The Transformation of the World (159 page)

Fourth
. The gold standard did not really function worldwide. Silver-currency nations such as China remained outside it, and colonial currencies, as the Indian example shows, operated independently of external interventions. The largest bloc of peripheral noncolonial countries that experimented with the gold standard were the states of Latin America. Until the 1920s these mostly lacked a central bank or private banking institutions that offered reasonable proof against crisis. No entity could intercept the inflow or outflow of metal money, and the public had little faith in government guarantees of gold cover for paper notes. South American as well as South European countries might be forced to suspend gold convertibility and to allow the value of their currency to decline—a not-unusual occurrence reflecting the influence of elite groups (landowners or exporters, often the same people) who had an interest in high inflation. Weak currencies and monetary chaos suited the oligarchies, which could make their will prevail with astonishing frequency against foreign capitalist allies and foreign creditors. Currency reforms were therefore usually halfhearted affairs that ended in failure; some countries never joined the gold standard, while others such as Argentina or Brazil hardly went beyond formal lip service. Despite British “hegemony” over Latin America, pressure from London never managed to force their compliance. The contrast with Japan is instructive. The archipelago was never a major exporter of raw materials, and special export interests carried little political weight there. The other way around, it had an interest in imports for its rapid modernization, and therefore in a stable currency. All the circumstances conspired to make Japan an ideal candidate for the gold standard.
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Fifth
, and last but not least, the functioning of the gold standard presupposed free international trade such as the system created in the middle third of the nineteenth century had put in place. Paradoxically, it was the US economy—by then the largest in the world—that proved the greatest factor of instability after the turn of the century. Its huge agricultural sector, with no well-developed rural banking system behind it, had a periodic need for gold that put a great strain on European countries with sizable reserves. It is therefore not enough naively to hail the gold standard as a pure advance of globalization and network building. The risks inherent in this strongly Anglocentric system must also be appreciated. Above all, neither the colonial nor the noncolonial periphery of the world economy was integrated into it, however indirectly or lightly.

The gold standard was a kind of moral order. It universalized the values of classical liberalism: the autonomous individual pursuing his own interests, a reliable and predictable business environment, and a minimally active state. To function well, the system required its players to abide by these norms and to share the “philosophy” in which they were embedded. Conversely, a successful monetary system confirmed that the liberal worldview was fit for life's practical purposes.
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The system was not invulnerable, however, being dependent on environmental and partly precapitalist conditions. It would not have attained its eventual form without the huge gold discoveries that happened to be made after 1848 on the frontiers of three continents. The mining of the new gold and silver deposits, though later put on a capitalist basis (especially in South Africa), initially owed everything to a primitive “grab and run” mentality in California, Nevada, and Australia.
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A long chain of cause and effect stretched all the way from coarse gold panners to the refined gentlemen in the boardroom of the Bank of England.

There were wider repercussions of the system. For the dynamic stability of the pre-1914 Belle Époque, often glorified in retrospect, also rested on the fact that the working population was subject to a degree of discipline that later ceased to exist except in totalitarian systems. Since organized labor did not yet have the power to defend income levels or to fight successfully for higher wages, pay cuts could be used to head off a short-term crisis. It is true that workers in the literally “golden” age of capitalism were better off than in earlier times, and that in frontier areas where productivity gains could deliver more cash into their pockets or in those tropical export enclaves where farmers rather than plantation coolies were the force driving expansion, those who owned nothing but their labor power were able to make some headway. Yet the cost of adjustments could easily be loaded onto the backs of the weak. The gold standard was the mechanism symbolizing an order in which liberalism paradoxically went together with the subordination of both capital and labor to the “iron laws” of economics.
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The Export of Capital

If the nineteenth century was a time of network building in the world economy, then this applied not only to commerce (free-trade regime) and monetary matters (gold standard) but also to international finance markets.
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Here too, as in currency relations, though not in international trade, the discontinuity with the early modern period is greater than the continuity. The “modern” European banking system gradually took shape from the sixteenth century on. Instruments such as long-term public debt and the financing of foreign governments were well developed, so that overseas investors subscribed on a considerable scale to Britain's national debt. The government of the newly independent United States of America tried to raise long-term loans on the Amsterdam money market, which was still in good shape despite the decline of Dutch commercial hegemony. The free transfer of capital characteristic of eighteenth-century Europe was severely limited by the wars that shook the continent between 1792 and 1815.
Subsequently, capital markets were rebuilt more as national institutions, with a greater level of government involvement, and only later gradually moved back to forms of international integration.
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The “cosmopolitanism” of the early modern period had been confined to Europe; no ruler and no private individual from Asia or Africa had thought of borrowing money in London or Paris, Amsterdam or Antwerp. This changed in the nineteenth century, especially during its second half. While tens of millions of Europeans and Asians migrated overseas, some nine to ten billion pounds sterling flowed out from just a few European countries (Britain being the frontrunner by far) to nearly all parts of the world.
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These sums took one of four forms: (a) credits to foreign governments; (b) loans to private individuals living abroad; (c) corporate stock and bonds held by foreigners; and (d) direct investment by European firms in other countries, often through branches and subsidiaries.

The export of capital was essentially an innovation of the second half of the nineteenth century. In 1820 there was very little foreign investment—all of it British, Dutch, or French
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—but the period after 1850 saw the gradual emergence of the necessary prerequisites: special financial institutions in both lending and borrowing countries, accumulation of the savings of a new middle class, and a new awareness of the opportunities for foreign investment. Above all, liquid assets and the capacity to handle them came together in that unparalleled square mile called the City of London. The London capital market mobilized credit internationally and financed business far beyond the confines of the British Empire; it attracted funds from all over the world, and handled the issue of securities from many countries of origin as they became more and more important worldwide during the decades before 1914.
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By 1870 Britain, France, and Switzerland were the only countries in the world with significant foreign investments (the Netherlands no longer played any role). Germany, Belgium, and the United States joined the list during the great boom that followed, yet on the eve of the First World War, when Britain had long lost its industrial supremacy, its 50 percent share of capital invested overseas still made it the largest source of foreign investment, followed a long way behind by France and Germany. The United States, accounting for no more than 6 percent, was not yet a major factor in the equation. British capital was present everywhere in the nineteenth century. It financed the Erie Canal, the early railroads in Argentina and Japan, and conflicts such as the war of 1846–48 between the United States and Mexico. For a long time it enjoyed a front-ranking position such as that which the United States briefly held around 1960.

Though international finance developed in response to the needs of global trade and communications, it would be misleading to think of the basic structure of capital flows as a fully articulated network. They did not have the reciprocity of trade relations: capital was not exchanged but transferred from core to periphery. The reverse flow from countries in receipt of the credits and
investments consisted not of loan capital but of profits, which disappeared into the pockets of the financiers. It was thus a typically imperial constellation, in which the asymmetry was plainly visible. The export of capital could be steered much better than trade flows, for there were only a few control centers.
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And since, unlike trade, it presupposed the creation of modern institutions such as banks, insurance companies, and stock exchanges all around the world, it presented only weak analogies with the linkage between European merchants and preexisting local networks.

There were also considerable differences between capital flows and international monetary relations (although these were essential for the conduct of financial business). Before 1914 the circulation of investment capital was not regulated by any international agreements; there were no capital controls, no equivalent of the customs departments that had an effect on trade, and no limits on the sums that could be transferred. All that had to be paid to state treasuries was the capital gains tax, if there was one in the respective country. In Germany and France after 1871 the government had the right to block a public loan to another country (which seldom happened); in Britain and the United States even such instruments were lacking.

In contrast to the situation today, foreign loans were not generally issued by
governments
, and of course development aid was unknown. A foreign government in need of money turned to the free capital market. Large projects usually involved a consortium of banks, which either existed already or had to be assembled ad hoc. In many cases, such as that of Chinese government bonds after 1895, banks from different countries joined forces. All the major banks of the time had a branch in London, where most of the international loans were issued. The often colossal sums for war reparations, such as those incurred by China after its war with Japan in 1894–95, also had to be raised in the private money market.

Although European governments were not themselves active as creditors or donors, they did offer diplomatic and military support that made the banker's task easier. Many loans were foisted on reluctant parties, such as China or the Ottoman Empire, which found it more difficult to resist unfavorable terms if these had the backing of the British or French government. Diplomatic intervention was sometimes required to obtain securities from foreign borrowers. Whereas German and Russian banks worked closely with their governments from the 1890s on, the same was not true of their counterparts in Britain. The major British bankers of the age were never puppets of Whitehall, and the British state (or its avatar, the government of India) could sometimes stubbornly distance itself from private banking and business interests. High finance and international politics never overlapped completely. Otherwise, how would it have been possible for French bankers in 1887 to organize capital exports to Russia with great vigor, at a time when the Tsarist Empire was still in an alliance with Germany?
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Yet the boundary between private interests and state strategies could become blurred, especially if foreign loans required official authorization or if the “good
offices” of diplomats were brought to bear in the negotiation of concessions or contracts. In some striking cases—such as those involving China (1913) and the Ottoman Empire (1910), both at a time of weakness in the aftermath of revolution—a request for a loan was used to exert massive pressure. Those who felt its weight could not have been too concerned about the precise share of public and private elements in such financial imperialism.

The large-scale export of capital after 1870 was linked to expectations, especially among small private investors in Britain and France, that good and relatively secure profits were to be had overseas and in the Tsarist Empire. The ideal country for investors was one in the throes of modernization, politically stable, and with a high demand for Western railroads and other industrial inputs, yet sufficiently weak to accept and meet the conditions set by lenders. Such a scenario did not always correspond to the realities. Russia, Australia, and Argentina came close to it, but as for China, the Ottoman Empire, Egypt, or Morocco the average European “coupon clipper” (as Lenin put it) hoped that the Great Powers would prop up the government and that creditors would be indemnified in the event of a crisis. Were the general financial expectations fulfilled? In the period between 1850 and 1914, loans to the ten main borrowers did
not
secure an average return higher than that obtainable on domestic government bonds.
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Japan was anything but an unreliable debtor. It transformed itself into a model borrower, enjoying the highest trust on finance markets, but was forced to run up debts to cover its chronic balance-of-payments deficit. It also had to fund its costly wars with China and Russia, although, as we have seen, it managed to extract exorbitant reparations from China after its victory in 1895. By the end of the century the Bank of Japan was even strong enough to help out the Bank of England in case of need. Yet the Japanese government took care never to borrow under pressure or without due preparation, and avoided overreaching itself at all costs; even foreign business investments in Japan were made virtually impossible between 1881 and 1895. Japan was therefore not an easy customer to deal with, and over the years it proved capable of negotiating uncommonly favorable loan terms. Thanks to these farsighted policies, and to the mobilization of domestic capital through a reformed tax system and Asia's only network of savings banks, Japan offered no potential targets for European finance imperialism.
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By contrast, one of the main obstacles to development in the Muslim world was that it lacked an efficient banking system under its own control—and failed to develop one after contacts with the West became more intensive.
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The
domestic
impulse to run up foreign debts was therefore unusually strong, and little could be done in the face of Western attempts to gain financial supremacy.