Do figures such as these provide a better explanation of yield spreads and fluctuations than anachronistic debt/GDP ratios? One way of answering this question is to test statistically the relationship between bond yields and contemporary fiscal measures. The results, however, are disappointingly ambiguous: only one out of six countries for which data are available for the period 1880–1913 evinced a strong positive relationship between the deficit/revenue ratio and the bond yield (France); in two cases (Britain and Germany) the relationship was actually negative.100 This is perhaps not altogether surprising. Measures of the sort described above exaggerated the debt burdens of industrialized countries like Britain and France, which had big debts but also big economies. On the basis of the debt/revenue ratio, only two countries in the 1880s (or four if only central government is counted for Germany and Switzerland) were as ‘creditworthy’ as Britain in the 1980s; and in the case of the other two – China and Bulgaria – their low debt burden primarily reflected their lack of access to domestic or international bond finance.101 In the same way, the Crédit Lyonnais ratings placed Russia – the biggest debtor in the world102 – in the ‘first division’ along with the United States but would, if rigorously applied, have put Britain in the second division along with Romania, Egypt, Austria, Hungary and Spain.103
The third explanation for yield convergence is that the rise in the number of states on the gold standard reduced currency risk as a factor in investors’ calculations.104 According to this view, adherence to gold standard was a signal of fiscal rectitude which ‘facilitated access by peripheral countries to capital from the core countries of western Europe’. Gold standard membership indicated that a country followed ‘prudent fiscal and monetary policies’. The exception that proved the rule was ‘a well-understood emergency such as a major war’; but if a country went off gold in such an emergency, the public understood that the suspension was temporary. The gold standard was thus a ‘contingent rule or a rule with escape clauses’; it delivered the benefit of lower interest rates at the affordable cost of balanced budgets in peacetime. To be precise, a commitment to gold reduced the yield on government gold-denominated bonds by around 40 basis points.105
There is, however, a difficulty with this analysis too: namely, the assumption that wars were ‘well understood emergencies’. The historical reality is that the period 1890–1914 was characterized by a growing danger of a war of unprecedented magnitude and unforeseeable duration between all the great powers. This was hardly unknown to investors. The Polish financier Ivan Bloch predicted as early as 1899 that ‘the immediate consequence of [a great] war would be to send securities all round down from 25 to 50 per cent, and in such a tumbling market it would be difficult to float loans’.106
How are we to explain the paradox of yield convergence at a level significantly below the average of the 1870s at a time of rising international tension? One possibility is that investors simply forgot what a full-blown political crisis could do to the international financial markets.107 In the 1980s, after all, ‘the guiding principle of Salomon Brothers in the department of customer relations’ was said to be that ‘customers have very short memories’.108 Table 15 above gives some indication of how that forgetfulness might have been encouraged in the four and a half decades between 1870 and 1914. Compared with the preceding forty years, the biggest political crises of that period had a markedly less dramatic impact on international bond yields. The French debacle of 1870–1871, for example, hardly influenced other countries’ bonds. The Eastern Crisis of 1876–8 also had a relatively muted impact on yields (though of course Turkish bonds were hit hard by default). Even the power of a revolution to alarm investors seems to have diminished over time; witness the 129 basis point rise in Russian yields in the crisis of 1904–6.
In the light of this tendency for political crises to have diminishing financial repercussions, a plausible hypothesis may be that investors grew over-confident. Like the liberal journalist Norman Angell, they came to believe that nothing – neither war nor revolution – could long disrupt the business of the world’s stock exchanges. ‘The delicate interdependence of international finance’ – according to Angell’s best-selling book The Great Illusion – meant that a war between the great powers had become more or less impossible.109 The illusion was all Angell’s of course. The historical significance of his book is that it shows how ill understood the First World War was on the eve of its outbreak.
On 23 July 1914 the British Foreign Secretary, Sir Edward Grey, warned the Austrian ambassador that a major war ‘must involve the expenditure of so vast a sum of money and such an interference with trade, that [it] would be accompanied or followed by a complete collapse of European credit and industry’.110 A continental war, he told the German ambassador the next day, would mean ‘total exhaustion and impoverishment; industry and trade would be ruined, and the power of capital destroyed. Revolutionary movements like those of the year 1848 due to the collapse of industrial activities would be the result.’111 The prediction of a commercial collapse proved accurate in the very short term; and Grey was also prescient about what would ultimately happen in East and Central European countries. What he and many others failed to foresee was that the suspension of gold convertibility and the expansion of domestic and international bond markets would suffice to finance a global conflict for more than four years.112
THE CRISIS OF THE INTERNATIONAL BOND MARKET: LESSONS FOR TODAY?
