6.1: Rise of World Trade
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There has been extensive trade since ancient times. Objects from thousands of miles away have been found in prehistoric sites. However, the volume and speed of international trade increased enormously with the era of western expansion. This was primarily because of larger and better ships and the industrial revolution producing more, better and cheaper goods, all with strong government support. The Spanish and Portuguese never industrialized on a large scale, but the Dutch and later the British and French developed worldwide industry, finance and trade from the 1600s through the 1800s, and established limited liability trading companies such as British East India Company (1600), the Dutch East India Company (1602), the Virginia Company (1606), the French East India Company (1664) and the Hudson’s Bay Company (1670).
In the 1800s, as the dominant military and financial power, the British enforced the gold standard, set fixed exchange rates that were policed by the European central banks, and set the British pound as the world’s reserve currency. During the 1860s and early 1870s, there was increased free trade in Europe, expedited by the spread of Most Favored Nation treaties that gave every country the same low tariffs. New technology, new production methods and more efficient transportation such as railroads and steamships led to a great increase in the volume of international trade.
British trade and financial dominance continued until the beginning of WWI. However, Britain’s share of global steel and other industrial production had gradually slipped in the competition with newly industrialized, faster growing countries with the latest technology. (Sound familiar?) The United States had pioneered machine-made interchangeable parts (“The American System”), rapidly developed electricity and other new technologies, built huge railroad mileage and made large government investments in infrastructure and economic development, until the U.S. economy was almost three times the size of Britain’s. Germany also exceeded Britain by eliminating internal tariffs, building railroads and pioneering chemistry and other new technologies.
Wheat and other commodity prices fell because of improved farming techniques, increased production in the U.S., Russia and Argentina, and easier transportation to world markets. However, agricultural and industrial overproduction contributed to the crash of 1873 and led to a protectionist backlash, which increased tariffs to protect local industry. Nevertheless, by 1900 international trade and the world economy were thriving and driving a wide sense of optimism in the Global North.
WWI (1914-18) was a catastrophe. Besides killing 10 million working-age men, it severely damaged the economies of Europe and helped outsiders like the U.S. (to whom Britain owed huge war debts) and Japan (an ally of the U.S. and Britain in WWI) to become stronger.
After a bubble in the 1920s, in 1929 the U.S. stock market crashed, which led to the 1930s Great Depression across the world, and increased international protectionism (like the U.S. Smoot-Hawley tariff), further decreasing trade and causing further economic damage.
Meanwhile, hyperinflation in the 1920s had ruined Germany’s economy. Prices went up by the hour, savings became worthless and unemployment soared. When the Great Depression hit, the economy crashed and in 1933 Hitler came to power.