It is only cheating if you get caught – Creative accounting at the Bank of England in the 1960s

by Alain Naef (Postdoctoral fellow at the University of California, Berkeley)

This research was presented at the EHS conference in Keele in 2018 and is available as a working paper here. It is also available as an updated 2019 version here.

 

Naef 3
The Bank of England. Available at Wikimedia Commons.

The 1960s were a period of crisis for the pound. Britain was on a fixed exchange rate system and needed to defend its currency with intervention on the foreign exchange market. To avoid a crisis, the Bank of England resorted to ‘window dressing’ the published reserve figures.

In the 1960s, the Bank came under pressure from two sides: first, publication of the Radcliffe report (https://en.wikipedia.org/wiki/Radcliffe_report) forced publication of more transparent accounts. Second, with removal of capital controls in 1958, the Bank came under attack from international speculators (Schenk 2010). These contradictory pressures put the Bank in an awkward position. It needed to publish its reserve position (holdings of dollars and gold ) but it recognised that doing so could trigger a run on sterling, thereby creating a self-fulfilling currency crisis (see Krugman: http://www.nber.org/chapters/c11032.pdf).

For a long time, the Bank had a reputation for the obscurity of its accounts and its lack of transparency. Andy Haldane (Chief Economist at the Bank) recognised, for ‘most of [it’s] history, opacity has been deeply ingrained in central banks’ psyche’.

(https://www.bankofengland.co.uk/speech/2017/a-little-more-conversation-a-little-less-action). One Federal Reserve (Fed) memo noted that the Bank of England took ‘a certain pride in pointing out that hardly anything can be inferred by outsiders from their balance sheet’, another that ‘it seems clear that the Bank of England is being pushed – by much public criticism – into giving out more information.’ However, the Bank did eventually publish reserve figures at a quarterly, and then monthly, frequency (Figure 1).

Transparency about the reserves created a risk for a currency crisis so in late 1966 the Bank developed a strategy for reporting levels that would not cause a crisis (Capie 2010). Figure 1 illustrates how ‘window dressing’ worked. The solid line reports the convertible reserves as published in the Quarterly Bulletin of the Bank of England. This information was available to market participants. The stacked columns show the actual daily dollar reserves. Spikes appear at monthly intervals, indicating the short-term borrowing that was used to ensure the reserves level was high enough on reporting days.

 

Figure 1. Published EEA convertible currency reserves vs. actual dollar reserves held at the EEA, 1962-1971.

Naef 1

 

The Bank borrowed dollars shortly before the reserve reporting day by drawing on swap lines (similar to the Fed in 2007 https://voxeu.org/article/central-bank-swap-lines). Swap drawings could be used overnight. Table 1 illustrates how window dressing worked using data from the EEA ledgers available at the archives of the Bank. As an example, on Friday, 31 May 1968, the Bank borrowed over £450 million – an increase in reserves of 171%. The swap operation was reversed the next working day, and on Tuesday the reserves level was back to where it was before reporting. The details of these operations emphasise how swap networks were short-term instruments to manipulate published figures.

 

Table 1. Daily entry in the EEA ledger showing how window dressing worked

Naef 2

 

The Bank of England’s window dressing was done in collaboration with the Fed. Both discussed reserve figures before the Bank published them. During most of the 1960s, the Bank and the Fed were in contact daily about exchange rate matters. Records of these phone conversations are parsimonious at the Bank but the Fed kept daily records (Archives of the Fed in New York, references 617031 and 617015).

During the 1960s, collaboration between the two central banks intensified. The Bank consulted the Fed on the exact wording of the reserve publication (Naef, 2019) and the Fed communicated on the swap position with the Bank, to ensure consonance between the public statements. Indeed, the Fed sent excerpts of minutes to the Bank to allow excision of anything mentioning window dressing (Archives of the Fed in New York, reference 107320). Thus, in December 1971, before publishing the minutes of the Federal Open Market Committee (FOMC) for 1966, Charles Coombs (a leading figure at the Fed) consulted Richard Hallet (Chief Cashier at the Bank):

‘You will recall that when you visited us in December 1969, we invited you to look over selected excerpts from the 1966 FOMC minutes involving certain delicate points that we thought you might wish to have deleted from the published version. We have subsequently deleted all of the passages which you found troublesome. Recently, we have made a final review of the minutes and have turned up one other passage that I am not certain you had an opportunity to go over. I am enclosing a copy of the excerpt, with possible deletions bracketed in red ink.’

Source: Letter from Coombs to Hallet, New York Federal Reserve Bank archives, 1 December 1971, Box 107320.)

 

Coombs suggested deleting passages where some FOMC members criticised window dressing, while other members suggested the Bank would get better results ‘if they reported their reserve position accurately than if they attempted to conceal their true reserve position’ (https://fraser.stlouisfed.org/scribd/?item_id=22913&filepath=/docs/historical/FOMC/meetingdocuments/19660628Minutesv.pdf). However, MacLaury (FOMC), stressed that there was a risk of ‘setting off a cycle of speculation against sterling’ if the Bank published a loss of $200 million, which was ‘large for a single month’ in comparison with what was published the previous month.

The history of the Bank’s window dressing is a reminder of the difficulties central banks face in managing reserves, a situation similar to how investors today closely monitor the reserves of the People’s Bank of China.

 

 

To contact the author: alain.naef@berkeley.edu

 

References:

Capie, Forrest. 2010. The Bank of England: 1950s to 1979. Cambridge: Cambridge University Press.

Naef, Alain. 2019. “Dirty Float or Clean Intervention?  The Bank of England in the Foreign Exchange Market.” Lund Papers in Economic History. General Issues, no. 2019:199. http://lup.lub.lu.se/record/dfe46e60-6dfb-4380-8354-e7b699ed8ef9.

Schenk, Catherine. 2010. The Decline of Sterling: Managing the Retreat of an International Currency, 1945–1992. Cambridge University Press.

