PART 2—
EUROPE

3—
Spenders and Hoarders the World Distribution of Spanish American Silver, 1550–1750^[*]

Introduction

Anglo-Saxon history of economic thought, which may be ethnocentric, puts the beginning of the end of mercantilism, and especially its bullionist component, about the 1620s with the writings of Thomas Mun (1621; 1664 — the latter written in the 1620s), and the end in the 1750s with David Hume's Essays (1752). The picture is not completely accurate. The Italian city-states, especially Venice, permitted the export of precious metals received from central European mines eastward to the Levant in exchange for Middle Eastern and Asian luxuries, well before the flood of silver from Spanish American mines into Europe after 1560. Having liberated itself from the Midas complex (DeVries, 1976, p. 239), Holland in the early seventeenth century was more relaxed than England in allowing bullion and foreign coin to be exported. But the progression from bullionism to the price-specie-flow mechanism — from preoccupation with accumulating gold and silver to the realization that a self-equilibrating mechanism was at work — was confined to Europe over the two centuries it required. At the other ends of the

[*] Reprinted from a pamphlet published by the Asean Economic Research Unit of the Institute of Southeast Asian Studies, Singapore, 1989. I acknowledge with thanks help from Moses Abramovitz, Arthur Attman, William S. Atwell, Paul Bairoch, Rondo Cameron, John K. Fairbank, Ole Feldbaek, Albert Feuerwerker, Wolfram Fischer, Dennis Flynn, John Hurd, H.C. Johansen, P.W. Klein, William H. McNeill, Peter Petri, Eric Schubert, Barbara Solow, Paul Streeten, Birgit Nuchel Thomsen and Stein Tveite, of whom I asked questions or who provided comments. Since I may lack the background to understand their answers or their observations, they are absolved from the mistakes that follow.

earth, in Spanish America (and Spain) and in the Middle and especially the Far East, different models prevailed.

Potosí in Peru (modern Bolivia), which produced silver in prodigious quantities from 1560, and Mexico to a lesser extent a century later, viewed silver as a commodity rather than money and were ready to part with it. Spain was like the rest of Europe in wanting to keep silver within its borders, but resembled Peru in being unable to hold on to it. In Asia, China and India were sponges that soaked up the streams of silver flowing through Europe (and the Philippines) from Spanish America. Instead of one developing price-specie-flow model, there were three: equilibrium, persistent deficits, and persistent surpluses. Peru, Mexico, and Spain were what are called today "high absorbers," economies that spent heavily for private and public consumption, including, in the last, military expenditure. China and India, on the other hand, were 'low absorbers", with high propensities to save or hoard. The demand for goods at one extreme and for silver and gold at the other was characterized in terms of the human condition: Potosí was "starved for goods" (Borah, 1954, p. 82). India had "a voracious appetite for precious metals" (Richards, 1983, p. 183) or "an ever-thirsty insatiable market" (for silver) (Perlin, 1983, p. 68). China had a "hunger for silver" (Parry, 1967, p. 210), or an "avidity" (Spooner, 1972, p. 77).

There is some question whether India and China were really different from Europe. Chaudhuri, who posed the question, thinks not (1978, p. 156), maintaining that the "role of silver in the commercial life of India may appear on closer examination to have been fundamentally determined by the same type of considerations as elsewhere" (ibid., p. 182). An expert on Chinese monetary history first noted that the Chinese government's silver revenues would normally have been spent in substantial proportion on goods and services and thus re-entered the economy and the monetary system, but that in the late Ming period (1368–1644), they fell into the hands of powerful political and military figures, many of whom chose to hoard. In a subsequent footnote, however, this expert questioned whether the Chinese habitually hoarded a higher percentage of their precious metals than other pre-modern peoples (Atwell, 1982, p. 88).

This paper is addressed to the economic forces that determined the amounts of silver that stayed in various countries or passed through. I write as an economist, not as an economic historian, responsive to Coleman's remark that economists make theories, and historians want evidence (1969, p. 2). The central issue is whether there is one balancing model of the balance of payments — the price-specie-flow model in the period concerned — or three, with persistent surpluses and persistent deficits along with balance. The analysis runs in terms of Alexander's

terms of absorption or spending propensities rather than the elasticities implicit in Hume's model based on prices. Several considerations govern the choice. In the first place, after decades of acceptance of the quantity theory of money and the explanation of the price revolution of the sixteenth and seventeenth centuries in Europe as caused by Spanish American silver imports, revisionists have begun to raise doubts. The rise in prices preceded the silver arrivals by several decades, and was much more pronounced in food than in prices in general, suggesting that it was caused more by real than by monetary factors, and especially by the faster comeback of population than of agriculture after the Black Death of the fourteenth century (Outhwaite, 1969). Secondly, price data in the Far East are fragmentary and localized. In India a discussion of "one great rise" of prices between 1610 and the mid-1630s relies on evidence on sugar, indigo, copper, and gold (Habib, 1982, pp. 275ff.); another on copper and indigo alone (Brennig, 1983, pp. 495–6). A discussion of Chinese prices is confined to rice, assumed to be representative of prices in general (Wang, 1972, p. 348). In this paper, it is assumed that gains or losses of specie are based on low or high absorption as much as on low or high prices; of course, the two may be correlated. The monetary approach to the balance of payments under which an excess supply of money, relative to demand, spills over into imports of merchandise and exports of specie, and an excess demand into a merchandise surplus and imports of specie, may have it right for the Far East. In Europe of the sixteenth and seventeenth centuries, however, mercantilist concern for an export surplus to add to the money supply was especially strong because the bullion famine of the fifteenth century had been a consequence of luxury imports from the East that had drained the money supply (Day, 1978).

Among the forces that determined the balance of payments, then, were prices, the money supply, and, of primary concern here, spending and non-spending or hoarding. How much specie and coin were used as money, how much sought as assets for conspicuous consumption or insurance against disasters of one or another sort, and, of the money, how much was retained in the country to help circulate national income, how much spent abroad?

The suggestion that persistent surpluses and deficits can occur alongside the balancing model has some relevance to the present day with dollars (silver) pouring out of the United States (Peru, Mexico, and Spain), circulating into and out of Europe, and ending up — some going directly, to be sure — in the coffers of Japan and Taiwan (India and China). The parallel is inexact because the mining of silver in the earlier period was an economic activity based on costs and selling prices, whereas the dollars in excess supply since at least 1971 have been produced

costlessly. The pattern of the world distribution of Spanish silver, therefore, is of interest both in its own right and as a cautionary tale for the United States today.

Crisis

The period from 1550 or 1600 to 1750 in Europe, and various portions of it, are widely described in the historiography in terms of "crisis". Sometimes the crisis is financial, sometimes real. The word "crisis" appears often in the title of histories: DeVries (1976) covering 1600 to 1750, with the emphasis on finance, and a book edited by Aston (1965), covering 1560 to 1660 and dealing largely with real factors, are examples. The latter contains essays by Hobsbawm and Trevor-Roper on crisis in the seventeenth century, both in real terms: Hobsbawm ascribing it to the transition from feudalism to capitalism, Trevor-Roper to the changes taking place between society at large and the emerging nation-state.

Many of the crises pointed to are local. Crisis in Venice is typically thought to have arisen after the Age of Discovery of the fifteenth century because of the diversion of trade with the East from Venice—Aleppo and Venice—Alexandria to direct trade around the Cape of Good Hope, first in Portuguese caravels and, from 1600, in the ships of the Dutch and English East India companies. An idiosyncratic view is that Venetian trade to the Levant continued for a century after 1550, and that the decline of that city-state was rather the result of British competition with Venice, not without deception, in woolen textiles and soap (Rapp, 1976). Trade depression in England in the 1620s has especially been seen in crisis terms, with a variety of not necessarily exclusive causes such as Alderman Cockayne's abortive project for forbidding the export of unfinished, undyed cloth to Holland for dyeing and finishing there, the East India Company's exports of silver to the Far East, and especially the debasement of Polish and German currencies as a result of the Thirty Years War (Gould, 1954; Supple, 1959, ch. 4). Another view suggests that part of the English crisis of 1621 may have been related to a cutoff of Dutch lending to Britain in response to the arrest and trial in Star Chamber of eighteen prominent foreign merchants — mostly Dutch — on charges of exporting £7 million in coin — a large sum for those days (Barbour, 1966, pp. 53, 123). There was occasional crisis in particular markets, as in 1619 when the short Anglo-Dutch war in Asian waters ended and both East India companies brought heavy shipments to Europe, resulting in a pepper glut. Related to the Polish and German currency debasements was a flood of copper over Europe from Sweden as it ransomed the fortress of Alvborg from the Danes in compliance with the 1613 Treaty of Knared — copper used to extend the coins of

Spain as it ran short of silver and to adulterate the outputs of Polish and east German mints in the Kipper- und Wipperzeit (period of clipping and debasement).

The connection between real deep-seated change and financial crisis is illustrated by the Polish and East German debasements. The grain-export boom in those countries was the consequence of the rise in populations recovering from the Black Death of 1348, and especially the rise of towns in southern and western Europe faster than agricultural output came back. In the debate between monetarist and real-forces historians, this is the explanation of the latter for the price revolution of the sixteenth century rather than the later sharp increase in silver imports from Spanish America. The comeback of agriculture in the west of Europe in the seventeenth century was critical for east Germany and Poland. The changing structure of agriculture in the west produced a crisis there as well (Ruggerio, 1964). Rice competed with wheat in Italy and Spain as maize did in France. New products of mass consumption were appearing — sugar, maize and tobacco from the New World, calico and tea, to add to the luxuries of pepper, spices, porcelain, and silk, from the Far East. A transition was under way from traditional society based on self-sufficient peasants at the bottom to a market society using money to buy mass consumption goods, not only in food but also in the new instead of the old draperies. As part of this transition, monetization increased, and hoarding decreased. The changes did not come all at once all over Europe, but at different rates in different countries. Postan and Braudel each dismiss theories based on discrete stages which follow one another in succession, for example, that of Hildebrand, postulating stages of natural economy, metallic money and credit, or materialism (self-sufficiency), market economy and capitalism. Postan (1973) and Braudel (1981; 1982; 1984) both claim they overlap. The real aspect of the crisis in Europe between 1550 and 1700 was that these changes — at different rates in different countries — were moving more rapidly.

Crises were not confined to Europe. Two recent articles on seventeenth-century Asia have the word "crisis" in their titles (Atwell, 1986; Wakeman, 1986), in one instance in quotation marks. Atwell (1986, p. 222) calls attention to the literature on crisis in Europe before asking whether there was a little ice age in the seventeenth century in the world as a whole. It is hard to see the connections.

Bullionism

There is a dispute in the literature on mercantilism whether it was largely an issue of money supply, or one of building the national state.

This need not concern us here as my interest is in the monetary aspects. There is something of a tendency today to regard the bullionist aspects of mercantilism as error, based on the failure of observers of the period to understand the self-equilibrating nature of specie movements, later recognized and elaborated by Hume. This negative judgment is being modified. It is recognized that in trading with the East, the self-balancing mechanism did not function well, if at all. In Roman times, the Mediterranean world lost gold to the Middle and Far East (Simkin, 1968, pp. 45–6), and in the late Middle Ages the drain was continuous. The Middle East is called by Ashtor (1971) a sponge economy, soaking up gold and silver. Most of the gold was produced in the Sudan until the Italians and Portuguese diverted it after the sailors of Henry the Navigator made it around Cape Bojador in 1434 to the Gold Coast (now Ghana). The silver came largely from the mines of Central Europe, shipped by Italian merchants, mostly Venetians, with some from Central Asia (Ashtor, 1971, p. 39).

Day (1978) has described the "Great Bullion Famine of the Fifteenth Century" and Vilar (1976, p. 63) explains that the basic purpose of Columbus's voyage across the Atlantic was to obtain gold, a metal that he mentioned at least sixty-five times in his diary during the passage from August 3 to October 12 1492. With metallic coinage shrinking, trade rising, and a lag in the spread of Italian methods of credit, especially bills of exchange, bullionism was not a simple fallacy, like that of misplaced concreteness. "In economies without fully developed credit institutions, central banks and fiat moneys . . . concern about a country's coinage was hardly irrational" (Munro, 1979, p. 176). Such a mercantilist as Thomas Mun, who had been a merchant in Leghorn in the 1590s before joining the East India Company on its creation in 1600, knew about bills of exchange. In a famous passage, he stated that if the exchange in Amsterdam is against London because of an unfavourable balance of trade, the East India Company could obtain guilders to buy Spanish reals in Amsterdam by contemplating the countries where England had a favourable balance, "Spain, Italy, Florence, then next to Frankfurt or Antwerp until at last I come to Amsterdam" (Mun, 1664, p. 167). Mun scorned Maynes's view that country could control its exchange rate — a thought not irrelevant to the world of today — observing:

I have lived long in Italy where the greatest Banks and Bankers of Christendom do trade, yet I could never see nor hear, that they did, or were able to rule the price of Exchange by Confederacie but still the scarcity or plenty of mony in the course of trade did overrule them. (Ibid., p. 171)

The bill of exchange was spreading rapidly within Europe at this time. In 1585 bills on Amsterdam were traded in Antwerp, Cologne,

Danzig, Hamburg, Lisbon, Lübeck, Middleburg, Rouen, and Seville. By 1634 six more cities had been added, including Frankfurt, London, and Paris; by 1707 nine more (Sperling, 1962, p. 451). By Hume's time (the 1750s) the network had grown to resemble that of the time of Alfred Marshall more than a century later (Price, 1961, p. 273), sharply reducing the necessity for settling bilateral balances in Europe in specie, when overall trade was more or less balanced. But trade between Europe and the East was not in overall balance.

Data on Specie and Specie Flows

I choose not to try to sort out the great variety of estimates of specie production and flows into and out of Europe as a whole, and certainly not country by country. Figures for world production of silver have been produced by Hamilton (1965), reworked and supplemented with those for gold by Vilar (1976) as shown in Table 3.1.

The rise in gold output after 1680 is because of the discoveries at that time in Brazil. After declining from its 1580–1620 highs to 1700, silver production picked up in Spanish America in the eighteenth century since output in New Spain (Mexico) rose higher than it declined in Peru.

Precious metal arrivals at Seville were given by Hamilton by decades (and converted into rixdollars, broadly equal to one piece of eight or real , also spelled rial , in Arab countries riyal , and the plural in French réaux ) based on the records of the Casa de la Contratación (House of Trade). For a long time these data led to the belief that silver imports

from the New World declined from the 1630s. Subsequent investigators have challenged this widely accepted view, noting in part that there was a break after about 1630 when the bar on the Guadalquivir River at San Lucar shifted and larger ships could not make their way to Seville, but unloaded at Cadiz twenty leagues downstream. Cargoes of precious metals were required to be transported intact overland to the Casa de la Contratación in Seville (Haring, 1918, p. 10), but they may not have been. The same was required of the occasional cargo that was unloaded in Lisbon. In addition there was smuggling, and diversion of silver directly from the flota to foreign merchants and their ships. Everaert (1973) and Morineau (1985) have challenged the Hamilton figures, the former for a limited number of years on the basis of French consular reports for 1670–90, the latter on the evidence of newspaper reports from 1600. The several estimates are compared by Attmann (1986) in Table 3.2. These data do not include the exports of silver from Peru via New Spain to the Philippines, by way of the Manila galleon, discussed below.

The impact of the precious metals from Spanish America on Europe will be touched upon presently. First observe that most of it was passed through to the East. Charles Wilson asserted that "On balance there seems to be little reason to doubt that over long periods of time, Europe exported at least as much silver as it received" (1967, p. 511). This con-

clusion is broadly supported by the recent estimates of Attman who also states: "The bulk of the supplies of precious metals to Spain and Portugal between 1650 and 1750 were re-exported from Europe to the East" (1986, p. 33). His data show a comparison of precious-metals production with arrivals in Europe and exports East, annual figures for selected years in Table 3.3 and exports by proximate destination, overall in Table 3.4, and by Holland in Table 3.5.

Figures for the separate flows from Europe to the East, by three streams, were estimated in an earlier work by Attman (1983), and the overall figures do not agree exactly. Table 3.4 shows yearly averages about the time of the selected years, Table 3.5 Dutch exports which accounted for somewhere between a half and two-thirds of the total.

In connection with the data on European specie exports to the Baltic (in Table 3.4) Attman insists that the figures are minimal and should not be reduced (1983, p. 12). This certainty reappears in his 1986 discussion of Morineau's work, where he accepts the figures for production but rejects Morineau's resulting estimates for the European monetary stock because Morineau "greatly underestimated the precious metal requirements of the Baltic trade" (Attman, 1986, p. 75 note).

The Producers

The flow of precious metals from Europe to the East via the Levant long antedates the Age of Discovery that produced the route around the Cape of Good Hope and the torrent of output in America. Roman gold coins have been discovered in abundance in India, and Pliny complained of the drain thither. Silver from central Europe and central Asia was soaked up before and during the thirteenth century by Eastern countries with a "silver famine" (Ashtor, 1971, ch. 2, quotation from p. 31). But the massive movement begins in the second half of the sixteenth century, well after Columbus, following the discovery in 1545 of Potosí (see Figure 3.1), a mountain rich in silver ore, and the surge in its output in the early 1570s with the introduction of the mercury amalgamation process and production of mercury at not-too-distant Huancavelica, discovered in 1567, eliminating the necessity to bring it from the Almaden mines in Spain (Vilar, 1976, ch. 14).

Vilar (1976, chs. 14–16) sets out a detailed account of the production of silver in Peru and Mexico, and its passage through and around Spain.

Braudel's three magisterial volumes on Civilization and Capitalism recur to monetary questions at various places (especially 1981, ch. 7; 1982, passim ; 1984, pp. 413–25). It suffices here to note that Potosí produced a silver madness, the city growing from nothing in 1545 to a population of 45,000 by 1555, 120,000 by 1585, and 160,000 by 1610. There were 700–800 criminals, 120 white prostitutes, 14 gambling houses, and 14 dance halls. The city spent 8 million pesos to celebrate the succession to the throne in 1556 of Philip II. Indian labour was virtually enslaved. Imported goods were expensive and importing merchants rich. The population was "inordinately given to luxury and display, and recklessly extravagant", and the "heart of the Indies, leading a riotous career of indulgence for which the stream of silver from the Cerro furnished abundant means . . ." "A city of feverish life, called by a Portuguese by reason of its riches the most fortunate and happiest of cities" (Schurz, 1939, pp. 365–6).

Figure 3.1
Spanish America in the sixteenth and seventeenth centuries

Peru produced little except silver, and imported most of its consumption goods, either in a trickle from Spain, transported from the Atlantic to the Pacific across the Isthmus, or from Mexico and via Mexico and Manila, from China, the counterpart of the silver shipped in the Manila galleon that began with the settlement of Manila in 1571.

The Manila Galleon

The flow of silver that went from Peru and Mexico — the port of Acapulco — to Manila and thence largely to China, is not included in Tables 3.2 to 3.5 and cannot be tabulated as readily. The trade began in 1573 and lasted until 1815. In an effort to attract the silver to Spain and to preserve the Peruvian market for Spanish silks, the Spanish crown tried to limit the Manila trade, but with little success. By 1590 between 2 and 3 million silver pesos were going annually to Manila and in 1597 the figures reached 12 million (Borah, 1954, p. 123). At this stage the movement had grown so large — equal to the shipments across the Atlantic to Spain — that the king increased his measures to stop it. The size of the permitted ships, and their number each year, were limited. In 1631 the trade was forbidden altogether, provisionally for five years and then permanently, but success was small (ibid.). The trade lasted in all two and a half centuries, with the regulations a dead letter (Schurz, 1939, p. 185). In 1770 one Boana provided a list of six irregularities in the form of false oaths, perjury, excess loads, and violations of silver limits, with bribes paid to Spanish officials. The motive for concealment was so strong that figures on the trade, merchandise and silver alike, are impossible to believe. Wild rumours abounded. One ship took 2,791,632 pesos to Manila from Acapulco in 1794, and a contemporary estimate gave 1.5 to 2 million pesos per vessel with one to four vessels a year (ibid., p. 189). Governors of the Philippines were said in 1767 to accumulate 300,000 to 500,000 pesos above expenses in four or five years, and merchants and officials conspired to frustrate attempts of the extraordinary Spanish inspectors investigating fraud.

Peruvian and Mexican silver reached China by way of Manila not only by Chinese traders arriving annually from Canton in junks. Beginning slowly in 1644 and picking up especially in the eighteenth century, though with interruptions for European wars, several groups in India brought primarily cotton cloth to Manila to exchange for silver. This "country trade," as it was called to distinguish it from bilateral trade with England, was conducted originally by Company servants, then by English free merchants, Armenians resident in India and finally by the East India Company itself. It is not completely clear from the

detailed study of the trade how much of the silver was brought back to Madras, the main seat of the business after the British had been driven out of Bantam by the Dutch, and how much was taken to Canton to be exchanged for such goods as silk, tea, and porcelain for Europe. But it has been estimated under assumptions that in the first half of the eighteenth century 45 percent of the silver reaching Madras, which received approximately half of the East India Company's silver shipment to India as a whole, came from Manila (Quiason, 1966, pp. 75–6). Quiason estimates that the total flow from Manila to China exceeded that to India, but it unable to break it down as between Chinese junks, on the one hand, and the "country trade", on the other. In the first half of the eighteenth century, the total flow from Manila to China greatly exceeded that to China direct from England, but by the middle of the century the two amounts were approximately equal. The "country trade" with Manila came to an end, however, in 1762 when the British captured Manila, killing the goose that laid the silver eggs.

It is not clear from accounts whether Peru was short of money as Spain was, as we shall see, and as was New Spain (Mexico). Mexico was drained of its pesos by the exactions of Madrid, which claimed a large share of mining, state monopolies and state taxes not spent in the colonies (Borah, 1954, p. 83). In addition, Mexican groups complained that the Peruvians bought too much of Spanish and Mexican wares in Mexico City, making goods as well as money scarce (ibid., p. 120). Potosí and Lima were famous for their imports of luxury goods from China via Manila and Acapulco — silks, porcelain, lacquer ware, precious stones and pearls. Imports into Lima from China may have reached 2 million pesos regularly and, in the peak year 1602, 5 million (ibid., p. 123). Mexican merchants made substantial profits from this trade, pouring from Mexico City over the "China Road" to Acapulco when the Manila galleon arrived (Schurz, 1939, p. 381). By no means all goods were sold to Peru. All classes in Mexico wore fabrics of the Far East — cottons of Luzon, silks of China, calicos of India — and both men and women in the early seventeenth century were extravagant in their apparel, for example, wearing a hatband of diamonds in a gentleman's hat, and one of pearls in that of a tradesman. Millions of pesos of gold, silver, pearls, and jewels could be seen in jewelry shops (ibid., pp. 362–3). Attempts to control the quantities and flow of trade were futile as corruption and venality abounded in Mexico, Peru, and Manila (ibid., passim , but especially pp. 136, 173, 176, 184–7, 194, 204, 369). Charles V is quoted as having said that it was easier to keep the Flemish from drinking than the Spaniards from stealing (ibid., p. 399). The Manila galleon belongs to the story at the absorbing end, especially China, but our major concern is with the flow around the world counterclockwise.

Spain

Despite smuggling and privateers most silver from America shipped in the flotas arrived in Seville and Cadiz. It did not stay long. It remained long enough, however, to produce disaster. A Spaniard in 1650 discussed the ruin brought about by inflation in these terms:

the possession and abundance of such wealth altered everything. Agriculture laid down the plough, clothed itself in silk and exchanging the workbench for the saddle, went out to parade up and down the streets. The arts disdained mechanical tools . . . Goods became proud, and when gold and silver fell in esteem, they raised their prices. (Quoted in Vilar, 1976, pp. 168–89)

Spain suffered from an acute case of what is known today as the "Dutch disease," in which brilliant success in one activity (silver) raises wages to the point where they stifle the rest of the economy (Forsyth and Nicholas, 1983).

The Habsburgs were forced to rely completely on foreigners in supplying the colonies: five-sixths of the outbound cargoes in the sixteenth century were supplied by foreigners (Haring, 1918, p. 113). In 1702 Cadiz, with a monopoly of Spanish overseas commerce, had 84 commercial houses of which 12 were Spanish, 26 Genoan, 11 French, 10 English, 7 from Hamburg, and 18 Dutch and Flemish. At the end of the eighteenth century, 8,734 foreigners were resident in Cadiz, 5,018 Italian, 2,701 French, 272 English, 277 German and Flemish, etc. (Dornic, 1955, p. 85). Spanish manufacturing had been virtually destroyed, and an immense amount of linens came to Cadiz, a turning table for Europe and the Spanish colonies, from France, Flanders, Holland, and Germany (ibid., pp. 83, 86). Da Silva comments that in Spain as a whole, merchants dominated producers and financiers dominated merchants (1969, pp. 607, 620). The internal trading network was weak as interior bills of exchange were prohibited because of usury. Seville could not count on credit facilities to provision the fleet going to the colonies, and Aragon and Castile found it difficult in consequence to export. Indeed exchanges between Seville and Castile required shipment of gold to the north (ibid., pp. 604, 605). Transport in mountainous Castile was difficult enough; financiers, both domestic and foreign, turned their attention to the market for silver and financial transactions, largely abroad (ibid., p. 620).

One industry flourished: silversmithing. In Seville this was the highest class of artisans, along with pharmacists, and some smiths were rich. In her discussion of Seville society, Ruth Pike mentions silversmiths numerous times, either as individuals of wealth, or members of the upper class (1972, pp. 132, 137, 139, 141, 143, 145, 146, 147). Silver-

smithing presumably took place elsewhere in Spain on a sumptuous scale. The Duke of Alva of Toledo, who had served as captain general of the Spanish forces in the Netherlands, and again in the court of Philip II in Madrid, a man without a reputation for wealth, on his death in 1582 left 600 dozen silver plates and 800 silver platters (Braudel, 1981, p. 463).

But most of the silver shipped to Spain from America was diverted elsewhere in Europe or passed quickly through. The Spanish tried to restrain the hemorrhaging, but without success. "Scarcely has it come than it disappears." "When a fleet comes in from the Indies with much money, within a month there is no good money to be found for it is all exported in different ways" (quoted by Vilar, 1976, p. 166). Spain ended the seventeenth century relying mainly on billon , a compound largely of copper.

The silver left Spain by many routes. Some was paid out immediately to requite bills of exchange drawn on local banks or on foreign representatives for goods delivered to Seville or Cadiz. This might be shipped north to Amsterdam or London; or ships of the East India Company or the Dutch counterpart, the Verenigde Oostindische Compagnie (United East India Company or VOC), would stop at Cadiz to pick up silver for carrying to India and what is now Indonesia (Chaudhuri, 1978, p. 171). A large portion of the silver, however, was required to pay the asientos drawn by the Spanish government on German or Genoese banks, or by suppliers of the Spanish troops in Flanders on the Spanish government, to pay the troops fighting in the Spanish Netherlands, and for arming ships of war to fight against France, England, and in the Mediterranean. The problem of the troops in Flanders was particularly exigent. If the troops were not paid they would mutiny or desert as they were largely mercenaries. Spanish soldiers were regarded as superb fighters but as a rule they made up only five or six thousand at a time of armies that reached 84,000 men in 1574 and 300,000 in 1625. The rest were hired in the Spanish Netherlands, Italy and especially Germany (Parker, 1972, pp. 6, 42). Mutinies occurred 45 times between 1572 and 1607, and the more violent of them resulted in the sack of towns (ibid., p. 185).

Asientos were of two types, Spanish and Flemish. The Spanish were negotiated by the Council of Finance in Madrid, though handled at Medina del Campo outside Seville, with businessmen who contracted to provide local funds at given times in foreign places, typically Paris, Lyons, Savoy, Frankfurt or the Genoan fairs of "Besançon" (in Italian transliteration Bizenzone), which for the most part meant Piacenza outside Genoa. Flemish asientos originated with the Spanish troops in Flanders when the king's governors or captain generals obtained local

moneys, often from German bankers such as the Fuggers and Welsers, against payment in Spain. Asientos usually included a license to export silver from Spain (Lapeyre, 1953, pp. 18–19). The silver might be shipped for Spanish account from Barcelona to Genoa, converted into gold and transported via the "Spanish Road" from Piedmont to Savoy, Franche Comté and north through Lorraine to Flanders (Parker, 1972, p. 59). Much of the silver went to Flanders by sea — the so-called "English Road" — from Cadiz to Dover to Flanders, except during outbreaks of war between Spain and England (Attman, 1986, p. 59). Simon Ruiz, the Spanish banker, had a brother in Nantes in France and shipped silver to Flanders through that city and Paris under safe conducts granted by the French with the proviso that one-third of the coin be left in France (Lapeyre, 1953, p. 25). Sometimes silver was used to buy Netherlands currency from the Portuguese, who obtained it with pepper.

The war lasted 80 years, with fighting building up and dying down. In 1572, it cost 1,200,000 florins a month while the Spanish were able to provide only 7,200,000 in all of 1572 and 1573, so that by July 1576 the troops were owed 17,500,000 florins. In September 1575 Philip II declared himself bankrupt, cancelled all licenses to export silver and paid off the asientos in juros , long-term bonds denominated in reals. By August 1576 the entire army had dissolved in mutiny and desertion (Parker, 1972, pp. 136–7). A more far-reaching bankruptcy occurred in 1596 when the king, attempting to repair his finances, signed asientos for a total of 4 million ecus, 280,000 a month, but was unable to make good. He revoked licenses for exporting specie on all earlier asientos , and took over revenues that had been assigned as surety to creditors. The pinch in Flanders was so tight that it was said that the captain general did not have enough money for lunch. This was the crisis that crippled the Fuggers of Augsburg and caused the collapse of Genoan credit (Lapeyre, 1953, ch. 4). In due course the debts were settled with the liberal use of juros and the resumption of payments in silver arriving from America. There were later royal Spanish bankruptcies in 1607, 1627, 1647, and 1653, with more asientos converted forcibly into juros . Spain fought long, hard and losing battles with the aid of American silver, but it did not retain it as money.

David Hume thought that there was a sort of inevitability about Spain's inability to hold on to its silver:

Can one imagine, that it had ever been possible by any laws, or even any art of industry, to have kept all the money in SPAIN, which the galleons had brought from the INDIES? Or that all the commodities would be sold in FRANCE for a tenth of the price they would yield on the other side of the PYRENEES, without finding their way thither and draining from that

immense treasure? What other reasons, indeed, why all nations, at present, gain in their trade with SPAIN and PORTUGAL; but because it is impossible to heap up money, more than any other fluid, beyond its proper level. (1752, p. 335)

The hydraulic metaphor had other uses, however. An English merchant of Thomas Mun's time, expressing the general concern for the loss of specie to the East, said "Many streams run thither [India], as all rivers to the sea, and there stay" (quoted by Thomas, 1926, p. 8). And Mun himself anticipated Hume's conclusion, if not his rhetoric, in giving Chapter 4 of England's Treasure by Forraign Trade the sub-title "The Spanish Treasure cannot be kept from other Kingdoms by any prohibition made in Spain" (1664).

European Demand

In his well-known "Digression Concerning the Variation in the Value of Silver," Adam Smith observes that the demand for silver has two components. As wealth increases, the demand for silver as coin increases in order to circulate a greater quantity of commodities. And wealth also leads to the acquisition of more plate, from vanity and ostentation, "like statues, pictures and every other luxury and curiosity" (Smith, 1937, p. 188). Smith elsewhere distinguishes between goods the value of which derives from "use and necessity" and those based on "fashion and fancy" (ibid., pp. 114–15). The demand for precious metals comes partly from utility and partly from their beauty. A silver boiler, for example, is cleaner than one of lead, but the principal merit of silver is beauty, which renders it particularly fit for the ornaments of dress and furniture (ibid., p. 172).

The matter is more complex. Precious metals may be hoarded not for ostentation and display but as insurance, in which case they are often hidden. "In . . . Asia [there is an] almost universal custom of concealing treasures in the bowels of the earth, of which knowledge dies with the person . . ." (ibid., p. 208). Ostentation and insurance can be complements rather than substitutes, as in the case of silver and gold plate, capable of being coined, and war chests may be thought of as insurance if needed for defence, or ostentation if preparatory to conquest. Thomas Mun, a mercantilist and anti-bullionist, thought some national treasure — "by forraign trade" in a country without mines like England — was necessary, but observed that it should not be entirely in bullion. England's Treasure should consist not only of specie but also of

ships of war with all provisions . . . Forts . . . Corn in Granaries of each province . . . and Gunpowder, Brimstone, saltpeter, shot, Ordnance,

Musquets, Swords, Pikes, Armours, Horses, and in many other such like Provisions fitting War. (1664, p. 188)

The Northern monarchs — Gustavus Vasa, Ivan the Terrible, Charles XI, Frederick William I, for instance — were not so sophisticated but were "hoarders of a type that was disappearing in countries that were advanced economically (Aström 1962, p. 84).

This brings us to the central issue, whether the traditional view that hoarding in India and China was a reflection of financial lack of sophistication or whether their use of precious metals was much the same as that in Europe (see Figure 3.2 for a political map of Europe at this time). Observe that practice in Europe differed widely. In discussing Indian hoarding, Keynes adverts to hoarding in Europe. Of India he says:

India, as we all know, already wastes far too high a proportion of her resources in the needless accumulation of precious metals. Government . . . ought to counteract an uncivilized and wasteful habit. (1924, p. 99).

Then he states further on:

There is no one now living in England within whose memory hoarding has been a normal thing. But in countries where the tradition is but lately dead or still lingers, it is apt to revive with astonishing vitality at the least sign of danger. France, Germany and especially Austria during the Balkan wars . . . very remarkable. If this is still the case in Europe, there can not be much doubt as to what would happen in India. (Ibid., p. 165)

These remarks relate to the early part of the twentieth century. In commenting on France, Wicksell refers to the bas de laine (woolen stocking) in which the peasant stores gold coins, and went on to quote a witness to the British Gold and Silver Commission of 1887 who thought it remarkable that a hotel owner in southern France with a turnover of a million francs annually would point to his safe, where gold coins were kept, and say "That's my bank." He compared this with the father of Alexander Pope who was said to have retired two hundred years earlier with £20,000 in gold and silver coins which he drew for spending money for the rest of his life (1935, p. 9).

Hobsbawm underlines the fact that, even in the nineteenth century, the French peasant, whether rich or just well-to-do, did not use much money, forming "an uninviting market for mass manufactures". Their wants were traditional. Wealth went into land and cattle, or into hoards, or new buildings, or even into "sheer waste like those gargantuan weddings, funerals and other feasts which disturbed continental princes at the turn of the sixteenth century" (1965, p. 26). Robert Forster, a historian of French families in the eighteenth century, records widely varied attitudes toward money and its use. One command in 1736 was

Figure 3.2
Early modern Europe

for sale for 160,000 livres, 60,000 in coin (1971, p. 33); the Marquis de Tesse left 500,000 in cash (argent comptant ) (ibid., p. 52). On the other hand, the father-in-law of one of the Deponts who died in 1766 left an estate of 653,040 livres, only 1,436 in specie (Forster, 1980, p. 114) whereas the grandfather-in-law in 1748 left an estate which was audited at 42,429 livres with 15,000 in specie. Equally varied were the tastes of the Danse and the Mottes, families of Beauvais who dyed linens for export to the Spanish colonies via Cadiz when they went out of style in France. Nicholas Danse, the Beauvais bleacher, died in 1661 with property worth 110,000 livres. He was interested in neither silver nor jewelry (Goubert, 1959, p. 52). The Mottes, merchants of the same town, however, were bemused by great luxury — silver, jewels, silk cloths, and indiennes , the French word for calicos (ibid., pp. 34, 149).

In the eighteenth century, France required a great deal of bullion, as explained by Hume:

It is not to be doubted, but the great quantity of bullion in FRANCE is, in great measure, owing to the want of paper-credit. The FRENCH have no banks: Merchant bills do not circulate there, as with us: Usury or lending on interest is not directly permitted; so that many have large sums in their coffers; great quantities of plate are used in private houses; and all churches are full of it. By this means, provisions and labour still remain cheaper among them, than in nations that are not half so rich in gold and silver. (1752, p. 338)

Hume goes on to say:

Our modern politics embrace the only means of banishing money, the using of paper-credit; they reject the only method of amassing it, the practice of hoarding . . . (ibid., p. 343)

Meuvret (1970) has provided a detailed description of monetary conditions in France in the sixteenth and seventeenth centuries. There was a scarcity of money, especially in the provinces. Gold and silver were imported from Spain, especially in the provinces bordering the Pyrenees. Gold and silver were not necessary to satisfy ordinary needs, as peasants lived in semi-autarky. Merchants rarely kept cash reserves, and surviving inventories seldom indicate large liquid wealth. An important fraction of the imported metal went to gold and silversmiths.

No councillor, treasurer, bishop or abbot did not have a complete set of plate . . . and there was no small artisan who did not seek to have a basin, ewer and cup, or at least a salt cellar and half a dozen spoons.

To this was added a large quantity of precious metals in the chalices, vases, chandeliers, crosses, rods and crucifixes, lamps and reliquaries of churches. This was not totally withdrawn from commercial life as it

could be borrowed on and was sometimes melted down on the order of some Huguenot or government official (Meuvret, 1970, passim , especially pp. 144–6).

The amount of specie hoarded in a country relative to that which circulated as money is most uncertain, although the ratio probably varied negatively with the state of development. In 1751, Ferdinando Galiani estimated that the hoards of Naples amounted to four times the value of money in circulation. In quoting this observation, Braudel remarks that Naples at the time had a relatively unsophisticated economy (1981, p. 467).

