Introduction

Patterns of growth, 1867–1914

In 1841 the heretofore separate provinces of Upper and Lower Canada were brought together in a legislative union creating what might be termed the first Canadian confederation. In 1848 the citizens of Nova Scotia were granted responsible government. That status was confirmed to Canadian residents (residents of what had been Upper and Lower Canada) a year later, and in the ensuing years it was introduced into New Brunswick, Prince Edward Island, and Newfoundland. In 1867 Nova Scotia, New Brunswick, and the now linked colonies of Upper and Lower Canada (taking the provincial names of Ontario and Quebec) joined together in a far more extensive federal union. The new commonwealth comprised 384,598 square miles; within a half dozen years it was augmented by the vast territories of the Hudson's Bay Company, British Columbia, and Prince Edward Island, the whole amounting to 3,357,348 square miles, an area almost nine times as large as was contained in the original Confederation.

The act of the British Parliament that created the Confederation was a constitutional document. Among its other features, it distributed powers and tax sources among the federal, provincial, and local governments, and, in order to open the domestic market, forbade interprovincial tariffs. The chief responsibility of the federal government was to promote peace, order, and good government; and a series of Canadian politicians have taken these goals to include policies that promote economic growth.

Introduction

Economists have tended to focus their attention on short-run issues in part because the institutional structure – the rules that are observed or enforced that govern the ways in which economic agents can compete or cooperate – can be treated as exogenous and fixed. Any economist who attempts to understand the process of long-run economic growth and development, however, must immediately confront the problem of institutional change. In the long run the institutional structure does change, and the changes are at least partly endogenous. Any successful long-run analysis must explicitly include assumptions about the nature of institutional development, but we still know little about the relationship between the institutional structure and the more traditional economic variables or about the way changes in the external environment – economic, political, social, and cultural – affect the institutional structure.

Much of what we do know about institutional change comes from the work of Nobel Prize winner Douglass North. To North, “the economies of scope, complementarities, and network externalities of an institutional matrix make institutional change overwhelmingly incremental and path dependent.” Since “the static nature of economic theory ill fits us to understand that process we need to construct a theoretical framework that models economic change.” Although he clearly understands the nature of the problem, we are left with a warning, an admonishment, and a number of examples.

Introduction

The Australian experience stands in marked contrast to those of Canada and the United States. Although all three were frontier countries, initially Australia had by far the smallest population, and, therefore, population growth over the next half century depended relatively more on immigration. In 1865 the population of the six colonies was less than 1.4 million. In contrast, the Canadian population was 3.4 million, and that of the United States, 35.7 million. Over the next five decades Canadian population grew at an annual rate of 1.7 percent, that of the United States at 2.0 percent, but that of Australia at 2.5 percent.

Initially, Australian income had been raised by the gold and silver discoveries of the 1850s, but gold can be taken out of the ground only once. Between 1860 and the Western Australian discoveries of the late 1880s, precious metal production played a steadily decreasing role in the continent's economic expansion. Given the initial high levels of income and the subsequent exhaustion of the mines, except for the fifteen years from 1889 to 1904, Australia's economic performance was remarkably good. Between 1861 and 1889, when population was increasing by 3.5 percent a year, per capita real GDP rose by 1.3 percent per year; and between 1905 and 1914, when the rate of population increase was 2.3 percent, real per capita GDP was increasing by 2.9 percent (see Table 5:1-1).

Introduction

When World War I broke out, Britain and the four frontier countries were among the richest in the world. Britain was the most fully developed, had the best articulated and most comprehensive set of financial intermediaries, and was the world's leading creditor. Per capita income was at least as high in the United States as in Britain, and the American economy was very much the larger – in fact, the largest in the world. The financial system was also well developed; American savings had begun to exceed domestic investment requirements; and the United States had taken up the role of an international lender. Canada had experienced an exceptionally high rate of growth in the two decades before the war, a rate sustained by an unusually large Canadian capacity (and willingness) to save and invest, and by a steady inflow of foreign capital. The Canadian economy was much smaller than the American, but per capita income was gaining on that of the United States. The banking system was strong; the securities markets were small, but effective and growing; and in other respects the system of intermediation was gaining in depth and strength. These countries seemed set on a course of successful modern economic growth.