All quiet before the take-off? Pre-industrial regional inequality in Sweden (1571-1850)

by Anna Missiaia and Kersten Enflo (Lund University)

This research is due to be published in the Economic History Review and is currently available on Early View.

 

Missiaia Main.jpg
Södra Bancohuset (The Southern National Bank Building), Stockholm. Available here at Wikimedia Commons.

For a long time, scholars have thought about regional inequality merely as a by-product of modern economic growth: following a Kuznets-style interpretation, the front-running regions increase their income levels and regional inequality during industrialization; and it is only when the other regions catch-up that overall regional inequality decreases and completes the inverted-U shaped pattern. But early empirical research on this theme was largely focused on the  the 20th century, ignoring industrial take-off of many countries (Williamson, 1965).  More recent empirical studies have pushed the temporal boundary back to the mid-19th century, finding that inequality in regional GDP was already high at the outset of modern industrialization (see for instance Rosés et al., 2010 on Spain and Felice, 2018 on Italy).

The main constraint for taking the estimations well into the pre-industrial period is the availability of suitable regional sources. The exceptional quality of Swedish sources allowed us for the first time to estimate a dataset of regional GDP for a European economy going back to the 16th century (Enflo and Missiaia, 2018). The estimates used here for 1571 are largely based on a one-off tax proportional to the yearly production: the Swedish Crown imposed this tax on all Swedish citizens in order to pay a ransom for the strategic Älvsborg castle that had just been conquered by Denmark. For the period 1750-1850, the estimates rely on standard population censuses. By connecting the new series to the existing ones from 1860 onwards by Enflo et al. (2014), we obtain the longest regional GDP series for any given country.

We find that inequality increased dramatically between 1571 and 1750 and remained high until the mid-19th century. Thereafter, it declined during the modern industrialization of the country (Figure 1). Our results discard the traditional  view that regional divergence can only originate during an industrial take-off.

 

Figure 1. Coefficient of variation of GDP per capita across Swedish counties, 1571-2010.

Missiaia 1
Sources: 1571-1850: Enflo and. Missiaia, ‘Regional GDP estimates for Sweden, 1571-1850’; 1860-2010: Enflo et al, ‘Swedish regional GDP 1855-2000 and Rosés and Wolf, ‘The Economic Development of Europe’s Regions’.

 

Figure 2 shows the relative disparities in four benchmark years. If the country appeared relatively equal in 1571, between 1750 and 1850 both the mining districts in central and northern Sweden and the port cities of Stockholm and Gothenburg emerged.

 

Figure 2. The relative evolution of GDP per capita, 1571-1850 (Sweden=100).

Missiaia 2
Sources: 1571-1850: Enflo and. Missiaia, ‘Regional GDP estimates for Sweden, 1571-1850’; 2010: Rosés and Wolf, ‘The Economic Development of Europe’s Regions’.

The second part of the paper is devoted to the study of the drivers of pre-industrial regional inequality. Decomposing the Theil index for GDP per worker, we show that regional inequality was driven by structural change, meaning that regions diverged because they specialized in different sectors. A handful of regions specialized in either early manufacturing or in mining, both with a much higher productivity per worker compared to agriculture.

To explain this different trajectory, we use a theoretical framework introduced by Strulik and Weisdorf (2008) in the context of the British Industrial Revolution: in regions with a higher share of GDP in agriculture, technological advancements lead to productivity improvements but also to a proportional increase in population, impeding the growth in GDP per capita as in a classic Malthusian framework. Regions with a higher share of GDP in industry, on the other hand, experienced limited population growth due to the increasing relative price of children, leading to a higher level of GDP per capita. Regional inequality in this framework arises from a different role of the Malthusian mechanism in the two sectors.

Our work speaks to a growing literature on the origin of regional divergence and represents the first effort to perform this type of analysis before the 19th century.

 

To contact the authors:

anna.missiaia@ekh.lu.se

kerstin.enflo@ekh.lu.se

 

References

Enflo, K. and Missiaia, A., ‘Regional GDP estimates for Sweden, 1571-1850’, Historical Methods, 51(2018), 115-137.

Enflo, K., Henning, M. and Schön, L., ‘Swedish regional GDP 1855-2000 Estimations and general trends in the Swedish regional system’, Research in Economic History, 30(2014), pp. 47-89.

Felice, E., ‘The roots of a dual equilibrium: GDP, productivity, and structural change in the Italian regions in the long run (1871-2011)’, European Review of Economic History, (2018), forthcoming.

Rosés, J., Martínez-Galarraga, J. and Tirado, D., ‘The upswing of regional income inequality in Spain (1860–1930)’,  Explorations in Economic History, 47(2010), pp. 244-257.

Strulik, H., and J. Weisdorf. ‘Population, food, and knowledge: a simple unified growth theory.’ Journal of Economic Growth 13.3 (2008): 195.

Williamson, J., ‘Regional Inequality and the Process of National Development: A Description of the Patterns’, Economic Development and Cultural Change 13(1965), pp. 1-84.

 

How many days a year did people work in England before the Industrial Revolution?

By Judy Stephenson (University College London)

The full paper that inspired this blog post will be published on The Economic History Review and is currently available on early view here

DomeConstruction09
St Paul’s Cathedral – the construction of the Dome. Available at <https://www.explore-stpauls.net/oct03/textMM/DomeConstructionN.htm>

How many days a year did people work in England before the Industrial Revolution? For those who don’t spend their waking hours desperate for sources to inform wages and GDP per capita over seven centuries, this question provokes an agreeable discussion about artisans, agriculture and tradition. Someone will mention EP Thompson and clocks or Saint Mondays. ‘Really that few?’ It’s quaint.

But, for those of us who do spend our waking hours desperate for sources to inform wages and GDP per capita over seven centuries the question has evolved in the last few years into a debate about productivity and when modern economic growth began in an ‘industrious revolution’. A serious body of research in economic history has recently estimated increasing numbers of days that people worked from the late seventeenth century. Current estimates are that people worked about 270 days a year by 1700, rising to about 300 after 1750.

