The Transformation of the World (158 page)

Standardization

The process of systematization and the creation of large-scale systems of exchange was even more dramatic in the realm of money and finance. Here Europeans had a bigger lead than in the field of commerce, as far as rationalization and efficiency were concerned, over economies that not so long before had been neck and neck with them. Complex currency relationships, multiple forms of money, and the difficulty of calculating the ratios between them always entail additional costs: this was true in early modern Europe, as it was in China until 1935. Despite several attempts, Imperial China did not manage to simplify its chaotic dual system of silver and copper money; trustworthy paper money gained ground only slowly, and the most diverse foreign means of payment remained in circulation—from the Spanish Carolus dollar that had been the standard currency in the Yangtze delta since the late eighteenth century to banknotes issued by foreign banks in the treaty ports. These were all major factors in the country's backwardness in the nineteenth and early twentieth centuries. Before 1914, when the Yuan Shikai dollar was introduced, there were not even the basic elements of a uniform national currency. A central bank finally came into being in 1928, but political turmoil kept it from functioning in more than a rudimentary fashion.
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Such conditions, characteristic of large parts of the world, contrasted with the creation of national monetary areas in nineteenth-century Europe. This certainly posed problems, especially for newly formed nation-states, but a combination of economic expertise, political will, and local interests proved decisive. The integration of national markets and economic growth, usually attributed to industrialization alone, would have been impossible without this far-from-marginal factor.
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Only standardization and credible guarantees of stability enabled certain Western currencies (above all the pound sterling) to become sufficiently strong to operate internationally. Monetary and currency reforms were always a highly complex affair. It was necessary to borrow from successful models, and there had to be banks capable of issuing and managing a new currency. The obstacles to a uniform national system were often apparent also from the persistent fragmentation of credit markets. In Italy, for instance, a regional differentiation of interest rates persisted for several decades after the lira became the official currency in 1862.
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The logical next step—though one that had to be synchronized with national homogenization—was the international alignment of currencies. We should be wary, however, of assuming a general process of ever wider integration. In the eighteenth century, the Spanish Empire was the largest single currency and fiscal area in the world, and its dissolution between 1810 and 1826 eliminated the benefits it had brought and confronted each of the successor states with the problem
of creating a monetary and financial system of its own. That this almost never succeeded upon the first attempt was one of the factors behind a vicious circle of political instability and economic inefficiency.
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For much of Europe, the Latin Monetary Union of 1866 finally created a de facto single currency that greatly facilitated business and travel. But this was not the main goal of the union. Rather, it reflected (a) France's emergence as a major exporter of capital; (b) France's political wish to make its bimetallic silver and gold currency hegemonic throughout continental Europe; and (c) the need to restore the balance between silver and gold prices upset by the discovery of new American and Australian gold deposits.
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A further policy goal, addressed for the first time in such an international manner, was to create price stability. The currency of the Latin Monetary Union, embracing France, Belgium, Switzerland, and Italy (and later Spain, Serbia, and Romania), was really a silver currency, since each country defined its own money in relation to a fixed weight of silver. An unforeseen “extrasystemic” development caused this edifice to topple, when the discovery of new deposits lowered the price of silver and unleashed a flood of the metal in the countries of the union. There was then much to be said for an alternative gold-based currency, yet silver displayed an astonishing capacity to hang on.

Silver

The international monetary systems of the nineteenth century were the first coordinated attempts by a number of states to control the precious metal flows that had been circling the globe since the 1540s.
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Even countries that aimed at strict regulation of their external economic (and other) relations—Japan, for example, and a fortiori China—were caught up in these flows and, often without understanding the causes, experienced the inflationary or deflationary effects of the global circulation of coins and metal. These effects could break through into politics. The Opium War between Britain and China (1839–42) had its main cause in the problems associated with silver. All through the eighteenth century, China had earned large quantities of silver in exchange for its export products (especially silk and tea), and these had breathed life into its domestic economy. But at the beginning of the nineteenth century this flow was reversed, until the British finally came up with something of interest to Chinese customers: opium produced in the Indian territories of the East India Company. This orientation also had consequences in far-flung parts of the world, since from the 1780s onward the need to sell something to the Chinese had been a major impetus for the exploitation of new Pacific resources, such as the sandalwood forests on the islands of Fiji and Hawaii. The more important opium became as an import good to China, the more the economic and ecological pressure on the Pacific subsided.

