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Slouching Towards Utopia?: The Economic History of the Twentieth Century


-IX. Empires and Economic Leadership-


J. Bradford DeLong
University of California at Berkeley and NBER

January 1997; DRAFT 1.00


Europe's sixteenth century overseas empires, in Latin America, in the Philippines, and in the spice islands of Indonesia, had firm economic rationales: in the words of the chronicler of the Spanish Conquistadores, Spain's warriors conquered the New World "to spread the word of God, and to get rich." Control over the high-value low-weight luxury goods of East Asia, or over the precious metals of Latin America, could make individuals' fortunes and provide a healthy boost to any early modern European royal treasury. Europe's seventeenth and eighteenth century overseas empires also had an economic component: obtaining a near-monopoly of the tobacco or the slave trade, or conquering the sugar-growing islands of the Caribbean, could boost mercantile prosperity.

But by the nineteenth century little was needed in the way of luxuries that could not be made more cheaply in the industrial core of the world economy, and little was to be found in raw materials from further extensions of European empires. Yet the nineteenth century saw the European great powers complete their conquest of the world.

In the last years before World War I, only Ethiopia, Siam, Persia, Afghanistan, the Ottoman Empire (the core of which is now Turkey), China, and Japan could claim to be neither a colony nor an ex-colony of Europe's great powers. The independence of all those save Ethiopia (which had slaughtered an invading Italian army) and Japan (with its junior empire of Taiwan, Korea, and scattered Pacific islands, along with large chunks of Manchuria) was heavily compromised. For in the second half of the nineteenth century it became clear that there was no part of the world in which Europeans could not--if they wished--impose their will by armed force without anything like total mobilization.

To give just example: at the battle of Omdurman in the Sudan in 1898, 10,000 soldiers of the Mahdist Sudanese regime died; only 48 British and Egyptian soldiers died. The difference was not entirely due to superior European military technology. After all, the Mahdist regime did have machine-guns, telegraphs, and mines--all bought from European suppliers. What it did not the have was the organizational capacity and discipline to make effective use of them.

The outcome was integration into the European dominated world economy, political submission--either formal or informal--to rule by European proconsuls, and what we might call "cultural contamination": the spread of European languges and European views of life around the globe. Missionaries brought European religions. Proconsuls interested in uplift brought European-style schools. Europe-originated culture, methods of administration, science, and technology began to percolate down through non-European societies as the children of the past and the members of the future elite were taught--in European languages--how "our ancestors the Gauls" had fought the Romans in the fist century B.C. European technologies percolated up through non-European societies as international investments paved the way for world trade: harbors, railroads, factories, and (most important) plantations sprung up from Bali in what is now Indonesia to Accra in what is now Ghana.

In Latin America, the U.S. helped the continent avoid a second round of recolonization. The "Munroe Doctrine" declared that the U.S. would oppose any attempt to impose European rule on the former Spanish colonies, and it served Britain's interest to use the British navy to support the formal independence of Latin America. (During the U.S. Civil War of 1861-1865, however, the French did attempt to set up a Mexican empire under a client Austrian prince). But toward the end of the nineteenth century United States politicians began to exert U.S. influence in Latin America, not just to bar potentially-hostile European powers from having American colonies. The aim was "to teach the Mexicans [and others] to elect good men," in the words of President Woodrow Wilson. Steamships and the rise of American interest in Asia made the United States government much more sensitive to central America: one consequence was U.S. intervention in Colombia, triggering the secession of a piece of the country, the establishment of the independent republic of Panama, and the Panama Canal.

After a brief aggressive war against Spain, Puerto Rico and the Phillippines became U.S. possessions at the turn of the century. Cuba gained an "independence" that guaranteed the U.S. a right of intervention. The U.S. provoked the break-up of Colombia in order to create an independent Panama in which to build a canal, established a protectorate over panama, and placed the canal zone itself under U.S. administration. U.S. interventions in Cuba and the Dominican Republic were frequent; the marines landed in Nicaragua in 1912, at Vera Cruz in Mexico in 1914, and in Haiti in 1915.

The expansion of european empires was coupled with a willingness to hand over power over local affairs to locals--to white locals. Canada gained its substantive independence from Britain with the granting of "Dominion status" in 1867, nearly two decades before the completion of the Canadian Pacific Railroad in 1885 made "Canada" as an economic unit even possible. The various British colonies in Australia were gathered into the self-governing Commonwealth of Australia in 1901. Self-government for New Zealand followed in 1907. And the Union of South Africa was established with Dominion status in 1910, even though the majority of the white population of the newly-established Union had been at war with the British Empire only a decade before.