The uninitiated might think that estimates of such important things like the working year would be based on some substantive evidence, but in fact, most estimates of the working year that economic historians have been using for the last two decades don’t come from working records at all. They come from court depositions where witnesses told the courts when they went to and left work, or they come from working out how many days a worker had to toil to afford a basket of consumption goods. This approach, pioneered by Jacob Weisdorf and Bob Allen in 2011, essentially holds welfare as a constant throughout history, and it’s the key assumption made in a new paper on wages forthcoming from Jane Humphries and Jacob Weisdorf. Unsurprisingly for historians familiar with material showing the miserable conditions under which the poor toiled in eighteenth century Britain, this calculation frequently leads to a high number of days worked. It also implies that Londoners, due to higher day wages, may have had slightly more leisure than rural workers. Both implications might appear counterintuitive.

Knowledgeable historians, such as John Hatcher, have pointed out that the idea that anyone had 270 days paid work a year before the industrial revolution is fanciful. But unless there was an industrious revolution, and people did begin to work more days per year in market work – as Jan de Vries posited – the established evidence firmly implies that workers became worse off throughout the eighteenth century, because wage rates as measured by builders wages didn’t increase in line with inflation, and in fact builders earned even less than we thought.

My article, “Working days in a London construction team in the eighteenth century: evidence from St Paul’s Cathedral” forthcoming in the Review, takes a different approach: it uses the actual working records of a team of masons working under William Kempster who constructed the South West tower of St Paul’s Cathedral. For five years in the 1700s, these archives are exceptionally detailed. They show that building was seasonal (it’s not like we didn’t know – it’s just we had sort of forgotten), and building was stage dependent, so not all men could have worked all year. In fact, they didn’t. Surprisingly, for a stable firm at an established and large site, very few men worked for Kempster for more than about 27 weeks. Work was temporal and insecure, and working and employment relationships were casual.

If one was to take a crude average of the days each man worked in any year it would be less than 150 days. To do so is obviously misleading and that’s not what the paper claims, because obviously men worked for other employers too. But, what the working patterns reveal is that unless men seamlessly moved from one employer to another with no search costs or time in between, it would have been impossible for them to have worked 250 days a year. Its more plausible that they were able to work between 200 and 220 days.

Moreover, the data shows that men did not work the full 6 days per week on offer. The average number of days worked per week was only 5.2. This wasn’t because men did not work Saint Mondays (which are almost indiscernible) but because they took idiosyncratic breaks. Only the foremen seem to have been able to sustain six days a week.

However, men that had a longer relationship with Kempster worked more days per year than the rest. This implies that stronger working relationships or consolidation of employers and workers relationships might have led to an increase in the average number of days worked. However, architectural and construction historians generally think that consolidation in the industry did not occur until the 1820s. If there was an industrious revolution in the eighteenth century it might not have happened for builders. If builders’ wages are representative – and that old assumption seems increasingly stretched these days – then the story for wages in the eighteenth century is even more pessimistic than before.

The evidence from working records presented in this article paper are still relatively fragmentary but they do clearly show that holding welfare to be stable by calculating the number of days worked from consumption goods – as the Weisdorf/ Humphries/ Allen approach does not give us the whole story.

But then again, is it really plausible to hold welfare stable? The debate, and scholarship no doubt will continue.

 

To contact the author:

J.Stephenson@ucl.ac.uk

@judyzara

A Policy of Credit Disruption: The Punjab Land Alienation Act of 1900

by Latika Chaudhary (Naval Postgraduate School) and Anand V. Swamy (Williams College)

This research is due to be published in the Economic History Review and is currently available on Early View.

 

Agriculture_in_Punjab_India
Farming, farms, crops, agriculture in North India. Available at Wikimedia Commons.

In the late 19th century the British-Indian government (the Raj) became preoccupied with default on debt and the consequent transfer of land in rural India. In many regions Raj officials made the following argument: British rule had created or clarified individual property rights in land, which had for the first time made land available as collateral for debt. Consequently, peasants could now borrow up to the full value of their land. The Raj had also replaced informal village-based forms of dispute resolution with a formal legal system operating outside the village, which favored the lender over the borrower. Peasants were spendthrift and naïve, and unable to negotiate the new formal courts created by British rule, whereas lenders were predatory and legally savvy. Borrowers were frequently defaulting, and land was rapidly passing from long-standing resident peasants to professional moneylenders who were often either immigrant, of another religion, or sometimes both.  This would lead to social unrest and threaten British rule. To preserve British rule it was essential that one of the links in the chain be broken, even if this meant abandoning cherished notions of sanctity of property and contract.

The Punjab Land Alienation Act (PLAA) of 1900 was the most ambitious policy intervention motivated by this thinking. It sought to prevent professional moneylenders from acquiring the property of traditional landowners. To this end it banned, except under some conditions, the permanent transfer of land from an owner belonging to an ‘agricultural tribe’ to a buyer or creditor who was not from this tribe. Moreover, a lender who was not from an agricultural tribe could no longer seize the land of a defaulting debtor who was from an agricultural tribe.

The PLAA made direct restrictions on the transfer of land a respectable part of the policy apparatus of the Raj and its influence persists to the present-day. There is a substantial literature on the emergence of the PLAA, yet there is no econometric work on two basic questions regarding its impact. First, did the PLAA reduce the availability of mortgage-backed credit? Or were borrowers and lenders able to use various devices to evade the Act, thereby neutralizing it?  Second, if less credit was available, what were the effects on agricultural outcomes and productivity? We use panel data methods to address these questions, for the first time, so far as we know.

Our work provides evidence regarding an unusual policy experiment that is relevant to a hypothesis of broad interest. It is often argued that ‘clean titling’ of assets can facilitate their use as collateral, increasing access to credit, leading to more investment and faster growth. Informed by this hypothesis, many studies estimate the effects of titling on credit and other outcomes, but they usually pertain to making assets more usable as collateral. The PLAA went in the opposite direction – it reduced the “collateralizability” of land which should have  reduced investment and growth, based on the argument we have described. We investigate whether it did.

To identify the effects of the PLAA, we assembled a panel dataset on 25 districts in Punjab from 1890 to 1910. Our dataset contains information on mortgages and sales of land, economic outcomes, such as acreage and ownership of cattle, and control variables like rainfall and population. Because the PLAA targeted professional moneylenders, it should have reduced mortgage-backed credit more in places where they were bigger players in the credit market. Hence, we interact a measure of the importance of the professional, that is, non-agricultural, moneylenders in the mortgage market with an indicator variable for the introduction of the PLAA, which takes the value of  1 from 1900 onward. As expected, we find that  that the PLAA contracted credit more in places where professional moneylenders played a larger role – compared to  districts with no professional moneylenders.  The PLAA reduced mortgage-backed credit by 48 percentage points more at the 25th percentile of our measure of moneylender-importance and by 61 percentage points more at the 75th percentile.

However, this decrease of mortgage-backed credit in professional moneylender-dominated areas did not lead to lower acreage or less ownership of cattle. In short, the PLAA affected credit markets as we might expect without undermining agricultural productivity. Because we have panel data, we are able to account for potential confounding factors such as time-invariant unobserved differences across districts (using district fixed effects), common district-specific shocks (using year effects) and the possibility that districts were trending differently independent of the PLAA (using district-specific time trends).

British officials provided a plausible explanation for the non-impact of PLAA on agricultural production: lenders had merely become more judicious – they were still willing to lend for productive activity, but not for ‘extravagant’ expenditures, such as social ceremonies.  There may be a general lesson here:  policies that make it harder for lenders to recover money may have the beneficial effect of encouraging due diligence.

 

 

To contact the authors:

lhartman@nps.edu

aswamy@williams.edu

Falling Behind and Catching up: India’s Transition from a Colonial Economy

by Bishnupriya Gupta (University of Warwick and CAGE)

The full paper of this blog post was published by The Economic History Review and it is available here 

152473-004-E0D19F36
Official of the East India Company riding in an Indian procession, watercolour on paper, c. 1825–30; in the Victoria and Albert Museum, London. Available at <https://www.britannica.com/topic/East-India-Company/media/1/176643/162308&gt;

There has been much discussion in recent years about India’s growth failure in the first 30 years after independence in 1947. India became a highly-regulated economy and withdrew from the global market. This led to inefficiency and low growth. The architect of Indian planning –Jawaharlal Nehru, the first prime minister, did not put India on an East Asian path. As a contrast, the last decade of the 20th century has seen a reintegration into the global economy and today India is one of the fastest growing economies.

Any analysis of Indian growth and development that starts in 1947, is deeply flawed. It ignores the history of development and the impact of colonization. This paper takes a long run view of India’s economic development and argues that the Indian economy stagnated under colonial rule and a reversal came with independence. Although a slow growth in comparison to East Asia, the Nehruvian legacy put India on a growth path.

Tharoor (2017) in his book Inglorious Empire argues that Britain’s industrial revolution was built on the destruction of Indian textile industries and British rule turned India from an exporter of agricultural goods.  A different view on colonial rule comes from Niall Ferguson in his book Empire: How Britain Made the Modern World. Ferguson claimed that even if the British rule did not increase Indian incomes, things might have been much worse under a restored Mughal regime in 1857. The British build the railways and connected India to the rest of the world.

Neither of these views are based on statistical evidence. Data on GDP per capita (Figure 1), shows that there was a slow decline and stagnation over a long period. Evidence on wages and per capita GDP show a prosperous economy in 1600 under the Mughal Emperor Akbar. Living standards began to decline from the middle of the 17th century, before colonization, continued as the East India Company gained territorial control in 1757. It is important to note that the decline coincided with increased integration with international markets and the rising trade in textiles to Europe. In 1857, India became a part of the global economy of the British Empire. Indian trade volume increased, but from an exporter or industrial products, India became an exporter if food and raw material. Per capita income stagnated even as trade increased, the colonial government built a railway network and British entrepreneurs owned large parts of the industrial sector. In 1947, the country was one of the poorest in the world. Figure 1 below also tells us that growth picked up after independence as India moved towards regulation and restrictions on trade and private investment.

What explains the stagnation in income prior to independence? The colonial government invested very little in the main sector, agriculture. The bulk of British investment went to the railways, but not in irrigation. The railways, initially connected the hinterland with the ports, but over time integrated markets, reducing price variability across markets. However, it did not contribute increasing agricultural productivity. Without large investment in irrigation, output per acre declined in areas that did not get canals. Industry on the other had was the fastest growing sector, but employed only 10 per cent of the work force. Stagnation of the economy under control rule had little to do with trade.

fig01
Indian GDP per capita between 1600 and 2000. Source: Aniruddha Bagchi, “Why did the Indian economy stagnate under the colonial rule?”  in Ideas for India 2013

Indian growth reversal began in independent India with regulation of trade and industry and a break with the global economy. For the first time in the 20th century, the Indian economy began to grow as the graph shows with investment in capital goods industries and agricultural infrastructure. Industrial growth and the green revolution in agriculture, moved the economy from stagnation to growth. This growth slowed down, but the economy did not stagnate as in the colonial period. Following economic reforms after the 1980s, India has entered a high growth regime. The initial increase in growth was a response to removal of restrictions on domestic private investment, well before reintegration into the global economy in the 1990s. The foundations for growth were laid in the first three decades after independence.

The institutional legacy of British rule, had long run consequences. One example is education policy that prioritized investment in secondary and tertiary education, creating a small group with higher education, but few with basic primary schooling. In 1947, less than one–fifth of the population had basic education. The higher education bias in education continued after independence and has created an advantage for the service sector. There are lessons from history to understand Indian growth after independence.

 

To contact the author: B.Gupta@warwick.ac.uk

Why did the industrial diet triumph?

by Fernando Collantes (University of Zaragoza and Instituto Agroalimentario de Aragón)

This blog is part of a larger research paper published in the Economic History Review.

 

Harvard_food_pyramid
Harvard food pyramid. Available at Wikimedia Commons.

Consumers in the Northern hemisphere are feeling increasingly uneasy about their industrial diet. Few question that during the twentieth century the industrial diet helped us solve the nutritional problems related to scarcity. But there is now growing recognition that the triumph of the industrial diet triggered new problems related to abundance, among them obesity, excessive consumerism and environmental degradation. Currently, alternatives, ranging from organic food and those bearing geographical-‘quality’ labels, struggle to transcend the industrial diet. Frequently, these alternatives face a major obstacle: their relatively high price compared to mass-produced and mass-retailed food.

The research that I have conducted examines the literature on nutritional transitions, food regimes and food history, and positions it within present-day debates on diet change in affluent societies.  I employ a case-study of the growth in mass consumption of dairy products in Spain between 1965 and 1990. In the mid-1960s, dairy consumption was very low in Spain and many suffered from calcium deficiency.  Subsequently, there was a rapid growth in consumption. Milk, especially, became an integral part of the diet for the population. Alongside mass consumption there was also mass-production and complementary technical change. In the early 1960s, most consumers only drank raw milk, but by the 1990s milk was being sterilised and pasteurised to standard specifications by an emergent national dairy industry.

In the early 1960s, the regular purchase of milk was too expensive for most households. By the early 1990s, an increase in household incomes, complemented by (alleged) price reductions generated by dairy industrialization, facilitated rapid milk consumption. A further factor aiding consumption was changing consumer preferences. Previously, consumers perceptions of milk were affected by recurrent episodes of poisoning and fraud. The process of dairy industrialization ensured a greater supply of ‘safe’ milk and this encouraged consumers to use their increased real incomes to buy more milk. ‘Quality’ milk meant milk that was safe to consume became the main theme in the advertising campaigns employed milk processers (Figure 1).

 

Figure 1. Advertisement by La Lactaria Española in the early 1970s.

Collantes Pic
Source: Revista Española de Lechería, no. 90 (1973).

 

What are the implications of my research to contemporary debates on food quality? First the transition toward a diet richer in organic foods and foods characterised by short food-supply chains and artisan-like production, backed by geographical-quality labels has more than niche relevance. There are historical precedents (such as the one studied in this article) of large sections of the populace willing to pay premium prices for food products that in some senses are  perceived as qualitatively superior to other, more ‘conventional’ alternatives. If it happened in the past, it can happen again.  Indeed, new qualitative substitutions are already taking place. The key issue is the direction of this substitution. Will consumers use their affluence to ‘green’ their diet? Or will they use higher incomes  to purchase more highly processed foods — with possibly negative implications for  public health and environmental sustainability? This juncture between  food-system dynamics and  public policy is crucial. As Fernand Braudel argued, it is the extraordinary capacity for adaption that defines capitalism.  My research suggests that we need public policies that reorient food capitalism towards socially progressive ends.

 

To contact the author:  collantf@unizar.es

Asia’s ‘little divergence’ in the twentieth century: evidence from PPP-based direct estimates of GDP per capita, 1913–69

by Jean-Pascal Bassino (ENS Lyon) and Pierre van der Eng (Australian National University)

This blog is part of a larger research paper published in the Economic History Review.

 

Bassino1
Vietnam, rice paddy. Available at Pixabay.

In the ‘great divergence’ debate, China, India, and Japan have been used to represent the Asian continent. However, their development experience is not likely to be representative of the whole of Asia. The countries of Southeast Asia were relatively underpopulated for a considerable period.  Very different endowments of natural resources (particularly land) and labour were key parameters that determined economic development options.

Maddison’s series of per-capita GDP in purchasing power parity (PPP) adjusted international dollars, based on a single 1990 benchmark and backward extrapolation, indicate that a divergence took place in 19th century Asia: Japan was well above other Asian countries in 1913. In 2018 the Maddison Project Database released a new international series of GDP per capita that accommodate the available historical PPP-based converters. Due to the very limited availability of historical PPP-based converters for Asian countries, the 2018 database retains many of the shortcomings of the single-year extrapolation.

Maddison’s estimates indicate that Japan’s GDP per capita in 1913 was much higher than in other Asian countries, and that Asian countries started their development experiences from broadly comparable levels of GDP per capita in the early nineteenth century. This implies that an Asian divergence took place in the 19th century as a consequence of Japan’s economic transformation during the Meiji era (1868-1912). There is now  growing recognition that the use of a single benchmark year and the choice of a particular year may influence the historical levels of GDP per capita across countries. Relative levels of Asian countries based on Maddison’s estimates of per capita GDP are not confirmed by other indicators such as real unskilled wages or the average height of adults.

Our study uses available estimates of GDP per capita in current prices from historical national accounting projects, and estimates PPP-based converters and PPP-adjusted GDP with multiple benchmarks years (1913, 1922, 1938, 1952, 1958, and 1969) for India, Indonesia, Korea, Malaya, Myanmar (then Burma), the Philippines, Sri Lanka (then Ceylon), Taiwan, Thailand and Vietnam, relative to Japan. China is added on the basis of other studies. PPP-based converters are used to calculate GDP per capita in constant PPP yen. The indices of GDP per capita in Japan and other countries were expressed as a proportion of GDP per capita in Japan during the years 1910–70 in 1934–6 yen, and then converted to 1990 international dollars by relying on PPP-adjusted Japanese series comparable to US GDP series. Figure 1 presents the resulting series for Asian countries.

 

Figure 1. GDP per capita in selected Asian countries, 1910–1970 (1934–6 Japanese yen)

Bassino2
Sources: see original article.

 

The conventional view dates the start of the divergence to the nineteenth century. Our study identifies the First World War and the 1920s as the era during which the little divergence in Asia occurred. During the 1920s, most countries in Asia — except Japan —depended significantly on exports of primary commodities. The growth experience of Southeast Asia seems to have been largely characterised by market integration in national economies and by the mobilisation of hitherto underutilised resources (labour and land) for export production. Particularly in the land-abundant parts of Asia, the opening-up of land for agricultural production led to economic growth.

Commodity price changes may have become debilitating when their volatility increased after 1913. This was followed by episodes of import-substituting industrialisation, particularly during after 1945.  While Japan rapidly developed its export-oriented manufacturing industries from the First World War, other Asian countries increasingly had inward-looking economies. This pattern lasted until the 1970s, when some Asian countries followed Japan on a path of export-oriented industrialisation and economic growth. For some countries this was a staggered process that lasted well into the 1990s, when the World Bank labelled this development the ‘East Asian miracle’.

 

To contact the authors:

jean-pascal.bassino@ens-lyon.fr

pierre.vandereng@anu.edu.au

 

References

Bassino, J-P. and Van der Eng, P., ‘Asia’s ‘little divergence’ in the twentieth century: evidence from PPP-based direct estimates of GDP per capita, 1913–69’, Economic History Review (forthcoming).

Fouquet, R. and Broadberry, S., ‘Seven centuries of European economic growth and decline’, Journal of Economic Perspectives, 29 (2015), pp. 227–44.

Fukao, K., Ma, D., and Yuan, T., ‘Real GDP in pre-war Asia: a 1934–36 benchmark purchasing power parity comparison with the US’, Review of Income and Wealth, 53 (2007), pp. 503–37.

Inklaar, R., de Jong, H., Bolt, J., and van Zanden, J. L., ‘Rebasing “Maddison”: new income comparisons and the shape of long-run economic development’, Groningen Growth and Development Centre Research Memorandum no. 174 (2018).

Link to the website of the Southeast Asian Development in the Long Term (SEA-DELT) project:  https://seadelt.net

Factor Endowments on the “Frontier”: Algerian Settler Agriculture at the Beginning of the 1900s

by Laura Maravall Buckwalter (University of Tübingen)

This research is due to be published in the Economic History Review and is currently available on Early View.

 

It is often claimed that access to land and labour during the colonial years determined land redistribution policies and labour regimes that had persistent, long-run effects.  For this reason, the amount of land and labour available in a colonized country at a fixed point in time are being included more frequently in regression frameworks as proxies for the types of colonial modes of production and institutions. However, despite the relevance of these variables within the scholarly literature on settlement economies, little is known about the way in which they changed during the process of settlement. This is because most studies focus on long-term effects and tend to exclude relevant inter-country heterogeneities that should be included in the assessment of the impact of colonization on economic development.

In my article, I show how colonial land policy and settler modes of production responded differently within a colony.  I examine rural settlement in French Algeria at the start of the 1900s and focus on cereal cultivation which was the crop that allowed the arable frontier to expand. I rely upon the literature that reintroduces the notion of ‘land frontier expansion’ into the understanding of settler economies. By including the frontier in my analysis, it is possible to assess how colonial land policy and settler farming adapted to very different local conditions. For exanple,  because settlers were located in the interior regions they encountered growing land aridity. I argue that the expansion of rural settlement into the frontier was strongly dependent upon the adoption of modern ploughs, intensive labour (modern ploughs were non-labour saving) and larger cultivated fields (because they removed fallow areas) which, in turn, had a direct impact on  colonial land policy and settler farming.

Figure 1. Threshing wheat in French Algeria (Zibans)

Buckwalter 1
Source: Retrieved from https://www.flickr.com/photos/internetarchivebookimages/14764127875/in/photostream/, last accessed 31st of May, 2019.

 

My research takes advantage of annual agricultural statistics reported by the French administration at the municipal level in Constantine for the years 1904/05 and 1913/14. The data are analysed in a cross-section and panel regression framework and, although the dataset provides a snapshot at only two points in time, the ability to identify the timing of settlement after the 1840s for each municipality provides a broader temporal framework.

Figure 2. Constantine at the beginning of the 1900s

Buckwalter 2
Source: Original outline of the map derives from mainly from Carte de la Colonisation Officielle, Algérie (1902), available online at the digital library from the Bibliothèque Nationale de France, retrieved from http://catalogue.bnf.fr/ark:/12148/cb40710721s (accessed on 28 Apr. 2019) and ANOM-iREL, http://anom.archivesnationales.culture.gouv.fr/ (accessed on 28 Apr. 2019).

 

The results illustrate how the limited amount of arable land on the Algerian frontier forced  colonial policymakers to relax  restrictions on the amount of land owned by settlers. This change in policy occurred because expanding the frontier into less fertile regions and consolidating settlement required agricultural intensification –  changes in the frequency of crop rotation and more intensive ploughing. These techniques required larger fields and were therefore incompatible  with the French colonial ideal of establishing a small-scale, family farm type of settler economy.

My results also indicate that settler farmers were able to adopt more intensive techniques mainly by relying on the abundant indigenous labour force. The man-to-cultivable land ratio, which increased after the 1870s due to continuous indigenous population growth and colonial land expropriation measures, eased settler cultivation, particularly on the frontier. This confirms that the availability of labour relative to land is an important variable that should be taken into consideration to assess the impact of settlement on economic development. My findings are in accord with Lloyd and Metzer (2013, p. 20), who argue that, in Africa, where the indigenous peasantry was significant, the labour surplus allowed low wages and ‘verged on servility’, leading to a ‘segmented labour and agricultural production system’. Moreover, it is precisely the presence of a large indigenous population relative to that of the settlers, and the reliance of settlers upon the indigenous labour and the state (to access land and labour), that has allowed Lloyd and Metzer to describe Algeria (together with Southern Rhodesia, Kenya and South Africa) as having a “somewhat different type of settler colonialism that emerged in Africa over the 19th and early 20th Centuries” (2013, p.2).

