Capitalism’s Success Stories The Rise of 19th Century Capitalist Economies

Today�s Class •  Brief Review •  19th Century Hegemon •  Gold and Monetary Policy •  Other Success Stories

Brief Review

Basic Concepts l Production, specialization & trade

(comparative/absolute advantage) l Balance of payments

(imports, exports, investments) l Macro-economic policy

(fiscal, monetary) l Currency exchange rates

(floating, managed, trade deficits)

Balance of Payments l  In calculating the

balance of payments between countries, there are three main accounts to consider: current, capital, and official reserve accounts.

l Economists also calculate the margin of statistical discrepancy.

l  Current Account n  Imports: Goods/Services n  Exports: Goods/Services n  Investment Dividends n  Government Goods/Services

l  Capital Account n  International Investment

l  Official Reserves n  Foreign Currency n  Gold

Current Account Balances Compared Cumulative Balances from 1980-2008

https://upload.wikimedia.org/wikipedia/commons/3/32/Cumulative_Current_Account_Balance.png

U.S. Billions

Simon Norfolk On Monday, September 17, 2007, Dr. Shirk spoke at an exhibition of border art by photographer Simon Norfolk at the Chicago Museum of Contemporary Photography. Norfolk was born in Lagos, Nigeria in 1963 and received degrees in Philosophy and Sociology at Oxford and Bristol Universities. His work has examined war zones and conflict areas.

Kabul

Thomas Cole, �Pastoral State,��The Course of Empire (1836)

Cole, �Consummation of Empire,��The Course of Empire (1836)

Thomas Cole, �Destruction,��The Course of Empire (1836)

Thomas Cole, �Desolation,��The Course of Empire (1836)

Frieden, Global Capitalism Prologue-Into the 20th Century: From Waterloo (1815) to the growing tensions of the 1890s.

Frieden, Global Capitalism Ch 1—Global Capitalism Triumphant: From the U.S. Populist Movement to the lead up to World War I.

Wizard of Oz as Allegory •  Frank Baum’s book is

an allegory of the Panic of 1893

•  By the end of the great depression, it was also a symbol of U.S. transformation (from B&W to technocolor) and the coming of a new golden era

Dow Jones Industrial Average, 1800-2003

Dorothy: The everyman, led astray, but able to stand up to power (The-o-dore backwards)

Scarecrow: Wise, but naïve western farmer

Tin Woodman: Dehumanized industrial workers

Cowardly Lion: William Jennings Bryant, and perhaps all politicians

Dow Jones Industrial Average, 1800-2003

Wicked Witch of the East: Eastern industrialists/bankers killed by Dorothy’s (political) cyclone

Dow Jones Industrial Average, 1800-2003

Munchkins: Little people oppressed by the wicked witches (bankers and industrialists)

Dow Jones Industrial Average, 1800-2003

Yellow Brick Road: Hazardous path of gold

Dow Jones Industrial Average, 1800-2003

William Jennings Brian: “Having behind us the producing masses of this nation and the world, supported by the commercial interests, the labouring interests, and the toilers everywhere, we will answer their [i.e. the bankers’] demand for a gold standard by saying to them: ‘You shall not press down upon the brow of labor this crown of thorns; you shall not crucify mankind upon a cross of gold.'” (WJB, age 36)

Loud roar, no power: Bryan (1860-1925) ran for the presidency in 1896 and lost to William McKinley.

Dow Jones Industrial Average, 1800-2003

Silver (not ruby) slippers: Populist cure for Panic of 1893 was “free, unlimited coinage of silver”

Dow Jones Industrial Average, 1800-2003

Wicked Witch of the West: Western industrialists/bankers attempting to seize control of silver

Dow Jones Industrial Average, 1800-2003

Emerald City: Fraudulent world of greenback paper money (Washington, D.C.)

Wizard: Hapless

Gilded age presidents.

Frieden, Global Capitalism Ch 2—Defenders of the Global Economy: The supporters of the “Golden Age” of Capitalism.

The Gold Standard •  Britain’s hegemony

in international markets bolstered and was bolstered by the adoption of gold as the primary basis of currency instruments around the world.