The two most sophisticated economies in Europe were the Dutch and the British, in that order. The British agonized under the currency disturbances of the early seventeenth century; the Dutch did something about them. Supple (1959, p. 178) records the case of one young man leaving college in 1620, unable to sell his furniture because of a shortage of silver, i.e., of money of the appropriate denomination, since the furniture was worth more than copper, less than gold. Legislation limited how much silver the newly founded East India Company could take with it to the East; proclamations forbade the melting, culling or exporting of gold and silver coin. In 1622 a Commission was appointed on abuse of the exchanges, and a lively debate ensued, the origins of which had gone back to the middle of the sixteenth century. Mun was more sophisticated than many of the participants, winning Misselden to his point of view, and scoring over Gerald Malynes who wanted an official exchanger appointed to monopolize all exchange dealings (Wilson, 1967, p. 504). It was in this connection that Mun expressed his views against Confederacie quoted earlier. Mun's basic contention was that shipping specie east brought back goods that could be sold with great profit in Europe and earn more than the original investment in specie. Wilson calls this argument "using a sprat to catch a mackerel" and claims that it did not apply to the specie shipped by the Eastland corporation to buy timber in Norway, since this was rarely re-exported (1949, pp. 154, 155). Other imports from Asia were sold throughout Europe, some even in Italian ports such as Leghorn in competition with the Mediterranean trade to the Levant. Mun insisted that specie was simply one of Britain's commodities. If it were prohibited, the Dutch would take over the trade, charge Britain monopoly prices and cause her to lose bullion in any event (Chaudhuri 1965, pp. 112–13).

For a time, the East India Company paid its dividends in kind, letting its shareholders dispose of pepper, nutmeg, cloves, calico, etc. (ibid., pp. 142ff.). This was stopped in the 1620s, perhaps as a result of the pepper glut of 1619 that followed peace between the Dutch and English in the East.

The nagging worry about loss of specie continued. The Company made continuous attempts to provide British goods to the East but found little demand for its woolens, tin, lead from Britain, or for other products bought in Europe or Africa, such as iron, coral, ivory, and mercury. In due course it learned to engage in triangular trade, in considerable part within the East, taking calicos against silver from Surat on the west coast of India to Bantam to be exchanged for pepper and spices for Europe. There is a variety of estimates of the proportion of goods and specie in the eastward voyages. In the first twenty-three years of the East India Company's operations, bullion made up 75 percent (ibid., Table III, p. 115). Another estimate gives 80 to 90 percent of imports from Asia paid in gold and silver coins (DeVries, 1976, p. 135). It was mostly silver as the price of silver relative to gold was higher in the East than in Europe or America. Silver was bought everywhere it was available, not only in Lisbon, Cadiz, and Seville, as already mentioned, but in smaller ports such as Saint Malo, Calais and Rouen (ibid., p. 126). For the most part, however, it was acquired in Amsterdam.

Amsterdam's sophistication was shown in its responses to the currency debasement in Europe at the beginning of the sixteenth century: it created deposit banks in Amsterdam in 1609, which was followed by similar institutions in Middelburg in 1616 and Hamburg in Germany in 1619 — and then two more in the United Provinces of Holland, Delft in 1621 and Rotterdam in 1635 (Van Dillen, 1934; Sieveking, 1934). Small states, as Adam Smith had noted in a digression on banks of deposit (1937, pp. 446–55), have to use the coin of neighbouring states, and that circumstances, together with the presence of worn or clipped coins, furnished an opportunity for the formation of banks of deposit, to weigh and assay deposits of coin and give receipts for them which, with assured weight and fineness, lowered transactions costs for merchants. Amsterdam had a huge supply of silver, including Spanish reals, bullion, and Dutch minted coins, the total accumulated in its flourishing trade since the collapse of Antwerp in 1585 when the Dutch Navy blockaded the Scheldt. The imperious Spanish demand for goods meant that the Dutch brought to Spain and the Mediterranean the grain, timber products, and naval stores of the Baltic and Norway. In addition, it accumulated silver in the Low Countries by selling herring, cheese, butter, and all sorts of English, German, and French manufactures to the rebels against Spanish authority (Attman, 1983, pp. 31–2). During the Spanish—Dutch truce from 1609 to 1621, silver shipments took place direct. After the Coddington treaty between Britain and Spain, the English road came into play. The peace of Munster in 1648 left Holland free to buy silver not only in Lisbon, which ceased to be part of the Spanish empire in 1640, but also in Seville and Cadiz.

Amsterdam had abundant trade, abundant money and an open market. Attman records that about 1683 the Dutch mintmasters coined the equivalent of 15–18 million guilders, and 13 million of them were exported. By 1699 Dutch opinion favoured freedom of export as well as import for precious metals (1983, pp. 27–8). The point relates to the export of domestic coins, in contrast to foreign coins and bullion. The practice, however, went further back in the century. And in reaching the view that markets for precious metals and all coins should be free, Thomas Mun seems to have been, in the 1620s, well in advance of the Dutch as a whole.

Peace in Europe did not last long. England depended on Holland for the success of its trade but was fiercely rivalrous. In particular, it resented Dutch monopolies in shipping and fishing for herring. The first Navigation Act was passed in 1651 to restrict British cargoes to British ships. Three Anglo-Dutch wars ensued, in 1652–4, 1665–7 and 1672–4. None of these, so far as it has been borne in on my consciousness, had a major effect on world trade in specie.

The Three Streams

In a memorandum submitted to the English Commission established in 1621 to devise means of coping with the drain of silver, Sir John Wolstenholme, a one-time member of the East India Company's Court of Committees, stated that there were three streams leading east for silver — one by Aleppo for raw silk, one by Mocha in the Red Sea for calicos, and one by Surat and the islands for indigo, pepper, cloves, mace, and nutmeg (Chaudhuri, 1965, p. 120). This is the view of an East Indian merchant (that inadequately takes the Baltic trade into account).

If the focus is on American silver, moreover, there was the stream westward across the Pacific of the Manila galleon. Leaving the last aside, however, but including the Baltic, the streams can be collapsed into three by dividing the trade of Mocha and Ormuz in the Red Sea and Persian Gulf, depending on whether their trade comes around the Cape of Good Hope or north by caravan to Aleppo or Alexandria. It is perhaps anachronistic to take up the Baltic trade ahead of those of the Levant and the Cape route. I do so for geographic reasons, moving gradually eastward.

The Baltic

A number of scholarly debates have sprung up over the need, as seen by the Eastland Company, to export specie to buy imports from the

Baltic countries and Norway. First, it has been held that while bilateral Baltic-British trade needed to be balanced by specie, this was because of the absence of trade in bills of exchange; if they had been available, it might well have been that Britain's import surplus was matched by a Dutch export surplus and that trade could have been balanced all around with adequate financial institutions. This turns out not to have been the case (Heckscher, 1935; 1950; Wilson, 1949; 1951). Wilson (1951) has shown that the Dutch, too, had an import surplus through the Sound, i.e., by sea, in the seventeenth century. In the late eighteenth century, Dutch earnings on invisible transactions covered its negative merchandise balance, and the French accounts were also in surplus. The British deficit remained substantial, however, and outweighed the combined Dutch and French surpluses. As a consequence, bullion continued to flow to the East (Johansen, 1986, p. 140). Direct bilateral estimates of British trade with Scandinavia may be understated, however, on account of exports by sea to Hamburg, by land to Lübeck, and again by sea to Denmark and Norway. It was estimated by the English Hamburg Company in 1737 that its annual sales of woolens to Denmark and Norway by this route were, at between £60,000 and £70,000 a year, of the same order of magnitude as those direct (Thomsen and Thomas, 1966, about p. 60).

The question arose in the earlier period whether the Baltic countries had a large import surplus with Europe by land, large enough to balance the seaborne export surplus with the two major trading companies. Evidence exists of jewelry imports from Leipzig by Eastern nobles, and some imports in the middle of the eighteenth century were paid for with bills drawn on Amsterdam (Jeannin, 1982, p. 18). But the major overland export was livestock, of an amount broadly equal to the export of grain from Poland, Lithuania and East Germany, and in the same direction. Trade of these regions with Western Europe was not thus balanced (ibid., p. 20).

An exception should be noted for Norway, although there is some disagreement. General histories suggest that Norway was traditional in the Hobsbawm sense quoted earlier, importing little in consumption goods, and using the precious-metal proceeds of exports partly as "silver plate and other imported luxuries for want of alternative outlets. Travellers frequently commented on the quality of the houses and furnishings of shipbuilders and merchants" (Milward and Saul, 1973, p. 519). In the sixteenth-century weddings, "We are told how 'the bride was dressed in brown velvet, magnificently arrayed in a crown, and many gold chains around her throat, shoulders and elbows; she had gold chains hanging down toward the ground . . .'" (Larsen, 1948, p. 264).

This view was disputed by Heckscher, insisting that the Baltic was

not India (1950, p. 226) and by Scandinavian scholars in recent research covering the timber trade between Norway and England for the period 1640–1710 (Tveite, 1961) and Anglo-Danish trade from 1661 to 1963, for the first part of which, down to the Napoleonic Wars, Norway was part of Denmark (Thomsen and Thomas, 1966). Each study has an English summary, which is all that I can read, although Dr Thomsen was kind enough to translate several pages of her main text commenting on Dr Tveite's study.

Both studies emphasize the large balance-of-payments deficit of England with Norway because of timber imports and their freight, but point to the fact that bullion imports into Norway were supplemented as early as 1630 and commonly from 1660 by bills of exchange drawn in Norway which were discounted in Copenhagen and returned for payment in London via Hamburg or Amsterdam (Tveite, 1961, p. 576). Precious metals continued to be sent in the form of English coins which became the usual means of payment in southern Norway from the middle of the seventeenth century (Thomsen and Thomas, 1966, p. 60). Such coin continued to serve as Norwegian money in the manner described by Adam Smith, already noted, and in 1751 a Norwegian tax collector said he was unable to collect taxes in Norwegian money because merchants paid their workers and creditors in English coin, a practice legalized in 1758 (ibid.).

A Danish student of the Norwegian timber trade, Ole Feldbaek, has privately told me his impression that the notion that Norwegians imported a lot of specie and used it in conspicuous consumption and insurance, in so far as jewelry displays in weddings had such a component, is probably mistaken. In the early trade, with timber cut in south Norway near the water's edge, merchants imported foodstuffs which were traded against timber. As cutting took place further from the ports, and involved cutters away from the sea and specialized haulers, the Norweigian economy had to become both specialized and monetized, and most of the imported specie served this latter purpose. Taxes were paid in money, and the net flow to Copenhagen was partly passed back to Lübeck, Hamburg, and Britain in a loop that did not go continuously east and remain there.

Sweden seems to have been another country that stood aside from the preoccupation with precious metals. For one thing, Sweden's money was initially largely copper, though some silver circulated from time to time when not driven by Gresham's Law. The Stora Kopperberg (copper mountain) at Falun produced half the copper in Europe around 1690, and the awkwardness of the metal as money led the country to issue the first paper money in Europe and to establish the first central bank. The scattered character of the iron and timber industries sus-

tained the natural economy with wages paid in kind longer than elsewhere in Europe. Large inward and outward payments for invisibles took place in the balance of payments — war-tolls collected in Prussia until halted by the Thirty Years War; "feverish" borrowings against the collateral of copper to pay ransom or for conduct of war on the Continent; remittance of profits of the many foreign entrepreneurs in the country, of whom the best known was the ironmaster from Liège, Louis de Geer, transplanted to Amsterdam. The Heckscher account observes that Sweden was only mildly mercantilistic in the period 1600–1720, and gives no indication of preoccupation with gold and silver either for monetary purposes or for ostentation (1954, ch. 4).

Elsewhere in the Baltic, including that honorary Baltic port, Archangel, the precious metals featured prominently. East Germany, Poland, Lithuania, and Russia exported to the West especially grain and timber, grown by peasants on huge noble estates, and brought to the ports down broad rivers that provided cheap transport. Table 3.6 gives an estimate of the export surplus at Danzig and Elbing for median years of decades from the 1560s to the 1640s. The export surplus of the area as measured by this portion of it was variable in response to blockades, wars and bad harvests, but it was on the whole continuous. The question is what happened to the specie counterpart (Maczak, 1974, p. 507).

The important point to bear in mind in this area — I judge from a limited amount of reading — is the skewness of income distribution. The peasants that grew the grain and cut the timber were in effect serfs, while the nobles and the merchants that exploited them were "extremely rich". In a contiguous passage, Braudel claims that prices were dictated from Amsterdam — which seems unlikely — and that the Danzig

merchants manipulated the magnates by advancing them downpayments on wheat and rye (1984, pp. 254–6). On the land, yields were low but surpluses were obtained "mostly at the expense of peasant consumption" (Bogucka, 1980, p. 7), what are sometimes called "hunger exports".

Some specie was drained to the Middle East through Lwów, or to buy silks, furs, carpets, and jewels from Venice, Leipzig, or Vienna, as well as wines, and Dutch and English cloth through the Sound. The movement of "ready money" (a term for coins of gold or silver) drained to Constantinople was so heavy that robbers in the mountains trimmed their hats with English "nobles" (Maczak, 1976, p. 17). Polish nobles spent heavily on grand tours to the West, and their "greedy and hungry retainers" also lived high, with much more magnificence than servants in Italy and Spain, according to a 1650 remark (ibid., pp. 77, 83). In 1601 Chancellor Zamoyski took 31 sacks of coins, worth 6,000 ducats, on his travels, half his ready money (ibid., p. 80). Precious metals of all kinds were a sign of prestige, still used in the rather medieval way, which, in the West, was slowly giving way to a more economical lifestyle (ibid., p. 82).

How much was spent in the West on luxury goods and travel, how much was drained away to the East in payment for its exotic merchandise, and how much displayed or hoarded at home, the scholar experts on the subject fail to guess. Bogucka twice says that hoarding needs further study (1975, p. 148; 1980, p. 16). In the 1980 paper she says "it seems to have played an enormous role". The crisis of the 1650s and 1660s, she asserts, struck its worst blow at the nobility, which had been accustomed to a lavish lifestyle. The rapid rise in the price of gold (from the depreciation of the currency) cut down the nobles' purchases of cloth, furs, imported wine and fruit from the South, increased the cost of adornment, jewelry, plates, and fancy goods, and reduced the opportunities for hoarding. She quotes one Gostkowski, a nobleman:

If a nobleman needs to buy anything in silver or gold for himself or his children, such as a jewel, spoon, an inlaid sword or some article of clothing, he now has to cut twice as much corn as he had a few years ago. (Bogucka, 1975, p. 145).

The attitude clashes sharply with that of a nineteenth-century English economist who said:

No one can feel much commiseration for the richer classes of the community when their expenditure presses inconveniently close to their income. A footman, a horse, a ball or a shooting excursion retrenched during the year will restore the balance without inflicting very great hardship . . . but the poor . . . (Jevons, 1884, p. 93)

It is further observed that the poor burghers and even the peasants tried to lock away valuable ornaments, sometimes a little of the old small coin that was sought after (Bogucka, 1975, p. 148). One is not entitled to a guess, but I gather the impression that of the specie paid to East Germany, Poland, and Lithuania — and doubtless there were differences among them and among different periods — some fraction, perhaps a fifth each, went circulating back to the West, went circulating forward to the East, and stayed in domestic circulation over the long haul, while perhaps two fifths went into hoards.

The Middle East

The further east he goes, the deeper the writer's ignorance, and I venture to say anything at all merely to try to sketch the picture as a whole and to encourage experts to correct and fill it out.

The flow of gold and silver from Europe to the Middle East against luxuries brought to the shore of the Mediterranean by caravan produced the great European bullion famine of the fifteenth century, as noted earlier. But the Middle East itself was said to have experienced a scarcity of precious metals as a regular matter, especially after the wave of silver looted from central and Southern Asia produced by the Muslim conquest of those areas. Gold from the Sudan went regularly to the Middle East as Moslem converts made their pilgrimages to Mecca until the ships of Henry the Navigator penetrated south in the Atlantic to acquire it for Portugal and Christendom from the Gold Coast. This diversion, according to one conjecture, may have dealt a severe blow to the Ottoman Empire of Turkey, Syria, and Egypt (Ashtor, 1971, p. 13).

There was ostentation and display. The sultans sought to win recognition with lavish gifts (Walz, 1983, p. 311; Ashtor, 1971, pp. 100–3). Tribute was paid by Egypt to Istanbul, 600,000 gold coins annually in the sixteenth century, and by Syria, 450,000 ducats each year of which 300,000 came from Aleppo. Tribute was equivalent to taxation and also to protection money (Steensgaard, 1973, pp. 41, 178). But more damaging to the circulation of precious metals as coin, says Ashtor (1971) for the fifteenth century, was hoarding. The mus-dara was a contribution arbitrarily levied on the wealthy, especially high dignitaries from time to time to tax away fortunes amassed legally or with fraud. (The practice was widespread in seventeenth- and eighteenth-century France, where it was known as the Lit de Justice , in England after the collapse of the South Sea bubble, and even in twentieth-century Argentina, where

specialized tribunals were established to tax away "undue enrichment" under the Perón administration.) The threat of such confiscation and pillage that took place frequently led to burying large quantities of gold and silver, jewelry, precious stones, and objects of great value. Ashtor comments that this tendency was more harmful in reducing the quantity of money available for circulation and investment than wasteful spending (1971, pp. 103–5).

In the period of our interest, a substantial movement occurred in silver further east, and some small amount of gold to the West, not as arbitrage but because of the greater profit available by spending the cheaper metal in each direction. Transactions costs were so high, with worn coin, losses, heavy transport charges, and commissions to money changers, that arbitrage in the modern sense was impossible (Munro, 1983, p. 111). The silver going east was used in what Steensgaard calls "the glorious peddling trade" (1973, pp. 47, 196) or "the magnificent but insignificant [peddling] trade" (ibid., p. 205). This was the shipment by camel of silver and some goods to the Indian Ocean by way of Aleppo, Baghdad and Basra to Ormuz on the Persian Gulf, or Alexandria to Mocha on the Red Sea. From Ormuz and Mocha the Gujarati, later the Portuguese, and — after the fall of Ormuz in 1632 — the British and Dutch exchanged calicos, and spices, especially pepper, for silver and Arabian coffee. Some Chinese silks were also brought to the caravan trade, but further loads consisted of Persian silks. It was initially thought that the Portuguese transport of pepper to Europe around the Cape would ruin the Venice—Aleppo and Venice—Alexandria trade, but it survived another century. The decline of the Ottoman Empire was only in part owing to the gradual shift to the sea route, according to Bernard Lewis (quoted by Steensgaard, 1973, p. 78). Other contributing factors were the closing of the European frontier, the price revolution and depreciation of Turkish money, and the shift of the army from feudal cavalry, who contributed their services on the basis of loyalty, to mercenaries who had to be paid. Some part of the decay may be attributable to the neglect of Middle East navies and shipping. Gradually the Moslems stopped importing timber, iron and pitch from Venice, and let their fleets and shipbuilding decay. An Arab soldier who died in 1406 said that in his day the Moslems no longer knew how to build ships (Ashtor, 1976, p. 577). In addition, the taxing authorities in Constantinople tried to raise their returns. Cheap silver killed the Balkan mines of the Empire after 1580 (Richards, 1983, p. 17; Sahillioglu, 1983, p. 284). Ottoman monetary liquidity was offset by an unspecified amount of hoarding (Steensgaard, 1973, pp. 80, 113), but for a great part the Middle East was a stage in the path of silver to the east, and some gold in the opposite direction.

India and China — Levels and Distribution of Income

India and China are thought of as poor today. Such has not always been the case. In the third quarter of the eighteenth century, they were considered rich. Hume wrote:

China is represented as one of the most flourishing empires in the world; though it has little commerce beyond its borders. (1752, p. 296).

However:

The skill and ingenuity of EUROPE in general [surpass] perhaps that of CHINA, with regard, to manual arts and manufactures; yet we are never able to trade thither without grave disadvantage. (Ibid., p. 334)

The difficulty lies in the monopolies of the India companies and the distance.

Nor can any reasonable man doubt but that that industrious nation, were they as near to us as POLAND or BARBARY would drain us of our overplus of specie, and draw to themselves a larger share of WEST INDIAN treasure. (Ibid.)

Adam Smith is equally emphatic:

China has long been one of the richest, that is, one of the most fertile, most industrious, and most populous countries in the world. (1937, p. 71).

And again:

China is a much richer country than any part of Europe and the difference between the price of subsistence in China and in Europe is very great . . . In China, a country much richer than any part of Europe, the value of the precious metals is much higher than in any part of Europe. (Ibid., pp. 189, 238)

There are traces of Malthusian doctrine and a belief in the backward-bending supply curve:

In rich countries, which generally yield two, or sometimes three crops a year, each of them more plentiful than any common crop of corn, the abundance of food must be greater than in any corn country of equal extent. Such countries are accordingly more populous. In them too, the rich, having a greater super-abundance of food to dispose of beyond what they themselves can consume, have the means of purchasing a much greater quantity of the labour of other people. The retinue of a grandee in China or Indostan accordingly is . . . more numerous and splendid than that of the richest subjects in Europe . . . and the same super-abundance of food . . . enables them to give a greater quantity of it for all those singular and rare productions which nature furnishes in very small quantities; such as the precious metals and the precious stones, the great objects of the competition of the rich. (Ibid., p. 205)

The poor, however, are hungry, suffering

low wages of labour, . . . and the difficulty which a labourer finds in bringing up a family in China. If by digging in the ground all day, he can get what will purchase a small quantity of rice in the evening, he is contented . . . The poverty of the lower ranks of people in China far surpasses that of the most beggarly nations in Europe . . . The subsistence is so scanty that they are eager to fish up the nastiest garbage thrown overboard from any European ship . . . [In] Bengal and . . . some other English settlements in the East Indies . . . three or four hundred thousand people die of hunger in one year. (Ibid., pp. 72–3)

Daniel Defoe, writing half a century earlier in 1728, ascribed the "incredibly cheap manufactures" of China, India, and other Far Eastern countries to the poverty of the labourers:

The people who make all these fine works are to the last Degree miserable, their Labour is of no Value, their Wages would frighten us to talk of it, and their way of Living raises a horror in us to think of it. (Quoted in Heckscher, 1935, II, p. 171)

Paul Bairoch has estimated that the Third World including Asia was as rich on the average as developed countries in 1750 — about 180 1960 dollars per capita — but in private correspondence grants that averages are not very meaningful when distributions are highly skewed.

India

After the caravans that brought Asian goods to the Levant via Mocha or Ormuz, direct Indian trade with Europe began in the sixteenth century with Portuguese caravels and was followed in the seventeenth with the East India Company of Britain and the United East India Company of Holland. Each chose different modes of operation and different bases (see Figure 3.3). Portugal traded to Goa on the west Indian coast, Ormuz in the Persian Gulf, Malacca in the Straits, and Macao in China. Portugal lost Ormuz in 1632 and Malacca was overtaken about the same time by the Dutch headquarters in Batavia and the British Indonesian centre in Bantam, both trading to Canton in China. In addition to the silver the Portuguese brought from the Iberian peninsula, their ships exchanged Chinese silks for Japanese silver from about 1540 to the 1630s, bringing the silver to Macao, Malacca, and India until the Japanese cut them off because of their attempts to convert the Japanese to Catholicism. Thereafter the Dutch continued to obtain Japanese silver against silks from Canton until 1668 when Japan banned the export of silver for monetary reasons (Yamamura and Kamiki, 1983, pp. 348–50). The

Figure 3.3
Early modern Asia

British had stopped trading in Japan in 1623. Portuguese, Dutch, and English traders brought silver to India and China from Europe directly, from the Red Sea and the Persian Gulf, and from Japan. The importance of the local trade, in which the servants of the East India company traded privately as well, is underlined in a famous 1619 statement by Jan Pieterszoon Coen, the governor-general of the Dutch East India Company (VOC) in Batavia:

Our wishes we have often repeated before: many ships, good warships, good return ships, medium-size ships for the intra-Asian trade . . . Once we obtain them we can not only procure gold for the Coromandel Coast but also rials for the pepper trade the silver for trade with China without it being necessary to send the bullion from home, but the supplies from the Netherlands must on no account be stopped immediately . . .

Piece goods from Gujarat we can barter for pepper and gold on the coast of Sumatra, rials and cottons from the coast for pepper in Bantam, sandalwood, pepper and rials we can barter for Chinese goods and Chinese gold; we can extract silver from Japan with Chinese goods . . . And all of it can be done without any money from the Netherlands and with ships alone. We have the most important spices already. What is missing then: Nothing else but ships and a little water to prime the pump . . . (By this I mean sufficient money so that the rich Asian trade can be established.) (Quoted in Steensgaard, 1973, pp. 406–7)

European ships had the advantage over the dhows of the Arabs, small sailing vessels of the Indians and the Chinese junks in that they were more seaworthy and carried larger cargoes. But the prospect of cutting off the flow of silver from Europe failed to materialize.

The silver had to keep coming partly because not enough profit could be earned in the intra-Asian trade in competition with local merchants and seamen, and partly because neither the Indians nor the Chinese wanted European goods. The East India Company at least, and presumably the VOC as well, consistently tried to load English woolens for India, but was unable to sell them. There was an initial demand for woolen cloth as a novelty, serving some great men as covering for their elephants or as blankets under their horses' saddles (Chaudhuri, 1965, p. 137). Some tin, lead, ivory from Africa, cowrie shells from the Maldive Islands in the Indian Ocean, and the like could be used, but the limit was low, and silver was needed. When silver from any source was traded against gold, the gold was not shipped home, not because of the high rate of interest and the length of the voyage, as Chaudhuri (1973, p. 181) claims — the interest charges would be the same on gold or merchandise of the same value — but because the profit on Asian luxuries in Europe was higher. The silver/gold ratio was consistently higher in India than in China so that it paid to trade silver to China for gold for India.

Why was there no demand for European goods in India? Some put

the explanation in terms of the self-sufficiency of the economy in necessities, and the greater expense of luxuries from Europe as opposed to those available locally (Richards, 1983, p. 183). The same explanation is given of the Chinese lack of interest in imports by one Sir Robert Hart, writing in 1901:

The Chinese possess the best food in the world, rice; the best drink, tea, and the best clothing, of cotton, silk, furs. Provided with these articles and their innumerable indigenous complements, they have no need to buy for a penny outside themselves. (Quoted by Dermigny, 1964, II, p. 685; see also III, ch. iii, discussing the Chinese lack of need for European products. Simkin, 1968, p. 252, also quotes Hart, noting he might well have added the best pottery.)

In India it was said that the Europeans were surprised to find that the supply of native produce dried up when they raised the prices they were willing to pay, testifying to the presence of a backward-bending supply curve, derived from "satisficing," working to a target income, presumably at the level of subsistence, and being uninterested in maximizing levels of living (Rich, 1967, p. xxiii). This explanation is vigorously denied by Chaudhuri who asserts that it is difficult to accept the hypothesis of an income elasticity of demand for real income of zero (1978, p. 156). The more general view, called "traditional" by Richards (1983, p. 183), is the Indian penchant for hoarding, each generation putting coins down a hole in the ground, well or cistern, not counted, it not being known how much was down in what Smith called "the bowels of the earth". In addition there was the Indian "excessive liking for gold and silver and jewelry" (Richards, 1983, p. 184). Chaudhuri chafes at this, saying that it is hard to accept the argument of an income elasticity of demand for hoarding greater than one (1978, p. 156), although the elasticity of demand for all luxuries is greater than one (by definition). Chaudhuri wants to explain the demand for silver and gold in terms of the need for money — a transactions demand, and a demand for assets, in the absence of alternatives, just as in England (1978). Another scholar who attacks the hoarding thesis is Frank Perlin. He admits that there was an insatiable market for silver, but insists that it was needed for monetization as proto-industrialization — that is, cottage industry organized by merchants — spread through the countryside and required the use of money. Along with cottage industrial workers, peasants in western Deccan in south India participated in fairly frequent if low-level monetary transactions (Perlin, 1983, section vi, especially pp. 68, 73, 75).

Richards has written of the Muslim attack on India from 1000 to 1400 and its plundering of Indian treasure under four Moslem sultans, who

looted temples, demanded ransom for captives, instituted payment of tribute, and the like, taking it north and west in one stream, and later in another to Delhi. The amounts of gold and silver were enormous (1983, pp. 186ff.). Later the Emperor Akbar (1572–1607) accumulated a large hoard of precious metals (Brennig, 1983, p. 492), and a sudden drop in the price of gold relative to silver in 1676 was rumored to be the result of a sudden dispersion of the ancestoral gold hoards of the Emperor Auraazeb (1659–1707) who needed money to finance campaigns in western India and Afghanistan (Chaudhuri, 1978, p. 178). This interpretation is disputed by Habib (1982, p. 369), who states that the collapse of the gold price in 1676 (in terms of silver) was the consequence of large imports of Japanese gold, shipped to India by the Dutch. It is worthy of note in the quotation from Jan Pieterzoon Coen on p. xx above that gold was wanted for the Coromandel coast (in India) and silver for trade with China.

It is clearly the case on the reading of the evidence that after 1600 silver was minted into coins in Surat, and used as money as well as hoarded. Jean-Baptiste Tavernier, a French jeweller who travelled in India in the seventeenth century, observes, however, that gold was not coined but sold directly to jewelers (Habib, 1982, p. 365). One Asiza Hasan, whose study I have not seen, working from numismatic finds, concludes that all the silver arriving in India was coined into rupees, and that it tracks closely, with a five- to ten-year lag, the pattern of Hamilton's estimates of American silver arriving in Spain (Habib, 1982). Not all was used as money within India, although monetization was pursued, farm rentals were converted to money payments, and after an initial period when rupees circulated mostly within cities (Brennig, 1983, p. 482) they spread. But Habib's attempts to measure the increase in the Indian money stock based on strong assumptions about all silver arriving being coined and circulated, and no change in the earlier absolute amount of hoarded silver, estimated in 1571 as two-thirds of the total, seem overstated. There was undoubtedly some hoarding of the rupees passed northward along the caravan trail to Agra where the calicos were woven. Perlin states that silver and gold found ready markets in India, silver in the north, gold in the south (1986, p. 1044). There was also a substantial movement of rupees, often recoined when they reached their destination, to Southeast Asia to buy local spices, especially pepper, and Chinese silks, porcelain, and later tea.

The rankest of amateurs is persuaded of the Indian propensity to hoard from the experience of the twentieth century. The appetite for precious metals goes back, as earlier noted, to Roman times, and it comes down to the present day. A New York Times article of January 18, 1988 (p. D6) discusses the wedding season and the jewelry expected

to adorn many of the 10 to 20 million brides of the season, the 150 to 200 tons of gold smuggled into the country each year from abroad, the 7,000 tons believed to be hoarded in the country. A 1982 study of the world gold position gives a figure of 3,500 tons hoarded in India as of 1968 and well over 4,000 tons at the time of writing (International Gold Corporation Ltd., 1982, p. 15). The report observes that while most of the Indian hoards consist of old jewelry, smuggled exports and imports respond to changes in the outside price so that Indian net demand tends to stabilize the world price (see also The Economist , April 30, 1988, p. 85).

Earlier in the century, when the price of gold was raised in the United States from $20.67 an ounce to $35, in 1934 a billion and a half dollars worth of gold poured out of India and China according to Graham and Whittlesey (1939, p. 16). They considered that India was unlikely again to hoard in significant amounts, adding: "If, in these circumstances, the natives of India increase their holdings materially they will not only be failing to show their alleged shrewdness but will be acting against all tradition and common sense" (ibid., p. 125). It is not clear that gold hoarding in India is contrary to tradition there, but as for common sense a United Press International story in the Boston Globe of January 31, 1988, discussing a wave of gold buying following a nine-month decline in the stock market in 1987 that reduced the values of portfolios by 25 percent, used expressions like "gold fever," "an age-old lust," "a crazy buying spree," and "madness." One jeweler noted that in India "Gold is considered sacred and auspicious" (sic ) (Boston Globe , February 28, 1988, p. A19). The newspaper account notes that at $29 a gram, equivalent to $812 an ounce, the price of gold in India was 40 percent above the world price, which had recently been $480 in New York (ibid.). The wedge in this instance, of course, was the result of a government ban on private imports of gold, and the need for a large premium to cover the risks involved in smuggling.

Given this fascination with gold, it is hard to accept the experts' opinion — those of Chaudhuri, Perlin, and Richards — that India did not have a strong propensity for hoarding gold, but needed silver imports to use as money, given the spread of small-scale industries and the need for money to pay rents and taxes. The reason is that gold was not used as money in India, money being confined initially to cowrie shells, and then to copper and silver. Much — how much? — of the silver was exported further east to Indonesia against spices, and to China in exchange for gold. The only use of gold in India was ostentation, insurance against a bad monsoon, and for hoarding.

Chaudhuri's most recent statement renews the attack on an Eastern propensity to hoard:

The huge influx of gold and silver from the New World to Europe from the sixteenth century to the nineteenth was seen by many European historians as one of the fundamental determinants of economic expenditures. But the outflow of the same precious metals to the Middle East, India and China in the paths of an ancient trans-continental trade, we are told, owed its explanation to a totally different reasoning, an eastern psychology which assigned a higher value to stored wealth than to current material consumption. The point has been made many times, by myself and others, that the absorption of gold and silver by the Asian economies in the early modern period had little to do with a "hoarding" social mentality but was grounded on an international pattern of economic specialization, on payments mechanisms, and socially determined demand which had existed for at least a millennium. (1986, pp. 64–5)

The payments mechanism cannot, of course, be said to have produced India's taste for gold over a millennium, especially as gold was not used as money, and monetization of silver to replace cowrie shells is not a thousand years old. Secondly, the pattern of economic specialization and the socially determined demand are consistent with a propensity to hoard. Apart from monetization, the utility produced by gold and silver lies in its possession, rather than in its use and being used up as food, clothing, raw materials. Other objects similar to gold and silver play roles in international trade, for example, paintings. Indian purchases of gold constitute investment, rather than consumption, and it is difficult to accept the argument of the experts that the East is no different from the West when, with millions of poor people, it trades consumption goods — albeit luxuries — against investment goods.

Hoarding in modern times has been studied analytically for Southeast Asia by P.J. Drake who explains it as a transitional stage in very poor countries between saving in real forms such as stores of goods and land, and saving through financial institutions (1980, pp. 124–8). It is thought to be small as a flow, but large as a stock, and the stock further serves to balance consumption cyclically by being borrowed against in bad times. Charles Gamba lists the propensity to hoard first among twelve factors affecting inability to spend and save, following inadequate earnings (1958, p. 35). He notes different hoarding practices — Eastern Indonesians in hollow bamboos, hidden in the walls of houses or buried in the ground; Chinese in Southeast Asia mostly in gold ornaments; rural Indians, particularly the Tamils from Madras, in buried earthenware pots, in the form of gold ornaments and diamonds — and observes the contribution to hoarding of the Muslim prohibition of taking interest on savings (ibid., p. 38). Drake's general discussion of hoarding under the rubric of "informal finance" notes that it gives psychic income, especially when it takes the form of jewelry and ornaments, an attribute of

durable consumer goods not obtainable from other stores of value (1980, p. 127). This aspect of hoarding, of course, is not confined to poor villages, in which 90 percent of the people of Asia live, but applies to both rich in poor countries, and some rich countries as a whole.

I end this section with a diversionary aside to note that in Gunnar Myrdal's three-volume work on Asian development, there is no discussion of specie imports, hoarding, or monetization, issues which might have been thought connected with Myrdal's interest in development. He dealt, however, with real rather than with financial factors (1968).

China

The frequent mention of China by Adam Smith and David Hume underlines Heckscher's remark that China to the eighteenth century was idealized as the Netherlands had been earlier, and as China is, to some extent, idealized today (Heckscher, 1935, I, p. 352). A modern historian observes that there was an "India Craze" in the 1680s and 1690s (Brennig, 1983, p. 481). Heckscher says that China was an economic utopia. It was, moreover, full of contradictions, having a disdain of foreign trade based on Confucian philosophy (Richards, 1983, p. 378; Smith, 1776, p. 462, p. 644), but sending its merchants to Manila and the Dutch East Indies to obtain above all else silver. In one view, part of the avidity for silver, at least initially, stemmed from the collapse of its paper money in the second half of the fourteenth century when the silver to gold ratio went from 10:1 to 4:1 between 1346 and 1375 (Atwell, 1982, p. 83; letter of September 15, 1987, and seminar at Harvard University, October 5, 1987). An expert has hypothesized that the movement of silver into the Middle East from Central Asia in the second half of the thirteenth century may have been the result of the introduction of paper money into China (Ashtor, 1971, p. 39).

If both these explanations have merit, a substantial outflow of specie from China during the expansion of paper money, and a return flow when the paper money had collapsed, would constitute a pattern, stretched out over time, such as that followed later in France at the beginning of the French Revolution. The revolution and especially the events leading up to the Terror in 1793 produced a strong outflow of capital that piled up specie in England and contributed substantially to the British canal mania of 1792, whereas the collapse of the assignats in 1795 led to an imperious need for money in France. This was so strong that it induced a return flow of specie that depleted the reserves of the Bank of England and led to abandonment of convertibility of sterling in 1797 with the run

precipitated by the landing of a handful of Frenchmen on English soil at Fishguard (Hawtrey, 1919, ch. xv). The demand for money continued in the Ming (1368–1644) and Ch'ing (1644–1911) dynasties, and took the form of silver perhaps because of an inbred distrust of paper substitutes, but the experience is unlikely to have dominated Chinese attitudes three centuries later.

