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Carnegie, Andrew

Robert Whaples, Wake Forest University

Andrew Carnegie (November 25, 1835-August 11, 1919) rose from poverty to become an industrial magnate, as well as a prolific and influential writer. His writings celebrated individualism, competition, economic growth and democracy, and challenged the wealthy to practice a philanthropy that would elevate mankind.

When the Carnegie family emigrated from Scotland to western Pennsylvania, poverty compelled thirteen-year-old Andrew to work as a bobbin boy in a cotton factory at $1.20 a week. Making opportunities for himself, working hard, and learning fast, he quickly rose, becoming successively a messenger boy, telegraph operator, secretary to one of the Pennsylvania Railroad’s superintendents, and finally superintendent of the Pennsylvania Railroad’s western division in Pittsburgh at age twenty-three in 1859. During the Civil War, Carnegie helped organize the repair of the rail system around Washington, DC and then organized the Telegraphers Corps. While still working for the railroad during the war, he organized a partnership to manufacture railroad bridges.

Desiring greater autonomy, Carnegie left the railroad in 1865 to run his own enterprises. He marketed bonds and invested in oil and railway sleeping cars, but his primary business was iron-making. Introducing the cost-accounting techniques of the railroad industry and hiring trained chemists, he ruthlessly adopted procedures that cut per-unit costs and soon emerged as one of the industry’s dominant forces. Following a personal demonstration Carnegie decided to adopt Henry Bessemer’s new technology and enter the steel industry, building the Edgar Thompson Works in 1873, just as the Panic of 1873 hit. His deep financial resources allowed him to buy up his hard-pressed partners’ stakes cheaply and gain a majority share of the enterprise.

Carnegie looked upon his industrial rivals as enemies and worked ruthlessly to adopt innovations and cut costs in an effort to defeat them. In the process the price of steel was driven ever lower, benefiting steel buyers and users. In 1883, as steel prices collapsed amid another recession, Carnegie bought out a major competitor, taking ownership of the Homestead steel plant. Homestead became the scene of one of the era’s most famous confrontations between capital and labor in 1892, when the director of Carnegie’s operations, Henry Clay Frick, called on Pinkerton agents to wrest control of the plant from striking workers. Five strikers and three Pinkertons died in the confrontation. The state militia restored order and the union was soon broken, but Carnegie’s reputation was permanently tarnished in the eyes of many, despite the fact that he was living in his summer estate in Scotland when the events transpired.

In the 1890s Carnegie pushed for greater and greater vertical integration, as a way to cut costs and increase profits. He had previously acquired a dominant stake in Frick’s coke business and now leased recently-discovered ore deposits in Minnesota’s Mesabi Range, purchased lake steamers to handle his ore traffic and bought and extended a railroad to link his steel works to Lake Erie — thereby guaranteeing an uninterrupted flow of raw materials to his manufacturing plants. Simultaneously, he adopted the new Siemens open-hearth furnace in his steel works. By the end of the 1890s, Carnegie Steel Company was the world’s largest steel producer, manufacturing a quarter of the nation’s soaring steel output. Profits accumulated at an unprecedented rate, hitting $40 million in 1900. Carnegie’s competitive zeal and unwillingness to collude irked his competitors, as did his moves around 1900 to expand into producing steel goods in hoop, rod, wire and nail mills.

In 1901, amid the most comprehensive merger wave in American history, Carnegie sold his interests to J.P. Morgan’s syndicate. His personal fortune exceeded $300 million — about $6.7 billion at today’s (2004) prices — making him one of the world’s richest men. Thereafter he turned his attention to distributing his wealth and promoting international peace.

As much as he wanted to make money and outdo business rivals, Carnegie had a desire to influence public opinion, publishing numerous magazine articles and books. Carnegie’s general thesis was that America’s democratic institutions and the economic and social freedoms they encouraged were responsible for her ascendance over monarchical Europe. His message and style are exemplified in Triumphant Democracy (1886). “The old nations of the earth creep on at a snail’s pace; the Republic thunders past with the rush of the express,” it opens. Carnegie stood for a meritocracy in which, with integrity, thrift, self-reliance, optimism and hard work, any man and his family could ascend the economic ladder.

Until his later years, he defended the era’s relatively laissez-faire economic policies and championed a Social Darwinist law of competition, “for it is to this law that we owe our wonderful material development, which brings improved conditions in its train.” Carnegie argued that the high tariffs of the late 1800s had little impact on most American manufacturing industries because foreign producers could not have competed successfully in their absence and because American firms competed so vigorously with each other. (Indeed, economic historians agree that America’s comparative advantage in the late 1800s was in goods, like Carnegie’s steel, which relied on non-renewable natural resources.) Carnegie saw free trade as a goal that was not “within the reach of practical politics in the lives of those now living,” because there was no alternative revenue source for the federal government. However, free trade was a distant goal: “Far be it from me to retard the march of the world towards the free and unrestricted interchange of commodities. When the Democracy obtains sway through-out the earth the nations will become friends and brothers, instead of being as now the prey of the monarchical and aristocratic ruling classes, and always warring with each other; standing armies and war ships will be of the past, and men will then begin to destroy custom-houses as relics of a barbarous and monarchical age, not altogether from the low plane of economic gain or loss, but strongly impelled thereto from the higher standpoint of the brotherhood of man.”

While vast income inequalities were “inevitable,” Carnegie did not glorify greed and opulence. Instead, he argued in 1889 in The Gospel of Wealth, that “the man who dies rich dies disgraced,” because the wealthy man should “consider all surplus revenues which come to him simply as trust funds, which he is called upon to administer.” Excess wealth should be distributed by the man who created it, because of his superior wisdom, experience, and ability to administer. With these talents, he could do more to elevate the people, than they or the state could ever do. Carnegie emphasized that wealth should not be given to “charity,” but that it go to libraries, schools, museums and other projects that helped those who would help themselves. By the time of his death in 1919, he had overseen the distribution of nearly $350 million. This included the cost of constructing 2811 public libraries and donations for almost 8000 church organs, as well as funds to endow the Carnegie Foundation for the Advancement of Teaching, the Carnegie Institute of Technology, the Hero Funds, the Scottish Universities Trust, pensions for steelworkers, the Carnegie Institution in Washington, DC, and the Carnegie Endowment for International Peace. Carnegie’s Peace Palace at The Hague was dedicated in 1913. A year later World War I began, shattering Carnegie’s hopes and precipitating a slide into declining health and death.

References

Carnegie, Andrew. Triumphant Democracy; or, Fifty Years’ March of the Republic. New York: Scribners, 1886.

Carnegie, Andrew. Autobiography of Andrew Carnegie. Boston: Houghton Mifflin, 1920.

Hughes, Jonathan R. T. The Vital Few: American Economic Progress and Its Protagonists. Boston: Houghton and Mifflin, 1965.

Livesay, Harold. Andrew Carnegie and the Rise of Big Business. Boston: Houghton Mifflin, 1975.

Nasaw, David. Andrew Carnegie. New York: Penguin, 2006.

Wright, Gavin. “The Origins of American Industrial Success, 1879-1940.” American Economic Review 80, no. 4 (1990): 651-668.

Citation: Whaples, Robert. “Andrew Carnegie”. EH.Net Encyclopedia, edited by Robert Whaples. January 11, 2005. URL http://eh.net/encyclopedia/carnegie-andrew/

Oscar Douglas Skelton and Canada’s Economic History

Terry Crowley, University of Guelph

Oscar Douglas Skelton (1878-1941) provided the essential bridge between the founding of Canadian economic history by Adam Shortt in the late nineteenth century and its larger development by Harold Innis from the 1920s to the 1950s. More than Shortt, Skelton was the first to identify the parameters of the economic history of the northern dominion. Long before Canada became officially independent of Britain in 1931, Skelton’s writings hypothesized a nation that he saw coming into existence on the basis of colonial economic activities. These ventures were forged in both private and public spheres in defiance of a vast geography that otherwise would have prohibited the formation of a national identity.

As one of the earliest professionally trained political economists, Oscar Skelton turned to history after acquiring a distaste for intellectual attempts to make the world conform to theoretical paper sketches purporting to elucidate immutable laws. The diachronic methods of historical study appeared to him to provide knowledge with more satisfying richness and complexity than the synchronic approaches of the more theoretically minded. As a scholar who was also a public intellectual intimately involved in the political and economic currents of his time and place, Skelton taught at Queen’s University in Kingston (Ontario), published extensively in a variety of media, and eventually became Undersecretary of State for foreign affairs and the closest advisor of two Canadian prime ministers, William Lyon Mackenzie King and Richard Bedford Bennett.

Born into Anglo-Irish stock in Shelbourne, Ontario, Oscar Skelton received his earliest education locally and in neighboring Orangeville, north of Toronto. At Queen’s University he studied Classics and went on to graduate work in the subject at the University of Chicago, but finding the program unsatisfactory, he returned to Kingston to take more courses in political economy from Adam Shortt. Having already developed a fine writing style that communicated with verve and color, Skelton returned to Chicago in 1905 where he prepared a thesis in its department of political economy on Marxism. Department chair James Laurence Laughlin, who had founded the Journal of Political Economy, served as his advisor, but by the time he graduated in 1908 he regretted that he had not studied with Robert Hoxie, a labor economist. Work in political economy at Chicago proved formative to the young man by introducing him to such great thinkers as Thorstein Veblen. With this intellectual formation Oscar Skelton was soon able to surpass Adam Shortt whose academic preparation had been in philosophy and science before he had turned to economic history. Skelton’s doctoral dissertation about socialism (largely Marxism) led to his disenchantment with formalized theory and his turn to historical study. By the time the thesis was published as book in 1911 – acclaimed by Vladimir Lenin and British guild scholar G.D.H. Cole – Oscar Skelton not only accurately predicted the command economy that would ensue under communism but he also arrived at a position that sided fully with the historicists within the emerging discipline of economics rather than with the marginalists.

Employed at Queen’s University, Skelton held the Sir John A. Macdonald Chair, became chair of the Department of Political and Economic Science as the two disciplines progressively disentangled themselves, and then Dean of Arts before he was appointed to the federal government in 1924. During this time he published seven books of history and economic history, as well as innumerable scholarly and popular articles. More than any of his other works, Skelton’s volumes on the economic history of Canada from Confederation in 1867 to 1912, his studies of banking, and his volume on railroad builders gave shape to an emerging subject. In these writings Skelton reinvented a colony of the United Kingdom as the North American nation that he wanted to see come about.

As a liberal nationalist Skelton was concerned with collective identities as they expressed themselves in both political and economic spheres. His economic history of Canada since Confederation was the first to examine consistently how markets were organized and economic space was shaped by public and private sectors. Concerns about structures, evolution, and state policy were interwoven with a keen eye to external developments over which the country had little control. Canadians were viewed as restless people striving for material betterment within a context that was only partially of their own making. As a trading nation and as a colony, Canada was dependent on the vagaries of strangers; the talents of Canadians rested in being able to make the best of changing conditions in the United Kingdom or the United States. The country’s nineteenth-century regional economies based on fishing, farming, lumbering, mining, and manufacturing had moved increasingly into national and international markets through the force of technological change and commercial policies. Reciprocity between the British North American colonies and the United States from 1854 to 1866 had extended the possibility of increased trade, but after it failed, both countries pursued protectionist policies despite Canadian efforts to break the juggernaut. This trend reached its apogee in 1879 with John A. Macdonald’s national policy tariffs, but in Skelton’s view protection had been waged at a price to consumers and the country as a whole. Economic stagnation in the 1880s and the return of depression between 1893 and 1896 increased emigration to the United States.

Canada’s fate was only partially determined by her geographical proximity to the burgeoning republic; Canadian ingenuity and ties to the United Kingdom were equally important. Willingness to grasp opportunities provided by technology allowed the creation of a country that might otherwise have been little more than remotely scattered regions pursuing desperate policies. “The railway found Canada scarcely a geographical expression and made it a nation,” Skelton exclaimed. This bold stroke bordered on technological determinism and flew in the face of Canadian imperialists who saw the country as only British North America. It also countered Toronto historian Goldwin Smith’s view that rampant anti-Americanism alone seemed to hold the country together. While carefully delineating how Canadian interest in railroads developed, and not ignoring its seedier side as a corrupting influence in political life, Skelton pursued his argument, reserving the most fulsome praise for the Canadian Pacific Railway completed to British Columbia in 1886. Prior to its construction, Skelton thought, Canada “covered half a continent, but in reality it stopped at the Great Lakes. There was little national spirit, little diversity of commercial enterprise. Hundreds of thousands of our best born had been drawn by the greater attraction of the United States’ cities and farms, until one-fourth of the whole people were living in the republic.”

There was also a larger conclusion to be drawn. If Canadians had managed to construct the largest railroad in the world before the Russian Trans-Siberian, and since the ratio of people to railroad kilometers was also the highest, the C.P.R. carried even greater significance. “Here, again,” Skelton thought, “if railways were Canada’s politics it was not only because Canadians were materialists, but because they were idealists. They were determined in spite of geography and diplomacy, in spite of Rocky Mountains and Lake Superior wilderness, Laurentian plateaus and Maine intrusions, that Canada would be one and independent.” Skelton’s principal contentions about the role of geography and historical links to Europe in Canadian history were not far from the mind of a young Harold Innis when, two years after Skelton’s The Railway Builders appeared in 1916, he embarked on a doctoral program in political economy at the University of Chicago to write a dissertation on the Canadian Pacific Railway.

Skelton also struck another theme in Canada’s economic history that proved enduring. What, Skelton asked, was the country’s fate: “to link our commercial destinies with Great Britain or the United States – or neither?” Maintaining that Canadians sought advantage where they could, his question proposed the context within which he saw national history evolving. Oscar Skelton portrayed Canada as having existed precariously not just within a colonial relationship but between two poles on either side of the Atlantic. Sometimes, as his statistical studies of World War One finances showed, Canada moved closer to the United States, other times it stood more aloof despite the advantages he believed that freer trade would bring, especially in stemming emigration to south of the border.

