Economic History
History and Economics
• the subject matter of economics is essentially a unique process in historic time. Nobody
can hope to understand economic phenomena ... who has not an adequate command of
historical facts...
• the historical report cannot be purely economic but must inevitably reflect also
‘institutional’ facts ... therefore it affords the best method for understanding how economic
and non-economic facts are related to one another ...
• most of the fundamental errors currently committed in economic analysis are due to the
lack of historical experience more often than to any other shortcoming of the economist's
equipment
Why economics needs economic history.
1. Economic History helps us to think about the economy (major discontinuities in
economic performance and economic policy regimes have occurred many times in the
past)
2. the importance of context (the ‘right’ model/policy choice/ institution depends on
context)
3. understanding the real world (a particular theoretical framework may not always work)
4. facing long-term challenges (poverty, globalization, technological advancement,...)
5. the role of path dependence
Learning Outcomes
At the end of the course, students will be able to:
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remember the basic concepts necessary for the analysis of an economic system;
describe the main historical manifestations of economic growth/development
and crises;
explain their causes and consequences, grasping the interaction between
economic aspects and factors related to demography, technology, institutions,
culture and geography;
apply the acquired knowledge and skills to a case study;
work in a group and communicate effectively in oral and written form.
A historical issue: the gap between rich and poor nations
• How to measure the ‘wealth’ or level of development of a country?
• GDP* – total value of goods and services produced in a country/region (→ size of an
economy) / GDP per capita (→ standard of living)
* Another option is GNP or National income
The geography of development
Nominal and Real GDP
Nominal GDP  GDP calculated at current prices (prices change from year to year)
→ GDP depends on the quantity of goods and services produced and their price (inflation
effect)
Real GDP GDP calculated at constant prices (i.e. with reference to the price level in a
given year) → GDP reflects only the quantity of goods and services produced
To compare GDP
between countries, we
must use GDP at PPP
(Purchasing Power Parity)
→ exchange rate is
calculated as the ratio of
the price of a basket of
goods in one country to
the price of the same
basket in the other
country
The shortcomings of per
capita GDP as an index of
well-being: is GDP an effective measure of our quality of life?
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Inability to grasp the qualitative aspects of goods/services
Exclusion of the informal (and underground) economy
Pricing of public services (without market price) at factor cost
The problem of GDP per capita as a statistical average → What distribution within
society? (Trilussa, Statistics)
GDP does not take into account some important aspects → 'relational goods',
environmental conditions, security ...
Is GDP growth a measure of inclusive and sustainable development?
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2009 Stiglitz Report - 2018 OECD ‘Beyond GDP’ report
2030 UN Agenda for Sustainable Development (17 SDGs)
Some examples of alternative measures:
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A curiosity: Gross National Happiness (Buthan)
Human Development Index – HDI
Gross National Income per capita
•
Education (mean of years of schooling/expected years of schooling)
Life expectancy
✔ Inclusive Wealth
Index – IWI (change
in the amount of
capital available over
time) takes into
account the
sustainability
dimension
The ‘doughnut’ economics
A new approach to sustainable and
inclusive development
Kate Raworth, Doughnut Economics:
Seven Ways to Think Like a 21stCentury Economist, 2017
Seeks a balance between satisfying
basic needs and protecting the
ecosystem (as a guarantee for
future generations)
https://www.kateraworth.co
m/doughnut/
Growth: sustained increase in GDP
Development: Growth +
organizational or structural change
in the economy (= change in the size
and features of economic sectors)
Historically, we have had these phases
PRIMARY SECTOR (agriculture, husbandry, etc.)
SECONDARY SECTOR (industry)
TERTIARY SECTOR (services)
The Economic System
It can be observed from the DEMAND and the SUPPLY side. • SUPPLY (PRODUCTION)
depends on:
Factors of production
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Land
Labor
Capital
Entrepreneur
Rival factors of production
Efficiency in the use of input factors → PRODUCTIVITY
Production: combination of factor inputs aimed at producing goods and services
Productivity: ratio between the output of the production process and the factors employed
Which factors influence productivity?
Non-rival factors 
❑ Specialization and division of labour
❑ Technology
❑ Institutions
Division of labour and economic development
Adam Smith (Wealth of Nations, 1776): specialization and division of labour between
nations, as well as between individuals, enhances productivity.
The benefits of free trade: in the absence of state intervention hindering trade, the market
can expand beyond national borders, fostering specialization and the division of labour.
Technology and
economic
development
• Technology as «applied
knowledge» (as distinct from
the fixed capital that
embodies it)
• Industrial Revolutions reflect
the history of technological
progress
→ This does not mean that
there was no technological
progress before
industrialisation
First Industrial Revolution: c. 1760-1830 England, cotton - iron - coal - steam engine*
• Second Industrial Revolution: mid 19th-mid 20th century, electricity* - combustion
engine* (oil) - organic chemistry
• Third Industrial Revolution: second half 20th century, nuclear - artificial materials biochemistry – electronics*
• Fourth Industrial Revolution: ongoing, interconnection between the physical and digital
world (Industry 4.0, Internet of Things, 3D printers...)
* general-purpose technologies
Institutions and economic development
• Douglass North: institutions are the 'rules of the game' → formal rules and informal
constraints with respective sanctioning mechanisms, which regulate the interaction
(cooperation/competition) between individuals within a society
Institutions
→ define property rights and provide incentives to invest and innovate
→ reduce uncertainty and 'transaction costs' (cost of market exchanges = information,
bargaining, monitoring, enforcement)
→ are characterised by path dependence (Paul David, QWERTY)
• Daron Acemoglu and James Robinson distinguish between inclusive (→ equality of
opportunity) and extractive (→ rent extraction by a narrow elite) political and economic
institutions
Production is aimed at satisfying DEMAND
❑ of consumer goods (durable and nondurable) ❑ domestic private demand (businesses; households)
❑ of capital goods
❑ domestic public demand
❑ of services
❑ foreign demand
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Private household demand depends on population’s wants
Wants become effective demand, i.e. are recorded by the market, when they are
supported by purchasing power, which is provided by income
Income is earned by participating in production process (rents, wages, interest,
profits)
Public budget refers to public spending and public earnings ( Public spending – public
earnings)
Balance of payments current account all payments in exchange for goods and services.
For invisible all those payments not related to exchange of material good. Capital account
refers to investments. Foreign direct investment and portfolio investments.
1. PREINDUSTRIAL ECONOMIES Structural features and
elements of dynamism
Structural features of preindustrial economies
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Population
Factors of production
The primacy of agriculture
Structural features of secondary and tertiary sectors
Elements of dynamism
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Innovations in medieval agriculture
The shock of the Black Death
Innovations in the secondary and tertiary sectors
✔Technological innovations
✔Institutional innovations
✔Organizational innovations → the putting-out system
The opening of new Atlantic routes
Preindustrial economies: structural features
Slow change of the economic and social structure o Low economic growth and social
mobility
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Slow population growth (Malthusian constraint)
High birth rate, but also high death rate (30-40 per thousand)
Frequent peaks of «extraordinary» or «catastrophic» mortality
Malthusian constraint: population
grows in geometric progression (1,2,4,
8...), resources in arithmetic
progression (1,2,3, 4,...)
In the absence of preventive checks
(celibacy, postponement of marriage),
positive checks (famine, epidemics,
wars) come into play, restoring a
balance of pure subsistence.
LABOUR
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Preponderance of agricultural work → clear predominance of the rural population
Multi-activity: e.g., in rural areas, a combination of agricultural work with
manufacturing (textiles) and tertiary activities (domestic services)
Limits in terms of quantity and quality of labor: holidays, weather, physical
conditions, education and technical preparation
Preindustrial societies allow for a low dependency ratio (dependent pop./active
pop.)
CAPITAL
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Limited importance of fixed capital, especially in manufacturing activities (plant,
equipment) - livestock is important in agricultural work
Working capital (stocks) prevails.
LAND
• Natural resources: arable land competes with forest resources; minor role of inanimate
energy sources (water, wind) compared to human and animal energy
How to explain the primacy of agriculture?
• Preindustrial economies are agrarian economies → primacy of AGRICULTURE both in
terms of income /value added produced and labour force employed
• This type of economic structure is explained by the dialectic between supply and demand
SUPPLY
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Limited division of labor: low specialization
Limited technology
→ Low labor productivity= inability to increase production and limited surplus
Fragility in the face of crop fluctuations and population growth – limitation to urban growth
= low income level
DEMAND
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Low income → prioritising essential needs, i.e. food (Engel’s law)
Economic growth is not absent, but is slow and reversible
Structural features of the secondary and tertiary sectors (especially in the medieval age)
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Manufacturing