Chinese preoccupation with silver does seem paranoid to a Westerner. Atwell puts it in terms that are non-economic: "Foreign silver was so important to the Chinese economy that merchants would do almost anything to procure it" (1982, p. 69). One can find a few traces in the literature of Chinese exports of silver to Japan and to Southeast Asia (Yamamura and Kamiki, 1983, p. 341; Simkin, 1968, p. 98, referring to the period from AD 999 to the twelfth century; Prakash, 1986, p. 84, referring to the sixteenth century; Meilink-Roeloesz, 1962, pp. 40, 168). They were ready to export gold which was not money and they exported money in the form of cash — copper coins, holed, and strung on string — to Japan and the East Indies, "vast quantities" to Bantam, for example (Meilink-Roeloesz, 1962, p. 248). Chinese merchants trading to Manila wanted only silver, and those to Southeast Asia, mostly silver, along with a few spices, sandalwood, an aromatic material available in quantity in Timor and used for ointments, perfumes and especially in cremation ceremonies and sacrifices (ibid., p. 87). Some clockworks were brought from Europe as toys; furs, first from Russia and then the United States, and in the early nineteenth century opium. Another import was rhinoceros horns, an aphrodisiac (Simkin, 1968, p. 98). Silver was clearly money — although it was not minted by the Chinese, but rather used in little "shoes" or "loaves" that could be cut to produce wanted amounts. In due course, the Mexican peso circulated as money, in contrast to Smith's dictum that large countries did not use foreign money. Somewhere between 150 and 500 million dollars flowed into the country between 1700 and 1826 (Wang, 1972, p. 364). Wakeman comments that China drew as much as 20 percent of all silver mined in Spanish America via the Manila galleon, other silver through Central Asian trade at Bokara, as much as half of the silver coming from Spain, plus substantial amounts from Japan. In all, he suggests that at least 250,000 to 265,000 kilograms of silver were imported in the first third of the seventeenth century, and probably much more (1986, p. 3). The amount from Japan to China is estimated at over 112,500 kilograms between 1640 and 1772 (Yamamura and Kamiki, 1983, p. 350).

What needs to be explained is why the silver stops when it comes to China. In other proximate destinations — the Baltic, Levant, India — some is used as money, some as conspicuous consumption or insurance hoards, but some is passed on. China is the end of the line. Not until

the opium period of early nineteenth century was silver exported in large amounts, $140 millions from 1827 to 1849 according to Yu-Chienchi'ung, following a net inflow of $75 millions in 1801–26, and followed by net imports equivalent to $360 millions from 1871 to 1931, as estimated by Charles F. Remer (both quoted by Wang, 1972, pp. 365–6). It would appear that silver was as addictive as opium.

There was lavish use of silver but also of gold, pearls, and precious stones at the court, first in Nanking and after 1421 in Beijing. The emperors ran enormous establishments; 3,000 court ladies, and 20,000 eunuchs (Wakeman, 1986, pp. 10, 11), 5,000 servants in the kitchen alone, and 70,000 overall at the end of the Ming dynasty, most employed in the capital, serving lavish meals on gold and silver vessels, with great banquets four to six times a year (Mote, 1977, pp. 212–13, 220, 243). The court gave gratifications and received presents and tribute. Marco Polo noted that the Great Khan rewarded his captains with fine silver plate, fine jewels of gold, silver, pearls, and precious stones: the officer who was a captain of 100 received a tablet of silver, a captain of 1,000 a tablet of gold or silver gilt, and a captain of 10,000 a tablet of gold with a lion's head on it (Yule, 1903, I, p. 351). On New Year's Day the Great Khan held a festival in which the direction of giving was reversed: from the people who showed him allegiance came "great presents of gold and silver and pearls and gems and rich textiles of all kinds" (ibid., p. 394). Gold and silver came to China regularly from Vietnam in tribute, in the shape of gold men, golden gongs, a gold turtle weighing 90 ounces, silver cranes, etc. (Whitmore, 1983, passim , but especially pp. 375–8). Atwell comments that wealth poured into public coffers after the middle of the sixteenth century, leading to imperial extravagances of monumental proportions, illustrated by the weddings and investiture ceremonies of the five sons of Emperor Wan-li costing 450,000 kilograms of silver. This behaviour was emulated by others so that conspicuous consumption became a hallmark of the late Ming period (1986, p. 227). At the same time some poor were starving under the pressure of taxes and labour-service obligations (ibid., p. 228) while others were executed for tax delinquency and anti-government activities (ibid., p. 244 note).

It is hard in the light of this admittedly spotty and anecdotal evidence to share the conclusion of the experts that the Chinese appetite for silver was dominated by monetization and that the notion that the Chinese hoarded more than other countries is questionable (Atwell, 1982, p. 88 note 75). Monetization was important, especially in taxation. Taxes were originally levied in rice, then in paper money, then bolts of cloth, and finally silver (Wakeman, 1986, p. 9). The Imperial Treasury collected its taxes in "silver chests" (Reischauer and Fairbank, 1958, p. 340). Land taxes, labour-service obligations and extra levies were

also commuted into silver payments — not exactly monetization since, as already noted, the silver was dealt in as bullion in tael. Taxes were oppressive. The Ming dynasty raised taxes seven times between 1618 and 1636, drawing silver from the economy directly, and increasing the hoarding of warlords (Atwell, 1982, p. 88).

China covers an enormous span of land, and the economies of different areas differed, especially in a monetary sense. The south supplied most of the export products — silk, tea, porcelain, and most of the industrial goods sold internally. The north collected silver in taxes and contributions mainly from the south, spent silver there, and remitted silver south as the private income of officials; local transactions were conducted with cash. The far west was relatively unaffected by monetary changes, but dealt in silver bullion and cash (Wang, 1977, pp. 483–90).

Much of the demand for silver arose from the increase in population from 100–150 million in 1644 to more than 400 million by 1850, along with the commutation of real to money payments. Daily expenses were made in cash, rather than silver, although the use of Spanish dollars started in Canton at the end of the seventeenth century and spread north along the coast. But considerable hoarding must have gone on fairly continuously. Banks had to provide private armies to guard silver shipments (Fairbank et al. , 1965, p. 98). Disorder would seem to have been pandemic, and contributed to substantial hoarding. Hoarding is mentioned by Wang, who notes that "a certain percentage [of silver] was channelled into the arts and industry, hoarded or buried under the ground for safekeeping," but offers no guess as to what that percentage was (1977, p. 474).

It would be plausible to believe that the Chinese passion for silver (and the Indian for gold) were no different than those in Europe, except for the fact that the silver seldom left China, and then mainly in payment for the addictive substance, opium, or esoteric items such as spices, incense, and sandalwood.

A final contemporary fact that may or may not be related to a Chinese hoarding phenomenon: the Boston Globe reported that in the first few months of 1988, Taiwan bought 186 tons of gold from the United States, worth approximately $600 million, leading a New York commentator to call the country "a major sponge for gold, literally absorbing more gold than is available" (May 23, 1988, pp. A6–7). A traditional Midas complex may not account for the purchases: the metal bought was gold, not silver; it was bought for official, not private account, and it may reflect primarily an attempt to cut down the statistical size of the Taiwanese export surplus by recording the purchases as commodity imports. It may none the less be worth mention.

Gold/Silver Ratio

Much of the literature on precious metals is devoted to the ratio of the price of silver relative to gold. This is not a particular interest in this discussion, which is directed more to the high deficits settled in silver at one end of the chain and its hoarding or disappearance at the other. A few figures gathered from the handiest sources — largely from a single book on precious metals in the later medieval and early modern world (Richards, 1983) — are useful, however, in illuminating some features of the problem (see Table 3.7). The dates selected from those available in tables by separate authors, covering different periods, are guided on those in the table for China. The drop in the ratio after 1200 and particularly after the collapse of Chinese paper money in about 1360 strongly supports the monetary view favouring silver as money over gold as wealth for ostentation and display, perhaps hoarding and the like. The lower price of silver in India in the early seventeenth century may well reflect the preference of that country for hoarding gold. Increasing trade in modern times helps explain the convergence of ratios, although

the integration of markets is far from perfect with arbitrage limited in the explanation of Munro (1983, p. 111) already referred to. But our interest is less in the ratio than in the high prices of both precious metals in the East as compared with the West.

Conclusion

Chaudhuri contends that India was not basically different in its response to supplies of precious metals than any other country, and that the movement of silver and some gold eastward was the same as any commodity movement, to be explained along Ricardian principles of comparative advantage (1978, p. 157). Gold and silver were cheap in the West, expensive in the East, and luxury products, the only ones that would bear the cost of transport taking a long time, were cheap in the East and expensive in the West. That is satisfactory as far as it goes, but seems to demand some explanation why the precious metals were so highly prized in India and China. Why did the influx of metal not raise prices, as called for by the price-specie-flow mechanism, and push it out again? Chaudhuri recognizes the problem and says that it is not possible to solve the paradox with available evidence, nor to trace the precise effects of bullion imports on the Indian economy (ibid., p. 160).

Dennis Flynn (1986) attempts to deal with the flow of bullion to the east in micro- rather than macro-economic terms, terms that closely parallel those of Chaudhuri. Instead of the silver being needed to pay for the imports of the West from the East, he claims that the precious metals were the cause of the expansion of intercontinental trade, not the response. This leaves unanswered why the East wanted silver and gold more than it wanted luxury consumers goods. Assume that the East could not have been able to buy food in the West (for it would spoil on the long voyage) or other highly useful but inexpensive goods such as iron, timber for shipbuilding and housing (too heavy and bulky relative to their value), or goods that would be used up in the course of consumption like the exported spices, calico, silks, later tea (but not porcelain, which was durable but could be put to daily use). Perhaps it could be argued that the trade was one in durable consumers goods — say, only porcelain and silver — that yielded utility through aesthetic enjoyment over time. Or the precious metals serving as money could be regarded as highly useful goods, producing utility through lowering transaction costs. I find the explanation unacceptable if it is intended to explain passion, avidity, a voracious appetite, and the like. The West seemed quickly to get sufficient pepper, with gluts leading to sharply lower prices. While the prices of gold and silver shifted against one

another in Asia, prices of other goods rose only slightly against the two metals. This is what needs to be explained.

The distribution of income is perhaps a key. The Eastern rich had their necessities cheap, including cheap service, had little taste for Western luxuries, and cultivated the precious metals for their beauty as well as for the insurance they afforded in troubled times. The poor had difficulty in obtaining the cheaper necessities, and no capacity to buy others that were imported. Income distribution was skewed in the West, to be sure, and there was something of the same indulgence in conspicuous consumption. But the tastes of the rich were communicated fairly quickly to the poorer classes in England, at least in the spices, tea, and calico if not in silk and porcelain.

Monetization plays a role, to be sure, especially in the intermediate run, but over the long run money problems can be met through innovation. Wang observes that China developed four types of credit instrument in the eighteenth century: silver notes, cash notes, native bank order drafts, and transfer accounts (1977, p. 480). These made progress at different rates in different places, slowly in the interior such as Yunnan and Sinkiang, more rapidly along the coast. The view that the flow of specie to the East was primarily for monetization encounters the difficulty that India had a voracious appetite for gold and gold was not money, perhaps not even near-money, and that additions of specie were continuous, whereas money plays a balancing role, raising prices and reversing the flow of trade, as explained by Hume in the price-specie-flow mechanism. In China, silver was spent primarily for opium, one addictive substance exchanged for the other. The answer to the puzzle may lie less in economic theory than in psychological and psychoanalytical regions.

Let me return to the present day, and the heavy dollar deficit of the United States, on the one hand, and the surpluses of Japan, Taiwan, and the three other small Asian economies, South Korea, Singapore and Hong Kong, on the other. American high absorption — spending for consumption, investment and government, especially military — and low savings are explained in terms of United States wealth. In writing about the Decline of Empires , Cipolla

points out that improvements in the standard of living brought about by a rising economy lead to more and more people demanding to share in the benefits. Incomes and extravagances develop, as new needs begin to replace those that have been satisfied. (1970, Introduction)

Japanese per capita income has surpassed that in the United States, though the comparison relies on market exchange rates which are often distortionary when real incomes are compared. Japanese savings, how-

ever, remain high. A pair of articles in the Boston Globe suggests that the Japanese realize that they are in a position to work less hard, consume more, indulge in leisure and save less, but somehow Japanese society finds it difficult to the point of impossibility thus far to do so (February 27, 1988, p. 1; February 28, 1988, p. 1). They export goods with great intensity but find it difficult to buy foreign goods.

I find it difficult to explain the United States deficits by a surplus of money, and the Japanese and Taiwanese trade surpluses by an excess demand for money which could not more readily be otherwise satisfied.

In brief, the explanation that India and China are just like Spain and the rest of Europe, or that Japan and Taiwan today are like the United States and the United Kingdom is implausible, counter-intuitive and unacceptable.

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4—
Introduction to England's Treasure by Forraign Trade, or The Ballance of Our Forraign Trade Is the Rule of Our Treasure by Thomas Mun^[*]

Thomas Mun's Discourse of Trade , published in 1621 as a defense of the East India Company of which he was a director, is a minor classic in political economy of the mercantilist period. Mun's second book, England's Treasure by Forraign Trade, or The Ballance of our Forraign Trade is the Rule of our Treasure , has a wider purpose than the defense of the Company and is a major classic. The latter is economic science, applied to the controversies of the day over international trade and payments. Also written in the economically turbulent 1620s, it was not published until 1664 when it was put forth "for the Common Good" by his son, John Mun, as the second Anglo-Dutch war approached. This introduction to England's Treaure , also covering Mun's thought in A Discourse of Trade , is divided into four sections dealing with the man, the times, his defense of the East India Company, and his wider thought on mercantilism and bullionism.

The Man

Thomas Mun was born in 1571 and died in 1641. He is described in the Dictionary of National Biography (DNB ) as an "economic writer"

[*] Introduction to a facsimile edition of Thomas Mun's England's Treasure by Forraign Trade (1664), in the series Klassiker der National Okonomie (Classics of Political Economy), edited by Professor Horst Claus Rechtenwald and published by Verlag Wirtschaft und Finanzen, Dusseldorf, Federal Republic of Germany in a separate small volume in German translation with the title "Uber den Handel: Thomas Mun's Ideen im Lichte unserer Epoche" ("A Discourse on Trade: Thomas Mun's Ideas in Contemporary Light"), 1989.

(1921–2, XIII, p. 1183); however, he wrote not to serve party politics but for science (Heckscher, 1935, p. 184, note 7). Son of a mercer, John Mun, he had a stepfather who was also a mercer, and a grandfather and uncle who, as moneyers of the Royal Mint, may have given him an early insight into currency matters. His career as a merchant started about 1596, before the founding of the East India Company in 1600, and he spent some time in Italy, from perhaps 1597 to 1607, where he seems to have failed and absconded because of bankruptcy. In Leghorn, he was known to have been a factor of the merchant William Galloway, who was inscribed on the lists of the Levant Company, trafficking between London and the Eastern Mediterranean, and to have dealt in importing into Italy lead, tin and cloth, while exporting alum. He maintained an account with the bankers Matteo and Lorenzo Galli of Florence (DeRoover, 1957). His Italian experience is mentioned twice in England's Treasure , once in recounting that the Grand Duke of Tuscany, Ferdinand the First, had lent him 40,000 crowns and allowed him to export it in specie to import goods from Turkey (pp. 18–19)^[1] and again to make the point that exchange manipulation cannot determine the rate of exchange, as Gerard Malynes, an intellectual adversary in London, maintained it did:

I have lived long in Italy where the greatest Banks and Bankers of Christendom do trade, yet could I never see nor hear, that they did, or were able to rule the price of Exchange by Confederacie, but still the plenty or scarcity of money in the course of trade did always overrule them and made the Exchange to run at high or low rates. (p. 51)

Mun returned to London from Italy sometime after 1609, married in 1612, and in July 1615, "as a well known merchant" (DNB , 1921–2, XIII, p. 1184) was elected a member of the committee, or a director, of the East India Company. He spent the rest of his life actively promoting the Company's interests and was said to have been "its ablest advocate" (Chaudhuri, 1965, p. 20). He refused, however, certain responsibilities within the Company — in November 1621 to go to India to inspect the Company's "factories," and in March 1624 to serve as deputy governor of the Company. He none the less played a prominent role in the Company's decisions, his name appearing frequently in the Company's minutes, opposing resettlement in Bantam in Java in the 1618–19 war in Asia, advocating instead withdrawal to north India; propounding in 1626 the theory that the Company would have to earn a return three and a half times the original cost of its goods bought in Asia to cover freight, customs, goods exported and other costs and to make a profit; persuading the Court in 1626 to change the manning and stowage of the Company's ships bound for India to another port to lessen the danger

from French ships with letters of marque; insisting in 1627 with the governor, but vainly, on the necessity of sending shipping to realize on the Company's assets in India; proposing in 1632 expansion of the investment in Coromandel factories from £15,000 to £20,000 (Chaudhuri, 1965, pp. 67, 68, 71, 102).

Mun's name also turns up among those lending money to Lionel Cranfield, a financier of the early seventeenth century, who borrowed money and received deposits from a wide circle to invest in syndicates formed to take over offices, farm taxes, and buy up properties sold off by the crown (Tawney, 1958, p. 111). The amounts and dates are not stated, but they were probably before 1613 when Cranfield became a minister in James I's government.

Most important for the East India Company, and certainly for economic thought, Thomas Mun was put forward by the East India Company as its representative in the critical times of the 1620s, and to serve on Crown Commissions to make recommendations to the Privy Council on the privileges of the Company in exporting foreign coin. Mun submitted four memoranda to the Commission on Trade appointed in October 1622 that settled down to write its report in the spring of 1623. Their wording follows closely portions of England's Treasure , establishing that the origin of that book goes back to the early 1620s, and not, as previously thought, to the last years of the decade (Supple, 1954, pp. 91–2). Other parts have been traced to 1626 or 1627 (DeRoover, 1957). In any event, Mun proved persuasive on these governmental commissions, fighting off proposals that the East India Company be forbidden to export gold and silver coin and bullion to Asia to buy spices, silk, and calicos. In particular, he was one of twelve signatories to the June 1622 Report of the Clothing Committee of the Privy Council — his name misspelled as Thomas Man in the careless orthography of the day — that set out a host of recommendations for overcoming the decay of cloth exports, but explicitly defended the East India Company against the accusation of 'taking away of money to furnish their trade, and return only commodities again' (Thirsk and Cooper, 1972, pp. 210–16). He delayed for some years a proposal by Gerard Malynes to appoint a Royal Exchanger to monopolize all dealings in foreign bills of exchange. Even here, however, he ultimately triumphed because the experiment adopted in 1627 lasted only a short time before it was recognized to have failed.

The Times

The period is widely described as one of "crisis," without, however, entire agreement on the nature of the crisis or its duration and extent.

For many historians the crisis covered a century and a half (DeVries, 1976); for others a pair of years (Ruggerio, 1964). In the seventy years of Mun's life there were only twenty-six years of good trade (Hinton, 1975, p. 284, quoting W.R. Scott). Many years were critical because of bad harvests in the Mediterranean, in northern Europe, and especially on occasion in several consecutive years, or because Swedish blockades of Baltic ports in the Thirty Years War from 1618 to 1648 cut off the flow of grain needed in the West. At a more fundamental level, Poland, eastern Germany and Russia lost the prosperity they had enjoyed in the sixteenth century when population had grown faster in the West and Mediterranean than agricultural productivity and rising prices attracted Eastern exports. The early seventeenth-century market for eastern grain was hurt by Italian and Spanish production of rice and French production of maize, as well as by greater agricultural productivity in the West in general.

Crisis further turned on war. In addition to the Thirty Years War, there was the attempt by Spain to crush rebellion of the Dutch in the Netherlands that lasted eighty-odd years from 1572 to 1659, with a truce from 1607 to 1612; religious and dynastic wars between France and Spain, and wars of the British with now Spain, now France, now the Dutch. At times, Spain was simultaneously fighting the Turks in the Mediterranean, the French, English and Dutch. Despite the flow of silver from the New World, Spanish kings were continuously in debt and forced to declare bankruptcy in 1560, 1575, 1596, 1607, 1627, 1647 and 1653, refunding the asientos , or finance bills of exchange they had discounted, in long-term juros or bonds. Not all Spanish American silver was received in Spain; some was diverted to Lisbon or to Acapulco and the Manila galleon; British and Dutch privateers and even naval forces continuously tried to capture the fleet and occasionally succeeded — Drake in 1573, 1580 and 1586, and Admiral Piet Hein of the Dutch navy in 1628. British exports of woolens were in process of shifting from the old to the "New Draperies," lighter cloth and cheaper, to compete especially with high-quality Venetian woolens and to serve a wider market. One crisis ensued from a bungled attempt in Alderman Cockayne's project of 1614 to persuade the English Crown to forbid the export of cloth to the Dutch for finishing and dyeing there, and to undertake those processes at home. The effort failed, but the crisis in the British export trade that followed was due more to the outbreak of the Thirty Years War and the debasement of Polish and East Germany currency in the so-called Kipper- und Wipperzeit (clipping and debasing) which rendered the British pound appreciated. There was also a pepper glut after 1619 when the short war between the Dutch and the British in Asian waters came to an end and both the East India Company and the Dutch equivalent, the Verenigde Oostindisiche Compagnie (VOC),

brought heavy cargoes to Europe. Some part of the crisis of 1621 may have been due to the arrest and trial in Star Chamber in 1618–19 of eighteen prominent foreign merchants — most of them Dutch — on the charge of exporting the very large sum of £7 million in coin. This is thought to have been part of an effort to halt the payment of interest to Dutch lenders, which in turn may have contributed to the Dutch withholding new loans and thus accentuating the exchange crisis (Barbour, 1966, pp. 53, 123).

The monetary troubles contributing to crisis were short-run — the flood of copper from Sweden used to ransom the fortress of Alvborg from the Danes as called for by the 1613 Treaty of Knared, copper used by Spain to blacken her coinage when silver became scarce, and by the private mint masters of Poland and Germany to adulterate their coins. Of crucial importance was the long-run decline in the flow of silver from the New World as production slowed down in Peru and Mexico in consequence of the exhaustion of the supply of labor, although Morineau has recently raised a question whether the conventional estimates, based on Seville records, gave Hamilton a wrong impression because of smuggling, and whether, when all records are reconciled, silver imports into Europe did not actually rise from the sixteenth to the seventeenth century (Morineau, 1985; for a chart of the Hamilton and Morineau data see Braudel, 1982, p. 174). Undervaluation of silver relative to gold in Britain at 15 to 1 contributed to a drain of silver, the money in daily use, against gold that circulated less effectively. The shortage of silver for hand-to-hand exchanges was especially acute in 1616–22 (Supple, 1957, p. 244 n.; 1959, pp. 178ff.). The currency debasement throughout Europe led to the establishment of deposit banks to receive and test coin and issue standardized receipts against it used as bank money — the Bank of Amsterdam (1609), of Middelburg (1616), of Hamburg (1619), of Delft (1621) and of Rotterdam (1635).

There is some question whether it is appropriate to regard the silver and gold produced in Spanish America and that hoarded in Asia, and to a lesser extent in Scandinavia, Poland and Russia, as money. In modern economics, prior to free floating in 1973, gold produced in South Africa was a commodity which became transformed into money when it arrived in Europe to be distributed through the gold market. In comparable fashion the Spanish bullion in the sixteenth and seventeenth centuries, some gold but mostly silver, was a commodity on leaving Spanish America, money as it arrived in Europe, and then a commodity again when it was swallowed up in Eastern Europe and Asia.

A certain amount of gold was acquired in the first half-century after Columbus, but the big flow took place in silver, began about 1560 and lasted until about 1600 or 1620 when, according to the orthodox

account, it started to decline. The great majority of it escaped capture by English and Dutch privateers, flooded into Spain, and went out again. Spain spent the silver and borrowed against future receipts to provide Peru and Mexico with the supplies needed by the populations there, and to finance its wars in Europe. The New World exchanged silver as a commodity against consumer goods supplied by Spain and especially by the rest of Europe. Some circulated in Europe as money, but most was spent in the East, in the Baltic, the Levant, and the East Indies — for grain and timber as far as the Baltic was concerned, and East for luxuries from the Levant and Asia. Much of the specie received by Poland, Russia and Turkey was in turn passed along to Asia for luxuries, though some was hoarded. The New World and Spain were what we would call low absorbers, spending their income fully. Asia was a high absorber, selling luxuries and hoarding the commodity, silver, it received for them. Between stood Europe, exchanging necessities sent to the mining communities in the New World against luxuries received from Asia.

The high spending and low productivity of Spain and its colonies in the field of necessities have been explained. According to a contemporary Spanish source, Spain was ruined by the flood of precious metals:

the possession of such wealth altered everything. Agriculture laid down the plough, clothed herself in silk and softened her work-calloused hands. Trade put on a noble air and exchanging the work-bench for the saddle, went out to parade up and down the streets. The arts disdained mechanical tools. Goods became proud, and when silver and gold fell in esteem, they raised their prices. (Quoted by Vilar, 1976, pp. 168–9)

Thomas Mun, disapproving of luxury consumption, echoes these sentiments in England's Treasure :

But this great plenty which we enjoy, makes us a people only vicious and excessive, wasteful of the means we have, but also improvident and careless of much other wealth that shamefully we lose . . . we leave our wonted exercises and studies, following our pleasures, and of late years besotting ourselves with pipe and pot, in a beastly manner, sucking smoke and drinking healths . . . As plenty and power doe make a nation vicious and improvident, so penury and want doe make a people wise and industrious." (pp. 72–4)

A more detailed account draws distinctions within the New World. Peru was a purely Spanish community with an avid desire for consumer goods of Spanish, European, Mexican and even Chinese origin, the last imported via Manila and Acapulco in exchange for silver, while the mixed Spanish and Indian community in Mexico exported consumer goods to Peru as well as silver to Spain and Manila (Parry, 1967, pp. 208–10).

The Spanish silver in Europe went initially to those countries that supplied the Spanish army in Flanders and the goods needed for the Iberian empires and domestic consumption (Parker, 1972). As it had not stayed in Spain and Portugal, so most of it did not stay in Holland, Italy, France and England. Three streams took it east, to the Baltic, Levant and East Indies.

Economic historians have explored the specie movements to the Baltic and Levant, noting that some of it was passed further along to Asia in payment for luxuries, some spent again in the West for luxuries and travel, and some hoarded (Maczak, 1976). A controversy turns on whether the bilateral trade of the West through the Sound to the Baltic, settled in specie, was offset by other overland trade with a reverse movement of specie, and on whether the import surplus of one country such as England was balanced multilaterally by an export surplus of others, such as Holland, France or Italy. There was some eastward movement of Western luxuries, such as Leipzig jewelry, silks and spices from the Levant by way of Venice, and similar readily transportable objects of high value and low weight that could move by land. But the main trade overland was in oxen and hides that moved in the same direction as grain and timber (Jeannin, 1982). It seems clear that the gross import surpluses by sea that had to be requited in specie were necessarily balanced bilaterally since all major traders in the West had import surpluses (Wilson, 1949; Heckscher, 1950), and that they were not matched by export surpluses overland. Trade within Europe was multilateral, as Thomas Mun insists, but outside the Continent the opportunity for multilateral balancing through bills of exchange was limited, and specie was necessary to close the accounts.

A question remains: what did the East do with the specie it acquired in exchange for its grain, timber, oxen and luxuries? The answer seems to be that it hoarded it. The distribution of income in Eastern Europe was highly skewed, with rich nobles and largely foreign merchants, and poor peasants. The monarchs of the backward economies of the Baltic hoarded rather than circulated the silver that did not pass on to Asia (Aström, 1962, p. 84). In addition, the Baltic countries, including Russia, insisted on collecting their customs duties in specie. Some hoarding went on in the upland bazaars of India, where the variability of the monsoon made it useful for the risk-averse peasant to accumulate a bridal dowry in silver or gold. Something of the same fashion existed in Norway where in noble or burgher weddings the bride might be magnificently arrayed in a crown and many gold chains around her throat, shoulders and elbows, and many gold chains hanging down toward the ground (Larsen, 1948, p. 264). Poor burghers and peasants in Poland would try to lock away a valuable ornament, a spoon or a coin

(Bogucka, 1975, pp. 145–8). The same mentality existed to a degree in France where no councilor, treasurer, bishop or abbot was without a complete set of tableware in precious metal, and there was no artisan who did not have basin, ewer and cup, at least a salt cellar, belts, rings, or necklace (Meuvret, 1970, p. 146). Mercantilists in Holland and England, while conscious of the function of silver and gold plate serving as a reserve, were interested in specie for circulation, not to gratify a Midas complex. Thomas Mun was disdainful of money as wealth. He was interested in the state having some treasure, but not too much, and he was anxious that it be imported, not drawn from circulation (Heckscher, 1935, p. 212). Harvey's research on the circulation of blood was not published until 1628, but the comparison of blood with money had been made earlier (ibid., p. 217).

Europe was acutely conscious of the loss of specie to the East. An English merchant of the time said "Many streams run thither [to India], as all rivers to the sea, and there stay" (quoted by Thomas, 1926, p. 8). Persistent attempts were made to send goods to India instead of coin, and sometimes gold instead of silver, but factors on the spot resisted. English cloth of wool was unsuitable and expensive. Some arms and ammunition could be provided, some metals, ivory, coral, quicksilver and the like, obtained outside Europe. Mainly the East wanted silver. It has been suggested that one element in the equation was a backward-bending supply curve of labor: satisfied with a target income, and hoarded valuables that protected it against a bad monsoon, increased earnings went into leisure and insurance rather than consumption (Rich, 1967, p. xxiii, quoted by Wallerstein, 1980, p. 47, n. 69). Or income distribution was sharply skewed against the producers of cloth and spice, with precious metals a form of conspicuous consumption for wealthy landlords and compradores . There was country trade among the economies of the East, but European goods were not wanted, and the profit for the East India Company and the VOC lay in silver — Venetian ducats before the seventeenth century, Spanish reals for the early days of the chartered companies, then Dutch rixdollars.

When the silver arrived in India it did not go immediately into hoards: some was reminted into rupees, some passed upcountry in purchasing calico and muslin to be hoarded, and some, like the specie received in the Baltic, passed along in country trade. The same occurred in Batavia. To keep its coins in circulation, Batavia, like Spain, raised the prices of undervalued coins (Glamann, 1958, pp. 53–5 and 65–6). Arbitrage took place among various parts of Asia, especially India, Japan and Indonesia trading silver for gold with China. The silver/gold ratio was at times 5:1 in China, and 10:1 or 11:1 not far away in Japan or India (Vilar, 1976, p. 95; Spooner, 1972, p. 77). Chaudhuri suggests that the

role of silver in the commercial life of India may be more like that of the Eastern European countries (1978, p. 182). The real sinkhole seems to have been China, with its hunger for silver (Spooner, 1972, p. 77). The highest absorber at the producing end was Peru: the lowest at the receiving end, China.

With a large flow of specie into Europe and out again — in rough balance over long periods of time (Wilson, 1967, p. 511) — the monetary position of Western Europe, and even more of the separate countries, was a matter of some anxiety. There had been a bullion famine in the fifteenth century as German silver mines became depleted, a famine that inspired the voyage of Columbus in search of gold (Day, 1978; Vilar, 1976, ch. 7). "In economies without fully developed credit institutions, central banks and fiat moneys . . . concern about a country's coinage supply was hardly irrational" (Munro, 1979, p. 176). Supple says it bordered on neurosis but was understandable in the light of the drain (1957, p. 246). Controversies had risen over foreign exchange in 1576, 1586, 1600 and 1621. The last particularly raised the question whether the East India Company contributed to the scarcity of money by sending silver to the East in exchange for luxuries. Various measures in 1611 and 1619 forbade the export of gold and silver coin, melting it down, paying prices in excess of the mint, and the like (Supple, 1959, pp. 181–4). Proposals for manipulation of the exchange rate, usually through a Royal Exchanger, abounded. In these circumstances, Thomas Mun came to the defense of the East India Company.

A Discourse of Trade

Mun's defense of the East India Company, and especially of its practice of shipping coin to the East, is divided into parts, answering what he calls four objections to the Company's trade. The first objection is that necessary money is exchanged for unnecessary luxury goods such as spices, dyes, silks and calicos. The second regards the ships of the Company, much larger and more expensive than those used in coastal or Continental commerce, as wasteful, and using up scarce timber. Related to this is a third line of attack on the Company based upon its employment for long periods and at great risk of mariners who consume large amounts of food and are frequently lost at sea, leaving behind widows and children to be cared for. The last criticism returns to the question of money raised in the first, complaining that the Company's export of silver leaves the Mint less than fully employed.

Mun's answer to the first objection rests in part on a defense of consumer sovereignty — that if people want to spend income on drugs,

spices, raw silk and calicos they should be allowed to — although in his later argument, both in A Discourse and in England's Treasure , he criticizes his countrymen for not working as hard as the Dutch, which runs against letting people behave as they choose. He argues further that the East India Company obtains these luxuries in direct trade more cheaply than the previous practice of having them transported overland to Turkey where they were purchased by the Levant Company, or importing them from Dutch, French or Venetian sources. The third part of his reply to the first objection is the principal argument that appears again in his answer to the objection about the Mint. He explains that the East India Company has exported far less foreign silver — it was not licensed to export British coin — than permitted — £548,090 in Spanish reals and some dollars to 1620, as against a permitted amount of £720,000 — and exported £292,286 of British, and some foreign, goods. Moreover, he claims that £100,000 of foreign coin exported annually will produce £500,000 of imports gross, of which England would consume £120,000 annually and re-export £380,000. This last sum is more than three and a half times the original silver exported (pp. 27, 8) and can regain the specie or pay for imports. Thus the East India Company is said to pay out (foreign) specie gross, but earn it net through re-export of the luxury goods bought in the East. He does not make anything of the argument that the United Provinces of the Netherlands, and especially Holland — a more advanced economy than that of England — did not restrict the export of specie and seemed always to have an abundance. In fact, the East India Company bought much of its Spanish silver in Amsterdam.

The second objection that the large ships built for the Indian trade use up British resources and are otherwise useless need not occupy us long. An argument along the lines of opportunity costs is made on the basis of resources — not a cogent one, since the timber and naval stores could be put to use building fishing boats which he calls for in his answer to the fourth objection. For the rest, he argues that the East Indiamen train sailors, and induce a supply of shipbuilders and suppliers that are available to use for the naval defense of the British Isles. Like that of Adam Smith, who upheld the Navigation Acts on the ground that defense is "of much more importance than opulence," the argument is non-economic. It does bear on the question whether mercantilism was more concerned with power than plenty, but Mun devotes only a few pages to the issue and gives it little weight.

The same can be said for the objection that the East India Company wastes sailors and their rations and leaves their wives and children impoverished. The men would have eaten food had they remained at home, much of the grain is imported, rather than home-grown, those

that die are replaced, ships are lost in war with the Dutch as well as through perils of the sea, and the Company takes care of the unhappy widows and children resulting from casualties. The fifth part of the third objection is oddly connected with the rest, apparently arguing that for all the losses of men and ships, there has been no saving in the cost of goods imported from the East. This objection is disposed of with tables that compare the cost of imports of spices and indigo from the Levant and Lisbon with those directly from India. The latter route produces a substantial saving. Thus the country gained both employment and wealth.

The fourth objection, that the East India Company takes silver that would otherwise be brought to the Mint and keep it employed, is met in various ways. Both rich and poor continuously complain they do not have enough money. The Mint has been idle some years the Company has exported little silver and busy some years it has exported more. The Company never exported as much silver as it had been licensed to. Moreover, if the East India Company did not trade with India the trade would be taken over by the VOC, which would send the same amount of silver there and sell the same goods to Britain at higher prices. This, of course, is the substitution of a general-equilibrium argument for one of partial equilibrium, following through on the consequences of action to halt shipments by the East India Company, instead of assuming that everything else would remain the same.

The third and last part of the answer to the fourth objection is more general than the earlier and narrower defense of the Company, and sets out a mercantilist concept of trade. Britain could live without trade, but to do well it must trade its superfluities against necessary wares available in other countries and in treasure. This is a theory of trade close to that of Adam Smith in which exports are a vent for surplus. The troubles of the country lie not in the East India Company's dealings but in depreciation abroad (raising the price of foreign coins) and selling England commodities against coin rather than other commodities. He blames goldsmiths for culling and exporting heavy English coin, against the law, and then the authorities for failing to enforce the Statute of Employment, which required foreign exporters to use the proceeds of exports to England to buy English goods, rather than bills of exchange drawn on the Continent (p. 54).

The final suggestion is that the loss of specie may be due to inexperienced British merchants who buy more abroad than they sell, lacking sufficient knowledge of the vocation of merchant. This criticism is directly linked to the opening chapter of England's Treasure , listing twelve qualities needed in a good merchant. An export surplus will make a country rich, an import surplus render it poor. Gross imports

can be large if a substantial portion of them is re-exported, as the East India Company is wont to do. What is needed is restraint in consumption of imports so as to enable them to be resold abroad for treasure. The country will grow rich if Englishmen increase productivity in the production of the "natural Commodities of the Realme," do not neglect fishing (this is a reference to the strength of the Dutch in the herring fisheries) and avoid excesses of consumption of food and rayment.

England's Treasure

The emphasis in A Discourse of Trade is on the East India Company and its innocence of responsibility for Britain being drained of its money. The aim of England's Treasure by Forraign Trade is far wider, to make the point that trade should be balanced not bilaterally with each country but overall, that spending specie to acquire valuable goods is a means of getting more specie, that it is a mistake to seek to regulate the level of the exchange rate through manipulation, as Gerard Malynes wanted Britain to do, and that while it is wise to accumulate a treasure it should be a moderate one and in real goods, such as ships and stores, as well as in specie. Mun understood that the balance of trade differed from the balance of payments (on current account) because of payments like those for freight and shipping. He was interested in how to reckon the balance of payments, as were also many early mercantilists. He was, as Viner says, a mercantilist but an anti-bullionist (1937, p. 5) or perhaps more accurately a moderate bullionist.