The beginning of the opium trade reversed China's insertion into the world economy, since it now paid for the opium with silver. The result was a serious
deflation that affected South China down to the village level, as well as a threat to government tax revenue. In this situation the imperial court decided to put an end to opium imports (already regarded as illegal smuggling). The casus belli came when the emperor's special commissioner in Canton had stocks of British opium confiscated and destroyed, shortly after London's representative in the port had unceremoniously declared them to be Crown property. Since in this period opium revenues came second after the land tax among government income in India, there was a strong political interest in the continuation and expansion of the opium exports to China.
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Of course, the silver-opium economy of China and India operated in wider global contexts, and the Chinese move was somewhat more complex than a simple measure against British corrupters of the Chinese people. A contraction of the country's export markets for silk and tea reduced its silver earnings after 1820, while at the same time lower output in South American mines raised the international price of silver and triggered further outflows of the metal from China. The aggressive and criminal British opium trade was therefore not the only reason for China's economic crisis of the 1830s.
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The economic fate of India was also strongly marked by silver. After 1820, large quantities of Chinese silver originating in the mines of Spanish America flowed into opium-producing India. In addition, silver from newly opened North American deposits was soon being used to pay for rising Indian exports of tea and indigo. When cotton supplies to European industry faltered during the American Civil War, Egypt and India leapt in to fill the breach. India's seemingly endless capacity to absorb silver—rather like that of China in the eighteenth century—was acceptable to the colonial power, since it facilitated the gradual monetization of the rural economy and the collection of land taxes on which British rule rested. From 1876 on, however, a steady decline in world silver prices dragged down the exchange rate of the Indian rupee, making exports cheaper. Because the dominant ideology of free trade ruled out tariff increases of any kind, the Indian government was unable to stem the resulting outward flow of agrarian products, and it faced growing difficulties as it struggled both to deliver promised pay raises to its officials and to cover the usual “home charges” to London.

Caught in an essentially silver-induced trap of inflexible revenue and rising expenditure, the government in Calcutta resorted in 1893 to a radical measure utterly at variance with market liberalism. It closed down the Indian mints, where until then anyone had been able to convert a small sum of silver into rupees. Now the country had a manipulated currency whose face value, decided by the Secretary of India in London, no longer corresponded to its metal value. This took India out of the global play of currency forces, tightening the British grip on the Indian economy.
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This example shows how the free silver market—all in all, the chief globalizing factor from the early modern period down to the late nineteenth century (or in China even until 1931, when the
Great Depression hit the country)—could work itself out in practice. It also illustrates how, in the end, only the major Western states were capable of intervening in this interplay of forces.

Gold

Governments and investors fled from the risks of silver into the safety of gold. It was more by accident than design that the British economy, by far the strongest in the nineteenth century, had already used a de facto gold currency in the eighteenth. In medieval England, the pound sterling had still been fixed as a pound weight of “sterling” silver. But from 1774 on gold coins were the legal tender (the famous “guinea,” so called after the main source region of the gold), soon displacing silver money in everyday use. After the Napoleonic Wars, the British government—alone in Europe at the time—committed itself to the gold standard. In 1821 a coherent monetary order was introduced by law: the Royal Mint had to trade gold in unlimited quantities at a fixed price; the Bank of England and any other British bank instructed by it had a legal obligation to exchange banknotes into gold; and the import and export of gold was subject to no restrictions. This meant that gold functioned as the reserve for the whole volume of money. Until the early 1870s Britain was the only country in the world with this kind of system. After the alternative model of the Latin Monetary Union collapsed within a short time of its introduction, the bimetallic solution fell by the wayside and one European government after another switched to the gold standard: Germany, Denmark, and Sweden in 1873, Norway two years later, France and other members of the Latin Monetary Union in the 1880s.