In conclusion, it is reasonable to assume that, as rural settlement gains ground within a colony, local endowments and cultivation requirements change. The case of rural settlement in Constantine reveals how settler farmers and colonial restrictions on ownership size adapted to the varying amounts of land and labour.

 

To contact: 

laura.maravall@uni-tuebingen.de

Twitter: @lmaravall

 

References

Ageron, C. R. (1991). Modern Algeria: a history from 1830 to the present (9th ed). Africa World Press.

Frankema, E. (2010). The colonial roots of land inequality: geography, factor endowments, or institutions? The Economic History Review, 63(2):418–451.

Frankema, E., Green, E., and Hillbom, E. (2016). Endogenous processes of colonial settlement. the success and failure of European settler farming in Sub-Saharan Africa. Revista de Historia Económica-Journal of Iberian and Latin American Economic History, 34(2), 237-265.

Easterly, W., & Levine, R. (2003). Tropics, germs, and crops: how endowments influence economic development. Journal of monetary economics, 50(1), 3-39.

Engerman, S. L., and Sokoloff, K. L. (2012). Economic development in the Americas since 1500: endowments and institutions. Cambridge University Press.

Lloyd, C. and Metzer, J. (2013). Settler colonization and societies in world history: patterns and concepts. In Settler Economies in World History, Global Economic History Series 9:1.

Lützelschwab, C. (2007). Populations and Economies of European Settlement Colonies in Africa (South Africa, Algeria, Kenya, and Southern Rhodesia). In Annales de démographie historique (No. 1, pp. 33-58). Belin.

Lützelschwab, C. (2013). Settler colonialism in Africa Lloyd, C., Metzer, J., and Sutch, R. (2013), Settler economies in world history. Brill.

Willebald, H., and Juambeltz, J. (2018). Land Frontier Expansion in Settler Economies, 1830–1950: Was It a Ricardian Process? In Agricultural Development in the World Periphery (pp. 439-466). Palgrave Macmillan, Cham.

Military casualties and exchange rates during the First World War: did the Eastern Front matter?

by Pablo Duarte and Andreas Hoffmann (Leipzig University)

An article expanding on this blog has been published in the Economic History Review.

 

Russian_Troops_NGM-v31-p372
Russion troops going to the front. Available at Wikimedia Commons.

In 1918 the Entente forces defeated the Central Powers on the Western Front. The First World War, with countless brutal battles and over 40 million casualties, had finally ended.

During the war, all governments substantially increased their national debt and promised to hand the bill to the losers. They also promised to return to the pre-war gold parity rather than inflating and devaluing their currency. Since the outcome of the war was expected to severely affect currency values, particularly for the losers,  foreign exchange traders had an incentive to closely follow war events to update their beliefs on who was more likely to win.

According to Ferguson’s (1998) The Pity of War, the lost morale of the German troops — reflected in higher numbers of prisoners of war and of soldiers surrendering on the Western Front — was the ultimate reason for their defeat. Complementing this argument, Hall (2004) provided evidence that military casualties on the Western Front — the key front to finally winning the war — can help explain contemporary fluctuations in the exchange rates between belligerents’ currencies.

Although finally decided in the West, historians have emphasized the relevance of the global dimension of the First World War and the importance of the Eastern Front in understanding its complex evolution. Imagine it is 1914. Russia has just entered the war (earlier than expected), upsetting the plans of the Central Powers to circumvent a two-front war. Events on one front affected those on the other. But did contemporary traders, like historians today, consider the Eastern Front to be of relevance?

In our forthcoming article, we provide the first empirical insights into the relative importance of the Eastern Front during the First World War from the perspective of contemporary foreign exchange traders. Building on Hall’s study, the article indicates when and to what extent military casualties from both the Western and  Eastern Fronts were linked to exchange rate fluctuations during the First World War, and suggest that traders used this information as an indicator as to  which side was more likely to win.

To analyze the link between exchange rates and casualties we have introduced a novel dataset:  the German Reichsarchiv and the Austrian War Office. Merging our dataset with that for the Western Front employed by Hall (2004), we have been able to construct a rich dataset on war casualties for France, Britain, and Russia as well as Germany and Austria-Hungary, for  both Fronts.

 

Figure 1. 15,000 Russian Prisoners of war in Germany.

Duarte &amp; Hoffmann
Russian prisoners in Germany. Available at Wikimedia Commons.

 

Using the digital archives of the Neue Zürcher Zeitung (a Swiss newspaper),  we have further documented information on casualties, specifically  the number of prisoners of war (Figure 1).  The following quote from December 1914 makes this finding explicit:

Berlin, Dec. 31 [1914] (Wolff. Authorized) The overall number of prisoners of war (no civilian prisoners) in Germany at the end of the year is 8,138 officers and 577,875 men. This number does not include a portion of those captured on the run in Russian Poland nor any of those still in transit. The overall number is comprised of the following: French 3,159 officers and 215,905 men, including 7 generals; Russians 3,575 officers and 306,294 men, including 3 generals; British 492 officers and 18,824 men (Neue Zürcher Zeitung, 1 Jan. 1915, p. A1.).

 

In summary, our forthcoming article provides evidence that foreign exchange traders recognized the global dimension of the war, especially the Eastern and Western Fronts.  Casualties on both Fronts were associated with exchange rate fluctuations. The number of soldiers captured on the Eastern Front affected exchange rates in the early war years. Foreign exchange traders gave additional weight to the Eastern Front during the first year of the war because Russia’s attack came as a surprise and the number of casualties was substantially higher than on the Western Front.

From autumn 1916 onwards, even though Russia had not yet left the war, our findings indicate that traders believed that the key to winning the war was in the west.  The Brusilov offensive, a massive Russian attack (from June to September 1916), had proven that the Central Powers would face substantial opposition in the East. Moreover, the Allied forces on the Western Front had started to coordinate joint offenses.