South Africa is of special interest as the point of closest contact between the first and the third world--a region that was half settler colony (like Canada or Australia) and half colonial possession (like Nigeria or India). After the end in 1815 of the Napoleonic Wars that began the nineteenth century , Great Britain retained as a strategic asset the former Dutch colony at the southern tip of Africa, the Cape of Good Hope. The British navy saw control of the Cape of Good Hope as an important safeguard for communications with British-ruled India. The Dutch monarchy did not mind--or at least did not object. The Orange dynasty was being returned to power in a much stronger position (as Kings of the Netherlands rather than as "stadtholders" of each of the individual provinces), was protected from future French interference by a British and Prussian alliance--and was allowed to annex what is now Belgium as well.

After 1815 British colonists began to arrive in the Cape Colony. The response of the Dutch-descended Boers to this gorwing influx of foreigners who could talk to the rulers sent out from London was to leave: to move north across the Orange River outside of the British Empire in 1835, to found the Orange Free State. Once in South Africa, the British began to expand: their annexation of the neighboring Natal triggered another exodus of Boers to the Transvaal north of the Vaal River. Zulu kingdom of Shaka. Attempted annexation of the Transvaal Republic in the late 1870s. The Xhosa, the Zulu, and other kingdoms on the ground and in the way of the British expansion put up some resistence: the Zulu kingdom even annihilated a British battalion and mauled a second at the battles of Rourke's Drift and Islandhwana, thus doing even better against the advance of European settlers and their armies than the Souix at the Little Bighorn. An attempt to annex the Transvaal in the 1870s was abandoned when London contemplated the difficulties of maintaining effective rule over a hostile population of European-descended and European-armed farmers.

But the calculus changed when gold was discovered in large quantity in the Transvaal in 1886. The result was a huge influx of miners and speculators. Johannesburg grew in a few years to a city of 100,000--the largest city in Africa south of the Sahara. Railroads were built to transport gold to the coast, powerful pneumatic tools were installed to crush gold-bearing rock, a complicated high-technology advanced chemicals industry was built to extract gold from the rock, for although South African gold deposits were vast they were too low-quality for mining to be possible without the most advanced chemisry of the late nineteenth century. Gold made the interior of South Africa important to Europeans, the swallowing-up of the rest of Africa by European colonial powers made British geopoliticians anxious to cement control over the Cape.

British officials on the spot in South Africa provoked the Boer War in 1899. A quarter of a million British soldiers were sent to South Africa. Defeated in open battle, the Boers turned to guerrilla warfare. The British responded with the twentieth century's first concentration camps. Mao Zedong was to remark that a successful guerrilla army is like a school of fish: they must learn to swim in the sea of the people. The British at the turn of the century knew how to fight such a guerrilla army: dry up the sea in which they swim by bringing the population into "concentration camps" where they can be monitored and watched. It is effective--even though the "concentrated" civilian population dies of disease at a relatively rapid rate, and even though it impoverishes the country.

The possibility of a British defeat simply did not exist. A peace treaty ending the war was signed in 1902, annexing the two Boer republics to the British Empire. But control over the newly-conquered South Africa by proconsuls set by London or by British-speaking colonists was relatively brief. By 1906 Boer-centered political parties had won control over the Transvaal provincial legislature. 1910 saw the establishment of the Union of South Africa as a self-governing dominion, with equality for Afrikaans and English as official languages.

A millennium from now, historians are likely to judge the British and Dutch-descended colonists of South Africa less harshly than the settlers of North America, of the Argentine pampas, or of Australia. They will be struck by the--relatively only--mercy shown by settlers in South Africa to the indigenous population. In North America the standard treatment of the Cherokee, the Souix, the Pequot, and many others was to expel them by force from land that white settlers might want, to concentrate them on reservations, and to give them smallpox-infected blankets. In Australia the standard treatment of the Aborgines was to massacre them. There are no survivors from the indigenous population of Tasmania. What the Boers and English colonists of South Africa did was first to fight, and then to employ the Xhosa, Zulu, Swazi, Matabele, Basuto, and others.