If Adam Shortt was the father of economic history in Canada as Harold Innis said, then Oscar Skelton was the vital spur who combined Shortt’s rigorous methodology with far reaching interpretations challenging the imagination. Shortt had been so entranced by the new methodology of documentary evidence that his output was highly fragmented and displayed little coherence. Skelton, in contrast, had the ideas, flare for writing, and dedication and discipline, although his political histories were unabashedly whiggish in their present-mindedness and Liberal bias. Oscar Skelton made his most original contributions in economic history where his connection of state policy and market logic in economic development was suggestive to Innis and his work influenced other economic historians such as William A. Macintosh. Innis’ studies in the economic history of Canada, and later of communications, also assumed the same determinist bent that had appeared in Skelton’s work. Oscar Skelton proved to be a formative influence in the development of economic history in Canada.

References

Berger, Carl. The Writing of Canadian History: Aspects of English-Canadian Historical Writing since 1900. Toronto: University of Toronto Press, 1986.

Crowley, Terry. Marriage of Minds: Isabel and Oscar Skelton Reinventing Canada. Toronto: University of Toronto Press, 2003.

Ferguson, Barry. Remaking Liberalism: The Intellectual Legacy of Adam Shortt, O.D. Skelton, W.C. Clark and W.A. Mackintosh, 1890-1925. Montreal: McGill-Queen’s University Press, 1993.

Innis, Harold. Staples, Markets, and Cultural Change: Selected Essays. Daniel Drache, editor. Montreal: McGill-Queen’s University Press, 1995.

Skelton, Oscar. Socialism: A Critical Analysis. Boston and New York: Houghton Mifflin, 1919; London: Constable & Co., 1911.

Skelton, Oscar. General Economic History of the Dominion, 1867-1912. Toronto: Publishers’ Association of Canada, 1913. Prepared for Canada and Its Provinces, vol. 9: 95-276.

Skelton, Oscar. “Early Banking in Upper and Lower Canada”; “The Merchant’s Bank of Prince Edward Island”; “The Bank of British Columbia.” In A History of the Canadian Bank of Commerce, edited by Victor Ross, vol. 1. Toronto, 1920.

[Skelton, Oscar]. “Historical Sketch.” In Fifty Years of Banking Service, 1871-1921: The Dominion Bank. Toronto: Dominion Bank, 1922.

Watson, A. John. Marginal Man: The Dark Vision of Harold Innis. Toronto: University of Toronto Press, 2006.

Citation: Crowley, Terry. “Oscar Douglas Skelton and Canada’s Economic History”. EH.Net Encyclopedia, edited by Robert Whaples. January 16, 2007. URL
http://eh.net/encyclopedia/oscar-douglas-skelton-and-canadas-economic-history/

The Economic History of Australia from 1788: An Introduction

Bernard Attard, University of Leicester

Introduction

The economic benefits of establishing a British colony in Australia in 1788 were not immediately obvious. The Government’s motives have been debated but the settlement’s early character and prospects were dominated by its original function as a jail. Colonization nevertheless began a radical change in the pattern of human activity and resource use in that part of the world, and by the 1890s a highly successful settler economy had been established on the basis of a favorable climate in large parts of the southeast (including Tasmania ) and the southwest corner; the suitability of land for European pastoralism and agriculture; an abundance of mineral wealth; and the ease with which these resources were appropriated from the indigenous population. This article will focus on the creation of a colonial economy from 1788 and its structural change during the twentieth century. To simplify, it will divide Australian economic history into four periods, two of which overlap. These are defined by the foundation of the ‘bridgehead economy’ before 1820; the growth of a colonial economy between 1820 and 1930; the rise of manufacturing and the protectionist state between 1891 and 1973; and the experience of liberalization and structural change since 1973. The article will conclude by suggesting briefly some of the similarities between Australia and other comparable settler economies, as well as the ways in which it has differed from them.

The Bridgehead Economy, 1788-1820

The description ‘bridgehead economy’ was used by one of Australia’s foremost economic historians, N. G. Butlin to refer to the earliest decades of British occupation when the colony was essentially a penal institution. The main settlements were at Port Jackson (modern Sydney, 1788) in New South Wales and Hobart (1804) in what was then Van Diemen’s Land (modern Tasmania). The colony barely survived its first years and was largely neglected for much of the following quarter-century while the British government was preoccupied by the war with France. An important beginning was nevertheless made in the creation of a private economy to support the penal regime. Above all, agriculture was established on the basis of land grants to senior officials and emancipated convicts, and limited freedoms were allowed to convicts to supply a range of goods and services. Although economic life depended heavily on the government Commissariat as a supplier of goods, money and foreign exchange, individual rights in property and labor were recognized, and private markets for both started to function. In 1808, the recall of the New South Wales Corps, whose officers had benefited most from access to land and imported goods (thus hopelessly entangling public and private interests), coupled with the appointment of a new governor, Lachlan Macquarie, in the following year, brought about a greater separation of the private economy from the activities and interests of the colonial government. With a significant increase in the numbers transported after 1810, New South Wales’ future became more secure. As laborers, craftsmen, clerks and tradesmen, many convicts possessed the skills required in the new settlements. As their terms expired, they also added permanently to the free population. Over time, this would inevitably change the colony’s character.

Natural Resources and the Colonial Economy, 1820-1930

Pastoral and Rural Expansion

For Butlin, the developments around 1810 were a turning point in the creation of a ‘colonial’ economy. Many historians have preferred to view those during the 1820s as more significant. From that decade, economic growth was based increasingly upon the production of fine wool and other rural commodities for markets in Britain and the industrializing economies of northwestern Europe. This growth was interrupted by two major depressions during the 1840s and 1890s and stimulated in complex ways by the rich gold discoveries in Victoria in 1851, but the underlying dynamics were essentially unchanged. At different times, the extraction of natural resources, whether maritime before the 1840s or later gold and other minerals, was also important. Agriculture, local manufacturing and construction industries expanded to meet the immediate needs of growing populations, which concentrated increasingly in the main urban centers. The colonial economy’s structure, growth of population and significance of urbanization are illustrated in tables 1 and 2. The opportunities for large profits in pastoralism and mining attracted considerable amounts of British capital, while expansion generally was supported by enormous government outlays for transport, communication and urban infrastructures, which also depended heavily on British finance. As the economy expanded, large-scale immigration became necessary to satisfy the growing demand for workers, especially after the end of convict transportation to the eastern mainland in 1840. The costs of immigration were subsidized by colonial governments, with settlers coming predominantly from the United Kingdom and bringing skills that contributed enormously to the economy’s growth. All this provided the foundation for the establishment of free colonial societies. In turn, the institutions associated with these — including the rule of law, secure property rights, and stable and democratic political systems — created conditions that, on balance, fostered growth. In addition to New South Wales, four other British colonies were established on the mainland: Western Australia (1829), South Australia (1836), Victoria (1851) and Queensland (1859). Van Diemen’s Land (Tasmania after 1856) became a separate colony in 1825. From the 1850s, these colonies acquired responsible government. In 1901, they federated, creating the Commonwealth of Australia.

Table 1
The Colonial Economy: Percentage Shares of GDP, 1891 Prices, 1861-1911

Pastoral Other rural Mining Manuf. Building Services Rent
1861 9.3 13.0 17.5 14.2 8.4 28.8 8.6
1891 16.1 12.4 6.7 16.6 8.5 29.2 10.3
1911 14.8 16.7 9.0 17.1 5.3 28.7 8.3

Source: Haig (2001), Table A1. Totals do not sum to 100 because of rounding.

Table 2
Colonial Populations (thousands), 1851-1911

Australia Colonies Cities
NSW Victoria Sydney Melbourne
1851 257 100 46 54 29
1861 669 198 328 96 125
1891 1,704 608 598 400 473
1911 2,313 858 656 648 593

Source: McCarty (1974), p. 21; Vamplew (1987), POP 26-34.

The process of colonial growth began with two related developments. First, in 1820, Macquarie responded to land pressure in the districts immediately surrounding Sydney by relaxing restrictions on settlement. Soon the outward movement of herdsmen seeking new pastures became uncontrollable. From the 1820s, the British authorities also encouraged private enterprise by the wholesale assignment of convicts to private employers and easy access to land. In 1831, the principles of systematic colonization popularized by Edward Gibbon Wakefield (1796-1862) were put into practice in New South Wales with the substitution of land sales for grants in order to finance immigration. This, however, did not affect the continued outward movement of pastoralists who simply occupied land where could find it beyond the official limits of settlement. By 1840, they had claimed a vast swathe of territory two hundred miles in depth running from Moreton Bay in the north (the site of modern Brisbane) through the Port Phillip District (the future colony of Victoria, whose capital Melbourne was marked out in 1837) to Adelaide in South Australia. The absence of any legal title meant that these intruders became known as ‘squatters’ and the terms of their tenure were not finally settled until 1846 after a prolonged political struggle with the Governor of New South Wales, Sir George Gipps.

The impact of the original penal settlements on the indigenous population had been enormous. The consequences of squatting after 1820 were equally devastating as the land and natural resources upon which indigenous hunter-gathering activities and environmental management depended were appropriated on a massive scale. Aboriginal populations collapsed in the face of disease, violence and forced removal until they survived only on the margins of the new pastoral economy, on government reserves, or in the arid parts of the continent least touched by white settlement. The process would be repeated again in northern Australia during the second half of the century.

For the colonists this could happen because Australia was considered terra nullius, vacant land freely available for occupation and exploitation. The encouragement of private enterprise, the reception of Wakefieldian ideas, and the wholesale spread of white settlement were all part of a profound transformation in official and private perceptions of Australia’s prospects and economic value as a British colony. Millennia of fire-stick management to assist hunter-gathering had created inland grasslands in the southeast that were ideally suited to the production of fine wool. Both the physical environment and the official incentives just described raised expectations of considerable profits to be made in pastoral enterprise and attracted a growing stream of British capital in the form of organizations like the Australian Agricultural Company (1824); new corporate settlements in Western Australia (1829) and South Australia (1836); and, from the 1830s, British banks and mortgage companies formed to operate in the colonies. By the 1830s, wool had overtaken whale oil as the colony’s most important export, and by 1850 New South Wales had displaced Germany as the main overseas supplier to British industry (see table 3). Allowing for the colonial economy’s growing complexity, the cycle of growth based upon land settlement, exports and British capital would be repeated twice. The first pastoral boom ended in a depression which was at its worst during 1842-43. Although output continued to grow during the 1840s, the best land had been occupied in the absence of substantial investment in fencing and water supplies. Without further geographical expansion, opportunities for high profits were reduced and the flow of British capital dried up, contributing to a wider downturn caused by drought and mercantile failure.

Table 3
Imports of Wool into Britain (thousands of bales), 1830-50

German Australian
1830 74.5 8.0
1840 63.3 41.0
1850 30.5 137.2

Source: Sinclair (1976), p. 46

When pastoral growth revived during the 1860s, borrowed funds were used to fence properties and secure access to water. This in turn allowed a further extension of pastoral production into the more environmentally fragile semi-arid interior districts of New South Wales, particularly during the 1880s. As the mobs of sheep moved further inland, colonial governments increased the scale of their railway construction programs, some competing to capture the freight to ports. Technical innovation and government sponsorship of land settlement brought greater diversity to the rural economy (see table 4). Exports of South Australian wheat started in the 1870s. The development of drought resistant grain varieties from the turn of the century led to an enormous expansion of sown acreage in both the southeast and southwest. From the 1880s, sugar production increased in Queensland, although mainly for the domestic market. From the 1890s, refrigeration made it possible to export meat, dairy products and fruit.

Table 4
Australian Exports (percentages of total value of exports), 1881-1928/29

Wool Minerals Wheat,flour Butter Meat Fruit
1881-90 54.1 27.2 5.3 0.1 1.2 0.2
1891-1900 43.5 33.1 2.9 2.4 4.1 0.3
1901-13 34.3 35.4 9.7 4.1 5.1 0.5
1920/21-1928/29 42.9 8.8 20.5 5.6 4.6 2.2

Source: Sinclair (1976), p. 166

Gold and Its Consequences

Alongside rural growth and diversification, the remarkable gold discoveries in central Victoria in 1851 brought increased complexity to the process of economic development. The news sparked an immediate surge of gold seekers into the colony, which was soon reinforced by a flood of overseas migrants. Until the 1870s, gold displaced wool as Australia’s most valuable export. Rural industries either expanded output (wheat in South Australia) or, in the case of pastoralists, switched production to meat and tallow, to supply a much larger domestic market. Minerals had been extracted since earliest settlement and, while yields on the Victorian gold fields soon declined, rich mineral deposits continued to be found. During the 1880s alone these included silver, lead and zinc at Broken Hill in New South Wales; copper at Mount Lyell in Tasmania; and gold at Charters Towers and Mount Morgan in Queensland. From 1893, what eventually became the richest goldfields in Australia were discovered at Coolgardie in Western Australia. The mining industry’s overall contribution to output and exports is illustrated in tables 1 and 4.

In Victoria, the deposits of easily extracted alluvial gold were soon exhausted and mining was taken over by companies that could command the financial and organizational resources needed to work the deep lodes. But the enormous permanent addition to the colonial population caused by the gold rush had profound effects throughout eastern Australia, dramatically accelerating the growth of the local market and workforce, and deeply disturbing the social balance that had emerged during the decade before. Between 1851 and 1861, the Australian population more than doubled. In Victoria it increased sevenfold; Melbourne outgrew Sydney, Chicago and San Francisco (see table 2). Significantly enlarged populations required social infrastructure, political representation, employment and land; and the new colonial legislatures were compelled to respond. The way this was played out varied between colonies but the common outcomes were the introduction of manhood suffrage, access to land through ‘free selection’ of small holdings, and, in the Victorian case, the introduction of a protectionist tariff in 1865. The particular age structure of the migrants of the 1850s also had long-term effects on the building cycle, notably in Victoria. The demand for housing accelerated during the 1880s, as the children of the gold generation matured and established their own households. With pastoral expansion and public investment also nearing their peaks, the colony experienced a speculative boom which added to the imbalances already being caused by falling export prices and rising overseas debt. The boom ended with the wholesale collapse of building companies, mortgage banks and other financial institutions during 1891-92 and the stoppage of much of the banking system during 1893.

