A hundred years ago, the international economy was entering the 20th century with the

freest flow of goods, services and capital in human history. The previous century had
witnessed expansion of global output and trade, and rising living standards in Europe and North
America at a pace never before seen in human history. The 20 th century then saw jus A hundred
years ago, the international economy was entering the 20th century with the
freest flow of goods, services and capital in human history. The previous century had
witnessed expansion of global output and trade, and rising living standards in Europe and North
America at a pace never before seen in human history. The 20 th century then saw just over a
decade of continued expansion, followed by the abrupt disruption of trading and financial ties
during the First World War. After some steps toward a restoration of the prewar situation, the
international economy collapsed during the decade of the Great Depression, and continued to be
fragmented during the Second World War. The century long trend toward globalization had been
reversed and, as of 1950, or even 1960, globalization and the degree of integration of the world
economy was considerably less than it had been fifty years before.

Since then, of course, there has been an unprecedented revival and intensification of global
integration, supported by technical change, and by international economic policies resulting from
multilateral cooperation. These phenomena combined to result in greatly reduced barriers to
international flows; further acceleration in the growth rate of world output; the spread of living
standards that we associate with advanced industrialization to additional parts of the world and
the reduction of poverty and improved living standards in most other parts of the globe; and the
emergence of a number of new key players in the international economy.

My purpose in this lecture is to present a broad outline of the evolution of the world
economy in the 20th century, with a view to examining where we stand today. I shall argue that
international economic policies have been phenomenally successful to date, and have in many
ways changed the contour of the world economy itself, mainly for the better. At the same time,
however, there are a number of challenges which, without appropriate and timely responses,
could undermine progress to date and undo many of the benefits so far achieved.

In both the 19th and 20th centuries, technical change played an important role. But, paradoxically,
in the 19th century it was the dramatic decline in transport costs that enabled the rapid expansion
of global trade and real incomes, whereas in the second half of the 20 century, it was a dramatic
th

decline in policy-induced trade barriers that had the same effect. And whereas the reversal of
globalization in the early 20th century resulted from political hostilities, the major threat to
continued economic success at the beginning of the 21 century appears to be economic
st

nationalism.

The Background

One hundred years ago, observers of the international scene would have described the
phenomenal globalization of the preceding century, especially in the period 1870-1914.

Until the 19th century, transport costs had been sufficiently high to discourage all but high value
low volume trade, while policy-imposed trade barriers (tariffs and other taxes or restrictions
on international transactions) had further impeded trade flows. For most commodities, transport
costs exceeded the price of goods in the country of origin, often by a substantial margin.
In the early l9th century, the United Kingdom provided leadership in reducing tariffs, and many
other European countries followed suit in the middle of the century. Transport costs also fell
dramatically, even in the first half of the century. Douglas North, for example, cites evidence that
ocean shipping costs by around 1850 were only about a third of what they had been barely thirty
years earlierwhen shipping under sail was still the order of the day. While international trade
and economic growth picked up as a result of these phenomena, it was really in the late l9th
century, especially in response to the "amazing" decline in transport costs (the phrase used by
O'Rourke and Williamson), that trade volumes and growth rates accelerated. The last decades of
the 19th century were described as the "gilded age" on this continent, as per capita incomes are
estimated to have doubled between l870 and l900. The late Victorian era was likewise regarded
as a boom period in Europe as European per capita incomes and wage rates rose at even faster
rates, albeit from a lower base.

The late nineteenth century boom was encouraged by technical change and by policy changes in
industrial countries. Technical change was especially apparent with the introduction of electricity
and its applications, and included communications (the telephone and telegraph), transport, and
much more. The introduction of the railroad led to a steep decline in the costs of moving freight,
and there were further dramatic drops in the costs of ocean shipping following the introduction
of steamships. Data from O'Rourke and Williamson imply a drop in costs of transport between
the U.S. and Europe from about 80 per cent of the price of the commodity to less than 20 percent
during that period.

As a consequence, world trade grew rapidlyat an annual rate of 3.4 percent between 1870 and
1914, with growth not only in industrial goods but also in raw materials. In many instances, the
primary commodity exporters were colonies, whose manufacturing bases did not achieve
sustained development.
Simultaneously, integration of world capital markets proceeded rapidly. By the early 20 century,
th

it is estimated that foreign-owned assets were about equal in value to about 20 percent of world
GDP. The United Kingdom was, as is well known, the world's banker and at its peak, owned 80
percent of foreign assets globally. Its capital outflows were as much as 10 percent of GDP in
some years, and averaged 4.5 percent of GDP per year between l870 and l914.
The growth of real incomes, the growth of world trade, and the integration of the world economy
both through the removal of artificial barriers to trade such as tariffs and through reduced costs
of transportwere causally linked. The drop in costs of international transactions was itself a
function, in significant part, of technological change. But while real wages and living standards
rose throughout the world, the rate of increase was much faster in the industrial countries. Until
the early l700s, it is estimated that living standards were not significantly different between
different geographic regions of the world. But by the end of the nineteenth century, economic
growth had been sufficiently rapid in the "industrial countries" that the world had bifurcated in
terms of living standards and rates of economic growth.
The First World War, however, led to an abrupt reversal in the degree of globalization. As
transport routes were disrupted and countries experienced different degrees of inflation in
response to the differential strains of their wartime expenditures, the earlier integration of the
international economy was largely reversed.
Despite efforts to restore the status quo ante after the war, disequilibria associated with the
overvaluation of the pound sterling following the British return to the Gold Standard in 1925,
German reparations, and other imbalances led to slow progress in the l920s. At the end of that
decade, markets were not as integrated as they had been prewar.

