The structural evolution that profoundly altered British and American influence in international economic relations is also reflected in the evolution of world trade and the international movement of capital.
The transformation of trade flows
At the end of the nineteenth century, European exports represented between 55% and 60% of world exports. This share fell to 45% between 1920 and 1930 and reached a low of 35% around 1950. It rose again to 46% by 1961. The figures in Table IV confirm this decline of Europe’s position in the international economy between 1913 and 1938.
Industrialization not only changed the economic scale of countries but also the content of their production. The emergence of new products and the evolution of internal structures shaped the distribution of exports by product groups. Exporting countries benefited or not depending on the structure of their productive apparatus. Italy, Switzerland, and France were the worst positioned, as 80% of their exports consisted of declining products. The figure was 62% for the United Kingdom and Belgium, and 45% for Sweden and Germany.
From 1842 to 1873, the volume of British exports increased by 355%, or 11% annually. This rate fell to 2.5% per year between 1873 and 1898 (a Kondratieff downswing) and rose to 5% between 1898 and 1913. Thereafter, production growth often outpaced the growth of foreign trade. Between 1815 and 1914, the volume of British imports multiplied by 20, while national income only multiplied by 10. Before the First World War, one-sixth of global production entered international trade.
The evolution of international investment
Raw-material-producing regions benefited from growing demand from industrial countries and from the inflow of capital that supported basic production and emerging industries. Not all countries benefited equally, since their capacity to profit depended on their export structure. Nineteenth-century production and trade expansion relied on economic complementarity between industrial nations and raw-material producers, as well as on international investment flows.
Great Britain consistently invested a large share of its capital in the “new countries,” many of which formed part of the British Empire: Canada, South Africa, Australia, and New Zealand. In 1913, 45% of British foreign investment was located in these new regions.
Around 1870–1875, Britain was the world’s leading creditor nation, with roughly 6 billion dollars invested abroad. On the eve of the First World War, this figure exceeded 18 billion dollars. Total global foreign investment reached about 44 billion dollars. France held second place among creditor nations, while the United States—despite having 3.5 billion dollars invested abroad—remained a debtor country, as it had received 7.2 billion dollars in foreign capital.
Between 1914 and 1919, France, Britain, and Germany raised 12 billion dollars. The war caused a redistribution of real capital and a decline in its real value. Between 1919 and the onset of the global crisis, the United States increased its foreign investment to over 17 billion dollars. As we will see when studying the gold exchange standard, American lenders flooded Europe and the world with capital whose security and profitability were not always assured. It was normal and desirable that the United States lend capital abroad, as such lending helped finance American exports—just as British capital financed part of the United Kingdom’s exports in the nineteenth century. However, the United States often pressured borrowers—especially Germany—to “invest” even more abroad.
The new dominant economy of the twentieth century operated in a framework very different from that of the nineteenth century, but the American technique of foreign lending could become a new source of instability. This profound transformation of international economic structures—rooted in nineteenth-century industrial development and accelerated by the First World War—helps explain the economic fluctuations of the period 1919–1939, and in particular the Great Depression of the 1930s.
The weakening of demand for durable consumer goods, once household stocks were replenished, was certainly one of the factors behind the depression of the 1920s. Finally, the normalization of international trade, the resupply of raw materials, and the disappearance of exceptional transactions acted as additional forces slowing economic activity. The 1920 crisis would become the prototype of the reconversion crisis marking the transition from a wartime to a peacetime economy.