Perhaps the difference was that the aborigines in Australia and the Indians in the United States were simply not very useful as employees in the land-intensive, capital-intensive agriculture of the New World or of Australia, while African employees were very useful indeed in the mine- and transport-based relatively industrialized gold-centered South African economy of the turn of the century. Perhaps the difference was that Africa was always connected by land to Eurasia, and so the coming of Europeans bearing their diseases did not have the catastrophic consequences for indigenous populations that it had in the Americas or Australia. Perhaps the difference was that the Boers who settled South Africa were a more moral people than the American or the Australian settlers.



From the beginning of the nineteenth century, the British had effective control of India. The conquests (largely with Indian armies) that made the British the dominant power in India in the eighteenth century had been carried out on a shoestring, under the formal authority of a trading company: the British East India Company. Yet from that base British military operations in the nineteenth century were largely mopping-up operations: small wars against Indian powers that had no chance of assembling the resources to match the British-controlled forces in India.

Possession of India gave the British an immense interest in Egypt. Control over Egypt, and the link between the Mediterranean and the Red Sea, could cut several months off of the time needed to travel to or communicate from London to the centers of British influence at Calcutta or Bombay. The coming of the steamship, and the completion of the Suez Canal in 1869 brought India much closer to Britain--and made British interests in Egypt much stronger.

Egypt in the mid-nineteenth century was ruled by a "khedive." The Mamluk warrior-slave aristocracy that had ruled Egypt (under pledge of formal obedience to the Istanbul-centered Ottoman Empire) had been broken by Napoleon during his campaign of conquest. The viceroys established in Egypt afterwards by the Ottoman Empire had established their substantive independence within a generation.

In 1863, six years before the completion of the Suez Canal, the relatively young khedive Ismail took the throne. Ismail had been educated in France: he was open to European influences, eager to modernize his country, and eager to play the role of the open-handed Eastern ruler. He became ruler of Egypt in 1863, in the middle of the "cotton famine" created by the American Civil War and the consequent temporary disappearance of the U.S. South from the world's cotton supply. The consequence was a cotton boom everywhere else in the world: the factories of the industrial revolution needed cotton to run on, and they were willing to pay almost any price for it. Egypt grew cotton. And so for a few years it seemed as though Egypt's economic resources and wealth were growing rapidly and were inexhaustible.

More over, the khedive Ismail was more than extravagant. The Egyptian national debt was 7 million British pounds or so at Ismail's accession. It had swelled to 100 million British pounds 13 years later--and interest charges on the debt amounted to 5 million a year.

In 1876 the Egyptian government declared bankruptcy, and the creditors of the khedive became the rulers of the country. Ismail abdicated. Two financial controllers--one British, one Frence, for the bankers who had loaned to Ismail came overwhelmingly from those two counties--were appointed with substantial control over taxes and expenditures. Their task was to make sure that Egypt was governed by Ismail's son to keep up revenue and pay off the debt.

The Egyptians wondered why they were being highly-taxed to pay off debts run up by their extravagant ex-khedive. If Ismail had borrowed more than he could repay, wasn't that a problem for the bankers? Why was it a problem for the Egyptian people--and why should they be taxed and ruled by foreigners as a result? Discontent led to attempted revolution against foreign domination and high taxation. And British troops restored order and suppressed the uprising in 1882. Thereafter the khedive was a British puppet: the strategic importance of the Suez Canal for communications with India meant that British troops were to stay in Egypt on varying pretexts and for various reasons until 1956.

The opening of the Suez Canal cut the travel time to Egypt by a third. The coming of the steamship cut travel time by another third. Travelling to India from London after 1870 or so took perhaps two months, compared to six months around 1800. As India came closer, more Britons began to go there for at least a part of their career. The British presence was transformed from long-term expatriates willing to make substantial and semi-permanent adjustments in their culture and style of life to shorter-term visitors anxious to reproduce as much of Britain as possible and keep their lives as close to the British pattern as possible. And as India came closer to Britain, British institutions began to penetrate the country. The old eighteenth-century East India Company had no interest in Christianizing India. But missionaries began to appear from 1813; the first railroads were started in 1853; and universities to educate young Indians in European styles of learning started in 1857.

The drawing-nearer of India to Britain helped create a class of British officials with little sympathy for old Indian patterns: reform minded officials saw a culture in which female infanticide and the incineration of widows were common customs, in which religion served to keep the poor submissive and unambitious by convincing them that meekness now would allow them to inherit the earth in a future reincarnation, and in which caste distinctions and monopolies blocked any possibility of efficient production. Earlier conquerors had all been absorbed by Indian society in greater or lesser measure. The Victorian British with their modern technology, confidence in their intellectual and religious superiority, and continuously-renewed contacts with their homeland maintained their own caste distinctiveness.

