November 10, 2018

Early Globalization and its Impact on the US Market: A Historical Analysis

By Davide Giordano

How the United States successfully responded to increasing international flows of goods, capital, and people in the age of early globalization (1870-1913)


The political unity following the American Civil War and the abundant resources in the US, combined with the already globalizing dynamic world economy, formed the perfect context for the wave of technological innovation and flow of capital to hit the country. Although imperialistic European economies induced the process, the US definitely played a key role during this period in driving the international trade of goods and movement of capital of all sorts, including a large amount of immigration. This essay will therefore explore the effects and response of their economy to the evermore globalized situation from 1870 to 1913, analysing the flow of people, capital and goods.

Migratory Flows and the Assimilation of Cheap Labour

In the area of migration, the late 19th century experienced an unprecedented degree of globalization even compared with nowadays, with amounts of moving people skyrocketing in most countries. The US in particular welcomed a free flow of immigrants as never before in its history. According to Chiswick and Hatton (2003, p.68), the number of free immigrants to the Americas rose to more than one million a year by 1900, surmounting the 15380 per annum of the 1820s, which was only a quarter of the slave inflow at the time. This wave was composed by Chinese (only initially), Italians and Eastern Europeans, in addition to the already emigrating Northern Europeans. The main driving force of this mass migration was the abundant resources and the higher land to labour ratio in the Americas which cause a huge initial divergence in wages from European economies (Hatton and Williamson, 1998, 2005). Data for 1870 shows in fact that British real wages were less than 60% of those for British workers in the US, with Irish wages amounting to 44% of their US counterparts and Norwegian ones to a mere 26%, according to Hatton and Williamson (2005, p.55). The United States allowed such a stream with its liberal immigration policies and with new travel technologies the cost to migrate was decreasing steadily while gains from making the voyage were high. Increasing fertility rates supplied more mobile young workers who now, thanks to industrialization, were detached from their land. Furthermore, as immigrants built up in the US, their relatives and friends had an extra incentive to migrate.

The effects of such a high quantity of migrants were an obvious but still impressive contribution to the economic growth of the time, especially in the industrial sector, which raised the living standards of the US. However, repercussions on the American economy, as proposed by Taylor and Williamson (1997), were a significant impact on unskilled labour wages. All New World destinations suffered in fact from lower unskilled real wages, with the US figure amounting to 8% less than without immigrants. Although economic growth counterbalanced this issue and raised living standards, there was a political backlash which lead to restrictive immigration policies in the late 1800s (Timmer and Williamson, 1998). Examples of these can be seen with the 1888 ban of Chinese immigration, lasting twenty years, and with the introduction of literacy tests in 1917, which effectively reduced unskilled immigrants. The increase of such labour however benefitted the American people from another point of view. By the end of the 1900s in fact, workers gained significant power and the basis for the modern welfare state was born, thanks to labour-market regulations and the introduction of sickness and unemployment insurance (Lindert, 2004).

Foreign Direct Investment and the Internationalisation of American Industry

A second aspect of globalization at the time was the impressive integration of capital markets. The US from 1870 to 1913 especially prospered from its abundant resources and good access to capital from Europe, which was considered by Feis (1930) as the world’s financial centre. At the time, for emerging markets such as America’s, foreign investments by the rest of the world were considered very safe. This is reflected in bond spreads, which were less than half of those in 1990 (Mauro et al. 2002). The US in fact received around 20.5% of all English capital exports. This success in attracting foreign investment was due to its ability to provide Europeans with food for consumers and raw materials for factories. In turn, as Clemens and Williamson (2004) prove, finances were employed inland to improve infrastructure, land, housing and transport systems. The US also did its share of foreign investment in places such as Cuba and Panama, with their capital held abroad amounting to $685 million in 1897, when right after the Civil War it was a mere $75 million. From 1897 to the late 1920s, it rose a further $20 billion (Lebergott, 1980).

