Monthly Archives: May 2018

The Economic Consequences of the Napoleonic Wars

The Napoleonic Wars: A Watershed in Spanish History?

By Leandro Prados de la Escosura (Carlos III University de Madrid) and Carlos Santiago-Caballero (Carlos III University de Madrid).

Abstract: The Napoleonic Wars had dramatic consequences for Spain’s economy. The Peninsular War had higher demographic impact than any other military conflict, including civil wars, in the modern era. Farmers suffered confiscation of their crops and destruction of their main capital asset, livestock. The shrinking demand, the disruption of international and domestic trade, and the shortage of inputs hampered industry and services. The loss of the American colonies, a by-product of the French invasion, seriously harmed absolutism. In the long run, however, the Napoleonic Wars triggered the dismantling of Ancien Régime institutions and interest groups. Freed from their constraints, the country started a long and painful transition towards the liberal society. The Napoleonic Wars may be deemed, then, a watershed in Spanish history.

URL: https://EconPapers.repec.org/RePEc:hes:wpaper:0130

Distributed by NEP-HIS on: 2018-04-30

Review by: Guido Alfani (Bocconi University)

goya-muertadehambre

Figure 1: Francisco de Goya, Muerta de hambre, c. 1812-1820. Drawing. Source: see entry in Goya en El Prado.

Summary

Large-scale war, as well as other major shocks that punctuate human history – plagues and famines for example – have been the object of much recent research in economic history, especially regarding their long-term consequences. Leandro Prados de la Escosura and Carlos Santiago-Caballero focus on the so-called “Peninsular War” which followed Napoleon’s invasion of Spain in 1808. They set out to provide an in-depth analysis of the short-term effects of this devastating war, then focusing on their long-term consequences. They argue that although the immediate consequences of war were considerably damaging to the Spanish economy, in the long run they were probably positive as the Peninsular War triggered the transition from an absolutist empire to a modern nation. They support their argument by means of counterfactual analysis.

This paper presents an overview of recent research on different dimensions of the Spanish economy during the eighteenth and nineteenth century, re-organized around how the Peninsular War raging from 1808 to 1814 affected the trends. Much of this research has been published in Spanish, often in publications difficult to find outside of Spain, and consequently this paper is precious for international scholars as a kind of guide to recent achievements in Spanish economic history.

Overall, the Peninsular War, which was triggered by the invasion of Spain by Napoleonic armies – first a peaceful process, agreed upon with the Spanish authorities in order to force Portugal to enforce the “continental block” trade policies against Britain and leading to the Franco-Spanish invasion of Portugal in 1807 – had negative economic consequences in the short run. This is clear looking at the industrial sector, which suffered because of a sharp reduction in internal and international demand as well, the unrestricted influx of French and British goods, a shortage of inputs and high war taxation. Certain sectors – like the luxury productions organized around the Reales Fábricas or “Royal Factories” – never recovered. War also badly affected trade, which was disrupted both at the national and international scale, suffered because of increasing transportation costs and was badly hindered by interruption of contacts with the colonies.

The immediate impact of war is less clear on agriculture, given that on the one hand war led to plundering and confiscation by the armies, while on the other hand it brought to an end Old Regime institutions that vexed the countryside, like the tithe paid to religious institutions. In addition, a large-scale process of confiscation and sale of lands and real estate owned by the Church (the desamortización) took place, leading to a spread of private (lay) property and altering the distribution of wealth across the country. The impact of war on agriculture, however, has to be understood also in the light of the widespread famines affecting Spain during the war period.

More generally, from the demographic point of view the Peninsular War was clearly catastrophic, leading to “population falling one million short of its potential and its direct effect representing half a million casualties, around 5 per cent of the population” (p. 18). To place these figures in the right perspective, the authors note that this is more than double the population loss during the 1936-39 Civil War.