Nathan Rothschild

Exchange Rates: The Price of Currency

•  The price of one currency relative to another is known as the currency exchange rate

•  The number of units of a currency required to buy another currency uses a simple formula: o Y-to-X exchange rate = o  1 / X-to-Y exchange rate

The more abundant the supply of pesos, the fewer dollars it takes to buy them. Conversely, the fewer dollars available, the more pesos required to buy a dollar.

Exchange Rate: Market Price

$1.00 = 10 pesos $0.50 = 5 pesos $0.25 = 2.5 pesos $0.10 = 1 peso

10 pesos = $1.00 5 pesos = $0.50 2.5 pesos = $0.25 1 peso = $0.10

Dollar to Peso Exchange Rate:

Peso to Dollar Exchange Rate:

$-to-peso exchange rate = 1 / $-to-peso exchange rate

How It Works: La Casa de Cambio

Exchanging Dollars 9.75 pesos 10.25 pesos BUY SELL

Exchanging Pesos .0975 dollars .1025 dollar

Converting dollars to pesos: I will sell you one peso for .1025 dollars, for a $0.0025 profit. Or every dollar you give me, I will give you 9.75 pesos (keeping .25 pesos as profit). Converting pesos to dollars: I will sell you one dollar, if you give me 10.25 pesos (making a 2.5% profit). Or I will buy a peso from you for .0975 dollars (making a 2.5% profit).

$-to-peso exchange rate

1 / $-to-peso exchange rate

Currency Exchange Markets •  The supply or demand for a

given currency is what primarily determines its value

•  Several factors affect supply and demand: government policy, trade, and currency markets.

Exchange Rate: Floating or Managed? •  Floating Exchange Rate:

Currency value is determined by market demand without any government intervention.

•  Managed Exchange Rates: Government or central bank attempts to influence a currency’s value by: 1) “targeting” a specified range, 2) “pegging” its value to another currency, or 3) setting an official “fixed” rate of exchange.

Theoretically, currency values �float� freely in the market. However, most governments try to manage their currency�s value in some way. When a country�s currency value is fixed, the government exchange rate may not reflect actual demand for the currency, contributing to a �black market� in which buyers and sellers trade the currency at market rates.

The Gold Standard Using gold as currency or as the basis of a “fixed” currency offers the advantage of stability, but creates the problem of inflexibility and zero-sum competition.

Frieden, Global Capitalism Ch 3—Capitalism’s Success Stories: The experiences of Britain, the United States, Germany, & Japan.

The Case of Great Britain

•  Compared to other European states, the United Kingdom had unique advantages that enabled it to develop a strong national economy and rapidly expand its colonial holdings.

The Industrial Revolution

•  The 18th and 19th centuries brought technological innovations in energy (coal to steam), production (machinery), transportation (railroads), and communications.

The invention (or perfection) of the steam engine by Thomas Newcomen (1712) made it possible to harness the power of combustion to increase productivity and speed up the transportation of goods in the economy.

Technological Change and Industrial Restructuring

•  Geography: British isles �uneven� geography amenable to textiles.

•  Unified national identity: Merging of England & Scotland in 1707.

•  Maritime imperitive: Need to develop specialized industries.

•  Population growth: Pressure for free trade in agriculture.

•  Head start: Early advances enabled vast colonial holdings.

Britain’s Advantages

Liberalizing Governance & Trade •  Charter of Liberties

(1100) •  Magna Carta (1215) •  Corn Laws

(1815-1846) •  Navigation Acts

(1651-1849) •  Cobden Chevalier

Treaty (1860)

Colonial Expansion •  In the age of

mercantilism, national competition was fueled by colonial expansion to gain resources and power by expanding territorial control and influence into the Americas, Africa, Asia, and the South Pacific.

British Colonialism

Capitalism’s Other Success Stories

Late 19th Century Shift •  New technologies

(trains, steamships, telegraph, refrigeration, and chemicals)

•  Emerging industrial economies with large domestic markets (USA, Germany), as well as newcomers like Japan.

Global Industrial Production (%) Table 3.1, Lairson and Skidmore, p. 50.