The convulsion that seized nearly all financial markets in 1914 forced stock exchanges all over the world to close. Even the London Stock Exchange did not reopen after the bank holiday of 3 August 1914 until the end of the year. Yet this did not spell the death of the international bond market. On the contrary, the First World War was decided as much by flows of capital as by spilling of blood. By 1917 Russia owed foreign creditors around £824 million.113 Italy and France too were substantial net foreign debtors.114 By 1919 Britain had lent her Dominions and wartime allies £1.8 billion, equivalent to 32 per cent of GNP, and had borrowed £1.3 billion (22 per cent of GNP) from the United States and other foreign countries.115 The US was a net creditor to the tune of more than $7 billion, around 9 per cent of GNP. The years 1914–18 were by some measures the historic peak of international lending.
Moreover, these immense wartime transactions were followed in the 1920s by a new wave of international lending. The mean value of net foreign investment as a percentage of national income for ten major economies fell only slightly from its peak of 5.5 per cent in 1915–19 to 4 per cent in 1920–1924, a higher figure than in 1910–1914.116 All told, international capital flows totalled around $9 billion between 1924 and 1930. Now, however, America was the world’s banker. Total long-term foreign lending from the United States between 1919 and 1928 amounted to $6.4 billion, of which more than half went to national and provincial governments.117 Just as the Rothschilds had lectured nineteenth-century foreign borrowers on the need to Anglicize their institutions, ‘money doctors’ like Edwin Kemmerer toured the world preaching Americanization in return for dollar loans.118
Yet signs of impending crisis were already manifesting themselves. The Bolshevik regime in Russia had enacted perhaps the biggest default in history after the October 1917 revolution, affecting bonds worth around £800 million. As in the Turkish and Mexican revolutions of seven years before, foreign creditors were soft targets for a radical new regime, particularly one avowedly at war with the bourgeoisie. Investors could hardly be oblivious to the pledges of Trotsky to export the Russian revolution to the rest of the world. Secondly, the new German Republic defrauded foreign and domestic investors alike by allowing its currency, and hence all government bonds denominated in marks, to depreciate to the point of worthlessness. The net capital flow into Germany between 1919 and 1923 may have been as much as 6 or 7 per cent of net national product; but much of the money foreigners put into German securities and currency was wiped out by the inflation: a form of ‘American Reparations to Germany’.119 Thi
rdly, many of the major international loans of the 1920s were, on closer inspection, designed to refinance pre-war sterling loans in post-war dollars.120 Fourthly, the flows from the principal lenders (US, UK and France) were significantly lower in real terms: in 1913 prices, the average annual outflow was just $550 million from 1924 until 1928, compared with $1,400 million between 1911 and 1913. Finally, short-term lending – ‘hot money’ – was significantly more important than it had been before 1914; and among the biggest short-term debtors were the principal net long-term creditors.121 The most striking thing about capital flows in the inter-war period is how quickly they were reversed – and with what devastating consequences.122 In the short run, capital withdrawals intensified recessions that had begun in most primary producing countries in the mid-1920s. But after 1931 defaults and devaluations led to major redistributions of resources from creditor to debtor countries.123 There were defaults by Turkey, China, most of Eastern Europe and all of Latin America.124 Bolivia defaulted in January 1931, followed by Peru, Chile, Cuba, Brazil and Columbia. Hungary, Yugoslavia and Greece defaulted in the following year, Austria and Germany in 1933.125 By 1934 all debtor countries except Argentina, Haiti and the Dominican Republic had suspended debt service.126
The purpose of this chapter is not to offer an explanation of why this collapse of the global financial system happened; the answer to that question is so bound up with the workings of the international monetary system that it properly belongs in the next chapter. The point here is simply that financial globalization did collapse. This raises two questions. The first is: could it happen again? The second is: was there a connection between the collapse of global finance between the war and the decline of Britain’s capacity to act as a hegemonic power, politically underwriting international financial stability through formal and informal imperialism?
GLOBALIZATION PAST AND PRESENT
Economic historians disagree about whether or not globalization today is greater than it was in the decade or so before the First World War. The answer to the question depends on which indicators they choose to look at – as well, perhaps, as which country they come from. A glance at the external debt/GNP ratios of big international debtors like India and Russia would suggest that the present and the past are uncannily alike: the ratios before 1913 were between 25 and 30 per cent, as they were again in 1997.127 However, few large economies today are as heavily reliant on foreign capital as Argentina was before 1914, when around half the capital stock was foreign-owned and current account deficits ran as high as 10 per cent of GDP. Between 1870 and 1890 Argentinian capital imports amounted to nearly 20 per cent of GDP, compared with a figure of just 2 per cent in the 1990s.128 As we have seen, the zenith of capital export was in fact the First World War, when the average current account reached around 5 per cent of GDP, compared with a nadir of 1.2 per cent in the years 1932–9. The figure for the period 1989–96 was still only 2.3 per cent.129
Table 17 gives some more comprehensive indicators of globalization, however. By these measures, it is clear that the global markets for goods and for capital are more open today than ever before. Merchandise exports amounted to at most 9 per cent of world GDP in 1913; the figure in 1990 was 13 and is almost certainly higher now.130 This reflects the fact that international tariff barriers are currently lower than they were in the early 1900s: it was the fall of freight costs more than liberal economics that boosted trade before 1914.131 Foreign assets were equivalent to around 18 per cent of world GDP in 1913; in 1995 the figure was an astonishing 57 per cent. The table also shows that capital exports declined far more drastically than merchandise exports from the 1930s until the 1960s. At their lowest recorded point, in 1945, foreign assets amounted to less than 5 per cent of world GDP. In other respects too, globalization today exceeds that of a century ago. Direct investment (as opposed to portfolio investment mediated through stock exchanges) is much greater now because of the growth of multinational corporations.132 Information flows are both faster and greater in volume, greatly facilitating cross-border investment decisions. What is more, this process could go further. According to the IMF, 144 countries still had capital controls on foreign direct investment in 1997, while 128 still regulated all international financial transactions.133 If such controls were to be dismantled, cross-border capital movements would get even bigger.
Table 17. Indicators of commercial and financial globalization
* * *
Merchandise exports as percentage of world GDP
Foreign assets as a percentage of world GDP
* * *
1870
6.9
1890
6.0
1900
18.6
1913
9.0
17.5
1930
8.4
1945
4.9
1950
7.0
1960
8.0
6.4
1970
10.0
1980
17.7
1990
13.0
1995
56.8
* * *
Source: Crafts, ‘Globalization and Growth’, pp. 26, 27.
On the other hand, the global labour market is almost certainly less open than it was a century ago. The first age of globalization witnessed two massive waves of migration, the first enforced, the second voluntary. By 1820 around 8 million Africans had been shipped as slaves to the Americas and the Caribbean. In the century that followed, no fewer than 60 million Europeans emigrated, three-fifths to the United States.134 Total net emigration from the United Kingdom alone between 1881 and 1890 was more than 3.2 million, around 7 per cent of the mean population.135 German emigration – 1.3 million in the same period – reached annual peaks in 1854 and 1881 of 7 and 5 per thousand of the population, or nearly 3 per cent for the 1880s as a whole.136 Ireland was, of course, the great exporter of people: total emigration in the 1880s was equivalent to 14 per cent of the population. Despite the relaxation of US restrictions in the 1980s and 1990s, immigration has still not reached the heights attained in the decade after 1900, when total immigration was equivalent to around 10 per cent of the population. (For Argentina in the same period the figure was a staggering 29 per cent.137) The US immigration rate in 1990 was less than a third of what it had been a century before.
This is a profoundly important difference between the past and the present, since it was migration that did most to reduce inequalities in incomes between countries in the first age of globalization. When flows of capital predominate, the gap between rich and poor countries tends to widen. This is because when humans move, the poor go to richer countries where labour is relatively scarce. But when capital moves, it tends to avoid really poor countries, not least because of the low productivity of their workers.138
For many commentators, globalization is a force for good, promising nothing less than ‘A Future Perfect’.139 The sociologist Anthony Giddens approves of the way economic globalization subverts not only the nation state, but also ‘traditional’ cultures and even the family.140 Yet there can be little doubt that free trade and capital movement without a proportionate volume of international migration are leading to unprecedented levels of inequality around the world. In 1999 the United Nations estimated that the assets of the world’s three leading billionaires were greater than the combined GNPs of the world’s poorest countries, the inhabitants of which number 600 million people. In the 1960s the richest fifth of the world’s population had a total income thirty times greater than the poorest fifth’s; in 1998 the ratio was 74 : 1.141 According to the World Bank, some 1.3 billion people now live in abject poverty, meaning on an income of less than $1 a day. And the way the world is going, the gap between rich and poor nations may widen further.142 If the first age of globalization saw a substantial measure of convergence of incomes, this age is seeing a pronounced divergence. Recent academic writing about the ‘first era’ of globalization
before 1914 has been haunted by the question: could there be ‘another backlash’ in the early twenty-first century, whether in the form of protectionism, xenophobia or even international conflict?143 But that is to presuppose that the ‘backlash’ will come from the developed economies.
Another qualification relates to the very different roles played by the hegemonic powers in the two eras of globalization. Significantly, those who believe the present is more global than the past tend to be Americans relying on mainly American data.144 But as Table 18 shows, British data tell a quite different story; and since Britain was the ‘hegemonic’ power of early twentieth-century globalization, these figures may be a more appropriate benchmark. British merchandise exports were equivalent to nearly 30 per cent of GDP in 1913 or 76 per cent of merchandise value added, compared with figures for the United States in 1990 of, respectively, 8 and 36 per cent. American economists argue that exports of services are more important now than they were then, but while this is true of the United States, it is not true of the UK.145 American trade policy is certainly more liberal than ever, but it is still not as liberal as British trade policy before 1914. And Britain was a net exporter of people before 1914, whereas America today is once again a significant importer, if not on the scale witnessed in the first decades of the century.
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