In each case there were major debates on the pros and cons of gold. It was not only in France that a gap opened between theory and practice. From 1879 the United States had in effect a (highly controversial) gold currency, although Congress did not officially admit to this until 1900. Russia—which entered the century with a silver standard and then printed quite large amounts of uncovered paper money—converted to the gold standard in 1897. Japan followed suit the following year, having used China's reparations from the war of 1895 to build up a gold reserve in its central bank. As so often in Japan at that time, this was associated with the aim of following the “civilized West”—unlike China, increasingly held in contempt by the Japanese, which did not manage to rid itself of its archaic silver currency.

But Japan was not alone in reacting as it did. Virtually all other countries, especially those outside Europe, were parvenus in comparison with Great Britain. Adherence to the gold standard signified international respectability and a will to respect the Western rules of the game. In some cases, there were also high hopes in foreign investment—a major factor for Russia, for instance, which by the end of the Tsarist period was the largest debtor country in the world.
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Russia's switch to gold meant that all the major economies of Europe now had the same kind of currency; the integration of the continent was thus even greater
than, at the level of commerce, under the free-trade system of the 1860s (which Saint Petersburg had never joined). A closer examination reveals some differences, however. Almost all countries but Britain, even financially strong creditor nations such as Germany and France, provided their monetary authorities with instruments to defend their gold reserves if they came under threat. In exceptional situations, the strict gold cover of paper money could be abandoned. None of the Continental countries (except France) was a net exporter of capital, and none had England's fully developed banking structure. The British model could therefore be imitated only in parts.

The Gold Standard as a Moral Order

The technical devices affording price and currency stability under the gold standard need not concern us here.
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The key points in terms of network formation are the following.

First
. Britain introduced the gold standard in the eighteenth century more or less by accident. In the next century too, the system did not display any clear-cut, intrinsic advantages over a bimetallic currency. An important element in the adoption of the gold standard by one European country after another was the fact that Britain—not mainly
because of
its gold currency—had become the world's leading industrial power and financial center. When Germany then caught up with it industrially, a chain reaction was unleashed. Anyone who wished to do commercial or financial business with Britain and Germany was well advised to adhere to their monetary system. Pragmatism was here mixed up with considerations of prestige. Gold counted as “modern,” silver did not.

Second
. It took a long time for a truly international gold-based monetary system to become operational—until the early years of the twentieth century, in fact. Soon afterward it was ripped apart by the First World War.

Third
. The gold standard, as a regulatory mechanism effective across the world from North America to Japan, was not simply the abstract apparatus presented in textbooks. To quote the economic historian Barry Eichengreen, it was “a socially constructed institution whose viability hinged on the context in which it operated.”
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This institution required from participating governments an explicit or implicit willingness to do anything necessary to defend currency convertibility—hence a consonance at the level of economic policy. This meant, for example, that no one was supposed even to think of devaluation or revaluation, and that in a highly competitive international system, governments were ready to solve financial crises by mutual agreement and mutual assistance. This happened in the Baring crisis of 1890, for example, when a large British private bank declared itself insolvent and only prompt support from the French and Russian state banks maintained liquidity on the London market. The following years witnessed a number of similar cases in other countries. Such international coordination and fine-tuning, at a time when there was still no telephone and top officials did not hold regular meetings, was much more difficult to achieve
than it is today. Yet the system proved its effectiveness thanks to the professional solidarity—“trust” would perhaps be too strong a word—among governments and central banks. In the world as it existed before 1914, there was a greater convergence of interests and spirit of cooperation in the field of monetary policy than in diplomacy and military affairs. This discrepancy between the different levels of international relations, involving an autonomy of prestige-centered power politics, was one of the main distinguishing features of globality during the quarter century before the outbreak of the First World War.