The depression of the 1890s was worst in Victoria. Its impact on employment was softened by the Western Australian gold discoveries, which drew population away, but the colonial economy had grown to such an extent since the 1850s that the stimulus provided by the earlier gold finds could not be repeated. Severe drought in eastern Australia from the mid-1890s until 1903 caused the pastoral industry to contract. Yet, as we have seen, technological innovation also created opportunities for other rural producers, who were now heavily supported by government with little direct involvement by foreign investors. The final phase of rural expansion, with its associated public investment in rural (and increasingly urban) infrastructure continued until the end of the 1920s. Yields declined, however, as farmers moved onto the most marginal land. The terms of trade also deteriorated with the oversupply of several commodities in world markets after the First World War. As a result, the burden of servicing foreign debt rose once again. Australia’s position as a capital importer and exporter of natural resources meant that the Great Depression arrived early. From late 1929, the closure of overseas capital markets and collapse of export prices forced the Federal Government to take drastic measures to protect the balance of payments. The falls in investment and income transmitted the contraction to the rest of the economy. By 1932, average monthly unemployment amongst trade union members was over 22 percent. Although natural resource industries continued to have enduring importance as earners of foreign exchange, the Depression finally ended the long period in which land settlement and technical innovation had together provided a secure foundation for economic growth.

Manufacturing and the Protected Economy, 1891-1973

The ‘Australian Settlement’

There is a considerable chronological overlap between the previous section, which surveyed the growth of a colonial economy during the nineteenth century based on the exploitation of natural resources, and this one because it is a convenient way of approaching the two most important developments in Australian economic history between Federation and the 1970s: the enormous increase in government regulation after 1901 and, closely linked to this, the expansion of domestic manufacturing, which from the Second World War became the most dynamic part of the Australian economy.

The creation of the Commonwealth of Australia on 1 January 1901 broadened the opportunities for public intervention in private markets. The new Federal Government was given clearly-defined but limited powers over obviously ‘national’ matters like customs duties. The rest, including many affecting economic development and social welfare, remained with the states. The most immediate economic consequence was the abolition of inter-colonial tariffs and the establishment of a single Australian market. But the Commonwealth also soon set about transferring to the national level several institutions that different the colonies had experimented with during the 1890s. These included arrangements for the compulsory arbitration of industrial disputes by government tribunals, which also had the power to fix wages, and a discriminatory ‘white Australia’ immigration policy designed to exclude non-Europeans from the labor market. Both were partly responses to organized labor’s electoral success during the 1890s. Urban business and professional interests had always been represented in colonial legislatures; during the 1910s, rural producers also formed their own political parties. Subsequently, state and federal governments were typically formed by the either Australian Labor Party or coalitions of urban conservatives and the Country Party. The constituencies they each represented were thus able to influence the regulatory structure to protect themselves against the full impact of market outcomes, whether in the form of import competition, volatile commodity prices or uncertain employment conditions. The institutional arrangements they created have been described as the ‘Australian settlement’ because they balanced competing producer interests and arguably provided a stable framework for economic development until the 1970s, despite the inevitable costs.

The Growth of Manufacturing

An important part of the ‘Australian settlement’ was the imposition of a uniform federal tariff and its eventual elaboration into a system of ‘protection all round’. The original intended beneficiaries were manufacturers and their employees; indeed, when the first protectionist tariff was introduced in 1907, its operation was linked to the requirement that employers pay their workers ‘fair and reasonable wages’. Manufacturing’s actual contribution to economic growth before Federation has been controversial. The population influx of the 1850s widened opportunities for import-substitution but the best evidence suggests that manufacturing grew slowly as the industrial workforce increased (see table 1). Production was small-scale and confined largely to the processing of rural products and raw materials; assembly and repair-work; or the manufacture of goods for immediate consumption (e.g. soap and candle-making, brewing and distilling). Clothing and textile output was limited to a few lines. For all manufacturing, growth was restrained by the market’s small size and the limited opportunities for technical change it afforded.

After Federation, production was stimulated by several factors: rural expansion, the increasing use of agricultural machinery and refrigeration equipment, and the growing propensity of farm incomes to be spent locally. The removal of inter-colonial tariffs may also have helped. The statistical evidence indicates that between 1901 and the outbreak of the First World War manufacturing grew faster than the economy as a whole, while output per worker increased. But manufacturers also aspired mainly to supply the domestic market and expended increasing energy on retaining privileged access. Tariffs rose considerably between the two world wars. Some sectors became more capital intensive, particularly with the establishment of a local steel industry, the beginnings of automobile manufacture, and the greater use of electricity. But, except during the first half of the 1920s, there was little increase in labor productivity and the inter-war expansion of textile manufacturing reflected the heavy bias towards import substitution. Not until the Second World War and after did manufacturing growth accelerate and extend to those sectors most characteristic of an advance industrial economy (table 5). Amongst these were automobiles, chemicals, electrical and electronic equipment, and iron-and-steel. Growth was sustained during 1950s by similar factors to those operating in other countries during the ‘long boom’, including a growing stream of American direct investment, access to new and better technology, and stable conditions of full employment.

Table 5
Manufacturing and the Australian Economy, 1913-1949

1938-39 prices
Manufacturing share of GDP % Manufacturing annual rate of growth % GDP, annual rate of growth %
1913/14 21.9
1928/29 23.6 2.6 2.1
1948/49 29.8 3.4 2.2

Calculated from Haig (2001), Table A2. Rates of change are average annual changes since the previous year in the first column.

Manufacturing peaked in the mid-1960s at about 28 percent of national output (measured in 1968-69 prices) but natural resource industries remained the most important suppliers of exports. Since the 1920s, over-supply in world markets and the need to compensate farmers for manufacturing protection, had meant that virtually all rural industries, with the exception of wool, had been drawn into a complicated system of subsidies, price controls and market interventions at both federal and state levels. The post-war boom in the world economy increased demand for commodities, benefiting rural producers but also creating new opportunities for Australian miners. Most important of all, the first surge of breakneck growth in East Asia opened a vast new market for iron ore, coal and other mining products. Britain’s significance as a trading partner had declined markedly since the 1950s. By the end of the 1960s, Japan overtook it as Australia’s largest customer, while the United States was now the main provider of imports.

The mining bonanza contributed to the boom conditions experienced generally after 1950. The Federal Government played its part by using the full range of macroeconomic policies that were also increasingly familiar in similar western countries to secure stability and full employment. It encouraged high immigration, relaxing the entry criteria to allow in large numbers of southern Europeans, who added directly to the workforce, but also brought knowledge and experience. With state governments, the Commonwealth increased expenditure on education significantly, effectively entering the field for the first time after 1945. Access to secondary education was widened with the abandonment of fees in government schools and federal finance secured an enormous expansion of university places, especially after 1960. Some weaknesses remained. Enrolment rates after primary school were below those in many industrial countries and funding for technical education was poor. Despite this, the Australian population’s rising levels of education and skill continued to be important additional sources of growth. Finally, although government advisers expressed misgivings, industry policy remained determinedly interventionist. While state governments competed to attract manufacturing investment with tax and other incentives, by the 1960s protection had reached its highest level, with Australia playing virtually no part in the General Agreement on Tariffs and Trade (GATT), despite being an original signatory. The effects of rising tariffs since 1900 were evident in the considerable decline in Australia’s openness to trade (Table 6). Yet, as the post-war boom approached its end, the country still relied upon commodity exports and foreign investment to purchase the manufactures it was unable to produce itself. The impossibility of sustaining growth in this way was already becoming clear, even though the full implications would only be felt during the decades to come.

Table 6
Trade (Exports Plus Imports)
as a Share of GDP, Current Prices, %

1900/1 44.9
1928/29 36.9
1938/38 32.7
1964/65 33.3
1972/73 29.5

Calculated from Vamplew (1987), ANA 119-129.

Liberalization and Structural Change, 1973-2005

From the beginning of the 1970s, instability in the world economy and weakness at home ended Australia’s experience of the post-war boom. During the following decades, manufacturing’s share in output (table 7) and employment fell, while the long-term relative decline of commodity prices meant that natural resources could no longer be relied on to cover the cost of imports, let alone the long-standing deficits in payments for services, migrant remittances and interest on foreign debt. Until the early 1990s, Australia also suffered from persistent inflation and rising unemployment (which remained permanently higher, see chart 1). As a consequence, per capita incomes fluctuated during the 1970s, and the economy contracted in absolute terms during 1982-83 and 1990-91.

Even before the 1970s, new sources of growth and rising living standards had been needed, but the opportunities for economic change were restricted by the elaborate regulatory structure that had evolved since Federation. During that decade itself, policy and outlook were essentially defensive and backward looking, despite calls for reform and some willingness to alter the tariff. Governments sought to protect employment in established industries, while dependence on mineral exports actually increased as a result of the commodity booms at the decade’s beginning and end. By the 1980s, however, it was clear that the country’s existing institutions were failing and fundamental reform was required.

Table 7
The Australian Economy, 1974-2004

A. Percentage shares of value-added, constant prices

1974 1984 1994 2002
Agriculture 4.4 4.3 3.0 2.7
Manufacturing 18.1 15.2 13.3 11.8
Other industry, inc. mining 14.2 14.0 14.6 14.4
Services 63.4 66.4 69.1 71.1

B. Per capita GDP, annual average rate of growth %, constant prices

1973-84 1.2
1984-94 1.7
1994-2004 2.5

Calculated from World Bank, World Development Indicators (Sept. 2005).

Figure 1
Unemployment, 1971-2005, percent

Unemployment, 1971-2005, percent

Source: Reserve Bank of Australia (1988); Reserve Bank of Australia, G07Hist.xls. Survey data at August. The method of data collection changed in 1978.

The catalyst was the resumption of the relative fall of commodity prices since the Second World War which meant that the cost of purchasing manufactured goods inexorably rose for primary producers. The decline had been temporarily reversed by the oil shocks of the 1970s but, from the 1980/81 financial year until the decade’s end, the value of Australia’s merchandise imports exceeded that of merchandise exports in every year but two. The overall deficit on current account measured as a proportion of GDP also moved became permanently higher, averaging around 4.7 percent. During the 1930s, deflation had been followed by the further closing of the Australian economy. There was no longer much scope for this. Manufacturing had stagnated since the 1960s, suffering especially from the inflation of wage and other costs during the 1970s. It was particularly badly affected by the recession of 1982-83, when unemployment rose to almost ten percent, its highest level since the Great Depression. In 1983, a new federal Labor Government led by Bob Hawke sought to engineer a recovery through an ‘Accord’ with the trade union movement which aimed at creating employment by holding down real wages. But under Hawke and his Treasurer, Paul Keating — who warned colorfully that otherwise the country risked becoming a ‘banana republic’ — Labor also started to introduce broader reforms to increase the efficiency of Australian firms by improving their access to foreign finance and exposing them to greater competition. Costs would fall and exports of more profitable manufactures increase, reducing the economy’s dependence on commodities. During the 1980s and 1990s, the reforms deepened and widened, extending to state governments and continuing with the election of a conservative Liberal-National Party government under John Howard in 1996, as each act of deregulation invited further measures to consolidate them and increase their effectiveness. Key reforms included the floating of the Australian dollar and the deregulation of the financial system; the progressive removal of protection of most manufacturing and agriculture; the dismantling of the centralized system of wage-fixing; taxation reform; and the promotion of greater competition and better resource use through privatization and the restructuring of publicly-owned corporations, the elimination of government monopolies, and the deregulation of sectors like transport and telecommunications. In contrast with the 1930s, the prospects of further domestic reform were improved by an increasingly favorable international climate. Australia contributed by joining other nations in the Cairns Group to negotiate reductions of agricultural protection during the Uruguay round of GATT negotiations and by promoting regional liberalization through the Asia Pacific Economic Cooperation (APEC) forum.

Table 8
Exports and Openness, 1983-2004

Shares of total exports, % Shares of GDP: exports + imports, %
Goods Services
Rural Resource Manuf. Other
1983 30 34 9 3 24 26
1989 23 37 11 5 24 27
1999 20 34 17 4 24 37
2004 18 33 19 6 23 39

Calculated from: Reserve Bank of Australia, G10Hist.xls and H03Hist.xls; World Bank, World Development Indicators (Sept. 2005). Chain volume measures, except shares of GDP, 1983, which are at current prices.

The extent to which institutional reform had successfully brought about long-term structural change was still not clear at the end of the century. Recovery from the 1982-83 recession was based upon a strong revival of employment. By contrast, the uninterrupted growth experienced since 1992 arose from increases in the combined productivity of workers and capital. If this persisted, it was a historic change in the sources of growth from reliance on the accumulation of capital and the increase of the workforce to improvements in the efficiency of both. From the 1990s, the Australian economy also became more open (table 8). Manufactured goods increased their share of exports, while rural products continued to decline. Yet, although growth was more broadly-based, rapid and sustained (table 7), the country continued to experience large trade and current account deficits, which were augmented by the considerable increase of foreign debt after financial deregulation during the 1980s. Unemployment also failed to return to its pre-1974 level of around 2 percent, although much of the permanent rise occurred during the mid to late 1970s. In 2005, it remained 5 percent (Figure 1). Institutional reform clearly contributed to these changes in economic structure and performance but they were also influenced by other factors, including falling transport costs, the communications and information revolutions, the greater openness of the international economy, and the remarkable burst of economic growth during the century’s final decades in southeast and east Asia, above all China. Reform was also complemented by policies to provide the skills needed in a technologically-sophisticated, increasingly service-oriented economy. Retention rates in the last years of secondary education doubled during the 1980s, followed by a sharp increase of enrolments in technical colleges and universities. By 2002, total expenditure on education as a proportion of national income had caught up with the average of member countries of the OECD (Table 9). Shortages were nevertheless beginning to be experienced in the engineering and other skilled trades, raising questions about some priorities and the diminishing relative financial contribution of government to tertiary education.

Table 9
Tertiary Enrolments and Education Expenditure, 2002

Tertiary enrolments, gross percent Education expenditure as a proportion of GDP, percent
Australia 63.22 6.0
OECD 61.68 5.8
United States 70.67 7.2

Source: World Bank, World Development Indicators (Sept. 2005); OECD (2005). Gross enrolments are total enrolments, regardless of age, as a proportion of the population in the relevant official age group. OECD enrolments are for fifteen high-income members only.