In rural areas, household production (for self-consumption) dominates
Role of craft guilds in regulating urban manufacturing
Limited cases of centralised manufacturing
Trade and markets
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Clear prevalence of self-consumption
and barter in rural villages
Cities are the places of monetary
transactions
Limited trade over long distances
(Venice and Genoa: centers of
commercial capitalism)
Consequences: increased production
(surplus) and thus:
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intensification of market relations;
demographic growth and revival of urban life (interrupted by the 14th-century
plague).
Role of urban centers:
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Market places
More complex (artisanal) manufacturing
Civil and ecclesiastical institutions, tribunals.
What cause? Collapse in demand but also in supply due to the collapse of the labor force.
Some experts said that the black death was a good thing for Europe, why? It helps
to rebalance the distribution of resources among citizens. Increase in GDP per capita.
Innovations in the secondary and tertiary sectors in the
preindustrial period
Important technological innovations (1450-1650)
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Spread of blast furnaces (15-16th centuries)
Spread of water mill
new navigation techniques and tools the invention of movable type printing
(Johannes Gutenberg 1453)  in the long term more culture.
Institutional innovations: commercial partnerships (e.g. commenda), bank, insurance,
stock exchange, postal service...
Between the 15th and 16th centuries, new ways of organizing production in
manufacturing: the Verlagssystem (or putting-out system, società in accomandita, different role
between the parterns) and the figure of the merchant-entrepreneur → proto-industry.
The merchant-entrepreneur (ME) and domestic manufacturing
Especially in the textile sector.
The ME is an intermediary between the home producer (usually a rural labourer) and the
markets; has liquidity and business connections; extensive rural production network.
In the Kaufsystem, the ME merely commissions and buys the product from the home
producer.
Within the Verlagssystem, the ME supplies the home producer with working capital (raw
materials) and sometimes also fixed capital (working tools).  with this type of system
there is a sort of dependency between the two workers.
Sometimes the ME has the final stage of preparation of an item carried out in a centralised
workshop.
With the putting-out system, rural manifacturing spread:
• demand push: growing demand for manufactured goods at low prices
• supply push: merchants’ attempt to break free from guild constraints and acquire
greater flexibility
Proto-industry: stage in the evolutionary process leading (but not necessarily) to
industrialization.
An important turning point: the opening of the new Atlantic
routes
A fundamental rupture → growing integration of the world economy • Mediterranean world:
a never «closed» world
Land routes
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Silk road → precious items from the East (spices, silk, precious stones)
Caravan routes → gold, ivory and spices from Central Africa
Maritime routes
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Baltic connection → first trade fleets sent in the 13th-14th
Technological constraint on Atlantic shipping (inadequacy of Mediterranean
galleys and Hanseatic cogs)
The breaking of technological constraints and the opening of the Atlantic routes (15th-16th
centuries): the beginning of a 'proto-globalization'
or soft globalization  some features of what
we consider globalization such as
intensification of commercialization but not
so strong and frequent.
Europe at the center of a 'world economy’
(Braudel-Wallerstein)  (Braudel) is a system
that is self-sufficient with different countries that
are in a relationship between them. For instance,
there is a European world-system economy.
(Wallerstein) some countries provide high-profit
labor to periphery countries that offer cheap labor
and raw materials to the core countries.
Portuguese and Spanish supremacy
Portugal gains a monopoly of maritime trade with East
Asia
Portuguese explorations (Henry the Navigator and the
caravel → contamination of construction
techniques) especially exporting pepper.
Rounded the Cape of Good Hope (1488 Diaz),
circumnavigation of Africa and arrival in Calicut (1498
da Gama) network of trading bases and start of the
slave trade.
The Spain of the ‘Reconquista’: search for an alternative (Western) route to the Indies →
discovery of America (1492 Columbus)
• construction of vast colonial empires in Central and South America
• import of precious metals and price revolution (Fisher’s quantity theory of money)
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 inflation due to the quantity of money
the Columbian exchange
demographic collapse of Indigenous populations
Division of spheres of influence (Treaties of Tordesillas 1494 and Zaragoza 1529) →
eastern end of Brazil to Portugal, Philippines to Spain
Structural economic weaknesses of the Iberian Peninsula:
• Portugal - limited economic and demographic size/reliance on Antwerp Emporium
•
for spice redistribution
Spain - import of precious metals/manufacturing weakness ('resource curse’ ->
extractive institutions)
The dynamism of northern Europe
France, England and the Netherlands
a new instrument: the privileged trading companies → companies between merchants
(monopoly - diplomatic, military and administrative powers)
The 17th century - 'Dutch Golden Age': the United Provinces and the role of Amsterdam
replacement of the Portuguese in the Asian colonies and privateering war against the
Spanish:
• 1602 Dutch East India Company (Voc); 1630 Wic
• English rise and shift of the economic center to London in the 18th century
• 1600 English East India Company
GREAT’ AND ‘LITTLE’ DIVERGENCE How to explain them?
v
Agenda
Great Divergence
What? When? Why?
✔ Demography ✔ Geography ✔ Institutions
European Little Divergence
What? When? Why?
✔ Demography ✔ Geo-political factors✔ Institutions
The Great Divergence: What?
(Western) European supremacy over Asia = better living standards in Europe
Indicators of development: ✔GDP per capita ✔urbanization rate ✔scientific and
technological progress → the ‘Needham’ question
The Great Divergence: Why?
DEMOGRAPHIC FACTORS
Thesis 1. Higher concentration of population in Europe → fosters transfer of ideas /
creates pressure on resources → incentive for innovations
Thesis 2. Rising mortality in Europe due to plague: a solution to the 'Malthusian trap’
(Gregory Clark) → it reduced life expectancy, but improved living standards for those who
survived (↑ real wages)
Thesis 3. Lower birth rate in Europe due to higher age at marriage (John Hajnal)
GEOGRAPHICAL FACTORS
China’s unfavorable position with respect to southward navigation • Fragmentation of
European territory due to natural barriers (Jared Diamond)
→ several states of limited size → competition and innovation
Europe enjoyed favorable geographical position and resource endowment (Kenneth
Pomeranz):
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relative abundance of key resources (England - coal) in a favorable location
easy access to the natural resources of the Americas ('ghost acreage’)
different timing of the Great Divergence for Pomeranz, according to whom it started
in the 19th century (or at most in the 18th century)
INSTITUTIONAL FACTORS
In Europe, institutions were more innovation-friendly:
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Universities fostered the development of knowledge and set the stage for the
scientific revolution (Joseph Needham)
In mercantile cities, the bourgeoisie – a social class oriented towards enterprise
and economic innovation – emerged
Efficient markets, more secure private property rights, political institutions open
to economic elites (neo-institutional economics)
However, some authors point out that there were more similarities than differences
between European and Asian institutions
The European Little Divergence: What? When?
Within Europe, primacy of northern Europe (especially England and the Netherlands)
over the Mediterranean countries
Real GDP per capita in some European countries, 1270- 1870 (international $ 1990,
logarithmic scale)
The European Little Divergence: Why?
DEMOGRAPHIC FACTORS
Thesis 1
In north-western Europe, the European Marriage Pattern
* high age at marriage & neo-local behaviour → lower
fertility → higher human capital is combined with lifecycle service
*young people serving other families →
greater labour mobility and independence
Thesis 2
High fertility of English
elites and downward social mobility → spread of 'good practices' among the lower social
strata
• Thesis 3
The shock of the plague in the 17th century put southern Europe at a disadvantage
GEO-POLITICAL FACTORS
• Advantages for nations favourably located in relation to the new
Atlantic routes
• Obstacles to Asian trade posed by the expansion of the
Ottoman Empire
INSTITUTIONAL FACTORS
Of a political nature:
• Relative openness of political institutions to economic elites (+ favourable
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•
geographical location: Acemoglu-Johnson-Robinson)
Property rights (North) were more 'full' and 'secure' in England than in the rest of
Europe → reduction of uncertainty and conflicts / lower transaction costs
Citizenship rights (Praak-Van Zanden) more 'extended' in England and the United
Provinces → greater fiscal capacity of the state, more public goods
Critics: private property as the best solution is a myth; citizenship rights were still limited
Of an economic nature:
• A more dynamic/flexible labour market
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'Industrious revolution', especially in Flanders and England (→ cottage industry
or putting-out system), following a consumption revolution (colonial goods), Jan
de Vries
The Black Death strengthens the 'European marriage pattern' and increases
women's participation in the labour market in north-western Europe (de Moor-van
Zanden)
The Work ethic: Protestant reformation, predestination and economic success
(Max Weber)
Urban guilds become weaker in the North and more rigid in the South → Goods
manufactured in the Netherlands and England are more competitive
Critic: the positive role of guilds (quality, skills...)
Emergence of new economic institutions in the North: privileged trading companies,
stock exchanges...
THE FIRST INDUSTRIAL REVOLUTION
Why in Europe? Why in England?
Agenda
• Industrialization and modern economic development: a conceptual framework
• Why was industrialization a European phenomenon?
The First (English) Industrial Revolution
• Overseas trade
• Agricultural revolution
• Demographic revolution
• Transportation revolution