By the late l930s, recovery was underway, but then the Second World War began and rapid
expansion ensued in response to wartime demand. Of course, output and trade patterns were once
again disrupted, as production of consumer and investment goods demanded in peacetime were
replaced in significant part by production related to the war effort.

t over a decade of continued expansion, followed by the abrupt disruption of trading and
financial ties during the First World War. After some steps toward a restoration of the prewar
situation, the international economy collapsed during the decade of the Great Depression, and
continued to be fragmented during the Second World War. The century long trend toward
globalization had been reversed and, as of 1950, or even 1960, globalization and the degree of
integration of the world economy was considerably less than it had been fifty years before.

Since then, of course, there has been an unprecedented revival and intensification of global
integration, supported by technical change, and by international economic policies resulting from
multilateral cooperation. These phenomena combined to result in greatly reduced barriers to
international flows; further acceleration in the growth rate of world output; the spread of living
standards that we associate with advanced industrialization to additional parts of the world and
the reduction of poverty and improved living standards in most other parts of the globe; and the
emergence of a number of new key players in the international economy.

My purpose in this lecture is to present a broad outline of the evolution of the world
economy in the 20th century, with a view to examining where we stand today. I shall argue that
international economic policies have been phenomenally successful to date, and have in many
ways changed the contour of the world economy itself, mainly for the better. At the same time,
however, there are a number of challenges which, without appropriate and timely responses,
could undermine progress to date and undo many of the benefits so far achieved.

In both the 19th and 20th centuries, technical change played an important role. But, paradoxically,
in the 19th century it was the dramatic decline in transport costs that enabled the rapid expansion
of global trade and real incomes, whereas in the second half of the 20 century, it was a dramatic
th

decline in policy-induced trade barriers that had the same effect. And whereas the reversal of
globalization in the early 20th century resulted from political hostilities, the major threat to
continued economic success at the beginning of the 21 century appears to be economic
st

nationalism.

The Background

One hundred years ago, observers of the international scene would have described the
phenomenal globalization of the preceding century, especially in the period 1870-1914.

Until the 19th century, transport costs had been sufficiently high to discourage all but high value
low volume trade, while policy-imposed trade barriers (tariffs and other taxes or restrictions
on international transactions) had further impeded trade flows. For most commodities, transport
costs exceeded the price of goods in the country of origin, often by a substantial margin.

In the early l9th century, the United Kingdom provided leadership in reducing tariffs, and many
other European countries followed suit in the middle of the century. Transport costs also fell
dramatically, even in the first half of the century. Douglas North, for example, cites evidence that
ocean shipping costs by around 1850 were only about a third of what they had been barely thirty
years earlierwhen shipping under sail was still the order of the day. While international trade
and economic growth picked up as a result of these phenomena, it was really in the late l9th
century, especially in response to the "amazing" decline in transport costs (the phrase used by
O'Rourke and Williamson), that trade volumes and growth rates accelerated. The last decades of
the 19th century were described as the "gilded age" on this continent, as per capita incomes are
estimated to have doubled between l870 and l900. The late Victorian era was likewise regarded
as a boom period in Europe as European per capita incomes and wage rates rose at even faster
rates, albeit from a lower base.

The late nineteenth century boom was encouraged by technical change and by policy changes in
industrial countries. Technical change was especially apparent with the introduction of electricity
and its applications, and included communications (the telephone and telegraph), transport, and
much more. The introduction of the railroad led to a steep decline in the costs of moving freight,
and there were further dramatic drops in the costs of ocean shipping following the introduction
of steamships. Data from O'Rourke and Williamson imply a drop in costs of transport between
the U.S. and Europe from about 80 per cent of the price of the commodity to less than 20 percent
during that period.

As a consequence, world trade grew rapidlyat an annual rate of 3.4 percent between 1870 and
1914, with growth not only in industrial goods but also in raw materials. In many instances, the
primary commodity exporters were colonies, whose manufacturing bases did not achieve
sustained development.
Simultaneously, integration of world capital markets proceeded rapidly. By the early 20 century,
th

it is estimated that foreign-owned assets were about equal in value to about 20 percent of world
GDP. The United Kingdom was, as is well known, the world's banker and at its peak, owned 80
percent of foreign assets globally. Its capital outflows were as much as 10 percent of GDP in
some years, and averaged 4.5 percent of GDP per year between l870 and l914.
The growth of real incomes, the growth of world trade, and the integration of the world economy
both through the removal of artificial barriers to trade such as tariffs and through reduced costs
of transportwere causally linked. The drop in costs of international transactions was itself a
function, in significant part, of technological change. But while real wages and living standards
rose throughout the world, the rate of increase was much faster in the industrial countries. Until
the early l700s, it is estimated that living standards were not significantly different between
different geographic regions of the world. But by the end of the nineteenth century, economic
growth had been sufficiently rapid in the "industrial countries" that the world had bifurcated in
terms of living standards and rates of economic growth.
The First World War, however, led to an abrupt reversal in the degree of globalization. As
transport routes were disrupted and countries experienced different degrees of inflation in
response to the differential strains of their wartime expenditures, the earlier integration of the
international economy was largely reversed.
Despite efforts to restore the status quo ante after the war, disequilibria associated with the
overvaluation of the pound sterling following the British return to the Gold Standard in 1925,
German reparations, and other imbalances led to slow progress in the l920s. At the end of that
decade, markets were not as integrated as they had been prewar.

By the late l930s, recovery was underway, but then the Second World War began and rapid
expansion ensued in response to wartime demand. Of course, output and trade patterns were once
again disrupted, as production of consumer and investment goods demanded in peacetime were
replaced in significant part by production related to the war effort.