recent Spanish language treatment is Enrique Cárdenas Sánchez, El largo curso de la economía mexicana. De 1780 a nuestros días (México, DF: Fondo de Cultura Económica, 2015). A view from a different perspective is Carlos Tello, Estado y desarrollo económico. México 1920-2006 (México, DF, UNAM, 2007).

[51]André A. Hoffman, Long Run Economic Development in Latin America in a Comparative Perspective: Proximate and Ultimate Causes (Santiago, Chile: CEPAL, 2001), p. 19.

[52]Tello, Estado y desarrollo, pp. 501-505.

[53] Mario Vargas Llosa, “Mexico: The Perfect Dictatorship,” New Perspectives Quarterly 8 (1991), pp. 23-24.

[54] Rafael Izquierdo, Política Hacendario del Desarrollo Estabilizador, 1958-1970 (México, DF: Fondo de Cultura Económica, 1995. The term stabilizing development was itself termed by Izquierdo as a government minister.

[55]See Foreign Relations of the United States, 1964-1968. Mexico and Central America http://2001-2009.state.gov/r/pa/ho/frus/johnsonlb/xxxi/36313.htm (Accessed July 15, 2016).

[56] José Aguilar Retureta, “The GDP Per Capita of the Mexican Regions (1895:1930): New Estimates, Revista de Historia Económica, 33: 3 (2015), pp. 387-423.

[57] For a contemporary account with a sense of the immediacy of the end of the Echeverría regime, see “Así se devaluó el peso,” Proceso, November 13, 1976.

[58] The standard account is Stephen Haber, Herbert Klein, Noel Maurer, and Kevin Middlebrook, Mexico since 1980 (New York: Cambridge University Press, 2008). A particularly astute economic account is Nora Lustig, Mexico: The Remaking of an Economy (2d ed., Washington, DC: The Brookings Institution, 1998).  But also Louise E. Walker, Waking from the Dream. Mexico’s Middle Classes After 1968 (Stanford, CA: Stanford University Press, 2013).

[59] See, for example, Jaime Ros Bosch, Algunas tesis equivocadas sobre el estancamiento económico de México (México, DF: El Colegio de México, 2013).

[60] La Banca Central y la Importancia de la Estabilidad Económica  June 16, 2008.  (http://www.banxico.org.mx/politica-monetaria-e-inflacion/material-de-referencia/intermedio/politica-monetaria/%7B3C1A08B1-FD93-0931-44F8-96F5950FC926%7D.pdf, Accessed July 15, 2016.). Also see Brian Winter, “This Man is Brilliant: So Why Doesn’t Mexico’s Economy Grow Faster?” Americas Quarterly (http://americasquarterly.org/content/man-brilliant-so-why-doesnt-mexicos-economy-grow-faster) (Accessed July 21, 2016)

 

 

Strained Relations: U.S. Foreign-Exchange Operations and Monetary Policy in the Twentieth Century

Author(s):Bordo, Michael D.
Humpage, Owen F.
Schwartz, Anna J.
Reviewer(s):Edison, Hali J.

Published by EH.Net (August 2015)

Michael D. Bordo, Owen F. Humpage and Anna J. Schwartz, Strained Relations: U.S. Foreign-Exchange Operations and Monetary Policy in the Twentieth Century.  Chicago: University of Chicago Press, 2015. x + 442 pp. $97.50 (cloth), ISBN: 978-0-226-05148-2.

Reviewed for EH.Net by Hali J. Edison, International Monetary Fund.

This book is clearly destined to become a classic, leaving a mark on future research on foreign-exchange operations. In 1990, Michael Bordo (Rutgers University and NBER) and Anna Schwartz (NBER) began their collaboration to document the evolution of U.S. intervention. Ten years later, Owen Humpage of the Federal Reserve Bank of Cleveland joined the team. Regrettably, in 2012, before the book was finalized Anna Schwartz passed away.

The book explores the evolution of foreign-exchange intervention in the United States in the twentieth century. During this period, the United States transitioned from participating in the international gold standard regime to fixed exchange rates (“dollar standard”) and finally to a regime of floating exchange rates. Policymakers around the world during this period grappled with the choice of exchange rate regime, the role of monetary policy, and international capital mobility — often referred to as the trilemma. The book traces the changes in U.S. institutional arrangements and policymakers’ thinking to the economic and political events drawing extensively from Federal Reserve documents.

Chapter 1 lays out the plan of the book. It starts by describing how attitudes about foreign-exchange intervention and monetary policy evolved over the decades and how this was eventually reflected in theories of intervention and institutional arrangements.

Chapter 2 explains that the model for modern foreign-exchange-market operations can be linked to the operations under the gold standard. The authors argue that the historical evolution of exchange-market operations before 1934 yields important insights into understanding modern-day practices. For instance, the chapter illustrates early uses of secrecy, sterilization, and forward transactions, all of which became important methods of modern intervention.

The creation of the Exchange Stabilization Fund (ESF) in the United States is described in Chapter 3. This chapter was written by Anna Schwartz and maintains the same rich details as contained in her 1963 seminal book with Milton Friedman, A Monetary History of the United States, 1867-1960. It clarifies the role of the ESF and elaborates on the institutional arrangements. Two key features of the ESF are that it is under exclusive control of the U.S. Secretary of the Treasury and is self-financing, such that ESF funding is outside of the congressional appropriation process.

After outlining the background of the institutional arrangements, chapters 4 through 6 discuss the evolution of U.S. foreign-exchange operations since the end of World War II. Each of the chapters captures a distinct episode, describing the economic and political developments and the evolution of institutional arrangements. Chapters 5 and 6 also evaluate the effectiveness of U.S. intervention, drawing heavily from the methodology laid out in research conducted by the authors.