Summing Up: The Australian Economy in a Wider Context

Virtually since the beginning of European occupation, the Australian economy had provided the original British colonizers, generations of migrants, and the descendants of both with a remarkably high standard of living. Towards the end of the nineteenth century, this was by all measures the highest in the world (see table 10). After 1900, national income per member of the population slipped behind that of several countries, but continued to compare favorably with most. In 2004, Australia was ranked behind only Norway and Sweden in the United Nation’s Human Development Index. Economic historians have differed over the sources of growth that made this possible. Butlin emphasized the significance of local factors like the unusually high rate of urbanization and the expansion of domestic manufacturing. In important respects, however, Australia was subject to the same forces as other European settler societies in New Zealand and Latin America, and its development bore striking similarities to theirs. From the 1820s, its economy grew as one frontier of an expanding western capitalism. With its close institutional ties to, and complementarities with, the most dynamic parts of the world economy, it drew capital and migrants from them, supplied them with commodities, and shared the benefits of their growth. Like other settler societies, it sought population growth as an end in itself and, from the turn of the nineteenth century, aspired to the creation of a national manufacturing base. Finally, when openness to the world economy appeared to threaten growth and living standards, governments intervened to regulate and protect with broader social objectives in mind. But there were also striking contrasts with other settler economies, notably those in Latin America like Argentina, with which it has been frequently compared. In particular, Australia responded to successive challenges to growth by finding new opportunities for wealth creation with a minimum of political disturbance, social conflict or economic instability, while sharing a rising national income as widely as possible.

Table 10
Per capita GDP in Australia, United States and Argentina
(1990 international dollars)

Australia United States Argentina
1870 3,641 2,457 1,311
1890 4,433 3,396 2,152
1950 7,493 9,561 4,987
1998 20,390 27,331 9,219

Sources: Australia: GDP, Haig (2001) as converted in Maddison (2003); all other data Maddison (1995) and (2001)

From the mid-twentieth century, Australia’s experience also resembled that of many advanced western countries. This included the post-war willingness to use macroeconomic policy to maintain growth and full employment; and, after the 1970s, the abandonment of much government intervention in private markets while at the same time retaining strong social services and seeking to improve education and training. Australia also experienced a similar relative decline of manufacturing, permanent rise of unemployment, and transition to a more service-based economy typical of high income countries. By the beginning of the new millennium, services accounted for over 70 percent of national income (table 7). Australia remained vulnerable as an exporter of commodities and importer of capital but its endowment of natural resources and the skills of its population were also creating opportunities. The country was again favorably positioned to take advantage of growth in the most dynamic parts of the world economy, particularly China. With the final abandonment of the White Australia policy during the 1970s, it had also started to integrate more closely with its region. This was further evidence of the capacity to change that allowed Australians to face the future with confidence.

References:

Anderson, Kym. “Australia in the International Economy.” In Reshaping Australia’s Economy: Growth with Equity and Sustainability, edited by John Nieuwenhuysen, Peter Lloyd and Margaret Mead, 33-49. Cambridge: Cambridge University Press, 2001.

Blainey, Geoffrey. The Rush that Never Ended: A History of Australian Mining, fourth edition. Melbourne: Melbourne University Press, 1993.

Borland, Jeff. “Unemployment.” In Reshaping Australia’s Economy: Growth and with Equity and Sustainable Development, edited by John Nieuwenhuysen, Peter Lloyd and Margaret Mead, 207-228. Cambridge: Cambridge University Press, 2001.

Butlin, N. G. Australian Domestic Product, Investment and Foreign Borrowing 1861-1938/39. Cambridge: Cambridge University Press, 1962.

Butlin, N.G. Economics and the Dreamtime, A Hypothetical History. Cambridge: Cambridge University Press, 1993.

Butlin, N.G. Forming a Colonial Economy: Australia, 1810-1850. Cambridge: Cambridge University Press, 1994.

Butlin, N.G. Investment in Australian Economic Development, 1861-1900. Cambridge: Cambridge University Press, 1964.

Butlin, N. G., A. Barnard and J. J. Pincus. Government and Capitalism: Public and Private Choice in Twentieth Century Australia. Sydney: George Allen and Unwin, 1982.

Butlin, S. J. Foundations of the Australian Monetary System, 1788-1851. Sydney: Sydney University Press, 1968.

Chapman, Bruce, and Glenn Withers. “Human Capital Accumulation: Education and Immigration.” In Reshaping Australia’s economy: growth with equity and sustainability, edited by John Nieuwenhuysen, Peter Lloyd and Margaret Mead, 242-267. Cambridge: Cambridge University Press, 2001.

Dowrick, Steve. “Productivity Boom: Miracle or Mirage?” In Reshaping Australia’s Economy: Growth with Equity and Sustainability, edited by John Nieuwenhuysen, Peter Lloyd and Margaret Mead, 19-32. Cambridge: Cambridge University Press, 2001.

Economist. “Has he got the ticker? A survey of Australia.” 7 May 2005.

Haig, B. D. “Australian Economic Growth and Structural Change in the 1950s: An International Comparison.” Australian Economic History Review 18, no. 1 (1978): 29-45.

Haig, B.D. “Manufacturing Output and Productivity 1910 to 1948/49.” Australian Economic History Review 15, no. 2 (1975): 136-61.

Haig, B.D. “New Estimates of Australian GDP: 1861-1948/49.” Australian Economic History Review 41, no. 1 (2001): 1-34.

Haig, B. D., and N. G. Cain. “Industrialization and Productivity: Australian Manufacturing in the 1920s and 1950s.” Explorations in Economic History 20, no. 2 (1983): 183-98.

Jackson, R. V. Australian Economic Development in the Nineteenth Century. Canberra: Australian National University Press, 1977.

Jackson, R.V. “The Colonial Economies: An Introduction.” Australian Economic History Review 38, no. 1 (1998): 1-15.

Kelly, Paul. The End of Certainty: The Story of the 1980s. Sydney: Allen and Unwin, 1992.

Macintyre, Stuart. A Concise History of Australia. Cambridge: Cambridge University Press, 1999.

McCarthy, J. W. “Australian Capital Cities in the Nineteenth Century.” In Urbanization in Australia; The Nineteenth Century, edited by J. W. McCarthy and C. B. Schedvin, 9-39. Sydney: Sydney University Press, 1974.

McLean, I.W. “Australian Economic Growth in Historical Perspective.” The Economic Record 80, no. 250 (2004): 330-45.

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

Maddison, Angus. The World Economy: A Millennial Perspective. Paris: OECD, 2001.

Maddison, Angus. The World Economy: Historical Statistics. Paris: OECD, 2003.

Meredith, David, and Barrie Dyster. Australia in the Global Economy: Continuity and Change. Cambridge: Cambridge University Press, 1999.

Nicholas, Stephen, editor. Convict Workers: Reinterpreting Australia’s Past. Cambridge: Cambridge University Press, 1988.

OECD. Education at a Glance 2005 – Tables OECD, 2005 [cited 9 February 2006]. Available from http://www.oecd.org/document/11/0,2340,en_2825_495609_35321099_1_1_1_1,00.html.

Pope, David, and Glenn Withers. “The Role of Human Capital in Australia’s Long-Term Economic Growth.” Paper presented to 24th Conference of Economists, Adelaide, 1995.

Reserve Bank of Australia. “Australian Economic Statistics: 1949-50 to 1986-7: I Tables.” Occasional Paper No. 8A (1988).

Reserve Bank of Australia. Current Account – Balance of Payments – H1 [cited 29 November 2005]. Available from http://www.rba.gov.au/Statistics/Bulletin/H01bhist.xls.

Reserve Bank of Australia. Gross Domestic Product – G10 [cited 29 November 2005]. Available from http://www.rba.gov.au/Statistics/Bulletin/G10hist.xls.

Reserve Bank of Australia. Unemployment – Labour Force – G1 [cited 2 February 2006]. Available from http://www.rba.gov.au/Statistics/Bulletin/G07hist.xls.

Schedvin, C. B. Australia and the Great Depression: A Study of Economic Development and Policy in the 120s and 1930s. Sydney: Sydney University Press, 1970.

Schedvin, C.B. “Midas and the Merino: A Perspective on Australian Economic History.” Economic History Review 32, no. 4 (1979): 542-56.

Sinclair, W. A. The Process of Economic Development in Australia. Melbourne: Longman Cheshire, 1976.

United Nations Development Programme. Human Development Index [cited 29 November 2005]. Available from http://hdr.undp.org/statistics/data/indicators.cfm?x=1&y=1&z=1.

Vamplew, Wray, ed. Australians: Historical Statistics. Edited by Alan D. Gilbert and K. S. Inglis, Australians: A Historical Library. Sydney: Fairfax, Syme and Weldon Associates, 1987.

White, Colin. Mastering Risk: Environment, Markets and Politics in Australian Economic History. Melbourne: Oxford University Press, 1992.

World Bank. World Development Indicators ESDS International, University of Manchester, September 2005 [cited 29 November 2005]. Available from http://www.esds.ac.uk/International/Introduction.asp.

Citation: Attard, Bernard. “The Economic History of Australia from 1788: An Introduction”. EH.Net Encyclopedia, edited by Robert Whaples. March 16, 2008. URL
http://eh.net/encyclopedia/the-economic-history-of-australia-from-1788-an-introduction/

John Maynard Keynes

Author(s):Barnett, Vincent
Reviewer(s):Howson, Susan

Published by EH.Net (June 2013)

Vincent Barnett, John Maynard Keynes. London: Routledge, 2012. x + 301 pp. $28 (paperback), ISBN: 978-0-415-56770-1.

Reviewed for EH.Net by Susan Howson, Department of Economics, University of Toronto.

Why do we need another book on John Maynard Keynes?? The answer in this case is a series of Routledge Historical Biographies, which are intended to provide ?engaging, readable and academically credible biographies written from an explicitly historical perspective.?? The author understandably devotes some space (pp. 3-4) to considering what an historical biography of an economist could involve.? He raises three issues: (1) the balance between the subject’s contribution to economic theory and the rest of his life and work; (2) the relation of the history and the economics; and (3) the qualifications of the author.? On (1) he resolves the problem by writing complementary pairs of chapters for each period of Keynes’s life, the first of each pair focusing on the life, the second the economics writing.? The latter chapters are usually much shorter than the former.? On (2) he claims that it is necessary to consider the question:? ?how far does his [Keynes’s] economic theory stand or fall on whether his historical analyses have proved correct??? As for (3), he points out that he has written biographical studies of the Russian economists N.D. Kondratiev (1998) and E.E. Slutsky (2011).? On the cover of the book he is described as having been ?a Research Fellow on numerous economics and economic history projects at various UK universities? and having published three books, one of which is the Marx volume (2009) in the Routledge Historical Biographies series.

Judging by the source notes, and as the author acknowledges at the outset, this historical biography is heavily dependent on the writings of others about Keynes, both the major biographies by Harrod (1951), Moggridge (1992) and Skidelsky (1983, 1992, 2000) and shorter pieces on specific subjects (for instance, Toye [2000] on population), especially in relation to the life of Keynes.? But he is not afraid to criticize the major biographers, especially Skidelsky.? Discussion of the economics is backed by considerable, though selective, reading of the Collected Writings of Keynes.? Perhaps contrary to intention, the economics is better than the history.

There are mistakes, especially in the life chapters.? Keynes’s teaching at Cambridge before the First World War is described by a quotation (p. 37) from ?an awe-struck student,? A.F.W. Plumptre, who arrived in Cambridge almost twenty years later.? The famous ?Cambridge circus? was not ?a convivial association of sometimes like-minded individuals [including Dennis Robertson] who … interacted with each other profoundly over a significant period of time? (p. 170) but a small group of young economists who met to analyze and criticize the Treatise on Money in the first few months of 1931.? With respect to Keynes?s work for the government?s Economic Advisory Council, Barnett seems to have relied solely on one memorandum reprinted in Volume XIII of the Collected Writings, for he appears to be unaware that Keynes did not just ?participate? in the 1930 Committee of Economists of the Economic Advisory Council (p. 208): he proposed it to the Prime Minister and chaired it himself. He is also unaware that the committee was the occasion of a notorious row between Keynes and Lionel Robbins and that Keynes’s public advocacy of a tariff came in the New Statesman & Nation in March 1931, not in a radio broadcast in November 1932.? Writing about another late 1932 article, the author claims (p. 223) that Keynes ?proposed [a] new international monetary authority the Bank for International Settlements?: the BIS had already been in existence for two years to facilitate reparations payments.? There is also the extraordinary statement that the UN conference held at Bretton Woods, New Hampshire, in 1944 created, alongside the IMF and the World Bank, ?a General Agreement for [sic] Tariffs and Trade.?? GATT was the outcome of a different conference held in Geneva in 1947.?

Returning to the economics, the account of the argument of the General Theory of Employment, Interest and Money is quite good as it sticks to the book and does not get tangled up with different interpretations of Keynes’s message.? He has some perceptive points to make, notably about the influence of Keynes’s early interest in psychology (pp. 232-33 and 273-76).? But the author’s decision, understandable in itself, to treat the General Theory as the culmination of Keynes’s work and only to sketch Keynes’s activities after 1936 (p. 13) essentially ignores Keynes’s contribution to war finance and the creation of the postwar international economic order.? These rate one brief chapter of twelve pages compared to the two extensive chapters on the First World War and The Economic Consequences of the Peace (and the whole of one of Skidelsky’s three volumes).? It also means the book rather peters out ? as well as diminishing Keynes’s place in the history of the twentieth century.?

References:

Barnett, Vincent (1998) Kondratiev and the Dynamics of Economic Development, London: Macmillan.

Barnett, Vincent (2009) Marx, London: Routledge.

Barnett, Vincent (2011) E.E. Slutsky as Economist and Mathematician, London: Routledge.

Harrod, Roy (1951) The Life of John Maynard Keynes, London: Macmillan.

Moggridge, D.E.? (1993) Maynard Keynes: An Economist’s Biography, London: Routledge.

Skidelsky, Robert (1983) John Maynard Keynes: Hopes Betrayed, 1883-1920, London: Macmillan

Skidelsky, Robert (1992) John Maynard Keynes: The Economist as Savior, 1920-37, London: Macmillan.

Skidelsky, Robert (2000) John Maynard Keynes: Fighting for Freedom, 1937-46, London: Macmillan.

Toye, John (2000) Keynes on Population, Oxford: Oxford University Press.

Susan Howson is a professor of economics at the University of Toronto and the author of Lionel Robbins (Cambridge University Press, 2011). She is now working on a biography of James Meade.