His greatest contribution is in insisting on the multilateral nature of trade. The East India Company bought some of the silver it shipped to India in Cadiz and Lisbon, but most in Amsterdam. Most again was foreign coin. If the exchange on Amsterdam was low, because of an adverse English balance of trade with the Dutch, florins could be acquired in roundabout fashion, buying bills on Spain, Italy or elsewhere, and with those moneys, assuming that their countries had a surplus of Dutch bills on Amsterdam, with Spanish currency, buying first Florentine, then Venetian, then Frankfurt or Antwerp bills, until at last there is a claim on moneys in Amsterdam (England's Treasure , pp. 47, 8).

The specie exported to buy goods for re-export against specie brought back to England was likened to seed-corn, ostensibly thrown on the ground, that produced more corn in good season (England's Treasure , p. 21), a simile that pleased both Adam Smith (1937, p. 400) and was noted by Alfred Marshall (1890, Appendix B, footnote quoted in Marshall, 1961, II, p. 752). Charles Wilson characterizes the theory as

"using a sprat to catch a mackerel," and notes that it would not apply to the use of specie in the importing of timber from Norway, since heavy timber did not lend itself to re-export (1949, pp. 154–5). Thomas Mun's insistence on the re-exporting of imports to offset the original use of specie in importing marks a way station on the road from barter to well-developed multilateral trade based on bills of exchange. The Hanseatic League traded by bartering, or its close equivalent, selling goods to a country for local money that was then fully spent in acquiring new goods. The use of specie to pay for import surpluses was an intermediate step. A further advance was multilateral balancing through the use of bills of exchange as originally practiced by the Italian bankers. This was spreading rapidly within Europe and Mun was its prophet. Bills of exchange on Amsterdam were traded in 1585 in Antwerp, Cologne, Danzig, Hamburg, Lisbon, Lubeck, Middelburg, Rouen and Seville. By 1634 six more cities had been added, including Frankfurt, London and Paris; by 1707 nine more (Sperling, 1962, p. 451). Silver and gold were still required outside Europe and inside by persistent deficit countries like Spain. But within the West sophistication was increasing, and with it a declining need for settling bilateral balances in specie. While the world of Thomas Mun was not like that of Alfred Marshall, as Eli Heckscher (1950) claimed and Charles Wilson (1957) denied, it increasingly became so after 1700 (Price, 1961, p. 273) when money was again scarce.

Mun has been called the last of the early mercantilists (DeRoover, 1949, p. 157), and one can see his thought changing. In A Discourse of Trade he considers that the loss of specie to foreigners who sell goods in England for exported coin is easily remedied by application of the Statute of Employment, requiring that foreigners use the monies earned by their imports into England in buying English goods for export (p. 54). A few years later in England's Treasure he concludes that the Statute of "Imployments" cannot increase or preserve England's specie (ch. X). At first blush it seems an efficient way to augment England's treasure. On reflection he argues that bilaterally balanced trade is inefficient, as it distorts channels which might fit into multilateral patterns, that forcing foreign merchants to take English wares reduces the supply that English merchants might export, and that treasure can still be exported by English importers. Thus the multilateral balancing by bills of exchange of A Discourse is generalized.

In England's Treasure Mun comes close to developing a theory of international trade and specie movements as a self-equilibrating mechanism, but falls just short of the notion of the price-specie-flow mechanism that had to wait for David Hume (1752) to express with great clarity. As Viner points out, however, the essential elements of

the theory were already available in previous literature and several fairly satisfactory attempts had been made to bring them together (1937, p. 84).

As plenty or scarcity of mony do make the price of the exchange high or low, so the over or under ballance of our trade doth effectually cause the plenty or scarcity of mony. (England's Treasure , p. 39)

It is a common saying that plenty or scarcity of mony makes all things dear or cheap; and this mony is either gotten or lost in forraign trade by the over and under ballancing of the same. (Ibid., p. 20)

It is argued that the Spanish treasure cannot be kept from other kingdoms by any prohibition made in Spain (ibid., p. 23) and that no force such as the public authority proposed by Malynes could keep the price of bills at par if the underlying balance of trade is not favorable (ibid., ch. XIV).

Mun's pamphlet was published posthumously in 1664 by his son, as noted earlier, because of the Second Anglo-Dutch War. Large parts of the essay are spent not in detailing the qualities required in a merchant trading abroad — an excursus in which he anticipated Jacques Savary's Le parfait negociant (1675) and which differs sharply from Adam Smith (1937, p. 112); in arguing with Misselden against Malynes; or in developing the theory of the balance of trade — so much as in criticizing the British for being too little like the Dutch who work hard, trade industriously, and consume little. He is critical of the Dutch for their weak ships (the flyboat, or fluitschip ), resents their competition and attacks in Asia, protests that they take too many fish in English waters, and objects that they depend on alliance with England against Spain but reap the rich fruit of British trade "out of our own bosoms" (England's Treasure , p. 80). None the less it is clear that he admires the Dutch for having done so much in trade with such limited resources, all the while resisting the Spanish armies, and wishes that the English would reform "our vicious idleness" (ibid., p. 84) and compete with the Dutch in shipping, fish and trade. One can find an echo in these chapters of current American discussion of Japan.

The penultimate chapter touches on the topic of how to draw up a "ballance of trade," including not only merchandise as reported by the customs office's books, but also estimates for freight, duties, losses at sea, travel, remittances such as those of the Church, gifts, etc. As a conclusion he dismisses as unimportant most policies of bilateralism, currency manipulation, exchange-rate intervention and regulation of exports of bullion. Any such attempt to gain money for the kingdom may work for a time, but the important policy is to cherish and promote foreign trade as a whole. The point that a country without mines to

produce gold and silver could rely on trade to obtain its money was not original with Mun, although he kept returning to it (Forraign Trade , pp. 135, 145). Jean Bodin in the sixteenth century had said that salt, wine and wheat were the mines of France (Wilson, 1967, p. 524) and Antonio Serra had written A Brief Discourse on a Possible Means of Causing Gold and Silver to abound in Kingdoms where there are no mines in 1613 (ibid., p. 493). The wealth of every kingdom is partly natural — the product of land and sea such as wool, cattle, corn, lead, tin, fish and many things for raiment and munition (Discourse , p. 50) — and partly artificial — cloth. With this wealth, England can acquire the foreign goods it needs and her Treasure by Forraign Trade.

References

Aström, Sven-Erik (1962), From Cloth to Iron: the Anglo-Baltic Trade in the Late Seventeenth Century , Helsinki: Centraltryckeriet.

Attman, Artur (1983), Dutch Enterprise in the World Bullion Trade, 1550-1800 , Gothenburg: Kungl. Vetenkaps- och Vittergets-Samhållet.

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5—
The Historical Background: Adam Smith and the Industrial Revolution^[*]

I

An early version of this paper focused on the dispute, if one may call it that, between historians of economic thought who sometimes seek to demonstrate that Adam Smith was fully aware of the industrial revolution taking place around him as he wrote the Wealth of Nations , and economic historians who think he was not. It is true, as Samuel Johnson put it, that "in lapidary inscriptions, a man is not upon oath" and piety demands that the guest of honour be given the benefit of the doubt. None the less, I propose to dismiss this question quickly, with an open-and-shut verdict for the economic historians.

It is first necessary to establish that Adam Smith could have known, or should have known, about the industrial revolution. The timing of the industrial revolution is not fully agreed. Rostow, for example, puts "take-off" in 1783 which is too late for a book published in 1776, and even, allowing for publication lag, for the new Chapter VIII of Book IV and the new material of Chapter I of Book V which appeared in the third edition of 1783. But neither the Wealth of Nations nor the Industrial Revolution had production functions with point-input/point-output. The former, as we shall see, was 25 years in the writing, and the

[*] Published in Thomas Wilson and Andrew S. Skinner, eds, The Market and the State: Essays in Honour of Adam Smith (Oxford: Clarendon Press, 1976), presented at the Bicentennial Celebration in Glasgow of the publication of Smith's The Wealth of Nations . I am indebted for ideas, references, corrections and comments to Mark Blaug, Kenneth Carpenter, Ronald Coase, Larry Neal and Charles Staley.

timing and indicator(s) of the industrial revolution varies among observers, as Charles and Richard Tilly indicate in the following table:^[1]

Ashton notes that for those who like to be precise in such matters the lighting of the first furnace at the Carron iron works in 1760 may serve to mark the beginning of the industrial revolution in Scotland.^[2] Technology change turned sharply upward in the 1760s. The number of patents, which had seldom been a dozen a year prior to 1760, rose to 31 in 1766 and 36 in 1769, the year in which James Watt took out his patent on the steam engine and Arkwright his on the waterframe.^[3] Halévy notes that all the important inventions were crowded into the decade from 1766 to 1775.^[4]

Assume for the sake of argument that the industrial revolution was in the making from 1760 to 1782. These are roughly the dates of the Wealth of Nations . Dugald Stewart held that its fundamental principles go back to Adam Smith's lectures delivered in Glasgow in 1752–3, in his first year as professor of moral philosophy. W.R. Scott claims that his Edinburgh period from 1748 to 1751 was of the greatest importance for the central principle of his system, and that by 1749 at the latest he had begun to apply the idea of natural liberty — which emerged directly from the Naturalism of the 18th century — to commerce and industry. The lecture of 1755 at the Club dominated by Andrew Cochrane, provost and merchant, contained an important early statement of his ideas. The manuscript of about 1763 discovered by Scott contains a well worked-out version of the opening chapters of Book I on the division of labour, most of it preserved in the final version published 13 years later, but with one alteration in illustration significant for our purpose.^[5] In the 13 years between this draft and 1776, Smith spent two years in France, six years at Kirkcaldy in Scotland, and four years in London, the last ten writing, finishing, and publishing the book, as well as, at Kirkcaldy, in studying botany and some other sciences. Writing to Andreas Holt in October 1780, Smith said:

My own life has been extremely uniform. Upon my return to Great Britain, I retired to a small town in Scotland in the place of my nativity, where I

continued to live for six years in great tranquility and almost complete retirement.^[6]

Scott makes clear that Smith's technique of writing with a closely reasoned argument made revision difficult, as the text would have to be altered for a considerable distance.^[7] It may well be true, as Viner says, that "Smith was a keen observer of his surroundings and used skilfully what he saw to illustrate his general argument" — though Viner, puzzled by his unawareness of the bondage of Scottish colliers and salters and by the absence of references to the general economic state of the Highlands, excuses his failure to respond to his immediate Scottish background by saying his loyalties were largely to a wider Britain.^[8] But it is surely going too far to say with Max Lerner in his introduction to the Modern Library edition:

Smith kept his eyes and ears open . . . Here was something that gave order and meaning to the newly emerged world of commerce and the newly emerging world of industry . . . Smith took ten more years. He could not be hurried in his task. He had to read and observe further. He poked his nose into old books and new factories.^[9]

The last sentence is half right.

The text of the Wealth of Nations supports Smith on "great tranquility and almost complete retirement" against Viner and Lerner on contemporaneous illustrations. There is virtually no mention of cotton textiles, only one reference to Manchester in a list of cities, nothing on pottery, nothing on new methods of producing beer. Canals are dealt with under public works, but illustrated by the canal of Languedoc, finished in 1681, rather than by the Bridgewater canal of 1761, which initiated the spate of canal building and improvement in Britain culminating in the canal mania of the 1790s. Turnpikes are referred to without notice of the fact that travel times were falling rapidly: the first stagecoach from Birmingham to London in 1731 took 2 1/2 days; by 1776 the time had been reduced to 19 hours.

A historian of economic thought argues ingeniously that Smith was "fully aware" of the technical change about him, citing, for example, his text of the use of coal and wood as fuel, and the use of coal in iron and all other metals.^[10] But Smith does not discuss the spread of coal in industrial use. Coal is mentioned to illustrate points about rent^[11] or consumer taxes,^[12] primarily about space heating. From a discussion of producing iron with charcoal in the United States where wood is abundant^[13] and a mention of iron in a list — "In some manufactures, besides, coal is a necessary instrument of trade; as in those of glass, iron and all other metals" (825–6; V. ii. k. 12) — I find it difficult to infer that Smith had a full appreciation of Darby's contribution in substituting

coke for charcoal. Nor is it credible on the basis of the fact that Smith and Watt were acquainted, even friends, and had close friends in common — Dr Joseph Black, the chemist and Dr John Roebuck, an owner of the Carron Iron Works — to hypothesize a conversation in which Watt explained to Smith the machine-operated devices of the Soho plant of Boulton and Watt.^[14] There is no evidence that Watt and Smith met after Smith left Glasgow in 1763, and the evidence for their friendship in Smith's Glasgow period is slight, resting largely on Smiles's Lives of Boulton and Watt , unsupported by anything in the surviving papers of Watt or Smith.^[15] The minutes of Glasgow University do record that Smith was the chairman of a committee in 1762 to get back from Watt, and from the University printer Foulis, some of their considerable number of rooms.^[16] To go from these contacts to a suppositious post-1768 conversation is a heroic leap.

Moreover, Smith's analysis is static. Manufactures using coal were "confined principally to the coal countries; other parts of the country, on account of the high price of this necessary article, not being able to work so cheap" (825; V. ii. k. 12). He recognized the importance of transport costs in the delivered price of coal. What he failed to see was that the high price of coal away from the mines provided a strong incentive to reduce transport costs and to improve efficiency in coal consumption through invention, as in the Watt steam engine. In 1771 James Watt was working to install his new machines in Cornish copper mines where failures were being recorded because of the high price of coal and the inefficiency of the Newcomen engine.^[17]

It is unnecessary to labour the point. The Wealth of Nations was the work of a literary economist, like some of us, who drew his examples from books, not from the world around him. The steam engine which replaced the plough and grain mills to illustrate the third source of improvement from the division of labour — invention — between the 1763 and the 1776 versions of WN I. i was a Newcomen engine, not a separate-condenser Watt, and the story of the invention is said by Cannan to be mythical and drawn from a book published in 1744 (WN 9–10). Most of the books Smith relies on, moreover, are fairly old, published in the first quarter of the eighteenth century, and the bulk of his dated illustrations relate to this period as well, e.g. the detailed discussion on public debt in WN V. iii (865–7, 868–9 and 874–5 §§ 13–25, 27–30, 42–6). A detailed and up-to-the-minute discussion in the 3rd edition of 1783 concerns not industrial output but the impact of the herring bounty on the catch (485ff.; IV. v. a. 28–35 and Appendix I). Though it be heretical to say so, when he does go into the real world, he occasionally makes a slip. Smith believed, for example, that higher wages were paid in Birmingham than Sheffield because the former

produced goods based on "fashion and fancy", rather than the latter's "use or necessity".^[18] Birmingham goods are "continuously changing and seldom last long enough to be considered old established manufactures". This implies that the higher wages are required because of the risks of unemployment, whereas Birmingham workers were paid more because new articles in the "toy trade" — small metal articles, especially buckles and buttons — called for workmen with a capacity to adapt to new tasks, and to a continuous improvement in techniques.^[19]

I see no need to make the case that Adam Smith had a thorough understanding of the industrial revolution, and this for two reasons. In the first place, much of the substance of what he wrote was derivative; the division of labour goes back to Henry Martin's Considerations on the East-India Trade of 1701, and can be found worked out complete with references to pins in Carl's Traité de la Richesse des Princes et de leurs états et des moyens simples et naturels of 1722. Indeed, a powerful case has been made lately that much of the inspiration for Smith's emphasis on the division of labour came from Plato, rather than immediately earlier sources like the Encyclopédie , Harris, Locke, Mun or Mandeville (a list which omits Martin and Carl). Strong parallels are drawn between illustrations which Plato puts in the mouth of Socrates, and those used by Smith, along with the observation that the Smith library contained three sets of Plato's complete works.^[20] Like Shakespeare who borrowed his plays, his originality was in how vividly and graphically he expressed ideas which were common currency.

Secondly, few are given to recognize the beginnings of great movements at their birth. Smith wrote throughout of "improvements" in an age, as Samuel Johnson said, when the "world was running mad after innovation". A number of the inventors and entrepreneurs had large visions. In his well-known letter to Watt in 1769, Boulton, in reply to the Roebuck suggestion that he buy a licence to make the Watt steam engine for Warwick, Staffordshire and Derby, said that he wanted to make it for the whole world.^[21] To James Boswell in 1776 he stated "I sell here, Sir, what the world wants to have, Power".^[22] Similar exalted commercial ambition can be found in Josiah Wedgwood, who wrote to his partner, Thomas Bentley, in November 1768: "I have lately had a vision by night of some Vases, Tablets, &c with which Articles we shall certainly serve the Whole World ".^[23] On a more technical level, note Watt's interest in 1769 in a patent for drawing a chaise by steam.^[24] The idea had been advanced by his Glasgow colleague in 1759.^[25] Boulton and Dr William Small had many conversations on applying steam power to canal boats.^[26]

The men associated with nascent industry were many of them caught up in the changes around them. Watt and Boulton visited the Bridge-

water canal before undertaking the surveying of canal sites in Scotland in the former case, and the pushing for the Grand Trunk in the latter.^[27] Thomas Bentley "participated in the new spirit. Canal-navigation, moss draining, new materials for manufacturers, improved processes for industry, new inventions of all kinds arrested and retained his attention."^[28] The "spirit for enterprise and improvement in the arts" of (medical) Dr John Roebuck, friend of Adam Smith and patron of James Watt, inventor of the lead chamber method of making sulphuric acid, entrepreneur of coal mines and the Carron iron works, "was well known."^[29] Even Edmund Burke, as Koebner reminds us, in 1769 collected instances of the energies displayed in British manufactures, and praised the "spirited, inventive, and enterprising traders of Manchester."^[30] From one viewpoint,

It was an age in which economic and industrial facts loomed large; they advanced new claims and offered new stimulus . . . a vast change had come over the general mind; the objects of knowledge, study and pursuit were seen in altered perspective and acquired altered values.^[31]

Adam Smith, as just noted, wrote continuously of improvements but without suggesting he was aware of their details, on the one hand, or their collective import, on the other. The reason is surely contained in a statement by a colleague of mine at the Massachusetts Institute of Technology, a metallurgist, Cyril Stanley Smith, a statement which both sums up the nature of the industrial revolution and reveals how Adam Smith could have ignored it:

These and hundreds more materials and uses grew symbiotically through history, in a manner analogous to the S-curve of a phase transformation of the materials themselves. There was a stage, invisible except in retrospect, wherein fluctuations from the status-quo , involving only small localised distortion, began to interact and consolidate into a new structure; this nucleus then grew in a more or less constant environment at an increasing rate because of the increasing interfacial opportunity, until finally its growth was slowed and stopped by depletion of material necessary for growth, or by the growing counter-pressure of other aspects of the environment. Any change in conditions (thermo-dynamic = social) may provide an opportunity for a new phase. We all know how the superposition of many small sequential S-curves themselves tend to add up to the giant S-curve of that new and larger structure we call civilisation . . . Because at any one time there are many overlapping competing sub-systems at different stages of maturity but each continually changing the environment of the others, it is often hard to see what is going on. Moreover, nucleation must in principle be invisible, for the germs of the future take their validity only from and in a larger system that has yet to exist. They are at first indistinguishable from mere foolish fluctuations destined to be erased. They begin in opposition to their en-

vironment, but on reaching maturity they form the new environment by the balance of their multiple interactions. This change of scale and interface with time, of radical misfit turning into conservative interlock, is the essence of history of anything whatever, material, intellectual or social.^[32]

Adam Smith has a superb record for forecasting in his remarks on the subject of another revolution, that which started in the same year as the Wealth of Nations appeared, unless you take the parochial view of my fellow-citizens of Massachusetts that it started a year and a quarter earlier in the skirmishes at Lexington and Concord. Smith was, moreover, prescient in observing that after freeing the colonies

Great Britain would not only be immediately free from the whole annual expence of the peace establishment of the colonies, but might settle with them such a treaty of commerce as would eventually secure to her a free trade, more advantageous to the great body of the people, though less so the merchants, than the monopoly which she at present enjoys.^[33]

If one takes 1782 or 1783 as the date of ignition of the industrial revolution, the revolution Smith did foresee touched off the one he did not.^[34]

II

The industrial revolution is a well-squeezed orange, as Ashton has said, and my friend and former student, Charles Staley, on hearing that I was to write this essay, drew my attention to a quotation from an article on human evolution which he finds applicable to studies of Adam Smith:

Human paleontology shares a peculiar trait with such disparate subjects as theology and extra-terrestrial biology. It contains more practitioners than objects for study. This abundance of specialists has assumed the careful scrutiny of every bump on every bone.^[35]

Despite the danger of strongly diminishing returns, however, it may be appropriate to touch on three aspects of the industrial revolution which currently interest me: the overtaking of Holland by Britain; the role of beauty in technical change; and Stephen Marglin's recent suggestion that the division of labour was practised under capitalism less for efficiency than for lowering the return to labour.

In a curious passage, Adam Smith claimed that England and France consisted in great measure of proprietors and cultivators, whereas Holland and Hamburg were composed chiefly of merchants, artificers, and manufacturers (632; IV. ix. 13). Hollander states that this remark is meant comparatively, but the basis for such a judgment is not evident.^[36] Holland, Smith further thought, was a richer country than England in

proportion to the extent of its territory and the number of its people (91; I. ix. 10). In a later passage he states that Holland is by far the richest country in Europe, and England perhaps the second richest (354; II. v. 35), which is not completely congruent with a still later passage in which he states that there is no country in Europe, Holland not excepted, whose law is, on the whole, more favourable to the interests of commerce and manufactures, which have been making more rapid progress than agriculture (393; III. iv. 20). Still later, Smith discusses the ruin of manufactures in Holland which is ascribed to high wages (826–7, 857; V. ii. k. 14, 79). This last view of Dutch industry is accepted by modern scholars.^[37]

The picture could have been aided by a better historical sense. Holland was the richest country in Europe in 1675, after which its commerce and manufactures decayed and those of Britain advanced rapidly. By 1730, or at the latest 1750, according to modern interpretations, income per capita in Britain had outstripped that in Holland. A successful protectionist policy in Britain had stimulated linen production, especially in Ireland and in Scotland after union in 1707. Dutch potters moved to London to produce their Delftware there to exploit a patent taken out in 1671. Haarlem lost out in bleaching in 1730. Herring fishing and whaling declined. The staple trade of Amsterdam, moreover, had been replaced by direct exchanges of English woolens for German linen and Spanish and Portuguese wine and treasure, without the need for shipment through the intermediary of Amsterdam. Adam Smith was mistaken in relation to stapling. He thought that commerce or at least the carrying trade derived from opulence rather than led to it (354; II. v. 35) and stated elsewhere that merchants exchanging Königsberg corn for Portuguese wine brought both to Amsterdam and incurred the double charge for loading and unloading because they felt uneasy separated from their capital (421–2; IV. ii. 6), thus ignoring the stapling function of grading, packing, storing, and the economies of scale of broader markets.

It is odd that Smith should have thought Britain behind Holland in manufactures in the late 1760s. Josiah Tucker in 1757 wrote:

Few countries equal, perhaps none excell the English in the Numbers and Contrivance of their Machines to abridge Labour. Indeed the Dutch are superior to them in the Use and Application of Wind-Mills for sawing Timber, expressing Oil, making Paper, and the like. But in regard to Mines and Metals of all sorts, the English are uncommonly dextrous in their contrivance of the mechanic powers . . . Slitting Mills, Flatting Mills, Water Wheels, Steam Engines . . . Yet all these, curious as they may seem are little more than preparation or introduction for further operations . . . at Birmingham, Wolverhampton, Sheffield and other Manufacturing Places,

almost every Master Manufacturer hath a new Invention of his own, and is daily improving on those of others.^[38]

There is the view that it was not the decline of Holland so much as the fact that after 1648 she stood still and let other countries overtake her,^[39] or that the Dutch economy did not decline absolutely until 1780.^[40] This overlooks the deterioration of Leiden, Haarlem, Delft, and Saandam in shipbuilding, and the loss of the Dutch monopoly in shipping and in the herring catch.

Most of all, however, Smith seems not to have appreciated how much of the advances in commerce and industry in Britain were the result of intervention in the economic process as opposed to the simple and obvious system of natural liberty. The Dutch monopoly in commerce was invaded by the Navigation Acts of the seventeenth century, which Smith more or less approved of on the ground of national defence, though in this respect one view contends that he was being ironic.^[41] Smith explicitly objects to the monopoly of the carrying trade with the colonies and insists that Britain was a great nation in trade before the Navigation Acts (563; IV. vii. c. 23). This seems to overlook the basis for Glasgow's prosperity with the monopoly of tobacco trade with Maryland and Virginia; after its loss in 1776 Glasgow fell on hard times. And it especially ignores the position in textiles, where commercial policy was highly effective. It may well be that responsiveness of the economy is more important than the nature of the stimulus; under certain conditions, industry will be spurred either by an increase in a tariff or by a decrease. But the case of cotton textiles is instructive.

At the end of the seventeenth century Indian calicos were beginning to eat into the market for woolens, and the latter interests persuaded Parliament in 1700 to prohibit the import of printed calicos. In the interest of the printing industry, plain muslins were permitted entry under a heavy duty, but as these grew in volume, the woolen and linen interests agitated for an excise tax on calicos printed, stained, painted or dyed, which affected local finishing. This was levied at the rate of 3d. per yard in 1712, and raised to 6d. in 1714. Demand kept rising, and such was the distress among woolen producers that in 1720 an act was passed prohibiting the use or wear of all printed or dyed calicos except muslin, neckcloths and fustians. None of these measures was effective. In 1736 the manufacture of calico was permitted with a linen warp. Walpole's tariff reforms of 1721–42 abolished duties on exports of manufactured goods, and on imports of raw materials, stimulating textile manufacturing of all kinds, though the import of raw cotton did not pick up until after 1748, well after Kay's 1738 invention of the flying shuttle, which could not help, given the yarn bottleneck. When this was broken by Arkwright's waterframe in 1769 and Hargreaves's spinning

jenny in 1770, cotton was used first for stockings and then in 1773 for cloth. Arkwright petitioned Parliament to remove the duties, and by 1774 every kind of printed, stained and dyed stuffs made wholly from cotton became lawful.^[42] As noted in the 1783 edition of the Wealth of Nations , this last year also saw the enactment of a prohibition on the export of utensils used in the cotton, linen, woolen and silk manufacture (624; IV. viii. 43).

Commercial policy equally played a role in the development of linen manufacture in Ireland and Scotland, and in iron.

Policy, as I have noted, was probably less important than the response to it. In the 1820s, Spitalfields would respond positively to a reduction in tariffs as Manchester responded positively to a reduction in imports. The difference between silk and cotton lay in the elasticity of the supply of raw material, low in silk, high (after 1790) in cotton. Entrepreneurs were ready to be stimulated by lower prices or higher, of outputs or inputs.

III

Smith's distinction between fashion and fancy and use or necessity, referred to earlier, had its echo in the division of Josiah Wedgwood's manufactures between Wedgwood and (Thomas) Wedgwood, which produced useful wares at Burslem, and the new plant at Etruria, established for producing ornamental ware by Wedgwood and Bentley.^[43] It survives today in Galbraith's distinction between necessities and those goods forced on passive consumers by advertising, and in the lines drawn by developing countries between things they need and those like Coca-Cola and breakfast foods which ignorant consumers waste their substance on. At every epoch it is of doubtful validity.

The usual view is that necessity is the mother of invention, or invention the mother of necessity, or both. Or that inventions leapfrog through disproportionalities, what Hirschman calls unbalanced growth, with expansion at one stage of production putting pressure on improved efficiency upstream in the production of inputs, and downstream in the consumption of its outputs. None of this can be denied. But Cyril Smith makes the point that a very large number of inventions, and particularly the improvement of materials, derive from the attempt to make goods more pleasing — softer, whiter, more brightly coloured, more beautiful,^[44] better tasting. A great deal of the effort of merchants and manufacturers is in improving quality, and in standardizing it. Price is important, but so are quality and the assurance of quality which comes from standardization, a point largely missed initially in the Russian revolution and in economic development in the less developed countries, and one which

was inherent in capitalist organization under both putting out and the factory system.

In another paper, I make the distinction between the "gains-from-trade" merchant, who largely buys goods where they are cheap, and sells them where they are dear, and the "value-added" merchant, who concerns himself especially with extending the market by insisting that the goods be made better so as to have greater appeal. These are ideal types, of course, since the purest of gains-from-trade merchants, buying spice, silk, or china in the East and selling it in London, will repackage and sort the goods to add some value; at the other extreme, the value-added merchant must still buy cheap and sell dear. The distinction is not quite identical with Adam Smith's separation of the speculative merchant, who exercises no one regular, established, or well-known branch of business, who can sometimes accumulate a considerable fortune by two or three successful speculations, and the slow accumulator in a single industry who seldom makes a great fortune but in consequence of a long life of industry, frugality and attention (113–14; I. x. b. 38). The gains-from-trade merchant leaves goods much as they are, save for sorting, perhaps curing, packing, refining, and the like, relatively simple functions, while the value-added merchant puts pressure on his suppliers to make goods more efficient for the task in hand, and in the cases of textiles, glass, china, and 'toys' more attractive, or cheaper for the same degree of attraction. The chemical industry grew partly from pure science, the investigations of Priestly and Lavoisier which fall within the period of the industrial revolution, and also from pressure of industry to find cheaper methods of bleaching and dyeing, not for "use or necessity" but for "fashion and fancy".

Adam Smith frequently failed to distinguish between commerce and industry, treating them almost as one word, like "damn Yankee", and for the purpose of quality improvement and standardization, the differences are minimal. The merchant often retained the finishing stages of textile manufacture in his own hands, or subcontracted them out under rigorous supervision. Such was the case in Manchester,^[45] Leeds,^[46] Beauvais,^[47] Le Mans,^[48] Barmen and Elberfeld.^[49] In toy-making there was a feverish search for novelties, and designing advances was an important function of the industry.^[50] Wedgwood wrote to Bentley in 1770: "I am fully persuaded that the farther we proceed in it [ornament] the richer crop we shall reap of Fame and Profit ."^[51] The hunt for synthetic dyes in the mid-nineteenth century which ushered in the organic chemistry revolution had much the same spur.

It is of particular interest that import substitution and the search for economical beauty go hand in hand. The industrial revolution can be said to have resulted in large measure from the search for substitutes for cottons and china from the East. Calicos in Britain have been dis-

cussed. "Siamoises" were a cotton cloth in France devised to imitate the stuffs worn by the wife of the Ambassador of Siam when she was presented to the court of Louis XIV in 1684.^[52] China ware was brought from the Orient by the early East India companies at the turn of the sixteenth to seventeenth centuries. Meissen ware in the first decade of the eighteenth century and Sèvres china in the 1750s were early responses. They were both supported by courts, and did not need to meet a market test. Delft provided a less elegant substitute for the earthenware of the ordinary household until Wedgwood took over,^[53] in the same way as chemically bleached, dyed and printed cotton took over from unbleached or crudely bleached, and undyed or crudely dyed linens and woolens. Especially in the hot climates of the Mediterranean and Latin America, lighter and brighter were better.

Standardization means value-added in various ways. To the modern consumer, homespun, handcrafted, tailormade is superior to machine-produced goods, but that is because they are made to superior specifications. When all goods were homemade, the lack of standardization was a disability, whether in stacking plates which exerted unequal pressure on one another, and thus broke^[54] or the cloth that did not meet specifications and was returned, thus increasing the need for investment in working capital.

One form of standardization is attention to delivery dates. In the eighteenth century this did not seem pressing, but infrequent sailings of ships, the fleet leaving Bristol for Newfoundland once a year, for example, made prompt delivery a capital-saving virtue, as did marketing through semi-annual or annual fairs.

The spectacular inventions in steam, waterframe, spinning jenny, coke, puddling and the like occupy front and centre of the stage of the industrial revolution. Firms like Boulton and Watt capable of contemplating steam-chaises and moving canal boats by steam engine in 1759 and 1770 capture the imagination. But the steady improvement of goods in quality and standardization was a vital part of the action. Search for quality frequently led to breakthroughs such as Wedgwood's creamware, and jaspar, which leads Cyril Smith to hold Wedgwood's science-based, market-oriented industry as a nucleus of English economic growth as much as the better-known contributions of Darby and Cort to iron manufacture or of Watt to power production.^[55]

IV

Adam Smith's contribution which is most clearly related to the industrial revolution is doubtless the opening discussion in Book I,

Chapters i–iii. This has recently been praised and damned: praised by Lord Kaldor who asserts that economics went wrong immediately in the middle of Chapter iv when Smith abandoned his examination of the relationship between the division of labour and the extent of the market and moved off into money, the theory of value and the distribution of income, what most think his central contribution to our subject but Kaldor views as irrelevant;^[56] damned by Stephen A. Marglin, a radical critic, who contends that the division of labour has nothing to do with efficiency and everything to do with the expropriation of income from the worker by the capitalist.^[57] I leave the quarrel with Kaldor to others concerned with resource allocation and income distribution, and address Marglin's proposition. It is, I believe, of interest today because it makes a strong appeal to young people and to non-economist Marxists, such as Johann Galtung, who believe that all dependence, even interdependence, is exploitation.^[58] Hierarchical organizations of all kinds are under attack, and the radical faith suggests that foremen and supervisors in a factory should be chosen arbitrarily, by lot, by election, rather than by competitive means, and paid the same as those whom they supervise.

Marglin's argument proceeds along the same lines as Smith's, as he discusses the pin factory and the three sources of improvement: dexterity, the saving of waiting time between tasks, and the devising of inventions which abridge labour by workers concentrating on a single task. The last it is difficult to take seriously, and Marglin does not, pointing out that Smith himself observes that a workman engaged in repetitive tasks has no occasion to exercise his understanding or to exercise his invention in finding out expedients for difficulties which never occur (734; V. i. f. 50). Adam Smith indeed very quickly notes that "All the improvements in machinery . . . have by no means been the inventions of those who had occasion to use the machines" but that

in the progress of society, philosophy or speculation becomes, like every other employment, the principal or sole task of a particular class of citizens. Like every other employment, too, it is subdivided into a great number of different branches, each of which affords occupation to a peculiar tribe or class of philosophers; and this sub-division of employment in philosophy, as well as in every other business, improves dexterity and saves time. (10; I. i. 9)

Waiting time does not impress Marglin either. A farmer gains from staying with a task long enough to minimize set-up time. A pinmaker could undertake the first of ten operations for a day or days at a time, and then change, to reduce set-up time to an insignificant portion of total work time and then move to the second.^[59] In this case, however, Marglin may have missed the point about the extent of the market. He claims that

if each producer could integrate the component tasks of pin manufacture into a marketable product, he would soon discover that he had no need to deal with the market for pins through the intermediation of the putter-outer. He could sell directly and appropriate to himself the profit that the capitalist derived from mediating between the producer and the market.^[60]

The pin producer now performs all the ten manufacturing tasks and markets the product as well. Peasants perhaps can sell their produce above their own sustenance in a local market. It is not clear that the pin market is so organized. The pin is a "very trifling manufacture."^[61] Any substantial number produced must be moved in what Smith calls "distant sale."^[62] Distant sale requires knowledge of languages, commercial practice, credit standings, modes of transport, etc., forms of dexterity and skill which the home pinmaker may not readily achieve.

The matter is neatly put in a letter of August 23, 1772 to Thomas Bentley by Josiah Wedgwood who sought to lower piece-rates for workers:

I have had several Talks with our men at the Ornamental works lately about the price of our workmanships, and the necessity of lowering it, especially in Flowerpots, Bowpots [boughpots] and Teapots, and as I find their chief reason against lowering their prices is the small quantity made of each, which creates them as much trouble in tuning their fiddle as playing the tune , I have promised them that they shall make dozens and Groces of Flower, and Teapots, and of the Vases and Bowpots too, as often as we dare venture at such quantities.^[63]

Wedgwood, of course, divided functions with the merchant Bentley, and Boulton with the merchant Fothergill. Scale sufficient to handle the waiting-time problem required distant sale, which required merchants. On occasion distant marketing preceded efficient scale in production; often they grew side by side. Colonial trade provided important outlets:

The process of industrialisation in England from the second quarter of the eighteenth century was to an important extent the response to colonial demands for nails, axes, firearms, buckles, coaches, clocks, saddles, handkerchiefs, buttons, cordage and a thousand other things, "Goods, several sorts."^[64]

To this list could be added pottery, both useful and ornamental, produced in the potteries of Staffordshire, the "bulk" of which was exported to the continent and the islands of North America, as well as to every port in Europe.^[65] Between Easter 1771 and Easter 1772, at its height, 72 percent of Yorkshire's production of woolens was exported. While output was increasing four times between 1770 and 1780, the export proportion was rising from roughly 40 percent (in 1695) to two-

thirds (in 1800).^[66] The notion of a producer selling his own output without the aid of specialists seems in these circumstances utopian.

Marglin has most difficulty in maintaining that the division of labour does not add to output per unit of input in improving dexterity. He makes several damaging concessions. Adam Smith would be difficult to counter if he had been dealing with musicians, dancers or surgeons;^[67] to the extent that the skills at issue are difficult to acquire, specialization is essential to the division of labour into separate operations.^[68] Later he suggests that factory employment can be attractive to men, whereas earlier he had said that whenever it is possible to avoid factory employment, workers had done so.^[69] Most of his illustrations are drawn from the cotton-textile industry. In engineering, or in pottery, however, natural ability, training and practice are all needed:

My idea was to settle a manufactory for the steam engine near to my own by the side of the canal where I would erect all the conveniences necessary for the completion of the engines and from which manufactory we would serve all the world with engines of all sizes. By these means and your [i.e. James Watt] assistance we could engage and instruct some excellent workmen (with more excellent tools than would be worth any man's while to procure for one single engine) and could execute the engine 20 per cent cheaper than it would otherwise be executed and with as great a difference in accuracy as there is between the blacksmith and the mathematical instrument maker.^[70]

I have trained up many and am training up more young plain Country Lads, all of which that betray any genius are taught to draw, from which I derive many advantages that are not to be found in any manufacture that is or can be established in a great and Debauched capital.^[71]

We have not got thirty hands here, but I have much ado to keep the new ones quiet. Some will not work in Black. Others say they will never learn this new business, and want to be released to make Terrines and sauce boats again. I do not know what I shall do with them, we have too many fresh hands to take in at once, though we have business enough for them, if they knew, or would have the patience to learn to do it, but they do not seem to relish the thought of a second apprenticeship.^[72]

You observe very justly that few hands can be got to paint flowers in the style we want them. I may add, nor any other work we do — We must make them  . . . Where among our Potters could I get a complete Vase maker? Nay I could not get a hand through the whole Pottery to make a tableplate without training them up for that purpose, and you must be content to train up such Painters as offer to you and not turn them adrift because they cannot immediately form their hands to our new stile.^[73]

You must have more Painters — You shall, — But remember that there are none ready made  . . . So please give my respects to Mr. Rhodes, and tell him if any man who offers himself is sober , he must make him everything else .^[74]

A strong case can be made that the division of labour has very little to do with capitalism. Plato's interest in the subject has been referred to earlier. Haley asserts that Dutch shipbuilding in the seventeenth century would have made a better illustration of division of labour than pinmaking.^[75] Standardized flyboats were built at Saandam using laboursaving machinery — wind-driven saw mills and great cranes which handled heavy timbers; inventories of timber for building four or five thousand ships were kept in hand. In the second war with England, Saandam turned out a ship a day.^[76] A century earlier, moreover, in 1574, the Arsenal at Venice, a shipyard under public management, turned out a merchant galley for the edification of Henry III of France in less than an hour:

Mass production of ships of a standard design became the hallmark of the Venetian Arsenal. Workmen developed unusual skill and efficiency as a result of specialisation; standard replaceable parts made repairs easy; stockpiling such parts allowed the state to maintain a cadre of skilled men always available, who, in case of need, could direct the efforts of a suddenly enlarged workforce, such as might be required for building a new fleet in a hurry.^[77]

Marglin admits that evidence in support of his view that the division of labour represents not efficiency but an attempt to divide and conquer is "naturally enough, not easy to come by", and "not overwhelming".^[78] He cites in support a cotton textile manufacturer who kept his manager from knowing anything about mixing cotton, or costs, so that he could never take the business away from him.^[79] Evidence that care was taken not to furnish industrial secrets to individuals considered as possible candidates for setting up rival establishments is abundant, however. Workmen who had been trained were not encouraged to take their skills elsewhere; on the contrary, manufacturers like Josiah Wedgwood petitioned Parliament to restrict their movement abroad, were wary of imitators, separated the different departments in Etruria and gave each one only outside entrances, so as to prevent workmen in one department from wandering about and picking up proprietary information.^[80] At one point (1769) Wedgwood wrote:

If we get these new painters, and the figure makers, we shall do pretty well in those branches. But these hands should if possible be kept by themselves 'till we are better acquainted with them otherwise they may do us a great deal of mischief if we should be obliged to part with them soon.^[81]

It is true enough that owners of proprietary information hung on to it under capitalism as long as they could. It is also true that competition tended to erode its scarcity value. The merchant started out with a monopoly of information, concerning where goods could be found, and

where they were wanted. The monopoly over information was related to education, and when education became general, the merchant lost his pre-eminence, except to the extent that he innovated; direct buying and selling replaced him. His efforts to make goods of higher quality, more promptly and cheaper, were part of the innovating process, and generally involved improvements which were unpatentable and insufficiently distinctive to be awarded prizes.

Marglin further insists that the move from the cottage to the factory was prompted by efforts to enforce the division of labour and thereby exploit workers, rather than by application of power, prevention of pilferage and adulteration (the worker's only countervailing tactic, according to Marglin). The view is a familiar one. Charles Bray regarded the ordinary factory as a "cunning device to cheat workmen out of their birthright" and justified the cottage factory which the Quakers set up in Coventry as Owenism.^[82] One could equally refer to Karl Polanyi, a Christian socialist, who excoriated the market but exonerated the factory,^[83] or Lazlett who embraces the market but rejects the factory.^[84] But to pursue these aspects of the industrial revolution would take us too far afield.

Smith was aware that the division of labour could lead to a dead end; in a passage far removed from Book I, he holds:

The man whose life is spent performing a few simple operations, of which the effects too are, perhaps, always the same or very nearly the same, has no occasion to exert his understanding, or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become . . . His dexterity at his own particular trade seems, in his manner, to be acquired at the expense of his intellectual, social and martial virtues . . . In the barbarous societies . . . the varied occupations of every man oblige every man to exert his capacity, and to invent expedients for removing difficulties which are continually occurring. Invention is kept alive, and the mind is not suffered to fall into that drowsy stupidity, which, in a civilized society, seems to numb the understanding of almost all the inferior ranks of people.^[85]

This emphasis on the social aspects of the division of labour anticipates a line of argument found in Mary Wollstonecraft, who maintains that:

The time which, a celebrated writer says, is sauntered away, in going from one part of an employment to another, is the very time that preserves the man from degenerating into a brute . . . The very gait of the man who is his own master is so much more steady than the slouching step of the servant of a servant.^[86]

It is also found in John Ruskin, who held that division of labour should be regarded as division of men:

Divided into mere fragments of men — broken into small fragments and crumbs of life, so that all the little piece of intelligence that is left in a man is not enough to make a pin, or a nail, but exhausts itself in making the point of a pin, or the head of a nail.^[87]

These unhappy consequences may result from the division of labour, or what van der Wee refers to as "excessive division of labour," though in the cottage textile industry, rather than the factory.^[88] It is a fair point that the social consequences of the division of labour may be untoward, as Smith recognizes. It is quite a different matter to assert that the economic purpose of the division of labour was exploitation rather than efficiency.

Adam Smith's discussion of allocation, distribution, and the division of labour through the market was largely related to what is now called "proto-industrialization", rather than the industrialization into large factories of the industrial revolution. Large-scale production had existed in isolation for centuries, and in Britain for decades. But proto-industrialization, the specialization by merchants, weavers, spinners, nailers, pinmakers, philosophers, and speculators was efficient rather than exploitative. Rudolf Braun has shown for the Zurich Oberland how proto-industrialization raised the level of living of peasants who were overcrowded on limited land, rather than lowering it. Cottage industry did not uproot men. On the contrary, it gave them work and bread and enabled them not to migrate from their homeland.^[89] The factory in the Zurich Oberland was a defensive measure to enable the area to meet the competition of British machine-spun.

In cotton textiles in Switzerland, the early factory pioneers were technical people — Wyss, Honneger, Wild, Oberholzer — who worked on making cloth cheaper, and not on impoverishing the workers who were impoverished by improved and cheaper British exports. The less efficient cottage workers moved into the factory and improved their standard. It was the more effective cottage workers, with greater dexterity, who held on in cottage industry too long when the higher efficiency of factories, as revealed by cheaper goods of a given quality, sealed their doom.^[90]

Let us permit the division of labour between Adam Smith and, say, Josiah Wedgwood, though both in their way were protean. Wedgwood was a nucleus-maker and a man who understood nucleation;

I have for some time been reviewing my experiments, and I find such Roots , such Seeds would open and branch wonderfully if I could nail myself down to cultivation of them for a year or two. And the Fox-Hunter does not enjoy more pleasure from the chace, than I do from the prosecution of my experiments when I am fairly enter'd in the field, and the farther I go, the wider the field extends before me.^[91]

Smith was a man of wide interests in law, moral philosophy, criticism, rhetoric, and agriculture.^[92] He approached the heart of the industrial revolution with his division of labour, specialization and exchange, and extent of the market, and planted the seed which has developed into the great social science of economics. That surely is glory enough.

6—
Commercial Policy between the Wars^[*]

War and Postwar Reconstruction

The First World War marked the end of an era in the history of commercial relations among countries. New boundaries set in the peace treaties, especially with Austria and Hungary, converted pre-1914 internal trade to international trade. Trade relations interrupted by war could not always be restored. Extended fighting and disruption of peacetime economic intercourse produced substantial changes in the economic capacities and interests of major trading nations. Monetary disturbance evoked responses in trade policy, especially increases in tariffs, to offset effects of exchange depreciation abroad. A loosely concerted attempt was made after the war to patch up the fabric of trade relationships, but with nothing like the fervour exhibited after the Second World War. There was virtually no planning of postwar trade policies, despite President Wilson's third of the fourteen points that called for "removal, as far as possible, of all economic barriers and the establishment of an equality of trade conditions among all nations consenting to the peace and associating themselves with its maintenance."

Exigencies of war led to changes in commercial policy. The McKenna

[*] Published as Chapter II of Peter Mathias and Sidney Pollard, eds, The Cambridge Economic History of Europe , vol. VIII, The Industrial Economies: The Development of Economic and Social Policies , Cambridge: Cambridge University Press, 1989. The absence of references to the literature of the last decade is owing to the fact that the essay was turned in, slightly ahead of the deadline, in February 1976. I am grateful for the comments on the original draft of Barry Eichengreen, Jonathan Hughes and Donald Moggridge.

budget in the United Kingdom in 1915 imposed duties of 33 1/3 percent on motor cars and parts, musical instruments, clocks, watches, and cinematographic film in an effort to reduce imports of luxuries and to save shipping space — although the point has been made that the shipping space taken by watches is minimal (Kreider, 1943, p. 13). Unlike previous luxury taxes in the United Kingdom, these duties on imports were not matched by domestic excises to eliminate the protective effect. The tariffs, moreover, made it possible for the United Kingdom to discriminate in trade in favour of the British Empire, something it could not do under the regime of free trade which had prevailed since the 1850s. Canada had granted preferential tariff treatment to the United Kingdom on a unilateral and non-reciprocal basis since 1898 — the United Kingdom assenting to the extent that it denounced the trade treaties with Germany and Belgium going back to the 1860s under which those countries had the right to claim concessions made by one part of the Empire to another on a most-favoured-nation basis. The Finance Act of 1919 further reduced excise taxes on Empire tea, cocoa, coffee, chicory, currants, and certain dried fruits by one-sixth, and on Empire wines by one-third. The Key Industries Act of 1919, designed to strengthen defence industries, equally contained preferences for the Empire, as did the Safeguarding of Industries Act of 1921. If the McKenna duties were designed to economize shipping and foreign exchange, the Finance Act of 1919 to raise revenue, and the Key Industries Act of 1919 to serve national defence, the Safeguarding of Industries Act levying tariffs on imports of gloves, domestic glassware, and gas mantles — a list extended in 1925 to include leather, lace, cutlery, pottery, packing paper, and enameled hollow ware — represented straightforward protection of industries hurt by foreign competition.

A number of countries increased tariff coverage and raised rates to gain revenue. French minimum tariff rates had been raised by 1918 from 5 to 20 percent, and maximum rates from 10 to 40 percent. The use of import quotas in France dates from 1919, rather than the depression in 1930, although export and import prohibitions were a widespread feature of Colbert's mercantilism two and a half centuries earlier. In countries where the principal fiscal instrument was the tariff, such as Canada, tariff duties were increased early after the outbreak of war.

Fitful attention was given to commodity problems by Britain. Long concerned about the prospect of interruption of cotton supplies from the southern United States as a result either of boll weevil or black rebellion, Britain had contemplated an Empire scheme for producing cotton. The planting of Gezira in the Sudan was started in 1914 with the decision to irrigate 300,000 acres, but the Empire Cotton Growing Corporation was not chartered until November 1921, sometime after

the acute shortage of cotton fibre during the war and early postwar period. An Empire Resources Development Committee proposed in 1915 a scheme for producing palm kernel in West Africa and processing it in the United Kingdom, foreshadowing the East African groundnut scheme after the Second World War. The technique envisaged was an export tax of £2 per ton to be continued for five years after the war, but that was to be rebated in favour of British processors. The scheme was started in October 1919 but met sharp Gold Coast resistance. When the price of palm kernel fell, the project became untenable and the duty was withdrawn in July 1922 (Hancock, 1940, pp. 113–18).

Limited as it was, postwar planning took place along lines of military alliance. France took the lead in an Allied economic conference in June 1916 that produced a resolution committing the Allies to take first temporary and then permanent steps to make themselves independent of enemy countries in matters of raw-material supply, essential manufactures, and the organization of trade, finance and shipping (Drummond, 1972, p. 56). Neutral reaction, including that of the United States, neutral at that time, was hostile. When the United States entered the war, the notion was dropped despite French efforts to revive it at Versailles (Viner, 1950, pp. 24–5). On the other side, Germany and Austria concluded a treaty before the Armistice in 1918, providing for customs union after the war; the arrangement was not for complete free trade within the union, but permitted Austria-Hungary to retain protection at a preferential level in certain weak industries (ibid., pp. 105–6). In defeat it proved academic, except perhaps as a precedent to the 1930 proposal for Zollunion (customs union) between Austria and Germany, and the 1937 anschluss.

Commercial-policy features of the treaties ending the First World War were minimal. Germany was required to agree to apply the tariff nomenclature worked out at The Hague in 1913 (as well as to accept the international conventions of 1904 and 1910 suppressing the white slave trade, the conventions of 16 and 19 November 1885 regarding the establishment of a concert pitch (the agreed wavelength of the musical note of A above middle C) and a host of others). The principal effect of these measures seems to have been to stiffen German resistance to subscribing to the agreements. More significantly, Germany was required by the treaty of Versailles to grant the Allies unilateral and unconditional most-favoured-nation treatment for five years. On January 10, 1925, when the five years elapsed and Germany was free to negotiate trade agreements on her own, the postwar period of reconstruction may be said to have come to an end — at least in the area of trade. The lapse of these provisions helped Germany but posed a problem for France which now had to negotiate to obtain outlets for

Alsatian textiles and Lorraine minette iron ore which earlier had been marketed in Germany without payment of duties (Schuker, 1976, pp. 219–27).

These five years, however, constituted a period of considerable disorder in fluctuations of business and of exchange rates, and, in consequence, in policies relating to international trade. Anti-dumping legislation was enacted in Japan in 1920, in Australia, the United Kingdom, New Zealand and the United States in 1921, when also earlier legislation dating from 1904 in Canada was amended; the anti-dumping provisions of the Fordney–McCumber tariff took effect in 1922 (Viner, 1966, pp. 192, 219, 227, 231, 246, 258). The United Kingdom further authorized 33 1/3 percent duties against countries devaluing their currencies, although these were never imposed and were allowed to lapse in 1930. With the franc free to fluctuate, France initiated a system of tariff coefficients which could be adjusted to compensate for inflation at home or revaluations of the exchange rate. The Fordney–McCumber Act of 1922 in the United States not only extended anti-dumping provisions but raised tariffs on a variety of materials which had fallen in price in the sharp recession of 1920–1. Insult was added to injury from this and from the wartime enactment of Prohibition in the United States that cut off imports of wine, beer, and spirits, when the United States took sanitary measures against Spanish grapes and oranges to limit the danger of entry of fruit flies, without giving consideration to the possibility of refrigeration which kills the fruit fly (Jones, 1934, p. 35).

In Eastern Europe, new countries struggled with inflation, depreciation and inadequate sources of revenue, and were forced to levy heavy taxes on trade in a vain effort to restore financial balance. Export taxes were imposed along with import duties, despite a variety of international resolutions urging strongly against prohibitions of exports, and taxation, on the basis of equal access to materials (Bergsten, 1974, pp. 23–4). The finances of Austria and Hungary were supervised by experts under programmes of the Finance Committee of the League of Nations — Austria in 1922, Hungary in 1924 — which experts exerted strenuous efforts to liberalize trade.

As the world economy slowly settled down, the prewar system of trade treaties was resumed, with extension of the principle of high legislative tariffs — so-called "bargaining" or "fighting" tariffs — which would be reduced through mutual tariff concessions agreed in bilateral treaties, and extended through the most-favoured-nation clause. To a degree, the initial increases in tariff rates succeeded better than the subsequent reduction through negotiation, especially as not all countries were prepared to subscribe to the unconditional version of the most-favoured-nation clause (Page, 1927). The United States especially, with

its high Fordney–McCumber tariff, stood aloof from the system. Except in the period from 1890 to 1909, the United States administration was not empowered to enter into tariff treaties; under the Dingley tariff from 1897 to 1919, no tariff treaties came into force since Senate approval was required but not forthcoming. The Fordney–McCumber tariff of 1922, however, changed United States policy from conditional most-favoured-nation to unconditional treatment. Under the conditional version, concessions offered to one country were made available to others only in exchange for a reciprocal concession. The provision of the Tariff Act of 1922 for retaliation by the United States against countries which discriminated against American exports was judged to require the more general form of the non-discrimination clause (US Department of State, Foreign Relations of the United States , 1923, I, pp. 131–3). Exceptions to the unconditional most-favoured-nation clause were recognized for specific countries, such as Cuba and the Philippines in so far as the United States was concerned, and regional arrangements, in which "propinquity" was a usual characteristic (Viner, 1950, p. 19). The British position, opposed by the United States, was that a further exception could be based on "historical associations, such as were generally recognized". This referred to Empire preference.

As a policy, Empire preference meant more the relations of the United Kingdom with the Dominions than those with the colonies, including India. "Tariff reformers" at the turn of the century would have welcomed an imperial Zollverein , eliminating all tariffs between the mother country and the rest of the Empire. This was opposed not only by British free traders, who viewed free-trade areas and preferences as disguises for protectionism, but also by the Dominions that regarded tariffs as a symbol of sovereignty and were unwilling to remove all vestiges of protection for their manufactures against British products. Preferences in the Dominions meant largely tariffs to be levied in the United Kingdom against non-Empire foodstuffs, and higher domestic tariffs on foreign manufactures, rather than reductions in existing duties on British goods. Resistance to Empire preference in United Kingdom came not only from free traders, but from those who wanted to hold down the price of food, on the one hand, and those who sought protection against Empire as well as against foreign food producers, on the other.

The slogan of Empire visionaries in the United Kingdom and the Dominions after the war was "men, money, and markets". "Men" meant assisted settlement of British workers in the Dominions; "money" help for Empire borrowers in various ways, ranging from preferences in the queue to guaranteed interest; "markets" referred to Empire preference, to a considerable degree in new products that

especially Australia wished to have produced for export by immigrants settled on new farms — particularly dried fruit and frozen beef — rather than the traditional wheat, butter, wool, apples, bacon, and cheese.

The Imperial Economic Conference of 1923 made little progress toward tariff preferences: the election called by Stanley Baldwin in 1924 to provide tariffs that could be used for the purpose ended in a Labor victory and even repeal of the McKenna duties and the preferences granted under them. The return of Baldwin to power eleven months later restored the McKenna duties, with lorries added to motor cars, but the Conservatives stopped short of extending tariff discrimination. Feeble efforts were made to undertake non-tariff discrimination through an Empire Marketing Board which was to perform research and promotion. Empire settlement fizzled gently. Empire preference was postponed.

The reconstruction period to 1925 or so was characterized by instability. Rapidly changing exchange rates required rapidly changing tariffs through countervailing charges, or the application of coefficients. Trade agreements were frequently contracted for only three months. Where changes in tariff rates did not occur, administrative regulation was applied. The League of Nations Economic Committee worked to improve the position through such actions as the International Convention Relating to the Simplification of Custom Formalities of 1923, although this soon proved inadequate as far as worst practices were concerned (Winslow, 1936, p. 182).

Normalization of World Trade

The end of the reconstruction period about the middle of the decade was marked by the opening up of capital markets, following the success of the Dawes Loan in 1924 that primed the resumption of German reparations after the hyperinflation of 1923, by the restoration of the pound sterling to par on the gold standard in 1925, or perhaps by the expiration of the Versailles restriction on Germany's right to conclude commercial treaties, and with it the rapid extension of trade agreements in Europe. Whatever the event, it marked the initiation of increased efforts for trade normalization. A minor effort was represented by the International Convention for the Protection of Industrial Property of 1925 (Brown, 1950, p. 34). Of greater weight were the Convention for the Abolition of Import and Export Prohibitions and Restrictions, with which was associated a special agreement on hides, skins and bones, and a World Economic Conference on trade expansion, all in 1927. In 1929 a special conference produced a convention calling for national treatment

for foreign nationals and enterprises. A modernized tariff nomenclature to replace the 1913 Hague list was started in the 1920s; a first draft was produced in 1931, and a final one in 1937 (League of Nations, 1942, p. 45).

A number of these conventions failed to be ratified. That on the treatment of foreign nationals fell through because some states were unwilling to liberalize, and the liberal states were unwilling to sign an agreement which would have weakened the force of the principle of national treatment (League of Nations, 1942, p. 27). The Convention for the Abolition of Import and Export Prohibitions and Restrictions finally lapsed when the Poles refused to sign, because of an exception made for Germany, which reduced the value of the treaty in their eyes. Agreement on a tariff truce and subsequent reductions in rates was reached at the 1927 World Economic Conference, but this meeting was attended by delegations in their individual capacities and did not bind governments. Governments agreed on the necessity of reducing tariffs but did nothing about it. The League of Nations review of commercial policies in the interwar period called it a striking paradox that conferences unanimously adopted recommendations, and governments proclaimed their intentions to lower tariffs, but did nothing (League of Nations, 1942, p. 101), asking why governments made such recommendations if they did not propose to carry them out (ibid., p. 109). The answer furnished by one economist who had served on the economic secretariat of the League was that "the pseudo-internationalism of the nineteenth century was clearly an outgrowth of British financial leadership and trading enterprise, backed by the economic supremacy of London and by the British Navy" (Condliffe 1940, p. 118). With British hegemony lost and nothing to take its place, international relations lapsed into anarchy. The United Kingdom lost the will and lacked the power to enforce international cooperation as she had done in the nineteenth century (ibid., p. 145).

Discouragement over the failure of tariffs to come down despite agreement to lower them led to an attempt at a commodity-by-commodity approach, foreshadowing the free trade for iron and steel undertaken in the European Coal and Steel Community on Robert Schuman's initiative in May 1950. The Economic Committee of the League of Nations reported in March 1928 that there was no prospect of a general tariff reduction by means of standard cuts or the setting of a maximum scale of duties. Cement and aluminium were chosen for a case-by-case approach. A year of negotiation, however, produced no result. The League's account of the attempt cites as reasons, first, that reductions in duties in single products would upset national industrial structures; second, that it would increase the protection of finished goods — implying the so-called effective-rate-of-protection argument which was

more fully developed in the 1960s; and third, that among the limited groups of commodities and countries concerned, compensatory reductions were hard to find (League of Nations, 1942, p. 128–9).

While governments were agreeing to the necessity to lower tariffs but doing nothing about it, action was taken directly on a number of commodity fronts. Most conspicuous was the Stevenson rubber plan of 1923–4 which raised the price of rubber by 1926 to almost four times its 1923 level. To American protests, the British replied that it was

impossible to argue that the present high price is attributable solely or even mainly to the operation of the rubber restriction scheme. It is due to the great expansion of the demand for rubber. Only one half of the supply comes from the restricted area. (US Department of State, Foreign Relations of the United States , 1926, II, p. 359)

The fact that the other half — the Netherlands East Indies — had been left out of the scheme contributed to its early breakdown (Knorr, 1946).

More cartels were formed in a variety of commodities, that Mason divides into three groups: industrial raw materials and foodstuffs, like tin, oil, wheat, sugar, etc.; standardized processed and semi-fabricated goods such as steel rails, cement, tinplate, plate glass, dyes, etc.; and highly fabricated, specialized, and frequently patented items such as electrical equipment, pharmaceuticals, glass, etc. (1946, p. 16). Mason notes that the Soviet Union was a party to at least three international control schemes and eight cartel arrangements, despite its hostility to capitalism (ibid., p. 14 n.). Most of the commodity agreements begun in the 1920s broke down in the depression of the 1930s. The rubber scheme collapsed in 1928. Prices of agricultural commodities leveled off in 1925 and declined thereafter, faster after 1928, as European reconstruction crowded the extra-European supplies expanded to fill the gap left by war and postwar shortages, and demand shrank with such changes as the replacement of oats for horses by gasoline for motor cars.

Two of the most durable agreements were in oil: the As Is Agreement concluded at Achnacarry, Scotland, in 1928 between Sir Henry Detering of the Shell Oil Company and Walter Teagle of the Standard Oil Company of New Jersey, that provided that no oil company would seek to penetrate into markets where it was not already distributing, so that everything would stay "as is"; and in the same year the Red Line Agreement, among members of the Turkish Petroleum Company, that drew a line across the Middle East (through what is now Kuwait) and limited exploration by partners below that line, thereby ultimately making it possible for the Standard Oil Company of California, which was not a partner, to discover oil in Saudi Arabia (Federal Trade Commission 1952, pp. 199ff., 63).

National programmes further affected world markets in wheat and

sugar. The Italian "battle for grain" begun by Mussolini in 1925 was of limited economic significance, since Italy could not escape dependence on foreign supplies, but provided a disturbing symptom of the troubles of the 1930s. The United Kingdom expanded production of beet sugar through a bounty; Japan undertook sugar production in Formosa (Taiwan) and ceased to buy from Java. As the price of wheat declined, Germany raised tariffs in 1928 to slow down the movement of labour off the farm. From 1927 to 1931, German tariffs on foodstuffs were broadly doubled. France raised tariffs in 1928 and 1929 before resorting to quotas. Mixing provisions, under which foreign grain had to be mixed with domestic, were undertaken from 1929 on, patterned after the practice in motion pictures which allowed exhibitors to show foreign films only in fixed proportions to those domestically produced. In the United States, help for agriculture took the form of proposals for export subsidies, but President Coolidge's veto of the McNary—Haugen bill in 1928 led presidential candidate Herbert Hoover to seek other means of agricultural relief, and to promise help for farmers in his campaign speeches in the summer and autumn of that year. The League of Nations commented in 1942 that "before the end of 1928 it was evident that the United States tariff was going to be raised above the formidable level of 1922" (League of Nations, 1942, p. 126).

Grain exporters of Eastern Europe were especially affected by the world decline in price and sought solutions in meetings at Warsaw in August 1930, Bucharest in October 1930, Belgrade in November 1930, and Warsaw again in the same month. They tried, on the one hand, to limit exports of grain to improve the terms of trade, and, on the other, to obtain preferences in the import markets of Western Europe. The first proposal was never adopted. After the 1932 Stresa meeting, some reciprocal preferences were worked out between Austria and Hungary, on one side, and Italy, on the other, but with poor results.

A strenuous effort was made to halt tariff increases. The World Economic Conference of 1927 recognized that general demobilization of tariffs would be slow, and the Economic Committee of the League of Nations in March 1928 saw no prospect of general reduction. The September 1929 General Assembly of the League moved from attempts at reduction to an effort to halt increases. It called for a conference to stabilize rates for two or three years and then to lower them. The Preliminary Conference with a View to Concerted Action met in February 1930, but too late. It proposed extending existing agreements to April 1, 1931 and to provide opportunities for negotiation before tariffs were raised. By this time, however, retaliation against the forthcoming Hawley—Smoot tariff bill was far along. A second Conference with a View to Concerted Economic Action in November 1930

failed equally. The Netherlands, which, along with the United Kingdom, had pressed for the tariff truce, turned to a smaller group and organized the Oslo group. On 22 December, Norway, Sweden, the Netherlands, and Belgium signed an agreement undertaking not to raise tariffs without giving notice to other members. It was a brave example without much impact.

Quite unrelated to the fortunes of world incomes, prices, or trade, a highly original argument for tariffs emerged in Australia at the end of the prosperity of the 1920s. It bore resemblance to an earlier argument put forward by Alvin S. Johnson in 1908 that tariffs could add to capital formation by reallocating income from spenders to savers —an argument which went unnoticed until Harvey Leibenstein introduced similar notions into the discussion of economic growth in the 1960s. J.B. Brigden published an article in the Economic Record of November 1925 on "The Australian Tariff and the Standard of Living". He concluded that whereas the tariff on wheat in the United Kingdom favoured the landed classes, that on manufactured goods in Australia would redound to the standard of living of wage-earners, and increase the population of the country. Subsequently the Australian government appointed a committee of experts, including Brigden, D.B. Copland, E.C. Dyason, L.F. Giblin, and Wickens, which in 1929 produced The Australian Tariff: An Economic Enquiry (Australia 1929) that supported Brigden's conclusion. The analysis remained to be worked out by W.F. Stolper and P.A. Samuelson in their classic article of 1941. "Protection and Real Wages", and was to be rediscovered for Canada in the postwar period by C.L. Barber. It was heatedly debated during the 1930s both in Australia and in Anglo-Saxon economic literature. What was clear, however, was that Australia chose not to be guided by the neo-classical static maximizing calculus of foreign-trade theory, but to introduce into the discussion dynamic considerations of economic growth, migration, as well as income redistribution.

The Disintegration of World Trade

The Hawley—Smoot Tariff

The origins of the Hawley—Smoot tariff, as already noted, reach back to the autumn of 1928 when Herbert Hoover, campaigning for the presidency, promised to do something to help farmers suffering under the weight of declining agricultural prices. A special session of Congress was called in January 1929, long in advance of the stock-market crash of

October of that year, and began to prepare a tariff bill. Its scope was widened from agriculture to include industry; Democrats joined Republicans in their support for tariffs for all who sought them; and both Republicans and Democrats were ultimately pushed from the committee room as lobbyists took over the task of setting the rates (Schattschneider, 1935). A groundswell of resentment spread around the world and quickly led to retaliation. Italy objected to duties on hats and bonnets of straw, wool-felt hats, and olive oil; Spain reacted sharply to increases on cork and onions; Canada took umbrage at increases on maple sugar and syrup, potatoes, cream, butter, buttermilk, and skimmed milk. Switzerland was moved to boycott American typewriters, fountain pens, motor cars, and films because of increased duties on watches, clocks, embroidery, cheese, and shoes (Jones, 1934). Retaliation was begun long before the bill was enacted into law in June 1930. As it passed the House of Representatives in May 1929, boycotts broke out and foreign governments moved to raise rates against United States products, even though rates could be moved up or down in the Senate or by the conference committee. In all, 34 formal protests were lodged with the Department of State from foreign countries. One thousand and twenty-eight economists in the United States, organized by Paul Douglas, Irving Fisher, Frank Graham, Ernest Patterson, Henry Seager, Frank Taussig, and Clair Wilcox, and representing the "Who's Who" of the profession, asked President Hoover to veto the legislation (New York Times , 5 May 1930). A weak defence was offered contemporaneously by President Hoover as he signed the bill, saying "No tariff act is perfect" (Hoover, 1952, p. 291), and another 45 years later by Joseph S. Davis, who claimed that the Senate got out of hand, but that Hoover had won two key points: inclusion of the flexible provisions permitting the Tariff Commission to consider complaints and recommend to the president higher or lower rates, and exclusion of an export-debenture plan along the lines of the McNary—Haugen bill (Davis, 1975, p. 239). Both views were in the minority.

The high tariffs of 1921, 1922, and a fortiori 1930 were generally attacked on the grounds that the United States was a creditor nation, and that creditor nations were required to maintain low tariffs or free trade in order that their debtors might earn the foreign exchange to pay their debt service. This view is now regarded as fallacious since the macroeconomic impacts effects of tariffs on the balance of payments are typically reversed, wholly or in large part, by the income changes which they generate. Under the post-Second World War General Agreement on Tariffs and Trade, balance-of-payments considerations are ignored in settling on tariff reductions in bilateral or multilateral bargaining. In addition, a careful study for the Department of Commerce

by Hal. B. Lary states that the effect of the tariff increases of 1922 and 1930, and those of the reductions after 1930, cannot be detected in the import statistics. This was partly perhaps because tariffs were already close to prohibitive and early reductions were minimal, but mainly for the reason that wide fluctuations in world economic activity and prices overwhelmed any lasting impact of tariffs on trade (Lary, 1943, pp. 53–4).

The significance of the Hawley—Smoot tariff goes far beyond its effect on American imports and the balance of payments to the core of the question of the stability of the world economy. President Hoover let Congress get out of hand and failed to govern (Schattschneider, 1935, p. 293); by taking national action and continuing on its own course through the early stages of the depression, the United States served notice on the world that it was unwilling to take responsibility for world economic stability. Sir Arthur Salter's (1932, pp. 172–3) view that Hawley—Smoot marked a turning point in world history is excessive if it was meant in causal terms, apposite if taken symbolically.

Retaliation and business decline wound down the volume and value of world trade. The earliest retaliations were taken by France and Italy in 1929. In Canada the Liberal government kept parliament in session during the final days when the conference committee was completing the bill, and then put through increases in tariff rates affecting one-quarter of Canadian imports from the United States. Despite this resistance to its neighbour, the government lost the August 1930 election to the Conservatives, who then raised tariffs in September 1930, June 1931, and again in connection with the 1932 Ottawa agreements (McDiarmid, 1946, p. 273). The action in May under the Liberal, W.L. Mackenzie King, involved both increases and decreases in duties, with Empire preference extended through raising and lowering about one-half each of general and intermediate rates, but lowering the bulk of those applicable to Empire goods. Subsequent measures typically raised Empire rates, but general and intermediate rates more. In September 1930, anti-dumping rates were increased from 15 to 50 percent.

Deepening Depression

The Hawley—Smoot tariff began as a response to the decline in agricultural prices and was signed into law as the decline in business picked up speed. For a time during the second quarter of 1930, it looked as though the world economy might recover from the deflationary shock of the New York stock-market crash in October 1929, which had come on the heels of the failure in London of the Clarence Hatry conglomerate

after the discovery of fraudulent collateral used to support bank loans in September and the failure of the Frankfurt Insurance Company in Germany in August. This is not the place to set forth the causes of the depression in agricultural overproduction, the halt to foreign lending by the United States in 1928, the end of the housing boom, the stock-market crash, frightened short-term capital movements, United States monetary policy and the like. It is sufficient to observe that the chance of recovery was seen to fade at the end of June 1930 with the signing of the Hawley—Smoot tariff, the outbreak of retaliatory cuts in international trade, and the near-failure of the Young loan (to reprime German reparations) in international capital markets. Events thereafter were uniformly depressing, from Nazi gains in German elections in September 1930, the collapse of the Creditanstalt in Vienna in May 1931, the run on German banks in June and July, until the Standstill Agreement that blocked repayment of all German bank credits shifted the attack to sterling, which went off the gold standard in September 1931, followed by the yen in December.

One item of commercial policy contributed to the spreading deflation. In the autumn of 1930, Austria and Germany announced the intention to form a customs union. The proposal had its proximate origin in a working paper prepared by the German Foreign Ministry for the World Economic Conference in 1927. It was discussed on the side by Austrian and German Foreign Ministers at the August 1929 meeting on the Young Plan at The Hague. Germany took it up seriously, however, only after the September 1930 elections which recorded alarming gains for the National Socialists, and Chancellor Brüning felt a strong need for a foreign-policy success. The French immediately objected on the grounds that customs union between Austria and Germany violated the provision of the treaty of Trianon which required Austria to uphold her political independence. France took the case to the International Court of Justice at The Hague for an interpretation of the treaty. Other French and British and Czechoslovak objections on the grounds of violation of the most-favoured-nation clause were laid before the League of Nations Council (Viner, 1950, p. 10). The International Court ultimately ruled in favour of the French position in the summer of 1931. By this time, however, the Austrian Creditanstalt had collapsed — barely possibly because of French action in pulling credits out of Austria, though the evidence is scanty — the Austrian government responsible for the proposal of customs union had long since fallen, and the run against banks and currencies had moved on from Austria to Germany and Britain.

In the autumn of 1931, appreciation of the mark, the dollar and the gold-bloc currencies as a consequence of the depreciation of sterling

and the currencies associated with it, applied strenuous deflation to Germany, the United States and to Western Europe from September 1931 to June 1932. Depreciation of the yen in December 1931 marked the start of a drive of Japanese exports into British and Dutch colonies in Asia and Africa, and of colonial and metropolitan steps to hold them down. June 1932 was the bottom of the depression for most of the world. The United States economy registered a double bottom, in June 1932 and again in March 1933, when spreading collapse of the system of many small separate banks climaxed in the closing of all banks for a time, and recovery thereafter. German recovery started in 1932 after the resignation of Brüning, who had hoped to throw off reparations by deflation to demonstrate the impossibility of paying them, the succession of von Papen as chancellor, the finally the takeover of the chancellorship by Hitler in February 1933. The gold-bloc countries remained depressed until they abandoned the gold parities of the 1920s — first Belgium in 1935, and the remaining countries in September 1936.

In these circumstances, there was little if any room for expansive commercial policy. Virtually every step taken was restrictive.

Ottawa

The Hawley—Smoot Tariff Act occupied most of the time of Congress for a year and a half (Smith, 1936, p. 177). Empire preference was the major issue in Canadian politics for more than half a century (Drummond, 1975, p. 378). The Imperial Economic Policy Cabinet worried more about tariffs than about any other issue (ibid., p. 426), though much of it dealt with objectively insignificant goods (Drummond, 1972, p. 25). Drummond several times expresses the opinion that the Ottawa discussions in the summer of 1932 should have abandoned the question of tariff preferences and focused on monetary policy, and especially exchange-rate policy. In fact Prime Minister Bennett of Canada sought to raise the issue of the sterling exchange rate prior to Ottawa only to be rebuffed by Neville Chamberlain with the statement that the Treasury could not admit the Dominions to the management of sterling. Canada did succeed in getting exchange rates put on the Ottawa agenda, but the Treasury insisted that the question was minor and nothing came of it (Drummond, 1975, pp. 214–16).

Monetary policy and tariff policy were occasionally complements, occasionally substitutes. The Macmillan Committee report contained an addendum, no. 1, by Ernest Bevin, J.M. Keynes, R. McKenna and three others recommending import duties, and, in so far as existing treaties permitted, a bounty on exports, the combination being put

forward as a substitute for devaluation of sterling (Committee on Finance and Industry, 1931). In the event, the United Kingdom undertook both depreciation of sterling and the imposition of import duties.

Sterling left the gold standard on September 21, 1931 and depreciated rapidly from $4.86 to a low of $3.25 in December, a depreciation of 30 percent. Canada and South Africa adopted anti-dumping duties against British goods. On its side, the United Kingdom enacted an Abnormal Importations Act on November 20, 1931 that gave the Board of Trade the right to impose duties of up to 100 percent as a means of stopping a short-run scramble to ship goods to the United Kingdom before the exchange rate depreciated further. While 100 percent tariffs were authorized, tariffs of only 50 percent were imposed. This Act was followed in a few weeks by a similar Horticultural Products Act. Both the Abnormal Importations Act and the Horticultural Products Act exempted the Empire from their provisions (Kreider, 1943, p. 20).

In the Christmas recess of Parliament, Lord Runciman, President of the Board of Trade, persuaded Chamberlain to take up protection as a long-run policy, as had been recommended by Keynes and the Macmillan Committee, prior to the September depreciation, and opposed by Beveridge (1931), since without tariffs, the United Kingdom had nothing to exchange with the Dominions for preferences in their markets. The resultant Import Duties Act of February 1932 established a 10 percent duty on a wide number of imported products — but not copper, wheat, or meat — and created an Import Duties Advisory board, charged with recommending increases in particular duties above the flat 10 percent level. At the last minute a concession was made to the Dominions and colonies. The latter were entirely exempted from the increase, and the former were granted exemption until November 1932, by which time it was expected that mutually satisfactory arrangements for preferences would have been reached. Eighteen countries responded to the Import Duties Act by asking the United Kingdom to undertake negotiations for mutual reductions. The reply was universally negative on the grounds that it was first necessary to arrive at understandings with the Empire (Condliffe, 1940, pp. 300–8). In the spring of 1932, the Import Duties Advisory Board was hard at work raising duties above the 10 percent level, with the notable increase in iron and steel products to 33 1/3 percent. Three years later in March 1935 the iron and steel duties were increased to 50 percent in order to assist the British industry in negotiating a satisfactory basis with the European iron and steel cartel (Hexner, 1946, p. 118).

Imperial economic conferences held in 1923, 1926, and 1930 had all broken down on the failure of the United Kingdom to raise tariffs which

would have put her in a position to extend preferences to the Empire. Substitute assistance in the form of arrangements for Empire settlement or Empire marketing boards failed to produce significant effects on either migration or trade. British bulk-purchase schemes sought especially by Australia had been halted as early as 1922 and had not been resumed. Hopes were high for the Imperial Economic Conference of 1932 in Ottawa which now had British tariffs to work with.

Canada cared about wheat, butter, cheese, bacon, lamb, and apples; Australia about wheat, chilled meat, butter, cheese, currants, dried fruits, and canned fruits; South Africa about wine and dried and canned fruits; New Zealand about butter and mutton. The position differed in those commodities that the Dominions produced in greater amounts than the United Kingdom could absorb, like wheat, in which diversion of Dominion supplies to the United Kingdom from third markets would produce an offsetting increase in non-Dominion sales in non-British markets and leave Dominion export prices overall unchanged, from those in which the United Kingdom depended upon both Dominion and foreign sources of supply, among the latter notably Argentina in meat, Denmark in butter, Greece in dried currants and raisins, and, it would like to think, the United States in apples. Trade diversion from foreign to Dominion sources was possible in this latter group, but only at some cost in British goodwill in the indicated import markets. On this score, the United Kingdom was obliged to negotiate at Ottawa with an uneasy glance over its shoulder.

A significant Dominion manufacture, as opposed to agricultural product, which had earlier received preference in the British market, in 1919 under the McKenna duties, was motor cars. This preference had led to the establishment of tariff factories in Canada, owned and operated by United States manufacturers. Its extension in the Ottawa agreement led to the unhappy necessity of defining more precisely what a Canadian manufactured motor car consisted of, and whether United States-made motor parts merely assembled in Canada qualified as Canadian motor cars.

In exchange for concessions in primary products in the British market, the United Kingdom expected to get reductions in Dominion duties on her manufactures. But it proved impossible at Ottawa to fix levels of Dominion tariffs on British goods. Instead, the Dominions undertook to instruct their respective tariff boards to adjust the British preference tariff to that level which would make British producers competitive with domestic industry. Resting on the notion of horizontal supply curves, rather than the more usually hypothesized and far more realistic upward-sloping curves, the concept was clearly unworkable and gave rise to unending contention. It was abandoned in 1936.

Argentina, Denmark, Greece, Norway, and Sweden were not content to yield their positions in the British market without a struggle. Even before the Import Duties Act had taken effect, Denmark in January 1932 legislated preferences favouring Britain, and on raw materials used in manufactured exports. By June 1932, total imports had been reduced 30 to 40 percent, but import permits issued for British goods allowed for a 15 percent increase (Gordon, 1941, p.80). In similar fashion, Uruguay undertook to discriminate in the allocation of import licences in favour of countries that bought from her. The threat to discriminate against the United Kingdom was clear. Quickly after Ottawa, British customers pressed to take up negotiations postponed from early 1932 and to settle the extent to which Ottawa would be allowed to squeeze them out of the British market.

In the Roca—Runciman Agreement of May 1, 1933, the United Kingdom agreed not to cut back imports of chilled beef from Argentina by more than 10 percent of the volume imported in the year ended June 30, 1932, unless at the same time it reduced imports from the Dominions below 90 percent of the same base year. This was disagreeable to Australia, which was seeking through the Ottawa agreements to break into the chilled-beef market in the United Kingdom, in which it had previously not been strong (Drummond, 1975, p. 310). Three-year agreements with Denmark, Norway, and Sweden, running from various dates of ratification about mid-1933, provided minimum butter quotas to Denmark and (much smaller) to Sweden, a minimum bacon quota to Denmark amounting to 62 percent of the market, and agreement not to regulate the small and irregular shipments of bacon, ham, butter, and cheese by Norway. But guarantees to these producers left it necessary, if domestic British producers of, say, butter were to be protected, to go back on the Ottawa agreements which guaranteed unlimited free entry into the British market. The position was complicated by New Zealand's backward-bending supply curve which increased butter production and shipments as the price declined, and Australian policy, which evoked the most profound distrust from New Zealand, of subsidizing the export of butter to solve a domestic disposal problem (Drummond, 1975, pp. 320ff., 475). The problems of the Dominions and of the major foreign suppliers of the British markets for foodstuffs compounded the difficulties of British agriculture. In defence of the lost interest, the British agricultural authorities developed a levy-subsidy scheme under which tariffs imposed on imports were segregated to create a fund to be used to provide subsidies to domestic producers. The levy-subsidy scheme was first applied in the United Kingdom on wheat in 1932; strong voices inside the British cabinet urged its application to beef, dairy products, and bacon and ham. Wrangling over these proposals went on between

British and Commonwealth negotiators for the next several years as the United Kingdom tried to modify the Ottawa agreements, with Dominion and foreign-supplier consent, in order to limit imports. In the background, dispute deepened within the British cabinet between the agriculture minister, Walter Elliott, who wanted subsidies, and the chancellor of the exchequer, Neville Chamberlain, who feared their effect on the budget and consistently favoured raising prices and farm incomes, in the United Kingdom and abroad, by cutting production and limiting imports.

In its agreements in Scandinavia, the United Kingdom sought to bind its trading partners to give preferences to British exports, and especially to guarantee a percentage share of the market to British suppliers in that sorely afflicted export industry, coal. In eight trade agreements, British coal exporters were guaranteed generally the major share of import volume, with quotas as follows: Denmark, 90 percent; Estonia, 85 percent; Lithuania, 80 percent; Iceland, 77 percent; Finland, 75 percent; Norway, 70 percent; Sweden, 47 percent. In addition, Denmark agreed that all bacon and ham exported to the United Kingdom should be wrapped in jute cloth woven in the United Kingdom from jute yarn spun in the United Kingdom (Kreider, 1943, pp. 61–2). The Danish government gave British firms a 10 percent preference for government purchases, and undertook to urge private Danish firms to buy their iron and steel in the United Kingdom wherever possible. Kreider notes that these agreements constrained British trade into a bilateral mode: British agreements with Finland lifted the unfavourable import balance from 1 to 5 against the United Kingdom in 1931 to 1 to 2 in 1935. The agreement with the Soviet Union called for the import/export ratio to go from 1 to 1.7 against the United Kingdom in 1934 to 1 to 1.5 in 1935, 1 to 1.4 in 1936 and 1 to 1.2 in 1937 and thereafter. Argentina agreed to allocate the sterling earned by its exports to the United Kingdom to purchases from the United Kingdom.

The Ottawa agreement dominated British commercial policy from 1932 to the Anglo-American Commercial Agreement of 1938, and to a lesser extent thereafter. It was continuously under attack from foreign suppliers other than the United States that entered into trade and financial agreements with the United Kingdom, and from the United States which undertook to attack it as early as the World Economic Conference of 1933. But at no time could the agreement have been regarded as a great success for the Empire. It produced endless discussion, frequently bitter in character, and dissatisfaction on both sides that each felt they had given too much and gained too little. By 1936 and 1937, there was a general disposition to give up the attempt, or at least to downgrade its priority.

The Netherlands

The United Kingdom embraced free trade, broadly speaking, with the repeal of the Corn Laws in 1846, and gave it up with the McKenna duties in 1916. The Netherlands' support goes back at least to the sixteenth century, and lasted until 1931. A faithful supporter of attempts to spread freer trade throughout the world from the World Economic Conference in 1927 until the Convention for the Abolition of Import and Export Prohibitions and Restrictions and the Conference with a View to Concerted Economic Action, the Netherlands ultimately turned to the smaller arena of the Oslo agreement of Scandinavia and the Low Countries. The pressure from declining wheat prices, however, proved too severe. In 1931 the Netherlands undertook to regulate farm prices and marketing. The Wheat Act of 1931 set the domestic price at 12 florins per 100 kilograms at a time when the world price had fallen to 5 florins, necessitating the first major break with the policy of free trade in nearly three centuries. There followed in 1932 as a response to the depreciation of sterling, first an emergency fiscal measure establishing 25 percent duties generally, and then in agriculture the Dairy Crisis Act and the Hog Crisis Act, which were generalized in the following year as the Agricultural Crisis Act of 1933 (Gordon, 1941, p. 307). The freer-trade tradition of the Oslo group continued, however. At the depth of the depression in June 1932, the Oslo group concluded an agreement to reduce tariffs among themselves on a mutual basis by 10 percent per annum for five years. Though it was already blocking out the discrimination to be achieved at Ottawa two months later, the United Kingdom objected on the grounds that the arrangement would violate the most-favoured-nation clause. After dissolution of the gold bloc in 1936, the Oslo group resumed its example-setting work in reducing trade barriers, agreeing first to impose no new tariffs and then to eliminate quotas applied to one another's trade on a mutual basis. Since the most-favoured-nation clause applied only to tariffs and not to quotas, there was no basis for an objection or to claim extension of the concession.

During the period of restricted trade, the Netherlands licensed not only imports, but in some cases exports. The latter practice was followed where quotas in foreign import markets left open the question whether the difference between the domestic price and the world price would go to importers or exporters. A law of December 24, 1931 established a system of licensing exports in instances of foreign import quotas, with permits distributed among exporters in accordance with the volumes of some historical base period. Licence fees were then imposed, in the amount of 70–100 percent of the difference between the

world price and the domestic price in the import market, with the collected proceeds distributed to Dutch producers. The purpose of the fees was to divert the scarcity rents available from import restriction, first to the exporting country as a whole, and then, within the exporting country, from exporting firms to agricultural producers (Gordon, 1941, p. 356).

France

The French are often given the credit in commercial policy between the wars for the invention of the quota, a protective device which was to flourish until well into the 1950s, and even then to experience revival in various forms in the 1970s. While its origins go well back in time, the proximate causes of the quota in 1930 were the limitation on France's freedom of action imposed by the network of trade treaties it had fashioned, beginning with that with Germany in 1927, and the difficulty of ensuring a restriction of imports sufficient to raise domestic prices — the object of the exercise — in the face of inelastic excess supplies abroad. Like the Hawley—Smoot tariff increases in committee, quotas spread from agricultural produce to goods in general.

Under an old law of December 1897 — the so-called loi de cadenas — the French government had authority in emergency to change the rate of duty on any one of 46 agricultural items. The emergency of falling agricultural prices after 1928 caused the laws of 1929 and 1931 which extended the list. With especially wheat in excess supply overseas in regions of recent settlement like Australia and Canada, the French decided that raising the tariff under their authority would not only pose questions about their obligations under trade treaties, but might well not limit imports, serving only to reduce world prices and improve the terms of trade. Australia, in particular, lacked adequate storage capacity for its wheat and had no choice but to sell, no matter how high the price obstacles erected abroad. The decision was accordingly taken to restrict quantity rather than to levy a customs duty (Haight, 1941, p. 145). The device was effective. As the depression deepened, and as imports grew with the overvaluation of the franc, it was extended to industrial goods. Other countries followed suit, especially Germany with its foreign-exchange control. In 1931, Brüning and Pierre Laval, the then French premier, reached an agreement establishing industrial understandings to coordinate production and trade between German and French industries. One such understanding in electrical materials developed into a cartel. The rest were concerned primarily with restricting German exports to France. When they failed to do so, they

were replaced by French quotas (Hexner, 1946, pp. 119, 136). After a while, the French undertook bilateral bargaining over quotas, which led in time to reducing quotas below desired limits in order to have room to make concessions during negotiations.

Germany

Less by design than by a series of evolutionary steps, Germany developed the most elaborate and thoroughgoing system of control of foreign trade and payments. Foreign claims on Germany were blocked on July 15, 1931, when Germany could no longer pay out gold and foreign exchange to meet the demands of foreign lenders withdrawing funds. This default was followed by a negotiated Standstill Agreement between creditors and Germany, involving a six-month moratorium on withdrawals, subsequently renewed. The decision not to adjust the value of the Reichsmark after the depreciation of sterling in September 1931 made it necessary to establish foreign-exchange control, and to prevent the free purchase and sale of foreign currencies in the private market. The proceeds of exports were collected and allocated to claimants of foreign exchange seeking to purchase imports. Clearing agreements developed under which German importers paid Reichsmarks into special accounts at the Reichsbank in favour of foreign central banks, which then allocated them to their national importers of German goods. The foreign central bank faced a particular problem whether or not to pay out local currency to the exporter in advance of its receipts of local currency from national importers of German goods. Some central banks did pay off local exporters against claims on the German clearing, following what was later called the "payments principle," and experienced inflation through the resultant credit expansion. Other central banks made their exporters wait for payment which both avoided monetary expansion and held down the incentive to export to Germany (Andersen, 1946).

A number of countries with large financial claims on Germany, such as Switzerland, insisted that the proceeds of German exports be used in part to pay off creditors abroad, thus converting "clearing" into "payments" agreements. These payments agreements were also used in a few cases to require Germany to continue spending on non-essential imports of importance to the exporter, such as tourism in Austria.

Germany set limits on the use of foreign-owned Reichsmarks within Germany as well as against their conversion into foreign exchange. They were not permitted to be used for many classes of exports, capable of earning new foreign exchange, but only for incremental exports

which could be sold only at implicit depreciated exchange rates, for travel within Germany — the so-called Reisemark — and under certain limitations for investment in Germany. Foreshadowing some postwar limitations on foreign direct investment, permission was granted for investment by foreigners in Germany with outstanding mark balances only when the investment was considered generally beneficial to the German economy, was made for at least five years, did not involve a foreign controlling interest in a German enterprise, and did not exceed a stipulated rate of interest (Gordon, 1941, pp. 92–3).

In August 1934, the New Plan was adopted under the leadership of the German minister for economics, Hjalmar Schacht. In the words of Emil Puhl, an associate of Dr Schacht's at the Reichsbank, it provided totalitarian control over commodities and foreign exchange, with stringent controls on imports and on foreign travel, administered through supervisory boards for a long list of commodities and foreign exchange boards in the Reichsbank (Office of the Chief Counsel for Prosecution of Nazi Criminality, 1946, VII, p. 496). Along with trade and clearing agreements, designed especially to ensure German access to food and raw materials, and to promote exports, the Reichsbank developed a series of special marks for particular purposes. In addition to the Reisemarks for travel, there were special-account (Auslands-Sonder-Konto , or "Aski") marks which came into existence through imports of raw materials, especially from Latin America, and which were sold by the recipients at a discount and used by the buyers on a bilateral basis for purchases of incremental German goods. The incremental aspect of the exports was, of course, difficult to police. Because Aski-marks would be sold only at a discount, the raw-material supplies against them tended to raise their prices in the bilateral trade (Gordon, 1941, p. 180). On the German side, Schacht established a price-control agency in 1935 in each export group — amounting to 25 in all — to prevent German exporters from competing with one another for export orders and to assure that all exporters sold at the highest possible price (Office of the Chief Counsel, 1946, VII, p. 383).

Beginning in 1934, German foreign-trade plans were intended particularly to ensure access to imported food and raw materials. The New Plan, and especially the Four Year Plan which succeeded it in the fall of 1936, were designed to produce synthetic materials, especially Buna-S (synthetic rubber) and gasoline from coal, where foreign supplies for wartime needs could not be assured. Particular problems were encountered in non-ferrous metals, in iron ore, for which the low-grade Salzgitter project was developed in the Four Year Plan, and in synthetic fertilizer required for self-sufficiency in food. Schacht at the Reichsbank, Goering as Schacht's successor in the Economics Ministry and

as the head of the Four Year Plan, and the War and Food Ministries wrangled among themselves over policies, including especially whether to export wheat against foreign exchange following the bumper crops of 1933 and 1934 or to conserve it as a war reserve; whether to hoard Germany's meagre free foreign-exchange reserves or to spend them for crucially short raw materials; the mobilization of privately owned foreign securities and their conversion to cash for buying materials; the pricing of exports; the purchase of unnecessary imports like frozen meat from Argentina, for lack of which Schacht was unable to conclude a favourable trade treaty, etc. (Office of the Chief Counsel, 1946, vol. VII). The documents published by the prosecution at the Nuremberg postwar trials reveal considerable internal dissension, especially in the exchanges between Schacht and Goering that lasted through 1937 and ended in Schacht's defeat and resignation.

German sentiment had continuously decried the loss of the country's African colonies in the Versailles treaty. Schacht continuously referred to the loss in Young Plan discussions of the late 1920s and was still harping on the issue in an article in Foreign Affairs in 1937. In a conversation with the American ambassador, Bullitt, in the fall of 1937, Goering noted that Germany's demand for a return of the German colonies which had been taken away by the Versailles treaty was just, adding immediately that Germany had no right to demand anything but these colonies. Particularly sought were the Cameroons which could be developed by German energy (Office of the Chief Counsel, 1946, vol. VII, pp. 890, 898). Three weeks earlier, however, in a private conference, Hitler had stated that it made more sense for Germany to seek material-producing territory adjoining the Reich and not overseas (ibid., vol. I, p. 380). And at a final war-preparatory briefing in May 1939, he went further to explain the need for living space in the East to secure Germany's food supplies. It was necessary to beware of gifts of colonial territory which did not solve the food problem: "Remember blockade" (ibid., vol. I, p. 392). The directive to the Economic Staff Group on May 23, 1941 just before the attack on the Soviet Union stated that the offensive was designed to produce food in the East on a permanent basis.

It was widely claimed that Germany squeezed the countries of southeast Europe through charging high prices for non-essential exports, while not permitting them to purchase the goods they needed, at the same time delaying payment for imports through piling up large debit balances in clearing arrangements. In a speech at Königsberg in August 1935, Schacht expressed regret that Germany had defaulted on debts to numerous pro-German peoples abroad, indicated confidence that Germany could obtain the raw materials it needed, acknowledged

that the trade relations of Germany with different countries had changed a great deal, but insisted that these new relations had created for a number of countries new possibilities of exporting to Germany which had helped relieve them from the rigours of the world depression (Office of the Chief Counsel, 1946, vol. VII, p. 486). In a polemical exchange in 1941, Einzig insisted that Benham was in error in holding that southeast European countries had improved their terms of trade in dealing with Germany, which paid higher prices than Western Europe was able to pay, and sold German goods competitively in the area. A postwar analysis of the matter tended to show that Benham and Schacht had been right (Kindleberger, 1956, pp. 120ff.).

An intellectual defence of the Benham—Schacht position had been offered in a somewhat different context as early as 1931 by Manoilesco, who expressed the view that the theory of comparative advantage had to be qualified if the alternative to tariff protection for an industry were either unemployment, or employment at a wage below the going rate. His statement of this position in The Theory of Protection and International Trade (1931) was strongly attacked on analytical grounds by the leading international-trade theorists of the day — Haberler, Ohlin, and Viner, each in extended treatment — but was resurrected after the war by Hagen, and then generalized into a second-best argument for interference with free trade, e.g. by tariffs. When the conditions for a first-best solution under free trade do not exist, protection may be superior in welfare for a country to free trade. By the same token, export sales at less than optimal terms of trade may be superior to no exports and unemployment.

The Union of Soviet Socialist Republics

During the 1920s, commercial policy in the Soviet Union had been the subject of a great debate under the New Economic Plan, between the Right that advocated expansion of agriculture, and of other traditional exports, plus domestic production of manufactured consumer goods to provide incentives for farmers, and the Left that favoured development of domestic heavy industry and the relative neglect of agriculture. Under the proposals of the Right, exports of agricultural products would be expanded to obtain imports of machinery, metals, raw materials, and exotic foodstuffs such as coffee and tea. This was the trade-dependent strategy. The Left, on the other hand, sought to increase trade in order to achieve autarky as rapidly as possible, as it feared dependence on a hostile capitalist world. With Stalin's achievement of power, the Left strategy was adopted in the First and subsequent Five Year Plans.

Strong efforts were made to reduce dependence on imports to a minimum. Territorial losses during the First World War, land reform which divided large estates, and the inherent bias of planning which favoured domestic users over foreign markets helped reduce the ratio of exports to national income, which fell from a figure variously estimated within the range of 7–12 percent in 1913 to 3.5 at the interwar low in 1931. Estimates of the volume of Soviet exports vary, depending upon the weights chosen, but on the basis of 1927–8 weights, exports fell from 242 in 1913 to 53 in 1924–5 before recovering to 100 in 1929. Thereafter they rose sharply to 150 in 1930 and 164 in 1931 with disastrous consequences for the Soviet peoples (Dohan and Hewett, 1973, p. 24).

In 1930 and 1931, Soviet exports conformed to the model of the backward-bending supply curve in which volume increases, rather than decreases, as price falls. Declines in the prices of grain, timber and oil, starting as early as 1925, had threatened the Soviet Union's capacity to pay for the machinery and materials necessary to complete its Five Year Plans, and threatened as well its capacity to service a small amount of foreign debt contracted in the 1920s. To counter this threat, the Soviet authorities diverted supplies of foodgrains from domestic consumption to export markets, shipping it from grain-surplus areas to export ports and leaving internal grain-deficit areas unsupplied. The result was starvation and death for an unknown number of the Soviet people numbering in millions. The world price of wheat fell by half between June 1929 and December 1930, and more than half again by December 1932. So hard did the Soviet Union push exports that supplies of pulp wood, woodpulp, timber, lumber, and even coal, asbestos, and furs threatened to enter the Canadian market, a notable exporter of these products in ordinary times, and led the Canadian government in February 1932 to prohibit the import of these commodities from the Soviet Union (Drummond, 1975, p. 205). Similar discriminatory restrictions were taken in many other markets. The dysfunctional character of forcing exports on the world market became clear and the volume of Soviet exports levelled off and started downward in 1932. As primary-product prices rose after 1936, moreover, the export volume declined sharply below the 1929 level.

Japan

Japan had not participated fully in the boom of the 1920s, but the fact that it had restored the yen to par after the First World War as late as January 1930 made it highly vulnerable to the liquidity crisis of 1930 and 1931. It was vulnerable, too, because of heavy dependence on silk, a

luxury product, about to experience both a sharp decline in its income-elastic demand and severe competition from rayon and later from nylon. In 1929 silk was responsible for 36 percent of Japanese exports by value, and produced 20 percent of Japanese farm income. The price of silk fell by about half from September 1929 to December 1930. With the help of the depreciation of the yen after December 1931, it reached a level of $1.25 a pound in March 1933, compared with $5.20 in September 1929.

The combination of sharp exchange depreciation and the collapse of the American market in silk produced a drastic reorientation in Japanese export trade, away from North America and Europe and toward Asia, Africa, and Latin America. Export drives were especially intense in British and Dutch colonies, and in the so-called "yen bloc" of Korea, Formosa, Kwantung, and Manchuria. The Japanese share of the Netherlands East Indies market, for example, rose from 10 percent in the 1920s to 32 percent in 1934 before restrictive measures were applied under the Crisis Act of 1933 (Furnival, 1939, p. 431; Van Gelderen, 1939, p. 24). Japanese exports to the yen bloc rose from 24 percent in 1929 to 55 percent in 1938, with imports rising from 20 to 41 percent over the same period (Gordon, 1941, p. 473). Within Asia, Japan developed sugar production in Formosa and stopped buying it in Java in the Netherlands East Indies. The British and Dutch Empires imposed quantitative restrictions on Japanese imports, especially in textiles. Foreshadowing a technique extensively used by the United States after the war, at one stage the British asked the Japanese to impose export controls on shipments to India or face abrogation of the Indo-Japanese Commercial Convention of 1904 (Drummond, 1972, p. 133). By 1938 Netherlands East Indies imports from Japan were down to 14 percent of the total from a high of 30 percent in 1935 (Van Gelderen, 1939, p. 17). Japanese fear of reprisals led them to amend the Export Association Act of 1925, which had been enacted to promote exports, so as to control exports in accordance with restrictions imposed by importing countries (Gordon, 1941, p. 360).

The World Economic Conference of 1933

Sir Arthur Salter termed the Hawley—Smoot tariff a turning-point in world history. Lewis Douglas thought the Thomas amendment under which the dollar was devalued in March 1933 marked "the end of Western civilization as we know it" (Kindleberger, 1986, p. 200). W. Arthur Lewis regarded the failure of the World Economic Conference of 1933 as "the end of an era" (Lewis, 1950, p. 68). Each characterization contained an element of hyperbole. The World Economic Con-

ference offered only the slightest of chances to reverse the avalanche of restrictions on world trade and to stabilize exchange rates. The reversal in tariffs came the next year with the June 1934 Reciprocal Trade Agreements Act in the United States. More stability in exchange rates took root with the Tripartite Monetary Agreement of September 1936 among, initially, the United Kingdom, France, and the United States.

The inspiration for a new world economic conference after 1927 went back to the early years of deflation and to a suggestion of Chancellor Brüning of Germany to treat disarmament, reparations, war debts and loans as a single package to be settled on a political basis, rather than separately in each case by economic experts. A preparatory commission of economic experts under the auspices of the League of Nations fashioned a package of somewhat different ingredients, in which the United States would lower the Hawley—Smoot tariff, France would reduce quota restrictions, Germany relax foreign-exchange control and the United Kingdom would stabilize the pound. War debts were excluded from the agenda by the United States, and consequently reparations by France and the United Kingdom. Pending the convening of the conference, delayed first by the November 1932 elections in the United States and then by domestic preoccupations of the newly elected President Roosevelt, Secretary of State Cordell Hull tried to work out a new tariff truce, but ran into blocks. The United States desired new tariffs on farm products subject to processing taxes under the new Agricultural Adjustment Act; the United Kingdom had some pending obligations under the Ottawa agreements; France reserved her position until she could see what would happen to US prices as a response to the depreciation of the dollar initiated in April 1933. Only eight countries in all finally agreed to a truce on May 12, 1933, many with explicit reservations. In the final preparations for the conference, commercial-policy measures seemed secondary to all but Cordell Hull, as contrasted with the problem of raising international commodity prices and international public-works schemes, for neither of which could general solutions be found. In the end the United States broke up the conference by refusing to stabilize the exchange rate of the dollar (only to reverse its position seven months later in February 1934), the British felt moderately comfortable with their Empire solution in trade with the vast volume of wrangles still to come, and the gold bloc battened down to ride out the storm. The only positive results were an agreement on silver negotiated by Senator Key Pitman of the US delegation, and bases laid for subsequent international agreements in sugar and wheat. Perhaps a negative result was the de facto constitution of the sterling bloc with most of the Commonwealth, save Canada and the subsequent withdrawal of the Union of South Africa, plus foreign adherents such as Sweden, Argentina, and a number of countries in the Middle East.

Commodity Agreements

From the decline in commodity prices in the mid-1920s, one after another attempt had been made to devise schemes for raising prices. Some were private, like aluminum, copper, mercury, diamonds, nickel, iron and steel; some were governmental. Of the governmental, some were under the control of a single government — Brazil in coffee, Chile in nitrates, the United States in cotton, the Netherlands East Indies in cinchona bark; others, especially in sugar and wheat, were worldwide. Some of the private/government agreements in iron and steel, petroleum, and aluminum were regional, especially European (Gordon, 1941, pp. 430ff.).

The Chadbourne Plan in sugar was reached in May 1931 among leading export countries — Belgium, Cuba, Czechoslovakia, Germany, Hungary, Java, Peru, and Poland — later joined by Yugoslavia. But British India, France, the United Kingdom, and the United States — important consumers that also maintained substantial production — remained outside the agreement. The United States formulated its own legislation, the Jones—Costigan Act of 1934, which assigned rigid quotas to imports from abroad and discriminated in favour of Cuba. Under the Chadbourne Plan, production declined among the signatories but rose almost as much outside. Particularly hard hit was Java, which lost both the Japanese and the Indian markets, the former to Formosan production, the latter to domestic production. Unsold stocks in Java reached 2 1/2 million tons in 1932, and the government took over in January 1933 as the single seller. The failure of the Chadbourne scheme led the World Economic Conference to push for a new agreement, which was finally reached under League of Nations auspices only in May 1937 at the height of the recovery of primary-product prices.

The World Economic Conference was the twentieth international meeting on the subject of wheat after 1928 when the price of wheat started to plummet — two of the meetings dealt with imperial preference, seven were limited to Eastern Europe as already mentioned, and eleven were general. The agreement that emerged after the World Economic Conference achieved a system of export quotas for major producers, but no agreement on acreage controls to limit production (Malenbaum, 1953).

Tea was regulated in this period by an international committee which met in London. In March 1931 the four leading producers of tin—Malaya, Bolivia, Nigeria, and the Netherlands East Indies—cooperated in the Joint Tin Committee. In May 1934 nine countries in Southeast Asia producing 95 percent of the world's rubber supply undertook to impose export quotas to reconstitute the Stevenson rubber plan which had broken down in 1928 (Van Gelderen, 1939, pp. 51ff.). Their

problem was complicated by sharply differing supply elasticities in the plantation and the native sectors, the latter characterized in many countries by backward-bending responses. As rubber prices rose in the 1936–7 inventory boom, a number of governments sought to tax away the price increase from the producers, but until the price collapse of September 1937 succeeded mainly in raising the price to buyers in a sellers' market. With the eventual decline in prices, the incidence of the export taxes shifted back from the foreign consumer to the domestic producer and in most instances they were quickly removed.

Sanctions

In December 1934 a border incident occurred between Italian Somalia and Ethiopia. Italy demand an apology; Ethiopia refused. With tension rising, the League of Nations sought to arbitrate but received no help from Italy. After further border clashes, Italian troops invaded Ethiopia on October 3, 1935 without a declaration of war. Later in the month, the League of Nations declared Italy the aggressor and voted sanctions to be applied to her in arms supply, finance, and export-import restrictions. The League did not, however, decree sanctions in the critical item, oil. Germany refused to comply with the League vote; the United States, though not a member of the League of Nations, was strongly sympathetic. Oil sanctions were discussed again in March 1936. At this time an attempt was made to apply them informally through major world oil companies. These companies stopped selling to Italy, but the increase in oil prices thereby brought about encouraged a vast number of small shippers to enter the business for the first time and to deliver oil to Italian troops at Red Sea ports in the full quantities required. With the fall of Addis Ababa, the Italians proclaimed empire over Ethiopia and withdrew from the League. League members continued to apply sanctions with increasing resolution until July 15, 1936, when sanctions were abandoned (Feis, 1946, vol. III).

The Disintegration of the World Economy

In a few countries — notably France and the United States — foreign trade fell by the same proportion as national income from 1929 to 1938. In others trade fell more than output. Thus the ratio of imports to industrial production declined by 10 percent in the United Kingdom, nearly 20 percent in Canada, 30 percent in Germany, and 40 percent in Italy. Crop failures in the United States in 1934 and 1936, and in Germany in 1937 and 1938, prevented the decline in the proportion of

imports from being wider (Meade, 1939, pp. 107–8). Buy-British and Buy-American campaigns, involving government discrimination against foreign as against domestic suppliers with margins of initially 10 percent, increased to 25 percent, in the United States, and 100 percent for items under $100, were often supported by programs affecting state governments, and campaigns to persuade the general public to discriminate as well (Bidwell, 1939, pp. 70–1 and Appendix A). The major influences, to be sure, were higher tariffs, quotas, clearing and payments agreements, and preferential trade agreements.

What trade remained was distorted, as compared with the freer market system of the 1920s, both in commodity and in country terms. The index of German imports for 1937, with a base of 100 in 1929, strongly reflected Wehrwirtschaft , and especially rearmament: "other ores" 153, manganese ore 142, iron ore 122, iron and steel 121, copper 100, cotton 73, wool 62, coal 59, oil seeds 57, timber 28 (Meade, 1938, p. 128). The share of Germany in Turkish, Greek, and Italian imports rose between 1928 and 1939 respectively from 13 to 43 percent, 8 to 29 percent, and 10 to 24 percent; the same percentages of national exports to Germany rose from 13 to 43 percent, 27 to 39 percent and 13 to 17 percent for the same countries in the same order (Thorbecke, 1960, p. 100). By 1937, bilateral clearings amounted to 12 percent of total world trade and 50 percent of the trade of Bulgaria, Germany, Greece, Hungary, Romania, Turkey, and Yugoslavia (League of Nations, 1942, p. 70). Pioneering estimates of the shrinkage of multilaterally as opposed to bilaterally balanced trade were made for the League of Nations Economic and Financial Department by Folke Hilgerdt. In 1928, bilateral balancing of export and import values between pairs of countries on the average covered 70 percent of merchandise trade, with about 5 percent more covered by exports or imports of services or capital movements, and 25 percent balanced multilaterally (Hilgerdt, 1941). Hilgerdt's two studies emphasized the shrinkage of the proportion of the trade balanced multilaterally during the depression years, without furnishing a precise estimate for the end of the 1930s (Hilgerdt, 1941; 1942). A postwar study on a somewhat different basis furnished a comparison for 1938 with 1928, shown in Table 6.1.

Major changes occurred both world-wide and within Europe. On a world basis, the largest change shown in the Hilgerdt analysis derived from the fact that the developing countries of the tropics no longer earned large surpluses in merchandise trade with the United States to pay their interest on debts owned to Europe, and especially to the United Kingdom. Regionally, within Europe, the most important change was the failure of Germany to earn an export surplus in Europe, largely the United Kingdom, to enable her to pay for her net imports of raw materials from overseas. Another striking feature was the shift by the

United Kingdom of procurement from Europe to the sterling area. France, the Netherlands, and especially the United Kingdom diverted trade from the rest of Europe to their colonial empires, a trend which would be reversed after the Second World War, and especially after the formation of the European Economic Community in 1957 and the United Kingdom's accession to it in 1973. In 1913 22 percent of British exports went to the Empire. By 1938 the figure had more than doubled to 47 percent. In imports, the proportion rose over the same period from 22.3 to close to 40 percent. As noted earlier, the figures might have risen further had it not been for what has been called "Imperial Insufficiency" (Hancock, 1940, p. 232; see also Drummond, 1972).

World Trading Systems

Recovery of raw-material prices from 1933 to 1937 was followed by some considerable reduction in tariffs, and relaxation of quota restrictions. The renewed, though less far-reaching, decline of these prices in September 1937, outside the fields dominated by European rearmament, set back the movement towards freer trade. The last five years of the interwar period were most clearly characterized by what have been called disparate "world trading systems" (Tasca, 1938). At the limits were the system of German trade, locked into a network of bilateral clearing and payments agreements, and practising autarky for the sake of war economy (Petzina, 1968), and at the other extreme, the United States, which stood aloof from all payments and clearing agreements, with few quota restrictions, largely in agriculture, some subsidies to export in agricultural commodities, plus government credit through the Export-Import Bank for export promotion. Within Europe, the Balkan countries were nearer to the German model, the Oslo group to the American. Midway between was the Empire preference scheme of the United Kingdom, the Dominions, India, and the dependent colonies. Latin America had been hard hit by declines in raw-material prices and the decline in foreign lending, but was hopeful of trade expansion under

the Roosevelt "good neighbor" policy. The Soviet Union went its own way. Anxious to join a system, but largely orphaned outside them, were the Middle East and Japan, the latter of which carved out its own Greater East Asia Co-Prosperity Sphere.