Introduction

Of the four frontier countries, the United States depended least on foreign capital. Although as late as the mid-1890s the annual net change in claims on foreigners was typically negative – on balance, foreigners were lending to the United States or acquiring American assets – the story had begun to change; the country was gradually becoming a creditor nation (Table 3:1-1). From 1897 until 1905 the United States, on net, exported capital in every year, and capital exports over the nine years totaled more than $1.5 billion. Over the years 1906 through 1913, however, the country briefly returned to its heretofore traditional role of capital importer. By the standard of these measures, the United States was a very modest net importer of capital in 1906, 1907, and 1909–1913, the inflows in all of these years but one amounting to less than 2 percent of domestic capital formation. Furthermore, even in the years before the mid-1890s, when Americans were frequently experiencing numerically large net capital imports, total foreign holdings of American assets and debts were probably never as large as 10 percent of the American domestic capital stock (Table 3:1-2). Compared with the cases of Australia, Argentina, and Canada, American development was largely a result of internal finance.

Nonetheless, it would be a major mistake to treat the American experience as though it had little relationship to the international capital flows of the nineteenth and early twentieth centuries.

Introduction

As a result of the revolutionary movement in Spain's American empire, Argentina achieved independence early in the nineteenth century. By 1810 Buenos Aires was free, de facto, and by 1816, de jure; but the wars continued (with Argentine participation) until 1824, when the Spanish empire in America was largely liquidated. Conditions in Argentina continued unsettled until 1829, when the dictator Juan Manuel Rosas came to power. Traditional historiography treats the period of the Rosas regime as a time of political and social retrogression and economic stagnation:

No one denies the cruelty or political repression of the Rosas regime, nor even its opposition to the expansion of economic ties with Europe and North America; but modern interpreters do not find evidence of economic failure and stagnation during this period.

Introduction

In 1999 the international capital market, although still not a perfect market by an economist's definition of the term, is certainly much broader and almost certainly more efficient than it was two and a half decades ago. In fact, its breadth and efficiency have caused a number of highly respectable economists to suggest arguments that almost certainly would, only recently, have been considered heresy: namely, that “perfection” carries with it some serious problems and that, at times, it may constitute a considerably less than perfect institutional structure. There have been financial crises in Mexico and Latin America in the early 1980s, and again in the mid-1990s. Since the mid-1990s the Japanese miracle has become a bad dream. In 1998 and 1999 a major Asian crisis – a crisis that has already begun to impact Brazil and threatens to engulf markets throughout the western world – has had a dramatic effect on the financial infrastructure of developing Asian countries, countries like Korea, Thailand, Indonesia, and Malaysia. Given these apparently continuing problems, could policy makers have learned anything from the history of the world's financial markets in the years leading up to World War I?

Introduction

It was not that British savers were born with a lesser degree of aversion to uncertainty than their counterparts in the four frontier countries, it was simply that Britain had begun to develop earlier, and by the middle of the nineteenth century the process of educating savers had proceeded much further than it had in the outlands. Although a double-digit savings rate was not achieved until the early decades of that century, capital had been accumulating in trade and commerce for at least 300 years. It may well have been true, as Postan has noted, that at least two fifteenth-century families could have provided all the finance required to fund the entire Industrial Revolution. However, those (and other elite) families chose not to redirect their existing portfolios, to meet either the relatively small demands of the manufacturing sector – demands that were met largely out of retained earnings – or, much more importantly, the demands for supporting investment in infrastructure, particularly canal construction.

Although her findings have been subject to criticism, Elise S. Brezis has concluded that from 1740 to the end of the century the national savings rate, although rising, rose by substantially less than the investment rate. As a result, for the century as a whole, given the level of military expenditures, domestic savings were insufficient to finance the observed level of investment, and there was a need for foreign capital imports.

Introduction

History and current events

No one believes that history repeats itself exactly, but many economic historians must have nodded knowingly when they opened their morning newspapers on February 27, 1995. On that day newspapers throughout the world reported that the House of Baring – one of the world's oldest private banks – had gone into bankruptcy. Over one hundred years earlier, in 1890, Barings had also teetered on the verge of bankruptcy. The cases are remarkably similar. Not only did the two crises involve the same institution, but in both cases Barings was involved in financial operations in the less-developed world. In 1890 it was Latin America, particularly Argentina and Uruguay. One hundred and five years later the newspapers reported that Barings was a “strong niche player in the emerging markets of Asia, Latin America, Africa and Eastern Europe.” Moreover, despite the passage of time and the growth in the size of the British economy, the magnitudes of the potential losses, then and now, are not dissimilar. In 1890, £17.25 million was sufficient to cover Barings potential liabilities; in today's dollars that figure amounts to just over $850 million. In 1995, if the press is to be believed, the funds required to save “the world's oldest private bank” fell in the $950 million to $1.27 billion range.

(GALLMAN)

Notable contemporary efforts to measure the scale and performance of the U.S. economy were made in the nineteenth century. (See Robert E. Gallman, “Estimates of American National Product Made Before the Civil ar,” in Economic Development and Cultural Change, 9 [1961, supplement 397–412]). The best of this work was by Ezra Champion Seaman, Essays on the Progress of Nations (New York, 1846, Supplement I, 1847, Supplement II, 1848, 2nd ed. 1852, 3rd ed. 1865); see also, The American System of Government (New York, 1870). Seamen invented a conceptual system very like modern national accounts and made excellent estimates for 1840, 1850, 1860, and 1869. He also derived the size distribution of income in the late 1860s, on the basis of income tax data.

In the early twentieth century Willford Isbell King and Robert F. Martin (the latter on behalf of the National Industrial Conference Board) prepared national product figures for various dates in the nineteenth century: King, The Wealth and Income of the People of the United States (New York, 1919) and Martin, National Income in the United States, 1799–1938 (New York, 1939). The Martin estimates for the antebellum years were subject to a devastating critique by Simon Kuznets (“Long-Term Changes in the National Income of the United States of America since 1870,” in Simon Kuznets [ed.] Income and Wealth in the United States, Trends and Structure, Income and Wealth, Series II [Cambridge, 1952], 221–41, and “National Income Estimates for the United States prior to 1870,” Journal of Economic History, 12 [1952], 115–30).

The bibliographic essays include author contributions for all but two of the chapters. Chapters 2 and 14 include such extensive reference citations that we felt that separate bibliographic essays would not be necessary.

ABRAMOVITZ AND DAVID

Statistical Sources: Trends and Fluctuations

The most convenient, authoritative compilation of long-term statistical information is the U.S. Bureau of the Census, Historical Statistics of the United States, Colonial Times to 1970 (Washington, D.C., 1975).

The following paragraphs contain references to outstanding sources of statistics on particular subjects together with discussions by the compilers of the estimates and of the forces governing their trends and fluctuations.

Paul A. David, in “Real Income and Economic Welfare in the Early Republic,” Discussion Paper in Economic and Social History No. 5, March 1996, University of Oxford, presents the basic estimates of national product used in this chapter for the period 1800 to 1840. Alternative estimates may be found in Thomas Weiss, “U.S. Labor Force Estimates and Economic Growth, 1800-1860” in Robert E. Gallman and John Joseph Wallis (eds.), American Economic Growth and Standards of Living Before the Civil War (Chicago, 1992). The figures underlying the estimates used in this chapter for the decades from 1840 to 1890 were made by Robert Gallman, “Gross National Product in the United States, 1834—1909” in Dorothy S. Brady (ed.), Output, Employment and Productivity in the United States after 1800, Studies in Income and Wealth, vol. 30 (New York, 1966). These, however, have now been superseded by his estimates presented in Vol. II of The Cambridge Economic History of the United States, “Economic Growth and Structural Change in the Long Nineteenth Century.”