India came surprisingly close to evicting the British in the great mutiny of 1857. Suppression of the mutiny also led to the rationalization of the institutions of British rule, and to the creation of the post of Viceroy of India, directly responsible to the British government. The Indian National Congress--with its demands first for self-government and later for independence--was founded in 1885.

Before 1800 or so there was very little that European traders could offer to sell that Chinese consumers would wish to buy. For more than two thousand years China had been one of the leading, if not the leading civilization on the planet. It was not that the average standard of living was higher in China: Malthusian population pressures roughly equalized standards of living around the world. But China had a higher population density because more efficient technologies allowed a given plot of arable land to generate more food, better craftswork in most industries, a larger class of literati interested in high culture, and--quite probably--a higher standard of living for the landed and ruling elite. Before 1800 European trade for Chinese goods was by and large trade of silver for China-made luxuries. And the transfer of technology flowed from east to west: it is still unclear to what degree the European development of items like gunpowder, printing, the compass, and noodles owed to the Chinese example. It is clear that all of these were known in China before they were known in Europe.

Even after the voyages of European discovery it was not clear that Europe was in any sense the "dominant" culture. China had long had the capability of launching its own "voyages of discovery"--and its governments had chosen not to. The one exception came under the early Ming dynasty: the fifteenth-century imperial court funded its own series of voyages of discovery commanded by the politically-powerful eunuch admiral Cheng Ho. The fleet reached Zanzibar, and touched the east coast of Africa several times. Annoyed at their treatment by a Sri Lankan king, they captured him and brought him back to China to make his apology to the emperor. But the political balance in the Ming court changed, the follow-up expeditions were cancelled, and the exploration program abandoned.

After 1800 British merchants did discover one commodity besides silver that Indian producers could supply and that Chinese consumers were eager to buy: opium. By the end of the 1830s the Chinese government was beginning to worry about the consequences of opium addiction on the country, and the exchange of European silver for Chinese goods had turned around: the bulk of the China trade was the exchange of Chinese silver for Indian-grown opium. The Chinese government attempted to suppress the opium trade and opium smuggling. The result was the 1839-1842 "Opium War," in which the British fleet intervened on the side of free trade, the sale of opium, and drug addiction. The British Empire acquired the then nearly barren island of Hong Kong as a base, European influence was established in a substantial number of "treaty ports" along the Chinese coast, and the division of China not into European colonies but into regions in the "spheres of influence" of different European powers began.

The fact that the coming of the European powers to the western Pacific coincided with the decay into bureaucracy and impotence of the Ching dynasty (which had ruled China since 1648) did not make China's lot any easier in the nineteenth century. The normal Chinese pattern of peasant revolts against corrupt rulers during the decay of a dynasty combined with European influence to produce a catastrophe: the Tai-Ping rebellion of 1850-1864. Hung Hsiu-ch'uan, a would-be bureaucrat who failed him Chinese examinations several times, had visions that convinced him that he was the younger brother of Jesus Christ: The armies of "God's Chinese Son" dedicated to overthrowing the ruling dynasty and to the coming of the kingdom of "Great Peace" ravaged central China for fifteen years, aided by the fact that the imperial court feared successful generals (as potential usurpers) at least as much as it feared the rebels.

In the late nineteenth century some industrialization took place along the coast, within the European-influenced and -ruled enclaves. In the interior agricultural production jumped as farming technologies improved, but population kept pace: there was little improvement in the standard of living, and no sign of an approaching demographic transition. Attempt to learn European technologies and organizational attitudes--to replicate what was simultaneously going on in Japan--soon ran into the problem that the ruling dynasty feared economic reform and the consequent social change as a greater threat to its power than the European navies off the coast. The loss of the Japanese-Chinese War in 1895 brought matters somewhat to a head. The "hundred days of reform" in 1898 came to an ignomious end with the political victory inside the imperial palace of the dowager empress over the pro-reform faction (and the emperor). Reaction--the use of anti-European sentiment to support the regime and the subsequent "harmonious fist" rebellion in 1900--failed as well: an all-European expeditionary force relieved the beseiged European embassies in Beijing and burned the Ching dynasty's summer palace.

With both reform and reaction having failed, the only remaining option was revolution. In 1905 Sun Yat-sen formed--in Japan--China's first revolutionary party: to overthrow the Ching dynasty, reform land ownership, and establish a republic. The dynasty fell in 1911 when the most important of its military commanders, Yuan Shih-kai, turned on the regime rather than suppress local revolts. On 12 February 1912 the six-year-old Manchu emperor abdicated. But the new Chinese republic's president was not Sun Yat-sen but Yuan Shih-kai. China descended into anarchy with local military commanders and successful bandits exercising whatever civil authority there was in a civil war of all against all.

The Meiji "Restoration" in Japan

In the early seventeenth century the Tokugawa clan of samurai decisively defeated its opponents at the battle of Sekigahara, and won effective control over Japan. Tokugawa Ieyasu petitioned the--secluded--Priest-Emperor to grant him the title of
Shogun, the Priest-Emperor's viceroy in all civil and military matters. From its capital, Edo--now Tokyo--the Tokugawa Shogunate ruled Japan for two and a half centuries.

Early in the seventeenth century the Tokugawa Shogunate took a look to the south, at the Philippines. Only a century before, the Philippines had been independent kingdoms. Then the Europeans landed. Merchants had been followed by missionaries. Converts had proved an effective base of popular support for European influence. Missionaries had been followed by soldiers. And by 1600 Spain ruled the Philippines. The Tokugawa Shogunate was confident that it could control its potential rivals and subjects in Jpan. It was not confident that it could resist the technology, military, and religious power of the Europeans. he country was closed: trade restricted to a very small number of ships allowed access to the port of Nagasaki only, Japanese subjects returning from abroad were executed, foreigners discovered outside of their restricted zone were executed, and Christianity was suppressed. The Tokugawa Shoguns did adopt one more foreign practice: crucifixion--which they saw as a fitting punishment for those who refused to abjure the foreign religion of Christianity. For two and a half centuries the Tokugawa ruled a largely peaceful Japan. Population few. Rice-growing productivity increased. The arts and crafts flourished. rade flourished. The military skills of the samurai warrior class atrophied, Japan's technology fell further and further behind tht of Europe, but the country did not become a European colony.

In 1851 the President of the United States commissioned Commodore Perry to open relations with Japan. American warships enter Tokyo Bay in 1853. There argument for why the Tokugawa Shogunate should change its policy and open up trade was simple: if they did not, the U.S. fleet would burn Tokyo. The Tokugawa Shogunate submitted, and began trying to grasp how to deal with a world in which European powers would no longer permit isolation as an option.

For fifteen years the Tokugawa Shogunate muddled along. Then in 1868 it was overthown by the coup termed the "Meiji restoration." The shogunate was abolished. Theoretically, at least, the Priest- Emperor Meiji resumed the direct rule that his ancestors had turned over to the first Shoguns more than a thousand years before--hence "restoration." In fact Japan was ruled by a shifting coalition of notables interested in absorbing European technology while maintaining Japanese civilization and independence: "western learning with Japanese spirit" in the interest of creating a "rich country with a strong army."

The Priest-Emperors with their imperial court moved to Tokyo, took over the palace of the Tokugawa Shguns, and changed the name of Edo to Tokyo--"the Eastern Capital." There followed the rapid adoption of western organization: prefects, bureaucratic jobs, newspapers, an education ministry, military conscription, railways, and the Gregorian calendar were all in place by 1873. The samurai class's right to receive rents from the peasanst were transformed into bonds--debt owed by the central government. Within a generation inflation had expropriated the samurai. Representative local government was in place by 1879, and a bicameral parliament (with a newly-created peerage) was in place by 1889.

Even as early as 1876 Japan was flexing its muscles as a junior colonial power by putting pressure on Korea. A successful war with China in 1895 made Korea a Japanese protectorate. In 1899 the Japanese government abolished extra-territoriality--the immunity of Europeans from Japanese justice and law. Japan allied with Britain, seeking the role of Britain's viceroy in the North Pacific, in 1902. Disputes with Russia over spheres of influence in Manchuria led to the Russo-Japanese War in 1905. The Japanese were eager to escalate to test their armed forces; the Russians were eager to escalate as well, Czarist ministers believing that a "short victorious war" would solidify support for the Czar. The Japanese won decisively, bringing Manchuria into their sphere of influence. Formal annexation of Korea followed in 1910. And Japan's declaration of war against Germany in World War I brought it rule over all Pacific islands that had been German colonies.

Britain's (Relative) Decline

The United States became the world's leading-edge nation--the richest, the most prosperous, the most modern, and the highest technologied--only because Great Britain, the nineteenth-century "workshop of the world" seemed to falter in its economic growth. The story of America's rise to economic preeminence is in many ways simply the reverse of the story of Great Britain's rapid turn of the century relative economic decline.

Great Britain had been the first industrial nation. Its commercial dominance of the seventeenth and eighteenth centuries, coupled with its established sheepherding industry, its plentiful supplies of water power, coal, and iron, and a relatively large pool of wage-workers without traditional rights to occupy the land gave it crucial economic advantages at the start of the industrial revolution. In textiles, steam power, iron production, and canal building Great Britain led the way throughout the eighteenth and nineteenth centuries. The last years of the nineteenth century saw Great Britain the richest country in the world (save for Australia, the late nineteenth century sheep-raising equivalent of OPEC), with the heaviest industrial base, the most comprehensive railroad network, and ruling over the largest Empire the world had ever seen.

British productivity has grown more rapidly in the twentieth century than it did in the nineteenth. Britain's relative decline springs from its inability to partake fully of the acceleration of growth in productivity that the twentieth century saw. And American economic preeminence sprang from the American economy's ability to create and ride the wave of this growth acceleration.

Perhaps Britain's advance contained the seeds of its inability to lead the productivity revolutions of the twentieth century. Britain's relative prosperity had been based on a set of technologies that greatly multiplied the productivity of unskilled workers. The poor British educational system, its weak corps of technical engineers, and the easy availability of unskilled Irish and rural British workers were no great handicap as long as the most dynamic edge of the economy intensively used both machines and unskilled workers, but not skilled workers. But technologies that made heavy use of skilled workers would be the locus of industrial development in the twentieth century.

In the last years of the nineteenth and the first years of the twentieth century Britain lost its leading position in new, modern industry after new, modern industry. Organic chemicals became German (and American), British railroads became smaller and slower than those on the continent, the development of the automobile lagged behind France and the United States, the electric power grid was put into place slowly, the telephone network was rudimentary, and so on.

Even in textiles, Britain began to be excluded from foreign markets on the basis of too high a price. British levels of productivity remained high. They just failed to grow at the same rate as in the rest of the leading edge of the industrial world. And British companies lost, or failed to develop, market position in what were going to become the leading industries of the first half of the twentieth century.

Britain's loss of market position in the most technologically advanced industries is surprising, for in those industries lies the most natural comparative advantage of the leading industrial nation. The leading industrial nation is the richest, has the most experience with modern technology, and would seem to be the best set up to train and mobilize labor and capital to take advantage of new opportunities. Yet British firms and workers did not do so.

In fact, in the thirty years before World War I factors of production behaved as if there was something pernicious about locating in Britain. On net both British capital and British labor left the island for better opportunities elsewhere. As U.C. David economist Gregory Clark puts it, by 1910 you could combine British labor and British capital in the textile city of Fall River, Massachusetts, and obtain 50 percent more output per worker hour and 20 percent more output per machine hour than back in the textile city of Manchester, in England. The first public power station in England, in 1881, was built by the German firm of Siemens. On the eve of World War I, the German electrical manufacturing industry was more than twice as big as Britain's.

Alfred Chandler describes the rise of German dye firms to market dominance, in spite of the fact that the largest markets for dyes were in Britain until World War I. Starting in the 1880s, the major German firms--Bayer, Hoechst, and company--decided to build mammoth plants along the Rhine river, which would produce some ten times as many kinds of dyes as previous plants. To distribute the products the German firms for the first time integrated distributors into the manufacturing firms, rather than relying on wholesalers. And by the turn of the twentieth century the German dye manufacturers--relying on low costs made possible by economies of scale, and expanded distribution through sales forces that would push dye out the door and teach customers how to use it. By 1913 some 85% of textile dyes were produced in Germany; some 3% were produced in Britain.

One reason for Britain's slower growth than the other industrial powers is that its rate of investment was low. There have always been four candidate reasons: a deficiency in natural resources, the British labor relations system, and the British educational system, and a banking system that failed to mobilize capital for large-scale industrial firms. Of these, resource-based explanations for British relative decline are unsatisfactory. Germany and the United States had superior natural resources. Yet water transportation was very cheap. Britain grew no cotton, yet had no trouble dominating the world cotton spinning and weaving industry for a century. Japan today produces steel in large quantities from Australian iron ore and Brazilian and American coal.

Right-wing analysts have tended to blame Britain's industrial decline on the bloody-mindedness of British unions, unwilling to see firms earn profits or to allow economic readjustment and change to take place. Left-wing analysts have tended to blame Britain's industrial decline on its class structure and deficient educational system. These are not separate causes, but a single interlinked system: unions were bloody-minded and the educational system was deficient because Britain had strong class distinctions. And the deficient educational system and poor labor relations reinforced class distinctions. For those who governed Britain did not see an educated population as a high priority. As economic historian David Landes wrote, in Britain:

For every idealist or visionary who saw in education an enlightened citizenry, there were several 'practical' men who felt that instruction was a superfluous baggage for farm labourers and industrial workers. These people, after all, had been ploughing fields or weaving cloth for time out of mind without knowing how to read or write all they would learn in school was discontent. Under the circumstances, Britain did well to have roughly half of her [elementary] school-age children receiving some kind of elementary education around 1860.

This was a far lower percentage than found in the United States or in Germany. What was true of elementary education was even more true of technical and engineering education. In Britain, technical education was the business of private firms. Why should they train workers who might well go elsewhere for jobs? And why should they train workers if such training only upped the bargaining power of British unions?

Thus the year 1914 saw close to 40 percent of Britain's national capital stock-of its produced means of production-located overseas. No other country has matched Britain's high proportion of savings channeled to other countries. Britain's overseas investments were concentrated in government debt, in infrastructure projects like railroads, streetcars, and utilities, and in securities guaranteed by the local government.

Britain did not do well out of its overseas investments. In the forty years before World War I, British investors in overseas assets earned low returns, ranging as low to perhaps 2% per year in inflation-adjusted pounds on loans to dominion governments. Such returns were far below what presumably could have earned by devoting the same resources to the expansion of domestic industry. British industry in 1914, and British infrastructure, were not as capital intensive as American industry and infrastructure were to become by 1929. It is difficult to argue that Britain's savings could not have found productive uses at home if only they could be challenged appropriately and managed productively. And it is difficult to argue that foreign investments were more secure. In a depression at home--the major risk facing investors in British industry--exports to Britain drop far in both quantity and price, and firms and governments across the oceans declare bankruptcy.

Why, then, did British investors commit their wealth overseas? One possibility is that the high rates of return presumably available at home were not really there: the absence of British engineering skill, and the aggressive wage demands of British unionized workers would have prevented home investments from earning even the small profits earned abroad. A second possibility is that British investors did not understand the framework in which they were embedded. Perhaps they imagined that home investments--even a diversified portfolio of industrial, railroad, and utility corporations--were risky, while overseas investments guaranteed by the local government were safe.

Certainly a contributing factor was the failure of Britain to develop institutions for channeling the savings of thousands into the capital stock of one giant enterprise. How is an individual saver, in an age where the efficient size of an operating corporation is vast beyond his means, to evaluate which industries and companies have good prospects, monitor the management to which he has committed his capital, and control and replace the management when it does not do its job? Such tasks require the growth of financial intermediaries: investment banks of one form or another. German analysts, especially, criticized the pre-WWI British banking system because of the lack of such a monitoring system:

the complete divorce between stock exchange and deposits...causes another great evil, namely, that the banks have never shown any interest in the newly founded companies or in the securities issued by these companies, while it is a distinct advantage of the German system, that the German banks, even if only in the interests of their own issue credit, have been keeping a continuous watch over the development of the companies, which they founded.

And so few were willing to invest in companies that might become large organizations that contributed to the rapid advance of productivity. The scarcity of British engineering talent was matched by a scarcity of venture capital: there was plenty of capital for infrastructure or for government debts, but little for the progressive entrepreneur.

Britain's relative economic decline should have given libertarians much more cause to pause and take stock than they have. For turn-of-the-century Britain was, from a libertarian point of view, a laissez-faire utopia in which the government did little and the private market system did everything. Yet economic preeminence in the twentieth century appears to have required much more than an initially-rich country and a laissez-faire economic policy. It also required a government willing to invest in education to create a skilled labor force and a solid corps of technologically-trained engineers, it required financial institutions to channel savings into the domestic accumulation of the machines that embody industrial technology, it required a labor movement eager to share in and not to block economic reorganization and technological change, and modern business enterprises to take advantage of economies of scale and to translate scientific knowledge into productive engineering applications. In all of these Britain was deficient. In all of these the United States was--by luck--abundant.