There were limited attempts at achieving a single unified world trading system. The League of Nations Committee for the Study of the Problem of Raw Materials reported in September 1937 at a time when payments difficulties had eased but the position was on the point of reversal (Meade, 1938, p. 162). It found few problems of supply or access to materials, and argued in favour of valorization schemes to raise prices provided that consumers' interests were safeguarded. The report went to the League of Nations Assembly where it was pigeonholed as a consequence of the sharp check to commodity prices and deterioration in payment balances.

Before that time, the British and French governments had asked Paul Van Zeeland, a former Belgian prime minister, to prepare a program for world action in the commercial-policy field. In January 1938, the Van Zeeland report was presented to the public, equally an inopportune time. It called for reciprocal reductions of tariffs, generalized by the most-favoured-nation clause, replacement of industrial quotas by tariffs or by tariff quotas, removal of foreign-exchange control, clearing agreements, and the ban on new lending in London; and, as a final step when all else was in operation, six-month agreements on foreign-exchange rates leading ultimately to the establishment of fixed rates under the gold standard (Meade, 1938, p. 159). The report was received with universal agreement that the restoration of trade was needed, but equally universal reluctance on the part of all governments to take any decisive initiative in the matter (Condliffe, 1940, p. 47).

The 1937–9 recession in fact led to increases in tariffs in Belgium, France, Greece, Italy, the Netherlands East Indies, Norway, Sweden, Switzerland, and Yugoslavia in 1938, and in that stronghold of free-trade sentiment, the Netherlands, in March 1939. Rubber and copper quotas, which had been freed in 1937 under their commodity schemes, were tightened down again. Brazil, Colombia, and Japan extended their foreign-exchange restrictions. Germany and Italy introduced the death penalty for violations of foreign-exchange regulations in December 1936 and June 1939, respectively. Italy also constituted a Supreme Autarky Commission in October 1937 (Meade, 1939, p. 197). In all, the number of clearing and payments agreements rose from 131 on June 1, 1936 to 171 by January 1, 1939 (Gordon, 1941, p. 131).

Meanwhile some considerable relaxation of commercial policy was underway in the United States, led by Cordell Hull, whom Herbert Feis, his economic adviser in the Department of State, called a monomaniac

on the subject of tariff reductions (Feis, 1966, p. 262). Hull had long been a Congressman from eastern Tennessee, which specialized in tobacco for export, before becoming Secretary of State, and had been in opposition to the Fordney–McCumber and Hawley–Smoot tariff increases in 1922 and 1930 as a member of the House of Representatives Committee on Ways and Means. As early as the World Economic Conference of 1927, as a Congressman, he had been thought to believe that the tariff of the United States was the key to the entire world situation (US Department of State, Foreign Relations of the United States , 1928, vol. I, p. 239). As Secretary of State and leader of the United States delegation to the World Economic Conference of 1933, he had been frustrated in his attempts to get world tariffs reduced by the repudiation of President Roosevelt which prevented him from encountering the profound disinterest of the other countries. The tariff truce of May 1933 lapsed when the conference failed, but Secretary Hull persevered. At the Seventh Conference of American States at Montevideo in November 1933 – the first having been held in 1889 – he had tariffs put on the agenda for the first time and induced President Roosevelt to offer the Latin American republics tariff reductions (Gordon, 1941, p. 464). The main business accomplished at Montevideo was the strengthening of the most-favoured-nation clause, as Hull had tried to do at London, by government agreement not to invoke the clause in order to prevent the consummation of multilateral tariff reductions in agreements to which a government was not a party. The full agreement provided for no tariff reductions, and was signed by eight countries, though ratified only by the United States and Cuba (Viner, 1950, p. 37).

Upon his return from Montevideo, Secretary Hull found that the President had established an Executive Committee on Commercial Policy under the chairmanship of George Peek, agricultural expert and opponent of trade liberalization, and that the committee had already drafted a bill providing for trade treaties to be subject to Senate ratification. This was unsatisfactory to Hull. The Department of State had already been negotiating with Argentina, Brazil, Colombia, Portugal, and Sweden in the summer of 1933, had signed an agreement only with Colombia, but had not submitted it to the Senate for ratification. In early 1934 new legislation was drawn up that delegated authority from Congress to the Executive branch of government to conclude reciprocal trade agreements on its own authority. The draft legislation was completed on February 24, approved by President Roosevelt on February 28, passed the House of Representatives on March 20, the Senate on June 4, and was signed into law on June 13, 1934 as the Reciprocal Trade Agreements Act. The initial delegation of authority was for a

period of three years. The legislation was renewed in 1937 and 1940. It provided for mutual bilateral reductions in tariff duties, generalized by the most-favoured-nation clause, limited to 50 percent of the existing (largely Hawley–Smoot) tariff levels.

Even before the legislation had been drafted, further talks were going forward to reduce tariffs, with Belgium and Denmark in January 1934, and with Canada. Canada and the United States each made official public statements on the subject in February 1934, emphasizing the importance of their mutual trade relations. A request for negotiations was made by the Canadian government in November 1934 and an agreement was achieved a year later to the effect on January 1, 1936. Canada received concessions on 88 items, largely primary products, including, along with Hawley–Smoot items, the lumber and copper affected by the US Revenue Act of 1932. United States concessions obtained from Canada were largely in manufactured goods.

The first agreement under the Reciprocal Trade Agreements Act, however, was that concluded with Cuba in August 1934. By November 1939, agreements had been reached with 20 countries, 11 of them in Latin America. A second agreement was concluded with Canada in November 1938, but the most important was the British agreement concluded simultaneously with the revision of the Canadian agreement.

In the British and Canadian agreements, the United States hoped to break down Empire preference. This was beginning to happen of its own accord. In a British–Canadian trade agreement of 1937, five years after the Ottawa agreements of 1932, the British persuaded the Canadians to abolish the doctrine of equalizing competition and to substitute fixed tariff rates and fixed preferential margins in the agreements (McDiarmid, 1946, p. 295). New Zealand was ready to abandon the Ottawa agreements, and started to conclude agreements outside them with Sweden (1935), Greece (1936), and Germany (1937), and was negotiating a dozen others (Hancock, 1940, p. 278). Britain, meanwhile, was highly critical of Australian performance under Ottawa, on the ground that Australia had persistently violated its commitments. Australian Tariff Board studies were limited, and even when the Tariff Board recommended reductions on British goods, the government often failed to introduce them in Parliament (Drummond, 1975, pp. 392ff.). British and Australian interests were only partly complementary. Accordingly the United Kingdom, Canada, and the other Dominions as well were ready in their agreements with the United States to sacrifice advantages in each other's markets in return for significant compensation in the market in the United States (Hancock, 1940, p. 265).

To an extent, the Anglo-American trade agreement was more symbolic than effective. Two years of hard bargaining went into it, and

it lasted only eight months, from January 1, 1939 until British wartime controls were imposed on the outbreak of war with Germany in September 1939. Reductions were agreed on nine items in which trade amounted to no more than $350 per annum. Important concessions, as in cotton textiles, were prevented from being generalized to Japan and other competitors through reclassification. Full 50 percent reductions in the United States were made on 96 items but the total trade involved was worth only $14 million. Under all 20 agreements, the unweighted (equal weights) United States ad valorem duties were reduced from 57 percent on products subject to the tariff to 35 percent, a reduction of 39 percent, whereas the reduction under the British agreement, from 42 to 30 percent on the same basis, amounted only to a reduction of 29 percent. The 35 percent level achieved on January 1, 1939 was somewhat lower than the Fordney–McCumber average of 38.5 percent and the Payne–Aldrich tariff (1909) of 40.8 percent, and well below the Hawley–Smoot average of 51.5 percent. It was nevertheless still well above the 1913 Underwood level of 27 percent (Kreider, 1943, pp. 170ff.).

Moreover, the trade agreements applied largely to industrial products and materials. United States opposition to Empire preference had export concerns in view, especially in competition with Canada in pork and apples. The reductions in tariffs under the agreements, however, went side by side with continued US protection against agricultural imports and subsidies on agricultural exports. Protection was required under those domestic programs which raised prices in the United States and would, without new restrictions, have attracted further supplies from abroad; and subsidies were deemed necessary to offset the price disadvantage this imposed on American producers in their traditional markets. The trade agreements reduced tariffs on a few items, such as maple sugar from Canada, which had been a particular irritant under the Hawley–Smoot Act, and altered the arbitrary valuations on fresh fruits and vegetables early in the season that had hitherto been kept out of Canada by this device. A sanitary agreement between the United States and Argentina on the regulation of foot-and-mouth disease was not ratified by Congress (Bidwell, 1939, pp. 217–18); and independence for the Philippines was accelerated to push its sugar production outside the tariff borders of the United States. On the whole, the trade agreements marked the beginning of regarding liberal commercial policies as appropriate only for manufactures, and their inputs, and leaving agricultural trade largely to special arrangements.

A small beginning was made by the United States on what was to be a major postwar issue, East–West trade. The United States was unwilling to recognize the government of the Soviet Union all through the

1920s. With President Roosevelt's New Deal, this was changed and recognition was accorded in 1933. In the mid-1930s, the United States and the Soviet Union undertook a series of trade agreements. In 1935, the Soviet Union contracted to purchase at least $30 million worth of US goods in the following year; in return, the United States accorded the Soviet Union most-favoured-nation treatment. In August 1937, under a new pact, the Soviet Union agreed to step up its purchases from the United States to $40 million (Gordon, 1941, p. 407).

British adherence to the more liberal trade policies pursued by Cordell Hull was highly ambiguous. Kreider claims that the British concessions were not spectacular but represented a reversal of policy (1943, p. 240). At the same time, the British government was unwilling to repudiate the principle of Ottawa, despite its effects, as Mackenzie King claimed, in destroying the principle of imperial harmony (Drummond, 1975, p. 316).

Moreover, British ministers were experimenting with a new technique quite at variance with the American professed principle of increased reliance on the international market. Mention was made above of the special tariff assistance given to the iron and steel industry to assist in its negotiations with the International Steel Cartel. At the depth of the depression, in October 1933, the British had encouraged negotiations between Lancashire and Indian cotton textile mill owners. The resultant Less–Mody pact of October 1933 provided that India would lower her tariffs on British textiles to 20 percent while holding those against other (i.e. Japanese) goods at 75, to which they had been raised from 31 1/2 percent in August 1932 in several steps. As part of the negotiation, involving governments and business groups on both sides, the British agreed to take 1 1/2 million bales of cotton that had piled up as a result of a Japanese retaliatory boycott. At the time Lord Runciman stated: "The work of the Delegation has gone some way in justifying the Government in their belief that the best approach to the problem of international industrial cooperation is by the method of discussion between industrialists" (Drummond, 1972, p. 316).

In early 1939, immediately after signing the Anglo-American Reciprocal Trade Agreement in November 1938, and as part of an export drive, the British Board of Trade encouraged the visit to Düsseldorf of a delegation of the Federation of British Industry to meet with the Reichsgruppe Industrie, its institutional counterpart, and to fix quantitative relationships between the exports of the two countries in each commodity and market. In prospect, The Economist , after some qualifications, expressed itself as approving (CXXXIV, no. 4585 (February 25, 1939), p. 383). The agreement was concluded on March 16, 1939, one day after the German invasion of Czechoslovakia (text in Hexner, 1946,

Appendix III, pp. 402–4). The British government repudiated the agreement on political grounds, but not before The Economist had denounced it on the grounds that it involved cartelization of domestic industry as well as of trade, that it would extend Anglo-German subsidies to exports, and that it might involve joint action against competitors who refused to join the arrangement, including possible American firms (CXXXIV, no. 4589 (March 25, 1939), p. 607).

In Eastern Europe the German bloc was strengthened in ways to guarantee German access to raw materials and foodstuffs in short supply. An agreement with Hungary in 1934 provided for a shift of Hungarian agriculture from wheat to oilseeds with an assured outlet in Germany. German treaties with Romania in March 1935 and again four years later fostered the expansion of Romanian agriculture in oilseeds, feedgrains, and vegetable fibers, as well as industrial and financial cooperation, including the development of Romanian transport and petroleum under German–Romanian companies supervised by joint government commissions (Gordon, 1941, pp. 425–6). In 1937, the proportion of German exports sold through clearing agreements amounted to 57 percent, while 53 percent of her imports came through clearings. The comparable figures for Turkey were 74 and 72 percent respectively, for Romania 67 and 75 percent, for Switzerland 28 and 36 percent, for Sweden 17 and 24 percent, and for the United Kingdom 2 and 2 percent (Gordon, 1941, Table 7, p. 133).

The disintegration of world trade thus proceeded, despite the attempts of the United States, the Oslo group, Premier Van Zeeland under Anglo-French auspices and the economists of the Economic and Financial Department of the League of Nations. With some prescience Condliffe (1940, p. 394) concluded his book written at the outbreak of the Second World War: "If an international system is to be restored, it must be an American-dominated system, based on Pax Americana ."

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7—
The Postwar Resurgence of the French Economy^[*]

The postwar economic revival of France has perhaps been slighted in economic literature. It is easy to see why this might be so. The recovery of neighboring Germany seems more remarkable in the light of wartime destruction and postwar settlement; and attention in France has focused primarily on political problems. But the recovery of France is no mean feat: French industrial production rose about as much as German from before the war, though from a lower level in relation to capacity. And though France suffered less destruction and escaped the problem of refugees, its peculiar handicaps of war abroad and political crisis at home were severe enough.

The postwar economic vitality of France after about 1952 contrasts sharply with its miserable performance in the 1930s and the hesitant start in the early postwar period. Those delays produced a substantial literature on French economic backwardness, attempting to explain the country's incapacity to develop at rates equal to those of its neighbors. Some of this literature in fact appeared after the tide of recovery had definitely turned.

Even without the evidence of the present economic vitality, however, it is a mistake to regard France as a perennially backward developer. This essay, which will review the changes in the French economy,

[*] Published in Stanley Hoffmann, Charles P. Kindleberger, Laurence Wylie, Jesse R. Pitts, Jean-Baptiste Duroselle and François Goguel, In Search of France , Cambridge, Mass.: Harvard University Press, 1963. The book was the product of a seminar over two years at the Center for International Studies at Harvard University, directed by Robert R. Bowie. I am deeply indebted to the regular and occasional members of the seminar for ideas and criticism.

polity, and society accounting for the postwar resurgence, starts from a catalogue of explanations of French backwardness. But it should not be forgotten, despite the authors of these explanations, that French growth was rapid in at least three other extended periods in the last century or so — under the Second Empire from 1851 to about 1870; then from 1896 to 1913; and again in the 1920s. Some explanations for retardation imply that the French economy can never grow, others only that the growth will be sporadic and interrupted by the necessity to find new strengths. And it may be that the present period is due for interruption on similar grounds. In any case, interest in the current French recovery is heightened by past or current change in many of the alleged causes of retardation. French postwar experience commands attention on a more general basis than the history of the particular country, important as it is, in so far as that experience can illuminate the interrelations between a country's underlying characteristics and its economic growth.

The alleged causes of French economic backwardness must be analyzed with attention to what, if any, changes in underlying circumstances have supervened. One wants to know particularly whether the significant obstacles to growth have been removed — how, and when. I present the list of alleged causes first in brief summary, and then at greater length. The order is arbitrary.

The major explanations for French economic backwardness since about 1850 have been as follows.

On the side of production:

1. Lack of natural resources, especially of coking coal in an age of steel (Jean Chardonnet, Alexander Gerschenkron).

2. Lack of plentiful labor, not alone from the low rate of population growth but mainly from the slow release of manpower to the city by the agricultural sector with its love of the land and system of equal inheritance (W.A. Lewis, H.J. Habakkuk).

3. Diversion of savings from domestic capital formation to foreign political loans which "starved French industry of capital" (Maurice Lévy, Jean Weiller, A.K. Cairncross).

4. The organization of enterprise into family firms which resisted market competition (David S. Landes) and followed inefficient practices in financing, recruitment, and promotion of technical change (Jesse R. Pitts).

On the side of demand:

5. The slow rate of population growth, depriving France of an outlet for savings and a regular margin of expansion within which to effect technological change (Alfred Sauvy, Joseph J. Spengler).

6. The French national character, which favored high-quality rather

than mass consumption (Bert F. Hoselitz, Rondo E. Cameron).

7. Deep fissures in French society, preventing adjustment from traditional to modern patterns of social organization, exacerbating divisions among classes and sectors of society, promoting inflation, and diverting attention from growth to stability (John E. Sawyer).

On institutions:

8. "Malthusian" market organization with firms too small and markets highly cartellized (Charles Bettelheim, Herbert Luethy);

9. Governmental intervention, whether to maintain social stability, to direct resource allocation, or to carry out unduly ambitious national designs, and entailing contradictory policies, overcentralization, and economic incompetence (Warren C. Baum, Jean Gravier).

Though differing in emphasis, these explanations overlap and are not mutually exclusive. The importance which attaches to each factor will differ among observers, depending on one's view of the process of economic growth, the relative weight of economic and noneconomic factors, and the tolerable limits of governmental economic activity. Thus if one adheres to a Harrod—Domar view of economic growth in which capital formation by the process of compound interest is the central engine of expansion, the major foci of attention become the export of capital, the weakness of the family firm as a device for investing in industry, and the slow rate of population growth. But one who believes that the prime force for growth is technological advance, raising output per unit of factor inputs, will attach greater significance to the resistance to change of family firm, family farm, and government, and the organization of markets to limit competition.

What has happened since World War II to produce rapid economic growth in France can be seen in perspective, if at all, only after an examination of the separate factors which had supposedly held it back and the extent of the change in them.

On the Side of Production

Natural Resources

The complaint that France has been handicapped by lack of natural resources, and particularly of coal, has been recurrent almost since the invention of the steam engine. From at least J.A. Chaptal in 1819 to Jean Chardonnet in 1960, French economists, occasionally supported by foreign observers, have singled out the limited amounts and poor quality of French coal as a major obstacle to industrialization as rapid

as in Britain or Germany. More subtle commentators have suggested that the difficulty lay elsewhere — for example, that French natural resources, including iron ore, were too distant from industrial centers and ports; that the internally "balanced" nature of the separate regions of France limited the gains from specialization once the country had been joined by railroad interconnection; that France, unlike Britain and Germany, had difficulties in achieving cheap natural transportation because of the scarcity of navigable rivers and the rough terrain; or that France never developed the widespread trade in coal which, as an indirect consequence, would have thickened the transport network and, as a by-product, would have cheapened freight rates for other commodities, thus stimulating their interchange and their use as inputs by industry.

But examination of the case against natural resources raises doubts. Coal production grew substantially in the first two periods of rapid growth, during the Second Empire in the Nord, and in 1896–1913 in Lorraine. The latter period also saw a great expansion in coal imports. During most of this time there was a tariff, which could have been reduced to cheapen coal for industry. A canal from the Nord to Lorraine, which would have increased the availability of iron ore to the Nord and coal to Lorraine, was declared a public utility in 1881 but never constructed. Only after World War II was its purpose carried out by the double-tracking and electrification of the railroad from Valenciennes to Thionville. And even without the canal, French steel production grew at a rate of 8 percent per annum from 1880 to 1913, very close to the 10 percent rate of Germany and Belgium, and much in advance of the British performance.

Albert Hirschman holds that economic growth produces resources, rather than resources growth. This view seems to be borne out by the economic history of France prior to 1945, especially if one believes that the availability of resources is largely a problem of transport facilities, which are man-made. It is clearly borne out since the war. The nationalized coal industry, Charbonnages de France, has performed with technical brilliance, consolidating small pits into efficient units, mechanizing mines above and below ground, raising output per man-shift faster than Germany or Britain. (There may be more of a question about its economic performance — for example, whether it invested too many resources in coal, and whether its pricing policies did not unduly penalize efficient and subsidize inefficient mines.) French hydroelectric sites on the Rhône, in the Alps, and in the Pyrenees have been exploited on a rapidly widening scale. The discovery of oil in Algiers, and of natural gas at Lacq (made usable by the development of new techniques to separate the sulfur from the gas, which incidentally create new com-

petition for the United States sulfur industry) also testify in Hirschman's behalf. A long-run question has been raised whether Algerian oil is cheap or dear, compared to the resources which France would have had to give up to get an equal amount of oil from other areas through trade. If the Algerian War was justified in part by the riches of the Sahara, the calculation must be altered to include an allowance for an appropriate portion of the cost of the war. It is said to be a close question even without war costs.

Finally, note that at no time has there been any complaint about lack of resources in agriculture. On the contrary, the emphasis in all discussion is on France's varied and rich endowment of land. Blame for backwardness in agriculture is ascribed, instead, to lack of social-overhead capital such as roads, lack of education and technological instruction, the system of inheritance, inordinate love of land, and other flaws in administration or social values.

It seems clear that the alteration of France's resource base since the war has been a result rather than a cause of economic growth. As earlier in French history, resources have responded to the stimulus of industrial expansion. In this, as in much that follows, there is an inescapable element of interaction; growth begets resources and resources permit further growth. But the main point is that natural resources are not the controlling factor. In France it was not a lack of resources that held down the economy in its stagnant periods, nor an abundance of resources that prodded it forward in the 1950s.

Labor Supply

Chaptal in 1819 believed that France suffered compared to Britain from dear coal and cheap labor. The analysis evidently differed as between the two factors. Dear coal inhibited the plentiful use of an efficient fuel in static terms. The handicap of cheap labor was dynamic: it encouraged the abundant use of this input, maintaining the country in antiquated labor-intensive practices, and depriving entrepreneurs of an incentive to substitute machinery for labor.

There are traces of this view of labor through the nineteenth-century discussion. The present prevailing view, however, is diametrically opposite. It is believed that French industrial growth has been handicapped by stagnation in agriculture. This stagnation, arising from lack of education, French traditional love of the soil, and the Napoleonic system of equal inheritance, has limited the supply of savings for industry and the supply of agricultural raw materials used in industry, and has held down the demand for industrial products. Its major effect, however, is thought to have been its failure to release labor to industry

rapidly enough. Industrial expansion has been frustrated not by too cheap labor, but by too expensive. Expansions have been brought to a halt by rising wages. Space does not permit a thorough treatment of this problem in these pages, but a few conclusions may be in order.

French agriculture has been less technologically frozen than is generally believed. In the Paris basin, and in the North especially, but to a lesser degree everywhere, French agricultural practice advanced during the nineteenth century. The advances in agricultural rationalization were particularly rapid during the periods of industrial expansion under the Second Empire and before World War I. The agricultural advances were forced by the movement of labor into industry. But this movement was largely local in character. In France, as in Britain, agricultural workers did not move long distances to urban employment, except to the metropolis. There was this difference: redundant farm hands in southern England who did not go to London emigrated abroad. In France, the rural surplus from the Southwest was recruited by Paris into the national services as gendarmes, railroad workers, postmen and employees of the tobacco monopoly. Those from Brittany, however, would move neither to Paris nor abroad. And elsewhere in France, while the industrial economic historians were complaining of lack of labor supply, agricultural observers bewailed the rural exodus.

There is little evidence that the halting of French industrial expansion in 1870, 1913, or 1929 was due to inadequate labor supply. It is true that wages rose sharply in the 1850s and 1860s, and that prior to World War I the labor requirements of the North and East had to be met by immigration because of the unwillingness of French labor (which in most cases had already been drawn off local farms) to move the requisite long distances. It is also true that in some areas — Clermont-Ferrand, Sochaux in the Franche-Comté, and Bas-Rhin — industry and agriculture inhibited one another through the operation of isolated rural factories which used workers who continued part-time farming; here the recruiting of industrial laborers was hampered by the lack of small part-time farms available to them and farming continued by archaic methods because it remained a marginal contributor to family income, rather than a main support. But these factories were exceptional; they were not found in Paris or the North nor even in every part of Lorraine. Moreover, the pressure of industrial expansion around 1910 was beginning to result in rapid agricultural reorganization when war intervened. Industry would have benefited from a willingness of French agricultural labor to move longer distances into industrial employment, rather than insist on limited local moves (frequently into the independence of petit bourgeois occupations). But, on the other hand, more persistent industrial expansion would have favored greater mobility.

Since World War II, there has been a rapid movement of labor off

the farm and a rapid increase in French agricultural productivity. In the five years from 1949 to 1954, the active population engaged in agriculture, fishing and forestry — largely agriculture — fell by 30 percent, from 7.5 million to 5.2 million, or from 36.6 percent of the active population to 27.4 percent. The decline in men was only 19 percent, from 4.2 to 3.4 million, while the number of women dropped by 44 percent from 3.3 to 1.8 million. Productivity increased per worker and per acre, since the output rose while land tilled declined along with manpower.

This movement was partly motivated from the supply side. Mobility of the farm worker increased, with the spread of the motorbike, scooter, and automobile. Young women refused to continue to bury themselves in the village. But the major change came from the demand for workers in industry, the pull of jobs rather than the push of labor off the farm. If there had been a great demand for unskilled workers in industry, or greater education and skill among the agricultural population, the movement would have been still larger.

The backwardness of French agriculture at the beginning of the postwar period actually provided a force which sustained the subsequent growth, and in two ways. In the first place, it provided a reservoir of manpower for industry, just as German industry was helped by the influx of refugees which kept down wage rates, and Italian industry by the 2 million unemployed. Secondly, the movement off the farm led in turn to the necessity to rationalize agriculture, which contributed to the higher overall rate of growth in a way which is not possible in a country which already has an efficient agricultural sector.

There are some independent sources of improvement in farming in France. Some returning Tunisian settlers have taken over deserted farms in Aquitaine, built up the land with modern techniques, and farmed it by machine on a substantial scale with the liberal use of capital. The local peasants — those who had not abandoned the region — were at first skeptical but then became interested and sought to follow the pattern. This proved difficult because of their lack of access to capital.

The improvement of agricultural efficiency created new problems at the same time as it helped solve old ones. Efficiency, improving faster than labor moved out of the sector, gave rise to surpluses in grain, meat, milk, butter, and vegetables, to add to the traditional burdens of excess supplies in sugar and wine. The new surpluses have helped to color French attitudes toward the European Common Market, and especially toward British entry into it and toward the access to European markets of traditional overseas suppliers.

On the whole, it is difficult to maintain the case that the family farm

held back French industrial growth before 1939, or that its breakdown after 1946 has been responsible for the recent economic expansion. By and large, and though there is interaction, agricultural rationalization, like the discovery of natural resources, is a dependent not an independent variable in the equation of economic growth.

Capital Formation

In many formulations, economic growth is a result primarily of capital accumulation. According to them, the retardation in both the 1880s and the 1930s was due to lack of the capital which would have raised capacity and output. In the 1880s the lack is ascribed to capital exports — loans to the Balkans and tsarist Russia funneled through a financial community in Paris which corrupted the press and misled the public to earn its commissions on bond flotations. In the 1930s some capital, escaping Laval deflation and the Blum Popular Front, sought refuge in Switzerland and New York as hot money, while domestic business capital, on strike against the government of the Left, refused to undertake productive investment.

Like any unitary-valued explanation, this is too simple. Capital exports took place not only during the 1880s but also during periods of growth — in the 1850s and 1860s, between 1896 and 1913, and again in the 1920s. That Harry D. White's book on French capital exports contains the dates 1881–1913 in the title does not mean that capital exports began then, as Cameron has shown in great detail.^[1] The notion that French industry was starved for capital in the period before World War I is clearly exaggerated; and though the rate of expansion in the 1920s was greater after 1926 when capital was returning than during the period of flight, it was still possible for capital exports and expansion to take place simultaneously. In the 1930s, French business had little reason to invest at home, either under Laval deflation or Popular Front inflation. Capital export was an induced rather than an independent and causal phenomenon.

One could make a case, perhaps, that it was not the overall amount of saving which determined the rate of French industrial expansion, but only those funds available for industry. Under the Second Empire, capital for industry was furnished by the industrial banks, associated with the names of the Pereire brothers and the Crédit Mobilier. When these were destroyed or tamed, stagnation set in. In the period before World War I, there was lending by regional banks in Lorraine and Haute-Savoie, plus liberal rediscounting of industrial credits by the Bank of France, despite its rules and traditions limiting the rediscount

facility to commercial acceptances. In the 1920s, government credit for reconstruction was the source of capital formation. After World War II there was a variety of methods: self-financing by companies to the extent of nearly 50 percent of all industrial investment; government deficits; special governmental funds derived partly from the counterpart of foreign aid; inflationary finance through Bank of France rediscounting. In these operations the traditional Paris capital market continued to play a minimal role. On this showing, the critical variable for economic growth was not the overall supply of capital, but the mechanism for channeling savings into domestic investment. Capital exports were less a subtraction from the supply of capital available to industry than a means of mopping up the pool of savings which industry could not or would not use.

Blaming the barriers to capital flow into industry makes more historical sense than concentrating on the factors making for capital exports. But here, too, there is a problem of identifying cause and effect. Was it the barriers that restrained the demand, or the low demand that permitted the barriers to stand? Where demand for industrial capital is insistent enough, it can be said, institutional arrangements will adapt themselves to it and continue to channel savings into industry.

In any case, whether capital formation was deficient because of lack of demand or because of institutional blocks to industrial and governmental investment, it seems reasonable to exonerate the supply of capital. True, it is difficult to separate the demand and supply curves over time, because of their interdependence. On almost any showing, however, the supply of capital has moved in the wrong direction to explain France's postwar economic revival. Abundant during the period up to World War I, it was extremely scarce after World War II; yet this later period saw a larger expansion of domestic investment than the earlier. Postwar developments affecting the supply of savings — the discouragement to savers from inflation, the slight redistribution of real income to lower-income groups, and the growth of appetite for real income in the lower middle and working classes — have reduced rather than expanded the supply. It is perhaps fair to say that foreign-exchange control after World War II prevented the diversion of capital to hoarding in Geneva, London, and New York on the scale that had taken place in the interwar period. But this is a small difference compared with the postwar change in demand. The Monnet, Hirsch, and Massé plans, the renewal of construction, the need for roads, schools and other social-overhead capital, and, above all, the expansion of investment by nationalized industry, private enterprise, and even artisans, shopkeepers, and farmers, have put perhaps the severest strain on the capital supply that France has known since 1856. Bank credit has been tight;

dividends have been limited; capital markets and Plan authorizations have served to ration the tight supply of savings.

The supply of capital is an economic concept which is clear in itself. There is the behavior of domestic savers — corporate, private and governmental — and of foreign investors, and the competition of foreign borrowers for savings. But the domestic demand for capital is a less coherent aggregate. Back of it stand other factors with more basic explanatory force. It is to these factors — the character of entrepreneurship, the growth of population, functions assumed by the government, and so on — that we must turn.

The Family Firm

An important body of thought holds that French economic retardation has been due to the dominance of industry by the family firm. On this theory, family enterprises have slowed France's growth relative to other countries by various forms of behavior. Landes emphasizes their support of monopolistic or imperfectly competitive forms of market organization.^[2] The wider-ranging Jesse Pitts version of the theory contains a multiple indictment.^[3] For one thing, family enterprises refuse to grow beyond the size at which they can be dominated by the family; in particular, they refuse to dilute the family ownership by selling equity shares on the securities market. They minimize risks rather than maximize profits, and hence save in liquid form as insurance against adversity rather than invest in product or process innovation. They produce to fill orders rather than for stock. They are characterized by secrecy and mistrust; they fear banks, government, and even the consuming public. They hold prices high. Turnover is permitted to languish as the larger firms refrain from expanding output and sales in ways which would embarrass the small-scale inefficient producers at the margin.

The narrower Landes and wider Pitts theses are not universally accepted. Some scholars who do research on the origins of large-scale French industry insist that the theses overlook vast and significant fields of French entrepreneurial endeavor such as railroads, mines, iron and steel, automobiles, banks, and department stores. Some hold that family enterprise can function efficiently, as it has done in Britain. Some regard the family firm as a transitional form of enterprise in every country which happens to have lasted a little longer in France than in some other countries. It is generally agreed that family enterprise has characterized the French textile industry; but, even here, in various localities there have been examples of speculator firms which were interested in making money rapidly and selling out, rather than founding a con-

servative industrial dynasty as an extension of the bourgeois family. Family firms of a progressive nature can be found in iron and steel, tires, automobiles, locomotives, department stores, and so on. And when technological considerations require it, the pattern of many small-scale family-size units is replaced by concentration — despite the reluctance to dilute — by means of mergers, bankruptcy, or voluntary withdrawal after the sale of assets. Finally the French economic expansions of the 1850s and 1860s, of the period 1896–1913, and of the 1920s add to the doubts as the responsibility of the family firm for French economic stagnation.

But whatever its responsibility for stagnation, one would be hard pressed indeed to attribute the current French dynamism to changes in the structure of the family firm. A certain number of private mergers have taken place, especially in steel, and including some urged by the Planning Commission — though in Sollac, the new firm merely joins elements of the DeWendel family empire which had worked together earlier as an entente. Nationalization of coal, electricity, gas, and the Renault automobile firm has consolidated some small-scale family units into large organizations, or replaced family organizations by those recruited on universal rather than particularist lines. These changes are much less significant, however, than the change in attitudes of the family firms themselves. Landes was bold enough to say in 1957 that three years of expansion did not make an industrial revolution. Presumably he believed that the institutional bonds of the family firm would bring the recovery to a halt. What appears to have happened, on the contrary, is that the expansion in the economy altered the attitude, outlook, and hence the behavior of the family firm.

This result can be seen nowhere more sharply than in the automobile industry, where it is difficult and maybe impossible to judge from the behavior of the four major firms the nature of their ownership and direction.^[4] The two family firms (Peugeot and Citroën, which is owned by the Michelin family) are respectively the most and the least profitable, respectively the most efficient producer and the most daring product innovator. The limited liability company — Simca — has perhaps the least distinguished manufacturing record, though it has participated in the growth of output of the industry by means of aggressive domestic marketing. The nationalized concern, Renault, has innovated brilliantly in production and in foreign sales. But all have been helped by a demand which grew at the rate of 25 to 35 percent a year and provided a margin within which risks of innovation could be undertaken.

I am not, then, disposed to attribute any great responsibility for the periods of slow growth to the family firm, nor to attribute the present resurgence to changes in this institution. There is, of course, some

interaction between growth and the family firm in the postwar period of rapid technological change and increasing domestic investment. Inhibitions on the dilution of ownership through issuance of equity securities may slow down capital formation, just as the competition of public companies may have forced family firms to alter their policies on technical change. But basic causes of change cannot be found in the nature of the family enterprise.

On the Side of Demand

Population

It is a paradox that too little population growth is thought to have slowed economic growth in France — and in the 1930s in the United States — whereas too much population growth is inhibiting development in underdeveloped countries. But the reconciliation of the apparent conflict is fairly straightforward. When a country starts on the road to development, increases in income stimulate the net birth rate, generally by reducing disease through improvement of sanitation and medical care. The survival of additional young and old people lowers output per capita, reduces income available for investment, and slows the rate of growth on a Harrod — Domar model (compound interest based on increased savings). But in countries beyond the early stages of development, population growth may have a different effect. A static population may mean an excess of intended savings over intended investment, with unemployment, a reduced level of capital formation, and slower growth of capacity. Limiting children to a boy and a girl per family lessens pressure for mobility because children can follow parental occupations. Restricting investment to the level which will maintain the ratio of capital stock to a fixed population narrows the opportunity to incorporate technological improvements in the economy's assets. It is principally for these reasons, largely concerned with demand, that economic activity in a developed country is stimulated by expanding population — especially if the expansion results from the immigration of able-bodied workers or from the maturing of a new crop of babies to 15 years of age and more, rather than from an increase in the numbers of old people.

Since World War II both the economy and the population have grown at rapid rates. It is conceivable that the economic growth led to the population expansion, as occurs in underdeveloped countries, where development is accompanied by a reduction in infant mortality and improvements in public health which reduce the death rate. But in

France the causation almost certainly did not run in this direction. The net reproduction rate, which indicates the extent to which a population is reproducing itself, turned sharply upward from 1945 to 1946, well in advance of the rise in output. Table 7.1 shows the net reproduction rate over a period of nearly fifty years. A rate of less than 100 means that, under the conditions of female mortality and fecundity of the year given, the current generation will be replaced by a generation less numerous, and a rate higher than 100 means it will be replaced by a generation more numerous. The rate rose suddenly after both world wars, but in the second case it shot above 100 and stayed there, reaching the highest ground in at least a century and a half.

The question follows as to what was the cause of the population upturn — whether a simple (or complex) independent change of taste or a result of efforts of French demographers (especially Adolphe Landry) translated into the Code de la Famille of July 1939. The answer must be sought in timing, and, to the limited extent possible, in the differences in fecundity in different groups as affected by the family allowances.

On the first point — timing — it is generally believed that French interest in larger families took hold during the war.^[5] In the bourgeois quarter of Vienne, baptisms had been rising since 1936;^[6] and this would square with the very slight rise in the net reproduction rate from 1935 to 1939. But those observers, like Sauvy, who see the origin of the change as the adoption of family allowances at the insistence of the demographers can hardly be refuted by the fact that the upturn did not coincide exactly with the Code de la Famille. The Code itself had its forerunners, and significant effects were, of course, overwhelmed by the war and postponed until its end.