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

Subject(s):History of Economic Thought; Methodology
Geographic Area(s):Europe
Time Period(s):20th Century: Pre WWII
20th Century: WWII and post-WWII

Odd Couple: International Trade and Labor Standards in History

Author(s):Huberman, Michael
Reviewer(s):Baumann, Brittany A.

Published by EH.Net (October 2012)

Michael Huberman, Odd Couple: International Trade and Labor Standards in History. New Haven, CT: Yale University Press, 2012. xii + 237 pp. $65 (hardcover), ISBN: 978-0-300-15870-0.

Reviewed for EH.Net by Brittany A. Baumann, Department of Economics, Boston University.

In Odd Couple: International Trade and Labor Standards in History Michael Huberman argues that history in a global perspective reveals a causal relationship between free trade and labor standards. His claim is that not only did trade expansion induce the adoption of labor restrictions, but reverse causality exists as well. The pairing is ?odd? in that their relationship is not obvious, and the reverse causality may seem controversial. Nonetheless, the linkages are an interesting contribution to both economic history and modern perspectives on trade.

Between 1870 and 1914, changes in trade policy and labor standards were significant. The labor standards, which Huberman denotes as the ?labor compact,? pertain to labor regulations ? work age requirements, work hour restrictions ? and social entitlements ? accident insurance. As countries became increasingly open to trade, they also began adopting labor restrictions, precipitating the rise of welfare states. The traditional view is that industrialization led to rise of the factory system and urbanization, propagating a demand for greater protection of worker welfare, thereby leading to greater state intervention. Huberman stresses the significance of trade expansion as a causal influence for a labor compact. In eight thorough chapters Huberman describes how these two policies reinforced each other in the late nineteenth century Old and New Worlds. Historical data and regression analysis combined with his strong grasp of economic theory provide a convincing body of evidence.

Chapter 1 motivates the topic by focusing on the views of a political figure of the period, Emile Vandervelde, economist and patron of the Belgian Labor Party. Vandervelde was a steadfast supporter of free trade and influenced Belgium to become one of the first European economies to lift trade barriers. Vandervelde?s free trade ideology was the following: despite the welfare gains from trade in the form of higher wages, risks such as dislocation and employment uncertainty also rise in open economies. Hence, he believed free trade should be contingent on the adoption of labor standards to offset the costs of trade openness.

Huberman?s goal is to understand how this free trade ideology developed differently across nations and to reveal its linkage to labor standards. He limits his detailed analysis to three countries: Belgium to represent the labor abundant Old World; Canada, for the land abundant, richer New World; Brazil, for the New World of the southern hemisphere. Fortunately, the analysis also spans other important economies such as the U.S. and the UK.

Huberman divides the book in two parts: Part I describes how globalization induced the labor compact, and Part II describes the reverse causality. Chapter 2 that begins Part I paints a picture of the global economy in the late 1800s. To support his claim that international pressures explain the rise of the labor compact, he outlines the benefits and costs of trade, and shows why the labor compact reinforced the benefits and helped to offset the costs. The gains from trade are standard: increased market size, specialization, and, depending on the type of export, wages. Trade can be costly by lowering wages and raising employment risks, and its impact depends on the elasticity of substitution between foreign and domestic goods. To provide evidence of increased uncertainty in open economies, Huberman shows an increasing relationship between terms of trade and trade openness in both the Old and New Worlds. Huberman claims that the labor compact, besides providing social insurance against heightened trade risks, incentivized firms to invest in more efficient technology. This claim is powerful and is the recurring subject for the rest of the book. As evidence, Huberman uses regressions to uncover the effects of trade risk factors on labor legislation adoption, showing that legislation increases with trade openness. In logit regressions Huberman also reveals that trade facilitates country convergence in labor standards in Europe, yet not in the New World. He provides theoretical evidence that affirms that economies have incentive to harmonize labor standards in order to reap bilateral trade benefits.

Giving both empirical evidence and theory, Chapter 3 explains the divergence in labor and trade policy adoption between the Old and New Worlds. Adoption of labor standards was uneven and delayed in the New World compared to in Europe, as was free trade. The Stolper-Samuelson theorem can partially explain the opposing views between the Old and New toward free trade. The theorem predicts wages to fall in an economy, for example, Canada, exporting a land-abundant good. Immigration also contributed to lower wages. Hence, the New World was reluctant to support free trade since it hurt workers, and instead advocated tariff protection and immigration restrictions. On the other hand, Old World countries such as Belgium were inclined to support free trade by recognizing the benefits of a lower cost of living and reduced wage pressures for firms. In enacting free trade, countries advocated the labor compact in order to provide protections from trade risks. Coincidentally, Belgium adopted labor standards in a short period during which no tariffs were increased.

Chapter 4 develops the argument that open economies had incentives to harmonize their labor standards. The plethora of international conferences on labor standards, mostly held in Europe, motivates this view, and such conferences in fact did not contest free trade but had a primary goal of securing worker gains from trade with labor reform. Huberman confirms their significance by showing that country attendance was related to a higher likelihood of adoption. He suggests that bilateral labor treaties had more clout, given that a pair of countries had incentive to raise standards in order to gain market access through free trade. In a regression of trade costs on labor treaties, a significant negative relationship does exist for the Old World.?

The next three chapters are devoted to the reverse causality ? the labor compact inducing globalization. The main mechanism behind this causality is as follows: labor reform raised wages which raised firm productivity, shifting comparative advantage and enabling firms to export more. Here Huberman does justice to modern trade theory in describing the behavior of exporting firms: exporters are larger, pay higher wages, and are more productive and skill- and capital-intensive. By reducing labor supply and raising wages which incentivizes firms to become more efficient, the labor compact should induce more firms to export and thereby amplifies trade on both the intensive and extensive margins. This mechanism, however, lacks evidence and therefore appears weakly founded to an economist.

Odd Couple next turns to a discussion of the wage distribution. Chapter 5 explains how the trends in inequality during the period were related to the evolution of the labor compact and trade. Citing historical inequality experts Peter Lindert and Jeffrey Williamson, the author explains why inequality widened within New World countries relative to the Old: since the New World adopted a labor compact relatively later, the skill premium did not narrow in this region. Nevertheless heavy immigration would deliver the same effect, as Huberman mentions. Yet this argument is not complete in that this region was less open, and freer trade tends to raise inequality. Huberman continues by addressing between-country inequality and claims trade lessened inequality between the labor-intensive Old World and the labor-scarce New World. Although the trends in inequality are well-explained, the chapter seems to forget about the theme of Part II by leaving out the labor compact.

Fortunately the next chapter presents empirical evidence. Focusing on the textile sector, Huberman asserts that scarcity of labor ? a by-product of the labor compact ? induced exporters to upgrade technology. In charts of spindles per ring and per mule 1880-1914, he shows that the New World became more productive with greater specialization relative to the Old World. One reason would be that the New World adopted the labor compact more extensively during these years. As mentioned earlier, this mechanism is weak; Huberman even acknowledges that labor laws worsen trade flows in the short run by raising marginal costs, with regressions of trade balances to confirm it.? A multinomial logit model confirms trade openness increased convergence of low-cost labor laws, more so in the Old World, yet ironically confirms the opposite direction of causality. Thus the evidence is far from convincing.

Brazil presents a puzzling counter-example to his case. A collapse in trade in the 1920s proceeded implementation of labor laws, which Huberman?s hypothesis does not predict. Brazil only provides an example that the determinants of trade openness go far beyond labor policy. Nevertheless, the collapse of trade may have further stunted the rise of a welfare state. Huberman concludes that Brazil did not completely adopt a labor compact after enacting free trade in the 1980s because the economy lacked the historical precedent ? the precedent of adopting a labor compact during a period of global trade expansion.

Chapter 7 is an interesting, though somewhat extraneous, analysis of the divergent trends in labor hours of the New and Old Worlds. Both witnessed a decrease in hours since 1870, yet toward the end of the twentieth century the New World had relatively longer hours. The labor compact, being more fully adopted in the Old World, contributed to shorter hours due to greater regulation and work sharing. Huberman offers other sources of divergence: inequality and social emulation, labor power, work ethic, and religion. To connect to his hypothesis, Huberman shows that hours decline with trade openness in 1914, and the trend holds in 2000. Huberman hastily concludes that globalization contributed to a wedge between the social models of the New and Old Worlds.

In Odd Couple, Huberman provides a thorough description of the world economy during a phase of trade expansion and labor reform. An important conclusion is that the differences between the New and Old World labor standards and trade policy can actually explain the divergence in social models today. However, the book contains far-reaching conclusions. For example, Huberman asserts the collapse of trade in the 1930s was partially due to the failure to enact and harmonize labor standards. The passage of the New Deal along with the empirical evidence that recessions lead to collapses in trade flows drastically weaken this claim. The direction of causality from labor reform to trade expansion requires theoretical backing in addition to more empirical evidence. That the labor compact promoted higher efficiency and a shift of resources to export industries is another far-reaching assertion that remains unconvincing. Regardless, the book reveals unexpected yet interesting economic linkages and gives modern-day policy standards a new historical perspective.

Brittany A. Baumann is a Ph.D. candidate in Economics at Boston University. Her fields are International Economics, Macroeconomics, and Economic History.

Copyright (c) 2012 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 2012). All EH.Net reviews are archived at http://www.eh.net/BookReview.

Subject(s):Government, Law and Regulation, Public Finance
International and Domestic Trade and Relations
Labor and Employment History
Geographic Area(s):General, International, or Comparative
Time Period(s):19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Industrial Development in a Frontier Economy: The Industrialization of Argentina, 1890-1930

Author(s):Pineda, Yovanna
Reviewer(s):Rocchi, Fernando

Published by EH.NET (May 2010)

Yovanna Pineda, Industrial Development in a Frontier Economy: The Industrialization of Argentina, 1890-1930. Stanford, CA: Stanford University Press, 2009. xiii + 209 pp. $55 (cloth), ISBN: 978-0-8047-5983-0.

Reviewed for EH.NET by Fernando Rocchi, Department of History, Universidad Torcuato Di Tella.

The discussion about Argentina?s economic failure in the twentieth century has been a fruitful source of debate for economic historians. One of the Argentine economy?s major shortcomings has been the lack of sustainable industrialization, despite success in the agrarian sector. As a result, early performance of the manufacturing sector has attracted a wide variety of scholars. The book under review by Yovanna Pineda (Department of History, Saint Michael?s College) enters this debate by studying the extent and weaknesses of early industry in Argentina from 1890 to 1930.

Pineda focuses on industrial productivity, investment, entrepreneurship, profits, and policies towards industry. Her work is well researched and written. Its detailed analysis focuses on firms that participated in the Stock Market of Buenos Aires, which includes fifty-nine manufacturing companies across ten consumer goods sectors. The author dismisses structuralism and dependency theory by arguing that the ?failure of Argentina to successfully develop a self-sustaining industrial sector with forward and backward linkages cannot be attributed to a wrong course of action or even to a set of actions by the government or manufacturers. Instead this book discusses both what happened and what failed to happen during the course of industrialization? (p.7)

Industrial Development in a Frontier Economy successfully quantifies the sources of Argentine industrial underdevelopment. Pineda?s book works with four data sets that generate fresh insights and serve as useful primary sources. One of the key issues is the study of productivity increases between 1895 and 1935. By studying labor productivity, total-factor productivity, economies of scale, and concentration ratios, the author shows that Argentine industry was inefficient from the beginning and relied on government intervention to remain profitable. Another important topic is the technological shortcomings of the Argentine manufacturing sector. Argentine manufacturers failed to develop the technological capabilities needed to sustain industrialization, to a large extent, due to the political and legislative environment. As a result, local industry relied too much on imported machinery while tariff protection impeded competition and fostered concentration of capital.

Financing factories, according to Pineda, was in the hands of the members of the business networks, represented by five leading merchant groups. The study of entrepreneurial behavior is another field covered by this book, and the author successfully shows that these members most likely preferred to establish networks of finance rather than networks of technological knowledge. In parallel, entrepreneurial aversion to risk fostered concentration. The analysis of industrial legislation demonstrates that its failure to promote successful industrialization was the consequence of the absence of a well-defined plan. As a result, legislation discouraged sustainable industrialization

The chapter on the merchant finance group is one of the best contributions of the book. Quantitative and qualitative analysis unite to demonstrate that entrepreneurial behavior favored commercial aspects of the economic process rather than investing in the industrial sector.

This well crafted book is another nail in the coffin of the once standard perspective on the shortcomings of Argentine industry, which blamed the state for being hostile toward industrialization and favoring the traditional agricultural exporting sector. Pineda prefers to analyze the market and, when she studies industrial policies, highlights the state?s shortcomings in attempting to help the process of manufacturing growth. This process becomes apparent when studying the 1920?s. This decade of economic and industrial wealth for Argentina brought additional barriers set up by the state. Under the guise of trying to help industry, it brought about the unwanted result of a more concentrated and less competitive manufacturing sector.

The fresh insights of the cliometric perspective of Pineda?s book, the array of topics covered in the research, and the impressive data sets make Industrial Development in a Frontier Economy mandatory reading for those interested in Latin American industrialization and, in general, for those who enjoy the study of the region?s economic history. Although one of the shortcomings of Argentine economic history has been a lack of quantification, Pineda?s book offers an impressive amount of information about the industrial companies? performance in an original and stimulating way.

The only major criticism that might be leveled against the book is that it limits itself by studying only firms listed on the Stock Exchange, without analyzing family companies. In spite of this limitation, Pineda has given us an excellent book that has rearranged our understanding industry, economics and the entire topic of Argentina?s relative decline in the twentieth century.

Fernando Rocchi, Professor of History at the Universidad Torcuato Di Tella in Buenos Aires, is currently finishing a book on the history of commercial advertising in Argentina.

Subject(s):Industry: Manufacturing and Construction
Geographic Area(s):Latin America, incl. Mexico and the Caribbean
Time Period(s):20th Century: Pre WWII

A History of Macroeconomic Policy in the United States

Author(s):Wood, John H.
Reviewer(s):Wheelock, David C.

Published by EH.NET (June 2009)

John H. Wood, A History of Macroeconomic Policy in the United States. London: Routledge, 2008. xiii + 221 pp. $150 (hardcover), ISBN: 978-0-415-77718-6.

Reviewed for EH.NET by David C. Wheelock, Federal Reserve Bank of St. Louis.

