Econ 111
Economic History of the
United States
Bretton Woods: The Development of an International Monetary System
In July of 1944, a group of American and British officials met at the Mount Washington Hotel in Bretton Woods, New Hampshire (Eichengreen, 7). They were confronted with an immense challenge: How to create a stable international monetary policy at the end of the Second World War. What had emerged from Bretton Woods was a system that lasted for almost three decades while the institutions evolved to confront the challenges of today's global economy.
There were two objectives of Bretton Woods. The first objective was to promote faster growth through increased integration of the world economy. The second was to promote a stability of balance of payments system for international trade (Bayouni, 1995). Before Bretton Woods, the economics of global trade was based on the minting of gold and silver coins. Nations would engage in trade-importing and exporting products with other nations-conducting payments for goods in gold and silver coin (Eichengreen, 8-9). In the 19th century, Britain adopted a new monetary policy where the government would convert its currency into gold at a fixed rate of exchange on demand. This was the start of the gold standard (Eichengreen, 22). In the gold standard, balance of payments deficits were paid through the export of gold. This resulted in a decrease of the domestic money supply, causing a deflation of prices. This would cause an decrease in imports to the country. At the same time, the country's prices of exports would drop, stimulating international demand for the country's exports until the balance of payments deficit was corrected. A balance of payments surplus worked the opposed way. An increase in the money supply in a country would cause an increase in prices. This would have the opposite effect of increasing the demand for imports into the country and reducing exports, thus eliminating the surplus (Gavin, 1996). The gold standard lasted among the major powers until the 1930s and the world depression.
The participants of Bretton Woods recognized an important factor in trade liberalization and a system of open payments between nations (Bayouni, 1995). During the 1930s depression, nations had attempted to protect their industries and employment from an economic downturn by increasing exports, while at the same time limiting imports through high tariffs levied on products. While this policy may work on a single nation, however when all the great powers adopted these policies, international trade plummeted, further exasperating the economic malaise(A Fund By Design, 1991). The result of this downturn was the rise of fascist governments in Germany, Italy, and Japan in which each government embarked on a policy of military conquest for economic gains (Thurow, 1992).
To promote a stability of money supply and balance of payments, the International Monetary Fund (IMF) was created. This was the heart of Bretton Woods. The IMF was designed to monitor a system of fixed exchange rates between nations currencies and to provide short term loans to countries suffering balance of payments deficits (A Gift From The Cold War: Bretton Woods Revisited, 1994). The IMF was actually a compromise between British economist John Maynard Keynes and U.S. Treasury economist Harry Dexter White (Eichengreen, 97). Keynes wanted to allow countries to change their exchange rates and apply trade restrictions to reconcile full employment and balance of payments. White opposed this plan, insisting upon a world free of controls with pegged currencies supervised by an international organization (Eichengreen, 96). A compromised was worked out for the development of an "adjustable peg." This would allow for world currencies to be set at an exchange rate pegged to the gold or the U.S. dollar. The U.S. dollar would then be set at a fixed rate of gold. Currency adjustments were allowed under IMF supervision (A Gift From The Cold War: Bretton Woods Revisited, 1994). In effect, the U.S. dollar became the world's currency.
In one aspect, the IMF became a club where member nations would consult each other on international monetary problems. Upon joining the IMF, members would contribute a sum of money called a quota which would be used by the IMF to provide the short term loans to countries with balance of payments problems. Each member nation would have a percentage of voting power in IMF decisions based on the proportion of its quota (Fieleke, 1994). When the IMF began operations in 1946, the fund had 39 members. By 1994, the fund had grown to 178 members (Fieleke, 1994).
The IMF system of exchange rates worked up until the 1970s. By the early 1970s, the United States had incurred large balance of payments deficits (Fieleke, 1994). Much of the deficits were the result of increased U.S. military spending to finance the Vietnam War (Gavin, 1996). With more dollars chasing gold reserves, foreign governments confidence in the U.S government's ability to pay the original fixed dollar amount of $35.00 per ounce of gold had dropped. Governments began cashing dollars in for gold, causing a run on the U.S. gold reserves. On August 15, 1971, the Nixon Administration suspended the dollar's convertibility into gold, causing the dollar's value to rise and fall in relation to other world's currencies (Fieleke, 1994). The system of fixed exchange rates based on gold was scrapped. The dollar was no longer the world's currency.
But the International Monetary Fund still exists. The IMF continued its job as a lender of short term loans for countries experiencing balance of payment problems. In addition, the IMF developed lines of credit for nations to draw upon to pay cyclical deficits (A Fund By Design, 1991). Finally, the IMF has started to provide technical assistance to countries in areas of fiscal, monetary, and foreign exchange management. In 1993, the IMF dispatched 606 technical assistance missions to nations, (Fieleke, 1994).
The second unique institution created was the World Bank. The World Bank is a publicly owned institution which finances its loan operations by selling bonds (Crook, 1991. The bank's original purpose was to provide loans to nations for post-Second World War reconstruction and economic development (Mikesell, 2000). However, the World Bank was unable to complete the task after the United States embarked on the Marshall Plan for economic reconstruction of Europe and a similar reconstruction plan for Japan (Mikesell, 2000). In fact, one important aspect of the U.S. Marshall plan aid to Europe was the recipient's conditional agreement for a timetable to liberalize trade relations (Bayouni, 1995). This condition closely linked U.S and European trade policies closely together. No such condition of liberalizing trade policies existed with World Bank loans. What is interesting is that the World Bank adapted its role towards short term macro economic policy in developing programs of economic reform and backing the reform with loans. The bank attempted to place an economic theory into a viable program. Poor countries would have scarce capital for investment, but would have an abundance of labor and natural resources. The theory was that rich countries would provide an abundance of capital to poor countries on the premise that the investments into a poor country would provide a high rate of return on the investment (Singer, 1995). The World Bank would be the intermediary between the rich industrial countries providing capital for investment, and the poor countries requesting loans for economic development. However, attempts to design and implement this program became difficult and time consuming. The World Bank ended up operating on a limited basis (Singer 1995).
In 1970, former U.S. Secretary of Defense Robert McNamara became president of the World Bank. He adapted the World Bank's role away from funding large scale economical projects in developing countries to providing loans and resources to governments for spending on marginal projects which were not analyzed by the bank. The World Bank adapted to a new principle of fungibility (Singer, 1995). The World Bank has gradually evolved into an institution providing financial programs to countries for economic and social progress.
Finally, the members of the Bretton Woods conference recognized the importance of free trade. They were first hand witnesses of how governments, when faced with economic problems, would raise tariffs to discourage imports and push for exports, causing the collapse of free trade. The collapse of free trade and the introduction of projectionist measures resulted in the evolution of military blocks of powerful nations whose purpose was to expand and gain economic assets through military means. The delegates decided to create an organization called the International Trade Organization (ITO). The ITO was to coordinate the simultaneous reduction of tariffs and quotas in member nations (Eichengreen, 101). The ITO was finalized by 56 countries participating in the United Nations Conference on Trade and Employment, held in Havana, Cuba. However, the U.S. killed the ITO by failing to ratify the Havana Charter which would result in the creation of the ITO (Eichengreen, 101). The ITO was attached in the United States by trade protectionists who opposed its liberal policies on trade, and perfectionists who criticized the exceptions by countries seeking to establish full employment, accelerating economic development, and stabilizing prices of commodity exports (Eichengreen, 101). Out of the ashes of the ITO came the General Agreements of Tariffs and Trade (GATT). GATT provided a forum in which nations could reduce the levels of tariffs and promote open trade. In the first GATT round in Geneva, 1947, the U.S. agreed to cut its tariffs by a third (Eichengreen, 101). In 1995, the Uruguay Rounds of GATT created the World Trade Organization (WTO). The WTO takes up where the ITO left off-promoting free trade and the reduction of tariffs. However, the WTO has enormous powers, such as the authority to impose trade sanctions on member nations violating free trade rules (Evans, 1995). The authority to impose trade sanctions was never provided to GATT or the ITO. Yet GATT and the WTO will be facing a world at a crossroads. While the nations of the world espouse the ideas of free and liberal trade, however, a sense of regionalism has crept in as seen with the North American Free Trade Agreement--which creates a trading block between the United States, Canada and Mexico. A second regional trading block is the European Union which creates a free trade area among the nations of Western Europe. These are only two of the regional blocks of nations which are evolving and the WTO must find a means of promoting free trade among these blocks before protectionism can set in.
Bretton Woods may not have been the perfect system created to manage international finance on those summer days in New Hampshire. But the system has worked to a point where the world has remained at peace and international trade has continued without major problems.
Works Cited.
A Fund By Design. (1991). The Economist. Vol. 321. No. 7728. Pg. 57.
A Gift From The Cold War: Bretton Woods Revisited. (1994). The Economist. Vol. 332. No. 7871. Pg. 69.
Bayoumi, Tamim. (1995). The Postwar Economic Achievement. Finance & Development. Vol. 32. Pg. 48-51.
Crook, Clive. (1991). Two Pillars Of Wisdom: The IMF And The World Bank. The Economist. Vol. 321. No. 7728. Pg. 51.
Eichengreen, Barry. Globalizing Capital. Princeton. Princeton University Press. (1996).
Evans, Richard. (1995). Brave New World Order. The Geographic Magazine. Vol. 67. Pg. 39-42.
Fieleke, Norman S. (1994). The International Monetary Fund 50 Years After Bretton Woods. New England Economic Review. Pg. 17.
Gavin, Francis J. (1996). The Legends Of Bretton Woods. Orbis. Vol. 40. Pg. 183.
Mikesell, Raymond F. (2000). Bretton Woods-Original Intentions And Current Problems. Contemporary Economic Policy. Vol. 18. No. 4. Pg. 404-414.
Singer, Hans W. (1995). Bretton Woods And The UN System. The Ecumenical Review. Vol. 47. No. 3. Pg. 348.
Thurow, Lester C. (1992). New Rules For Playing The Game. National Forum. Vol. 72. No. 4. Pg. 10.
Showing posts with label SJSU Economic Essays. Show all posts
Showing posts with label SJSU Economic Essays. Show all posts
Wednesday, May 25, 2005
How the West Grew Rich
Econ 136
International Economics
April 26, 2005
Book Report: How the West Grew Rich
Five hundred years after the birth of Jesus Christ, the most powerful civilization in the world at that time—the Roman Empire—had collapsed. From its ashes, a more powerful civilization would arise. And in the next fifteen hundred years, this civilization would nearly take over the world in its views, its morals and beliefs. This civilization is known as the West.
How did the West gain its power? In a unique book called “How the West Grew Rich,” L.E Birdzell and Nathan Rosenberg claim that the West grew powerful through the gradual incorporation of unique thoughts and ideas of seeking out growth-inducing changes deeply within Western civilization. By incorporating these ideas within the social fabric of Western society, the West could continue to slowly advance economically, socially, and militarily, without any destabilizing changes which may occur in the rise or decline of an empire controlled by a single, charismatic political figure. They start their historical journey of gradual change from the rise and fall of the Middle Ages, through the mercantile system of the 16th century, finally culminating to an analysis of the Industrial Revolution, the Post-Industrial Revolution and development of free market economic systems of the United States and Europe.
Birdzell and Rosenberg start their unique work at the beginning of the Middle Ages. The Roman Empire has fallen, and the West’s wealth and power would germinate from the seeds of feudal society in Europe. Europe was a backwater society. There was no technology, production facilities, transportation systems, communication systems, or even any financial systems. The economy was agricultural—raising food for sustenance. The political and economic system was feudalism. Birdzell (et all) defines feudalism as a “system in which occupants of the land hold it as tenants of the sovereign in exchange for military service,” (41). The sovereign lord would own the land. Peasants, or serfs, would farm the land in a form of slavery. There was no social mobility—your status was defined by birth. There were no incentives to improve agricultural technology or output. Medieval towns and villages were comprised of merchants and artisans, who would trade simple manufactured goods for agricultural products. The contract between the lord and his workers were not based on wages for productivity, “but on a complex of political and social status, loyalty, and duty, reinforced by coercion” (45). Feudal society was complex in that it provided two types of contracts. The first was a social contract between the sovereign and his subjects in a similar manner as a contract between the state and the governed, with the state’s legitimacy dependent on the state of the governed. The second contract was that the institutions were designed to promote security and stability. Feudal society was patterned on the military. Its concept of sovereigns parceling out land to military commanders in exchange for their military services is key to understanding why feudalism survived for so long. What is important about feudalism is that it was a social and economic system, which is the complete opposite of today’s current Western society. Feudalism could not adapt to changes. Feudal armies could not adapt to the introduction of gunpowder in warfare—a trained knight in shining armor could easily be stopped by an infantryman wielding a musket. Heavily fortified castles could not take the pounding of siege canon. As a result, peasant and village armies for defense had to be adapted to new armies of professional soldiers—soldiers who were to be paid with new forms of financing. The simple agricultural system of the sovereign providing defense to his subjects in return for agricultural goods were disrupted with numerous famines, crop failures, wars, and plagues. This disruption had caused a decline in the population of Europe (66). The feudal system had to adapt in providing greater incentives to the serfs in exchange for increased agricultural output. This would provide the serfs more food, increase their health, and that greater amounts of surplus food could be traded in the towns and villages for more manufactured goods, produced by the villagers and artisans. This increase in trade of food for goods gave rise to a new specialization--the merchant. Birdzell defines the role of the merchant as to “intermediate, through money, the underlying local and distant exchanges of goods for goods. The merchant’s products are place, time, liquidity, and risk. They buy here and sell there, buy now and sell later,” (99). The merchant class in feudal society acted as a middleman in exchanging goods between different groups. As merchants were able to travel greater distances between different towns and early medieval cities, they were able to offer a greater variety of goods from differing geographical areas. This provided incentives to landowners and sovereigns to trade with the merchants for raw materials, or more importantly, for the luxury goods brought in from the Middle East and China during the Crusades. Because of this inflexibility to adapt to new changes in technology, society and the environment, that feudalism would be scrapped for new civil and social systems to provide the West with an advanced economy and great wealth.
Why did this change occur in the West and not in the Middle East or China? Both the Islamic Middle Eastern and Chinese societies were far more advanced in their own economic systems and in technology. The Middle East was situated at a prime geographic location where traders could act as middleman, trading raw materials of coal, iron ore, and lumber from Europe, for luxury goods in the Middle East and China. China was a technologically advanced society, which invented gunpowder and paper money. But why did European society advance far beyond either the Islamic or Chinese societies to the point where the greater European powers were carving up the Middle East and China in the 18th and 19th centuries? Within “How the West Grew Rich,” there are two subtle reasons, which answer this question. The first is religion. As feudal society had to adapt itself to the new concepts of trade and commerce, new institutions had to evolve in order to resolve disputes in commerce. Feudal society was based on tradition, custom, loyalty and kinship. This was the basis of trust and morality of feudal society—a morality that was heavily influenced by the church. Birdzell and Rosenberg claim that, “A morality inherited from a medieval economy based on faithful compliance with customary relationship could not have been expected to fit a commercial economy in which individual choice and bargaining had superseded custom as the basis of exchange,” (128). In a commercial economy, trust becomes a complex arrangement between different agents to purchase, sell, deliver or promise the quality of goods being exchanged. How do you resolve disputes stemming from this complex arrangement using custom and kinship? It took the Protestant Reformation to resolve this issue. The Protestant Reformation allowed for the separation of business from religion. “Protestantism emphasized the belief that salvation was intensely individual and personal,” (133). This is a powerful event, for it separates and individual’s desire to further their own self-interest from their moral beliefs. It also separates the church from imposing its own religious views in secular or governmental activities. Religion no longer had the power to decide commercial disputes. Instead, commercial disputes had to be decided within new institutions of which based their decisions on logic, reasoning, and legal precedents. Middle Eastern society has not had anything like the Protestant Reformation occur within the Islamic religion. Business or commercial disputes are not resolved through reasoning or legal precedents, but rather through religious judges interpretation of the Koran. This interpretation is highly subjective, depending on the judge’s knowledge of religion and his own personal beliefs. Disputes regarding complex trade or financial agreements could not be resolved in a logical or reasonable means to the acceptance of either party.