There is, however, a limited amount of evidence — and considerable opinion — to suggest that the change in attitude toward family size was not contingent upon subsidy. It would be desirable to have data by income group on the size of families formed since 1945. If such data showed that the lower income groups, to which the allowances provided a more substantial proportionate increase in over-all income, had experienced a larger increase in family size than higher income groups, we would be entitled to say that the family allowances stimulated the increase in fecundity. The available census data are of little use because they relate to existing families formed almost entirely before 1946.^[7] Data on net birth rates by French departments are misleading because of interdepartmental migration. More young people migrate than old, and this results in higher birth rates in departments of immigration and lower in those of emigration, without regard to birth rates by income groups.^[8] But there is evidence to suggest that the pre-World War II demographic pattern has changed drastically. In Vienne in the postwar period, bourgeois couples have had the largest families; the number of children per household was: bourgeois 1.46; workers 1.06; lower middle class (employees and small shopkeepers) 0.98.^[9] In a small sample of independent businessmen Pitts found that the number of children per family was well above the French average.^[10] And it is reported that in the poorest agricultural part of France the third child is always a mistake for which the "family allowances and premiums are never more than a consolation."^[11]

One can conclude, then, that the claim of Sauvy and the other French demographers that the family allowances produced the dramatic change in birth rates is not established. These allowances have doubtless had other significant effects in promoting child welfare and health. But the change in birth rate must be regarded as an independent change in taste. The question remains whether the change in birth rate has produced the French recovery.

It is certainly possible to regard it as an important remote cause, if not the proximate cause. The rising tide of youth has impressed on the French — government and public alike — the necessity to bestir themselves to achieve growth. This was by no means the only such stimulus; the humiliation of France in 1940 after the sorry record of the 1930s could equally produce a resolve for more effective economic performance. Nor did the birth rate provide the mechanism for growth. But the wave of children has modified French attitudes toward family life and toward social, regional, and occupational mobility; has led to an insistence on more housing and schools; and has reduced the resistance to economic growth of static elements in the society. The change in population growth rates contributed to economic growth but was not the sole basis for it.

Social Changes

The discontinuous change in population growth calls attention to the possibility that the change in the rate of economic growth may be attributable to wider social changes of which the step-up in the net reproduction rate is only one aspect. The economist is in no position to evaluate the quantitative importance of this sort of change. The purpose here is only to show how social attitudes and circumstances may have inhibited economic growth in the past, and, having undergone change, how they contribute to it at the present. Only two aspects will be discussed: values and social tension among classes.

It has long been observed that demand for mass products has been held back in France by French interest in elegance in consumption. Handwork was preferred to the output of machinery. The intense interest in individuality in consumption has kept Sèvres porcelain and Gobelin tapestries going today. In less durable goods the Paris dress industry provides the classic example, unless it be the French interest in good food and wine, which not only diverts demand to labor-intensive output but also slows production for several hours in the middle of the day.

Pitts attributes the French interest in quality to the long survival of aristocratic values, in particular the concern for prowess — the unreproducible act, whether of art, valor, sport, or craftsmanship. To these values were added the dynastic interests of the bourgeois classes, anxious to perpetuate the "extended family" and hence to amass savings; and the coexistence of quality consumption and a high propensity to save left little room for broad markets for consumers' goods. It is significant that in 1913, when France was the leading automobile producer in Europe, with a production of 45,000 cars, most of them were built to customer specifications and half the output was sold abroad, mainly in the United Kingdom. The country which originated the department store failed to adopt it as widely as did the United States, United Kingdom, and Germany, or to accompany it with the chain store or multiple shop.

The lack of demand for large-scale production is also partly explicable in class terms. With wide social barriers, one saved if one were ambitious to become a bourgeois, but the great mass of workers and peasants had little interest in owning durable goods, beautifying their houses, educating their children. Peasants saved to buy more land. The rise in workers' incomes went into meat and wine to give France the highest per capita consumption of these products in Europe.

Postwar recovery has been caused — or at least accompanied — by widespread interest in consumption of durable goods. The phenomenon is by no means restricted to France; it affects all of Western Europe. But

it is perhaps most striking in France, where it is intimately linked to the change in the family from the "extended" to the "nuclear," and the change in the reproductive pattern. Instead of living for the future of the dynasty, French people today seek enjoyment, including enjoyment in children. Rudimentary facilities for consumer credit have developed to assist in these gratifications. In bourgeois circles, there is probably less personal saving than before.

Along with the revaluation of mass consumption, France has undergone a change in attitude toward work. Partly this involved an abandonment of the aristocratic value system which disdained work in general, and particularly accorded an inferior status to selling, which would involve submitting one's worth to the whim of a customer. More generally perhaps it may have grown out of changed attitudes inside and outside the family. To refer again to the views of Pitts, the tensions of the extended family induced a polar change in behavior when men escaped from the family scene into business. There they constituted a "delinquent peer group," defiant not only toward home but also toward customers, potential competitors, and especially toward government. (By contrast, in the United States the tensions of school and business produce — in the home — the immoderate behavior of children and the relaxed attitude of breadwinners.) But with a change in the family structure to the nuclear unit created for enjoyment rather than dynastic continuity, there is said to have been room for converting the business enterprise from a delinquent community into an outlet for creative energy and accomplishment.

As for social tensions, the uneven economic development of France in the past has been explained by a number of observers in terms of the inability of the French to resolve deep divisions which extend beyond the politics of, say, the Dreyfus affair and embroil important economic interests. "The history of the Second Empire is in good part illustrated by the struggles of rival financiers."^[12] France had two capitalisms, one producer-oriented, family-oriented, Catholic; the other financial, speculative, Jewish or Protestant. The speculative group appeared to oppose the family-oriented group's values and structure, but used them for its own ends.^[13] The economic history of France from 1830 to 1880 can be written as a struggle between the grande and the petite bourgeoisie .^[14] Or the period from 1850 to 1939 was characterized by successive wars between the traditional economy and industrial society, with the petty bourgeoisie first on one side, then on the other. In this combat there was insufficient pressure from population, from foreign trade, from the new national market, and from spectacular and sudden rates of growth, permanently to alter the patterns of traditional and petty bourgeois resistance.^[15]

These views tend to be rather vague on the mechanism by which growth is held back. Some observers point to the family firm, which we have discussed. In a few cases the mechanism is said to be inflation, caused by distributional difficulties coupled with economic and political power. It is therefore appropriate to examine the theory that social divisions have caused inflation and that inflation has had a decisive effect on growth.

It is true that a small burden laid upon a society can cause inflation and inhibit investment and growth if there is difficulty in agreeing on how the burden should be shared among income groups and if each income group has some power to resist an undue portion of the burden being imposed upon it. If labor has power to raise wages and industry to increase prices, and if agriculture is prepared to withhold supplies when its prices rise slower than the prices at which it is buying, inflation is inevitable. This inflation will continue until the whole burden has been imposed on the pensioners, civil servants, rentiers, and other classes with fixed incomes. The power to resist burdens need not be narrowly economic. If police and civil servants go on 24-hour strikes when the cost of living rises precipitously in advance of their pay scales, or wine growers blockade Route Nationale 117 as a response to higher costs, higher taxes, or lower subsidies, the spiral mounts. Monetary theorists insist that a condition of inflation is that the money supply expand, and that inflation could be stopped if the central bank willed it. But this assumes away the problem created by the fact that the separate classes have enough power to prevent the burden from falling on them; industrial loans expand when wages rise as a result of strikes which in turn stem from the increase in the cost of living. To say that loans should not expand is to change the condition of the problem which arises from the capacity of industry, through its social and political power, to overcome any tendency to restraint which would force the weight of the burden on it, just as the threat or actuality of strikes prevents it from falling on industrial labor. On occasion the social struggle to fend off a share of the burden will take the form of a budget deficit as laboring and agricultural classes insist on governmental spending and all classes refuse to vote taxes, and industrial owners and professional classes refuse to pay those direct taxes which are levied on them.

But the main vehicle of inflation is the market, and inflation came to an end not so much through a change in monetary or fiscal policy as from a change in market power. When a good harvest and foreign aid destroy the capacity of farmers to raise prices by withholding supplies, the inflation comes to an end with a part of the burdens saddled on the farm sector. Thus the bumper crop of 1950 and the subsequent agricultural expansion broke the back of French inflation and reduced

agriculture's share of national income from 25 percent in 1949 to 14 percent in 1952.

But although inflation in France has been a symptom of social disharmony, revealed in persistent deficits and monetary expansion, it has not been harmful to growth. Nor, probably, has it helped. The growth of the 1850s and that of the 1920s were both accompanied by inflation, just as that of the late 1940s and early 1950s up to 1953.

Some of the deep social fissures in the nineteenth century are thought to have slowed growth in specific ways other than inflation; the hautes banques pulled down the Crédit Mobilier in 1868 and the Union Générale in 1882, and killed the Freycinet Plan of 1879 for investment in feeder railroads, canals, and roads. In the 1930s, the economy was crippled by the clash between the extremes of Left and Right, culminating in the Stavisky riots, the sitdown strikes, and Matignon agreement which humiliated industry. But there was also little social cohesion in the postwar period; yet growth began anyhow. Business groups emerged from the Vichy period in national disgrace.^[16] Small businessmen and tradesmen fought against the collectivity in the Poujade movement. Peasants' dissatisfaction with their economic lot, expressed especially in the demonstrations and riots of 1961, has been continuous since 1952. The Algerian question has divided the country as nothing has since Dreyfus. All this without halting expansion. For in the postwar period the concern for expansion — stimulated by technocrats in government — has been dominant.

There is some evidence that economic growth has helped to narrow social divisions, but not much. The Frenchman is said to feel himself still disfavored, despite a 43 percent increase in per capita income between 1949 and 1958; and people are not happy.^[17] The working classes have more material comfort, but their condition of life remains sharply differentiated from that of the bourgeois — except perhaps in the size of their automobiles. Tradesmen, farmers, and to some degree the petty bureaucrats have not done as well as the bourgeoisie and the industrial worker. They do not oppose the rise in the standard of living but are disgruntled that they do not fully share it. Particularly disaffected is the progressive farmer, who has changed his way of life as a producer, only to find, with falling agricultural prices on a saturated market, that he has taken on fixed service charges for his machinery which his enlarged output cannot help him to discharge because of the inelastic demand.

On the whole, then, France has adopted new attitudes toward the family and toward production and consumption, but without fundamentally altering class divisions and the mistrust felt by the individual for other classes, for other individuals, and for government as the

embodiment of others. That the change in values was important in producing economic growth is likely but impossible rigorously to demonstrate. The unimportance of class antagonism as a general inhibition on growth — so long as all classes agree on the desirability of expansion — would appear to be established.

On Institutions

When one turns from factors of supply and demand to the institutional arrangements governing the organization of production, he must acknowledge that the distinction is trivial. Institutions are outgrowths of underlying facts. The view that French economic growth has been held back by monopoly and monopolistic behavior is closely related to the view that it has been held back by the family firm.

The institutions that need close examination here are, first, the organization of the market, and second, the government.

Market Organization

Two schools of thought may be distinguished in the field of market organization. The first is an outgrowth of the argument about the family firm: it holds that industry was small-scale and non-competitive, or that such large-scale industry as existed held back from competing with small firms in the interest of high profits and social stability. The other school holds that industry was dominated by large-scale monopolies which restricted production and held up prices. In both cases the emphasis is on the structure of the market rather than on that of the firm. The first version, however, would expect an improvement in competition and productivity from bigger units. The second would not.

The version that better fits the facts is the one that rests primarily on the existence of inefficient small units protected by the unwillingness of the large to compete. Industries dominated by large firms have done better on the whole than those in which the average size was smaller.^[18] Much of the French economic literature falsely identifies large firms with concentration and small with competition, whereas it is possible for big firms to compete, as the automobile industry reveals, and for small-scale industry to maintain prices or standard markups, with resultant overcapacity and waste where entry is free. But even where this identification is correct, as it may sometimes be, the monopoly embodied in large-scale industry has not held back growth since 1945, whatever its prewar record.

Price maintenance by agreement (open or tacit), refusal to compete through innovation, insistence on protection in the home market — these are the earmarks of what the French call "Malthusianism."

Malthusianism is the principal cause of the lag of the French economy. Industrialists and agriculturalists have always been haunted by the specter of overproduction and have feared a collapse of prices. To protect their interests they are organized into coalitions. These have as their purpose to maintain production at a relatively low level and to assure high prices for sales. They thus assure survival of the least profitable units . . . and occasionally even require the state to finance activities which have no interest for the national community . . . Mechanization and rationalization are held back; investment is limited . . . Prices are no longer competitive with foreign prices . . . Since the national market is limited, the forecasts of overproduction become justified along with the Malthusian measures which the industrialists and the agriculturalists demand.^[19]

There has been an increase in the readiness of French industry to compete. This new attitude has appeared primarily in large-scale industry and reflects partly a change in attitude toward small French business. Rather than restrict production and hold a price umbrella over the heads of small firms in the interest of social stability, large-scale business now believes that its interests lie in lower prices, expanded output, and wider markets. Reduced profits per unit of sales will be more than made up, it is thought, by enlarged sales. And the Common Market provides a convenient cover for this change in attitude by large firms toward their inefficient compatriots. If small business succumbs to competition when tariffs are eliminated within the European Economic Community, it will look as though foreign enterprise, not French, wielded the weapons that destroyed it.

But the change in attitude goes wider. French business has lost its inferiority complex vis-à-vis foreign competition. Experience in steel in the European Coal and Steel Community, and in the metal, automobile, chemical, electrical and even the textile industry has persuaded efficient French firms that they can hold their own in competition with the best that the rest of the Common Market has to offer. It is sometimes suggested that the acceptance of the Common Market by French industry is no indication of self-confidence, because tariff barriers are going to be replaced with cartel agreements. There have indeed been numerous business agreements, mainly with a view to settling on different specialties for large-scale production by long factory runs. But European business is too well versed in the history of these agreements to depend on the forbearance of foreign rivals; such agreements are not respected unless they are between equals. Despite the industrial agreements, therefore, French entry into the Common Market signifies willingness to compete at home, and capacity to compete abroad.

Malthusianism has gone, or been very much reduced. But what has produced this result? Not an independent change in the size of firm, not capital investment, not an increase in domestic and foreign competition, though these changes are associated and related to one another and in sum represent the end of Malthusianism. A major change occurred in technology, including innovations in both process and product. And this technological change, latent in French technical capacities, was the outcome of deep-seated social and value changes.

Government

Intimately related to social cohesion and division, on the one hand, and to market organization, on the other, has been government, the focus of myriad French forces and ambivalent attitudes. Although government has occasionally taken a positive role, as under the Second Empire, its normal function has been to operate to maintain social stability in the face of divisive forces. Individuals, firms, and social groups curse the government for its favoritism to others and appeal to it for assistance to themselves.

Warren C. Baum has studied the postwar record of government and found it poor.^[20] He particularly attacks the inconsistencies and contradictions in policy. Government tried to improve efficiency and yet to maintain inefficient small firms and small farms. In providing security it discouraged output. In taxing sales on the forfait system, it encouraged high markups on low turnover with bad effects on the price level and efficient distribution. Rent controls inhibited building and limited labor mobility. The regressive system of social security taxes both raised manufacturing costs and had the effect of making the laboring classes pay for their own security.

An effective case can be made that French tax reforms have consistently been in the direction of encouraging private modernization, expansion, concentration, and adaptation.^[21] Much of this occurred after the period covered by Baum, and during or after the strong upsurge of recovery from 1953 to 1958. Baum's book, suggesting that the state has made it impossible for France to grow (most of it written in 1953), appeared in 1958 when the rate of growth was very high. Its more important weakness, however, is that government seems to be viewed as an independent organization outside the economy, whereas government is really a reflection, direct or distorted, of the contradictions embedded in the social fabric. French tariff history in recent years has reflected the same unresolved conflicts in that there have been tariffs for all — on foodstuffs and home-grown raw materials, for farmers, and on

industrial products, for manufacturers. As already indicated, inflation is an escape from the dilemmas implicit in sharing a burden, not a result of ignorance of monetary or fiscal policy.

Not only does government intervene internally. It is the instrument of foreign policy. Government and the country may make a success or failure abroad through ineptitude or excessive ambition. Here the postwar record is not distinguished, whether in Indochina or Algeria, or in France's share of NATO's defense of Europe. Large sacrifices have been imposed on the country and French allies alike, without substantial achievement, as concern for French greatness has outstripped capacity. But these failures have not had disastrous consequences for economic growth.

Two important discontinuities have occurred in government policy, one a decision to resist further centralization of control and activity in Paris, and the other a return to an ancient practice of government planning and investment.

All the French literature — produced partly by economists but mainly by geographers — has denounced the centripetal pull of Paris. Because of Louis XIV, or Napoleon I, or the layout of the railroads, or whatever factors, Paris is thought to have drained the rest of the country of vigor, capital, and opportunity. The Bank of France is stated to have taken steps as late as 1930 to centralize bank credit in Paris.

During the last quarter of a century this centralizing tendency has altered. In the late 1930s, the program of dispersal of aircraft manufacture helped; the transfer of more than one plant to the provinces (for example that of a Renault parts plant to Le Mans) may have been due to an urge to escape the Popular Front. But the real discontinuity occurred during the war. The division of France into the Occupied and Unoccupied Zones required initiative outside Paris. Moreover, a series of studies by geographers^[22] formed the basis, after their publication in 1945, for a vigorous program of government support for investment outside Paris, especially after 1953. The attraction of Paris for economic vitality and brains has by no means been destroyed; local talent is still being seduced to the capital, and certain regions of France remain unattractive for private investment. Nevertheless, expansion is most rapid in a few towns of great tourist attraction, like Annécy; and Lorraine, the Nord, and the Dauphiné are leading French economic growth.

There remains, however, a large question how much of the growth of economic vitality outside Paris is the result of government policies, and how much of it is spontaneous. Separate influences are, of course, impossible to disentangle. Policy changed, and the facts changed, but whether the policy change was responsible for the alteration of the facts is impossible to say with any finality. Both may have depended upon the

rise in economic energy throughout France. In the 1920s, it was easy to identify the expansion of the North with the governmental policies of reconstruction in that devastated area. After World War II, the most that can be said is that the conscious decision of government to reverse the concentration of economic decision-making and vitality in Paris either produced the geographic decentralization or was the product, along with that decentralization, of the revival of economic energy in France.

Government planning and investment were a new departure, at least since the defeat of the Freycinet plan in 1882. Their roots, however, lay deep in French culture in Saint-Simonism, the technocratic view which found favor with Napoleon III. In the emperor's view, government was not an ulcer, but a motor, and his early support for the construction of railroads, canals, telegraph facilities, ports, and roads, and for the rebuilding of Paris, Marseilles, and Le Havre set the stage for the period of rapid growth from 1851 to 1857 and even to 1870. His letter to the Minister of Commerce published in the Moniteur Industriel of January 15, 1860, outlined a plan for the economic development of France eight days prior to the unpopular Anglo-French treaty for tariff reduction, imposed by decree in opposition to the majority of the French Parliament. The Freycinet plan represented similar Saint-Simonian tendencies under the Third Republic, though it was defeated by the bankers; and Michel Augé-Laribé insists that "everyone knew what needed to be done for agriculture in 1880 — better methods, fertilizer, seed selection, irrigation, drains, roads, cheaper transport and education — but it did not get done, even slowly."^[23]

Although the Monnet Plan thus represented an ancient tradition, the vigor with which it was carried out and followed up by the Hirsch Plan and subsequent ones was new in French governmental annals. I shall explore presently the forces that gave rise to this burst of energy, which was felt earliest in the nationalized coal, electricity, gas and railroad industries, in the nationalized Renault automobile firm, and also in steel. The Monnet Plan, with its variety of controls and financing techniques, has been said to have raised the level of investment without overexpanding basic capacity. But the level of investment which France could maintain was much higher than it would have been in the absence of the Marshall Plan and other aid from the United States, such as the Export-Import Bank loan of 1946. Of course the possibility exists that this aid supported France's overseas wars rather than recovery, and that without it defense expenditure would have been cut back rather than investment.

Government, apart from its intervention in investment, may have made some contribution to economic recovery after the war by means of

economic policies in other lines — but this is more questionable. The monetary theorist may contrast the Laval deflation with the Rueff stabilization plan of December 1958, or the 40 hour week under Blum with the policy of forced mergers under the Monnet Plan. It is dangerous to push the contrast too far. The French economy began to pick up after Munich when the Reynaud government took office. This was partly attributable to defense spending, though mainly to the removal of unwise policies which held back production. On the other hand, it is hard to find sound governmental policies in the early postwar recovery period, except on investment. Monetary flaccidity, along with the policy of a prize for every group, permitted inflation. The devaluation of 1946 was unsuccessful. Inflation was halted more by foreign aid and a bumper harvest that by Pinay's policies. And with all respect to the Rueff Plan, which was a model of its kind, the devaluation and stabilization of 1958 were successful because of the recovery that had taken place rather than responsible for it. There is no justification for attributing great significance for French recovery to these monetary policies, which tidied up but did not build.

In brief, governmental policy is an expression of social and political consensus or its absence. It is naive to blame contradictory, muddled, or inept policies on the intelligence of members of the government rather than the political matrix in which the government operates. With his superior vision, Paul Reynaud may have advocated policies which hindsight rates as far superior to those adopted. But it is almost as much of an error to be in advance of the times as behind them. And few are the Churchills with the luck and leadership to have the bankruptcy of other views demonstrated in time.

French Recovery

This recital of alleged causes of economic backwardness has dismissed lack of resources, labor, and capital as causes of French economic backwardness, and has found no profound independent change in the French family firm which would account for the postwar revival (or for the earlier periods of rapid expansion). More interest attaches to the demand side — to the independent change in rates of population growth which occurred during the Second World War and to the change in French attitude toward levels of living. Market organization was found to be a dependent rather than an autonomously changing variable, and government too was largely dependent since it and its policies reflected the national consensus in the economic field or, as under the Second Empire, reflected the seizing of power by a strain of French thought

normally in the minority. It remains to examine how French attitudes toward growth changed, whose hands carried out the new consensus, and what modalities were used. But before we get to these topics it is important to address one significant ingredient of growth which has not been blamed for French economic backwardness — technical capacity. Economists are increasingly persuaded that economic growth is a process less of accretions of capital, labor, and new resources in a given state of the arts than of technological change.

Technological Change

It was the insight of Joseph Schumpeter that focused attention on the role of the entrepreneur as the introducer of new techniques. But after the Schumpeterian view of development had given way to the Harrod—Domar view that growth was the result of substituting capital for labor, a number of statistical investigations found much more growth than could be accounted for by the expansion of capital, and attributed it once more to technical advance.

As Schumpeter pointed out, technical change requires invention and innovation, the latter consisting of transforming new processes or new products from ideas to economic realities. Frenchmen claim that they are more effective at invention than at innovation. William N. Parker goes further and suggests that French intellectuality in the Cartesian tradition produced inventions of wide adaptability whereas British empiricism and especially German method yielded industrial secrets of immediate local usefulness.^[24]

This is evidently too complex a subject to the dealt with summarily. It is fair to say, however, that France was technologically very backward at the beginning of the nineteenth century. At this time French technical progress was clearly differentiated from British, being inspired by government rather than spontaneous and private, and it was in response to the British example and the competition it provided. After the Napoleonic wars, French businessmen flocked to England and undertook a mass imitation of British methods, assisted after 1828 by the removal of the British embargo on machinery exports.

The British technological lead over the world was at its biggest at the time of London's Great Exhibition of 1851, and was especially pronounced in textiles, iron, and railroading. It did not exist in all fields, however, nor was it maintained long. The major competition came from Germany and the United States; but even in France, by the 1880s, successes in industrial technology were being achieved in locomotives, glass, jute, shipbuilding, chemicals, and, of greatest importance, steel.

Even so, French technology was not distinguished on the whole, either prior to 1914 or in the interwar period. Believers in the family firm as the cause of economic retardation are persuaded that this institution is notoriously slow to take the risks involved in innovation. French business was riddled with secrecy, which provides exactly the wrong atmosphere for technical progress. Innovating firms must exhibit a willingness to absorb a large quantity of technical information, survey potential ideas, be willing to share knowledge, to look outside the firm, and so on.^[25] The distrustful family firm hardly fits this picture. Pitts has gone further: "To change the industrial secrets of the firm which have been taught to a few is like withdrawing the sacraments from a communicant."^[26]

The period since the war has brought significant change in the French technological performance. The success in solving the desulfurization problem at Lacq has been mentioned, as have the innovations in the automobile field from the DS19 and the 2CV to the Dauphine and 404. Renault developed its own machine-tool production in an effort to acquire modern automatic machinery for automobile production, and in so doing created a new machine-tool industry in France. The Caravelle is well known in aircraft, as is the Mystère. A brand new firm, Bull, has risen to international prominence in computers. French railroads have set new technical standards for the world, including the feeding of electric current into locomotives at 20,000 volts, so as to eliminate the need for stationary transformers. Electricité de France, in placing orders for power-generating equipment, has continuously raised the technological standards until by 1958 it was generating power and transmitting it to Paris from Genissiat at 380,000 volts.

Cameron exaggerates when he claims that French industry played a large role in spreading economic development to the rest of Europe in the nineteenth century.^[27] The technical contribution was almost entirely limited to civil engineering and mining, two fields in which French education at the Ecole Polytechnique and the Ecole des Mines was particularly distinguished. Today, however, French engineers are spread all over the globe on a variety of technical tasks. In the short space of 15 years, French engineering has risen from a European substandard to the equivalent of the world's best.

French technical virtuosity in the postwar period has been largely overlooked. British economists, for example, were disposed to attribute the fact that France's economic growth was faster than Britain's to the forced-draft investment by the "secret government" represented by the permanent civil service, which investment could be undertaken because all mistakes were underwritten by United States aid. German monetary theorists, and their sympathizers, considered that French economic

recovery was achieved by the Pinay and Rueff policies of deflation. But technical change is to a considerable degree independent of the level of investment, as demonstrated by British experience of investment without technical flair, and expanding in technically advanced lines may be said to have made deflation possible, rather than the other way round. The discontinuity in French technical performance is an important causal factor which, like the changes in population growth and in social values, can be traced back to the war.

War and Economic Change

One economic theorem holds that war on a considerable scale reinforces economic trends already under way. A growing country will grow faster, as the United States did during and after World War I. And a stagnant economy will continue to stagnate, as Britain's did in the 1920s. But the postwar French recovery on top of the spreading collapse of the economy in the 1930s provides a contrary case where the direction of economic change was reversed.

There are also other cases. German interest in nationalism, and indirectly in national economic development, dates from the defeats inflicted on Prussia by Napoleon. In turn the German victory over Denmark assisted that country in transforming itself from a grain producer to a major exporter of animal products. Even the French economic expansion after 1896 is linked to the defeat at Sedan and the 1871 Treaty of Frankfurt — for one leading industry, woolens, was developed at Elbeuf by refugees from Alsace;^[28] the discovery of new iron deposits was the result of exploration undertaken to compensate for war losses; and the growth of Lorraine, and the steel industry there, was stimulated by the pressure of refugees and the need to make up national losses. The time lag was long, until the Gilchrist Thomas process was developed and the technological difficulties at Briey were overcome. But the association of this expansion with defeat in 1870 is not altogether farfetched. The classic example, however, is Germany's economic revival after World War II. More ambiguous cases are furnished by Italy, which was and was not a defeated country, and by France, whose war was even more anomalous.

On this showing, defeat may be a greater stimulant to economic expansion than victory. The case is not clear-cut, as the example of the United States after World War I demonstrates. Nor is the stimulant of defeat a simple phenomenon. Part of the explanation is the purging effect of war's destruction, which assists development by making it possible to build new plants embodying the most modern techniques.^[29]

But this is not all; the humiliation of defeat — and in the French case, defeat without the satisfaction of having made an effective stand — may destroy old values and induce a country to sublimate in ways which are conducive to economic growth. Refugees who have lost their possessions are particularly ambitious in these respects, as suggested by the Alsatian migration and the more recent influx of East Germans into West Germany. But even without a particular class which seeks to compensate for its losses through economic success, a country may undergo in defeat a change of values which releases its energies for economic advance.

There were, of course, contributing factors which turned French interest after 1940 to economic expansion. Ideas were contributed by the success of the Russian experiment, the New Deal in the United States, and even Swedish Socialism. Pierre Lalumière believes that the most important intellectual change was the discovery of Keynes by the Inspection des Finances.^[30] It is necessary to point out that Keynes was concerned not with growth but with stability. On the other hand, the "discovery of Keynes" can be taken to mean the change of attention from problems of monetary stabilization — which had occupied Aftalion, Rist, and Rueff — to concern for real output. The point is well made.

The ancient formula of social stability made no sense in a world of French defeat and possible nuclear holocaust. Living for the future led nowhere. it was time that France turned from balancing social forces to expansion which would hopefully spill over to all groups.

The New Men

Who were the new men called for by the Schumpeterian system to lead the expansion? A number of different answers have been hazarded. In one view they had existed all along, buried in the business staffs of 1935–40. Or they emerged from the experience of Vichy, which developed efficient business administrators like Pucheu, or from German occupation. The difficulty here is that business finished the war thoroughly discredited in French public opinion from its opposition to the Popular Front, its support of Vichy, and its failure to participate fully in the Resistance. Or they thrust themselves forward from government, not from the ranks of politicians but from the civil service.

One thesis is that the Inspection des Finances was the focus of change. Great numbers of the men in the Inspection left government for industry. These civil servants, who are said to have admired businessmen but not politicians, went largely into finance — either into banking and

insurance, where their financial training was particularly useful, or into the financial side of large industry like automobiles and chemicals. Moreover, most of the members of the Inspection who remained in government had long since given up the narrow auditing function for general administration, and operated not in the Inspection but throughout the government. By 1955, approximately 170 members remained in the agency, and 109 of them were on detached service: 26 in the nationalized banks, 11 in other nationalized industry, 26 in international organizations, 30 in the regular ministries, and 16 in other governmental jobs.^[31] (Those in non-economic international organizations were able to contribute only marginally to French economic development, and many of those in the ministries were concerned with non-economic problems of foreign policy or defense.) Lalumière regards the Inspection des Finances as "alone or almost alone" as an active group, in the middle of general French inertia.^[32]

But this view attributes too much credit to the Inspection des Finances and underestimates the change which occurred elsewhere in the economy. Assume that there were 50 or 60 inspectors inside the government and concerned neither with auditing nor with noneconomic administration, plus an equal number of alumni outside. To ascribe the vigor of the French postwar recovery to these men alone is excessive. The French civil service as a whole, or at least that portion of it which had not followed de Gaulle abroad, emerged from the war rested, fresh, ready for a fast start, in contrast to British governmental employees, who reached VE day fairly exhausted from almost six years of overtime. The entire French civil service, and not only the Inspection des Finances, had time and opportunity to reflect on the deficiencies of French economic and social life prior to 1940.

But more than the civil service was involved. The change in attitude toward economic expansion was universal in France. The proof is that the net reproduction rate moved in a big jump in violation of normal causation as recognized in social science. There was vigor in many sections of society: in the Resistance leaders themselves; in the Communist Party which organized the revival of coal production; in the neo-Catholic Centre des Jeunes Patrons; and among geographers. Economists organized the Institut Scientifique d'Economie Appliquée with its focus on national-income accounting. The Confédération National de Patrons Français gradually abandoned its protective attitude toward little business. The family firm looked for outside help. One significant index: the demand for youth in business expanded rapidly. The Ministry of Labor stated in 1951 that the top hiring age for middle-rank executives (cadres ) declined from 60 in 1898 to 50 in 1945, 45 in 1950, and 40 in 1951.^[33]

Nationalized Industry and Planning

It remains to evaluate the role in French economic recovery of the "planning" carried on by the Planning Commission under the initial direction of Jean Monnet and later under Messrs Hirsch and Massé. A certain mystique has collected about this effort; in particular the British, conscious of the wide gap in postwar expansion between their country and France, have sought to find in planning the force responsible for French success.

There can be no doubt that the French government has controlled a large proportion of the French economy. Approximately 30 percent of national income has gone through government hands in the form of taxes. Nationalized industry was responsible for half of total investment. But the scope with which government operated to direct the economy was much wider than that implied by its tax receipts and the income of nationalized enterprises. The Planning Commission affected the operations of private enterprise in ways which were almost as pervasive as those of nationalized industry, and in some cases equally so.

Nationalization may have been necessary to French postwar economic recovery, though this is dubious in the light of the general public interest in expansion. Alone it certainly was insufficient to bring the recovery about. The British experience is relevant as a touchstone. Productivity increased much more in the nationalized French coal, electricity, and railroad industries than in the similar nationalized industries in the United Kingdom. Nationalization need not spark technological change.

Moreover, the extent of control over industry deriving from governmental ownership is debatable. The first five-year plan called for expansion in six key sectors: coal, electricity, transport, steel, cement, and agricultural machinery. Only the first three were nationalized. And the government contributed finance to private industry through the various funds for modernization and equipment, as well as underwriting the large deficits of the railway system and providing huge capital sums for electrical construction. Ultimately, to be sure, Electricité de France sold its obligations in the capital market much like a private company, although it had a state guarantee. And Pierre Lefaucheux, the dynamic leader of the Régie Renault, "recalled unceasingly as much by his action as by his intervention and speeches that if the Régie belongs to the state, it is in fact administered in the same fashion as a private enterprise."^[34] The quality of leaders — Massé in electricity and Armoud in railroads, along with Lefaucheux — was more important than state ownership.

If not nationalization, then what about planning? In 1961 the British suddenly awakened to an interest in French planning, hoping to find in

the techniques a secret of growth that could be applied to the sluggish British economy.^[35] The hope, unfortunately, is doomed to frustration. French planning is in some important respects the opposite of planning. Knowledge of income and industry projections and faith in the inevitability of expansion are communicated to firms at intra- and inter-industry meetings. This is perhaps the most powerful effect, and one which has a faint resemblance to a revivalist prayer meeting. In addition, and importantly, the Planning Commission uses a series of controls — powers to fix prices, adjust taxes, control credit, lend governmental capital, and authorize construction — to encourage firms to expand.^[36] There is far more stimulation than restraint. But levels of output are decided by the individual entrepreneur, not by planners; and profit anticipations have ultimate power of decision. Industry projections are fitted into national-income accounts as a check against their logical consistency, and even measured against input — output tables. These operations, however, have exhortatory rather than regulatory results, unless they imply an absence of stimulation.

The fact is that French planning is empiricism. The total polity is bent on expansion. This fact is communicated to all corners of the economy, expressed, so far as possible, in terms of numbers. Given the underlying faith in expansion, the numbers tend to confirm themselves, within limits. Where a sector or industry falls short, one weapon or another may be employed to help. The French insist that their planification is flexible (souple ). This comes close to a contradiction in terms. There is little dirigisme in the system, and much readiness to proceed by whatever paths lie open. The roles have been reversed from the nineteenth century when the British were the pragmatists and the French were doctrinaire.

Much is made in the recent French literature of the "technocratic" character of the expansion. In some quarters this spirit is identified with James Burnham's "managerial revolution" in which the bureaucratic employees have interests different from those of the owners, the workers, and the consumers.^[37] This hardly fits today in France. To the extent, however, that the term can be taken to refer to a society in which all groups are interested in expansion, partly by capital investment but primarily through technological change and increased total productivity, the characterization is apt.

The technological character of French expansion is one further proof of the unimportance of planning as such in French postwar expansion. Immediately after the war, planning referred primarily to investment planning, with implicit Harrod—Domar models of capital output ratios and the like. The growth of output was estimated from the growth of investment. The strong element of technological change in the expansion

was unplanned. It emerged, unexpectedly, from the French intellectual tradition and the nation-wide consensus on the need for economic expansion.

Conclusion

The economic recovery of France after the war is due to the restaffing of the economy with new men and to new French attitudes.

The opportunity for hiring new staff came from the discrediting of many of the existing leaders of the economy (whether in the prewar government or in Vichy), the passage of time with little constructive work taking place, and the upthrust of new energetic people in the Resistance and in the invading French army. Unlike World War I, the 1940s brought no widespread loss of youth which made it necessary to retain the prewar generation in economic command. The new men were found in private as well as nationalized industry, in family firms as well as corporate enterprises, in administrative positions as well as technical ones. Some of them had a "passion for innovation," some for expansion, all for efficiency of one sort or another, whether economic, engineering, administrative, or in terms of profit maximization. Dissatisfaction with the past led them to substitute change for stability as the operating guide.

New attitudes followed from the change in leading economic personnel. But the new attitudes went far wider. Not only did firms want to expand, but workers and consumers became willing that they should. The movement from the extended to the nuclear family, and to increased numbers of children, has been referred to. The causal connections between these sociological phenomena and the new staffing are not easily comprehended, but doubtless exist. And these new attitudes on the part of the public — at least in the social field though perhaps not in the political — seem to have had their origin in the frustration of the 1930s and the war and the occupation. Workers have become less revolutionary, more practical. The individual, or his parents on his behalf, has begun to be seized with more ambition for education and opportunities, and less for holding on to place, position, acquired rights.

To conclude that the basic change in the French economy is one of people and attitudes is frustrating to the economist. Natura non facit saltum (Nature does not make a jump) was Alfred Marshall's motto in the Principles of Economics . Marginal analysis, compound interest, growth as a function of fixed resources, evolving technology, and growing capital are more compatible with the economist's modes of reasoning. It is true that capital has grown, and technical progress has been

made, but these are accompaniments of a more far-reaching process, rather than exogenous variables.

Nor have the sociologists and economic historians furnished much in the way of explanation. The family firm and deep-seated fissures in the social structure fail to explain the rate of progress of the past, and exist even today when growth is again rapid.

The interest in progress is not new in France. Saint-Simon was a technocrat, and Napoleon III, Michel Chevalier, Eugène Rouher, and Charles de Freycinet continued in the tradition. When there was a clear view of the need to expand, whether responding to the destruction of World War I or taking advantage of the railroad, the Thomas process in steel, or the discovery of Briey iron mines, expansion followed. The present demand for economic growth at all levels in French society is different only in the extent to which various groups in society share in it. It has not been accompanied by a similar consensus in political matters. Whether its continuance into the future for a decade or a score of years will be self-perpetuating, as it has not been in the past, remains to be seen.