• Energy revolution
• Manufacturing revolution
Why did England industrialize first?
A ‘revolutionary’ change
Industrial Revolution (Toynbee, Lectures on the Industrial Revolution in England, 1884)
Socio-economic changes in England between 1760 and 1830, and later in Western
Europe and the USA
it is now preferred to use the term First Industrial Revolution or English Industrial
Revolution for the English case and, more generally, to refer to the industrialization
process.
Continuity or fracture?
From the 1970s onwards, the Industrial Revolution was questioned as a fracture and the
elements of continuity and graduality of the industrialization process were emphasized
A gradual change
Annual growth of English GDP per capita 0.2-0.5% between 1760-1830; acceleration
thereafter
high growth of the more innovative 'modern' sectors (cotton, iron) as opposed to the
'traditional' → sectoral imbalances
not all regions grew at the same time → regional imbalances (Sidney Pollard 1981: it is the
region that grows, not the nation)
Continuity with the proto-industrial phase (Franklin Mendels 1972: proto-industrialization =
Verlagssystem or putting-out system) of the late medieval and early modern age
However, the start of irreversible growth remains revolutionar
Modern economic development starts: main manifestations
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sharp rise in incomes accompanied by population growth
strong increase in the rate of technological innovation
strong increase in the capital-labour ratio and thus in labour productivity
transformation of the economic structure (labour force from agriculture to industry)
urbanization
depersonalization of business (joint stock companies)
specialization of businesses and growth of surplus for the market
Interpretations: why did industrialization start in Europe?
The centrality of institutional and cultural factors
Political fragmentation (as opposed to China being a monolithic entity) → competition and
wars → rise of the fiscal-military state attraction of specialized skills and naval-military
investment mobilization of financial resources and public debt → financial innovations,
lower interest rates
Mercantilist policies (as opposed to policies oriented towards stability and domestic order
in China) and support for the expansion of overseas trade → new resources + importance
of customs and excise duties for state revenues (vs. self-sufficiency of China and tax
revenues from a mass of peasants)
Western philosophical-religious view (the centrality of man and his ability to manipulate
nature) → Renaissance, scientific revolution, and Enlightenment
Technical-scientific culture: 'Industrial Enlightenment'(Joel Mokyr)
Advance in ‘useful knowledge’, trial and error, application of the
scientific method to the production process, the spread of
scientific institutions
Lively cultural debate in the West (vs. strict political control in
China)
1. Overseas trade
Strong growth in import-export and re-export: most dynamic sector in the 17th-18th
centuries
Britain is a key player in triangular trade (Europe-Africa-Americas → goods and people)
and Asian trade
Driving factors
• mercantilist policies
• large privileged trading companies (EIC)
• Navigation Acts, Calico Acts
Rising state budgets (tax collection capacity and public debt → military expenditure and
the Royal Navy)
Consequences
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international trade provides raw materials and outlet markets, enables capital
accumulation
urban growth → agricultural revolution
2. The agricultural revolution
Large increase in production due to the extension of arable land and productivity growth
Driving factors
17th-19th centuries: contraction of open fields and common lands in favour of
enclosures (+ land consolidation) – importance of Acts of Parliament
New crop rotations
Norfolk system (elimination of fallow and continuous rotation with fodder crops)
From free-range to stable rearing, increased use of fertilizers and selection of livestock
Corn laws favour producers and demand increases Consequences
The agricultural revolution supports demographic, urban and industrial development:
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surplus for the market
release of labor force (in the long run)
accumulation of capital
demand for manufactured goods
3. The demographic revolution
Intense and prolonged population growth
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1681-1841 English population triple
without growth in food prices (no bottlenecks)
Driving factors
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increase in birth rate (lower age at marriage)
Poor laws reduce uncertainty and support the purchasing power of the poorer
classes – opposition by Thomas R. Malthus
reduction in mortality rate (better nutrition, improved sanitary conditions, reduction
of epidemics, smallpox vaccine)
→ START OF DEMOGRAPHIC TRANSITION
Consequences
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increase in labour supply (supply)
increase in consumption, including manufactured goods (demand)
4. The transportation revolution
Favourable situation: insular nature (coastal navigation) and numerous navigable rivers
but worst roads in Europe
Improvement of land and water transport systems, stimulated by economic growth
(production, income) and urban growth → need to transport agricultural products, raw
materials, and finished goods
Driving factors:
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Establishment of turnpike trusts for the management of turnpike roads (private
ventures authorized by Parliament) canal companies (joint stock companies
authorized by Act of Parliament) for the construction and management of
waterways.
London docks (public-private investment)when industrialization was complete,
advent of railways (1825: Stockton-Darlington - 1830: Liverpool-Manchester)
Consequences
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reduction of time and costs of transport
release of animal power
reduction of stocks
5. The energy revolution
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From the 'organic’ economy to the 'mineral’ economy (Wrigley) → from the
exploitation of the earth's surface (forest, arable land) to underground resources
(fossil fuels)
Strong and rapid increase in available energy – which effect on long-term
sustainability?
The availability of cheap coal fuels the domestic consumption of the urban
population
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industrial consumption
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transportation
Steam engine
6. The manufacturing revolution
Increase in production and productivity (reduction in unit costs) Driving factors:
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High rate of technological innovation, especially in textiles and iron and steel
industries
Cotton textiles: weaving (flying
shuttle 1733) – spinning (1760s70s spinning jenny, water frame,
mule) – weaving (mechanical loom
1785)
Iron and steel: use of coke
instead of charcoal to produce iron
and steel – Cort’s puddling system
1783-84
Steam power: from the ‘miner’s’
friend to Newcomen’s pump and
Watt’s steam engine (1769)
Consequences:
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reduction in prices → increase in consumption and industrial usage
gradual establishment of the factory system (→ social costs), but still
accompanied by a widespread putting-out system
The interpretations: why did the First Industrial Revolution take
place in England?
The coexistence of a set of favourable factors (Peter Mathias)
GEOGRAPHY
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Location (between the North Sea and the Atlantic) → commercial development
Insularity, navigable rivers and scarcity of mountains → domestic market
Resources (1): abundance and low cost of coal vs. scarcity of wood
Resource (2): additional agricultural land in the Americas (‘ghost acres’)
INSTITUTIONS AND SOCIETY
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More ‘inclusive’ political institutions (open to the needs of economic actors)
Glorious Revolution (1688-89) → parliamentary control
increase in the state fiscal capacity and public investment
strenghtening of property rights
Fiscal-military state and mercantilist policies
•
•
•
•
•
public debt (→ Financial revolution and the Bank of England - 1694)
Royal Navy
protection of foreign trade
Legal system: the flexibility of common law
Early patent law (1624) → incentive to innovate • Efficient apprenticeship system →
skilled labour
Society: greater social mobility and lower income inequalities - 'middle class' with
standardized preferences
RELATIVE FACTOR PRICES (Robert Allen)
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High labour costs (high real wages)
Low cost of energy (coal) and capital (accumulation in agriculture and trade)
Incentive to introduce labour-saving technologies → replacement of labour by capital
/machinery powered by inanimate energy
FROM ENGLAND TO CONTINENTAL EUROPE (AND BEYOND)
The spread of industrialization and the Second industrial revolution
Agenda
The spread of industrialization: interpretations
• British industrialization as a model?
• Rostow and the ‘imitation without variation’
Gerschenkron and the ‘imitation with variation’:
• Advantages of backwardness and substitute factors
• Some examples: Germany and Italy
The Second industrial revolution
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Technologies and sectors involved
Economic consequences
 The advent of big business
 Financial systems
 Work organization
New world equilibria: explaining the US and German leadership and British
relative decline
The British case: a model to imitate?
The process of industrialization varies in intensity and timing from country to country.
Europe north of the Pyrenees and the Alps and west of the Elbe River were economically
developed by the end of the 19th century → countries closer geographically to England
and with similar prerequisites
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natural resources (coal)
relatively productive agriculture
openness to international trade
widespread proto-industrial activities o entrepreneurial skills
Capital accumulation.
The spread of industrialization was a 'peaceful conquest' according to Sidney Pollard, who
argues that the unit of analysis should be the region, not the nation-state ... although the
political-institutional dimension remains important
GDP per capita
compared to that of
Britain
Walt W. Rostow (1960): the
theory of the stages of
economic growth → 'imitation
without variation'
After Great Britain (first mover),
the follower countries (second
comers) and laggards (late
comers) embarked on their own
modernization in a profoundly
changed scenario:
economic → British leadership already established
technological → transition from the First to the Second Industrial Revolution


Alexander Gerschenkron (1962): interpretation of ‘imitation with variation’



Focus on backward countries
Concepts of relative backwardness and advantages of backwardness
The absence of English prerequisites (→ entrepreneurship and capital) can be
compensated for by activating substitute factors (state, banks) capable of facilitating
the catching up of laggards to the first mover.
Some examples of substitute factors:
1. GERMANY
• Protagonist in Europe of the Second Industrial Revolution
• Leadership in heavy industry (capital intensive): metallurgy, mechanics, chemistry,
electricity
• Role of the universal or mixed bank
-
Both commercial banking (→ branches for collecting savings, and short-term
loans) and investment banking (→ long-term financing)
Shareholdings in financed companies and trustees on boards of directors
Financing of railways and big industrial firms → cartels and dumping
Support from the Central Bank (Reichsbank)
Complementary function to the local banking system
2. ITALY
Universal bank after the German model: 1894-95 Banca commerciale italiana & Credito
italiano
Role of the State:




Public expenditure: military and railways
Trade policy: from free trade to protectionism (import tariffs of 1878 and 1887)
Commissions, subsidies, and rescue of the steel industry (Terni)
State and banks promote industrial take-off, but without a dynamic entrepreneurial
fabric, development cannot sustain itself. • ‘Industrial Triangle’ and the issue of
regional divides
The Second Industrial Revolution
At the end of the 19th century, the Second Industrial Revolution was underway. New
sectors are born...
Electricity:



a new form of energy: from the incandescent lamp (Edison 1879) to the longdistance transfer of electricity (Galileo Ferraris)
many applications: lighting, transport, chemistry, metallurgy; flexibility
opportunities for countries rich in water resources: internal combustion engine
(using a petroleum derivative) organic chemistry (from artificial dyes to
pharmaceuticals)
... and others are profoundly transformed



food (mass processing)
steel (Bessemer and Thomas converters)
mechanical (automatic canning, assembly of interchangeable parts)
These are more complex innovations than the First Industrial Revolution
Systematic application of scientific knowledge to the production process ⇨ ‘age of
engineers’
A new actor: Big Business
Pre-requisites: market expansion and new technologies
Railways and telegraph companies (USA) contribute to market expansion and lead the
way in solving unprecedented financial and management problems:
-
Separation of ownership (shareholders) and control (management)
-
Formal organizational chart defining line and
staff relations
New technologies enable the exploitation of
economies of scale and scope




Large plants – high volumes – lower unit costs
Constraint: continuous flow of materials
Growth through vertical integration
(backward/upstream and
forward/downstream), product
diversification, and search for new markets
Managerial hierarchies for coordination
In the presence of large companies, an oligopolistic market forms → a few companies
supply the national/world market
Financial systems
Two types of financial systems emerge in response to the financial needs of large
companies:


bank-oriented → central role of the universal bank (German or continental system)
market-oriented → central role of the market → stock exchange (Anglo-Saxon
system)
A revolution in workplace organization (USA)
Innovations also affect the organization of production:
From Taylorism (F.W. Taylor, Principles of Scientific Management, 1911) or scientific
organization of work...


Division of tasks and identification of the most effective methods of work
Increase in productivity, rewarded with wage increases
... to Fordism (H. Ford, 1913):



Assembly line and automatic movement
Cost of assembling a car (black Model T): 12 h → 1 1⁄2 h
Lower prices, higher wages and profits
Background: American System of Manufacturing → production and assembly of
standardized components – precision machine tools
US and German leadership and British
‘relative economic decline’
By the 1880s, the United States became the world’s
leading industrial nation and were, with Germany, the
protagonists of the ‘second industrial revolution’.
THE FIRST GLOBALIZATION (1850- 1914)
The international movement of goods, capital and labour
Agenda



What is globalization
International flows and price convergence:
The facilitating factors
Technology and institutions
Causes, facilitating factors and directions, consequences:



The international movement of goods
The international movement of labour
The international movement of capital
The gold standard as a factor of integration

Drivers of development during the Second Industrial Revolution and the First
Globalization Wave
To analyze the globalization process, we must consider the flows of



Goods
Labor
Capital
The degree to which these markets are integrated internationally defines the process of
globalization (→ price convergence)


In the 19th century international trade grew rapidly→ In 1913, Europe accounted
for more than 60% of world trade
The international movement of people (migratory flows) also accelerated
→ 1850-1914: more than 40 million people left Europe for the Americas, South
Africa and Oceania

International movement of capital (foreign investment) intensified → Europe was
the ‘banker of the world’
An early description of the globalization process
“The inhabitant of London could order by telephone, sipping his morning tea in bed, the
various products of the whole earth, ... he could at the same moment and by the same
means adventure his wealth in the natural resources and new enterprises of any quarter
of the world, ... He could secure forthwith, if he wished it, cheap and comfortable means of
transit to any country or climate without passport or other formality...”
(J.M. Keynes, The Economic Consequences of the Peace, 1919)
Facilitating factors
Reduction of natural and artificial obstacles
Technological progress → reduction of cost and time of transport (railways &
steamships/ iron, screw propeller) and communication (telegraph)
Removal of institutional obstacles to free movement of goods and people
Imperialism → integration of peripheries into the world system
The international movement of goods
Causes: differences between countries in resource endowment and/or productivity level
(→ commodity price gap)
Facilitating factors: transport development + free trade policies (abandonment of
mercantilism and advent of laissez-faire).
From theories in favor of free trade...
Adam Smith (Wealth of Nations, 1776): specialization and division of labor between
nations (and individuals) enhances productivity.

In the absence of government intervention to hinder trade, the market can expand
beyond national borders.
... to the main steps
• Britain is the first country to opt for free trade in the 1840s
• 1860 Anglo-French or Cobden-Chevalier treaty: a milestone in the spread of free
trade to the European continent
❖ Most-favored-nation clause (later widely adopted by other European countries):
bilateral treaties produced multilateral effects
The benefits of protectionism: theory...
• Friedrich List (The national system of political economy, 1841):
-
Protectionism is useful to support the ‘infant industry’: essential for the industrial
takeoff of a backward country
... and facts
The Great Depression and the return to protectionism (1873-1895)
It is the first major structural crisis in the Western economy due to oversupply → price
collapse = deflationary crisis


Cheap grain imports from the USA and Russia
Technological progress in innovative sectors
Demand for protection from farmers and industrialists (e.g., Germany 1879)
The protectionist turn involves many countries (exceptions: UK, Belgium, the Netherlands,
Denmark).
The growth of international trade slows down, only to accelerate again during the belle
époque.
• A signal of international market integration :
Wheat price gap between Chicago and Liverpool.
1870: 60% 1914: 15%
The international movement of labour: the advent of mass migration
Causes:

Demographic transition (French exception) → pressure on resources and labor market
saturation
PUSH

Great Depression (agrarian crisis)
In addition to economic motivations, political and religious motivations
PULL
Employment opportunities in countries with labor scarcity and resource abundance
Attraction measures (1862 Homestead Act – USA)
Facilitating factors:
• Advances in transportation
• ‘Migration chains’ and agents of emigration
• Migration policies: deregulation of emigration
Migration flows from Europe 1851-1920 (‘000 people)
At first mainly from northwestern Europe, UK primarilycolonial territories with ample
resources and Irish famine
At the end of the century, from southern and eastern Europe, especially Italy
Consequences: for countries of origin, reduced population pressure and increased wage
levels - key role of remittance
The international movement of capital
Causes: different capital endowment - different investment opportunities Facilitating
factors: advances in communication systems + development of financial
institutions/international monetary system
Main countries of origin



Great Britain (>40% foreign investment in 1913): London is the financial
capital
France – Germany
Belgium – Netherlands – Switzerland
Main countries of destination
• USA (primarily British capital)
• At the European level, Russia (French capital)
In general, from richer (endowed with capital) to less developed countries (relatively
high demand for capital).
Investment was aimed mainly at exploiting local
resources (primary sector: agricultural
products, livestock, mineral resources) and
building infrastructure
Also in the capital market, price convergence
signals the degree of integration achieved the
interest differential between London and the
U.S. between 1890 and 1914 stands at 1 %
The gold standard: an important factor in financial market integration
Origins: Great Britain (1819) - GS became the
international monetary system in the last decades of
the 19th century (British financial and commercial
dominance)
Features:



issue of paper money in proportion to gold reserves (held by the central bank)
convertibility of paper money into gold at a fixed parity
(fiduciary system)
free international circulation of gold
Compliance with ‘rules of the game’ ensures automatic adjustment of balance of
payments - exchange rate stability (fixed exchange rates)
THE WORLD ECONOMY IN TROUBLE
From the Great War to the Great Depression
Agenda
WWI
• The war economy: basic features
• Economic consequences of the War
• Economic consequences of the Peace
• Inflation and monetary stabilization in the 1920s
The Great Depression
• Manifestations
• The background
• Explaining the causes
• The responses in the USA
• The transmission to Europe
• Why a recession turned into a Great Depression
The war economy
WWI was a conflict of unseen proportions, requiring the mobilization of massive economic
and financial resources:
The first age of globalization comes to an end: abandonment of the gold standard and
disruption of international trade
state interventionism - control of production and consumption
• Rationing
• economic planning
• forced industrialization
ways of financing conflict
• taxation
• massive recourse to public borrowing
• issuance of money
The Economic Consequences of the War
Human costs (including "Spanish flu" casualties) and material damage




The problem of conversion of production: reallocation of resources from war
industries to peacetime production
Severe social tensions Demobilization and unemployment
Strong imbalances in public finances High public indebtedness and problem of
inter-allied loans o Need to cope with high social spending and reconstruction
International economic balances change - U.S. transformed from net debtor to net
creditor
The economic consequences of the Peace (= Peace Treaties)
European political map redrawn:
• Empires collapsed and new states arose
• Germany lost 13% of its territory (including Alsace-Lorraine) and all the colonies
• New currencies and tariff barriers, growth of economic nationalism
Monetary and financial problems


Heavy inflationary wave in many countries, both winners and losers
A big issue: war debts and reparations
The Treaty of Versailles (1919) and the ‘responsibility for war clause’:
• Keynes condemned German reparations as
•
•
•
economically irrational and politically imprudent
1921 Reparations Commission: 132 billion gold marks.
After Germany suspended payments, French and
Belgian troops occupied the Ruhr (1923)
Passive labor resistance and hyperinflation (4.2 trillion
marks per $); internal tensions that fueled National
Socialism
Monetary stabilization and return to the gold (exchange) standard
In the 1920s, major countries returned to the gold standard (seen as a guarantee of
stability) through a combination of:


restrictive economic policies
foreign loans (gold and foreign currencies) ... in the absence of any coordination
In Germany, stabilization is implemented through the Dawes Plan (1924)


reduction of annual instalments
influx of foreign credit (especially from the U.S.) allows Germany to meet its obligations
Great Britain: despite Keynes' opposition, return to prewar parity in 1925 (4.86 dollars to
the pound - 10% overvaluation of the pound sterling) with a strong deflationary policy

Export crisis and rising unemployment
France: stabilization of the franc in 1926 at a more realistic exchange rate (1/5 of its
prewar value)


Undervaluation of the franc against major currencies
↑ exports and inflow of gold = accumulation of reserves
Italy: with “Quota 90”, strong revaluation of the Lira (1926-27)


an economic goal, with strong political meaning (the "battle of the lira" → to bring the
lira to the October 1922 value)
bankruptcies and unemployment (an anticipation of 1929)
The Great Depression hits Europe at a time when there are several signs of instability:
⇨ low demand
⇨ high rates of unemployment
⇨ distorted exchange rates
⇨ international integration problems
The Great Depression: manifestations
The Great Depression is the
worst crisis ever experienced by
the world economy in terms of
duration, depth and global
scope:




collapse of demand
(consumption and
investment)
collapse of production
and employment
collapse of prices
collapse of international
trade
Unemployment in the U.S. 1900-2000
• Banking crisis: severe difficulties for many banks
o 1929-33: 11,000 of 26,000 banks close their doors in
the U.S.
1932-33: 12 million unemployed in the U.S.
- 6 million in Germany
US: the background
What is the role of the New York Stock Exchange crash of October 1929?




It is a symbol of the beginning of the ‘great
depression’
The stock market crash had serious
consequences for the real economy, but it
was not the cause of the Great Depression
Stock market quotations 1925-1932
After a brief postwar recession (1920-1921),
strong expansion of the US economy in the ‘Roaring Twenties’ income grows especially profits
In the 1920s, business euphoria was supported by a sense of confidence in the
country's great possibilities:




1922-1927: stock prices doubled - by 1929 their value was more than quadrupled
upward spiral (many people got into debt to speculate on the stock market)
stock prices rose excessively relative to companies' ability to make profits
financial panic erupted and from the stock market the crisis passed to the whole
American economic system
→ financial difficulties of companies, chain bankruptcies, factory closures and mass
layoffs, banking crisis
But even before the stock market crash there were already some signs of crisis.


In the 1920s, some sectors were struggling: coal mining, shipbuilding, textiles and
agriculture
Particularly strong demand for
consumer durables (cars, household appliances), supported by installment sales
or houses (construction industry)
⇨ the production system was producing in excess of the market's absorption capacity
A crisis occurred, not due to shortage but to abundance DEFLATIONARY CRISIS
The causes of the crisis
Different interpretations:



overproduction, both in industry and in the primary sector, and insufficient
demand
emergence of new mass production technologies • income distribution
problems (profits-wages)
poor economic policies
inconsistency between US trade and financial policy: short-term capital exports to
Europe (especially Germany) and protectionist trade policy
monetary policy: for much of the 1920s, the Fed maintained low interest rates, which
encouraged speculation.
The responses: from policy mistakes to the New Deal
Laissez-faire orthodoxy did not provide for appropriate forms of government intervention
in the economy.
According to the dominant ideology
- the state must pursue a balanced budget o market equilibrium is automatically restored
Protectionist policy: Smooth-Hawley Tariff (1930)
→ retaliation by other countries and collapse of international trade
FED cuts money supply (1931) → banking crises
→ pressure on debtor countries
In 1933, F.D. Roosevelt abandoned the logic of laissez-faire and
launched the New Deal.
Abandonment of free-market policies and extensive
government intervention with deficit-spending
policies
 welfare provision schemes
 work relief programs (TVA)
J.M. Keynes, General Theory of Employment, Interest and Money,
1936:


Market equilibrium is not restored in a reasonable timeframe
government intervention is necessary to support demand →
‘Keynesian multiplier effect.’
Further New Deal measures...
Extended regulation in several sectors:





AAA and NIRA to control output and prices
in banking and finance
Insurance on bank deposits
Separation of commercial and investment banks (Glass-Steagall Act)
Supervision of the stock exchange (SEC)
An important decision was to abandon the gold standard and to devalue the dollar → issue
of paper money in excess of gold reserves
However, only WWII ensured the definitive exit from the crisis in many countries the end of
the crisis was linked to the policy of rearmament → growth in employment and production
The Crisis in Europe: transmission channels and responses
⇨ first backlash with the withdrawal of US capital from Europe (already in 1928) ⇨
second backlash with the closure of American markets to imported goods
Europe experiences recessionary spiral
Governments adopt inappropriate economic policies: deflationary austerity policies
⇨ in the monetary field → to prevent the outflow of gold and foreign currencies
⇨ in the fiscal sphere → spending cuts and revenue increases, to balance state budgets
The Financial Crisis in Europe
Start of the financial collapse in May 1931






bankruptcy of the Creditanstalt in Vienna (2/3 of Austria's bank deposits)
the crisis spreads to Germany, Eastern Europe, and England
introduction of exchange controls in Germany and deflationary policies under
Chancellor Brüning
escape from the British sterling → formal abandonment of the gold standard in 1931,
soon followed by dozens of countries
expansionist monetary policy improves British performance in contrast to the poor
performance of the ‘golden bloc’ countries (with France at the center)
Governments eventually realized the importance of a more interventionist attitude →
rapid German recovery under the Nazi regime
The factors that amplified the crisis, turning a Recession into a Great Depression
Counterproductive trade policies
• protectionist policies (‘beggar-thy-neighbor policies)
• from multilateralism to bilateralism (clearing agreements) o formation of trade blocs
Wrong fiscal policies
• Harmful monetary policies: the gold standard as ‘golden fetters’
• Lack of an international Lender of Last Resort
Failure of US leadership
• Absence of international coordination and cooperation
Failure of the London World Economic Conference (1933)
FROM THE ‘GOLDEN AGE’ BACK TO INSTABILITY
Facts and interpretations
Agenda
International cooperation after WWII


the Bretton Woods agreement (gold exchange standard, IMF and WB)
the GATT
The Marshall Plan and the reconstruction of the European economy

objectives, mechanism and consequences
• The European economy from cooperation to integration
•
•
•
•
EPU; from ECSC to EEC
The European Union and the Euro
Forms of government intervention after WWII
The Golden Age
manifestations and interpretations
From stagflation to the Great Recession of 2008
The lessons of two world wars and a great depression





After WWII the winners’ attitude towards the defeated countries was different
The US accepted its leadership at the international level
Objectives: restoration of an open international economy, and introduction of a new
international monetary system
Start of the process of integration of the European economy
Emergence of the welfare state and new economic policies
The international cooperation 1944 - Bretton
Woods Agreements:
• New system of international payments
centered on the dollar (fixed exchange rates,
until 1971-73) - gold exchange standard.
• World Bank or IBRD: agency to support
development projects of backward countries
(long-term).
• International Monetary Fund (IMF): overseer
of the fixed exchange rate system, intervention in financial crises and in case of temporary
imbalances in the balance of payments; inspection and guarantee task for countries
benefiting from its interventions.
1947: forum to facilitate trade expansion – the GATT (General Agreement on Tariffs and
Trade):
⇨ elimination of import quotas and reduction of tariff barriers
⇨generalized application of most-favored-nation clause (with some exceptions ->
regional trade agreements)
⇨first manufactured goods, later agricultural products (from Kennedy Round onward) and
services
1994: Uruguay Round – the WTO (World Trade Organization) is created.
The Marshall Plan  search who is marshall
After the war, economy collapsed in many countries.
European countries had lost their foreign exchange reserves (‘dollar gap’) ⇨ limited
availability of raw materials
⇨ only by exporting could they import raw materials
⇨ without raw materials they could not have exported.
The European Recovery Program - ERP intervened to break this vicious cycle
• political motivations (avoiding nationalist or socialist turns);
• economic motivations (securing markets for U.S. exports).
The Plan:
• covers the balance of payments deficits of European countries
• restarts the production process by dampening inflationary tensions • stimulates an
increase in productivity.
The ERP mechanism
Resources, mainly capital goods, are transferred to recipient countries after a positive
assessment by the OEEC (Paris) and approval by the ECA (Washington)
Goods are sold on the market of the
recipient country
The proceeds obtained flow into a
‘counterpart fund’ (in domestic currency)
The fund is used, in agreement with the
U.S., to support the country’s development
$13.3 billion in aid flowed into Europe from the ERP until 1951.
Among the largest beneficiaries were the
UK (24 percent) and France (21 percent),
but also Germany and Italy (11.5 percent
each).
ERP aid distributed between 1948 and
1951 (million $)
The conditions of U.S aid: market
integration, international cooperation, currency
convertibility.
Effects on expectations and advances in technology and industrial organization.
The logic of multilateralism favors intra-European cooperation.
The start of European economic integration
⇨1948 Paris: OEEC (Organization for European economic cooperation)
⇨ 1950: EPU (European Payments Union), first experiment in monetary cooperation: a
clearing arrangement centered on the BIS, to restore currency convertibility and free,
multilateral trade
From international to supranational organizations / from
cooperation to integration
• Political and economic motives
⇨ 1951: ECSC (European Coal and Steel Community)
• F-G-BE-NE-LUX-I
• French-German initiative promoted by R. Schuman
(Schuman Declaration, inspired by J. Monnet)
⇨ 1957 Rome: EEC (European Economic Community) or Common Market: not just a free
trade area or a customs union