Chapter 4 focuses on the Bretton Woods era from 1944 to 1973. During this period countries attempted to maintain par values for their currencies, promote free cross-border financial flows, and achieve domestic macroeconomic objectives such as full employment. Intervention was one of the policy instruments used to achieve these objectives. According to the authors, intervention may have been successful in the sense that it delayed the disintegration of the Bretton Woods system but it did not fix the problem: Current account surplus countries did not want to undermine their domestic macroeconomic objectives to maintain fixed exchange rates.

Chapter 5 covers the foreign-exchange-market operations during the early float period (1973 to 1981). On March 12, 1973, the Bretton Woods era fixed-exchange-rate system ended. During much of the period, policymakers viewed that foreign-exchange markets were subject to bouts of disorder, requiring intervention to direct the exchange rate along a path they viewed consistent with their domestic policy objectives. The chapter describes the evolution of the institutional arrangement, including the Federal Reserve’s swap line with the U.S. Treasury, known as the warehousing facility.

Chapter 6 considers the currency operations and the ongoing debates during the Volcker and Greenspan era (1981 to 1997). Early in the period, between 1981 and 1985, the U.S. adopted a minimalist approach that was spearheaded by the U.S. Treasury. As the dollar strengthened in 1985, the United States assumed an activist approach, intervening frequently. The chapter includes details of the 1983 Jurgensen Report, commissioned by G7 officials to study intervention. In addition, it provides a rich discussion of the 1989-1990 conversation within the Federal Reserve of its involvement in U.S. intervention operations, partly reflecting the report from a staff Task Force on System Foreign Exchange Operations. The United States essentially stopped intervening in the mid-1990s, but has never officially ruled out intervention.

Overall, this book describes the evolution of U.S. policy regarding currency-market interventions, the institutional arrangements, and the interaction of currency-market policy with monetary policy. It documents how U.S. intervention and exchange rate policy changed over time, reflecting a learning process. The work leaves open many interesting doors for more analysis that could and should engage future scholars.

Hali J. Edison (Hedison@imf.org), International Monetary Fund, is author of The Effectiveness of Central-Bank Intervention: A Survey of the Literature after 1982 (Special Papers in International Economics, Princeton University Press).

Copyright (c) 2015 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (August 2015). All EH.Net reviews are archived at http://eh.net/book-reviews/

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

Large Databases in Economic History: Research Methods and Case Studies

Editor(s):Casson, Mark
Hashimzade, Nigar
Reviewer(s):Oxley, Les

Published by EH.Net (December 2014)

Mark Casson and Nigar Hashimzade, editors, Large Databases in Economic History: Research Methods and Case Studies. Abingdon, UK: Routledge, 2013. xviii + 278 pp.  $145 (hardback), ISBN: 978-0-415-82068-4.

Reviewed for EH.Net by Les Oxley, Department of Economics, University of Waikato.

Reading this book I realized that “size does matter.”  Large datasets are not the “big data” we hear so much about today, and large datasets need not be “wide” nor “broad,” but they surely should be “long”! These are not simple semantics, but important issues to bear in mind when considering, evaluating, and considering the contributions of this new book by edited by Mark Casson and Nigar Hashimzade.  The editors do mention “big data” in the Introduction, but only in passing and as a “how to build” project.  An exception would perhaps be chapter 6 by John and Sheryllyne Haggerty where they use Visual Analytics (VA) methods to consider networks in Liverpool, 1750-1810.

The ten chapters authored by seventeen contributors plus two editors, present a mixture of “how to do” modern cliometrics and what the editors often refer to as “case studies.”   The editors stress that the ethos of the book (intended for doctoral and post-doctoral researchers in business history, economic history and social history) is to put principles into practice with the aid of practical historical studies. They criticize modern cliometrics for being “typically single equation” based “making limited use of simultaneous equation models, stochastic trends” and other concepts featured in their book. However, this seems to have missed the development and broad application of cointegration into quantitative economic history. When one considers the actual contributions published in the book, however, some chapters seem to over rely (often “due to convergence issues”) on OLS even when the stated best, theoretical, approach would be logit-type models and methods.

The range of authors include many regular contributors to economic history (Sara Horrell, Jane Humphries, E.A. Wrigley) and others who have a strong connection to the University of Reading (Adrian Bell, Chris Brooks, Anna Campbell, Jane McCutchan, Tony Moore, and Margaret Yates).

As a cliometrician, I am always looking to see how economic hypotheses can be tested through the lens of historical data.  Discovering, interrogating, estimating and testing data is what I like to do.  However, there were many surprises and a few disappointments that were revealed in this book.

In terms of surprises, the book includes just eleven figures of which only three are plots of actual data (two are photographs, two are schematic diagrams and four are VA-output plots which I defy anyone to be able to read without the aid of a microscope!). Univariate and multivariate plots, especially of time series are a crucial and simple first step in discovering the “hidden patterns in the data researchers fail to discover” which is a fundamental principle of the book.

Other surprises are related to the ability to use the chapters as “case studies.”  Yes, the authors present their research questions and allude to the data used and results presented, but with the exception of the readily available and well-mined data sets of e.g., Bob Allen and Greg Clark, much of the data used are not readily available. As a minimum, I would have thought that the large datasets used by the authors would be readily available, ideally as a link, or if not, easy to recreate (including not having to input nineteen pages of numbers presented as the data in chapter 3 by Nick Mayhew).  However, this simply is not the case.  To give a couple of examples; the data used in chapter 4, “Medieval Foreign Exchange,” by Adrian Bell, Chris Brooks and Tony Moore, “draws on exchange rates quoted in merchants’ letters from Barcelona, Bruges and Venice, written between c. 1385 and c.1410.”  The original data are identified by links presented as footnote 1 (see www2.scc.rutgers.edu/memdb/search_form_spuf.php)  and footnote 2 (see http://datini.archiviodistato.prato.it/www.indice.html) but it would be a Herculean task to recreate what the authors use derived from what are “huge” source materials, especially when the authors state (fn.3) that, “we identified data points that deviated significantly from contemporaneous rates, checked them against the original letters from the Datini archive and made corrections where necessary.”  Secondly, Jane McCutchan’s chapter 9 on “The Diffusion of Steam Technology in England: Ploughing Engines, 1859-1930,” uses data “derived from the unpublished business records of John Fowler & Co., which are held at the Museum of English Rural Life (MERL), University of Reading……The research was made possible by Robert Oliver of the Steam Plough Club (SPC) who painstakingly, over seven years, teased individual engine records from the Fowler archive.” In conclusion McCutchan states that this chapter “has presented the first comprehensive and definitive database of steam ploughing engines produced in the UK.”  My problem is that I can’t actually see it.

Apart from the lack of plots/figures and ready access to the databases, a few more niggles include; i) a general lack of summary statistics and diagnostic test results, ii) the rather too often casual use of language (especially if the book is targeted at doctoral and post-doctoral researchers) for example, “trial and error suggests that the impact of longer lags is relatively insignificant’ (p.88); “suggests that the value of the constant is quite substantial” (p. 135); “the proportion of the variation in women’s ownership that is explained …. is relatively small” (p. 217); “the overall fit of the regression is impressively high: (p. 237), etc., etc.

There are some useful and helpful references to econometric packages (p.21) and here I would also add-in “R” (which is free) and Matlab (which is certainly not); the chapter on Visual Analytics by Haggerty and Haggerty is an excellent example of the approach and a fascinating read.  They list a number of pieces of software that are now available for such analysis, and I would certainly endorse Pajek (2013) (see http://pajek.imfm.si/doku.php?id=pajek) and suggest anyone interested also purchase Pajek’s useful book.  I also enjoyed the paper on “Women’s Landownership in England in the Nineteenth Century” by Janet Casson, and “Cupidity and Crime” by Horrell, Humphries and Sneath.

Overall, the book brings together a number of interesting papers on economic, business and social history.  Doctoral and post-doctoral researchers may find it to be a useful collection of research findings that will inform and facilitate their own research.

Les Oxley is Professor in Economics, University of Waikato, New Zealand.  He has published extensively in cliometrics with co-author David Greasley and recently on environmental economic history in papers published in the Journal of Environmental Economics and Management and Scandinavian Journal of Economics.

Copyright (c) 2014 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (December 2014). All EH.Net reviews are archived at http://www.eh.net/BookReview

Subject(s):Development of the Economic History Discipline: Historiography; Sources and Methods
Financial Markets, Financial Institutions, and Monetary History
History of Technology, including Technological Change
Social and Cultural History, including Race, Ethnicity and Gender
Transport and Distribution, Energy, and Other Services
Geographic Area(s):General, International, or Comparative
Europe
Time Period(s):General or Comparative

Early Forward Exchange Markets: Vienna, 1876-1914

The “Early Forward Exchange Markets, 1876-1914” database isbackground for Marc Flandreau and John Komlos, “Target Zones inTheory and History: Credibility, Efficiency, and Policy Autonomy,”Journal of Monetary Economics, forthcoming. The pre-publication version of the paper is available at http://www.cepr.org/pubs/new-dps/dplist.asp?dpno=5199

This is the first publicly available database fornineteenth-century forward exchange markets. Futures in suchcommodities as grain and wool were common practice in the MiddleAges,[1] and futures in peppers were traded inHolland of the sixth century. Futures in stocks of the DutchEast-India company came into being shortly after its founding in1602.[2] Futures transactions gainedconsiderable importance in the course of the nineteenth century, somuch so, in fact, that by the 1880s most of the volume on theLondon stock exchange was said to be in forwardtransactions.[3] The institutions andlegal framework for this niche of the financial markets evolvedduring the course of the century, with a landmark being thefounding of a clearing house in futures in Berlin in 1869, ahead ofLondon.[4] Contracts were generally dated atultimo, that is, at the end of the month, although some exchangesalso permitted medio contracts due at the middle of the month, andlonger contracts were also known.[5]

Futures in foreign exchange facilitated transactions in bothgoods and securities across borders if both countries were not onthe same commodity standard. Thus, there was no reason for futuresamong the German reichsmark, the French franc, or the poundsterling to develop, because all were on the gold standard in thelate nineteenth century. However, among the ruble, mark, and thegulden such a need did exist, insofar as Germany was both Russia’sand Austria-Hungary’s most important trading partner, and both wereeffectively on a flexible exchange rate until the 1890s. The valueof the gulden did vary enormously in the final third of thenineteenth century, and its gyrations could be quite dangerous forinternational financial transactions. It was in this climate ofuncertainty that the biggest market in currency futures came intobeing in Central Europe.

Thus Central Europe was a leader of financial innovation in theforeign exchange market.[6] A largeforward market in rubles came into being – first in Breslau andKönigsberg – and then in Berlin,[7] and futuresin rubles were also traded in Vienna.[8]Berlin lost its dominant position in futures in rubles at the endof 1894 when the Russian Finance minister announced that thegovernment intended to defend a fixed exchange rate, and theRussian Central Bank began publishing these rates beginning inmid-April 1895.[9] Gulden-mark futures cameinto being out of the same considerations, probably well before thedata began to be published in the1870s.[10]

In Vienna, as in other European markets, there was also aforward market in general securities. These forward transactionswere to be settled – liquidated – in a major settlement proceduretaking place at the end of the month. The settlement date andoperation was named after the French word “liquidation,”which designated the same operation occurring every fortnight inthe Paris official market. As emphasized by Haupt [1894],international arbitrage in securities was a routine operation inlate-nineteenth-century Europe that brought substantial profits. Itrested on lending securities where the “report” rate (differencebetween spot and forward price) was high and borrowing money wherethe rate was low. Doing so, however, involved an element of riskdue to the possibility of exchange fluctuations. This wasespecially a problem for arbitrage between western Europeanfinancial centers and Central and Eastern ones such as Vienna andSt. Peterburg, which had close financial connections with WesternEurope (large chunks of Russian or Austro-Hungarian securities wereheld in Western Europe), but which experienced violent exchangerate movements. Obviously, the only way to be covered against thesefluctuations was to have a forward exchange market that would clearat the same dates as the markets for forward securities, and thusenable one to perform a “true” (i.e. risk free) arbitrage. It isthus not surprising to find that, along with the ultimo quotes forgeneral securities there were also in Vienna ultimo quotes forGerman marks and Russian rubles, in addition to the spot (or percassa) rates. Not surprisingly, the settlement dates for bothforward securities and forward exchange operations coincided: itwas the end-of-month “liquidation.”

Interestingly, this provides a rationale for the development ofthe forward markets that points to the combined influence offloating exchange rates and international financial arbitrage. Toconclude, we should emphasize that these genuine forward exchangerates should not be mixed up with quotes for time deposits inforeign currency, such as three months bills, that some authorshave mistakenly described as “forward” exchange rates. Purchases ofthree months bills implied a present purchase of a bill maturing ina foreign market several weeks later, while the genuine forwardcontracts to which this database refers, like today, were onlyagreements to perform a foreign exchange transaction at a futuredate. The difference between the two financial instruments istherefore obvious.

Our exchange rate data was collected from the WienerBörsekammer Coursblätter, in the archive of the Wiener BörseA.G., Strauchgasse 1-3, A-1014 Vienna, Austria. Schneider et al.[1990] and Schneider et al. [1993] have spot, but not forwardrates. Forward rates for the next “liquidation” were also publishedin the Wiener Zeitung as well as in the Neue FreiePresse. A comparison among the three sources indicated onlymarginal deviations. The other possible official market source isthe Amtliches Coursblatt der Wiener Börse. We havecompared monthly quotations for the Amtliches Coursblatt derWiener Börse and the Wiener Zeitung between 1904 and1907 (inclusive) and have not found any discrepancies at all in thequotations for the spot rates and just one slight variation in theforward quotations during these four years.

The reason for preferring the Coursblatter is that itis more systematic in that it gives a series of quotes, day high,day low, mid day, closing. Closing quotes were the mostcomprehensive and were thus the ones we collected. Spot (per cassa)exchange rates with Germany are reported from January 1870 untilthe summer of 1914 in all three sources. Until February 1873,though, they are reported in florins per 100 marks bancos, theHamburg unit (Hamburg was Germany’s prominent foreign exchangemarket until Germany’s monetary unification which shifted businessto Berlin). Rates switched to German marks in February 1873 withthe advent of the new German currency. In order to obtain ahomogeneous series in florins per mark, we divided the quotes inMark Banco by 1.5. The sources report both “Geld” and “Waare”rates. “Geld” prices were the bid price, the price at which peoplewere willing to buy foreign exchange and offering local money.“Waare” was the price at which people were offering to sell the”goods” (in this case Marks). Forward rates are available fromNovember 1876 until June 1889 under the heading “LiquidationsCourse,” but no distinction was made between bid and ask rates.From July 1889 onwards, the forward rates were quoted as Ultimo,and the distinction between bid and ask rates appeared. Moreover,from January 1900 quotes are given in Crowns per 100 mark and thequotes were divided by two in order to produce a homogeneousseries. Given that forward rates are quoted for the end of themonth (liquidation date), the best date to collect the figures isthe first day of the month after the previous liquidation.When this was a bank holiday, we collected the next availablequote. Three observations need special mention:

  • Spot quotes were not reported for 2.10.1871, and we used therate for 3.10.1871.
  • · 2.2.1911, the value for the spot rate: 117.800 is clearly atypographical error (because bid price exceeded the ask price) andwe used instead 117.300, as the obvious value. We would have gottenthe same results if we had used midday values.
  • · For 01.04.1913 we use midday values for both spot and forwardrates, because end-of-day value is unavailable for forwardrate.

We then constructed two series. A series of average bid/askrates ({Geld(t)+Waare(t)]/2, 1876:11-1914:7) and a series of bidrates (1889:7-1914:7). The database consists of florin/markexchange rates (number of florins for 100 marks) and spans theperiod 1870:1-1914:7 (spot rates) and 1876:11-1914:7 (forwardrates). Since study of forward exchange rates typically alsoinvolves exercises on covered interest parity conditions, data forinterest rates (private and official) in both Vienna and Berlin arealso provided. They were collected from same sources at same datesfor Vienna. German interest rates were collected from TheEconomist, Der deutsche Ökonomist, and the FrankfurterZeitung, at matching dates. Additional details are provided inthe tables.

  1. Archives
    • Wiener Börsekammer Coursblätter, in the archive of theWiener Börse A.G., Strauchgasse 1-3, A-1014 Vienna, Austria
    • Amtliches Coursblatt der Wiener Börse, in thearchive of Crédit lyonnais, Bayeux, France.
  2. Periodicals
    • Deutsche Ökonomist
    • The Economist
    • Frankfurter Zeitung
    • Neue Freie Presse
    • Wiener Zeitung

[1] Reinhold C. Mueller, TheVenetian Money Market. Banks, Panics, and the Public Debt,1200-1500 (Baltimore: The Johns Hopkins University Press,1997), p. 149. The Artesian-Flemings in the 12th century (WilliamCade of St. Omer) and the Italian merchant firms of the later 13thcentury – such as the Riccardi, the Bardi, the Bettore, theFrescobaldi Bianchi e Neri, — frequently bought futures expressedas loans: they would make agreements with various monastic estatesto provide these estates with immediate cash payments or loans inreturn for a guarantee to supply specific amounts of wool, up tothree years in advance. John Munro, ‘Wool-Price Schedules and theQualities of English Wools in the Later Middle Ages, ca.1270-1499,’ Textile History, 9 (1978): 118-69 (esp. pp.126-29).

[2] Herbert Schlicht,Börsen-terminhandel in Wetpapieren (Frankfurt: FritzKnapp Verlag, 1972), p. 25.

[3] Emil Struck, „Die Effektenbörse. EineVergleichung deutscher und englisher Zustände,“ Staats-undsocialwissenschaftliche Forschungen, 3 (1881) 3, 1-244; herep. 27.

[4] Struck, „Die Effektenbörse,» p. 37.

[5] . The actual ultimo price was not easyto determine by any means, because of the imminent danger ofmanipulation of the market through bogus sales. As a consequence,an elaborate mechanism was brought into being for the determinationof the ultimo price, with a sworn committee of experts making thefinal judgment call Obviously, in order for a future transaction totake place, expectations of future prices need to vary. For everyseller of a futures contract there had to be a buyer. At ultimo,however, the financial instruments did not actually have to changehands. The account could be settled by paying the differencebetween the spot price and the agreed upon futures price. (In fact,contract could actually specify that the instruments would not beexchanged in any event, only the difference in value would bepaid.) Yet, the parties to the ordinary contract (say, A and B)could well demand that the financial instrument be actuallydelivered. In that case, if the seller (A) did not possess theinstrument, but B wanted to take possession, A had to purchase itin the open market. However, an aftermarket developed which enabledA to borrow the instrument for a month from a third party (C)without investing the whole value of the financial instrument; thecontract between A and C stipulated that A would return the sameinstruments to C at the next ultimo. A’s position of borrowing wasknown in the commercial language of the time as Deport, and C’sposition of selling was known as Report. Similarly, it might be thecase that A had the instruments in hand and wanted B to takepossession, but B did not have the money to pay A. In such a case Bcould lend the instruments to someone who did have the money, D,with the promise of repurchasing them at ultimo. Thus, the reportmarket was an aftermarket of the futures market, but the reportmarket did not exist in currency. Struck, „Die Effektenbörse,» pp.30-39. For a study of the development of the market for reports seeFlandreau and Sicsic 2000.

[6] Lotz Walther, “Die Währungsfrage,” p.1279.

[7] Gerhart v. Schulze-Gävernitz,Volkswirtschaftliche Studien aus Russland (Leipzig:Duncker & Humblot, 1899), pp. 503-504.

[8] Knapp, Staatliche Theorie desGeldes, p. 252. That there was no such organized counterpartwithin Russia itself, and that the Russian government charged aBerlin bank to intervene in the markets in such a way as tomaintain the value of the Rubel, is a clear sign of theunderdevelopment of Russian financial intermediation. In a sense, aGerman private bank assumed functions otherwise associated with acentral bank.

[9] Schulze-Gävernitz,Volkswirtschaftliche Studien, pp. 527-30.

[10] Einzig, p. 31-38. There wereforward markets in Vienna in other major currencies, but these weresmall and were not quoted in the official publications. (Anexception was the 20 French Franc gold piece and the rubel whichwere quoted forward). Walther Federn, „Das Problem gesetzlicherAufnahme der Barzahnlungen in Österreich-Ungarn,“ SchmollersJahrbuch für Gesetzgebung, Verwaltung und Volkswirtschaft 34(1910), pp. 151- 172, here p. 164.

Files

Economic History Classics

Selections for 2006

During 2006 EH.NET published a series of “Classic Reviews.” Modeled along the lines of our earlier Project 2000 and Project 2001 series, reviewers were asked to “reintroduce” each of the books to the profession, “explaining its significance at the time of publication and why it has endured as a classic.” Each review summarizes the book’s key findings, methods and arguments, as it puts it into the larger context and discusses any weaknesses.

This year’s selections are (alphabetically by author):

Selection Committee

  • Gareth Austin, London School of Economics
  • Ann Carlos, University of Colorado
  • John Murray, University of Toledo
  • Lawrence Officer, University of Illinois at Chicago
  • Cormac Ó Gráda, University College Dublin
  • Peter Scott, University of Reading
  • Catherine Schenk, University of Glasgow
  • Pierre van der Eng, Australian National University
  • Jenny Wahl, Carleton College

An Overview of the Economic History of Uruguay since the 1870s

Luis Bértola, Universidad de la República — Uruguay

Uruguay’s Early History

Without silver or gold, without valuable species, scarcely peopled by gatherers and fishers, the Eastern Strand of the Uruguay River (Banda Oriental was the colonial name; República Oriental del Uruguay is the official name today) was, in the sixteenth and seventeenth centuries, distant and unattractive to the European nations that conquered the region. The major export product was the leather of wild descendants of cattle introduced in the early 1600s by the Spaniards. As cattle preceded humans, the state preceded society: Uruguay’s first settlement was Colonia del Sacramento, a Portuguese military fortress founded in 1680, placed precisely across from Buenos Aires, Argentina. Montevideo, also a fortress, was founded by the Spaniards in 1724. Uruguay was on the border between the Spanish and Portuguese empires, a feature which would be decisive for the creation, with strong British involvement, in 1828-1830, of an independent state.

Montevideo had the best natural harbor in the region, and rapidly became the end-point of the trans-Atlantic routes into the region, the base for a strong commercial elite, and for the Spanish navy in the region. During the first decades after independence, however, Uruguay was plagued by political instability, precarious institution building and economic retardation. Recurrent civil wars with intensive involvement by Britain, France, Portugal-Brazil and Argentina, made Uruguay a center for international conflicts, the most important being the Great War (Guerra Grande), which lasted from 1839 to 1851. At its end Uruguay had only about 130,000 inhabitants.

“Around the middle of the nineteenth century, Uruguay was dominated by the latifundium, with its ill-defined boundaries and enormous herds of native cattle, from which only the hides were exported to Great Britain and part of the meat, as jerky, to Brazil and Cuba. There was a shifting rural population that worked on the large estates and lived largely on the parts of beef carcasses that could not be marketed abroad. Often the landowners were also the caudillos of the Blanco or Colorado political parties, the protagonists of civil wars that a weak government was unable to prevent” (Barrán and Nahum, 1984, 655). This picture still holds, even if it has been excessively stylized, neglecting the importance of subsistence or domestic-market oriented peasant production.

Economic Performance in the Long Run

Despite its precarious beginnings, Uruguay’s per capita gross domestic product (GDP) growth from 1870 to 2002 shows an amazing persistence, with the long-run rate averaging around one percent per year. However, this apparent stability hides some important shifts. As shown in Figure 1, both GDP and population grew much faster before the 1930s; from 1930 to 1960 immigration vanished and population grew much more slowly, while decades of GDP stagnation and fast growth alternated; after the 1960s Uruguay became a net-emigration country, with low natural growth rates and a still spasmodic GDP growth.

GDP growth shows a pattern featured by Kuznets-like swings (Bértola and Lorenzo 2004), with extremely destructive downward phases, as shown in Table 1. This cyclical pattern is correlated with movements of the terms of trade (the relative price of exports versus imports), world demand and international capital flows. In the expansive phases exports performed well, due to increased demand and/or positive terms of trade shocks (1880s, 1900s, 1920s, 1940s and even during the Mercosur years from 1991 to 1998). Capital flows would sometimes follow these booms and prolong the cycle, or even be a decisive force to set the cycle up, as were financial flows in the 1970s and 1990s. The usual outcome, however, has been an overvalued currency, which blurred the debt problem and threatened the balance of trade by overpricing exports. Crises have been the result of a combination of changing trade conditions, devaluation and over-indebtedness, as in the 1880s, early 1910s, late 1920s, 1950s, early 1980s and late 1990s.

Population and per capita GDP of Uruguay, 1870-2002 (1913=100)

Table 1: Swings in the Uruguayan Economy, 1870-2003

Per capita GDP fall (%) Length of recession (years) Time to pre-crisis levels (years) Time to next crisis (years)
1872-1875 26 3 15 16
1888-1890 21 2 19 25
1912-1915 30 3 15 19
1930-1933 36 3 17 24-27
1954/57-59 9 2-5 18-21 27-24
1981-1984 17 3 11 17
1998-2003 21 5

Sources: See Figure 1.

Besides its cyclical movement, the terms of trade showed a sharp positive trend in 1870-1913, a strongly fluctuating pattern around similar levels in 1913-1960 and a deteriorating trend since then. While the volume of exports grew quickly up to the 1920s, it stagnated in 1930-1960 and started to grow again after 1970. As a result, the purchasing power of exports grew fourfold in 1870-1913, fluctuated along with the terms of trade in 1930-1960, and exhibited a moderate growth in 1970-2002.

The Uruguayan economy was very open to trade in the period up to 1913, featuring high export shares, which naturally declined as the rapidly growing population filled in rather empty areas. In 1930-1960 the economy was increasingly and markedly closed to international trade, but since the 1970s the economy opened up to trade again. Nevertheless, exports, which earlier were mainly directed to Europe (beef, wool, leather, linseed, etc.), were increasingly oriented to Argentina and Brazil, in the context of bilateral trade agreements in the 1970s and 1980s and of Mercosur (the trading zone encompassing Argentina, Brazil, Paraguay and Uruguay) in the 1990s.

While industrial output kept pace with agrarian export-led growth during the first globalization boom before World War I, the industrial share in GDP increased in 1930-54, and was mainly domestic-market orientated. Deindustrialization has been profound since the mid-1980s. The service sector was always large: focusing on commerce, transport and traditional state bureaucracy during the first globalization boom; focusing on health care, education and social services, during the import-substituting industrialization (ISI) period in the middle of the twentieth century; and focusing on military expenditure, tourism and finance since the 1970s.

The income distribution changed markedly over time. During the first globalization boom before World War I, an already uneven distribution of income and wealth seems to have worsened, due to massive immigration and increasing demand for land, both rural and urban. However, by the 1920s the relative prices of land and labor changed their previous trend, reducing income inequality. The trend later favored industrialization policies, democratization, introduction of wage councils, and the expansion of the welfare state based on an egalitarian ideology. Inequality diminished in many respects: between sectors, within sectors, between genders and between workers and pensioners. While the military dictatorship and the liberal economic policy implemented since the 1970s initiated a drastic reversal of the trend toward economic equality, the globalizing movements of the 1980s and 1990s under democratic rule didn’t increase equality. Thus, inequality remains at the higher levels reached during the period of dictatorship (1973-85).

Comparative Long-run Performance

If the stable long-run rate of Uruguayan per capita GDP growth hides important internal transformations, Uruguay’s changing position in the international scene is even more remarkable. During the first globalization boom the world became more unequal: the United States forged ahead as the world leader (nearly followed by other settler economies); Asia and Africa lagged far behind. Latin America showed a confusing map, in which countries as Argentina and Uruguay performed rather well, and others, such as the Andean region, lagged far behind (Bértola and Williamson 2003). Uruguay’s strong initial position tended to deteriorate in relation to the successful core countries during the late 1800s, as shown in Figure 2. This trend of negative relative growth was somewhat weak during the first half of the twentieth century, improved significantly during the 1960s, as the import-substituting industrialization model got exhausted, and has continued since the 1970s, despite policies favoring increased integration into the global economy.

 Per capita GDP of Uruguay relative to four core countries,  1870-2002

If school enrollment and literacy rates are reasonable proxies for human capital, in late 1800s both Argentina and Uruguay had a great handicap in relation to the United States, as shown in Table 2. The gap in literacy rates tended to disappear — as well as this proxy’s ability to measure comparative levels of human capital. Nevertheless, school enrollment, which includes college-level and technical education, showed a catching-up trend until the 1960’s, but reverted afterwards.

The gap in life-expectancy at birth has always been much smaller than the other development indicators. Nevertheless, some trends are noticeable: the gap increased in 1900-1930; decreased in 1930-1950; and increased again after the 1970s.

Table 2: Uruguayan Performance in Comparative Perspective, 1870-2000 (US = 100)

1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
GDP per capita

Uruguay

101 65 63 27 32 27 33 27 26 24 19 18 15 16

Argentina

63 34 38 31 32 29 25 25 24 21 15 16

Brazil

23 8 8 8 8 8 7 9 9 13 11 10
Latin America 13 12 13 10 9 9 9 6 6

USA

100 100 100 100 100 100 100 100 100 100 100 100 100 100
Literacy rates

Uruguay

57 65 72 79 85 91 92 94 95 97 99

Argentina

57 65 72 79 85 91 93 94 94 96 98

Brazil

39 38 37 42 46 51 61 69 76 81 86

Latin America

28 30 34 37 42 47 56 65 71 77 83

USA

100 100 100 100 100 100 100 100 100 100 100
School enrollment

Uruguay

23 31 31 30 34 42 52 46 43

Argentina

28 41 42 36 39 43 55 44 45

Brazil

12 11 12 14 18 22 30 42

Latin America

USA

100 100 100 100 100 100 100 100 100
Life expectancy at birth

Uruguay

102 100 91 85 91 97 97 97 95 96 96

Argentina

81 85 86 90 88 90 93 94 95 96 95
Brazil 60 60 56 58 58 63 79 83 85 88 88
Latin America 65 63 58 58 59 63 71 77 81 88 87
USA 100 100 100 100 100 100 100 100 100 100 100

Sources: Per capita GDP: Maddison (2001) and Astorga, Bergés and FitzGerald (2003). Literacy rates and life expectancy; Astorga, Bergés and FitzGerald (2003). School enrollment; Bértola and Bertoni (1998).

Uruguay during the First Globalization Boom: Challenge and Response

During the post-Great-War reconstruction after 1851, Uruguayan population grew rapidly (fueled by high natural rates and immigration) and so did per capita output. Productivity grew due to several causes including: the steam ship revolution, which critically reduced the price spread between Europe and America and eased access to the European market; railways, which contributed to the unification of domestic markets and reduced domestic transport costs; the diffusion and adaptation to domestic conditions of innovations in cattle-breeding and services; a significant reduction in transaction costs, related to a fluctuating but noticeable process of institutional building and strengthening of the coercive power of the state.

Wool and woolen products, hides and leather were exported mainly to Europe; salted beef (tasajo) to Brazil and Cuba. Livestock-breeding (both cattle and sheep) was intensive in natural resources and dominated by large estates. By the 1880s, the agrarian frontier was exhausted, land properties were fenced and property rights strengthened. Labor became abundant and concentrated in urban areas, especially around Montevideo’s harbor, which played an important role as a regional (supranational) commercial center. By 1908, it contained 40 percent of the nation’s population, which had risen to more than a million inhabitants, and provided the main part of Uruguay’s services, civil servants and the weak and handicraft-dominated manufacturing sector.

By the 1910s, Uruguayan competitiveness started to weaken. As the benefits of the old technological paradigm were eroding, the new one was not particularly beneficial for resource-intensive countries such as Uruguay. International demand shifted away from primary consumption, the population of Europe grew slowly and European countries struggled for self-sufficiency in primary production in a context of soaring world supply. Beginning in the 1920s, the cattle-breeding sector showed a very poor performance, due to lack of innovation away from natural pastures. In the 1930’s, its performance deteriorated mainly due to unfavorable international conditions. Export volumes stagnated until the 1970s, while purchasing power fluctuated strongly following the terms of trade.

Inward-looking Growth and Structural Change

The Uruguayan economy grew inwards until the 1950s. The multiple exchange rate system was the main economic policy tool. Agrarian production was re-oriented towards wool, crops, dairy products and other industrial inputs, away from beef. The manufacturing industry grew rapidly and diversified significantly, with the help of protectionist tariffs. It was light, and lacked capital goods or technology-intensive sectors. Productivity growth hinged upon technology transfers embodied in imported capital goods and an intensive domestic adaptation process of mature technologies. Domestic demand grew also through an expanding public sector and the expansion of a corporate welfare state. The terms of trade substantially impacted protectionism, productivity growth and domestic demand — the government raised money by manipulating exchange rates, so that when export prices rose the state had a greater capacity to protect the manufacturing sector through low exchange rates for capital goods, raw material and fuel imports and to spur productivity increases by imports of capital, while protection allowed industry to pay higher wages and thus expand domestic demand.

However, rent-seeking industries searching for protectionism and a weak clienteslist state, crowded by civil servants recruited in exchange for political favors to the political parties, directed structural change towards a closed economy and inefficient management. The obvious limits to inward looking growth of a country peopled by only about two million inhabitants were exacerbated in the late 1950s as terms of trade deteriorated. The clientelist political system, which was created by both traditional parties while the state was expanding at the national and local level, was now not able to absorb the increasing social conflicts, dyed by stringent ideological confrontation, in a context of stagnation and huge fiscal deficits.

Re-globalization and Regional Integration

The dictatorship (1973-1985) started a period of increasing openness to trade and deregulation which has persisted until the present. Dynamic integration into the world market is still incomplete, however. An attempt to return to cattle-breeding exports, as the engine of growth, was hindered by the oil crises and the ensuing European response, which restricted meat exports to that destination. The export sector was re-orientated towards “non-traditional exports” — i.e., exports of industrial goods made of traditional raw materials, to which low-quality and low-wage labor was added. Exports were also stimulated by means of strong fiscal exemptions and negative real interest rates and were re-orientated to the regional market (Argentina and Brazil) and to other developing regions. At the end of the 1970s, this policy was replaced by the monetarist approach to the balance of payments. The main goal was to defeat inflation (which had continued above 50% since the 1960s) through deregulation of foreign trade and a pre-announced exchange rate, the “tablita.” A strong wave of capital inflows led to a transitory success, but the Uruguayan peso became more and more overvalued, thus limiting exports, encouraging imports and deepening the chronic balance of trade deficit. The “tablita” remained dependent on increasing capital inflows and obviously collapsed when the risk of a huge devaluation became real. Recession and the debt crisis dominated the scene of the early 1980s.

Democratic regimes since 1985 have combined natural resource intensive exports to the region and other emergent markets, with a modest intra-industrial trade mainly with Argentina. In the 1990s, once again, Uruguay was overexposed to financial capital inflows which fueled a rather volatile growth period. However, by the year 2000, Uruguay had a much worse position in relation to the leaders of the world economy as measured by per capita GDP, real wages, equity and education coverage, than it had fifty years earlier.

Medium-run Prospects

In the 1990s Mercosur as a whole and each of its member countries exhibited a strong trade deficit with non-Mercosur countries. This was the result of a growth pattern fueled by and highly dependent on foreign capital inflows, combined with the traditional specialization in commodities. The whole Mercosur project is still mainly oriented toward price competitiveness. Nevertheless, the strongly divergent macroeconomic policies within Mercosur during the deep Argentine and Uruguayan crisis of the beginning of the twenty-first century, seem to have given place to increased coordination between Argentina and Brazil, thus making of the region a more stable environment.

The big question is whether the ongoing political revival of Mercosur will be able to achieve convergent macroeconomic policies, success in international trade negotiations, and, above all, achievements in developing productive networks which may allow Mercosur to compete outside its home market with knowledge-intensive goods and services. Over that hangs Uruguay’s chance to break away from its long-run divergent siesta.

References

Astorga, Pablo, Ame R. Bergés and Valpy FitzGerald. “The Standard of Living in Latin America during the Twentieth Century.” University of Oxford Discussion Papers in Economic and Social History 54 (2004).

Barrán, José P. and Benjamín Nahum. “Uruguayan Rural History.” Latin American Historical Review, 1985.

Bértola, Luis. The Manufacturing Industry of Uruguay, 1913-1961: A Sectoral Approach to Growth, Fluctuations and Crisis. Publications of the Department of Economic History, University of Göteborg, 61; Institute of Latin American Studies of Stockholm University, Monograph No. 20, 1990.

Bértola, Luis and Reto Bertoni. “Educación y aprendizaje en escenarios de convergencia y divergencia.” Documento de Trabajo, no. 46, Unidad Multidisciplinaria, Facultad de Ciencias Sociales, Universidad de la República, 1998.

Bértola, Luis and Fernando Lorenzo. “Witches in the South: Kuznets-like Swings in Argentina, Brazil and Uruguay since the 1870s.” In The Experience of Economic Growth, edited by J.L. van Zanden and S. Heikenen. Amsterdam: Aksant, 2004.

Bértola, Luis and Gabriel Porcile. “Argentina, Brasil, Uruguay y la Economía Mundial: una aproximación a diferentes regímenes de convergencia y divergencia.” In Ensayos de Historia Económica by Luis Bertola. Montevideo: Uruguay en la región y el mundo, 2000.

Bértola, Luis and Jeffrey Williamson. “Globalization in Latin America before 1940.” National Bureau of Economic Research Working Paper, no. 9687 (2003).

Bértola, Luis and others. El PBI uruguayo 1870-1936 y otras estimaciones. Montevideo, 1998.

Maddison, A. Monitoring the World Economy, 1820-1992. Paris: OECD, 1995.

Maddison, A. The World Economy: A Millennial

Citation: Bertola, Luis. “An Overview of the Economic History of Uruguay since the 1870s”. EH.Net Encyclopedia, edited by Robert Whaples. March 16, 2008. URL http://eh.net/encyclopedia/article/Bertola.Uruguay.final