1870 1880s 1890s 1900s U.S. 23 29 30 35 U.K. 29 27 20 15 Germany 13 14 17 16 France 10 9 7 6 Russia 4 3 5 5 Japan 0 0 1 1 India 0 0 1 1

Shifting Production, 1870s-1910s

Source: Table 3.1, Lairson and Skidmore, p. 50.

0

5

10

15

20

25

30

35

1900s

United States United KingdomGermany FranceRussia JapanIndia

The Case of the United States

An Emerging Hegemon •  After gaining

independence, United States enjoyed abundant advantages, including a large territory, abundant resources, a growing population, flexible institutions.

The Case of the United States •  Consolidation of

nation-state •  Centralization of

political authority •  Restructuring from

agriculture to manufacturing

•  National identity forged to reduce social cleavages

Competing Interests •  Jefferson’s vision

argued for an agrarian society, and favored free trade in agriculture.

•  Hamilton’s vision argued for an industrial society and advocated the protection of infant manufacturing industries Alexander Hamilton

Thomas Jefferson

Friedrich List •  Also reacting to the

perceived threat from the United Kingdom, German immigrant Friedrich List argued for U.S. protectionism, claiming that “The power of producing [is] infinitely more important than wealth itself.”

Friedrich List (1789-1846) was a German exile and vigorous proponent of mercantilist policies in the United States.

A Reluctant Hegemonic Power •  With British economic

power in decline, the United States was the world’s emerging hegemonic power

•  U.S. isolationism and reluctance about global leadership created a power vacuum in the international system

Today, incidentally, the U.S. population has similarly isolationist views…

The Case of Germany

The Case of Germany •  Consolidation of

nation-state •  Centralization of

political authority •  Restructuring from

agriculture to manufacturing

•  National identity forged to reduce social cleavages

Key Dates in German History •  Holy Roman Empire

(962-1814) •  Protestant Reformation

(1517) •  German Confederation

(1814) •  German Customs Union

(1834) •  German Empire (1871)

The champion of German integration, Chancellor Otto Von Bismarck (1862-90) promoted Prussian expansion vs. Austria (1866) and France (1870), forged the German Empire, and established a fragile balance of power in Europe (later eroded after Emperor Wilhelm II removed Bismarck in 1890).

The Case of Japan

The Case of Japan •  Consolidation of

nation-state •  Centralization of

political authority •  Restructuring from

agriculture to manufacturing

•  National identity forged to reduce social cleavages

The Case of Japan •  Tokugawa

Shogunate (1600-1867)

•  Foreign intrusion by U.S. and U.K. (1850s)

•  Meiji Restoration (1867)

•  Russo-Japanese War (1904)

IMAGE SOURCE: http://reformation.org/tokugawa-ieyasu.jpg

Tokugawa Ieyasu (1543-1616)

The Case of Japan •  Tokugawa

Shogunate (1600-1867)

•  Foreign intrusion by U.S. and U.K. (1850s)

•  Meiji Restoration (1867)

•  Russo-Japanese War (1904)

Commodore Matthew Perry

IMAGE SOURCE: http://www.japantravelinfo.com/uploads/Image/MatthewPerry_aj(5).jpg

1853 Black Ships in Edo Harbor

The Case of Japan •  Tokugawa

Shogunate (1600-1867)

•  Foreign intrusion by U.S. and U.K. (1850s)

•  Meiji Restoration (1867)

•  Russo-Japanese War (1904)

The Emperor Meiji

IMAGE SOURCE: http://www.waidev2.com/php/IMAGES/HC_ThisDayInHistory/MeijiRestorationinJapan.jpg

Iwakura Mission, 1871

The Case of Japan •  Tokugawa

Shogunate (1600-1867)

•  Foreign intrusion by U.S. and U.K. (1850s)

•  Meiji Restoration (1867)

•  Russo-Japanese War (1904)

Japanese Naval Power vs. Russia

British training of Japanese naval

forces

Japanese propaganda featuring Tsar Nicolas II and his true-life nightmare: a Japanese victory in 1905 (achieved through the defeat of the Russian Pacific Fleet at Port Arthur, and the �Second Pacific Fleet� from the Baltic Sea. In 1905, an unsuccessful

revolution sought to oust Nicolas from power.

Japan Defeats Russia

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