Does macroeconomic theory have any influence on macroeconomic policy? Not much, according to John H. Wood, Reynolds Professor of Economics at Wake Forest University. In his book, A History of Macroeconomic Policy in the United States, Wood argues that U.S. fiscal and monetary policy have been remarkably consistent over the decades and largely uninfluenced by macroeconomic theory. Economists have rationalized more than influenced policy, Wood contends, and the direction of influence between economic theory and practice is primarily from the latter to the former. ?Conservatism in monetary and fiscal policies is … unavoidable in a democratic society of enduring interests,? Wood argues, whereas ?economists [have] gyrated from classical to Keynesian to New Classical theories.?

The book divides neatly into two halves ? one focusing on fiscal policy and the other on monetary policy. Each half has three chapters. The first deals with interests and institutions; the second with ideas; and the third with practice. The section on fiscal policy begins with a history of tax conflicts in the United Kingdom and the United States to illustrate that ?government budgets are political outcomes of conflicts between interests? and that ?tax changes not supported by interests have little chance, including … those advocated by economic theorists.? Wood describes the fiscal tussles between the British monarch and Parliament following the Glorious Revolution, Britain?s unsuccessful attempts to impose enforceable and palatable taxes on its American colonies, and the problems of raising and collecting revenue encountered by the American states. He includes a lengthy description of the history of U.S. tariff policy and a short section on the role of military spending on the U.S. federal budget since World War II.

Next Wood examines the theory of stabilization policy, focusing on how the ideas in Keynes? General Theory were framed and modified by subsequent economic theorists and how those ideas were presented to policymakers. Keynesian policy prescriptions are widely cited as a key reason why government budget deficits have been the rule, rather than the exception, since World War II. However, Wood argues that The General Theory had little influence on policy because of both the evolution of Keynesian economics and, more importantly, the persistent lack of impact from economic ideas on the institutions and interests that determine government spending and revenues. Wood argues that military spending and tax smoothing have been the main determinants of the annual federal deficit historically and explain the size of postwar deficits as well as they do deficits before World War II. Further, he reports regression evidence indicating that the GDP gap had little or no influence on the size of the deficit during 1956-2001, indicating little evidence of systematic stabilization policy. Of course, the absence of systematic stabilization policy does not preclude occasional attempts to use fiscal actions to steer the economy. Wood admits that tax cuts in 2001 and 2008 were justified by ongoing recessions, and the massive economic stimulus package enacted by Congress and signed by President Obama in February 2009 was perhaps the most obvious example of Keynesian stabilization policy ever attempted. Nonetheless, Wood?s contention that economic theory has had only limited impact on the U.S. fiscal position historically is largely convincing.

The second half of the book follows a similar path in describing how interests and politics, rather than economic theories, have driven U.S. monetary policy over time. Again, Wood begins in England. The Bank of England was granted a charter in 1694 in return for a loan to the government, and for many years the Bank?s operations and privileges were intertwined with its lending to the government. By the nineteenth century, the Bank?s focus evolved more toward financial stability, though Wood notes that the Bank never accepted Bagehot?s call for making an explicit commitment to act as lender of last resort.

Next, Wood describes the history of central banking in the United States, beginning with the first and second Bank of the United States. Contrary to conventional wisdom, Wood argues that the Second Bank did not pursue a macroeconomic stabilization policy, but rather acted mainly in its own interest. Further, the Bank?s relative conservatism reflected its favored position and size, which made it the industry leader.

The Federal Reserve was established in 1914 to promote financial stability. Although a product of the Progressive Era, the Fed was dominated by bankers and pursued policies that fostered banking profits. Wood argues that financial stability remained the Fed?s principal goal even after a major reorganization in 1935 that sought to reduce the influence of private interests on policymaking. Wood contends that Federal Reserve policy has been remarkably consistent throughout the institution?s history, arguing that ?the Fed continues to see the world today much as it did in the 1920s.? The Fed?s assistance to financial markets and institutions in 2008, Wood argues, was entirely consistent with its long-standing focus on preserving financial stability.

Wood contends that conflicting interests and pressures on the Fed explain the Fed?s uneven performance over time with respect to price stability. He argues that ?bankers have always appreciated that financial stability requires an environment of price stability? and that the Fed has generally pursued price stability when it was able to do so. However, inflation began to rise in the mid-1960s when the Fed faced intense political pressure to hold down interest rates.

Perhaps I have an inflated view of the influence of economics and economists on recent Fed policy because I have been a Federal Reserve economist for several years. Wood argues that Fed officials were aware of the importance of inflation expectations and policy credibility before those concepts became prominent features of macroeconomic models. However, policymakers seem not to have worried much about expectations or credibility before the 1980s. Moreover, only since the 1980s have Fed officials acknowledged that the rate of inflation is determined solely by monetary policy. That is a stark change from the 1970s when Fed officials, as well as many academic economists, blamed inflation on government budget deficits, energy price shocks, and monopolistic pricing.

As Wood argues, the stability of financial markets, particularly the New York money market, has been a principal goal of Federal Reserve officials throughout the Fed?s nearly 100-year history. Concern with financial market conditions also undoubtedly explains the Fed?s vigorous response to the recent financial crisis, which resulted in a doubling of the size of the Fed?s balance sheet and monetary base in a matter of months. However, unlike the Fed?s response to financial crises during the Great Depression, I believe that the Fed?s recent efforts to stabilize the financial system reflect the desire of Chairman Bernanke (and other officials) to avoid a 1930s-style deflation, rather than to protect the financial system per se.

Although I am not entirely convinced by Wood?s arguments and evidence, especially about the relative influence of economists and economic ideas on Federal Reserve policy in recent years, this book provides considerable insight about the influences on U.S. macroeconomic policy and why economic theory historically has had little impact on policy. Accordingly, the book should be of interest to a broad audience of macroeconomists and political economists, as well as to economic historians.

David C. Wheelock is an assistant vice president and economist at the Federal Reserve Bank of St. Louis. He is the author of The Strategy and Consistency of Federal Reserve Monetary Policy, 1924-1933 (Cambridge University Press, 1991). Among his recent publications is ?The Federal Response to Home Mortgage Distress: Lessons from the Great Depression,? Federal Reserve Bank of St. Louis Review, May/June 2008.

Subject(s):Military and War
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

Free Trade Nation: Commerce, Consumption and Civil Society in Modern Britain

Author(s):Trentmann, Frank
Reviewer(s):Cain, Peter J.

Published by EH.NET (October 2008)

Frank Trentmann, Free Trade Nation: Commerce, Consumption and Civil Society in Modern Britain. Oxford: Oxford University Press, 2008. xiv + 450 pp. ?25/$50 (cloth), ISBN: 978-0-19-920920-0.

Reviewed for EH.NET by Peter J. Cain, Department of History, Sheffield Hallam University.

In discussions and analyses of trade regimes in Britain from the late nineteenth century through to the 1930s, protectionist campaigns have hogged most of the attention of historians and free trade ? the ruling regime before the 1930s ? has been relatively neglected. For that reason alone, Frank Trentmann?s account of free trade and its supporters would be a welcome addition to the literature: the bonus is that author, Professor of History at Birkbeck College in London University, has not only added a great deal to our knowledge through painstaking research but has written about it with verve and energy and produced a most readable volume on a subject that can be very dull indeed.

Trentmann?s case is that support for free trade in Edwardian Britain did not mainly rely on calculations of interest, though he does not totally ignore that, but was driven by a highly emotional, even passionate, commitment akin to nationalist or religious fervor, and was seen by its advocates as a crucial element in defining what they thought of as Britishness. He admits that around 1900 the free trade movement was in poor shape as foreign manufactured imports mounted and foreign tariffs rose, and that some form of protectionism was being discussed even at government level. Chamberlain?s tariff campaign starting in 1903 changed all that. Faced with a clear and open challenge, the free trade cause gathered an astonishing momentum which swept the previously ailing Liberal party into office in 1906 and helped to keep them there through two further elections. Masterminded by the Free Trade Union (which, ironically, learned much from its rival the Tariff Reform League) the electorate was aroused by a campaign of propaganda that successfully associated protection with poverty by reminding the nation of the ?Hungry Forties? when protection had last held sway. The free traders also succeeded in accusing protectionists of attempting to revive an oppressive state; of undermining free trade?s natural tendency to bring peace through economic interdependence; and of serving the interests of a minority of landed and business elites whom they branded as selfish vested interests, intent on creating monopolies and cartels that would exploit the majority of the nation. As Trentmann acutely notes, the campaign had a great effect in politicizing women as key consumers and, more widely, in putting consumers? interests at the center of policy, something that anticipates many modern political movements. All this made for a very lively politics that sometimes erupted into violence and which led to extraordinary organizational developments, such as the great series of lectures and entertainments that the FTU took to the seaside towns of Britain.

After 1914, that momentum proved increasing hard to sustain. The war shook faith in laisser-faire and made state control and big business seem much more natural. Under state auspices, some protection was introduced to regulate imports and ensure that they served the cause of winning the war: free trade thus began to appear as a policy that ministered to individual needs rather than to the national interest. That encouraged the idea of ?safeguarding? key industries after the war in case conflict should erupt again; and the much higher unemployment rates in the 1920s also undermined the long-held idea that free trade naturally meant prosperity. Again, the rise of nutritional science meant that more stress was placed on health and the need for the state to improve it, rather than on the ?cheapness? lauded by free traders that now began to seem synonymous with undernourishment and poverty. Moreover, free trade had clearly failed to keep the peace internationally and radicals who had once been fervent Cobdenites were thinking, by the 1920s, much more of the need for international organizations like the League of Nations to regulate international intercourse rather than relying on the invisible hand of the market. As visions of world peace and prosperity under free trade were challenged, empire increased in appeal and, naturally enough, greater stress was placed on the need to bind the empire to Britain through tariffs. All this served to undermine the great cultural movement that had transformed the Edwardian political scene and by the time the world economy began to collapse in the early 1930s, free trade was viewed not as the cement binding the nation together but as the belief of a relatively few staunch individualists who were out of touch with the times.

There is far more in this fine book than can be represented here and Trentmann makes a powerful case for his interpretation of the evidence. It may be, however, that he underestimates the fragility of the commitment to free trade before 1914, thus making its decline in the 1920s seem more precipitous than it was. Trentmann recognizes that Chamberlain was a godsend to free traders but he does not say enough about how easy he made it for them. Firstly, he split the Conservative party thus making it impossible for them at the 1906 election; secondly, in highlighting imperial preference he failed to garner the level of support that a more wholehearted commitment to domestic protection would have given. It may be true, as Trentmann contends, that effective organization by free traders was crucial to victory in the 1910 elections: but it is still the case that the Liberals only won the two elections of that year by a whisker, despite the fact that protectionism was still hobbled by disunity. Protectionists were also unlucky in their timing: Chamberlain launched his campaign just at the beginning of the long Edwardian boom. Support for protection increased sharply in the brief downturn of 1908-09, and if economic times had been harder free trade might have disappeared sooner. If this is so, it may put in question the depth of the moral commitment to free trade that Trentmann lays such stress upon. It may also suggest the need for a counterbalancing reinvestigation of the importance of interest in maintaining free trade before 1914 and in undermining it after that date.

Peter J. Cain is Professor of History at Sheffield Hallam University, UK. E-mail: p.j.cain@shu.ac.uk He is the author of Hobson and Imperialism: Radicalism, New Liberalism and Finance, 1887-1938 (Oxford, 2002).

Subject(s):Social and Cultural History, including Race, Ethnicity and Gender
Geographic Area(s):Europe
Time Period(s):20th Century: Pre WWII

John Maynard Keynes and International Relations: Economic Paths to War and Peace

Author(s):Markwell, Donald
Reviewer(s):Lawlor, Michael S.

Published by EH.NET (February 2008)

Donald Markwell, John Maynard Keynes and International Relations: Economic Paths to War and Peace. Oxford: Oxford University Press, 2006. xv + 320 pp. $85 (hardcover), ISBN: 0-19-829236-8.

Reviewed for EH.Net by Michael S. Lawlor, Department of Economics, Wake Forest University.

This book will be of interest to economists in general, and to Keynes specialists in particular. It focuses on the topic of the international relations views expressed by Keynes over his long career, from his involvement in the First World War as a Treasury official and as Lloyd George’s economic advisor at the Paris Peace Conference; through his interwar position as a prominent analyst of international monetary problems; to the part he played in the British Treasury during the Second World War. There he was very influential on the policies of how Britain would pay for the war, the form that the post-war international payment systems would take under the Bretton Woods system, and the negotiation of the terms of the American post-war loan to Britain in 1946, shortly before his death.

The fact that this book solely focuses on this limited facet of Keynes’s multi-dimensional career, that Markwell is a political scientist and therefore uses much non-economic material, consisting mostly of primary internal memoranda from the Treasury office and other governmental units, and that he frames his arguments in terms of the secondary scholarship on international relations in political science ? both of which are unfamiliar territory for most economists ? adds to the freshness and usefulness of this study. It should also be added ? and I don’t think Markwell would disagree ? that some of the debates and contexts for Keynes’s activities in this regard have already been well discussed in both Robert Skidelsky’s (2000) and Donald Moggridge’s (1992) biographies of Keynes. These books provide a thorough background and context for the many issues, events and personalities surrounding Keynes’s involvement in international relations. I would suggest one of these volumes for further reading to those who find this to be an area of interest. Markwell’s book goes beyond them, and is a useful companion to them, in its bringing together the various strands of Keynes’s ideas, writings and activities with respect to international relations in one place. This treatment adds focus to the material in a way that Keynes’s biographers, necessarily more focused on the grand sweep of his career, were not able to do.

More broadly, this book is instructive to this reviewer for the opportunity it offers to ponder the importance of context for the application of some of the fundamental tenets of economic theory. Ironically, perhaps this is precisely because of Markwell’s lack of focus on economics and due to his use of the aforementioned wealth of policy evidence on Keynes’s extensive involvement in government and international affairs. Markwell’s analysis requires the economic reader to follow Keynes into the task of applying economic theory to knotty problems of international politics and thereby to think hard about the validity of the abstract nature of economic principles in various real geopolitical scenarios of great import (like the two World Wars), to consider what role economic factors may play in the development of hostilities between nations, and to consider seriously the compatibility of microeconomic truths with macroeconomic truths when their application is not just a hypothetical example, but a real live political circumstance.