The second reason why China did not change was based on how incentives were received in Chinese society. While Europe was struggling through the Middle Ages, China had developed a technologically and culturally advanced civilization. And yet, Chinese society was very similar to the feudal society of Europe. Birdzell says that “China was ruled by mandarins, a class of civil servants with no prospect whatever of hereditary succession. Thus, Chinese civilization was more rational in the very specific sense that people were admitted to positions of leadership on the basis of ability and not of birth,” (87). The problem was that the mandarin leadership was unable to change. The Chinese had developed an economic system that allowed for a father to pursue commerce and trade for economic gains. Once the father had profited from his gains, the son would aspire, “not to expand or even necessarily to perpetuate the family business, but to prepare for the imperial examinations and to enter and eventually rise in the mandarinate. These values underplayed the importance of bettering the material conditions of everyday life,” (88). Trade and commerce was not pursued for an individual’s own self-interest, but rather as a means to enter the Chinese civil service. Once the individuals were able to enter and rise within the civil service, their own views became hardened and resistant to change. This is also opposite of social systems which evolved in European society. Individuals in the post-feudal and mercantile civilizations also responded to their own self-interests regarding trade and commerce. But they pursued their interests for their own individual reasons—not simply as a social means to gain entrance to a government bureaucracy. Also in China, the civil service was a centralized institution based on merit. The mandarins utilized technology as a means to gain pleasure or to satisfy curiosity. Europe, on the other hand, was decentralized with competing aristocracies and individual centers of economic and political power. Competition between these aristocracies and the individual centers for economic resources and luxury goods resulted in the adaptation of new technologies and the development of economic and commercial systems based on newly discovered knowledge and research. This allowed for the West to change and adapt its political, economic, social and military institutions so that by the 18th century, the West would become more powerful than either China or the Middle East.
Throughout this book, Birdzell and Rosenberg continuously stress the West’s ability to adapt to different changes in history. This adaptation comes from a wide variety of changes—changes in political systems, economic systems, the military, and religion. But there are other changes that Birdzell and Rosenberg also include in their history. There is the evolution of shipbuilding, from the simple one-masted galleys used since the Roman times, to the building of fully rigged ships from the 15th to 19th centuries. There is the development of a banking industry, checking accounts, and lines of credit--all can be traced back to the use of bills of exchange in Italy during the 13th century. Bills of exchange were merchant drafts, drawn from their accounts and used as substitutes for payment of coin. These bills allowed merchants to transfer funds in the same way as modern Western individuals transfer funds between banks. The introduction of guilds, proprietorships, partnerships, and corporations, all stemmed from the need for a group of individuals to form a secularized version of a family to conduct business transactions to the benefit of the group and to the benefit of each individual’s self-interest. There are interesting historical details regarding each of these examples. What is more interesting is that Birdzell and Rosenberg have the ability to weave each of these individual details into a rich tapestry of connecting ideas which cleverly show the gradual evolution of economic history of the West. The West had to change because events in history forced the West to change. After the fall of Rome, Western civilization had to learn that a society based on inflexibility and stagnation would ultimately fail. It is because of those lesions, that the West has learned to become one of the richest and most powerful civilizations in the world today.
Notes.
Birdzell, L.E. and Rosenberg, Nathan. How the West Grew Rich. Basic Books. 1986.
International Economics
April 26, 2005
Book Report: How the West Grew Rich
Five hundred years after the birth of Jesus Christ, the most powerful civilization in the world at that time—the Roman Empire—had collapsed. From its ashes, a more powerful civilization would arise. And in the next fifteen hundred years, this civilization would nearly take over the world in its views, its morals and beliefs. This civilization is known as the West.
How did the West gain its power? In a unique book called “How the West Grew Rich,” L.E Birdzell and Nathan Rosenberg claim that the West grew powerful through the gradual incorporation of unique thoughts and ideas of seeking out growth-inducing changes deeply within Western civilization. By incorporating these ideas within the social fabric of Western society, the West could continue to slowly advance economically, socially, and militarily, without any destabilizing changes which may occur in the rise or decline of an empire controlled by a single, charismatic political figure. They start their historical journey of gradual change from the rise and fall of the Middle Ages, through the mercantile system of the 16th century, finally culminating to an analysis of the Industrial Revolution, the Post-Industrial Revolution and development of free market economic systems of the United States and Europe.
Birdzell and Rosenberg start their unique work at the beginning of the Middle Ages. The Roman Empire has fallen, and the West’s wealth and power would germinate from the seeds of feudal society in Europe. Europe was a backwater society. There was no technology, production facilities, transportation systems, communication systems, or even any financial systems. The economy was agricultural—raising food for sustenance. The political and economic system was feudalism. Birdzell (et all) defines feudalism as a “system in which occupants of the land hold it as tenants of the sovereign in exchange for military service,” (41). The sovereign lord would own the land. Peasants, or serfs, would farm the land in a form of slavery. There was no social mobility—your status was defined by birth. There were no incentives to improve agricultural technology or output. Medieval towns and villages were comprised of merchants and artisans, who would trade simple manufactured goods for agricultural products. The contract between the lord and his workers were not based on wages for productivity, “but on a complex of political and social status, loyalty, and duty, reinforced by coercion” (45). Feudal society was complex in that it provided two types of contracts. The first was a social contract between the sovereign and his subjects in a similar manner as a contract between the state and the governed, with the state’s legitimacy dependent on the state of the governed. The second contract was that the institutions were designed to promote security and stability. Feudal society was patterned on the military. Its concept of sovereigns parceling out land to military commanders in exchange for their military services is key to understanding why feudalism survived for so long. What is important about feudalism is that it was a social and economic system, which is the complete opposite of today’s current Western society. Feudalism could not adapt to changes. Feudal armies could not adapt to the introduction of gunpowder in warfare—a trained knight in shining armor could easily be stopped by an infantryman wielding a musket. Heavily fortified castles could not take the pounding of siege canon. As a result, peasant and village armies for defense had to be adapted to new armies of professional soldiers—soldiers who were to be paid with new forms of financing. The simple agricultural system of the sovereign providing defense to his subjects in return for agricultural goods were disrupted with numerous famines, crop failures, wars, and plagues. This disruption had caused a decline in the population of Europe (66). The feudal system had to adapt in providing greater incentives to the serfs in exchange for increased agricultural output. This would provide the serfs more food, increase their health, and that greater amounts of surplus food could be traded in the towns and villages for more manufactured goods, produced by the villagers and artisans. This increase in trade of food for goods gave rise to a new specialization--the merchant. Birdzell defines the role of the merchant as to “intermediate, through money, the underlying local and distant exchanges of goods for goods. The merchant’s products are place, time, liquidity, and risk. They buy here and sell there, buy now and sell later,” (99). The merchant class in feudal society acted as a middleman in exchanging goods between different groups. As merchants were able to travel greater distances between different towns and early medieval cities, they were able to offer a greater variety of goods from differing geographical areas. This provided incentives to landowners and sovereigns to trade with the merchants for raw materials, or more importantly, for the luxury goods brought in from the Middle East and China during the Crusades. Because of this inflexibility to adapt to new changes in technology, society and the environment, that feudalism would be scrapped for new civil and social systems to provide the West with an advanced economy and great wealth.
Why did this change occur in the West and not in the Middle East or China? Both the Islamic Middle Eastern and Chinese societies were far more advanced in their own economic systems and in technology. The Middle East was situated at a prime geographic location where traders could act as middleman, trading raw materials of coal, iron ore, and lumber from Europe, for luxury goods in the Middle East and China. China was a technologically advanced society, which invented gunpowder and paper money. But why did European society advance far beyond either the Islamic or Chinese societies to the point where the greater European powers were carving up the Middle East and China in the 18th and 19th centuries? Within “How the West Grew Rich,” there are two subtle reasons, which answer this question. The first is religion. As feudal society had to adapt itself to the new concepts of trade and commerce, new institutions had to evolve in order to resolve disputes in commerce. Feudal society was based on tradition, custom, loyalty and kinship. This was the basis of trust and morality of feudal society—a morality that was heavily influenced by the church. Birdzell and Rosenberg claim that, “A morality inherited from a medieval economy based on faithful compliance with customary relationship could not have been expected to fit a commercial economy in which individual choice and bargaining had superseded custom as the basis of exchange,” (128). In a commercial economy, trust becomes a complex arrangement between different agents to purchase, sell, deliver or promise the quality of goods being exchanged. How do you resolve disputes stemming from this complex arrangement using custom and kinship? It took the Protestant Reformation to resolve this issue. The Protestant Reformation allowed for the separation of business from religion. “Protestantism emphasized the belief that salvation was intensely individual and personal,” (133). This is a powerful event, for it separates and individual’s desire to further their own self-interest from their moral beliefs. It also separates the church from imposing its own religious views in secular or governmental activities. Religion no longer had the power to decide commercial disputes. Instead, commercial disputes had to be decided within new institutions of which based their decisions on logic, reasoning, and legal precedents. Middle Eastern society has not had anything like the Protestant Reformation occur within the Islamic religion. Business or commercial disputes are not resolved through reasoning or legal precedents, but rather through religious judges interpretation of the Koran. This interpretation is highly subjective, depending on the judge’s knowledge of religion and his own personal beliefs. Disputes regarding complex trade or financial agreements could not be resolved in a logical or reasonable means to the acceptance of either party.
The second reason why China did not change was based on how incentives were received in Chinese society. While Europe was struggling through the Middle Ages, China had developed a technologically and culturally advanced civilization. And yet, Chinese society was very similar to the feudal society of Europe. Birdzell says that “China was ruled by mandarins, a class of civil servants with no prospect whatever of hereditary succession. Thus, Chinese civilization was more rational in the very specific sense that people were admitted to positions of leadership on the basis of ability and not of birth,” (87). The problem was that the mandarin leadership was unable to change. The Chinese had developed an economic system that allowed for a father to pursue commerce and trade for economic gains. Once the father had profited from his gains, the son would aspire, “not to expand or even necessarily to perpetuate the family business, but to prepare for the imperial examinations and to enter and eventually rise in the mandarinate. These values underplayed the importance of bettering the material conditions of everyday life,” (88). Trade and commerce was not pursued for an individual’s own self-interest, but rather as a means to enter the Chinese civil service. Once the individuals were able to enter and rise within the civil service, their own views became hardened and resistant to change. This is also opposite of social systems which evolved in European society. Individuals in the post-feudal and mercantile civilizations also responded to their own self-interests regarding trade and commerce. But they pursued their interests for their own individual reasons—not simply as a social means to gain entrance to a government bureaucracy. Also in China, the civil service was a centralized institution based on merit. The mandarins utilized technology as a means to gain pleasure or to satisfy curiosity. Europe, on the other hand, was decentralized with competing aristocracies and individual centers of economic and political power. Competition between these aristocracies and the individual centers for economic resources and luxury goods resulted in the adaptation of new technologies and the development of economic and commercial systems based on newly discovered knowledge and research. This allowed for the West to change and adapt its political, economic, social and military institutions so that by the 18th century, the West would become more powerful than either China or the Middle East.
Throughout this book, Birdzell and Rosenberg continuously stress the West’s ability to adapt to different changes in history. This adaptation comes from a wide variety of changes—changes in political systems, economic systems, the military, and religion. But there are other changes that Birdzell and Rosenberg also include in their history. There is the evolution of shipbuilding, from the simple one-masted galleys used since the Roman times, to the building of fully rigged ships from the 15th to 19th centuries. There is the development of a banking industry, checking accounts, and lines of credit--all can be traced back to the use of bills of exchange in Italy during the 13th century. Bills of exchange were merchant drafts, drawn from their accounts and used as substitutes for payment of coin. These bills allowed merchants to transfer funds in the same way as modern Western individuals transfer funds between banks. The introduction of guilds, proprietorships, partnerships, and corporations, all stemmed from the need for a group of individuals to form a secularized version of a family to conduct business transactions to the benefit of the group and to the benefit of each individual’s self-interest. There are interesting historical details regarding each of these examples. What is more interesting is that Birdzell and Rosenberg have the ability to weave each of these individual details into a rich tapestry of connecting ideas which cleverly show the gradual evolution of economic history of the West. The West had to change because events in history forced the West to change. After the fall of Rome, Western civilization had to learn that a society based on inflexibility and stagnation would ultimately fail. It is because of those lesions, that the West has learned to become one of the richest and most powerful civilizations in the world today.
Notes.
Birdzell, L.E. and Rosenberg, Nathan. How the West Grew Rich. Basic Books. 1986.
The Marshall Plan: The Economic Recovery of Europe
Economics 110
Economic History of Europe
12-18-01
The Marshall Plan: The Economic Recovery of Europe
Europe; 1947. Only two years had passed since the defeat of Hitler’s Third Reich. The continent was divided between the American, British and French armies in the Western half of Germany and Europe, while Eastern half of Germany and East European countries were controlled by the Red Army under the protection of the Soviet Union.
Europe was at a serious crossroads at this time. The continent was devastated after 7 years of total war. Cities were in rubble. Industrial production centers were destroyed. Transportation centers such as roads and railways were smashed. European nations such as Great Britain and France were unable to export manufactured goods in order to raise capital so as to import food, raw materials to improve their industrial base, or even to pay down their war debts. In addition, this lack of industrial production would cause factories to lay off workers, increasing unemployment. With European people out of work, they would not have the means to provide for basic living necessities such as food and shelter. It was at this time that socialist and Marxist-based political movements began to grow in their numbers, membership, and their political power.
On June 5, 1947, Secretary of State George C. Marshall announced the European Recovery Program in his commencement address at Harvard University (Walker, 1997). This humble plan would allow the United States to provide aid and to rebuild the war-ravaged economies of Europe. George Marshall stressed that, “It would be neither fitting or efficacious for this government to undertake to draw up unilaterally a program designed to place Europe on its feet economically. This is the business of the Europeans. The initiative, I think, must come from Europe,” (Walker, 1997). The European Recovery Program, subsequently named The Marshall Plan, would become a successful lifeline to save Europe.
The Marshall Plan was a unique program in that not only did the program help rebuild Europe’s economy, but also cemented a stronger relationship between Europe and the United States, but also planted the seeds for European unification. Thus, the Marshall Plan was an economic and a political success. The European Recovery Program had three goals. The first goal was to remedy the “dollar gap,” (Kunz, 1997). In this dollar gap, European nations were short of U.S. dollars, which needed to import U.S goods (Kunz, 1997). European nations also lacked any substantial gold reserves since such gold reserves were used to purchase war materials from the United States early on in the Second World War. In 1945, the U.S. actually held half the world’s gold and currency reserves and produced half the world’s manufactured goods (Reynolds, 1997). Without gold or American dollars, European nations could not purchase goods from the United States. This problem brought a second integrated goal of the Marshall Plan aid. While the economic infrastructures of Europe and Asia were destroyed during the war, the U.S. infrastructure remained intact. American industry needed a market to sell their products. In the beginning of 1947, economic indicators were pointing to a possible recession in the United States. With the possible recession in the U.S., coupled with the poor economic conditions of Europe, the State Department feared such ramifications could cause trade protectionism by nations, followed by a drop in global trade and the possible rise of global fascism—conditions similar to the late 1930s and the aftermath of the Great Depression (Kunz, 1997). United States Under Secretary for Economic Affairs William L Clayton said, “Let us admit right off that our objective has at its background the needs and interests of the people of the United States. We need markets—big markets—in which to buy and sell (Reynolds, 1997). Finally, Marshall aid would provide debt relief for European nations. This allowed Europe to consolidate their balance sheets, freeing up currency that could be use to purchase more American goods in order to rebuild their economic infrastructure. Great Britain and Norway both used counterpart funds—funds the European governments were required to put up equal to the value of European Recovery Program goods in which Washington wanted earmarked for specific purposes—to reduce their debt (Reynolds, 1997).
The Marshall Plan called for the creation of the Economic Co-Operation Administration or ECA. The ECA would be an inter-governmental agency between Washington and the European countries, which would earmark Marshall aid dollars for reconstruction. Two individuals would head the ECA jointly. In Washington, Paul Hoffman, the former president of the Studebaker Automobile Company, would head the ECA. While in Europe, the ECA would be headed by former Secretary of Commerce Averall Harriman (Maddox, 1997). The ECA allocated grants and loans to European nations according to each countries dollar balance of payment deficit (Kunz, 1997). Great Britain received 23% of Marshall Plan aid, while France received 20% of Marshall Plan aid (Kunz, 1997). Overall, one-third of all Marshall aid imports were agricultural products (Kunz, 1997). Between 1948 and 1951, Congress authorized over $13 billion in Marshall aid for Europe (Maddox, 1997). The ECA also provided American technical and manufacturing expertise to help modernize European industry and brought European managers over to the U.S. to observe American manufacturing techniques (Maddox, 1997).
Was the Marshall Plan a success? In terms of industrial production, Marshall aid dollars provided an incredible catalyst to jump-start the European economies. In 1951, Italy’s industrial production was up 54% (Walker, 1997). In France, industrial production had increased 50% higher than it had been in 1939 (Walker, 1997). As a whole, Western European industrial production rose 62% in the two years after 1947 (Walker, 1997). However, the Marshall Plan provided an even greater political success in three areas. First, the Marshall Plan cemented American interests firmly into Western Europe. The years of 1947 to 1951 marked the beginning of the Cold War between the United States and Soviet Union. In March of 1947, President Harry Truman invoked the Truman Doctrine, which pledged U.S. support to nations threatened by subversions. Truman also offered $250 million in aid to Greece and $150 million in aid to Turkey in order to fight off communist insurgencies (Kunz, 1997). In Western European governments, socialist and communist parties were making inroads in gaining legislative seats among the governments of France and Italy (Kunz, 1997). George Kennan’s Policy Planning Staff reported that, “Economic maladjustment…makes European society vulnerable to exploitation by any and all totalitarian movements,” (Kunz, 1997). Marshall Plan aid allowed Washington to cement close ties towards Europe and allow the European leaders to avoid dealing with power-sharing arrangements with extreme leftist and Marxist parties. The second great political success of the Marshall Plan was that it allowed the coalescence of a defensive alliance between Europe and the United States while providing containment policy against the Soviet Union. Marshall aid helped rebuild a strong Western European economy. Yet at the same time, the development of a stronger European economy also meant the need for a stronger defensive force to counter Soviet military power in Eastern Europe. In the opening months of 1948, the United States and Great Britain started to develop the possibility of a security alliance. This security alliance evolved into the North Atlantic Treaty Organization on April 4, 1949 (Kunz, 1997). NATO and the deployment of U.S. troops in Europe deterred any Soviet attempts to militarily invade Western Europe. Finally, the Marshall Plan allowed for the early beginnings of European integration. The Marshall Plan forced the European nations to come together and hammer out an aid package, which they were to provide to the United States. Individual nations had to set aside their differences to achieve common ground. In addition, the ECA became an inter-European government agency, which was influential in shaping European monetary and fiscal policy as a whole, rather than shaping such policy within individual nations at the expense of others. Success of the ECA allowed for further European economic co-operation with the development of the European Economic Community, the Common Market, and finally the European Union.
The Marshall Plan was a unique economic program, which lifted a continent from the destruction of war to a plateau of strong prosperity. No other aid program could compare in scope or grand design—nor could such a plan hailed as successful. George Marshall reiterated in his Harvard address “Our policy is not directed against any country or doctrine, but against hunger, poverty, desperation, and chaos,” (Walker, 1997). For George Marshall, the people of the United States showed that resolve and humane gesture for the people of Europe.
Notes
Kunz. Diane B. (1997). The Marshall Plan Reconsidered: A Complex Of Motives. Foreign Affairs. Vol. 76. No. 3. Pg. 162.
Maddox, Robert James. (1997). Lifeline To A Sinking Continent. American Heritage. Vol 48. No. 4. Pg. 90.
Reynolds, David. (1997). The European Response: Primacy Of Politics. Foreign Affairs. Vol. 76. No. 3. Pg. 17.
Walker, Martin. (1997). George Marshall: His Plan Helped Save Europe. Europe. No. 365. Pg. 22.
Economic History of Europe
12-18-01
The Marshall Plan: The Economic Recovery of Europe
Europe; 1947. Only two years had passed since the defeat of Hitler’s Third Reich. The continent was divided between the American, British and French armies in the Western half of Germany and Europe, while Eastern half of Germany and East European countries were controlled by the Red Army under the protection of the Soviet Union.
Europe was at a serious crossroads at this time. The continent was devastated after 7 years of total war. Cities were in rubble. Industrial production centers were destroyed. Transportation centers such as roads and railways were smashed. European nations such as Great Britain and France were unable to export manufactured goods in order to raise capital so as to import food, raw materials to improve their industrial base, or even to pay down their war debts. In addition, this lack of industrial production would cause factories to lay off workers, increasing unemployment. With European people out of work, they would not have the means to provide for basic living necessities such as food and shelter. It was at this time that socialist and Marxist-based political movements began to grow in their numbers, membership, and their political power.
On June 5, 1947, Secretary of State George C. Marshall announced the European Recovery Program in his commencement address at Harvard University (Walker, 1997). This humble plan would allow the United States to provide aid and to rebuild the war-ravaged economies of Europe. George Marshall stressed that, “It would be neither fitting or efficacious for this government to undertake to draw up unilaterally a program designed to place Europe on its feet economically. This is the business of the Europeans. The initiative, I think, must come from Europe,” (Walker, 1997). The European Recovery Program, subsequently named The Marshall Plan, would become a successful lifeline to save Europe.
The Marshall Plan was a unique program in that not only did the program help rebuild Europe’s economy, but also cemented a stronger relationship between Europe and the United States, but also planted the seeds for European unification. Thus, the Marshall Plan was an economic and a political success. The European Recovery Program had three goals. The first goal was to remedy the “dollar gap,” (Kunz, 1997). In this dollar gap, European nations were short of U.S. dollars, which needed to import U.S goods (Kunz, 1997). European nations also lacked any substantial gold reserves since such gold reserves were used to purchase war materials from the United States early on in the Second World War. In 1945, the U.S. actually held half the world’s gold and currency reserves and produced half the world’s manufactured goods (Reynolds, 1997). Without gold or American dollars, European nations could not purchase goods from the United States. This problem brought a second integrated goal of the Marshall Plan aid. While the economic infrastructures of Europe and Asia were destroyed during the war, the U.S. infrastructure remained intact. American industry needed a market to sell their products. In the beginning of 1947, economic indicators were pointing to a possible recession in the United States. With the possible recession in the U.S., coupled with the poor economic conditions of Europe, the State Department feared such ramifications could cause trade protectionism by nations, followed by a drop in global trade and the possible rise of global fascism—conditions similar to the late 1930s and the aftermath of the Great Depression (Kunz, 1997). United States Under Secretary for Economic Affairs William L Clayton said, “Let us admit right off that our objective has at its background the needs and interests of the people of the United States. We need markets—big markets—in which to buy and sell (Reynolds, 1997). Finally, Marshall aid would provide debt relief for European nations. This allowed Europe to consolidate their balance sheets, freeing up currency that could be use to purchase more American goods in order to rebuild their economic infrastructure. Great Britain and Norway both used counterpart funds—funds the European governments were required to put up equal to the value of European Recovery Program goods in which Washington wanted earmarked for specific purposes—to reduce their debt (Reynolds, 1997).
The Marshall Plan called for the creation of the Economic Co-Operation Administration or ECA. The ECA would be an inter-governmental agency between Washington and the European countries, which would earmark Marshall aid dollars for reconstruction. Two individuals would head the ECA jointly. In Washington, Paul Hoffman, the former president of the Studebaker Automobile Company, would head the ECA. While in Europe, the ECA would be headed by former Secretary of Commerce Averall Harriman (Maddox, 1997). The ECA allocated grants and loans to European nations according to each countries dollar balance of payment deficit (Kunz, 1997). Great Britain received 23% of Marshall Plan aid, while France received 20% of Marshall Plan aid (Kunz, 1997). Overall, one-third of all Marshall aid imports were agricultural products (Kunz, 1997). Between 1948 and 1951, Congress authorized over $13 billion in Marshall aid for Europe (Maddox, 1997). The ECA also provided American technical and manufacturing expertise to help modernize European industry and brought European managers over to the U.S. to observe American manufacturing techniques (Maddox, 1997).
Was the Marshall Plan a success? In terms of industrial production, Marshall aid dollars provided an incredible catalyst to jump-start the European economies. In 1951, Italy’s industrial production was up 54% (Walker, 1997). In France, industrial production had increased 50% higher than it had been in 1939 (Walker, 1997). As a whole, Western European industrial production rose 62% in the two years after 1947 (Walker, 1997). However, the Marshall Plan provided an even greater political success in three areas. First, the Marshall Plan cemented American interests firmly into Western Europe. The years of 1947 to 1951 marked the beginning of the Cold War between the United States and Soviet Union. In March of 1947, President Harry Truman invoked the Truman Doctrine, which pledged U.S. support to nations threatened by subversions. Truman also offered $250 million in aid to Greece and $150 million in aid to Turkey in order to fight off communist insurgencies (Kunz, 1997). In Western European governments, socialist and communist parties were making inroads in gaining legislative seats among the governments of France and Italy (Kunz, 1997). George Kennan’s Policy Planning Staff reported that, “Economic maladjustment…makes European society vulnerable to exploitation by any and all totalitarian movements,” (Kunz, 1997). Marshall Plan aid allowed Washington to cement close ties towards Europe and allow the European leaders to avoid dealing with power-sharing arrangements with extreme leftist and Marxist parties. The second great political success of the Marshall Plan was that it allowed the coalescence of a defensive alliance between Europe and the United States while providing containment policy against the Soviet Union. Marshall aid helped rebuild a strong Western European economy. Yet at the same time, the development of a stronger European economy also meant the need for a stronger defensive force to counter Soviet military power in Eastern Europe. In the opening months of 1948, the United States and Great Britain started to develop the possibility of a security alliance. This security alliance evolved into the North Atlantic Treaty Organization on April 4, 1949 (Kunz, 1997). NATO and the deployment of U.S. troops in Europe deterred any Soviet attempts to militarily invade Western Europe. Finally, the Marshall Plan allowed for the early beginnings of European integration. The Marshall Plan forced the European nations to come together and hammer out an aid package, which they were to provide to the United States. Individual nations had to set aside their differences to achieve common ground. In addition, the ECA became an inter-European government agency, which was influential in shaping European monetary and fiscal policy as a whole, rather than shaping such policy within individual nations at the expense of others. Success of the ECA allowed for further European economic co-operation with the development of the European Economic Community, the Common Market, and finally the European Union.
The Marshall Plan was a unique economic program, which lifted a continent from the destruction of war to a plateau of strong prosperity. No other aid program could compare in scope or grand design—nor could such a plan hailed as successful. George Marshall reiterated in his Harvard address “Our policy is not directed against any country or doctrine, but against hunger, poverty, desperation, and chaos,” (Walker, 1997). For George Marshall, the people of the United States showed that resolve and humane gesture for the people of Europe.
Notes
Kunz. Diane B. (1997). The Marshall Plan Reconsidered: A Complex Of Motives. Foreign Affairs. Vol. 76. No. 3. Pg. 162.
Maddox, Robert James. (1997). Lifeline To A Sinking Continent. American Heritage. Vol 48. No. 4. Pg. 90.
Reynolds, David. (1997). The European Response: Primacy Of Politics. Foreign Affairs. Vol. 76. No. 3. Pg. 17.
Walker, Martin. (1997). George Marshall: His Plan Helped Save Europe. Europe. No. 365. Pg. 22.
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