American Exceptionalism: The Furnace Where the Future Was Being Forged

Because it was in relative terms so prosperous and so technologically advanced, the United States in the twentieth century was the country where people looked to see the shape of the future, just as Holland in the seventeenth and Britain in the nineteenth centuries had been the focuses of institutional and economic innovation and the balance wheels of world economics and politics. For much of the twentieth century, the United States seemed to observers from Europe and elsewhere to be a qualitatively different civilization: it lacked the burden of the past that constrained the politics and oppressed the peoples of the nations of Europe, and freed from the burden of the past it could look toward the future.

We can see some of this admiration and wonder by gazing at the early twentieth century United States through the eyes of a 1916 transitory immigrant who, later, recorded his experiences in his autobiography. Unlike the bulk of the people who had left the Old World for the New in the previous half century, Lev Bronstein did not want to be there. He was a political exile: one of those feared by Czars and policemen, and hunted and exiled because they were feared. But once he and his family had landed in New York, he and his family made the best of it. The Bronsteins:

rented an apartment in a workers' district, and furnished it on the installment plan. That apartment, at eighteen dollars a month, was equipped with all sorts of conveniences that we Europeans were quite unused to: electric lights, gas cooking-range, bath, telephone, automatic service-elevator, and even a chute for the garbage.These things completely won the boys over to New York. For a time the telephone was their main interest; we had not had this mysterious instrument either in Vienna or Paris...

They--particularly the children--were overwhelmed by the prosperity of the United States, and by the technological marvels that they saw in use everyday:

...the children had new friends. The closest was the chauffeur of Dr. M. The doctor's wife took my wife and the boys out driving... the chauffeur was a magician, a titan, a superman! With a wave of his hand, he made the machine obey his slightest command. To sit beside him was the supreme delight.

He stayed in the United States for less than a year. The Russian Revolution came, and he returned to the city of St. Petersburg (whose name was changed, first to Petrograd, then to Leningrad, and now back to St. Petersburg). As Leon Trotsky (an alias taken from one of his former Czarist jailers in Odessa in order to evade the police) he became Lenin's right-hand, the organizer of Bolshevik victory in the Civil War, the first of the losers to Stalin in the subsequent power struggle, and finally the victim of the Soviet secret police, assassinated with an ice-pick in his head outside Mexico City in 1940.

Trotsky was never allowed back into the United States. He had no time to more than "catch the general life-rhythm of the monster known as New York." But on his departure Trotsky felt--or at least he later wrote in exile that he had felt--as if he was leaving the future for the past: "I was leaving for Europe, with the feeling of a man who has had only a peek into the furnace where the future is being forged...."

"The White Man's Burden"

by Rudyard Kipling

Take up the White Man's burden--
Send forth the best ye breed--
Go, bind your sons to exile
To serve your captives' need
To wait, in heavy harness
On fluttered folk and wild--
Your new-caught sullen peoples,
Half devil and half child.

Take up the White Man's burden--
In patience to abide,
To veil the threat of terror
And check the show of pride;
By open speech and simple,
An hundred times made plain,
To seek another's profit
And work another's gain.

Take up the White Man's burden--
The savage wars of peace--
Fill full the mouth of Famine
And bid the sickness cease;
And when your goal is nearest
(The end for others sought)
Watch sloth and heathen folly
Bring all your hope to nought.

Take up the White Man's burden--
No iron rule of kings,
But toil of serf and sweeper--
The tale of common things.
The ports ye shall not enter,
The roads ye shall not tread,
Go, mark them with your living
And mark them with your dead.

Take up the Whie Man's burden,
And reap his old reward--
The blame of those ye better
The hate of those ye guard--
The cry of hosts ye humour
(Ah, slowly!) toward the light:--
"Why brought ye us from bondage,
Our loved Egyptian night?"

Take up the White Man's burden--
Ye dare not stoop to less--
Nor call too loud on Freedom
To cloak your weariness.
By all ye will or whisper,
By all ye leave or do,
The sullen silent peoples
Shall weigh your God and you.

Take up the White Man's burden!
Have done with childish days--
The lightly-proffered laurel,
The easy ungrudged praise:
Comes now, to search your manhood
Through all the thankless years,
Cold, edged with dear-bought wisdom,
The judgment of your peers.

Next Chapter

20 Century

Created 1/24/1997
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Associate Professor of Economics Brad DeLong, 601 Evans
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