To first take up the issue of the contextual nature of the application of economics to political situations consider the situation that Keynes, and all western economists and political analysts, faced in the period from the end of the First World War, through the slump and depression of the thirties. What concerned them most was the question of how to re-create the era of rising prosperity and smoothly functioning world trade that had characterized Europe and America in the period before 1914. From the end of the First World War and the Paris Peace Conference on, Keynes was one of the first and most prominent (but by no means the only) international figures who felt that this goal required a lasting peace that would allow Germany to regain its rightful place, for reasons of geography and size, as the economic engine of Europe.

This was Keynes’s message in the book that first made him internationally famous, The Economic Consequences of the Peace. This book, as Markwell shows, grew from Keynes’s fears that restoring prosperity to Europe was wholly lost sight of in the blind rush to revengefully heap reparations and crippling terms of defeat upon a prostrate Germany. Keynes’s sometimes over-the-top criticism of the principals at the conference ? with Lloyd George, George Clemenceau and Woodrow Wilson coming particularly under extensive personal attack, some thought bordering on ridicule ? stemmed from the fact that Keynes believed that their actions, as opposed to their hypocritical words, would lead to an unstable peace.

Thus, at some risk to his own influence and career, Keynes quit his role in the negotiation of the Paris peace treaty and returned to England to hastily write his reaction to that experience in the form of The Economic Consequences. It was a book that both criticized the leaders of England and France for cowardice, in being unwilling to challenge the popular clamor for revenge upon Germany, and that laid bare the flaws of the peace terms that the French and British political leaders had, Keynes thought, bamboozled President Wilson into signing. These plans, he felt, were counterproductive of a lasting peace and unrealizable to boot, because Germany could never meet its reparations obligations so long as its internal economy was crippled by the terms forced upon it by the treaty.

All this is well known to Keynes scholars and to students of the World War One period. What Markwell adds is context and detail to Keynes important role in the struggle to win both the war and the peace. What can be learned by all economists from his experience is that the dire nature of the post-war European economies, particularly those of the losing Axis powers, could not automatically be reversed unless attention was paid both to their immediate needs in the form of relief aid of one kind or another and also to their more long-term need to foster investment and trading institutions that would ensure the growth and permanence of economic prosperity. In asking how this would be achieved, Markwell classifies the nature of Keynes’s arguments at this crucial historical juncture as a species of a “liberal-idealist” one.

At the end of 1918, Keynes had a clear view of some of the elements of the post-war order he wished to see. His liberal-idealist faith in free trade, on which he had been brought up, was unshaken. He had urged the abandonment of inter-Allied debt and Britain’s forgoing her share of reparations, which he hoped would go to assist the new states. He had urged a moderate approach to reparations; and clearly wished the defeated powers to be treated so that they would not need assistance to avoid starvation, unemployment, anarchy, or perhaps Bolshevism. The fundamental views which underlay his action at the peace conference, and which were to be expounded in The Economic Consequences, were already formed and were shared by many others (p. 53).

Thus Keynes began his career, as many economists have before and since his time, as a solid proponent of free trade as the primary means to bring about international peace. This brings us to the second issue raised above: to what extent, and how, are economic factors causative of acrimony and war between nations? Any modern economist could profit by considering this question in light of Markwell’s book. Here, Markwell writes, Keynes’s view matured over the course of his career. The standard argument pits free trade against imperialism. Free trade, it is thought in the standard liberal argument, may have peaceful benefits as an unintended consequence, if it make customers out of potential enemies. Moreover, since mutually beneficial gains for any two countries can be shown (and this is one of the principle lessons of a liberal economics) to lead to rising prosperity for both trading partners, there is a potential for any two countries to both benefit from trade. Trade, so this argument goes, would make traders reluctant to upset trading by aggression and war, and so free trade may tend to reduce international aggression and war.

On the other side, the argument of imperialism starts from the premise that it is beneficial for a country to run a favorable balance of trade, and an expanding export market, in that this tends to keep manufacturers and producers of tradable goods and services at home in a prosperous and expanding state. By this argument developed countries (note not firms directly, but perhaps state action spurred by firms) will seek means to maximize export opportunities in particular and may also vie to receive exclusive preferences for their goods and services in these markets, as well as trying to ensure scarce inputs to the production process, such as raw materials and/or natural resources that are in short supply at home. How is this accomplished? By the argument of imperialism, it is accomplished by military and diplomatic maneuvers that allow powerful states to dominate weaker states and to assemble official or semi-official trading empires.

The economic analysts of the liberal tradition in England ? Smith, Ricardo, Burke, Mill, and Marshall ? can be identified as the major proponents of the former idea. Dissenters from this tradition both in England and on the continent ? like Hobson, Lenin and Luxembourg ? can be identified with various twists on the latter idea in Keynes’s time. Markwell makes it clear that Keynes early in his career came down exclusively on the side of the liberal conception of free trade ? hence his categorizing of Keynes’s earliest arguments into those of a “liberal-idealist” camp. He recognized and believed in the potential of free trade to promote peace and harmony among nations, and he thought that by reestablishing Germany’s power to participate in trade with it neighbors, a lasting peace could be established in Europe after World War One.

It must be said, though, that the history of Europe and the world in the nineteenth century and leading up to the war in 1914, offered evidence supportive to both sides of this debate. On the one hand Britain, France, Germany and in fact most of Europe, had all grown prosperous in this period by trading with other nations, particularly was this so in the case of Britain, a small island economy with vast global trading interests. But each had also sought to carve out for itself some exclusive markets for its exports, and some exclusive sources of raw material for it own producers, through the conquest of overseas empires. This vying for power internationally had become so commonplace among European governments that part of this activity became known in England by the playful title of the “The Great Game.”

But imperialism and empire were not topics that engaged Keynes, either by upbringing or by temperament. In order to reassert the classical liberal argument he had been brought up on in this context he, like many of his fellow British liberals, made a crucial distinction between empires and exclusive trading blocks. “Empires,” according to Keynes (in 1903), need not lead to exclusive trading blocks. An empire that was founded and run on proper political principles, as he thought was the case of the British Empire, could lead to a loose confederation of states for which association with Britain was “to provide facilities for the growth under freedom and justice without molestation from abroad of these young nations … [W]hen a country becomes part of the Empire it is free to pursue it own destiny, in its own way. Because our ideal is democratic” (p. 19).

This somewhat condescending (to the colonial countries) and benign view of empires was in sharp contrast to both the imperialism theorist’s view of empires, as well as to those of other English political and ideological leaders (of the so called “Round Table”) who, after World War One, wanted to work for the imperial unity and exclusivity of trade relations between the various members of the British Empire. Keynes criticized the notion that empires necessarily would form into exclusive trading blocks that excluded all others, and that empires should lead to this state of affairs. He excoriated the latter in particular, exemplified for Keynes by the “German dream of Mittel-Europa.” It was a conception of empire based on “exclusivity” and the attempt to “monopolize” for the home country producers’ markets for their exports and sources of food and raw materials. This, he lamented, led to new frontiers “between greedy, jealous, immature, and economically incomplete, nationalist states” (p. 20). Worse, competing for such imperial preferences by nation-states, such as the British Round Table thinkers advocated, could lead to conflict and war.

Thus, the question that formed the international relations context in which Keynes wrote during and immediately after the First World War, was whether war could only stem from a perverse international policy in pursuing the potential gains from free trade (what Markwell calls the liberal-idealist position) or whether war was a natural outcome that could be expected from an inevitable imperialist-capitalism by which states would naturally vie for national power by assembling competitive exclusionary trading blocks (what Markwell identifies as the “realist” view).. Keynes, at this stage, as we have seen, favored the first argument ? that free trade only caused war when it was perversely pursued along the lines of imperial, exclusive terms. If trade and empires could be based on openness of markets and democracy, such as British experience in the pre-war period showed to Keynes was possible, then empires could be a beneficial source of cosmopolitanism and peace.

So what did Keynes at this early stage in his development think were the economic causes of war? Wars could result, said the younger, classical liberal Keynes, from “impoverishment, population pressure, penetration by foreign capital and the ‘competitive struggle for markets'” (p. 3). Note this fits our conclusion in the previous paragraph, by carefully excluding free-trade from those causes, so long as it is not pursued in exclusionary terms. So the interesting questions for economists today ? trained to believe unreflectively and in the abstract in the eternal verity of the potential for mutual gains from trade ? to take from this study of Keynes are as follows: Are there some possible circumstances under which this gain will not automatically arise in the context of actual situations of international relations? Does economic theory itself suggest conditions in which we may want to abandon a dogmatic attachment to what seems like a species of economic Truth? It turns out that the historical analog to these questions in the present case is “how did Keynes’s view of the role of economics in international relations evolve over his career?”

One way to answer these questions is by following Markwell in identifying three further stages in Keynes’s evolution in this regard ? identified as his “early liberal institutional, protectionist and mature liberal institutionalist” (p. 3) positions. All three stages could be thought of as instances where Keynes did not so much abandon the above-listed catalogue of the potential economic causes of war, but rather thought of extensions to the first cause ? economic “impoverishment.” His extensions were of two varieties. First in the 1920’s, and again in the 1930’s, Keynes suggested extensions from the contextual perspective of then current national and international events. Later in the 1930’s, and from the theoretical perspective of his General Theory, he suggested further, more economically fundamental extensions to this factor. Put another way, as he matured in terms of both experience and theoretical framework, he added to this list of the potential economic causes of war the crucial factors of monetary disorder, trade imbalances and unemployment. Even later, with special reference to Hitler and Germany, he added that there is no proper economic cause that extended to a nation’s possible reaction to “impoverishment” by embracing what he called a “brigand.” That is to say, economics had no explanation or remedy for a nation that was led by “a madman or a gambler” that was willing to risk war for personal power (p. 198). (Markwell convincingly shows on pp. 197-203 that Keynes was never pro-German or an appeaser, as he has sometimes been accused.)

Let us take the first stage of the evolution of Keynes’s views to begin. As Britain suffered through the slump of the twenties and as most of the West similarly suffered though the worse experience of the Great Depression in the thirties, Keynes came to blame these continued difficulties in restoring prosperity on the lack of existence a of well-functioning international monetary order. In particular, he was convinced that the gold standard had become a shackle on Britain, and on western expansion in general, because it forced weakened economies, such as he identified Britain as being since the First World War, to run a high-interest-rate policy for international reasons (to protect its gold reserves) that was wholly inconsistent with a needed internal low-interest-rate policy to restore employment and prosperity. This again deviated from the belief that free trade would automatically restore prosperity in any political context. In this case, and barring international agreement on an alternative system that bitter experience had taught him was not likely, it would be better for Britain to unilaterally either peg its pound below its pre-war parity rate ? and by such a devaluation encourage the output of its exporters – or, as eventually transpired in 1931, to abandon the gold standard altogether.

Even as this was his best counsel on short-term policy, Markwell shows Keynes was continuously preoccupied in this period, roughly 1922-1932, with finding a solution to the question of what possible type of international arrangement could be agreed upon by many nations and managed with some high degree of efficiency that would not rely upon what Keynes considered the immiserating and trade-inhibiting policies of the gold standard [1].

So the second-stage of the development of Keynes’s views on international relations was that he came to feel strongly that a return to the pre-1914 prosperity in Europe required the adoption by international agreement of an alternative to the former gold standard that would attract wide participation. This could only happen, he thought, if there were strong international leadership (which he long looked for from the U.S., as far back as the end of the First World War, but did not actually witness until World War Two). Moreover, Markwell clearly shows that in all of his many writings and participation in conferences devoted to this topic, Keynes was very fluid and pragmatic about the form that such a system should take. He was willing to compromise his own vision of a U.S./British-led system of managed (flexible) fixed exchange rates and the form that a managed stock of international liquidity reserves and payment media would take, if it would encourage wider agreement. (He stressed that the search for unanimity was an evil to be avoided.)

This fluidity as to details was to serve him well when he was negotiating with America during the Second World War over Lend-Lease and especially the post-war monetary system in that the Americans had firmly held demands and alternative plans of their own, which when added to Britain’s weak financial position, meant that Keynes was forced to negotiate from a distinctly weak position. Thus, the 1923-30 period was the stage of Keynes’s developing international relations views that Markwell calls “early liberal institutionalist.” Free trade could be beneficial, he was saying, but only if a properly functioning international monetary institution was adopted.

Briefly, we proceed on to the third stage of Keynes’s views on the economic element in international relations. Here the question becomes more starkly the universal nature of the coincidence of free trade and peaceful international relations. This stage arose out of Keynes’s participation on the Macmillan Committee on Trade and Finance (1929-31), the Economic Advisory Council set up by Ramsey McDonald, and particularly its Committee of Economists (created in July 1930, and to which also belonged William Beveridge, A. C. Pigou and Lionel Robbins) and in the pages of the political affairs journal that he headed at the time, the New Statesman. All of this activity arose from the need to respond to the international crisis that arose from the Great Depression and its particular impact on Britain.

In this and the fourth stage of Keynes’s grappling with international relations questions, Markwell emphasizes continuity in Keynes’s evolving views. The economist in me wants to call the first issue one of political context and, therefore not economically fundamental. But Markwell makes a good case that the last two stages of Keynes’s thought in this regard should be seen as merging into, and reinforcing, one another. The fourth phase he identifies is the period after 1933, sometime between 1934 and 1936, depending on when one judges Keynes to have been in control of the central propositions of his General Theory.

To go back, we should start with describing the third stage of Keynes’s views that Markwell describes as his “protectionist” phase. This occurred when, in the early years of the Great Depression, 1929-33, and to quite a bit of controversy, Keynes advocated protectionist measures for Britain, especially higher tariff barriers, as a way of combating the British unemployment of that period. He contextualized this recommendation by arguing that this unemployment had unfortunately occurred within a world system where the gold standard made the pursuit of free trade for “creditor” countries (such as Britain was since 1914) a road to even higher domestic unemployment than it was already experiencing. This was because, in order to maintain its balance of payments, it was forced to run a high-interest rate policy and deflation to protect its reserves. In this circumstance, and again barring a better international monetary system that seemed so impossible to him at that dark stage in history, Keynes gave a limited endorsement to British protectionist policy in the then-current economic emergency and for the short term. One detects almost a reluctance on his part to do so. And, indeed, his about-face was controversial enough on the Economists Committee that Robbins found it necessary to both author a dissenting minority report, attack Keynes’s position in the press and later author, with Beveridge and other LSE economists, a book defending free trade even in this context (Beveridge et al. 1931).[2] Consider Markwell’s comment on Keynes in this period: “Keynes’s renunciation of free trade came, hesitantly, and then boldly, in proposals, first, for emergency tariffs, and, secondly, for greater national self-sufficiency and economic isolation. Keynes moved from admitting that the classical connection between free trade and peace was an argument against a tariff, but one outweighed by the economic emergency; through saying that his proposed tariffs could also help international amity; to denying that free trade did in fact promote peace” (p. 153).