As part of global capital integration, the US turned, like the rest of the world, to more stable and conservative fiscal and monetary policies, such as the adherence to the gold standard (Bordo and Rockoff, 1996). The benefits were twofold. First, it removed risk from exchange-rate fluctuations, and second, it reassured potential investors with the reasonably safer returns that came with pursuing conservative policies. The second half of the 19th century was also an important step in the movement of capital under the form of innovation and technology. The United States for example received textile technology mainly from Britain (Clark, 1987), while spreading their own knowledge in other sectors such as ship building or communication technologies to Europe or even Japan (Jeremy, 1991). This type of capital transfer was extremely facilitated by improvements and cost reductions for transports and by general spread of knowledge through migration. On the flipside of the coin, to circumvent restrictions imposed by governments and to protect the excessive spread of intellectual property, many multinational corporations were born during this period. The American firm West Electrics for example set up production in various European countries, thus establishing a secure presence in the market through direct foreign investment (Foreman-Peck, 1991). Finally, it can be said that scientific knowledge was used as a showcase of power and technical prowess, especially for rival European states such as Germany and France, looking to establish links with strong neutral countries, in particular the US (Charle, 1994, chp.8). The States also hosted the 1876 World Fair in Philadelphia, the first ever outside Europe, where also Chinese and Japanese exhibits took place, demonstrating America’s advance and internationalization.

International Trade

Trade of goods, another major aspect of globalization, saw a major increase throughout the world and in the US during the analysed period. It was favoured by a relatively widespread state of peace between the main powers (Jacks, 2006), the use of the gold standard, which stabilised exchange rates, and an overall decrease in risk due to faster and more regular ships. In its special case, America also benefitted from the fact that Europe couldn’t produce enough textiles like cotton and thus they catered most of the demand that came from the Old World. As previously stated, the US was also endowed with a large amount of raw materials and agricultural products, thus exporting them in great quantities to Europe. This caused a major price convergence, testament of the highly integrated Atlantic economies. The Liverpool-Chicago wheat price gap between 1870 and 1913 decreased from 57.6% to 15.6%, while bacon’s price gap saw a fall from 92.5% to 17.9%. The same convergence of US-British price gaps happened for industrial goods like copper, iron and textiles, plummeting from 32.7% to -0.1%, 85.2% to 19.3% and 13.7 to -3.6% respectively (O’Rourke and Williamson, 1994). The period saw also an efficient development of new railroads and improvement of existing ones, effectively lowering US’s internal transport costs. In fact, the cost of shipping wheat from Chicago to New York, as a percentage of Chicago wheat price, fell from 17.2% to 5.5%, while the cost of shipping it from New York to Liverpool fell slightly less: 11.6% to 4.7% (Findlay and O’Rourke, 2007, p.382). Although initially the US had a high wage/rent ratio (w/r), due to its vast lands and scarce labour, this price convergence and consequent decrease of America’s w/r was to be expected, as O’Rourke and Williamson (1999) tell us, with land prices soaring, manufactured goods having more foreign competition and farmers exporting more in the late 19th century.

Conclusion

Many conclusions can be drawn after analysing the question of how the United States of America had been affected and how it had responded to the 1870 wave of globalisation. From the development and spread of technology throughout the country, to the sheer amount of trade in goods and capital movement, to the diversification and growth of the population, the US has definitely been fully hit by all of the changes brought on in the second half of the 19th century and the beginning of the 20th. The variety of its reaction to such changes is also impressive and it formed, with start of the first immigration policies or the birth of the first multinational corporations or even the beginning of a primitive welfare state subsequent to the increase in labour force, what in the future years would become the America we know today.

Bibliography

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  • Charle, C. 1994. La République des Universitaires. Paris: Seuil.
  • Chiswick, B.R. and T.J. Hatton. 2003. International Migration and the Integration of Labor Markets. In Globalization in Historical Perspective, ed. M.D. Bordo, A.M. Taylor and J.G. Williamson. Chicago: University of Chicago Press.
  • Clark, G. 1987. Why Isn’t the Whole World Developed? Lessons from the Cotton Mills. Journal of Economic History 47: 141-173.
  • Clemens, M.A. and J.G. Williamson. 2004a. Wealth Bias in the First Global Capital Market Boom, 1870-1913. Economic Journal 114: 304-337.
  • Feis, H. 1930. Europe the World’s Banker 1870-1914: An Account of European Foreign Investment and the Connection of World Finance with Diplomacy Before the War. New Haven: Yale University Press.
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    Hatton, T.J. and J.G. Williamson. 2005. Global Migration and the World Economy: Two Centuries of Policy and Performance. Cambridge MA: MIT Press.
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