abolition of internal customs duties and quantitative restrictions; common external tariff
– EEC is a counterpart in international negotiations
free circulation of services, labor and capital
common policies
⇨1962: Common Agricultural Policy (CAP)
• price support and compensatory import duties
• need for agricultural policy reform in the 1980s
Further steps along the road to European economic integration
1973: UK, Ireland, Denmark; 1981-1986: Greece, Spain, Portugal
⇨ 1978 European Monetary System (EMS) – based on a currency basket (ECU) – to
promote monetary stability
Toward the Single Market
⇨ 1986 Single European Act: abolition of non-tariff
barriers to trade
⇨ 1993 Maastricht Treaty establishing the European
Union: convergence criteria for monetary union
• Government deficit and debt – inflation rate – interest
rate – exchange rate
⇨ 1998 European Central Bank (ECB) and subsequent
launch of the Euro (2002)
Forms of government intervention: mixed and welfare
state economies
• In the immediate postwar period, anti-inflationary policies: higher
interest rates (Einaudi line 1947: 4 to 5.5 percent), currency
substitution (Deutsche Mark 1948).
Growing role of the state: in France, UK and Italy the state
controls 10-20% of industrial production capacity in the post-war
period.
✔Motivations: reconstruction – the role of leftist parties – a legacy of
the interwar period.
Nationalization of key sectors: the rise of the mixed economy.
o Italy: the IRI (Istituto per la ricostruzione industriale – public holding company) debate;
1953 ENI (national oil and gas company); 1962 ENEL (national electricity authority)
Capital-labor cooperation:
concertation between state, trade union representatives and employers' organizations:
Sozialpartnerschaft (social partnership - Austria)
workers' participation in business decisions: Mitbestimmung (co-determination - Germany)
Economic planning
France: Plan de modernisation et d’équipement (Monnet) – an 'indicative' planning model
Extension of social security and welfare programs: the modern welfare state is born
UK: 1942 Beveridge report (NHS, family
allowances and old age pensions) to fight the ‘five
giant evils’
Basic needs, education, health, decent housing,
employment

•
Germany: Soziale Marktwirtschaft (social market economy)
Countercyclical and full employment policies
The Golden Age (1950-1973) of Western Europe (and Japan):
manifestations
⇨ After slow and volatile growth in the interwar period, a long period of uninterrupted
high growth followed

Growth in consumption and investment, imports and exports

Stable exchange rates; low inflation and
unemployment
GDP per capita 1950-1973 ($ 1990) 
Explanations for growth
⇨catch-up for ground lost
⇨ elasticity of labor supply: abundance of labor (agriculture, immigration)
low wages – higher profits
⇨ the low cost of raw materials
⇨ capital accumulation: high investments
⇨ technology and organization → productivity growth (advantages of backwardness)
⇨the foreign market: ‘export-led’ growth, thanks to progressive liberalization of
international trade
⇨ exchange rate stability and, more generally, a favorable institutional setting
⇨ expansionary (Keynesian) economic policies
The End of the Golden Age and the advent of ‘stagflation’
Causes



Suspension of dollar convertibility (1971) and end of fixed exchange rate system
Strikes and wage explosion
Oil shocks of 1973 and 1979, and soaring prices of commodities
manifestation

A new phenomenon emerges:
STAGFLATION = STAGNATION + INFLATION

Economic growth slows down - higher volatility
consequences


Questioning of Keynesian policies and the advent of deregulation (neoliberalism)
Difficulties for Fordist firms → transition to post-Fordism – flexible specialized
production (‘Toyotism’ - lean production, just-in-time) and offshoring
Toward the Great Recession: the background (NOT IN THE EXAM)
Neoliberal policies dominated in the 1990s

Deregulation and privatization, growing globalization of markets & growth of the
financial sector
Global imbalances: new emerging economies grew (especially China), the USA attracted
capital and the stock market grew
• American banks lent to people with low credit rating (subprime mortgages) to buy




homes
Low interest rates (until 2004)
Mortgage collateral were seemingly safe in a period of rising house values (housing
bubble)
Securitization of mortgages → sold to ‘shadow banks’ (Special Purpose Vehicles)
which repackaged the loans into financial products deemed low risk (Mortgagebacked Securities, MBS)
Credit institutions like Fannie Mae and Freddie Mac supported the process by
purchasing mortgages
Manifestations of the crisis
Demand for housing fell in early 2007 → The housing bubble burst

Insolvency of many households and loss of housing
Downward spiral



Collapse of property values and MBS (also bought by foreign financial institutions)
Difficulties in selling houses expropriated by banks due to price collapse
Banks find themselves with a mass of non-performing loans
Symbol of the financial crisis: bankruptcy of the investment bank
Lehman Brothers (15 September 2008) o End of the 'Too big to fail' illusion
• Collapse of the major stock exchanges and spread of panic
Loss of confidence and collapse of the interbank
market → liquidity crisis (credit crunch)
Financial crisis transferred to the real economy.




Contraction of loans to businesses and consumers
Contraction of industrial production and international
trade
Increase in unemployment.
Reduction in commodity prices (for a short period →
fear of deflation)
World industrial output
The responses in the USA
Volume of world trade
Prompt state intervention to rescue ailing banks and
companies


acquisition of shares to recapitalise banks, then
placed back on the market
purchase of MBS
Heavy injection of liquidity by the Fed (Bernanke) as
early as November 2008

Quantitative Easing → purchase of Treasuries
(government debt instruments) and MBS
The crisis in Europe
Also in Europe, banks were in trouble for mortgages and possession of US ‘toxic assets’
Governments intervened to support banks and financial institutions, resulting in a sharp
increase in public debt

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Sovereign debt crisis (= public debt) → fears for the Euro
PIIGS (Portugal, Italy 2011, Ireland, Greece 2009, Spain)
Government bonds downgraded by rating agencies → cost of debt increased
EU called for austerity measures (2013 ‘Fiscal Compact’ : to balance the government
budget and reduce the public debt) → criticism
Early 2015: formal introduction of quantitative easing = systematic purchase of
government bonds by ECB
Mario Draghi at the London Conference on 26 July
2012
‘Within our mandate, the ECB is ready to do whatever
it takes to preserve the euro. And believe me, it will
be enough.’
A ‘long amnesia’?
Conditions similar to those that had already fostered the 1929 crisis reappeared
Elements common to many crises (Youssef Cassis)
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global financial imbalances resulting from trade imbalances o low interest rates →
loose monetary policy
excessive risk-taking in search of profit -> collective euphoria (Alan Greenspan:
'irrational exuberance') in turn stimulated by expansive monetary policies
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opaque nature of financial instruments (derivatives) o failure to assess risk
appropriately
light regulation (the problem of market quality)
inadequate supervision
concealment of riskier assets (ethical behaviour)
The ‘lessons from the past’
The 2022 Nobel Prize in Economics for studies on banks and
financial crises
Bernanke, author of studies on the 1929 crisis and head of the
Fed during the 2008 crisis, prevented the recession from turning
into a depression