Splendid Exchange, A

by Bernstein, William L

  The reasons for the convergence of rents were clear enough. Cheap transport flooded Europe with grain and meat, driving down their prices in the Old World and raising them in the New World, where they previously would have gone to waste. This in turn lowered the value of farmland in the Old World while raising it in the New World.

  The convergence in the capital markets is even easier to understand. The telegraph removed uncertainty about distant interest rates and even allowed the instantaneous “wiring” of capital and credit.

  The reasons for wage convergence are more controversial. The most obvious, and likely, explanation is migration driven by higher wages in the New World. Europeans did not emigrate to the New World yearning for freedom or streets paved with gold; they simply wanted higher hourly rates. During the late nineteenth century, an Irish carpenter could earn a far better living in New York, and an Italian peasant could prosper on the endless Argentine pampas in a way he never could in the poor soil of his native land. But as large numbers of Europeans migrated across the Atlantic Ocean, these earning differentials gradually disappeared, reducing immigration even before legal restrictions were instituted. In 1900, real wages were almost three times higher in Argentina than in Italy. By 1950 they were equal, and by 1985, the average Italian earned four times as much as his emigrant Argentine relatives.11

  Were we to score the nineteenth-century transport revolution on points, Old World laborers and New World landowners (mainly farmers) won, and Old World landowners and New World workers lost. Admittedly, the lot of American workers did improve between 1870 and 1913, but their enormous advantage over their British counterparts eroded considerably. The same cannot be said for English landowners, who saw their rents fall disastrously.

  In 1941, in the aftermath of the Smoot-Hawley debacle and in the midst of the world war to which it had contributed, an Austrian-born instructor at Harvard University, Wolfgang Stolper, approached a young colleague, Paul Samuelson, with a question about trade theory. He wondered why classical economics taught that all nations benefited from trade when Heckscher and Ohlin’s work implied that with increased trade, wages in some nations must fall, hurting workers. Samuelson realized that Stolper was on to something, and the two collaborated on what came to be known as the Stolper-Samuelson theorem, a framework that provides insight into the politics of global trade: who draws the long straw, who gets the short one, and, most important, how the political fallout affects the fate of nations.

  Mathematics is the language of the economist, and in order to make their model work, Stolper and Samuelson could allow for only two products and two input factors—one that was scarce relative to that in other nations, and a second that was abundant relative to other nations. Their model predicted that protection benefited those who predominantly owned a relatively scarce factor and harmed those who owned a relatively abundant one.12 With free trade, the opposite occurred. (The factors considered were typically the inputs of classical economics: land, labor, and capital.)

  Let’s see how this works. If labor is scarce in nation A and abundant in nation B, then wages will be lower in B, and labor-intensive products made in B will consequently be cheaper there as well. With free trade, merchants and consumers will prefer the less expensive goods made in B to those made in A. Workers in B will benefit, and workers in A will lose. This is true of the other two factors as well; free trade helps farmers in countries with abundant land and hurts those in countries with scarce land, and it helps capitalists in rich nations with abundant capital and hurts capitalists in poor nations.13

  In Stolper and Samuelson’s terms, “free trade” and “protection” refer not just to tariff levels and prohibitions, but also to the costs of transport. Reducing the price of shipping has the same effect as lowering tariffs: in other words, a reduction of fifty cents per bushel in transport costs and a reduction of fifty cents per bushel in tariffs should both increase grain commerce by roughly the same amount.

  What does this mean in practice? Before 1870, England had, relative to other nations, abundant capital and labor, and scarce land. By contrast, the United States had relatively scarce capital and labor, but abundant land. Tariffs rose dramatically during that period around the world, especially in the United States after the Civil War, but trade grew more free as rapidly decreasing shipping costs more than compensated for the higher tariffs. Table 13-1 shows the “Stolper-Samuelson grid” for some representative nations and time periods.

  The Stolper-Samuelson theorem predicts that the main beneficiaries of increased trade would be the owners of abundant factors in each nation: capitalists and laborers in England, and landowners (that is, farmers) in the United States. This is precisely what happened, and thus it was no coincidence that all these groups favored free trade. Likewise it is no surprise that the owners of scarce factors in each nation—English landowners and American laborers and capitalists—sought protection.

  What about continental Europe? In general, these nations had scarce capital and land but abundant labor. Stolper-Samuelson predicts that falling transport costs after 1870 would have generated a wave of protectionism by continental capitalists and farmers. Again, the theory is dead-on: European farmers reacted vehemently and brought to an end the free-trade era that began with Corn Law repeal and the Cobden-Chevalier Treaty.

  In truth, the French had never been happy with the treaty, which was seen by their democratic forces and farmers as a “royal coup d’état” by a despotic Napoleon III. When the humiliating Franco-Prussian War of 1870–1871 brought Napoleon III’s Second Empire to an end, French support of free trade faded with it.

  The birth of the new French state, the Third Republic, occurred almost simultaneously with the flood of New World wheat. From time immemorial, the walls of terrain and distance had protected France’s farmers, particularly those in the hinterland. The railroad and steamship destroyed these comforting barriers, and by 1881, net French wheat imports passed the million-ton mark. Cheaper imported grain forced an increasing number of French farmers out of business, and they clamored for a new insulation to replace the one formerly provided by the wagon and the rutted road. There were simply too many farmers in France for an elected government to ignore; even as late as the end of the nineteenth century, about half of the nation’s labor force still worked the land. Their protectionism was supported by strapped French financiers, the owners of the other scarce factor, capital. The nation’s financiers, saddled with debt from the disastrous Franco-Prussian War, also saw salvation in higher tariff income. This combination of French capitalists and farmers proved decisive. By contrast, in England, only one-sixth of the labor force worked the land. And English financiers, flush with capital from industry and trade, opposed protection.14

  Table 13-1. Stolper-Samuelson Categories

  Abundant Factor(s)

  (Favor Free Trade)

  Scarce Factor(s)

  (Favor Protectionism)

  United States before 1900

  Land

  Labor, Capital

  United States after 1900

  Land, Capital

  Labor

  England, 1750–present

  Labor, Capital

  Land

  Germany before 1870

  Labor, Land

  Capital

  Germany 1870–1960

  Labor

  Capital, Land

  Germany after 1960

  Labor, Capital

  Land

  Once again, the different outcomes in England and France matched the predictions of Stolper-Samuelson: in Britain, the abundant factors of labor and capital that favored free trade teamed up to defeat the scarce factor favoring protectionism, the landowners. In France, the scarce factors favoring protectionism, capital and landowners, combined to defeat the abundant factor favoring free trade, labor.

  By the mid- to late-nineteenth century, every major nation had its disciple of Friedrich List and his “nationalist economics,” as this brand of protectioni
sm became known: Henry Carey in the United States; Joseph Chamberlain in England; and in France, Paul-Louis Cauwès, dean of the Sorbonne’s law school. In 1884, France repealed a law, passed nearly a century before by the revolutionary government, that prevented farmers and other workers from banding together in associations based on economic interest. Almost immediately after the repeal, agricultural syndicats sprouted and demanded a tariff wall. A resultant flurry of legislation slowly raised duties on imported grain, farm animals, and meat. The general election of 1889 sent to the Assembly a large number of protectionist deputies, especially from the agrarian strongholds of Normandy and Brittany.

  A dramatic series of parliamentary maneuvers and debates followed, the high point of which was a verbal duel between Léon Say, liberal economist and finance minister, and the protectionist Félix Jules Méline, a disciple of Cauwès and a future premier of France. Inveighing against any further tariff increases, Say argued that the struggle was not just between protection and free trade, but rather a mere facet of “that great combat of the individual against the state.”15 Say’s eloquence failed to move the Assembly, which in early 1892 passed the “Méline Tariff.” It nearly doubled existing rates and was followed by even further increases that would continue until World War II.

  The tariffs failed to stop the decline of agriculture in France and served only to burden its citizens with high food costs. Although many French observers decried their countrymen’s fear of the new global economy, others were more fatalistic. In a commentary as descriptive of French national character today as it was when it was penned in 1904, the economist Henri Truchy noted:

  We judged it better to content ourselves with the untroubled possession of the domestic market than to risk the hazards of the world market, and we built a solid fortress of tariffs. Within the boundaries of this limited, but assured market, the French live calmly, comfortably enough, and leaving to others the torment of great ambition, are no more than spectators in the struggles for economic supremacy.16

  Few Englishmen, however, shed tears over the harm done to the landed aristocracy by grain and meat from the New World. In the words of the economic historian Charles Kindleberger:

  No action was taken to halt the decline in farm prices or to assist the farming community. . . . Rents fell, young men left the farm for the town, land planted to crops shrank rapidly. The response to the decline in the world price of wheat was to complete the liquidation of agriculture as the most powerful economic group in Britain.17

  After 1890 some British industries, notably steel, sugar refining, and jewelry, began to feel the landowners’ pain, and they met increased American competition with cries for “fair trade.” England was beginning to catch the protectionist influenza, spread by Joseph Chamberlain, a prominent politician (first in the Liberal Party, and then the Liberal Unionist Party), president of the Board of Trade, and father of the future prime minister Neville Chamberlain. His protectionism was of a different strain from the ordinary continental variety; it would have erected a high tariff wall around the entire empire and the commonwealths, within whose ambit there would be free trade—so-called “imperial preference.” But England was not ready to abandon free trade. Chamberlain’s proposals became the major issue in the general election of 1906, in which he and his supporters were roundly defeated.18

  While most of continental Europe walled itself off from foreign imports, and even the English fretted over their free-trade policy, one nation took a different path, based on, of all things, pigs and cows. The best meat comes from the youngest animals, and earlier slaughter means more intense feeding to bring them up to weight. After 1870, the combination of high demand, inexpensive refrigerated shipping, and cheap feed corn brought the stars into nearly perfect alignment for the world’s producers of beef, pork, cheese, milk, and butter. For centuries, northern European nations held the lead in high-end animal husbandry, but curiously, only Denmark opened its markets and took advantage of the situation.

  Great industries are usually born of banal concerns in humble circumstances. In 1882 a group of dairy farmers in the village of Hjedding in western Jutland (Denmark’s large, mainland peninsula) organized a cooperative in order to purchase one of the expensive new milk-separating machines and jointly sell their cream and butter. They elected three directors who, after a long night of negotiation, came up with a members’ agreement that would become the cornerstone of Denmark’s rise to prosperity in the early twentieth century.

  The contract was a model of simplicity: each morning, milk was collected by the cooperative’s truck, taken to the factory, and processed by skilled technicians. The skimmed milk was returned to the farmer, the butter was sold on the open market, and the co-op’s profits were divided among the participants according to the quality and quantity of whole milk they contributed. The members agreed to deliver to the co-op every last drop that was not immediately consumed in the farmhouse, and to collect it according to rigorous hygienic standards. The arrangement proved wildly successful, and within less than a decade, Danish farmers had organized over five hundred co-ops.

  But this was only a prelude to the main event: bacon. In 1887 a group of hog farmers in eastern Jutland, unhappy with their rail service, banded together under the Hjedding model and built a state-of-the-art meatpacking plant. This time, the government took a hand: hog quality varies more than milk quality, and the Danish Agriculture Department set up experimental stations in order to supply farmers with the best breeding stock. In 1871, Denmark had 442,000 pigs; by 1914, it had 2.5 million. Between those two dates, pork exports rose from roughly eleven million pounds to three hundred million. By the early 1930s, with over half of all Danish adults members of co-ops, this small nation exported 731 million pounds of pork—nearly half of the world’s trade in it.

  The government also gave farmers moral encouragement and suggested to national dairy and hog-farming organizations that they trademark the quality of their products abroad. The Lur brand, which evolved into the modern Lurpak label, is today featured in supermarket cases around the world.19

  Both the creamery and the pork co-ops required relatively large amounts of borrowed capital to acquire factories, equipment, vehicles, and workers. The Danish experience remains to this day a powerful, though nearly forgotten, lesson on the appropriate government reaction to the challenge of global competition: support and fund, but do not protect.

  In Germany, the specter of inexpensive agricultural products from the New World and manufactured goods from Britain had a far less positive result. For centuries, German economic and political life had been dominated by the Junkers, the Prussian counterpart of England’s landed aristocracy.20 These freewheeling farmers dominated Germany’s “wild East” frontier with Poland and Russia, and over the centuries they accumulated an ever-increasing percentage of the nation’s arable land. Nothing could stop them; even the abolition of serfdom in Prussia in 1807 allowed the Junkers to exploit their connections and appropriate more of the peasant’s land. (And nothing did stop them until the Soviets confiscated their estates in 1945.)

  Before 1880, the factor used most intensively by the Junkers, land, had been abundant, compared with land in Germany’s neighbors at the time. Germany had been an exporter of wheat and rye and had been one of England’s major sources of these two vital grains. Naturally, in those days the Junkers were free-traders. According to the economic historian Alexander Gerschenkron, they

  not very consistently, but very conveniently, had contrived to find a place for Adam Smith in the system of their general philosophy and had nothing but scorn and hatred for the protectionist doctrines of [their countryman] Friedrich List.21

  After 1880, German landholdings looked puny relative to those in the new agricultural behemoths: the United States, Canada, Argentina, Australia, New Zealand, and Russia. Suddenly, the Junkers switched from being free-trading abundant-factor owners to being protectionist scarce-factor owners. As in France, a series of protectionist acts, most n
otably the “Bülow tariff” of 1902, dramatically raised import duties, particularly on grain.

  This protectionist response benefited only the grain-growing aristocracy and was otherwise an unmitigated disaster. Along the way, the Junkers duped northern German peasants into supporting the tariffs by shielding their cows and pigs with high protective duties on imported animals and meat. As skilled at animal husbandry as their Danish neighbors, these poor farmers found themselves deprived of the cheap feed grain that would have made them prosperous. Protectionism’s “silent killer”—the increased cost of raw materials to domestic industries—had struck again.

  Worse was to come. Take another look at Table 13-1. Note that in every nation and time period, the factor owners square off against each other in a two-against-one configuration.22 In both England and pre-1900 America, labor and capital found themselves on the same side—for free trade in the former, and for protection in the latter. In Germany, capital and land (the coalition of “iron and rye,” so-called because the iron industry was an intensive consumer of the scarce capital factor) found itself opposed to urban laborers, who tended toward Marxism.

  German urban workers favored free trade, not only because they represented the abundant factor, but also because of the perversities of the Marxist worldview. Free trade was an essential ingredient in the revolutionary recipe, since it supported industrial development and full-fledged capitalism, which then would inevitably crumble and clear the way for communism.23 Marx, logical to a fault, thus opposed tariffs: