Econ_1 - Hinsdale Central High School

Economic Trends in Europe
Max, Michael S., Owen, Alex
Period 1
Exploration and Early Colonization
Important Concepts:
- Early Economy - Before Exploration and Mercantilism took hold, the European economy was
mostly based on subsistence agriculture, with any and all profit going to feudal lords. Trades in
towns and cities were regulated by guilds that protected their economic power and trade secrets.
- Mercantilism - The predominant economic theory until the development of capitalism by Adam
Smith. Mercantilism stressed the importance of government intervention in commerce in order to
stimulate the economy and create monopolies. The other goal of governments was to secure
colonies to supply raw materials and purchase the nation’s goods. The goal of mercantilism was to
hold as much specie as possible while preventing outflow of capital. This economic theory was
predominant because it was believed that all wealth gained by a nation was at the expense of
another nation. This fundamental belief caused many conflicts and wars.
- Columbian Exchange - The Columbian Exchange was the sharing of resources, agriculture,
ideas, and disease between Europe and the newly discovered Americas. This stimulated economic
growth in Europe, but usually came at the expense of native populations, who died frequently of
disease and poor treatment. Also, the flow of economic wealth was mostly one-way, from America
to Europe.
- Middle Passage - As colonization abroad expanded, so did slavery to meet the growing demand
for labor. Many Africans endured horrible conditions on ships crossing the Atlantic, only to perform
dangerous, hard labor in the colonies. As a result of extremely poor conditions, many died quickly,
necessitating a growing slave trade that would continue to operate for generations to come.
The Age of Exploration saw the rise of Mercantilism as the prevailing economic theory in Europe.
This had far-reaching ramifications for the Europe and the Americas as the economic bond between
them grew. Pursuing specie above all else, governments played a large role in commerce, seeking
out colonies and waging wars to achieve economic success. The Columbian Exchange also
introduced new goods and sources of raw materials which would spark European consumerism.
Finally, the slave trade emerged as a key part of the European economy as nations used slaves to
exploit colonial resources for their own gain.
Commercial Revolution and the Rise of Capitalism
Important Concepts:
- Price Revolution - The Price Revolution was a period of relatively rapid inflation during the
sixteenth century. This was due to both a rapid period of population growth unimpeded by plague or
famine and by vast new sources of wealth pouring in from the Americas. This new growth set the
stage for the development of capitalism because it undermined traditional economic authority while
supporting the interests of the middle class.
- Rise of the Upper Middle Class - As commerce grew, more citizens were able to take advantage
of opportunities to advance their status, especially since the nobility tended to shy away from
economic pursuits. This new and emerging class quickly grew to rival the aristocracy in some
- Physiocracy and Capitalism - Towards the middle of the eighteenth century, some economists
began to reject mercantilism in favor of newer ideas. Physiocrats believed that land, not specie, was
the driving force behind wealth and the economy. Adam Smith adopted many of the Physiocrat’s
ideas while developing capitalism, as described in his book, On the Wealth of Nations, published in
1776. Capitalism soon took hold throughout Europe as the dominant economic philosophy.
Early exploration had set the stage for the Price Revolution, which shook the foundations of the
European economy and signaled coming change. During this time period, the beginnings of an
upper-middle class began to emerge as landholders profited from the inflation and invested in
commerce. In addition, Mercantilism began to be gradually replaced by Capitalism, which provided
a much better explanation for the workings of the European economy.
Agricultural Revolution and the Beginnings of Consumerism Important Concepts:
Agricultural Advancements - New crops from the Americas such as the potato, combined with
improved technology and technique revolutionized agriculture throughout Europe. Small plots of
land overseen by subsistence farmers were gradually consolidated as the beginnings of an
industrial system of farming took hold. This change spurred industrialization by moving Europe
towards a profit driven economy governed by larger organizations rather than individuals.
Triangular Trade - As mercantilism began to lose favor in Europe, nations began to make greater
profits by facilitating global trade between Europe, Africa, Asia, and the Americas. This new trade
helped promote capitalism and increased the commercial power of the middle class.
Consumerism - As trade continued, Europeans were exposed to countless new goods from
abroad which were viewed as status symbols and highly sought after. New or newly affordable
consumer goods included coffee, tea, sugar, spices, silks, and calicoes. This new consumer
economy created a positive feedback loop, further stimulating capitalism and trade.
The Agricultural Revolution and subsequent increase in consumerism throughout Europe set the
stage for the later Industrial Revolution which would begin in England. By promoting capitalism as
mercantilism faded into obscurity and promoting trade, it laid the foundations for a consumer
economy with a strong middle class. However, many of these changes were much more limited in
Eastern Europe, which lagged behind the west in its development of trade and its economy.
 Prior to Louis XIV in France, Henry IV promoted economic growth in his own ways. He spurred
economic growth through the building of roads and canals, draining swamps, and promoting
 The economics of the era of absolutism were marked by mercantilism similar to the age of
exploration. Under Louis XIV, France used mercantilism in order to boost its economic
position. Though France’s economy was limited by internal tariffs, France still managed to
increase its commercial presence and develop a unified internal market.
 Colbert, Louis’s minister of finance and chief advisor, created a free-trade zone called Five Great
Farms. He also bettered France with roads, a postal system, and manufacturing codes. The
French East India Trading Company was created by him to increase French commerce.
 High tariffs meant to limit foreign goods and high taxes meant to pay for war burdened the lower
classes and peasants while the upper classes and nobility negotiated out of them, creating the
roots for the French Revolution that was to come.
 Though Colbert worked (at least until his death in 1683) to better France’s economy, with the
buildup of massive armies, France was almost bankrupt. Other nations built up larger armies, as
well, leaving those nations in similar economic positions.
 Louis’s overspending was a major part of what contributed to France’s poor economic
conditions. It was estimated that the Palace of Versailles absorbed nearly 60-80% of the state’s
revenues (Freiler 104). Louis and his nobility lived decadently in Versailles and were not afraid to
spend money on wars.
Industrial Revolution
Important Concepts
-Classical Economists:
-Thomas Malthus believed that food supply can only grow incrementally while the population
expands exponentially. According to Malthus’ Essay on Human Population, the population will
always exceed the food supply. Malthus was also pessimistic about technological advance and
underestimated the eminence of the Industrial Revolution.
-David Ricardo built off the ideas of Malthus. Ricardo argued that if the poor get increased wages
they will simply create more children which will in effect, increase labor supply and drive down
wages. Like Malthus, Ricardo miscalculated the potential of the new technologies brought forth by
the scientific revolution.
-Britain’s Advantage:
-No place was farther than 70 miles from the ocean and Great Britain had vast coal iron ore
-The Agricultural Revolution gave Britain a larger population and a mobile labor force. Also, Great
Britain “could boast a better financial network banks and credit institutions able to supply
entrepreneurs and nascent businesses with the capital necessary for industrial enterprises” (Freiler
-Important Inventions:
Textile innovations were the first very large invention during the Industrial Revolution. With cotton
on the rise the flying shuttle, spinning jenny, water frame, and power loom were some of the major
innovations. Cotton was a key consumer item because it was cheap and sturdy. The invention of
the steam engine allowed the factories a new source of power and mobility. This gave a key
economic advantage because work could now be done quicker, more efficiently and from a vast
variety of locations. The steam engine gave way to locomotion. The locomotion replaced the canal
transportation and revolutionized the speeds that materials could be transported at. Machine tools
also made more cultured and pliable steel. This industry “formed the ‘spine’ of the British economy”
(Freiler 186). Perhaps the largest, if not one of the largest, reasons for the economic success of
Britain is the factory system. Like all other innovations, this maximized the efficiency and
productivity of production.
-Other nations
-France: France had more gradual industrialization and focused more on higher end products
because of their large internal market and skilled labor force. France didn’t focus on heavy steels
and therefore didn’t industrialize as quick
-Germany: Divided yet had large amount of natural resources. Friedreich List argued for a national
economic system but Germany would not take off economically until their unity in 1871.
-Russia: Still practiced serfdom and therefore had a hindered economic system
-Spain: Lack of natural resources and barren land caused Spain to be at a disadvantage
During the Industrial Revolution Great Britain saw great leaps economically. This was because
they knew their market. Great Britain hit their potential because they created quick and efficient
manufacturing and transportation. Other countries did not maximize their economic potential
because they had outdated systems (Russia/ serfdom) or lacked a sufficient amount of resources
(Spain). Overall, the Industrial Revolution saw a large jump in economic production.
The Great Depression and World War II
 Leading up to the Great Depression from 1924-1929, Europe was thriving, as new technologies
were becoming available to the consumer, and the stock market and businesses were on the rise.
 The Great Depression hindered the prosperity post WWI and was caused by many factors that all
were combined for economic disaster with US stock market crash in October 1929. In the post
WWI world, countries were looking to decrease their debt through depreciation which caused
inflation. Markets were disrupted which made following old trade patterns very difficult and
confusing the world market. A surplus of grain drove prices down, which hurt the
farmers. Nationalism post-war created higher tariff barriers, making it all the more difficult for
countries like Germany to pay reparations. The reparations also created a circular flow of capital
that became dependent on the financial well-being of America. The credit financing method helped
lead to the stock market crash (Freiler 273).
 Unemployment reached its height in this point, especially in Germany and the US. This gave more
extremist parties a chance to appeal to those hit the hardest by the Depression.
 Conditions continued to decrease from there. In Germany, the failure of the Creditanstalt caused
further financial distress and collapse. Currency also continued to depreciate which ruined the
gold-standard system which had been put in place for quite some time.
 In working towards recovery, some countries were worse off than others. In France, where the
country was less dependent on trade, the franc was reestablished at a lesser price which caused
goods to be cheaper on the world market- this was a much better recovery than, for example, Great
Britain. Great Britain depended the most on trade and faced a General Strike by the workers due to
the outrageous number of the unemployed and GBs diminished world power -this poor recovery put
Great Britain in a weakened condition for facing the Nazis in WWII.
Post WWII and Cold War Economics
 Throughout the post war settlement conferences between the allies, Joseph Stalin made it clear
that he saw the world divided into two sides: the imperialist and capitalist regimes that controlled the
world unfairly, and the Communist progressives. This dialogue shows the tension between the
countries, and the beginning of the Cold War
 After WWII, the devastation that all of Europe experienced was extremely extensive, and the U.S
gave financial aid to countries to jumpstart Europe’s economy. This was called the Marshall Plan,
and all allies were included. The Soviets, however, did not allow their European satellites to
participate in it because they saw it as a western policy that would destroy their empire.
 In reaction to this, to provide for their own allies in the Warsaw pact, the Soviets created the Council
for Mutual Economic Assistance (COMECON). Along with rebuilding the east, the purpose of that
establishment was to further remove themselves from western policy. The Soviets had a massive
ego, if you will, and they did not want to seem inferior to the American rule, nor did they want
America to control the world’s finances.
 Consumerism: With the use of mass marketing, advertising became an art. The art of persuasion.
Companies persuaded people with forms of sexuality, sports, and other social stigmas in order to
get them to buy various products. This is the first time that people began to make fortunes off of
something such as Coca-Cola.
 Economies tended to move away from hardcore industry and move into services and information
processing. While this represents an advancing economy, it also means the abandonment of many
jobs in traditional labor cities such as Manchester and Liverpool.
 With the mass production of resources, came pollution from factories, and the mass use of
resources. These are the first “green” party groups that advocate conservation of the planets
resources which are still active today.
West and East Germany and the Cold War
 Since the allies felt it necessary to revive Germany to its former glory they decided to create a
National West German currency, the Deutschmark. Well, since there was East and West Germany,
the Soviets felt as though the Allies were trying to destroy East Germany.
 A reaction along with their outrage was the Berlin Blockade by the Soviets in order to prove a point.
They intended to cut the city off from West Germany and “starve them out.” This was not a
successful strategy by the Soviets, as the Americans once again come to the rescue with the Berlin
Airlift where they supplied the oppressed people with supplies and food for almost a year.
 A continual theme throughout the Cold War was that the Soviets were envious of the American
power, and in order to “prove themselves” to the world, they constantly opposed the Americans.