 

To contact the authors:

pablo.duarte@uni-leipzig.de Twitter: @economusiker

ahoffmann@wifa.uni-leipzig.de Twitter: @Andhoflei

 

References

Ferguson, N. (1998). The Pity of War. Basic Books.

Hall, G. J., ‘Exchange rates and casualties during the First World War’, Journal of Monetary Economics, 51 (2004), pp. 1711–42.

 

 

 

Plague and long-term development

by Guido Alfani (Bocconi University, Dondena Centre and IGIER)

 

The full paper has been published in The Economic History Review and is available here.

A YouTube video accompanies this work and can be found here.

 

How did preindustrial economies react to extreme mortality crises caused by severe epidemics of plague? Were health shocks of this kind able to shape long-term development patterns? While past research focused on the Black Death that affected Europe during 1347-52 ( Álvarez Nogal and Prados de la Escosura 2013; Clark 2007; Voigtländer and Voth 2013), in a forthcoming article with Marco Percoco we analyse the long-term consequences of what was by far the worst mortality crisis affecting Italy during the Early Modern period: the 1629-30 plague which killed an estimated 30-35% of the northern Italian population — about two million victims.

 

Figure 1 Luigi Pellegrini Scaramuccia (1670), Federico Borromeo visits the plague ward during the 1630 plague,

Alfani 1

Source: Milan, Biblioteca Ambrosiana

 

This episode is significant in Italian history, and more generally, for our understanding of the Little Divergence between the North and South of Europe. It had recently been hypothesized that the 1630 plague was the source of Italy’s relative decline during the seventeenth century (Alfani 2013). However, this hypothesis lacked solid empirical evidence. To resolve this question, we take a different approach from previous studies, and  demonstrate that plague lowered the trajectory of development of Italian cities. We argue that this was mostly due to a productivity shock caused by the plague, but we also explore other contributing factors. Consequently,  we provide support for the view that the economic consequences of severe demographic shocks need to be understood and studied on a case-by-case basis, as the historical context in which they occurred can lead to very different outcomes (Alfani and Murphy 2017).

After assembling a new database of mortality rates in a sample of 56 cities, we estimate a model of population growth allowing for different regimes of growth. We build on the seminal papers by Davis and Weinstein (2002), and Brakman et al. (2004) who based their analysis on a new framework in economic geography framework in which a relative city size growth model is estimated to determine whether a shock has temporary or persistent effects. We find that cities affected by the 1629-30 plague experienced persistent, long-term effects (i.e., up to 1800) on their pattern of relative population growth.

 

Figure 2. Giacomo Borlone de Buschis (attributed), Triumph of Death (1485), fresco

Alfani 2

Source: Oratorio dei Disciplini, Clusone (Italy).

 

We complete our analysis by estimating the absolute impact of the epidemic. We find that in northern Italian regions the plague caused a lasting decline in both the size and rate of change  of urban populations. The lasting damage done to the urban population are shown in Figure 3. For urbanization rates it will suffice to notice that across the North of Italy, by 1700 (70 years after the 1630 plague), they were still more than 20 per cent lower than in the decades preceding the catastrophe (16.1 per cent in 1700 versus an estimated 20.4 per cent in 1600, for cities >5,000). Overall, these findings suggest that surges in plagues may contribute to the decline of economic regions or whole countries. Our conclusions are  strengthened by showing that while there is clear evidence of the negative consequences of the 1630 plague, there is hardly any evidence for a positive effect (Pamuk 2007). We hypothesize that the potential positive consequences of the 1630 plague were entirely eroded by a negative productivity shock.

 

Figure 3. Size of the urban population in Piedmont, Lombardy, and Veneto (1620-1700)

Alfani 3

Source: see original article

 

Demonstrating that the plague had a persistent negative effect on many key Italian urban economies, we provide support for the hypothesis that the origins of  relative economic decline in northern Italy are to be found in particularly unfavorable epidemiological conditions. It was the context in which an epidemic occurred that increased its ability to affect the economy, not the plague itself.  Indeed, the 1630 plague affected the main states of the Italian Peninsula at the worst possible moment when its manufacturing were dealing with increasing competition from northern European countries. This explanation, however, provides a different interpretation to the Little Divergence in recent literature.

 

To contact the author: guido.alfani@unibocconi.it

 

References

Alfani, G., ‘Plague in seventeenth century Europe and the decline of Italy: and epidemiological hypothesis’, European Review of Economic History, 17, 4 (2013), pp.  408-430

Alfani, G. and Murphy, T., ‘Plague and Lethal Epidemics in the Pre-Industrial World’, Journal of Economic History, 77, 1 (2017), pp. 314-343.

Alfani, G. and Percoco, M., ‘Plague and long-term development: the lasting effects of the 1629-30 epidemic on the Italian cities’, The Economic History Review, forthcoming, https://doi.org/10.1111/ehr.12652

Álvarez Nogal, C. and Prados de la Escosura,L., ‘The Rise and Fall of Spain (1270-1850)’, Economic History Review, 66, 1 (2013), pp. 1–37.

Brakman, S., Garretsen H., Schramm M. ‘The Strategic Bombing of German Cities during World War II and its Impact on City Growth’, Journal of Economic Geography, 4 (2004), pp. 201-218.

Clark, G., A Farewell to Alms (Princeton, 2007).

Davis, D.R. and Weinstein, D.E. ‘Bones, Bombs, and Break Points: The Geography of Economic Activity’, American Economic Review, 92, 5 (2002), pp. 1269-1289.

Pamuk, S., ‘The Black Death and the origins of the ‘Great Divergence’ across Europe, 1300-1600’, European Review of Economic History, 11 (2007), pp. 289-317.

Voigtländer, N. and H.J. Voth, ‘The Three Horsemen of Riches: Plague, War, and Urbanization in Early Modern Europe’, Review of Economic Studies 80, 2 (2013), pp. 774–811.