Beyond the desamortización, war also had other important political and institutional consequences. First of all, it started the process ultimately leading to the independence of Spanish America, as also argued by Grafe and Irigoin (2012). This has crucial importance to the way in which the authors frame their discussion of the long-term consequences of the Peninsular War, as specialists in the history of fiscal systems have clarified how colonial revenues to the Crown were instrumental in enforcing state centralization in the mainland (Yun Casalilla 1998). In other words, “empire strengthened absolutist monarchy” (p. 19).

Taken together, the liberalization of the land market – through the desamortización and the end of impartible inheritance systems like the mayorazgo – and the weakening of the absolutist power of the crown would have favored the “Liberal Revolution” sweeping through Spain during the immediate post-war decades.

In the authors’ view, this causal connection between the Peninsular War and the Liberal Revolution explains why although the short-term consequences of war were negative, the long-term ones were probably positive. They support this argument by a simple counterfactual analysis (which is openly presented by the authors as just the first step in a more encompassing research program). The analysis provides some statistical support to the idea that the Peninsular War marked a structural break in the long-term economic development of Spain. In particular, by the mid-nineteenth century per-capita GDP might have been 12% higher, real wages 139% higher, and land rents 30% lower than they would have been if the Peninsular War had not taken place.

heath-battlevittoria

Figure 2The Battle of Vittoria, June 21st 1813. Print. Source: See entry in The British Museum Collection Online.

Comment
This paper is an interesting contribution to the study of the economic impact of major shocks. In earlier research, one of the authors has contributed to clarify that the most iconic “bad in the short-run, positive in the long-run” shock, the fourteenth-century Black Death, had in fact long-term negative consequences in Spain due to the low population density of this European area in the Middle Ages (Álvarez Nogal and Prados de la Escosura 2013). Consequently, there is no reason to believe that the authors have any kind of a-priori in favor of positive long-term consequences of mortality shocks, which unfortunately seems to be a fairly common sin in much contemporary economic history (see further discussion, for the case of plague, in Alfani and Murphy 2017).

Additionally, the paper is built around a detailed and sector-by-sector analysis of how the Peninsular War affected directly the Spanish economy, which is a nice change from the wave of econometric articles in which the actual mechanisms through which crises might have affected the real economy are often just hinted at. For the same reason, this paper offers interesting elements for a comparison with recent research on the economic consequences of wars and other major shocks, research which has focused mostly on the medieval and early modern period (for example, Alfani 2013; Curtis 2014). Given the focus of the paper, the points made about the direct, short-term impact of war are somewhat stronger than the argument about a positive impact in the long run, which might still be the result of other causal factors. However, in this regard the paper is quite openly presented as just a first step, and a very necessary one, given the crucial importance of exploring and clarifying the historical mechanisms through which shocks might affect an economy before proceeding to complex statistical analyses of the data.

Looked at from this perspective, the paper presents only minor issues. A more detailed historical narrative of the Peninsular War would indeed be useful to the international reader. More importantly, no reference whatsoever is done to the fact that the French invasion triggered a phase of institutional and political change across much of continental Europe. The sale of Church property for example, as well as the end of fideicommissa and mayorascos, occurred throughout Catholic Europe. So there is reason to wonder why the Peninsular War would have had different consequences from the (forceful) spread of French innovating ideas and institutions that occurred in other parts of Europe. An obvious difference is, of course, the large-scale demographic impact of war itself – but in the current version of the paper, it is not clear whether the authors are considering the possibility of “Malthusian” dynamics interacting with political and institutional change. For example, to what degree the reported increase in per-capita GDP is the consequence of improvements in the institutional framework, and to what degree it is instead the result of a mass mortality-induced rebalancing of the resources/population ratio? This is a particularly important question, given that much of the war-related mortality was due to widespread famine, possibly to an even larger scale than the authors imply, as suggested by the most recent systematic analysis of famine in Spain (Pérez Moreda 2017).

Selected bibliography

  • Alfani, Guido (2013), Calamities and the Economy in Renaissance Italy. The Grand Tour of the Horsemen of the Apocalypse. Basingstoke: Palgrave
  • Alfani, Guido and Murphy, T. (2017), “Plague and Lethal Epidemics in the Pre-Industrial World”, Journal of Economic History 77(1), 314-343.
  • Álvarez Nogal, Carlos, and Leandro Prados de la Escosura (2013), “The Rise and Fall of Spain (1270–1850)”, Economic History Review, 66 (1), 1–37.
  • Curtis, Daniel R. (2014), Coping with Crisis. The Resilience and Vulnerability of Pre-Industrial Settlements. Farnham: Ashgate.
  • Grafe, Regina, and Alejandra Irigoin. (2012), “A Stakeholder Empire: the Political Economy of Spanish Imperial Rule in America”, Economic History Review 65 (2), 609–651.
  • Yun Casalilla, Bartolomé. (1998), “The American Empire and The Spanish Economy: An Institutional Perspective”, Revista de Historia Económica 16 (1), 123-156.
  • Pérez Moreda, Vicente (2017), “Spain”, in Guido Alfani and Cormac Ó Gráda (eds.), Famine in European History. Cambridge: Cambridge University Press, 48-72.
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Are Macroprudential Tools as Caring and Forethinking as They Claim to Be? Financial Stability and Monetary Policy in the Long Run

An Historical Perspective on the Quest for Financial Stability and the Monetary Policy Regime

By Michael D. Bordo (Rutgers University)

Abstract: This paper surveys the co-evolution of monetary policy and financial stability for a number of countries across four exchange rate regimes from 1880 to the present. I present historical evidence on the incidence, costs and determinants of financial crises, combined with narratives on some famous financial crises. I then focus on some empirical historical evidence on the relationship between credit booms, asset price booms and serious financial crises. My exploration suggests that financial crises have many causes, including credit driven asset price booms, which have become more prevalent in recent decades, but that in general financial crises are very heterogeneous and hard to categorize. Two key historical examples stand out in the record of serious financial crises which were linked to credit driven asset price booms and busts: the 1920s and 30s and the Global Financial Crisis of 2007-2008. The question that arises is whether these two ‘perfect storms’ should be grounds for permanent changes in the monetary and financial environment.

URL: https://EconPapers.repec.org/RePEc:nbr:nberwo:24154

Distributed by NEP-HIS on: 2018-01-15

Review by: Sergio Castellanos-Gamboa (Bangor University)

Summary 

In this paper Michael Bordo presents empirical historical evidence to analyze the incidence of credit-driven asset price booms and the extent to which they cause deep financial crises. The main argument of the paper is that we have to consider very carefully whether monetary policy should suffer a structural transformation whenever a rare “perfect storm” event occurs. Bordo supports this argument by looking at the correlation between and possible causality from credit-driven asset price booms to financial crises. The relation, he argues, is rather weak. Nonetheless, the consequences of implementing restrictive monetary policies when these events happen can be significantly bad in the long run.

The paper begins by reviewing the historical evolution of monetary and financial stability policy. In section 2 the author summarizes the appearance of central banks and the evolution of their functions and responsibilities, mainly as lender of last resort (LLR), across five diBordosq.jpgfferent periods: the “Classical Gold Standard”, the “Interwar and World War II”, the “Bretton Woods” period between 1944-1973, the “Managed Float Regime” between 1973-2006, and the “Global Financial Crisis”.

The next section of the paper deals with the measurement of financial crises in historical perspective. It starts by clarifying the definition of financial crises and looking at how this definition has changed from describing a banking panic to include “too important to fail” institutions, currency crises, sovereign debt crises, credit-driven asset price booms, sudden stops, and contagions. Of these crises, Bordo identifies five of them as global: 1890-1891, 1907-1908, 1913-1914, 1931-1932, and 2007-2008. He then turns to report the output losses of those global financial crises, using the cumulative percentage deviation of GDP per capita from the pre-crisis trend level of per capita GDP. He finds that in “the pre-1914 era the losses ranged from 3% to 6% of GDP. For the interwar period, driven by the Great Depression they are much larger – 40%. In the post Bretton Woods period losses are smaller than the interwar but larger than under the gold standard”. Finally, he finds that output losses in the period after 1997 are larger than in the pre-1914 period. The author ends this section by analysing the determinants of financial crises. Using a meta-study he concludes that financial crises are quite heterogeneous, and no particular factor stands out as a main determinant for their occurrence.

Section 4 of the paper reviews the historical narrative of a subset of 12 cases to evaluate the extent to which credit-driven asset price booms have been an important cause of financial crises. Bordo argues that although after the 2007-2008 crisis this factor has become more relevant, this was not the case before the collapse of Bretton Woods, with a few exceptions before World War II. Section 5 looks deeper into the relationship among credit booms, asset price booms, and financial crises using a business cycle methodology with a sample of 15 advanced countries from 1880 onwards. Once again, there is evidence that “suggests that the coincidence between credit boom peaks and serious financial crises is quite rare”. Moreover, credit booms do not seem to be highly correlated with asset price booms (except for the Great Depression and the Global Financial Crisis).

 The paper concludes by stating that there are four key principles to be followed to have a stable monetary policy regime that can be compatible with financial stability. These are: price stability, real macro stability, a credible rules-based LLR, and sound financial supervision and regulation and banking structure. These principles do not suggest that financial stability has to be elevated to the same level of importance as price stability or macroeconomic stability, and that implementing macroprudential tools to restrict monetary policy after a “perfect storm” can be more dangerous than beneficial in the long run.

Comments 

This paper brings important elements to the debate of whether implementing macroprudential tools is the right path to achieve financial stability. Moreover, Bordo raises a critical question that has not been properly addressed in the literature. To what extent can macroprudential tools be harmful for long-run economic growth? Additionally, the author invites us to question whether central banks should undertake activities that go beyond monetary policy (as bailing out failing institutions) to the point of putting at risk their credibility and even their independence, as it has already happened in the past.

Once again economic history becomes relevant to understand and shed a new light to contemporary debates. In particular, this paper implements a transparent and simple methodology to analyze whether credit-driven asset price booms can cause financial crises and if monetary policy should be fundamentally transformed when financial markets are hit by a “perfect storm”. The author is quite skeptical of the implementation of restrictive monetary policies to deal with serious financial crises, although there is still considerable room for more research to clarify this debate. Even though Bordo avoids using econometrics to assess this issue, the methodology proposed in this paper can still be subject to the Lucas critique (Lucas 1976). Therefore, there is still the need for a robust methodology that can provide evidence to produce a sound and testable economic theory to thoroughly study and understand this phenomenon.

More important, we still have to ask whether we can differentiate real productivity booms from bubbles. If there is still a lack of knowledge in this area we will not be able to know if we have the appropriate tools to diagnose a bubble and defuse an asset price boom before it bursts. Therefore, we cannot state for sure whether central banks should follow the Greenspan doctrine (Bernanke and Getler 2001), or if they should be more proactive in the procurement of financial stability. Even more and following the main argument of the paper, it is very important to ask and understand if financial stability should be granted the same importance as price stability or the stability of the real macroeconomy. For now, the answer seems to be no, but there also seems to be sufficient evidence to argue that banking should be made boring again (Krugman 2009).

References

Bernanke, Ben and Mark Gertler (2001). “Should Central Banks Respond to Movements in Asset Prices?” American Economic Review91(2), 253-257.

Krugman, Paul (2009). “Making banking boring.” New York Times, April 10.

Lucas, Robert (1976). “Econometric Policy Evaluation: A Critique.” In Allan H. Meltzer and Karl Brunner. The Phillips Curve and Labor Markets. Carnegie-Rochester Conference Series on Public Policy. 1. New York: American Elsevier, 19–46.