Thursday, 1 November 2012

Britain and the International Economy, 1870 - 1914

During the period from 1870 up to the start of the First World War in 1914 the British economy changed a lot. As well as this, the international economy as a whole had a spectacular change around so that conditions in 1870 in no way matched those in 1914. Firstly, world trade was growing. The rate at which it was growing was outstripping world output which shows the industrialisation, falling transport costs and mass emigration that was happening across the globe. In Britain, trade grew 35 fold over the 19th century.

Let's focus more on Britain now. Foreign Trade stayed fairly constant in the time period given, in terms of the fact it was at 30% of GNP in 1870s and also at this level in 1913. As a bit of background, it was at 10% in the 1830s and 17% in the 1850s. During 1870 and 1913 foreign trade as a percentage of GNP did fall, but it recovered just before the First World War. The majority of this foreign trade was in the form of manufactured goods, although it was declining. For example, 56% of exports in 1870 were textiles but textiles only made up 37% in 1910. As far as imports go, we imported a lot of food and raw materials because we weren't self sufficient in these, apart from coal.

We'll move on to the balance of payments position for Britain now. Before 1914, imports exceeded exports. Exports of goods only made up two thirds of our imports between 1870 and 1900. However, it wasn't all bad because Britain had a very sophisticated 'invisible' sector for this time; this comprised of business services and overseas investment. With the exports of these included in the mix Britain actually ran a surplus which increased between 1851 and 1913. We have many reasons as to why a lot of funds were leaving the country in terms of these 'invisible' goods, they are split into two groups: 'pushing' funds out factors and 'pulling factors'.

'Pushing' funds out factors are basically the factors in Britain that meant it was in the best interests of investors to send their money abroad. They include:

  •  The safe investments in Britain gave very poor returns compared to the equivalent abroad.
  • High return investments in Britain were all very high risk.

The other factors are called 'pulling' factors. These are factors that come from the countries abroad that encourage investment. They include:

  • Large infrastructure spending abroad because of industrialisation. 
  • Overseas governments were issuing bonds with returns of 4-5% in comparison to the 2% return in Britain.

Britain played a vital role in the world balance of payments during this time period as well. We ran deficits with industrial countries and surpluses with the primary producers. So, we were in deficit to countries such as the USA but ran surpluses with countries in Asia and South America. 

Some contempories came to the conclusion that Britain was in a weak position at the time. They argued that Britain's share of world exports was falling and they were beginning to import more and more manufactured goods. The British exporters were falling behind in more advanced products. They had solutions, however. They felt British business needed to be more efficient in their production techniques to make them competitive on the world market again. They also felt that government policy was to blame, especially free trade. The idea behind free trade was that it would maximise the wealth of all nations by the theory of comparative advantage, and this in turn would maintain Britain's dominant position in the world economy. However, most major economies didn't adopt it and the protectionist countries actually grew faster than Britain after 1870. 

I'll round things off there. Basically, we can conclude that from 1870 to 1914 Britain was comparatively having a bit of a rough period. It kept a surplus on its balance of payments and was still very much a key player in the world economy. But, other countries were catching up. Britain had lost its place as the dominant exporter of manufactured goods and was adopting policies (free trade) that weren't effective. Next I'll move on to the interwar period of the British economy to see how that changed. Thanks for reading!


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