His argument in the context of such an economic emergency as the Great Depression seems to have been analogous to the old saw that “the patient cannot stand the cure.” He thought that Britain was in such a crisis with regard to unemployment, that her money wages were too rigid for deflation to work its classic role in bring down costs, that the gold standard had so limited the range within which domestic economic policy had to maneuver, and that so many other countries were reacting to this crises by erecting tariff barriers of their own (effectively exporting their unemployment problems to Britain), that he had become “reluctantly convinced” (p.154) that protectionism was the best temporary policy Britain could pursue in this circumstance.

Economists, and particularly specialists in macroeconomics and in Keynes’s thought, might immediately wonder if the drafting of the General Theory of Employment, Interest and Money did not have a profound effect on Keynes’s ideas on this question. Less historically minded economists might also wonder if, and how, the perspective of macroeconomics might alter one’s view of the universal argument for the benefits from trade. Again the history of Keynes’s own international relations positions offers examples of him facing exactly this question. Consequently, the fourth and last stage that Markwell identifies in Keynes’s evolving views on international relations ? what he calls the “mature liberal institutionalist” phase ? was based on just this issue. Again depending on when one judges the proposition of the General Theory to have been drafted, in some period during the middle part of the 1930s, Keynes developed a more fundamental economic theory framework in which to argue the point about protectionism that we have seen him making on pragmatic policy grounds in the early years of the Great Depression. In the General Theory and after, Keynes insisted that the question of the economic causes of war and the advisability of protectionist, anti-trade measures depended on how close the economy was to full employment ? and this extended to his advice to the government during the Second World War, when he judged the economy to have met this condition. Short of this internal goal, Keynes said that countries were unlikely to reap the potential benefits from free trade described by classic liberal economics. This was because the temptation was too strong for any one country to erect tariff barriers around itself to boost the demand for domestic producers. It was Keynes’s view that the policies of many nations since 1929 offered examples of this. Since competitive attempts to export domestic unemployment to another country eventually ended in lowering employment in them all, protectionist policies became a second best solution in this context. Better that each county should act in isolation from international forces to raise domestic employment to its full potential, by lowering interest rates and bolstering demand for domestic industry in any way possible. According to Keynes, “if our central controls succeed in establishing an aggregate volume of output corresponding to full employment as nearly as practicable, the classical theory comes into it own again from this point onwards” (p. 186).

Here we can quote Markwell to the effect that Keynes hereby modified his position on the economic causes of war in a fundamental way:

In short, Keynes’s argument was both that laissez-faire did not have the tendency to peace claimed for it, and that a reformed capitalism along the lines he advocated would much improve the prospects for peace. Keynes said that ‘the new system might be more favourable to peace than the old has been.’ It is not clear whether by this Keynes meant simply that past causes of war would be absent, or that with these gone and free trade, some of the mechanisms classical liberals claimed were the means by which free trade actively promoted peace would work again. Such mechanisms included the creation by trade of vested interests in peace, and the promotion of moral solidarity between nations trading with each other.

Here is the final issue that modern economists might profit from pondering as a result of reading this book. Keynes was saying in the 1930s that countries had first to ensure full employment before they could anticipate the mutual economic gains and the possible peace dividends that trade holds out. If the economic system of a free-market economy does not automatically tend toward full employment, but needs to be managed to attain this goal consistently through time (and surely this is the basic lesson of macroeconomics even to this day), then it is a mistake to think and preach that free trade is some sort of divinely given cure for all economic ills, in all contexts, domestic and foreign.

Keynes, of course, should not be looked on as an infallible guide in pondering this issue. He was fallible in judgment even within the field of international relations that Markwell surveys here. For one, his self confidence about his cleverness in designing policy fixes often led to disastrous negotiations on his part with his official American counterparts during the Second World War. Harry Hopkins, the special advisor to U.S. President Franklin Roosevelt, reportedly expressed this irritation in his comment that Keynes was “one of those fellows that just knows all the answers” (Chandavarkar, 2001).

Moreover he showed a complete lack of understanding of the American political process. Used to dealing exclusively with ministers and their Whitehall staff in the more centralized English system, he was dismayed by the power of individual Congressman. Also, not only was Keynes unnecessarily rude to these Congressman, who he often gave the impression that he considered them provincial and beneath him, but his haughty behavior was also unwise, in that those very Congressmen could hold up American aid for British needs. He similarly accused the White House and State Department of being too timid in its relations with Congress, not realizing that the American Constitution gave Congress control of appropriations, whatever the White House may have negotiated for with the British.

But Keynes’s faults were more than outweighed by his many talents. Keynes’s insight into how economies work, combined with his ability to understand and exert influence over the process of policy creation, is unlikely to be seen again in today’s era of extreme specialization. As such, modern economists, whether they agree with his judgments or not, can learn valuable lessons in the political economy of policy application from following his career in international relations in the context of numerous actual international crises. Markwell does a fine job in showing, over numerous issues, how difficult and how much skill is required to apply economic reasoning in the realm of international relations. Markwell’s greatest attraction for an economist is that he shows how Keynes pursued this activity with skill and subtlety in the context of many of the weightiest geopolitical issues to face the West in the twentieth century. It is one measure of Keynes’s and others’ ultimate success in this context that it is hard now to even imagine Germany and England at war. We, as economists, can learn a great deal from a recounting of his experiences in establishing this peaceful and prosperous state of affairs in Europe. Perhaps it might even make us a bit humble to contemplate that it may be in large part due to Keynes’s own work both in economics and politics, to the wisdom of the architecture and implementation of the Marshall Plan, which was surely in the spirit of Keynes’s ideas, and to the way in which economies have been managed since his time, that we have the luxury of not facing his unpalatable choice between free trade and full employment.

Notes:

1. Also note that Keynes therefore wanted to destroy what he considered a “barbarous relic” of the nineteenth century, the belief that the gold standard operated “automatically” to restore international imbalances and that this meant it would encourage trade. Alternatively, a major message of Keynes throughout this period was that the gold standard was not, in fact, operating automatically by the pre-war rules of the game in the period after World War One because the U.S. and the Federal Reserve System refused to let its own eventual control of the majority of the world’s monetary gold cause U.S. prices to rise. Keynes thought this unfairly forced upon all other “creditor” nations the problems, noted above, of choosing to abandon international monetary arrangements, to competitively devalue its currency or to run a ruinous deflation.

2. It is instructive to modern economists that Robbins later, in his autobiography (Robbins, 1971), recanted his opposition to Keynes during those depression years.

References:

Chandavarkar, A. 2001. “A Fresh Look at Keynes: Robert Skidelsky’s Trilogy.” Finance and Development, Vol. 38, no. 4, December.

Moggridge, Donald. 1992. Maynard Keynes: An Economist’s Biography, Routledge.

Robbins, Lionel C. 1971. Autobiography of an Economist, Macmillan.

Skidelsky, Robert. 2000. John Maynard Keynes: Fighting for Britain, Macmillan.

Michael S. Lawlor is Professor of Economics, Wake Forest University, Winston-Salem, North Carolina. His most recent publication on Keynes is The Economics of Keynes in Historical Context: An Intellectual History of the General Theory (2006).

Subject(s):International and Domestic Trade and Relations
Geographic Area(s):Europe
Time Period(s):20th Century: WWII and post-WWII

Glass Towns: Industry, Labor, and Political Economy in Appalachia, 1890-1930s

Author(s):Fones-Wolf, Ken
Reviewer(s):Irons, Janet

Published by EH.NET (October 2007)

Ken Fones-Wolf, Glass Towns: Industry, Labor, and Political Economy in Appalachia, 1890-1930s. Urbana, IL: University of Illinois Press, 2007. xxviii + 236 pp. $25 (paperback), ISBN: 978-0-252-07371-7.

Reviewed for EH.NET by Janet Irons, Department of History, Political Science, and Economics, Lock Haven University.

It is unusual for an historian to give equal weight in the same book to two different topics: the micro-world of the transformation of the labor process on the one hand, and the macro-world of political economy on the other. Yet that is what Ken Fones-Wolf, professor of history at West Virginia University, accomplishes in his book Glass Towns. Using West Virginia as his setting, the author traces the rise and fall of what he calls the “development faith,” a belief in the promise of a high-tariff, high-wage economy as a path to prosperity. Embraced by the party of Lincoln, this faith is contrasted with the low-wage, low-tax economic strategy pursued by West Virginia (and southern) Democrats during the period of industrialization. Glass Towns chronicles the clash in these two economic visions when, at the end of the nineteenth century, communities in northern West Virginia recruited high-wage glass factories to their towns.

In contrast to West Virginia coal interests, who were absentee owners and had little commitment to local prosperity, local Republican political leaders in northern West Virginia counties sought industries whose profits would be recycled back into the community. Glass factories, protected from competition by a high tariff and run by highly paid craftsmen, fit the bill. Fones-Wolf draws on the recent insights of economic geographers to identify the motivation for the glass plants to relocate to these towns. The northern panhandle and the upper Monongahela valley had access to transportation, to skilled labor from nearby Pittsburgh, and most importantly, to pockets of natural gas which would prove ideal for powering glass factories.

The impact of the migration of Belgian and French-born glassworkers to these rural West Virginia communities is a story all by itself, and Fones-Wolf does not neglect the social and cultural implications of the glass industry’s relocation there. But the author (and the reader of EH.Net) is more interested in chronicling how the promise of the development faith subsequently became undermined when the high wage structure of the glass industry was eroded by mechanization and deskilling. This change process, the most complex part of the book, is carefully traced by means of case studies in three glass towns: Moundsville, Clarksburg, and Fairmont. Each represented a different branch of the glass industry and in each case the way that the labor force was restructured by technology was different.

In the most disappointing outcome ? the glass bottle industry in Fairmont ? mechanization deskilled the labor force to such an extent that the craft workers left or accepted new positions in the plant, and the low-skilled workers who took jobs there did not earn wages above the average state wage level. Despite some initial progress in local economic development, firms from Ohio and Connecticut built large factories there and dominated the local economy, a cruel epitaph for a development faith whose promise was the local character of the industry. Not incidentally, it was also in Fairmont that the coal industry had the greatest political influence.

In the most successful town, Clarksburg, deskilling did not fundamentally undermine the need for the most skilled craft workers for at least a generation. The story of Clarksburg, especially, illustrates how aware the author is that this is not simply a story of Republican versus Democratic political economies. Belgian craft workers in this “craftsman’s paradise” formed unions and cooperatives and developed a rich cultural and political presence which finally led to their breaking with the party of Lincoln and embracing Socialism or even Democracy. Workers thus became sometime allies, and sometime foes, to the two main political parties, contributing a third and complicating vision.

The structural underpinnings for a political economy based on high wages disappeared almost completely by the 1920s in all three communities, and the model for worker power which rose in the following decade was that of mass-production unionism linked to the Democratic Party, not skilled craft unions tied to a Republican political elite. As Fones-Wolf writes, the mass production workers in the 1930s “elbowed aside those skilled workers who had struck bargains with Republican politicians and employers who had tried to buy labor peace with sops to a skilled craft elite” (p. 176). Although the craft unions were pushed aside, it is nevertheless true that there was greater receptivity to unionism as a whole in towns like Clarksburg where craft unions had once flourished, than in Fairmont, where unionism in the glass industry had to wait until World War II.

Glass Towns is a deft combination of astute analysis and incisive reporting. The author hews to the parameters of his topic, producing a thorough, carefully argued work. As I tried to determine what else I had read that explored experiments in high-wage economic development in similar depth, I was reminded of the book Worked Over, by Dimitra Doukas, about the town of Ilion, New York [1]. Like the glass towns of West Virginia, Ilion prospered because the high wages of craftsmen in the gun industry there were recycled in the community. This recycling of income was made possible by the town’s geographical isolation. And like the glass towns, Ilion’s prosperity was undermined by mechanization and deskilling, triggered by the sale of the gun factory to owners outside the community. Both of these works uncover something of a hidden history, suggesting that we are beginning to shift our emphasis in the way we describe the contours of economic change in the U.S. in the late nineteenth century.

A reading of Glass Towns also provokes questions about its place in international debates about political economy. Here I was reminded of the classic work by Fernando Ortiz, Cuban Counterpoint: Tobacco and Sugar. “Tobacco has created a middle class,” Ortiz wrote, while “sugar has created two extremes, slaves and masters, the proletariat and the rich.” If coal was Appalachia’s sugar, owned by outsiders, committed to keeping wages low, then glass towns had the potential to be Appalachia’s tobacco-based communities, what Ortiz called “the abode of free men” [2].

For a generation, perhaps, the glass industry did produce a middle- class in these West Virginia towns. However, Fones-Wolf’s conclusion emphasizes the failure of the development faith to take permanent root. In part this failure stemmed from a tragic coincidence of forces: since the glass industry was mechanizing even as it was migrating to the natural gas fields of West Virginia, the faith that glass would transform northern West Virginia may have been misplaced from the start. But one could also argue, and Fones-Wolf does, that the sheer size and weight of the coal and energy sector in West Virginia overwhelmed the possibility of a political economy, based on glass, that would support self-sustained development. It would be interesting to know how these conclusions compare with the outcome of similar contests in other parts of the world.

While it is of great value to search for a broader geographical framework within which to place the story Fones-Wolf has told, one need not go far to find meaning from Glass Towns. It is startling enough to learn that in a place with the historic reputation of West Virginia, the promise of self-sustaining development took root to the extent that it did.

References:

1. Dimitra Doukas, Worked Over: The Corporate Sabotage of an American Community (Cornell University Press, 2003).

2. Fernando Ortiz, Cuban Counterpoint: Tobacco and Sugar (originally published 1947, reprint, Duke University Press, 1995).

Janet Irons teaches labor history at Lock Haven University of Pennsylvania.

Subject(s):Urban and Regional History
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII