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A Culture of Growth: The Origins of the Modern Economy

Author(s):Mokyr, Joel
Reviewer(s):Diebolt, Claude

Published by EH.Net (November 2017)

Joel Mokyr, A Culture of Growth: The Origins of the Modern Economy. Princeton, NJ: Princeton University Press, 2017. xiv + 403 pp. $35 (cloth), ISBN: 978-0-691-16888-3.

Reviewed for EH.Net by Claude Diebolt, Department of Economics, University of Strasbourg.

 
I enjoyed this new book by Joel Mokyr, which is praiseworthy for its elegance and erudition. It tells the story of economic growth with “culture” — a mushy word for most of us — as the invisible hand. However, I regret the lack of in-depth consideration of the German language literature. Significantly more attention could also have been given to economic cycles. Werner Sombart, for example (Der moderne Kapitalismus and Der Bourgeois. Zur Geistesgeschichte des modernen Wirtschaftsmenschen), was the first to come to mind while reading this fantastic book. It also reminds me of George Akerlof and Robert Schiller’s Animal Spirits, where confidence, fear, a propensity to gamble, and follow-the-leader effect stories are presented as central to explain the decision making process. The Bourgeois Trilogy by Deirdre McCloskey is another seminal work in that spirit: ideas, not capital or institutions enriched the world. A growth theorist would probably also see strong connections between Mokyr’s latest effort and the unified growth theory initiated by Oded Galor.

The book is about the roots of the Industrial Revolution, the Great Enrichment, and radical changes in values, beliefs, and preferences. It is not about a mass movement. It is a phenomenon related to an elite: philosophers and scientists of course, but also engineers, instrument makers, and even industrialists who spawned the process. In any case, it is a minority of the population. Mokyr’s ambition is to understand and to explain how these beliefs and values emerged — why some people developed new ideas and why these ideas replaced the ones in place.

According to Mokyr, we know pretty much what happened, how it happened and where it happened, but we still do not know why it happened. Why, after thousands of years of stagnation, have a number of countries and regions of the world experienced an unprecedented increase in both the scale and speed of their economic growth? Why Europe and not China? Why England? Is it the result of happenstance? The Black Death perhaps? What about the influence of religion (Max Weber and the Protestant ethic?), of major intellectual and scientific personalities who changed the game (Martin Luther, Francis Bacon, Isaac Newton, Adam Smith, Charles Darwin)? What role should be given to natural resource saturation, innovation (the compass, gunpowder, printing) and capital accumulation, trade networks, market institutions and organizations, ideas, violence (battles, dynastic arrangements, power struggles…), women, etc.? For Mokyr, the Gordian knot is a Culture of Growth — a “Useful knowledge,” scientific and technological knowledge, the meeting of motivations and incentives, of attitudes and aptitudes toward Nature and the ability to persuade others. These are the key elements of the puzzle.

“No theory-no history! Theory is the pre-requisite to any scientific writing of history,” wrote Werner Sombart (1929) in the Economic History Review. I urge you to carefully read Joel Mokyr’s evolutionary approach to culture in the spirit of Schumpeter’s theory on Unternehmergeist. It will give you a fresh insight into one of the most fascinating questions in our field: the origins of the Great Enrichment. It will invite everyone to visit economic history with an optimistic vision for the future of the World!

 
Claude Diebolt is CNRS Research Professor of Economics at the University of Strasbourg and editor of the journal Cliometrica.

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 (November 2017). All EH.Net reviews are archived at http://www.eh.net/BookReview.

Subject(s):Economic Development, Growth, and Aggregate Productivity
Social and Cultural History, including Race, Ethnicity and Gender
Geographic Area(s):General, International, or Comparative
Europe
Time Period(s):Medieval
16th Century
17th Century
18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

The Gunpowder Age: China, Military Innovation, and the Rise of the West in World History

Author(s):Andrade, Tonio
Reviewer(s):Eloranta, Jari

Published by EH.Net (February 2017)

Tonio Andrade, The Gunpowder Age: China, Military Innovation, and the Rise of the West in World History.  Princeton: Princeton University Press, 2016. ix + 432 pp. $40 (cloth), ISBN: 978-0-691-13597-7.

Reviewed for EH.Net by Jari Eloranta, Department of History, Appalachian State University.

The Gunpowder Age is a new elaborate volume on some of the key questions in world and economic history debates, namely the development of China, and to some degree Europe, in the long run, especially in the last five hundred years. Tonio Andrade, who is a professor of history at Emory University, has written a volume that cannot be overlooked in, for example, the so-called Great Divergence debate, which began with Kenneth Pomeranz’s work almost twenty years ago. Since then, economic historians have paid increasing attention to China, producing a lot of welcome scholarship on its long-run economic and social development, as well as tons of new data. Regardless, the debate over the timing and extent of China’s decline, vis-à-vis various parts of Europe, is still going strong. Scholars like Pomeranz, R. Bin Wong, Stephen Broadberry, Robert Allen, and others have weighed in, and the picture emerging from these debates is that China’s decline was probably apparent by the eighteenth century, at least in comparisons with the more affluent parts of Europe. Of course, there was also a great deal of divergence within Europe at the time, which complicates these comparisons.

Yet, Andrade’s work not only contributes to these debates, but also another huge issue in world (and economic) history, i.e. the introduction and use of gunpowder and the development of military supremacy in the early modern period. Andrade highlights the introduction of gunpowder and the technological advances made in both China and Europe, and he argues that China in fact continued to develop gunpowder technologies throughout this period of (relative) economic decline, even as late as the eighteenth century. Why then did China fail so spectacularly during the Opium Wars of the nineteenth century? His answer is that certain conditions failed to materialize in the Chinese case, for example the lack of continuous warfare and competition, which of course Europe experienced almost annually (as shown by Charles Tilly). In some ways, Andrade argues that some of China’s decline was not as noticeable or steep as we have assumed in the past. And it is here that he makes his greatest contribution to our understanding of long-run world history: China’s military development was simply on a different trajectory than in Europe. Europeans went further in developing cannons and handheld weapons, whereas the Chinese often favored rockets and alternative types of gunpowder weapons. In Europe, this manifested itself in “tournaments,” as Philip Hoffman has recently argued in Why Did Europe Conquer the World? (Princeton: Princeton University Press, 2015). Andrade also emphasizes other historical continuities in China’s recovery of superpower status at the end of the twentieth century, pointing to this past of military experimentation and deep understanding of military strategy. (One only needs to recall Sun Tzu to appreciate the long history.)

Andrade’s book is divided into four parts, plus the appendices and other extra material. Part I provides an introduction to the early history of Chinese warfare and military development. This section is mostly deep background to the main arguments of the book, and useful as a reminder of the conflicts that built and destroyed dynasties. Part II sets up the comparison between Europe and China in the early gunpowder age, and gives us a somewhat familiar story of the technological developments in weaponry, similar to Hoffman’s work. However, Chapter 6 is particularly interesting for economic historians in revealing some of the differences between European and Chinese priorities in warfare, in particular the use of cannons. Part III is more explicitly comparative and highlights how Europeans gained dominance in naval and other military weaponry. Part IV then discusses the nineteenth century superiority of the Europeans and how China attempted (actually quite successfully) to modernize their military after the defeats. Andrade then concludes with some broader ideas of China’s military, economic, and political development on the basis of these comparisons.

In general, this book is quite well researched and written, and it is a welcome addition to the new literature on China’s history, the Great Divergence, and the military development of the last 500 years. However, I have some reservations and modest criticisms of this volume. First, the Great Divergence debate is not covered very thoroughly in this book, especially the recent contributions made by many economic historians. I find this curious, but also somewhat predictable. World historians and economic historians still do not have enough common debates and discussions, and thus we often do not experience truly inter- or even intradisciplinary debates. Discussion of the timing and extent of China’s economic decline would have enriched the comparisons in the book. Second, on the same theme, Andrade does not reference some of the more interesting work done on conflicts and the role of governments in this period, for example by Mark Dincecco or David Stasavage. Military technologies are not only the outcome of conflicts, but also the changing role of the central government as well as revenue and spending patterns. Third, while Chapter 14 does discuss European navies, the role and cost of naval warfare, which is intricately linked to the European empire building projects, should have been discussed in a wider context — after all, many world historians ascribe the destruction of the Great Fleet in 1433 and the subsequent prohibition of trade as key moment in the Great Divergence. Andrade also fails to discuss enough the importance of the extensive training received by English seamen in the use of cannons and other gunpowder weapons, which gave them an advantage in the naval battles.

Finally, I would also like to mention that while the book does not make much use of quantitative data, there is an appendix of interesting new data, collected by the author, on the numbers of conflicts in China, in comparison with Europe. Andrade also compiles a data set on instances that warfare was referenced in Ming and Qing records.  This is a clever way of making some inroads into the mindset of the rulers of those dynasties. As we already know, for example the attitudes of Song and Ming rulers on the value of military service were very different — the former saw it as a dishonorable profession, which of course reflected on the quality of recruits and ultimately performance in the battlefield. This type of data is something that will surely also interest economic historians who are interested in broad comparisons between Europe and China in the early modern period.

In general, this is a well-written and careful analysis of an important topic, and the focus is explicitly comparative. While some of the chapters do not go deep enough into the comparisons, and some of the contributions made recently by economic historians are not always referenced here, this book is a welcome and worthwhile addition to the current literature on China, Europe, the Great Divergence, and the early modern military revolution. It should yield to interesting debates among world and economic historians in the near future — hopefully such debates will be visible enough in both fields, so we can have fruitful interactions similar to what followed Pomeranz’s early work in this area.

Jari Eloranta is Editor of monograph series Perspectives in Economic and Social History (Routledge).  He has written extensively on the history of military and government spending as well as conflicts, including a recent volume Economic History of Warfare and State Formation (Jari Eloranta, Eric Golson, Andrei Markevich, and Nikolaus Wolf editors, Springer: Tokyo, 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 (February 2017). All EH.Net reviews are archived at http://eh.net/book-reviews/

Subject(s):Military and War
Geographic Area(s):Asia
Europe
Time Period(s):Medieval
16th Century
17th Century
18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Concrete Economics: The Hamiltonian Approach to Economic Growth and Policy

Author(s):Cohen, Stephen S.
DeLong, J. Bradford
Reviewer(s):Salsman, Richard M.

Published by EH.Net (December 2016)

Stephen S. Cohen and J. Bradford DeLong, Concrete Economics: The Hamiltonian Approach to Economic Growth and Policy. Boston: Harvard Business Review Press, 2016. xi + 223 pp. $28 (cloth), ISBN: 978-1-422-18981-8.

Reviewed for EH.Net by Richard M. Salsman, Program in Philosophy, Politics and Economics, Duke University.

When the U.S. has prospered most has it been due mainly to a limited state that ensures equal legal treatment and relatively free markets, or has it been due to an active, intervening state that regiments activity and protects or subsidizes favored products, firms and sectors, at the expense of others? The latter, say the authors of this brief but rather interesting volume. Take note, any remaining fans of Adam Smith, true believers in “invisible hands,” or diehard devotees of “laissez faire.”

DeLong, a professor of economics at the University of California, Berkeley and Cohen, professor emeritus and co-director of the Berkeley Roundtable in the International Economy (BRIE), deserve credit for reminding us that no economic policy is truly “hands off.” As a discipline, political economy properly recognizes and studies the unavoidable interaction of politics and markets; the latter can’t even function without some basic provision of public goods (e.g., law and order, security of private property, legal sanctity of contract). They deserve kudos also for at least stipulating that prosperity (“the wealth of nations”) is a worthy goal (as it was for Smith), for that’s surely not a key premise of today’s environmentalists, social-justice warriors, or the Pope.

But is more needed, for prosperity, than the provision of basic, rights-protecting public goods? Yes, say these authors — substantially more. In their view the state is an economy’s designer, the one institution which can (must!) identify and clear out “spaces” where entrepreneurs can then confidently operate. They believe the U.S. has suffered economic crises and stagnation since 1980 because economic policy has been too pro-business — i.e., excessively-low tax rates, free trade, deregulation, entrepreneurialism, and promotion of “zero-sum” financial activity at the expense of value-added manufacturing. They tout five prior episodes in U.S. history when “real” prosperity occurred, due (they claim) to their preferred policy mix of high income tax (and tariff) rates, heavy regulation (especially of finance), infrastructure spending, and protectionism: the 1790s and early 1800s (via “Hamiltonian” principles), the post-Civil War Gilded Age (via Lincolnian prescriptions), the progressive era (via Teddy Roosevelt’s policies), the New Deal of the 1930s (via FDR’s New Deal), and the post-WWII decades of infrastructure/aerospace buildout (a by-product of the “military industrial complex” which Eisenhower both encouraged and distrusted).

By intention, the methodology here isn’t very rigorous. No new historical database is cited or analyzed. The authors eschew careful, disciplined treatments of history, empirics, and models. They offer, unapologetically, a selective historical narrative designed mainly to corroborate their theme. They believe policy formation (and analysis) goes awry if ever animated by “ideology,” especially in free-market form. Declaring themselves “non-ideological,” they focus on what they call the “concretes,” instead of abstractions; they endorse only what “works” (“pragmatically”), not what should work (“theoretically”). But can anyone specify what “works” without reference to some criterion? The authors implicitly deny that scientific methods require hypothesizing and testing — that some theory is necessary even to know where to look in a vast empirical record.

DeLong and Cohen’s methodology — more accurately, their anti-methodology posture — is worth mentioning, because in truth they cleverly apply a specific theory in choosing their anecdotes and structuring their narrative, one which economists have variously characterized as “economic nationalism” or “industrial policy.” In this model, popularized in the 1970s and early 1980s by Robert Reich and Lester Thurow, public officials and planners are presumed to be sufficiently wise and prescient to distinguish future economic “winners and losers” and thus able to generate sustainable prosperity by fostering the former and discouraging the latter, while (somehow) also avoiding the corporatist and labor union rent-seeking such policy targeting typically invites. A more recent example of the approach is Mazzucato’s The Entrepreneurial State (2013).

When a theory doesn’t explain economic reality very well, its adherents might elect to eschew theory altogether or instead to cherry-pick the historical record, to make the dubious theory “fit.” Hedging their bets, these authors try both. As for the cherry-picking, they cite nearly every major economic innovation in the U.S. since its founding era and attribute it to the encouragement of some government policy. Thanks mainly to Washington, America has had firearms, railroads, radio, aerospace, autos, trucking, assembly lines, nuclear power, electrification, central banking, paper money, infrastructure, computers, semiconductors, the Internet (yes, they credit Al Gore), and even smart phones. If the U.S. government has ever even remotely touched these things, the authors imply, it pretty much made them possible. At the same time, they blame failed products, eroded industries, and recession-depression decades in U.S. history on overly-free markets.

Even if the claim were true, that these products and sectors were made possible by Washington, it’s worth noting that the authors find that they entail primarily spin-offs from the outlays and projects of the U.S. Department of Defense — a state function even classical liberals can heartily endorse. Are prosperity-fostering spinoffs likely to flow also from the explosion of entitlement-transfer outlays in the half-century since the start of “Great Society” schemes? U.S. federal spending on national defense is now just 12% of all outlays, down from 16% in 2000, 23% in 1980, and 50% in 1960. It’s about as likely as the authors’ more liberal sympathizers being pleased to hear what aspect of U.S. spending most boosts the economy. These Berkeley dons are in the odd position of wishing devoutly for the “military-industrial complex” Ike warned against.

A misleading aspect of the book is the authors’ insistence that theirs is “the Hamilton approach to economic growth and policy.” In truth Alexander Hamilton, the first U.S. Treasury secretary (1789-1795) wanted (and implemented) a constitutionally-limited federal government, by no means a state engaged in “industrial planning” of the kind DeLong and Cohen want (let alone “social insurance” or “redistribution”). Hamilton rejected British mercantilism, which stunted American manufacturing; and unlike his Jeffersonian-agrarian opponents (and successors), he wanted low and uniform tariffs. Hamilton also defended and implemented a gold-silver based dollar, sustained reductions in the national debt, and a limited-power, privately-owned national (nationwide) bank (not a “central bank,” as the authors claim). Also unlike DeLong and Cohen, who devote a whole chapter to denouncing what they claim is a cancer-like “hypertrophy of finance” since 1980, Hamilton saw the financial sector as productive (if left free of government influence — as it surely isn’t today), not one that displaces real and healthy economic sinews.

Two periods in U.S. economic history are particularly misrepresented in the book, to fit the author’s theme. The “Gilded Age,” the half-century between the ended of the Civil War and start of World War I — supposedly entailed “vast accumulations of conspicuous wealth” and a “confiscation of the nation’s wealth” due to “the crushing power of trusts” (p. 71). In fact that was a half-century of stupendous invention, entrepreneurship, and wage gains, due to economic freedom, not theft; it was accomplished without a central bank, a federal income tax, centralized industrial planning, or a regulatory state. The other period misrepresented is the 1930s; the authors say FDR’s heavily-interventionist New Deal revived the economy, but in fact it mainly prolonged the stagnation.

It’s reasonable to expect a book authored by fans of “industrial policy” to highlight Japan, as did Reich and Thurow in the 1980s. After all, Japan’s Ministry of International Trade and Industry (“MITI”) was heralded as the model for planning agencies globally and the progenitor of its post-war economic “miracle.” Yes, Japan’s industrial production increased nearly 10% per annum from 1950 to 1991; but since then it has shrunk at a compounded rate of 0.4% per annum. Does this quarter-century contraction reflect free market policies enacted after 1991? Hardly. Somehow “things changed,” the authors report, dead-pan. “Japan had become a solidly rich nation.” “Asset values then crashed and stayed crashed,” and “rapid growth became dishearteningly elusive. Why? We do not claim to know” (p. 133).  Herein lies the futility (and dishonesty) of historical cherry-picking: when the facts don’t fit, plead humility and ignorance; otherwise, proclaim boldly and often that every sustained economic success necessarily has flowed from astute state planning.

DeLong and Cohen deserve thanks for issuing a reminder that the humane state should facilitate prosperity and higher living standards, as that’s become a minority (but much needed) view in recent decades. The book’s more refutable parts include the claim that prosperity is achievable by actively countermanding markets, the belief that today’s burgeoning welfare-transfer state (which they condone) can spawn wealth-producing “spinoffs,” and above all, the presumption that their book has the imprimatur of a truly Hamiltonian (pro-capitalist) political economy.

Richard M. Salsman is the author of The Political Economy of Public Debt: Three Centuries of Theory and Evidence (Edward Elgar, 2017). richard.salsman@duke.edu.

Copyright (c) 2016 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 2016). All EH.Net reviews are archived at http://eh.net/book-reviews/

Subject(s):Economic Planning and Policy
Geographic Area(s):North America
Time Period(s):18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Arresting Contagion: Science, Policy, and Conflicts over Animal Disease Control

Author(s):Olmstead, Alan L.
Rhode, Paul W.
Reviewer(s):Craig, Lee A.

Published by EH.Net (October 2016)

Alan L. Olmstead and Paul W. Rhode, Arresting Contagion: Science, Policy, and Conflicts over Disease Control. Cambridge, MA: Harvard University Press, 2015. x + 465 pp. $50 (cloth), ISBN: 978-0-674-72877-6.

Reviewed for EH.Net by Lee A. Craig, Department of Economics, North Carolina State University.

In Arresting Contagion, Alan Olmstead and Paul Rhode, both well-known economic historians, provide readers with a narrative of the history of the war on food-borne microorganisms.  It is a gory affair.  The warriors are, on the one side, veterinarians, public health officials, and U.S. Department of Agriculture scientists, and on the other, Boophilus microplus (the Texas Fever tick), Mycobacterium bovis (the source of Bovine Tuberculosis), and a few other bugs that make us sick, or even kill us, when we consume their livestock hosts.  The bugs are aided by two sets of humans: One is a group the authors call “deniers,” who deny the bugs are a major problem.  They resist eradication because of its perceived costs.  The other group is dominated by free-market economists, who resist eradication because it typically requires the all too visible hand of government.

The authors date the beginning of serious efforts at eradication and prevention with the establishment, by the U.S. Congress, of the Bureau of Animal Industry (BAI) in 1884.   Prior to that event, the hodgepodge of state laws and state and federal court rulings that covered livestock inspection allowed ranchers, shippers, and packers to pass along adulterated products.  The BAI was not an immediate panacea.  It took decades of scientific investigation, bureaucratic maneuvering, and the evolution of case law before eradication and prevention became the norms rather than anomalies.  Olmstead and Rhode give us a detailed narrative of various aspects of the history of eradication and prevention, documenting the process for several of the deadliest and most costly bugs.   To follow the scientific account of the BAI’s efforts, readers may occasionally find themselves searching for their freshman biology text (or Wikipedia on their I-phones), but the effort is rewarding.  If you’re having no trouble digesting that brisket sandwich you ate at lunch, this volume will tell you why.

Readers looking for one-stop shopping on the history of the eradication of meat- and milk-borne microorganisms should look elsewhere.  This is not an encyclopedia.  Some bugs get a few chapters, others a chapter or less, and some little more than a mention.  Rather, the authors focus on a handful of the more troublesome critters that were particularly acute in the United States.

A theme that runs through the volume is the juxtaposition between two conflicting approaches to government-enforced inspection: the public choice school and the public interest school.  Proponents of the former are represented most prominently by economists who argue that federal meat inspection initiatives were the result of bureaucratic meddling to the benefit of rent-seeking suppliers, often small-scale suppliers who found their businesses swamped by the rise of the major packers.  Proponents of the public interest view come from a broader set of academic fields and argue meat inspection was a logical, and valuable, effort to address a market imperfection.

Olmstead and Rhode are not coy when it comes to choosing between the two arguments.  They unambiguously side with the public interest folks.  In the war on bugs, the authors’ heroes are the vets, scientists and government bureaucrats who gave us (forced upon us, in the public choice view) federal meat inspection.  To support their case, the volume offers estimates of the rates of return on eradication and inspection efforts.  Even when biased downward, the figures are enormous.  For example, the authors’ estimate of the benefit-to-cost ratio of the eradication of foot-and-mouth disease is greater than 40 to 1 (p. 136).  The comparable figure for Texas Fever is between 9 and 20, depending upon the years in question (p. 273).  While these figures might seem high, the authors bias downward their estimates, and it is worth noting that in the late nineteenth-century the aggregate value of the nation’s livestock was greater than the capitalized value of its railroads (p. 9).  (Perhaps Irene Neu, George Rogers Taylor, and Carter Goodrich chose the wrong industry in the pre-dawn of the Cliometrics era.  One can only imagine the subsequent course of the discipline had they chosen to analyze livestock rather than railroads.)  By any reasonable standard the magnitude of the returns to eradication represent large net benefits.  In the authors’ view those benefits were not “led by an invisible hand.”  Indeed, near the end of the volume, the authors summarize the U.S. eradication experience: “Success in the United States required the unflinching use of police power and great expense, but the net benefits were enormous” (p. 301).  That is a good, concise summary of the volume itself.

Some EH.Net patrons will probably lament the volume’s lack of explicit cliometric rigor.  For example, the estimates of the returns to various eradication efforts are little more than back-of-the-envelope exercises, albeit relatively sophisticated back-of-the-envelope exercises.  For their part, the authors make no apologies for trying to provide a history that is accessible to an audience beyond EH.Neters.  How you feel about such efforts will help guide you toward or away from this well-written history of an important but oft-overlooked topic.

Vox populi suggests a receptive lay audience for the authors’ message.  I have taught undergraduates off and on for over thirty years and frequently poll them on their support for various public policies.  Support for free trade consistently runs about fifty-fifty; roughly a third of the students will openly denounce the minimum wage; and only a small and declining few will defend agricultural price supports; but I’ve never heard a student say meat inspection is a bad idea!

Lee A. Craig is Alumni Distinguished Professor and Head of the Department of Economics at North Carolina State University.  He is the author of Josephus Daniels: His Life and Times, Chapel Hill: University of North Carolina Press, 2013.

Copyright (c) 2016 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 2016). All EH.Net reviews are archived at http://eh.net/book-reviews/

Subject(s):Agriculture, Natural Resources, and Extractive Industries
Economic Planning and Policy
Geographic Area(s):North America
Time Period(s):19th Century
20th Century: Pre 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)

 

 

Reform or Repression: Organizing America’s Anti-Union Movement

Author(s):Pearson, Chad
Reviewer(s):Friedman, Gerald

Published by EH.Net (June 2016)

Chad Pearson, Reform or Repression: Organizing America’s Anti-Union Movement.  Philadelphia, University of Pennsylvania Press, 2016. viii + 303 pp. $55 (cloth), ISBN: 978-0-8122-4776-3.

Reviewed for EH.Net by Gerald Friedman, Department of Economics, University of Massachusetts.

Even while the Labor Movement is dying, its history thrives.  For a long time, Labor History was a narrow often sterile discipline focused on the glorious rise of unions and socialist political formations, the formal Labor Movement.  Labor History was populated by advocates whose works often read like sermons, histories of good and honest workers struggling against evil capitalists and their political toadies.  Strikes and unions were good, except where the earnest rank-and-file were betrayed by self-serving union leaders.  Sometimes, these betrayals cost the workers.  But the experience of collective action and struggle always contained good lessons, and task of the labor historian was seen as interpreting these lessons and passing them along to build the labor movement.

While labor historians imagined placing workers and their struggles at the center of historical analysis, by reducing capital, the state, and labor to simplistic Marxist elements, their work was consigned to a leftist ghetto.  Labor History as medieval morality play can contribute little to the broader study of history because it treats all actors as parodies. Ironically, by shrinking all social actors to a simplistic category, this work brought nothing to the understanding of the labor movement or the proper strategy for labor struggles.  In the face of the decline, even the collapse, of the Labor Movement, the old Labor History has had nothing to say except the old mantra of “evil capitalists” and “self-serving union leaders.”

Perhaps it is the crisis of the Labor Movement that has invigorated the field of Labor History.  A new generation of historians has emerged conscious that the old categories are inadequate to understand the current crisis.  They are ready for a much more nuanced approach, one that recognizes the varieties of capital. The experience of the Labor Movement’s rise and decline has forced them to recognize the often-contentious relationship between capital and democratic states, and the role of ideology in shaping not only the Labor Movement, but the response to labor militancy by states and by capitalists.  In short: the new generation recognizes that the making of the capitalist class and any capitalist state is just as challenging as the making of the working class.  By conceiving labor history as a history of contending collective movements, labor historians have enriched our understanding of American employers and their organizations (Ernst 1995; Harris 2006), their bargaining strategies and campaigns against unions (Richards 2008; Sidorick 2009; Cowie 1999), their often-tangled relationship with state officials (Howell 1992; Howell 2005; Friedman 1998; Friedman 2007), and the ideology they developed to sustain their collective action (Phillips-Fein 2009; Harris 1982; Leon 2015).  At its best, this new labor history is contributing, as labor historians have long wanted, to a broader emerging field of the history of capitalism (Beckert 2014).

Chad Pearson’s new book should be seen in the context of this transformation of Labor History into a piece of the larger history of American capitalism. His book uses brief biographies and case studies of local associations to examine the development of the Open Shop movement in American industry before the First World War.  (“Open Shops” are establishments that hire workers without regard for their union membership; in practice, they do not hire union members because they do not sign union contracts.)  In particular, Pearson addresses a question that has often appeared as a paradox to liberal historians eager to portray the American story as a march of progress: the coincidence, both in time and often in personnel, between the Progressive Era “Age of Reform” and the rise of militant anti-unionism and the repression of labor organization.  How to reconcile the seemingly antagonistic positions of progressive reformers like George Creel, who advocated of women’s suffrage, public ownership of utilities, and opposed child labor, while also campaigning for the Open Shop and serving on Citizen’s Industrial Association of America (CIAA) press committee (Pearson 2016, 70)?  What to say of Theodore Roosevelt, bitter critic of both the repressive labor policies of the Anthracite Coal companies and of the closed (union) shop?  Or the liberal hero, Louis Brandeis, who argued that the open shop protected the liberties of both employers and the rights of meritorious unionists and nonunionists alike (Pearson 2016, 83)?

It is the great strength of Pearson’s study that regardless of any personal sympathy with unions and labor militancy, he avoids any cant but evaluates seriously the positions of open-shop employers.  He shows that they, too, were often reformers and their employers’ movement was as much a part of the Progressive Era as was the Labor Movement. In rejecting labor militancy and the closed shop as incompatible with his vision of America’s political traditions, Brandeis, for example, expressed a view of labor relations and the economy that was championed by Progressive Era employers’ organizations, has remained popular in America, and has come to motivate much of our political right.  In this view, free Labor has no social dimension.  It means simply the right of individuals to conduct their businesses and to buy and sell commodities, including their own labor power, untrammeled by the interference of others, either state regulators or other workers or businesses.  An attribute of individuals, freedom is negated by collective action.  Not only does free competition among individuals best promote efficiency, it is fair because it rewards work and merit; and it is just because it represents liberty. Labor unions are a threat to efficiency because they place the lazy and incompetent on equal standing with the hard-working and meritorious.  Worse, through their political action, by promoting regulation and monopoly, they are a fundamental threat to freedom, “the greatest menace” (Pearson 2016, 182).  Far from a selfish battle to increase profits, the campaign for the open shop and the employer in the management of his property, was a noble and generous struggle to protect fundamental principles of justice and fairness.

If the open-shop activists had a general political orientation, Pearson shows that, paradoxically for many historians, it was liberal and progressive rather than reactionary.  Open shop proponents did not see themselves as part of a counter reformist movement; instead, they were part of a tradition of social reform that stretched back to the abolitionists and early Republicans, to Abraham Lincoln rather than Jefferson Davis.  They saw themselves as heirs to the abolitionists, reformers, patriotic and class-neutral proponents of industrial fairness and guardians of ambitious, hard-working individuals. It was natural then for them to oppose monopoly, to favor honest government, municipal efficiency, industrial progress and professionalization. Far from fighting against labor or higher wages, they often condemned abusive managers (like the Anthracite Coal companies), and favored welfare capitalist initiatives and what labor economists today call efficiency wages.

It would be a cheap shot at the open-shop activists to observe that their campaign in defense of individual liberty against collective regulation required collective action, “employer solidarity” and individual sacrifices to benefit the group.  Indeed, their campaigns were often undermined by the actions of self-interested individuals, employers who displayed an inclination not to “give their time to anything that will further the interests of the group. (Pearson 2016, 160, 162).  Like their union opponents, employers’ organizations face a collective action problem, the need to mobilize individual resources to produce public goods. Pearson’s greatest contribution is to show how these organizations addressed this problem, and how they used ideas — the ideology of individual liberty — to mobilize their constituents.  What socialism was for the working-class movement, progressivism became for America’s employers.

Pearson’s work should be read and read carefully by all interested in the history of the Progressive Era, the history of employer organizations, and American political thought.  His work is Labor History in the broadest and finest sense, the history of the development of American capitalist society.

References:

Beckert, Sven. 2014. Empire of Cotton: A Global History. New York: Knopf.

Cowie, Jefferson. 1999. Capital Moves: RCA’s Seventy-Year Quest for Cheap Labor. Ithaca: Cornell University Press.

Ernst, Daniel R. 1995. Lawyers against Labor: From Individual Rights to Corporate Liberalism. The Working Class in American History. Urbana: University of Illinois Press.

Friedman, Gerald. 1998. State-Making and Labor Movements: France and the United States, 1876-1914. Ithaca: Cornell University Press.

Friedman, Gerald. 2007. Reigniting the Labor Movement: Restoring Means to Ends in a Democratic Labor Movement. Abingdon, UK: Routledge.

Harris, Howell John. 1982. The Right to Manage: Industrial Relations Policies of American Business in the 1940s. Madison University of Wisconsin Press.

Harris, Howell John. 2006. Bloodless Victories: The Rise and Fall of the Open Shop in the Philadelphia Metal Trades, 1890-1940. New York: Cambridge University Press.

Howell, Chris. 1992. Regulating Labor: The State and Industrial Relations Reform in Postwar France. Princeton: Princeton University Press.

Howell, Chris. 2005. Trade Unions and the State: The Construction of Industrial Relations Institutions in Britain, 1890-2000. Princeton: Princeton University Press.

Leon, Cedric de. 2015. The Origins of Right to Work: Antilabor Democracy in Nineteenth-Century Chicago. Ithaca: ILR Press/Cornell University Press.

Pearson, Chad. 2016. Reform or Repression: Organizing America’s Anti-Union Movement. American Business, Politics, and Society. Philadelphia: University of Pennsylvania Press.

Phillips-Fein, Kim. 2009. Invisible Hands: The Making of the Conservative Movement from the New Deal to Reagan. New York: W. W. Norton.

Richards, Lawrence. 2008. Union-Free America: Workers and Antiunion Culture. The Working Class in American History. Urbana: University of Illinois Press.

Sidorick, Daniel. 2009. Condensed Capitalism: Campbell Soup and the Pursuit of Cheap Production in the Twentieth Century. Ithaca: ILR Press/Cornell University Press.

Jerry Friedman has served as the U.S. editor of Labor History since 2003.

Copyright (c) 2016 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 (June 2016). All EH.Net reviews are archived at http://eh.net/book-reviews/

Subject(s):Business History
Labor and Employment History
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII

Technological Innovation in Retail Finance: International Historical Perspectives

Author(s):Bátiz-Lazo, Bernardo
Maixé-Altés, J. Carles
Thomes, Paul
Reviewer(s):Wardley, Peter

Published by EH.Net (November 2013)

Bernardo Bátiz-Lazo, J. Carles Maixé-Altés, and Paul Thomes, editors, Technological Innovation in Retail Finance: International Historical Perspectives. New York: Routledge, 2011.
xvi + 319 pp.  £85/$125 (hardback), ISBN: 978-0-415-88067-1.

Reviewed for EH.Net by Peter Wardley, Department of History, Philosophy and Politics, University of the West of England (Bristol).

Until recently there was a largely unbridged historiographic divide between monetary historians, interested largely in stories about monetary aggregates, economic performance and financial policy, and bank historians, authors of scholarly texts that recount the origins, growth and, on occasion, the demise, of specific financial institutions. However, over the last three decades this separation has been to some extent diminished, prompted in part by research that focuses on the application and organization of new technology in financial institutions. In part, this is a result of a widespread familiarity with personal computers along with a growing awareness of the importance of the role of information technology throughout the modern economy. More specifically, it has become increasingly apparent to those outside the financial sector that the processing of information within financial institutions is a major and dynamic factor that should not be neglected. If one of the earliest and most advertised events in this process was the “Big Bang,” that transformed the nature of business on the London Stock Exchange in October 1986, then the “Global Financial Crisis” of 2007-08 demonstrated the extent and significance of international networks that knit together the world’s financial institutions. In this environment, academic interest in the internal structures of banks has increased and analysis of the adoption and organization of information technology in the financial sector, previously almost unheard of, is now well-established. It is in this context that this edited collection makes a novel and valuable contribution by providing a comparative study of technological change in European and North American retail finance.

An editorial introduction, entitled “In Digital We Trust,” provides an enthusiastic and detailed justification for the study of the introduction and usage of information and telecommunication technology (ICT) in the financial sector. This stresses the evolutionary and contingent nature of the diffusion of ICT within financial institutions which varied according to the greatly differing environments that differed by the market segment they operated in, the economic circumstances they faced, and the social, legal, political and cultural settings in which they developed. However, a general pattern emerges in the largely hard-headed and realistic approach adopted by the managers who were responsible for the acquisition and productive use of new machines and applications; often the technology led to the adaptation of existing methods rather than the adoption of completely new managerial practices. As the twentieth century saw a sequence of technological innovations, which were largely incremental and adaptive in nature, for the most part a long term perspective is taken here. This recognizes the initial adoption of mechanical aids in the banking parlor (for example, the typewriter and telephone), then the employment of data recording instruments (adding machines) which was followed by increasingly complex data recording and processing machines (accounting machines, first powered manually and then by electricity). Computers of various types, from mainframe to micro, have been the most recent manifestation of this technological progression that depended on co-developed theoretical and scientific advances which have both sped up processing and increased memory capacity, approximately according to Moore’s law, at costs that have correspondingly diminished. The nature of this technological progression, as evident in the banking industry, is competently discussed in Lars Heide’s concluding chapter which might usefully be read as a guide to much that appears in the preceding chapters.

First, though, a note of caution. There was a major characteristic of retail finance, one that is really important in the first half of the twentieth century, the pre-mainframe era, which might not immediately strike readers who are more accustomed to the banking system of the United States which should have been more emphatically indicated here. In the U.S. the relatively small, single unit bank adopted mechanization in order to process the widest range of functions, from recording personal statements associated with the accounts of individuals to the assessment of the aggregate financial position of the bank. In Europe, and notably in England’s “Big Five” High Street banks, the relatively much larger, multi-unit branched bank tended to undertake these two distinct operations at different locations; the former at the branch and the latter at the bank’s head office. Once recognized, this fundamental distinction explains a great deal about the different rates and patterns of technological adoption and diffusion experienced across retail banking systems in different countries. Different technologies could be used for different purposes but similar technology could also be adopted in other environments to do different tasks. And, of course, there was some path dependency within systems that, for example, linked the adoption of mainframe computer systems after 1950 to the prior implementation of pre-World War II bank mechanization. Here it is interesting to note, at least in the British setting, that the staff associated with computerization do not appear to have learned as much as one might have expected from the experiences of their predecessors, the generation of then recently retired senior bank managers, who it might be argued had been more successful in the interwar years in introducing new technology. The evidence suggests that these pioneers appear to have a much clearer understanding of one the themes of this book: the machine had to serve the bank rather than dictate a radical recasting of organizational practices. These themes appear prominently in chapters here that provide national case-studies.

Martha Poon’s account of the transformation of the credit risk calculations provided by the Fair Isaac Scorecard system highlights the significance of gender, a factor that is less prominent in the chapters presented here than it might be. In her story, before the introduction of electronic system, credit applications were “put-out” as raw data to local housewives who produced coded reports which were then processed by female operators of key punching machines to be coded. Even with the consolidation of a more completely office-based, machine-driven system of data processing, important “heritage” aspects, residual remnants of past practices, now deeply embedded in the calibration of the credit of individual consumers, persisted even as credit scoring became increasingly digitalized and automated. By contrast, women play no visible role in Joakim Appelquist’s study of “Technical and Organizational Change in Swedish Banking, 1975-2003,” which begs the obvious question about the nature of gender (in)equalities in Nordic society. This chapter provides an explicitly specified model whereby the adoption of different generations of ICT, from mainframe to internet via PC-based LANS, correspond with stages of a shift from Tayloristic bureaucracies to post-Taylorisitic organizations “characterized by flattened management structures, outsourcing, etc.” (p. 74). However, rather than the de-skilling of the labor force in a period of new technology adoption, à la Braverman, Appelquist argues that Swedish banks re-skilled their staff either by re-training existing workers or by substituting existing employees with replacements who were better equipped to deliver personal banking services of a more skilled nature.

Joke Mooij provides an exemplary account of the adaptation of new managerial structures and adoption of novel technologies that accompanied the consolidation in 1972 of the Rabobank Nederland (Coöperatieve Centrale Raiffeisen-Boerenleenbank), one of the world’s largest banks; this was achieved by the consolidation of two agricultural co-operative banks that had used earlier machinery within distinctive corporate cultures. Both had shared an initial commitment to Raiffeisen principles, one of which stipulated unsalaried management that made them very different from contemporary Anglo-Saxon co-operative enterprises, and faced challenges with respect to this defining characteristic caused by the technological and organizational changes narrated here.

Bernardo Bátiz-Lazo and J. Carles Maixé-Altés provide a comparative assessment of ICT adoption in a different “non-standard” corporate institution, the Savings Bank, by providing an historical evaluation of their development in Britain and Spain between 1950 and 1985; here they contrast the achievement in Spain of economies of scope, in the form of product portfolio, with the search for economies of scale in Britain. In both stories political factors are demonstrated to be significant though different in character. In Spain collaboration in the acquisition and operation of ICT shared by locally orientated, and sometimes relatively small, members of the Confederation of Spanish Savings Banks (La Confederación Española Cajas de Ahorros, or CECA) allowed the associated development of distinct regionally-based institutions, each of which grew a clearly defined profile in its community.  This was far removed from the British experience. There, after over one hundred and seventy-five years of relative success in providing deposit facilities for inhabitants of their respective neighborhoods, and especially to the comparatively poor, the British state in the 1970s herded together seventy-five semi-autonomous Trustee Savings Banks into a single entity, the Trustee Savings Bank (TSB) that was subsequently floated on the London Stock Exchange in 1986. Unsurprisingly, the philanthropic motives of the pioneers of the TSB movement and the local orientation of each TSB were lost to history and within a decade the TSB was the subject of a “reverse-takeover” by Lloyds Bank. Nevertheless, the TSB has re-emerged recently when, at the insistence of the European Commission in 2012, its divestment was made a condition of the British state’s rescue package to salvage Lloyds Bank; however, the inaugurating publicity of the TSB Bank (sic) did not suggest that the re-emergence of a community-orientated financial institution devoted to the needs of the less well-off was imminent.

The role of the British state is also revealed by Alan Booth and Mark Billings in their assessment of “Techno-Nationalism, the Post Office and the Creation of Britain’s National Giro,” which documents the creation of “very curious beast indeed” (p. 171). In addition to attempts by the British state to foster an indigenous computer-building industry, a persistent theme of the 1960s and 1970s, which could be generalized to encompass even more long-standing and recurrent policies to stimulate “high-tech” manufacturing in Britain, this evidences a political divide between the two parties that formed governments in the two decades before 1979. First, after the Radcliffe Committee Report of 1957, the Conservative administration saw in a Giro system a handy tool to nudge the commercial banks such that they became more responsive to the needs of the economy and more willing to address the shortcomings of their business behavior. Thereafter, Tony Benn, as Post Master General and then as Minister of Technology, in a Labour government whose leader had lauded the benefits of a scientifically informed transformation of society, supported the Giro as a prominent IT project within the nationalized sector of the economy that could contribute to this objective. However, the history of the Giro demonstrates a number of problematic features of this policy, including the difficulties of obtaining new technological capabilities which were embodied in imported equipment at a time when Britain suffered from recurrent Sterling problems and public spending difficulties.

Public perceptions of technical change in the financial sector have always been important and senior bank officials watched keenly the response of their customers, first to mechanization in the interwar years and later to computerization. As Ian Martin documents in “Britain’s First Computer Centre for Banking: What Did This Building Do?”, Barclays Bank was eager to shape public opinion in 1961 when it opened its No.1 Computer Centre near Euston station in London. However successful Barclays was in persuading its customers of the merits and advantages of its innovative strategy, and contrary to the case presented here, this was not first time that customer accounting in Britain had been dislocated “from its traditional confines of the individual bank branch” to be relocated to a centralized facility. This had been achieved, in association with a very similar publicity campaign to that narrated here, by the Westminster Bank some thirty years earlier (Wardley, 2000). As this strategy was dependent upon the comprehensive mechanization of record keeping at its Head Offices (at Lothbury, hard by the Bank of England), readers should also treat with caution Martin’s associated statement that “British banks, with the exception of the Bank of Scotland …, did not make use of tabulating machines to perform centralised branch accounting” (p. 37). The Bank of Scotland, as with other banks in Scotland, was a laggard in this respect; in England, even the Co-operative Bank had mechanized by 1935.

Hubert Bonin’s “Mechanization of Data Processing and Accounting Methods in French Banks, circa 1930-1950” provides an excellent survey of the mechanizing bank that reviews the introduction of tabulators, accounting machines and electromechanical data processors in the context of financial organizations that adopted and continually adapted technical capabilities that reflected existing procedures and dynamic managerial strategies. Here new technology is always the handmaiden of “streamlining” that saw recurrent rounds of re-organization and standardization of information within banks. Bonin also identifies the extensive and eager exchange of information about mechanization among French banks, a tendency shared by contemporary English banks. However, and English contemporaries might have been surprised by its omission here, in France the formation of the Comité Permanent d’Organisation Bancaire in 1930 saw a collective agency created to encourage increased efficiency through information exchange concerning mechanization, more effective work organization, improved clearing arrangements and better statistics and costing data. Paul Thomes responds affirmatively to the question “Is There an ICT Path in the German Savings Banking Industry? (c. 1900-1970s)” by evidencing the recurrent pioneering role of savings banks relative to technology adoption both by Germany’s large commercial banks and by the co-operative banks that served both SMEs and agricultural enterprises. Some additional interesting questions are prompted by this chapter: how was it that German banks were able to introduce machine bookkeeping during the First World War and increase mechanization in World War Two when in Britain such resources were very deliberately directed by the state to military purposes? Why was it that the Banque d’Alsace-Lorraine so quickly came to correspond to the French pattern described by Bonin rather than the “IT path” that Thomes presents for German banks? What is more certain is that a contemporary bank manager would have recognized a near 100% enhancement of the claimed productivity benefits had a hardware salesman suggested to him that “a machine-booking clerk could manage 500 entries a day against 180 done by hand: an efficiency gain of nearly 300 percent” (p. 124). Unfortunately, not only is this calculation wrong but it is one of the few examples provided in this collection of an explicit assessment of the gains, expected or realized, attributable to the introduction of new technology.

Although not the major subject of this collection, technological developments are prominent in some chapters; these include Juan Pablo Pardo-Guerra’s micro history of the successive stages of automation that delivered digitalization at the London Stock Exchange and David Stearn’s account of the iterative responses implemented by Visa to meet technical and organizational challenges of implementing a global consumer payment card system. Mexico provides the setting for Gustavo Del Ángel-Mobarak‘s study of the evolution of interbank connectivity though the use of ICT by its banks after 1965 which, despite an interlude of public ownership, once more illustrates a number of general themes. A novel and distinctive development here demonstrates the long term and continuing nature of technical change in banking; as early as 1934 wireless radio transmitters were used to transfer information between corporate headquarters and branches within Mexico City and this system was nation-wide within a decade.

Overall, this innovative anthology serves to remind that two polar positions can be discerned in studies that assess the impact of new technology. On the one hand, the adoption of novel devices can be captured by a “Gee whiz” response that emphasizes a dramatic break with past practices. Its polar opposite, by contrast, emphasizes long-run continuities and incremental developments. In this examination of technical innovation in the banking sector we find elements of both though generally the evidence presented affirms strongly the “slowly but surely” approach that one would expect from bankers who are often regarded as natural conservatives until the public is sharply reminded that risk-taking is a day-to-day activity for financiers. However, here it might also be noted that in this text at least two essential factors do not get the attention they probably deserve: one is a consideration of cost-benefit analysis of the adoption of new technology, both in terms of the net savings aspired to and the reduction in costs actually achieved; the other is gender: the employment of female staff is a basic characteristic, if not universal feature, of technological change in the financial sector and less attention than is warranted is devoted to gender-related considerations.

Peter Wardley was editor of the annual review of IT for the Economic History Review (1990-95) and has written several articles and chapters on economic and business history. Among those relating to banking history are “The Commercial Banking Industry and Its Part in the Emergence and Consolidation of the Corporate Economy in Britain before 1940,” Journal of Industrial History, 3 (2000) 71-97 (see JIH 3 3 Wardley 2000 Banks low res) and “Women, Mechanization and Cost-savings in Twentieth-century British Banks and Other Financial Institutions” in Mike Richardson and Peter Nicholls, eds. (2011) A Business and Labour History of Britain: Case Studies of Britain in the Nineteenth and Twentieth Centuries.

Copyright (c) 2013 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 (November 2013). All EH.Net reviews are archived at http://www.eh.net/BookReview

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

History of Property Taxes in the United States

Glenn W. Fisher, Wichita State University (Emeritus)

Taxes based on ownership of property were used in ancient times, but the modern tax has roots in feudal obligations owned to British and European kings or landlords. In the fourteenth and fifteenth century, British tax assessors used ownership or occupancy of property to estimate a taxpayer’s ability to pay. In time the tax came to be regarded as a tax on the property itself (in rem). In the United Kingdom the tax developed into a system of “rates” based on the annual (rental) value of property.

The growth of the property tax in America was closely related to economic and political conditions on the frontier. In pre-commercial agricultural areas the property tax was a feasible source of local government revenue and equal taxation of wealth was consistent with the prevailing equalitarian ideology.

Taxation in the American Colonies

When the Revolutionary War began, the colonies had well-developed tax systems that made a war against the world’s leading military power thinkable. The tax structure varied from colony to colony, but five kinds of taxes were widely used. Capitation (poll) taxes were levied at a fixed rate on all adult males and sometimes on slaves. Property taxes were usually specific taxes levied at fixed rates on enumerated items, but sometimes items were taxed according to value. Faculty taxes were levied on the faculty or earning capacity of persons following certain trades or having certain skills. Tariffs (imposts) were levied on goods imported or exported and excises were levied on consumption goods, especially liquor.

During the war colonial tax rates increased several fold and taxation became a matter of heated debate and some violence. Settlers far from markets complained that taxing land on a per-acre basis was unfair and demanded that property taxation be based on value. In the southern colonies light land taxes and heavy poll taxes favored wealthy landowners. In some cases, changes in the tax system caused the wealthy to complain. In New York wealthy leaders saw the excess profits tax, which had been levied on war profits, as a dangerous example of “leveling tendencies.” Owners of intangible property in New Jersey saw the tax on intangible property in a similar light.

By the end of the war, it was obvious that the concept of equality so eloquently stated in the Declaration of Independence had far-reaching implications. Wealthy leaders and ordinary men pondered the meaning of equality and asked its implications for taxation. The leaders often saw little connection among independence, political equality, and the tax system, but many ordinary men saw an opportunity to demand changes.

Constitutionalizing Uniformity in the Nineteenth Century

In 1796 seven of the fifteen states levied uniform capitation taxes. Twelve taxed some or all livestock. Land was taxed in a variety of ways, but only four states taxed the mass of property by valuation. No state constitution required that taxation be by value or required that rates on all kinds of property be uniform. In 1818, Illinois adopted the first uniformity clause. Missouri followed in 1820, and in 1834 Tennessee replaced a provision requiring that land be taxed at a uniform amount per acre with a provision that land be taxed according to its value (ad valorem). By the end of the century thirty-three states had included uniformity clauses in new constitutions or had amended old ones to include the requirement that all property be taxed equally by value. A number of other states enacted uniformity statutes requiring that all property be taxed. Table 1 summarizes this history.

Table 1 Nineteenth-Century Uniformity Provisions

(first appearance in state constitutions)

Year

Universality Provision

Illinois

1818

Yes

Missouri

1820

No

*Tennessee1

1834

Yes2

Arkansas

1836

No

Florida

1838

No

*Louisiana

1845

No

Texas

1845

Yes

Wisconsin

1848

No

California

1849

Yes

*Michigan3

1850

No

*Virginia

1850

Yes4

Indiana

1851

Yes

*Ohio

1851

Yes

Minnesota

1857

Yes

Kansas

1859

No

Oregon

1859

Yes

West Virginia

1863

Yes

Nevada

1864

Yes5

*South Carolina

1865

Yes

*Georgia

1868

No

*North Carolina

1868

Yes

*Mississippi

1869

Yes

*Maine

1875

No

*Nebraska

1875

No

*New Jersey

1875

No

Montana

1889

Yes

North Dakota

1889

Yes

South Dakota

1889

Yes

Washington

1889

Yes

Idaho6

1890

Yes

Wyoming

1890

No

*Kentucky

1891

Yes

Utah

1896

Yes

*Indicates amendment or revised constitution.

1. The Tennessee constitution of 1796 included a unique provision requiring taxation of land to be uniform per 100 acres.
2. One thousand dollars of personal property and the products of the soil in the hands of the original producer were exempt in Tennessee.
3. The Michigan provision required that the legislature provide a uniform rule of taxation except for property paying specific taxes.
4. Except for taxes on slaves.
5. Nevada exempted mining claims.
6. One provision in Idaho requires uniformity as to class, another seems to prescribe uniform taxation.
Source: Fisher (1996) 57

The political appeal of uniformity was strong, especially in the new states west of the Appalachians. A uniform tax on all wealth, administered by locally elected officials appealed to frontier settlers many of whom strongly supported the Jacksonian ideas of equality, and distrusted both centralized government and professional administrators.

The general property tax applied to all wealth — real and personal, tangible and intangible. It was administrated by elected local officials who were to determine the market value of the property, compute the tax rates necessary to raise the amount levied, compute taxes on each property, collect the tax, and remit the proceeds to the proper government. Because the tax was uniform and levied on all wealth, each taxpayer would pay for the government services he or she enjoyed in exact proportion to his wealth.

The tax and the administrative system were well adapted as a revenue source for the system of local government that grew up in the United States. Typically, the state divided itself into counties, which were given many responsibilities for administering state laws. Citizens were free to organize municipalities, school districts, and many kinds of special districts to perform additional functions. The result, especially in the states formed after the Revolution, was a large number of overlapping governments. Many were in rural areas with no business establishment. Sales or excise taxes would yield no revenue and income taxes were not feasible.

The property tax, especially the real estate tax, was ideally suited to such a situation. Real estate had a fixed location, it was visible, and its value was generally well known. Revenue could easily be allocated to the governmental unit in which the property was located.

Failure of the General Property Tax

By the beginning of the twentieth century, criticism of the uniform, universal (general) property tax was widespread. A leading student of taxation called the tax, as administered, one of the worst taxes ever used by a civilized nation (Seligman, 1905).

There are several reasons for the failure of the general property tax. Advocates of uniformity failed to deal with the problems resulting from differences between property as a legal term and wealth as an economic concept. In a simple rural economy wealth consists largely of real property and tangible personal property — land, buildings, machinery and livestock. In such an economy, wealth and property are the same things and the ownership of property is closely correlated with income or ability to pay taxes.

In a modern commercial economy ownership and control of wealth is conferred by an ownership of rights that may be evidenced by a variety of financial and legal instruments such as stocks, bonds, notes, and mortgages. These rights may confer far less than fee simple (absolute) ownership and may be owned by millions of individuals residing all over the world. Local property tax administrators lack the legal authority, skills, and resources needed to assess and collect taxes on such complex systems of property ownership.

Another problem arose from the inability or unwillingness of elected local assessors to value their neighbor’s property at full value. An assessor who valued property well below its market value and changed values infrequently was much more popular and more apt to be reelected. Finally the increasing number of wage-earners and professional people who had substantial incomes but little property made property ownership a less suitable measure of ability to pay taxes.

Reformers, led by The National Tax Association which was founded in 1907, proposed that state income taxes be enacted and that intangible property and some kinds of tangible personal property be eliminated from the property tax base. They proposed that real property be assessed by professionally trained assessors. Some advocated the classified property tax in which different rates of assessment or taxation was applied to different classes of real property.

Despite its faults, however, the tax continued to provide revenue for one of the most elaborate systems of local government in the world. Local governments included counties, municipalities of several classes, towns or townships, and school districts. Special districts were organized to provide water, irrigation, drainage, roads, parks, libraries, fire protection, health services, gopher control, and scores of other services. In some states, especially in the Midwest and Great Plains, it was not uncommon to find that property was taxed by seven or eight different governments.

Overlapping governments caused little problem for real estate taxation. Each parcel of property was coded by taxing districts and the applicable taxes applied.

Reforming the Property Tax in the Twentieth Century

Efforts to reform the property tax varied from state to state, but usually included centralized assessment of railroad and utility property and exemption or classification of some forms of property. Typically intangibles such as mortgages were taxed at lower rates, but in several states tangible personal property and real estate were also classified. In 1910 Montana divided property into six classes. Assessment rates ranged from 100 percent of the net proceeds of mines to seven percent for money and credits. Minnesota’s 1913 law divided tangible property into four classes, each assessed at a different rate. Some states replaced the town or township assessors with county assessors, and many created state agencies to supervise and train local assessors. The National Association of Assessing Officers (later International Association of Assessing Officers) was organized in 1934 to develop better assessment methods and to train and certify assessors.

The depression years after 1929 resulted in widespread property tax delinquency and in several states taxpayers forcibly resisted the sale of tax delinquent property. State governments placed additional limits on property tax rates and several states exempted owner-occupied residence from taxation. These homestead exemptions were later criticized because they provided large amounts of relief to wealthy homeowners and disproportionally reduced the revenue of local governments whose property tax base was made up largely of residential property.

After World War II many states replaced the homestead exemption with state financed “circuit breakers” which benefited lower and middle income homeowners, older homeowners, and disabled persons. In many states renters were included by provisions that classified a portion of rental payments as property taxes. By 1991 thirty-five states had some form of circuit breakers (Advisory Commission on Intergovernmental Relations, 1992, 126-31).

Proponents of the general property tax believed that uniform and universal taxation of property would tend to limit taxes. Everybody would have to pay their share and the political game of taxing somebody else for one’s favorite program would be impossible. Perhaps there was some truth in this argument, but state legislatures soon began to impose additional limitations. Typically, the statutes authorizing local government to impose taxes for a particular purpose such as education, road building, or water systems, specified the rate, usually stated in mills, dollars per hundred or dollars per thousand of assessed value, that could be imposed for that purpose.

These limitations provided no overall limit on the taxes imposed on a particular property so state legislatures and state constitutions began to impose limits restricting the total rate or amount that could be imposed by a unit of local government. Often these were complicated to administer and had many unintended consequences. For example, limiting the tax that could be imposed by a particular kind of government sometime led to the creation of additional special districts.

During World War II, state and local taxes were stable or decreased as spending programs were cut back because of decreased needs or unavailability of building materials or other resources. This was reversed in the post-war years as governments expanded programs and took advantage of rising property value to increase tax collections. Assessment rose, tax rates rose, and the newspapers carried stories of homeowners forced to sell their homes because of rising taxes

California’s Tax Revolt

Within a few years the country was swept by a wave of tax protests, often called the Tax Revolt. Almost every state imposed some kind of limitation on the property tax, but the most widely publicized was Proposition 13, a constitutional amendment passed by popular vote in California in 1978. This proved to be the most successful attack on the property tax in American history. The amendment:

1. limited property taxes to one percent of full cash value

2. required property to be valued at its value on March 1, 1975 or on the date it changes hands or is constructed after that date.

3. limited subsequent value adjustment in value to 2 percent per year or the rate of inflation, whichever is lesser.

4. prohibited the imposition of sales or transaction taxes on the sale of real estate.

5. required two-thirds vote in each house of the legislature to increase state taxes

and a two-thirds vote of the electorate to increase or add new local taxes.

This amendment proved to be extremely difficult to administer. It resulted in hundreds of court cases, scores of new statutes, many attorney generals’ opinions and several additional amendments to the California constitution. One of the amendments permits property to be passed to heirs without triggering a new assessment.

In effect Proposition 13 replaced the property tax with a hybrid tax based on a property’s value in 1975 or the date it was last transferred to a non-family member. These values have been modified by annual adjustments that have been much less than the increase in the market value of the property. Thus it has favored the business or family that remains in the same building or residence for a long period of time.

Local government in California seems to have been weakened and there has been a great increase in fees, user charges, and business taxes. A variety of devices, including the formation of fee-financed special districts, have been utilized to provide services.

Although Proposition 13 was the most far-reaching and widely publicized attempt to limit property taxes, it is only one of many provisions that have attempted to limit the property tax. Some are general limitations on rates or amounts that may be levied. Others provide tax benefits to particular groups or are intended to promote economic development. Several other states adopted overall limitations or tax freezes modeled on Proposition 13 and in addition have adopted a large number of provisions to provide relief to particular classes of individuals or to serve as economic incentives. These include provisions favoring agricultural land, exemption or reduced taxation of owner-occupied homes, provisions benefiting the poor, veterans, disabled individuals, and the aged. Economic incentives incorporated in property tax laws include exemptions or lower rates on particular business or certain types of business, exemption of the property of newly established businesses, tax breaks in development zones, and earmarking of taxes for expenditure that benefit a particular business (enterprise zones).

The Property Tax Today

In many states assessment techniques have improved greatly. Computer assisted mass appraisal (CAMA) combines computer technology, statistical methods and valve theory to make possible reasonably accurate property assessments. Increases in state school aid, stemming in part from court decisions requiring equal school quality, have increased the pressure for statewide uniformity in assessment. Some states now use elaborate statistical procedures to measure the quality and equality of assessment from place to place in the state. Today, departures from uniformity come less from poor assessment than from provision in the property tax statutes.

The tax on a particular property may depend on who owns it, what it is used for, and when it last sold. To compute the tax the administrator may have to know the income, age, medical condition, and previous military service of the owner. Anomalies abound as taxpayers figure out ways to make the complicated system work in their favor. A few bales of hay harvested from a development site may qualify it as agricultural land and enterprise zones, which are intended to provide incentive for development in poverty-stricken areas, may contain industrial plants, but no people — poverty stricken or otherwise.

The many special provision fuel the demand for other special provisions. As the base narrows, the tax rate rises and taxpayers become aware of the special benefits enjoyed by their neighbors or competitors. This may lead to demands for overall tax limitations or to the quest for additional exemptions and special provisions.

The Property Tax as a Revenue Source during the Twentieth Century

At the time of the 1902 Census of Government the property tax provided forty-five percent of the general revenue received by state governments from their own sources. (excluding grants from other governments). That percentage declined steadily, taking its most precipitous drop between 1922 and 1942 as states adopted sales and income taxes. Today property taxes are an insignificant source of state tax revenue. (See Table 2.)

The picture at the local level is very different. The property tax as a percentage of own-source general revenue rose from 1902 until 1932 when it provided 85.2 percent of local government own-source general revenue. Since that time there has been a significant gradual decline in the importance of local property taxes.

The decline in the revenue importance of the property tax is more dramatic when the increase in federal and state aid is considered. In fiscal year 1999, local governments received 228 billion in property tax revenue and 328 billion in aid from state and federal governments. If current trends continue, the property tax will decline in importance and states and the federal government will take over more local functions, or expand the system of grants to local governments. Either way, government will become more centralized.

Table 2

Property Taxes as a Percentage of Own-Source General Revenue, Selected Years

______________________________
Year State Local
______________________________
1902 45.3 78.2
1913 38.9 77.4
1922 30.9 83.9
1932 15.2 85.2
1942 6.2 80.8
1952 3.4 71.0
1962 2.7 69.0
1972 1.8 63.5
1982 1.5 48.0
1992 1.7 48.1
­­1999 1.8 44.6
_______________________________

Source: U. S. Census of Governments, Historical Statistics of State and Local Finance, 1902-1953; U. S. Census of Governments, Governments Finances for (various years); and http://www.census.gov.

References

Adams, Henry Carter. Taxation in the United States, 1789-1816. New York: Burt Franklin, 1970, originally published in 1884.

Advisory Commission on Intergovernmental Relations. Significant Features of Fiscal Federalism, Volume 1, 1992.

Becker, Robert A. Revolution, Reform and the Politics of American Taxation. Baton Rouge: Louisiana State University Press, 1980.

Ely, Richard T. Taxation in the American States and Cities. New York: T. Y. Crowell & Co, 1888.

Fisher, Glenn W. The Worst Tax? A History of the Property Tax in America. Lawrence: University Press of Kansas, 1996.

Fisher, Glenn W. “The General Property Tax in the Nineteenth Century: The Search for Equality.” Property Tax Journal 6, no. 2 ((1987): 99-117.

Jensen, Jens Peter. Property Taxation in the United States. Chicago: University of Chicago Press, 1931.

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Stocker, Frederick, editor. Proposition 13: A Ten-Year Retrospective. Cambridge, Massachusetts: Lincoln Institute of Land Policy, 1991.

Citation: Fisher, Glenn. “History of Property Taxes in the United States”. EH.Net Encyclopedia, edited by Robert Whaples. September 30, 2002. URL http://eh.net/encyclopedia/history-of-property-taxes-in-the-united-states/

Economic History of Portugal

Luciano Amaral, Universidade Nova de Lisboa

Main Geographical Features

Portugal is the south-westernmost country of Europe. With the approximate shape of a vertical rectangle, it has a maximum height of 561 km and a maximum length of 218 km, and is delimited (in its north-south range) by the parallels 37° and 42° N, and (in its east-west range) by the meridians 6° and 9.5° W. To the west, it faces the Atlantic Ocean, separating it from the American continent by a few thousand kilometers. To the south, it still faces the Atlantic, but the distance to Africa is only of a few hundred kilometers. To the north and the east, it shares land frontiers with Spain, and both countries constitute the Iberian Peninsula, a landmass separated directly from France and, then, from the rest of the continent by the Pyrenees. Two Atlantic archipelagos are still part of Portugal, the Azores – constituted by eight islands in the same latitudinal range of mainland Portugal, but much further west, with a longitude between 25° and 31° W – and Madeira – two islands, to the southwest of the mainland, 16° and 17° W, 32.5° and 33° N.

Climate in mainland Portugal is of the temperate sort. Due to its southern position and proximity to the Mediterranean Sea, the country’s weather still presents some Mediterranean features. Temperature is, on average, higher than in the rest of the continent. Thanks to its elongated form, Portugal displays a significant variety of landscapes and sometimes brisk climatic changes for a country of such relatively small size. Following a classical division of the territory, it is possible to identify three main geographical regions: a southern half – with practically no mountains and a very hot and dry climate – and a northern half subdivided into two other vertical sub-halves – with a north-interior region, mountainous, cool but relatively dry, and a north-coast region, relatively mountainous, cool and wet. Portugal’s population is close to 10,000,000, in an area of about 92,000 square kilometers (35,500 square miles).

The Period before the Creation of Portugal

We can only talk of Portugal as a more or less clearly identified and separate political unit (although still far from a defined nation) from the eleventh or twelfth centuries onwards. The geographical area which constitutes modern Portugal was not, of course, an eventless void before that period. But scarcity of space allows only a brief examination of the earlier period, concentrating on its main legacy to future history.

Roman and Visigothic Roots

That legacy is overwhelmingly marked by the influence of the Roman Empire. Portugal owes to Rome its language (a descendant of Latin) and main religion (Catholicism), as well as its primary juridical and administrative traditions. Interestingly enough, little of the Roman heritage passed directly to the period of existence of Portugal as a proper nation. Momentous events filtered the transition. Romans first arrived in the Iberian Peninsula around the third century B.C., and kept their rule until the fifth century of the Christian era. Then, they succumbed to the so-called “barbarian invasions.” Of the various peoples that then roamed the Peninsula, certainly the most influential were the Visigoths, a people of Germanic origin. The Visigoths may be ranked as the second most important force in the shaping of future Portugal. The country owes them the monarchical institution (which lasted until the twentieth century), as well as the preservation both of Catholicism and (although substantially transformed) parts of Roman law.

Muslim Rule

The most spectacular episode following Visigoth rule was the Muslim invasion of the eighth century. Islam ruled the Peninsula from then until the fifteenth century, although occupying an increasingly smaller area from the ninth century onwards, as the Christian Reconquista started repelling it with growing efficiency. Muslim rule set the area on a path different from the rest of Western Europe for a few centuries. However, apart from some ethnic traits legated to its people, a few words in its lexicon, as well as certain agricultural, manufacturing and sailing techniques and knowledge (of which the latter had significant importance to the Portuguese naval discoveries), nothing of the magnitude of the Roman heritage was left in the peninsula by Islam. This is particularly true of Portugal, where Muslim rule was less effective and shorter than in the South of Spain. Perhaps the most important legacy of Muslim rule was, precisely, its tolerance towards the Roman heritage. Much representative of that tolerance was the existence during the Muslim period of an ethnic group, the so-called moçárabe or mozarabe population, constituted by traditional residents that lived within Muslim communities, accepted Muslim rule, and mixed with Muslim peoples, but still kept their language and religion, i.e. some form of Latin and the Christian creed.

Modern Portugal is a direct result of the Reconquista, the Christian fight against Muslim rule in the Iberian Peninsula. That successful fight was followed by the period when Portugal as a nation came to existence. The process of creation of Portugal was marked by the specific Roman-Germanic institutional synthesis that constituted the framework of most of the country’s history.

Portugal from the Late Eleventh Century to the Late Fourteenth Century

Following the Muslim invasion, a small group of Christians kept their independence, settling in a northern area of the Iberian Peninsula called Asturias. Their resistance to Muslim rule rapidly transformed into an offensive military venture. During the eighth century a significant part of northern Iberia was recovered to Christianity. This frontier, roughly cutting the peninsula in two halves, held firm until the eleventh century. Then, the crusaders came, mostly from France and Germany, inserting the area in the overall European crusade movement. By the eleventh century, the original Asturian unit had been divided into two kingdoms, Leon and Navarra, which in turn were subdivided into three new political units, Castile, Aragon and the Condado Portucalense. The Condado Portucalense (the political unit at the origin of future Portugal) resulted from a donation, made in 1096, by the Leonese king to a Crusader coming from Burgundy (France), Count Henry. He did not claim the title king, a job that would be fulfilled only by his son, Afonso Henriques (generally accepted as the first king of Portugal) in the first decade of the twelfth century.

Condado Portucalense as the King’s “Private Property”

Such political units as the various peninsular kingdoms of that time must be seen as entities differing in many respects from current nations. Not only did their peoples not possess any clear “national consciousness,” but also the kings themselves did not rule them based on the same sort of principle we tend to attribute to current rulers (either democratic, autocratic or any other sort). Both the Condado Portucalense and Portugal were understood by their rulers as something still close to “private property” – the use of quotes here is justified by the fact that private property, in the sense we give to it today, was a non-existent notion then. We must, nevertheless, stress this as the moment in which Portuguese rulers started seeing Portugal as a political unit separate from the remaining units in the area.

Portugal as a Military Venture

Such novelty was strengthened by the continuing war against Islam, still occupying most of the center and south of what later became Portugal. This is a crucial fact about Portugal in its infancy, and one that helps one understand the most important episode in Portuguese history , the naval discoveries, i.e. that the country in those days was largely a military venture against Islam. As, in that fight, the kingdom expanded to the south, it did so separately from the other Christian kingdoms existing in the peninsula. And these ended up constituting the two main negative forces for Portugal’s definition as an independent country, i.e. Islam and the remaining Iberian Christian kingdoms. The country achieved a clear geographical definition quite early in its history, more precisely in 1249, when King Sancho II conquered the Algarve from Islam. Remarkably for a continent marked by so much permanent frontier redesign, Portugal acquired then its current geographical shape.

The military nature of the country’s growth gave rise to two of its most important characteristics in early times: Portugal was throughout this entire period a frontier country, and one where the central authority was unable to fully control the territory in its entirety. This latter fact, together with the reception of the Germanic feudal tradition, shaped the nature of the institutions then established in the country. This was particularly important in understanding the land donations made by the crown. These were crucial, for they brought a dispersion of central powers, devolved to local entities, as well as a delegation of powers we would today call “public” to entities we would call “private.” Donations were made in favor of three sorts of groups: noble families, religious institutions and the people in general of particular areas or cities. They resulted mainly from the needs of the process of conquest: noblemen were soldiers, and the crown’s concession of the control of a certain territory was both a reward for their military feats as well as an expedient way of keeping the territory under control (even if in a more indirect way) in a period when it was virtually impossible to directly control the full extent of the conquered area. Religious institutions were crucial in the Reconquista, since the purpose of the whole military effort was to eradicate the Muslim religion from the country. Additionally, priests and monks were full military participants in the process, not limiting their activity to studying or preaching. So, as the Reconquista proceeded, three sorts of territories came into existence: those under direct control of the crown, those under the control of local seigneurs (which subdivided into civil and ecclesiastical) and the communities.

Economic Impact of the Military Institutional Framework

This was an institutional framework that had a direct economic impact. The crown’s donations were not comparable to anything we would nowadays call private property. The land’s donation had attached to it the ability conferred on the beneficiary to a) exact tribute from the population living in it, b) impose personal services or reduce peasants to serfdom, and c) administer justice. This is a phenomenon that is typical of Europe until at least the eighteenth century, and is quite representative of the overlap between the private and public spheres then prevalent. The crown felt it was entitled to give away powers we would nowadays call public, such as those of taxation and administering justice, and beneficiaries from the crown’s donations felt they were entitled to them. As a further limit to full private rights, the land was donated under certain conditions, restricting the beneficiaries’ power to divide, sell or buy it. They managed those lands, thus, in a manner entirely dissimilar from a modern enterprise. And the same goes for actual farmers, those directly toiling the land, since they were sometimes serfs, and even when they were not, had to give personal services to seigneurs and pay arbitrary tributes.

Unusually Tight Connections between the Crown and High Nobility

Much of the history of Portugal until the nineteenth century revolves around the tension between these three layers of power – the crown, the seigneurs and the communities. The main trend in that relationship was, however, in the direction of an increased weight of central power over the others. This is already visible in the first centuries of existence of the country. In a process that may look paradoxical, that increased weight was accompanied by an equivalent increase in seigneurial power at the expense of the communities. This gave rise to a uniquely Portuguese institution, which would be of extreme importance for the development of the Portuguese economy (as we will later see): the extremely tight connection between the crown and the high nobility. As a matter of fact, very early in the country’s history, the Portuguese nobility and Church became much dependent on the redistributive powers of the crown, in particular in what concerns land and the tributes associated with it. This led to an apparently contradictory process, in which at the same time as the crown was gaining ascendancy in the ruling of the country, it also gave away to seigneurs some of those powers usually considered as being public in nature. Such was the connection between the crown and the seigneurs that the intersection between private and public powers proved to be very resistant in Portugal. That intersection lasted longer in Portugal than in other parts of Europe, and consequently delayed the introduction in the country of the modern notion of property rights. But this is something to be developed later, and to fully understand it we must go through some further episodes of Portuguese history. For now, we must note the novelty brought by these institutions. Although they can be seen as unfriendly to property rights from a nineteenth- and twentieth-century vantage point, they represented in fact a first, although primitive and incomplete, definition of property rights of a certain sort.

Centralization and the Evolution of Property

As the crown’s centralization of power proceeded in the early history of the country, some institutions such as serfdom and settling colonies gave way to contracts that granted fuller personal and property rights to farmers. Serfdom was not exceptionally widespread in early Portugal – and tended to disappear from the thirteenth century onwards. More common was the settlement of colonies, a situation in which settlers were simple toilers of land, having to pay significant tributes to either the king or seigneurs, but had no rights over buying and selling the land. From the thirteenth century onwards, as the king and the seigneurs began encroaching on the kingdom’s land and the military situation got calmer, serfdom and settling contracts were increasingly substituted by contracts of the copyhold type. When compared with current concepts of private property, copyhold includes serious restrictions to the full use of private property. Yet, it represented an improvement when compared to the prior legal forms of land use. In the end, private property as we understand it today began its dissemination through the country at this time, although in a form we would still consider primitive. This, to a large extent, repeats with one to two centuries of delay, the evolution that had already occurred in the core of “feudal Europe,” i.e. the Franco-Germanic world and its extension to the British Isles.

Movement toward an Exchange Economy

Precisely as in that core “feudal Europe,” such institutional change brought a first moment of economic growth to the country – of course, there are no consistent figures for economic activity in this period, and, consequently, this is entirely based on more or less superficial evidence pointing in that direction. The institutional change just noted was accompanied by a change in the way noblemen and the Church understood their possessions. As the national territory became increasingly sheltered from the destruction of war, seigneurs became less interested in military activity and conquest, and more so in the good management of the land they already owned land. Accompanying that, some vague principles of specialization also appeared. Some of those possessions were thus significantly transformed into agricultural firms devoted to a certain extent to selling on the market. One should not, of course, exaggerate the importance acquired by the exchange of goods in this period. Most of the economy continued to be of a non-exchange or (at best) barter character. But the signs of change were important, as a certain part of the economy (small as it was) led the way to future more widespread changes. Not by chance, this is the period when we have evidence of the first signs of monetization of the economy, certainly a momentous change (even if initially small in scale), corresponding to an entirely new framework for economic relations.

These essential changes are connected with other aspects of the country’s evolution in this period. First, the war at the frontier (rather than within the territory) seems to have had a positive influence on the rest of the economy. The military front was constituted by a large number of soldiers, who needed constant supply of various goods, and this geared a significant part of the economy. Also, as the conquest enlarged the territory under the Portuguese crown’s control, the king’s court became ever more complex, thus creating one more demand pole. Additionally, together with enlargement of territory also came the insertion within the economy of various cities previously under Muslim control (such as the future capital, Lisbon, after 1147). All this was accompanied by a widespread movement of what we might call internal colonization, whose main purpose was to farm previously uncultivated agricultural land. This is also the time of the first signs of contact of Portuguese merchants with foreign markets, and foreign merchants with Portuguese markets. There are various signs of the presence of Portuguese merchants in British, French and Flemish ports, and vice versa. Much of Portuguese exports were of a typical Mediterranean nature, such as wine, olive oil, salt, fish and fruits, and imports were mainly of grain and textiles. The economy became, thus, more complex, and it is only natural that, to accompany such changes, the notions of property, management and “firm” changed in such a way as to accommodate the new evolution. The suggestion has been made that the success of the Christian Reconquista depended to a significant extent on the economic success of those innovations.

Role of the Crown in Economic Reforms

Of additional importance for the increasing sophistication of the economy is the role played by the crown as an institution. From the thirteenth century onwards, the rulers of the country showed a growing interest in having a well organized economy able to grant them an abundant tax base. Kings such as Afonso III (ruling from 1248 until 1279) and D. Dinis (1279-1325) became famous for their economic reforms. Monetary reforms, fiscal reforms, the promotion of foreign trade, and the promotion of local fairs and markets (an extraordinarily important institution for exchange in medieval times) all point in the direction of an increased awareness on the part of Portuguese kings of the relevance of promoting a proper environment for economic activity. Again, we should not exaggerate the importance of that awareness. Portuguese kings were still significantly (although not entirely) arbitrary rulers, able with one decision to destroy years of economic hard work. But changes were occurring, and some in a direction positive for economic improvement.

As mentioned above, the definition of Portugal as a separate political entity had two main negative elements: Islam as occupier of the Iberian Peninsula and the centralization efforts of the other political entities in the same area. The first element faded as the Portuguese Reconquista, by mid-thirteenth century, reached the southernmost point in the territory of what is today’s Portugal. The conflict (either latent or open) with the remaining kingdoms of the peninsula was kept alive much beyond that. As the early centuries of the first millennium unfolded, a major centripetal force emerged in the peninsula, the kingdom of Castile. Castile progressively became the most successful centralizing political unit in the area. Such success reached a first climatic moment by the middle of the fifteenth century, during the reign of Ferdinand and Isabella, and a second one by the end of the sixteenth century, with the brief annexation of Portugal by the Spanish king, Phillip II. Much of the effort of Portuguese kings was to keep Portugal independent of those other kingdoms, particularly Castile. But sometimes they envisaged something different, such as an Iberian union with Portugal as its true political head. It was one of those episodes that led to a major moment both for the centralization of power in the Portuguese crown within the Portuguese territory and for the successful separation of Portugal from Castile.

Ascent of John I (1385)

It started during the reign of King Ferdinand (of Portugal), during the sixth and seventh decades of the fourteenth century. Through various maneuvers to unite Portugal to Castile (which included war and the promotion of diverse coups), Ferdinand ended up marrying his daughter to the man who would later become king of Castile. Ferdinand was, however, generally unsuccessful in his attempts to tie the crowns under his heading, and when he died in 1383 the king of Castile (thanks to his marriage with Ferdinand’s daughter) became the legitimate heir to the Portuguese crown. This was Ferdinand’s dream in reverse. The crowns would unite, but not under Portugal. The prospect of peninsular unity under Castile was not necessarily loathed by a large part of Portuguese elites, particularly parts of the aristocracy, which viewed Castile as a much more noble-friendly kingdom. This was not, however, a unanimous sentiment, and a strong reaction followed, led by other parts of the same elite, in order to keep the Portuguese crown in the hands of a Portuguese king, separate from Castile. A war with Castile and intimations of civil war ensued, and in the end Portugal’s independence was kept. The man chosen to be the successor of Ferdinand, under a new dynasty, was the bastard son of Peter I (Ferdinand’s father), the man who became John I in 1385.

This was a crucial episode, not simply because of the change in dynasty, imposed against the legitimate heir to the throne, but also because of success in the centralization of power by the Portuguese crown and, as a consequence, of separation of Portugal from Castile. Such separation led Portugal, additionally, to lose interest in further political adventures concerning Castile, and switch its attention to the Atlantic. It was the exploration of this path that led to the most unique period in Portuguese history, one during which Portugal reached heights of importance in the world that find no match in either its past or future history. This period is the Discoveries, a process that started during John I’s reign, in particular under the forceful direction of the king’s sons, most famous among them the mythical Henry, the Navigator. The 1383-85 crisis and John’s victory can thus be seen as the founding moment of the Portuguese Discoveries.

The Discoveries and the Apex of Portuguese International Power

The Discoveries are generally presented as the first great moment of world capitalism, with markets all over the world getting connected under European leadership. Albeit true, this is a largely post hoc perspective, for the Discoveries became a big commercial adventure only somewhere half-way into the story. Before they became such a thing, the aims of the Discoveries’ protagonists were mostly of another sort.

The Conquest of Ceuta

An interesting way to have a fuller picture of the Discoveries is to study the Portuguese contribution to them. Portugal was the pioneer of transoceanic navigation, discovering lands and sea routes formerly unknown to Europeans, and starting trades and commercial routes that linked Europe to other continents in a totally unprecedented fashion. But, at the start, the aims of the whole venture were entirely other. The event generally chosen to date the beginning of the Portuguese discoveries is the conquest of Ceuta – a city-state across the Straits of Gibraltar from Spain – in 1415. In itself such voyage would not differ much from other attempts made in the Mediterranean Sea from the twelfth century onwards by various European travelers. The main purpose of all these attempts was to control navigation in the Mediterranean, in what constitutes a classical fight between Christianity and Islam. Other objectives of Portuguese travelers were the will to find the mythical Prester John – a supposed Christian king surrounded by Islam: there are reasons to suppose that the legend of Prester John is associated with the real existence of the Copt Christians of Ethiopia – and to reach, directly at the source, the gold of Sudan. Despite this latter objective, religious reasons prevailed over others in spurring the first Portuguese efforts of overseas expansion. This should not surprise us, however, for Portugal had since its birth been, precisely, an expansionist political unit under a religious heading. The jump to the other side of the sea, to North Africa, was little else than the continuation of that expansionist drive. Here we must understand Portugal’s position as determined by two elements, one that was general to the whole European continent, and another one, more specific. The first is that the expansion of Portugal in the Middle-Ages coincides with the general expansion of Europe. And Portugal was very much a part of that process. The second is that, by being part of the process, Portugal was (by geographical hazard) at the forefront of the process. Portugal (and Spain) was in the first line of attack and defense against Islam. The conquest of Ceuta, by Henry, the Navigator, is hence a part of that story of confrontation with Islam.

Exploration from West Africa to India

The first efforts of Henry along the Western African coast and in the Atlantic high sea can be put within this same framework. The explorations along the African coast had two main objectives: to have a keener perception of how far south Islam’s strength went, and to surround Morocco, both in order to attack Islam on a wider shore and to find alternative ways to reach Prester John. These objectives depended, of course, on geographical ignorance, as the line of coast Portuguese navigators eventually found was much larger than the one Henry expected to find. In these efforts, Portuguese navigators went increasingly south, but also, mainly due to accidental changes of direction, west. Such westbound dislocations led to the discovery, in the first decades of the fifteenth century, of three archipelagos, the Canaries, Madeira (and Porto Santo) and the Azores. But the major navigational feat of this period was the passage of Cape Bojador in 1434, in the sequence of which the whole western coast of the African continent was opened for exploration and increasingly (and here is the novelty) commerce. As Africa revealed its riches, mostly gold and slaves, these ventures began acquiring a more strict economic meaning. And all this kept on fostering the Portuguese to go further south, and when they reached the southernmost tip of the African continent, to pass it and go east. And so they did. Bartolomeu Dias crossed the Cape of Good Hope in 1487 and ten years later Vasco da Gama would entirely circumnavigate Africa to reach India by sea. By the time of Vasco da Gama’s journey, the autonomous economic importance of intercontinental trade was well established.

Feitorias and Trade with West Africa, the Atlantic Islands and India

As the second half of the fifteenth century unfolded, Portugal created a complex trade structure connecting India and the African coast to Portugal and, then, to the north of Europe. This consisted of a net of trading posts (feitorias) along the African coast, where goods were shipped to Portugal, and then re-exported to Flanders, where a further Portuguese feitoria was opened. This trade was based on such African goods as gold, ivory, red peppers, slaves and other less important goods. As was noted by various authors, this was somehow a continuation of the pattern of trade created during the Middle Ages, meaning that Portugal was able to diversify it, by adding new goods to its traditional exports (wine, olive oil, fruits and salt). The Portuguese established a virtual monopoly of these African commercial routes until the early sixteenth century. The only threats to that trade structure came from pirates originating in Britain, Holland, France and Spain. One further element of this trade structure was the Atlantic Islands (Madeira, the Azores and the African archipelagos of Cape Verde and São Tomé). These islands contributed with such goods as wine, wheat and sugar cane. After the sea route to India was discovered and the Portuguese were able to establish regular connections with India, the trading structure of the Portuguese empire became more complex. Now the Portuguese began bringing multiple spices, precious stones, silk and woods from India, again based on a net of feitorias there established. The maritime route to India acquired an extreme importance to Europe, precisely at this time, since the Ottoman Empire was then able to block the traditional inland-Mediterranean route that supplied the continent with Indian goods.

Control of Trade by the Crown

One crucial aspect of the Portuguese Discoveries is the high degree of control exerted by the crown over the whole venture. The first episodes in the early fifteenth century, under Henry the Navigator (as well as the first exploratory trips along the African coast) were entirely directed by the crown. Then, as the activity became more profitable, it was, first, liberalized, and then rented (in totu) to merchants, whom were constrained to pay the crown a significant share of their profits. Finally, when the full Indo-African network was consolidated, the crown controlled directly the largest share of the trade (although never monopolizing it), participated in “public-private” joint-ventures, or imposed heavy tributes on traders. The grip of the crown increased with growth of the size and complexity of the empire. Until the early sixteenth century, the empire consisted mainly of a network of trading posts. No serious attempt was made by the Portuguese crown to exert a significant degree of territorial control over the various areas constituting the empire.

The Rise of a Territorial Empire

This changed with the growth of trade from India and Brazil. As India was transformed into a platform for trade not only around Africa but also in Asia, a tendency was developed (in particular under Afonso de Albuquerque, in the early sixteenth century) to create an administrative structure in the territory. This was not particularly successful. An administrative structure was indeed created, but stayed forever incipient. A relatively more complex administrative structure would only appear in Brazil. Until the middle of the sixteenth century, Brazil was relatively ignored by the crown. But with the success of the system of sugar cane plantation in the Atlantic Isles, the Portuguese crown decided to transplant it to Brazil. Although political power was controlled initially by a group of seigneurs to whom the crown donated certain areas of the territory, the system got increasingly more centralized as time went on. This is clearly visible with the creation of the post of governor-general of Brazil, directly respondent to the crown, in 1549.

Portugal Loses Its Expansionary Edge

Until the early sixteenth century, Portugal capitalized on being the pioneer of European expansion. It monopolized African and, initially, Indian trade. But, by that time, changes were taking place. Two significant events mark the change in political tide. First, the increasing assertiveness of the Ottoman Empire in the Eastern Mediterranean, which coincided with a new bout of Islamic expansionism – ultimately bringing the Mughal dynasty to India – as well as the re-opening of the Mediterranean route for Indian goods. This put pressure on Portuguese control over Indian trade. Not only was political control over the subcontinent now directly threatened by Islamic rulers, but also the profits from Indian trade started declining. This is certainly one of the reasons why Portugal redirected its imperial interests to the south Atlantic, particularly Brazil – the other reasons being the growing demand for sugar in Europe and the success of the sugar cane plantation system in the Atlantic islands. The second event marking the change in tide was the increased assertiveness of imperial Spain, both within Europe and overseas. Spain, under the Habsburgs (mostly Charles V and Phillip II), exerted a dominance over the European continent which was unprecedented since Roman times. This was complemented by the beginning of exploration of the American continent (from the Caribbean to Mexico and the Andes), again putting pressure on the Portuguese empire overseas. What is more, this is the period when not only Spain, but also Britain, Holland and France acquired navigational and commercial skills equivalent to the Portuguese, thus competing with them in some of their more traditional routes and trades. By the middle of the sixteenth century, Portugal had definitely lost the expansionary edge. And this would come to a tragic conclusion in 1580, with the death of the heirless King Sebastian in North Africa and the loss of political independence to Spain, under Phillip II.

Empire and the Role, Power and Finances of the Crown

The first century of empire brought significant political consequences for the country. As noted above, the Discoveries were directed by the crown to a very large extent. As such, they constituted one further step in the affirmation of Portugal as a separate political entity in the Iberian Peninsula. Empire created a political and economic sphere where Portugal could remain independent from the rest of the peninsula. It thus contributed to the definition of what we might call “national identity.” Additionally, empire enhanced significantly the crown’s redistributive power. To benefit from profits from transoceanic trade, to reach a position in the imperial hierarchy or even within the national hierarchy proper, candidates had to turn to the crown. As it controlled imperial activities, the crown became a huge employment agency, capable of attracting the efforts of most of the national elite. The empire was, thus, transformed into an extremely important instrument of the crown in order to centralize power. It has already been mentioned that much of the political history of Portugal from the Middle Ages to the nineteenth century revolves around the tension between the centripetal power of the crown and the centrifugal powers of the aristocracy, the Church and the local communities. Precisely, the imperial episode constituted a major step in the centralization of the crown’s power. The way such centralization occurred was, however, peculiar, and that would bring crucial consequences for the future. Various authors have noted how, despite the growing centralizing power of the crown, the aristocracy was able to keep its local powers, thanks to the significant taxing and judicial autonomy it possessed in the lands under its control. This is largely true, but as other authors have noted, this was done with the crown acting as an intermediary agent. The Portuguese aristocracy was since early times much less independent from the crown than in most parts of Western Europe, and this situation accentuated during the days of empire. As we have seen above, the crown directed the Reconquista in a way that made it able to control and redistribute (through the famous donations) most of the land that was conquered. In those early medieval days, it was, thus, the service to the crown that made noblemen eligible to benefit from land donations. It is undoubtedly true that by donating land the crown was also giving away (at least partially) the monopoly of taxing and judging. But what is crucial here is its significant intermediary power. With empire, that power increased again. And once more a large part of the aristocracy became dependent on the crown to acquire political and economic power. The empire became, furthermore, the main means of financing of the crown. Receipts from trade activities related to the empire (either profits, tariffs or other taxes) never went below 40 percent of total receipts of the crown, until the nineteenth century, and this was only briefly in its worst days. Most of the time, those receipts amounted to 60 or 70 percent of total crown’s receipts.

Other Economic Consequences of the Empire

Such a role for the crown’s receipts was one of the most important consequences of empire. Thanks to it, tax receipts from internal economic activity became in large part unnecessary for the functioning of national government, something that was going to have deep consequences, precisely for that exact internal activity. This was not, however, the only economic consequence of empire. One of the most important was, obviously, the enlargement of the trade base of the country. Thanks to empire, the Portuguese (and Europe, through the Portuguese) gained access to vast sources of precious metals, stones, tropical goods (such as fruit, sugar, tobacco, rice, potatoes, maize, and more), raw materials and slaves. Portugal used these goods to enlarge its comparative advantage pattern, which helped it penetrate European markets, while at the same time enlarging the volume and variety of imports from Europe. Such a process of specialization along comparative advantage principles was, however, very incomplete. As noted above, the crown exerted a high degree of control over the trade activity of empire, and as a consequence, many institutional factors interfered in order to prevent Portugal (and its imperial complex) from fully following those principles. In the end, in economic terms, the empire was inefficient – something to be contrasted, for instance, with the Dutch equivalent, much more geared to commercial success, and based on clearer efficiency managing-methods. By so significantly controlling imperial trade, the crown became a sort of barrier between the empire’s riches and the national economy. Much of what was earned in imperial activity was spent either on maintaining it or on the crown’s clientele. Consequently, the spreading of the gains from imperial trade to the rest of the economy was highly centralized in the crown. A much visible effect of this phenomenon was the fantastic growth and size of the country’s capital, Lisbon. In the sixteenth century, Lisbon was the fifth largest city in Europe, and from the sixteenth century to the nineteenth century it was always in the top ten, a remarkable feat for a country with such a small population as Portugal. And it was also the symptom of a much inflated bureaucracy, living on the gains of empire, as well as of the low degree of repercussion of those gains of empire through the whole of the economy.

Portuguese Industry and Agriculture

The rest of the economy did, indeed, remain very much untouched by this imperial manna. Most of industry was untouched by it, and the only visible impact of empire on the sector was by fostering naval construction and repair, and all the accessory activities. Most of industry kept on functioning according to old standards, far from the impact of transoceanic prosperity. And much the same happened with agriculture. Although benefiting from the introduction of new crops (mostly maize, but also potatoes and rice), Portuguese agriculture did not benefit significantly from the income stream arising from imperial trade, in particular when we could expect it to be a source of investment. Maize constituted an important technological innovation which had a much important impact on the Portuguese agriculture’s productivity, but it was too localized in the north-western part of the country, thus leaving the rest of the sector untouched.

Failure of a Modern Land Market to Develop

One very important consequence of empire on agriculture and, hence, on the economy, was the preservation of the property structure coming from the Middle Ages, namely that resulting from the crown’s donations. The empire enhanced again the crown’s powers to attract talent and, consequently, donate land. Donations were regulated by official documents called Cartas de Foral, in which the tributes due to the beneficiaries were specified. During the time of the empire, the conditions ruling donations changed in a way that reveals an increased monarchical power: donations were made for long periods (for instance, one life), but the land could not be sold nor divided (and, thus, no parts of it could be sold separately) and renewal required confirmation on the part of the crown. The rules of donation, thus, by prohibiting buying, selling and partition of land, were a major obstacle to the existence not only of a land market, but also of a clear definition of property rights, as well as freedom in the management of land use.

Additionally, various tributes were due to the beneficiaries. Some were in kind, some in money, some were fixed, others proportional to the product of the land. This process dissociated land ownership and appropriation of land product, since the land was ultimately the crown’s. Furthermore, the actual beneficiaries (thanks to the donation’s rules) had little freedom in the management of the donated land. Although selling land in such circumstances was forbidden to the beneficiaries, renting it was not, and several beneficiaries did so. A new dissociation between ownership and appropriation of product was thus introduced. Although in these donations some tributes were paid by freeholders, most of them were paid by copyholders. Copyhold granted to its signatories the use of land in perpetuity or in lives (one to three), but did not allow them to sell it. This introduced a new dissociation between ownership, appropriation of land product and its management. Although it could not be sold, land under copyhold could be ceded in “sub-copyhold” contracts – a replication of the original contract under identical conditions. This introduced, obviously, a new complication to the system. As should be clear by now, such a “baroque” system created an accumulation of layers of rights over the land, as different people could exert different rights over it, and each layer of rights was limited by the other layers, and sometimes conflicting with them in an intricate way. A major consequence of all this was the limited freedom the various owners of rights had in the management of their assets.

High Levels of Taxation in Agriculture

A second direct consequence of the system was the complicated juxtaposition of tributes on agricultural product. The land and its product in Portugal in those days were loaded with tributes (a sort of taxation). This explains one recent historian’s claim (admittedly exaggerated) that, in that period, those who owned the land did not toil it, and those who toiled it did not hold it. We must distinguish these tributes from strict rent payments, as rent contracts are freely signed by the two (or more) sides taking part in it. The tributes we are discussing here represented, in reality, an imposition, which makes the use of the word taxation appropriate to describe them. This is one further result of the already mentioned feature of the institutional framework of the time, the difficulty to distinguish between the private and the public spheres.

Besides the tributes we have just described, other tributes also impended on the land. Some were, again, of a nature we would call private nowadays, others of a more clearly defined public nature. The former were the tributes due to the Church, the latter the taxes proper, due explicitly as such to the crown. The main tribute due to the Church was the tithe. In theory, the tithe was a tenth of the production of farmers and should be directly paid to certain religious institutions. In practice, not always was it a tenth of the production nor did the Church always receive it directly, as its collection was in a large number of cases rented to various other agents. Nevertheless, it was an important tribute to be paid by producers in general. The taxes due to the crown were the sisa (an indirect tax on consumption) and the décima (an income tax). As far as we know, these tributes weighted on average much less than the seigneurial tributes. Still, when added to them, they accentuated the high level of taxation or para-taxation typical of the Portuguese economy of the time.

Portugal under Spanish Rule, Restoration of Independence and the Eighteenth Century

Spanish Rule of Portugal, 1580-1640

The death of King Sebastian in North Africa, during a military mission in 1578, left the Portuguese throne with no direct heir. There were, however, various indirect candidates in line, thanks to the many kinship links established by the Portuguese royal family to other European royal and aristocratic families. Among them was Phillip II of Spain. He would eventually inherit the Portuguese throne, although only after invading the country in 1580. Between 1578 and 1580 leaders in Portugal tried unsuccessfully to find a “national” solution to the succession problem. In the end, resistance to the establishment of Spanish rule was extremely light.

Initial Lack of Resistance to Spanish Rule

To understand why resistance was so mild one must bear in mind the nature of such political units as the Portuguese and Spanish kingdoms at the time. These kingdoms were not the equivalent of contemporary nation-states. They had a separate identity, evident in such things as a different language, a different cultural history, and different institutions, but this didn’t amount to being a nation. The crown itself, when seen as an institution, still retained many features of a “private” venture. Of course, to some extent it represented the materialization of the kingdom and its “people,” but (by the standards of current political concepts) it still retained a much more ambiguous definition. Furthermore, Phillip II promised to adopt a set of rules allowing for extensive autonomy: the Portuguese crown would be “aggregated” to the Spanish crown although not “absorbed” or “associated” or even “integrated” with it. According to those rules, Portugal was to keep its separate identity as a crown and as a kingdom. All positions in the Portuguese government were to be attributed to Portuguese persons, the Portuguese language was the only one allowed in official matters in Portugal, positions in the Portuguese empire were to be attributed only to Portuguese.

The implementation of such rules depended largely on the willingness of the Portuguese nobility, Church and high-ranking officials to accept them. As there were no major popular revolts that could pressure these groups to decide otherwise, they did not have much difficulty in accepting them. In reality, they saw the new situation as an opportunity for greater power. After all, Spain was then the largest and most powerful political unit in Europe, with vast extensions throughout the world. To participate in such a venture under conditions of great autonomy was seen as an excellent opening.

Resistance to Spanish Rule under Phillip IV

The autonomous status was kept largely untouched until the third decade of the seventeenth century, i.e., until Phillip IV’s reign (1621-1640, in Portugal). This was a reign marked by an important attempt at centralization of power under the Spanish crown. A major impulse for this was Spain’s participation in the Thirty Years War. Simply put, the financial stress caused by the war forced the crown not only to increase fiscal pressure on the various political units under it but also to try to control them more closely. This led to serious efforts at revoking the autonomous status of Portugal (as well as other European regions of the empire). And it was as a reaction to those attempts that many Portuguese aristocrats and important personalities led a movement to recover independence. This movement must, again, be interpreted with care, paying attention to the political concepts of the time. This was not an overtly national reaction, in today’s sense of the word “national.” It was mostly a reaction from certain social groups that felt a threat to their power by the new plans of increased centralization under Spain. As some historians have noted, the 1640 revolt should be best understood as a movement to preserve the constitutional elements of the framework of autonomy established in 1580, against the new centralizing drive, rather than a national or nationalist movement.

Although that was the original intent of the movement, the fact is that, progressively, the new Portuguese dynasty (whose first monarch was John IV, 1640-1656) proceeded to an unprecedented centralization of power in the hands of the Portuguese crown. This means that, even if the original intent of the mentors of the 1640 revolt was to keep the autonomy prevalent both under pre-1580 Portuguese rule and post-1580 Spanish rule, the final result of their action was to favor centralization in the Portuguese crown, and thus help define Portugal as a clearly separate country. Again, we should be careful not to interpret this new bout of centralization in the seventeenth and eighteenth centuries as the creation of a national state and of a modern government. Many of the intermediate groups (in particular the Church and the aristocracy) kept their powers largely intact, even powers we would nowadays call public (such as taxation, justice and police). But there is no doubt that the crown increased significantly its redistributive power, and the nobility and the church had, increasingly, to rely on service to the crown to keep most of their powers.

Consequences of Spanish Rule for the Portuguese Empire

The period of Spanish rule had significant consequences for the Portuguese empire. Due to integration in the Spanish empire, Portuguese colonial territories became a legitimate target for all of Spain’s enemies. The European countries having imperial strategies (in particular, Britain, the Netherlands and France) no longer saw Portugal as a countervailing ally in their struggle with Spain, and consequently promoted serious assaults on Portuguese overseas possessions. There was one further element of the geopolitical landscape of the period that aggravated the willingness of competitors to attack Portugal, and that was Holland’s process of separation from the Spanish empire. Spain was not only a large overseas empire but also an enormous European one, of which Holland was a part until the 1560s. Holland, precisely, saw the Portuguese section of the Iberian empire as its weakest link, and, accordingly, attacked it in a fairly systematic way. The Dutch attack on Portuguese colonial possessions ranged from America (Brazil) to Africa (Sao Tome and Angola) to Asia (India, several points in Southeast Asia, and Indonesia), and in the course of it several Portuguese territories were conquered, mostly in Asia. Portugal, however, managed to keep most of its African and American territories.

The Shift of the Portuguese Empire toward the Atlantic

When it regained independence, Portugal had to re-align its external position in accordance with the new context. Interestingly enough, all those rivals that had attacked the country’s possessions during Spanish rule initially supported its separation. France was the most decisive partner in the first efforts to regain independence. Later (in the 1660s, in the final years of the war with Spain) Britain assumed that role. This was to inaugurate an essential feature of Portuguese external relations. From then on Britain became the most consistent Portuguese foreign partner. In the 1660s such a move was connected to the re-orientation of the Portuguese empire. What had until then been the center of empire (its Eastern part – India and the rest of Asia) lost importance. At first, this was due to the renewal in activity in the Mediterranean route, something that threatened the sea route to India. Then, this was because the Eastern empire was the part where the Portuguese had ceded more territory during Spanish rule, in particular to the Netherlands. Portugal kept most of its positions both in Africa and America, and this part of the world was to acquire extreme importance in the seventeenth and eighteenth centuries. In the last decades of the seventeenth century, Portugal was able to develop numerous trades mostly centered in Brazil (although some of the Atlantic islands also participated), involving sugar, tobacco and tropical woods, all sent to the growing market for luxury goods in Europe, to which was added a growing and prosperous trade of slaves from West Africa to Brazil.

Debates over the Role of Brazilian Gold and the Methuen Treaty

The range of goods in Atlantic trade acquired an important addition with the discovery of gold in Brazil in the late seventeenth century. It is the increased importance of gold in Portuguese trade relations that helps explain one of the most important diplomatic moments in Portuguese history, the Methuen Treaty (also called the Queen Anne Treaty), signed between Britain and Portugal in 1703. Many Portuguese economists and historians have blamed the treaty for Portugal’s inability to achieve modern economic growth during the eighteenth and nineteenth centuries. It must be remembered that the treaty stipulated tariffs to be reduced in Britain for imports of Portuguese wine (favoring it explicitly in relation to French wine), while, as a counterpart, Portugal had to eliminate all prohibitions on imports of British wool textiles (even if tariffs were left in place). Some historians and economists have seen this as Portugal’s abdication of having a national industrial sector and, instead, specializing in agricultural goods for export. As proof, such scholars present figures for the balance of trade between Portugal and Britain after 1703, with the former country exporting mainly wine and the latter textiles, and a widening trade deficit. Other authors, however, have shown that what mostly allowed for this trade (and the deficit) was not wine but the newly discovered Brazilian gold. Could, then, gold be the culprit for preventing Portuguese economic growth? Most historians now reject the hypothesis. The problem would lie not in a particular treaty signed in the early eighteenth century but in the existing structural conditions for the economy to grow – a question to be dealt with further below.

Portuguese historiography currently tends to see the Methuen Treaty mostly in the light of Portuguese diplomatic relations in the seventeenth and eighteenth centuries. The treaty would mostly mark the definite alignment of Portugal within the British sphere. The treaty was signed during the War of Spanish Succession. This was a war that divided Europe in a most dramatic manner. As the Spanish crown was left without a successor in 1700, the countries of Europe were led to support different candidates. The diplomatic choice ended up being polarized around Britain, on the one side, and France, on the other. Increasingly, Portugal was led to prefer Britain, as it was the country that granted more protection to the prosperous Portuguese Atlantic trade. As Britain also had an interest in this alignment (due to the important Portuguese colonial possessions), this explains why the treaty was economically beneficial to Portugal (contrary to what some of the older historiography tended to believe) In fact, in simple trade terms, the treaty was a good bargain for both countries, each having been given preferential treatment for certain of its more typical goods.

Brazilian Gold’s Impact on Industrialization

It is this sequence of events that has led several economists and historians to blame gold for the Portuguese inability to industrialize in the eighteenth and nineteenth centuries. Recent historiography, however, has questioned the interpretation. All these manufactures were dedicated to the production of luxury goods and, consequently, directed to a small market that had nothing to do (in both the nature of the market and technology) with those sectors typical of European industrialization. Were it to continue, it is very doubtful it would ever have become a full industrial spurt of the kind then underway in Britain. The problem lay elsewhere, as we will see below.

Prosperity in the Early 1700s Gives Way to Decline

Be that as it may, the first half of the eighteenth century was a period of unquestionable prosperity for Portugal, mostly thanks to gold, but also to the recovery of the remaining trades (both tropical and from the mainland). Such prosperity is most visible in the period of King John V (1706-1750). This is generally seen as the Portuguese equivalent to the reign of France’s Louis XIV. Palaces and monasteries of great dimensions were then built, and at the same time the king’s court acquired a pomp and grandeur not seen before or after, all financed largely by Brazilian gold. By the mid-eighteenth century, however, it all began to falter. The beginning of decline in gold remittances occurred in the sixth decade of the century. A new crisis began, which was compounded by the dramatic 1755 earthquake, which destroyed a large part of Lisbon and other cities. This new crisis was at the root of a political project aiming at a vast renaissance of the country. This was the first in a series of such projects, all of them significantly occurring in the sequence of traumatic events related to empire. The new project is associated with King Joseph I period (1750-1777), in particular with the policies of his prime-minister, the Marquis of Pombal.

Centralization under the Marquis of Pombal

The thread linking the most important political measures taken by the Marquis of Pombal is the reinforcement of state power. A major element in this connection was his confrontation with certain noble and church representatives. The most spectacular episodes in this respect were, first, the killing of an entire noble family and, second, the expulsion of the Jesuits from national soil. Sometimes this is taken as representing an outright hostile policy towards both aristocracy and church. However, it should be best seen as an attempt to integrate aristocracy and church into the state, thus undermining their autonomous powers. In reality, what the Marquis did was to use the power to confer noble titles, as well as the Inquisition, as means to centralize and increase state power. As a matter of fact, one of the most important instruments of recruitment for state functions during the Marquis’ rule was the promise of noble titles. And the Inquisition’s functions also changed form being mainly a religious court, mostly dedicated to the prosecution of Jews, to becoming a sort of civil political police. The Marquis’ centralizing policy covered a wide range of matters, in particular those most significant to state power. Internal police was reinforced, with the creation of new police institutions directly coordinated by the central government. The collection of taxes became more efficient, through an institution more similar to a modern Treasury than any earlier institutions. Improved collection also applied to tariffs and profits from colonial trade.

Centralizing power by the government had significant repercussions in certain aspects of the relationship between state and civil society. Although the Marquis’ rule is frequently pictured as violent, it included measures generally considered as “enlightened.” Such is the case of the abolition of the distinction between “New Christians” and Christians (new Christians were Jews converted to Catholicism, and as such suffered from a certain degree of segregation, constituting an intermediate category between Jews and Christians proper). Another very important political measure by the Marquis was the abolition of slavery in the empire’s mainland (even if slavery kept on being used in the colonies and the slave trade continued to prosper, there is no way of questioning the importance of the measure).

Economic Centralization under the Marquis of Pombal

The Marquis applied his centralizing drive to economic matters as well. This happened first in agriculture, with the creation of a monopolizing company for trade in Port wine. It continued in colonial trade, where the method applied was the same, that is, the creation of companies monopolizing trade for certain products or regions of the empire. Later, interventionism extended to manufacturing. Such interventionism was essentially determined by the international trade crisis that affected many colonial goods, the most important among them gold. As the country faced a new international payments crisis, the Marquis reverted to protectionism and subsidization of various industrial sectors. Again, as such state support was essentially devoted to traditional, low-tech, industries, this policy failed to boost Portugal’s entry into the group of countries that first industrialized.

Failure to Industrialize

The country would never be the same after the Marquis’ consulate. The “modernization” of state power and his various policies left a profound mark in the Portuguese polity. They were not enough, however, to create the necessary conditions for Portugal to enter a process of industrialization. In reality, most of the structural impediments to modern growth were left untouched or aggravated by the Marquis’ policies. This is particularly true of the relationship between central power and peripheral (aristocratic) powers. The Marquis continued the tradition exacerbated during the fifteenth and sixteenth centuries of liberally conferring noble titles to court members. Again, this accentuated the confusion between the public and the private spheres, with a particular incidence (for what concerns us here) in the definition of property and property rights. The act of granting a noble title by the crown, on many occasions implied a donation of land. The beneficiary of the donation was entitled to collect tributes from the population living in the territory but was forbidden to sell it and, sometimes, even rent it. This meant such beneficiaries were not true owners of the land. The land could not exactly be called their property. This lack of private rights was, however, compensated by the granting of such “public” rights as the ability to obtain tributes – a sort of tax. Beneficiaries of donations were, thus, neither true landowners nor true state representatives. And the same went for the crown. By giving away many of the powers we tend to call public today, the crown was acting as if it could dispose of land under its administration in the same manner as private property. But since this was not entirely private property, by doing so the crown was also conceding public powers to agents we would today call private. Such confusion did not help the creation of either a true entrepreneurial class or of a state dedicated to the protection of private property rights.

The whole property structure described above was kept, even after the reforming efforts of the Marquis of Pombal. The system of donations as a method of payment for jobs taken at the King’s court as well as the juxtaposition of various sorts of tributes, either to the crown or local powers, allowed for the perpetuation of a situation where the private and the public spheres were not clearly separated. Consequently, property rights were not well defined. If there is a crucial reason for Portugal’s impaired economic development, these are the things we should pay attention to. Next, we will begin the study of the nineteenth and twentieth centuries, and see how difficult was the dismantling of such an institutional structure and how it affected the growth potential of the Portuguese economy.

Suggested Reading:

Birmingham, David. A Concise History of Portugal. Cambridge: Cambridge University Press, 1993.

Boxer, C.R. The Portuguese Seaborne Empire, 1415-1825. New York: Alfred A. Knopf, 1969.

Godinho, Vitorino Magalhães. “Portugal and Her Empire, 1680-1720.” The New Cambridge Modern History, Vol. VI. Cambridge: Cambridge University Press, 1970.

Oliveira Marques, A.H. History of Portugal. New York: Columbia University Press, 1972.

Wheeler, Douglas. Historical Dictionary of Portugal. London: Scarecrow Press, 1993.

Citation: Amaral, Luciano. “Economic History of Portugal”. EH.Net Encyclopedia, edited by Robert Whaples. March 16, 2008. URL http://eh.net/encyclopedia/economic-history-of-portugal/

An Economic History of New Zealand in the Nineteenth and Twentieth Centuries

John Singleton, Victoria University of Wellington, New Zealand

Living standards in New Zealand were among the highest in the world between the late nineteenth century and the 1960s. But New Zealand’s economic growth was very sluggish between 1950 and the early 1990s, and most Western European countries, as well as several in East Asia, overtook New Zealand in terms of real per capita income. By the early 2000s, New Zealand’s GDP per capita was in the bottom half of the developed world.

Table 1:
Per capita GDP in New Zealand
compared with the United States and Australia
(in 1990 international dollars)

US Australia New Zealand NZ as
% of US
NZ as % of
Austrialia
1840 1588 1374 400 25 29
1900 4091 4013 4298 105 107
1950 9561 7412 8456 88 114
2000 28129 21540 16010 57 74

Source: Angus Maddison, The World Economy: Historical Statistics. Paris: OECD, 2003, pp. 85-7.

Over the second half of the twentieth century, argue Greasley and Oxley (1999), New Zealand seemed in some respects to have more in common with Latin American countries than with other advanced western nations. As well as a snail-like growth rate, New Zealand followed highly protectionist economic policies between 1938 and the 1980s. (In absolute terms, however, New Zealanders continued to be much better off than their Latin American counterparts.) Maddison (1991) put New Zealand in a middle-income group of countries, including the former Czechoslovakia, Hungary, Portugal, and Spain.

Origins and Development to 1914

When Europeans (mainly Britons) started to arrive in Aotearoa (New Zealand) in the early nineteenth century, they encountered a tribal society. Maori tribes made a living from agriculture, fishing, and hunting. Internal trade was conducted on the basis of gift exchange. Maori did not hold to the Western concept of exclusive property rights in land. The idea that land could be bought and sold was alien to them. Most early European residents were not permanent settlers. They were short-term male visitors involved in extractive activities such as sealing, whaling, and forestry. They traded with Maori for food, sexual services, and other supplies.

Growing contact between Maori and the British was difficult to manage. In 1840 the British Crown and some Maori signed the Treaty of Waitangi. The treaty, though subject to various interpretations, to some extent regularized the relationship between Maori and Europeans (or Pakeha). At roughly the same time, the first wave of settlers arrived from England to set up colonies including Wellington and Christchurch. Settlers were looking for a better life than they could obtain in overcrowded and class-ridden England. They wished to build a rural and largely self-sufficient society.

For some time, only the Crown was permitted to purchase land from Maori. This land was then either resold or leased to settlers. Many Maori felt – and many still feel – that they were forced to give up land, effectively at gunpoint, in return for a pittance. Perhaps they did not always grasp that land, once sold, was lost forever. Conflict over land led to intermittent warfare between Maori and settlers, especially in the 1860s. There was brutality on both sides, but the Europeans on the whole showed more restraint in New Zealand than in North America, Australia, or Southern Africa.

Maori actually required less land in the nineteenth century because their numbers were falling, possibly by half between the late eighteenth and late nineteenth centuries. By the 1860s, Maori were outnumbered by British settlers. The introduction of European diseases, alcohol, and guns contributed to the decline in population. Increased mobility and contact between tribes may also have spread disease. The Maori population did not begin to recover until the twentieth century.

Gold was discovered in several parts of New Zealand (including Thames and Otago) in the mid-nineteenth century, but the introduction of sheep farming in the 1850s gave a more enduring boost to the economy. Australian and New Zealand wool was in high demand in the textile mills of Yorkshire. Sheep farming necessitated the clearing of native forests and the planting of grasslands, which changed the appearance of large tracts of New Zealand. This work was expensive, and easy access to the London capital market was critical. Economic relations between New Zealand and Britain were strong, and remained so until the 1970s.

Between the mid-1870s and mid-1890s, New Zealand was adversely affected by weak export prices, and in some years there was net emigration. But wool prices recovered in the 1890s, just as new exports – meat and dairy produce – were coming to prominence. Until the advent of refrigeration in the early 1880s, New Zealand did not export meat and dairy produce. After the introduction of refrigeration, however, New Zealand foodstuffs found their way on to the dinner tables of working class families in Britain, but not the tables of the middle and upper classes, as they could afford fresh produce.

In comparative terms, the New Zealand economy was in its heyday in the two decades before 1914. New Zealand (though not its Maori shadow, Aotearoa) was a wealthy, dynamic, and egalitarian society. The total population in 1914 was slightly above one million. Exports consisted almost entirely of land-intensive pastoral commodities. Manufactures loomed large in New Zealand’s imports. High labor costs, and the absence of scale economies in the tiny domestic market, hindered industrialization, though there was some processing of export commodities and imports.

War, Depression and Recovery, 1914-38

World War One disrupted agricultural production in Europe, and created a robust demand for New Zealand’s primary exports. Encouraged by high export prices, New Zealand farmers borrowed and invested heavily between 1914 and 1920. Land exchanged hands at very high prices. Unfortunately, the early twenties brought the start of a prolonged slump in international commodity markets. Many farmers struggled to service and repay their debts.

The global economic downturn, beginning in 1929-30, was transmitted to New Zealand by the collapse in commodity prices on the London market. Farmers bore the brunt of the depression. At the trough, in 1931-32, net farm income was negative. Declining commodity prices increased the already onerous burden of servicing and repaying farm mortgages. Meat freezing works, woolen mills, and dairy factories were caught in the spiral of decline. Farmers had less to spend in the towns. Unemployment rose, and some of the urban jobless drifted back to the family farm. The burden of external debt, the bulk of which was in sterling, rose dramatically relative to export receipts. But a protracted balance of payments crisis was avoided, since the demand for imports fell sharply in response to the drop in incomes. The depression was not as serious in New Zealand as in many industrial countries. Prices were more flexible in the primary sector and in small business than in modern, capital-intensive industry. Nevertheless, the experience of depression profoundly affected New Zealanders’ attitudes towards the international economy for decades to come.

At first, there was no reason to expect that the downturn in 1929-30 was the prelude to the worst slump in history. As tax and customs revenue fell, the government trimmed expenditure in an attempt to balance the budget. Only in 1931 was the severity of the crisis realized. Further cuts were made in public spending. The government intervened in the labor market, securing an order for an all-round reduction in wages. It pressured and then forced the banks to reduce interest rates. The government sought to maintain confidence and restore prosperity by helping farms and other businesses to lower costs. But these policies did not lead to recovery.

Several factors contributed to the recovery that commenced in 1933-34. The New Zealand pound was devalued by 14 percent against sterling in January 1933. As most exports were sold for sterling, which was then converted into New Zealand pounds, the income of farmers was boosted at a stroke of the pen. Devaluation increased the money supply. Once economic actors, including the banks, were convinced that the devaluation was permanent, there was an increase in confidence and in lending. Other developments played their part. World commodity prices stabilized, and then began to pick up. Pastoral output and productivity continued to rise. The 1932 Ottawa Agreements on imperial trade strengthened New Zealand’s position in the British market at the expense of non-empire competitors such as Argentina, and prefigured an increase in the New Zealand tariff on non-empire manufactures. As was the case elsewhere, the recovery in New Zealand was not the product of a coherent economic strategy. When beneficial policies were adopted it was as much by accident as by design.

Once underway, however, New Zealand’s recovery was comparatively rapid and persisted over the second half of the thirties. A Labour government, elected towards the end of 1935, nationalized the central bank (the Reserve Bank of New Zealand). The government instructed the Reserve Bank to create advances in support of its agricultural marketing and state housing schemes. It became easier to obtain borrowed funds.

An Insulated Economy, 1938-1984

A balance of payments crisis in 1938-39 was met by the introduction of administrative restrictions on imports. Labour had not been prepared to deflate or devalue – the former would have increased unemployment, while the latter would have raised working class living costs. Although intended as a temporary expedient, the direct control of imports became a distinctive feature of New Zealand economic policy until the mid-1980s.

The doctrine of “insulationism” was expounded during the 1940s. Full employment was now the main priority. In the light of disappointing interwar experience, there were doubts about the ability of the pastoral sector to provide sufficient work for New Zealand’s growing population. There was a desire to create more industrial jobs, even though there seemed no prospect of achieving scale economies within such a small country. Uncertainty about export receipts, the need to maintain a high level of domestic demand, and the competitive weakness of the manufacturing sector, appeared to justify the retention of quantitative import controls.

After 1945, many Western countries retained controls over current account transactions for several years. When these controls were relaxed and then abolished in the fifties and early sixties, the anomalous nature of New Zealand’s position became more visible. Although successive governments intended to liberalize, in practice they achieved little, except with respect to trade with Australia.

The collapse of the Korean War commodity boom, in the early 1950s, marked an unfortunate turning point in New Zealand’s economic history. International conditions were unpropitious for the pastoral sector in the second half of the twentieth century. Despite the aspirations of GATT, the United States, Western Europe and Japan restricted agricultural imports, especially of temperate foodstuffs, subsidized their own farmers and, in the case of the Americans and the Europeans, dumped their surpluses in third markets. The British market, which remained open until 1973, when the United Kingdom was absorbed into the EEC, was too small to satisfy New Zealand. Moreover, even the British resorted to agricultural subsidies. Compared with the price of industrial goods, the price of agricultural produce tended to weaken over the long term.

Insulation was a boon to manufacturers, and New Zealand developed a highly diversified industrial structure. But competition was ineffectual, and firms were able to pass cost increases on to the consumer. Import barriers induced many British, American, and Australian multinationals to establish plants in New Zealand. The protected industrial economy did have some benefits. It created jobs – there was full employment until the 1970s – and it increased the stock of technical and managerial skills. But consumers and farmers were deprived of access to cheaper – and often better quality – imported goods. Their interests and welfare were neglected. Competing demand from protected industries also raised the costs of farm inputs, including labor power, and thus reduced the competitiveness of New Zealand’s key export sector.

By the early 1960s, policy makers had realized that New Zealand was falling behind in the race for greater prosperity. The British food market was under threat, as the Macmillan government began a lengthy campaign to enter the protectionist EEC. New Zealand began to look for other economic partners, and the most obvious candidate was Australia. In 1901, New Zealand had declined to join the new federation of Australian colonies. Thus it had been excluded from the Australian common market. After lengthy negotiations, a partial New Zealand-Australia Free Trade Agreement (NAFTA) was signed in 1965. Despite initial misgivings, many New Zealand firms found that they could compete in the Australian market, where tariffs against imports from the rest of the world remained quite high. But this had little bearing on their ability to compete with European, Asian, and North American firms. NAFTA was given renewed impetus by the Closer Economic Relations (CER) agreement of 1983.

Between 1973 and 1984, New Zealand governments were overwhelmed by a group of inter-related economic crises, including two serious supply shocks (the oil crises), rising inflation, and increasing unemployment. Robert Muldoon, the National Party (conservative) prime minister between 1975 and 1984, pursued increasingly erratic macroeconomic policies. He tightened government control over the economy in the early eighties. There were dramatic fluctuations in inflation and in economic growth. In desperation, Muldoon imposed a wage and price freeze in 1982-84. He also mounted a program of large-scale investments, including the expansion of a steel works, and the construction of chemical plants and an oil refinery. By means of these investments, he hoped to reduce the import bill and secure a durable improvement in the balance of payments. But the “Think Big” strategy failed – the projects were inadequately costed, and inherently risky. Although Muldoon’s intention had been to stabilize the economy, his policies had the opposite effect.

Economic Reform, 1984-2000

Muldoon’s policies were discredited, and in 1984 the Labour Party came to power. All other economic strategies having failed, Labour resolved to deregulate and restore the market process. (This seemed very odd at the time.) Within a week of the election, virtually all controls over interest rates had been abolished. Financial markets were deregulated, and, in March 1985, the New Zealand dollar was floated. Other changes followed, including the sale of public sector trading organizations, the reduction of tariffs and the elimination of import licensing. However, reform of the labor market was not completed until the early 1990s, by which time National (this time without Muldoon or his policies) was back in office.

Once credit was no longer rationed, there was a large increase in private sector borrowing, and a boom in asset prices. Numerous speculative investment and property companies were set up in the mid-eighties. New Zealand’s banks, which were not used to managing risk in a deregulated environment, scrambled to lend to speculators in an effort not to miss out on big profits. Many of these ventures turned sour, especially after the 1987 share market crash. Banks were forced to reduce their lending, to the detriment of sound as well as unsound borrowers.

Tight monetary policy and financial deregulation led to rising interest rates after 1984. The New Zealand dollar appreciated strongly. Farmers bore the initial brunt of high borrowing costs and a rising real exchange rate. Manufactured imports also became more competitive, and many inefficient firms were forced to close. Unemployment rose in the late eighties and early nineties. The early 1990s were marked by an international recession, which was particularly painful in New Zealand, not least because of the high hopes raised by the post-1984 reforms.

An economic recovery began towards the end of 1991. With a brief interlude in 1998, strong growth persisted for the remainder of the decade. Confidence was gradually restored to the business sector. Unemployment began to recede. After a lengthy time lag, the economic reforms seemed to be paying off for the majority of the population.

Large structural changes took place after 1984. Factors of production switched out of the protected manufacturing sector, and were drawn into services. Tourism boomed as the relative cost of international travel fell. The face of the primary sector also changed, and the wine industry began to penetrate world markets. But not all manufacturers struggled. Some firms adapted to the new environment and became more export-oriented. For instance, a small engineering company, Scott Technology, became a world leader in the provision of equipment for the manufacture of refrigerators and washing machines.

Annual inflation was reduced to low single digits by the early nineties. Price stability was locked in through the 1989 Reserve Bank Act. This legislation gave the central bank operational autonomy, while compelling it to focus on the achievement and maintenance of price stability rather than other macroeconomic objectives. The Reserve Bank of New Zealand was the first central bank in the world to adopt a regime of inflation targeting. The 1994 Fiscal Responsibility Act committed governments to sound finance and the reduction of public debt.

By 2000, New Zealand’s population was approaching four million. Overall, the reforms of the eighties and nineties were responsible for creating a more competitive economy. New Zealand’s economic decline relative to the rest of the OECD was halted, though it was not reversed. In the nineties, New Zealand enjoyed faster economic growth than either Germany or Japan, an outcome that would have been inconceivable a few years earlier. But many New Zealanders were not satisfied. In particular, they were galled that their closest neighbor, Australia, was growing even faster. Australia, however, was an inherently much wealthier country with massive mineral deposits.

Assessment

Several explanations have been offered for New Zealand’s relatively poor economic performance during the twentieth century.

Wool, meat, and dairy produce were the foundations of New Zealand’s prosperity in Victorian and Edwardian times. After 1920, however, international market conditions were generally unfavorable to pastoral exports. New Zealand had the wrong comparative advantage to enjoy rapid growth in the twentieth century.

Attempts to diversify were only partially successful. High labor costs and the small size of the domestic market hindered the efficient production of standardized labor-intensive goods (e.g. garments) and standardized capital-intensive goods (e.g. autos). New Zealand might have specialized in customized and skill-intensive manufactures, but the policy environment was not conducive to the promotion of excellence in niche markets. Between 1938 and the 1980s, Latin American-style trade policies fostered the growth of a ramshackle manufacturing sector. Only in the late eighties did New Zealand decisively reject this regime.

Geographical and geological factors also worked to New Zealand’s disadvantage. Australia drew ahead of New Zealand in the 1960s, following the discovery of large mineral deposits for which there was a big market in Japan. Staple theory suggests that developing countries may industrialize successfully by processing their own primary products, instead of by exporting them in a raw state. Canada had coal and minerals, and became a significant industrial power. But New Zealand’s staples of wool, meat and dairy produce offered limited downstream potential.

Canada also took advantage of its proximity to the U.S. market, and access to U.S. capital and technology. American-style institutions in the labor market, business, education and government became popular in Canada. New Zealand and Australia relied on, arguably inferior, British-style institutions. New Zealand was a long way from the world’s economic powerhouses, and it was difficult for its firms to establish and maintain contact with potential customers and collaborators in Europe, North America, or Asia.

Clearly, New Zealand’s problems were not all of its own making. The elimination of agricultural protectionism in the northern hemisphere would have given a huge boost the New Zealand economy. On the other hand, in the period between the late 1930s and mid-1980s, New Zealand followed inward-looking economic policies that hindered economic efficiency and flexibility.

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Citation: Singleton, John. “New Zealand in the Nineteenth and Twentieth Centuries”. EH.Net Encyclopedia, edited by Robert Whaples. February 10, 2008. URL http://eh.net/encyclopedia/an-economic-history-of-new-zealand-in-the-nineteenth-and-twentieth-centuries/