Real Growth, Monetary Disturbances and the Transfer Process: The United States, 1879-1900

Abstract

In recent literature there has appeared a revived interest in the international transfer mechanism by which the occurrence of foreign borrowings becomes a loan in real goods. papers dealing with this somewhat old fashioned topic, both theoretical1 and a lesser extent empirical,2 have presented very strong cases which suggest that the classical interpretation would benefit considerably by the addition of a number of modern theoretical notions and by a general shift in emphasis. intention of this essay is definitely not add the swollen bibliography on the theory of transfer. On the contrary, my purpose is simply attempt a crude evaluation of both classical and modern theory of transfer when applied one episode of economic history. Perhaps the most famous empirical test of the Hume specie-flow mechanism, as an explanation for the real transfer, was performed by Jacob Viner.3 Viner's laboratory of study was a period in Canadian development from 1900-13. Hume specie-flow mechanism, and the role that it plays in the classical transfer, is standard equipment taught undergraduates in their first encounter with international trade theory. Briefly, and at the risk of trying the reader's patience, it is as follows: under a gold s andard system, and with the occurrence of a significant inflow of capital, an inflow of gold is precipitated by the exchange rate moving the gold import point. Assuming that the money supply is responsive that inflow, prices should rise in the receiving country and fall in the lending countries. result of the relative price movements is, of course, stimulate imports and depress exports in the borrowing country thus creating a tendency towards a deficit in the trade balance and current account. In this way, and ignoring accommodating short term capital flows, the real transfer process in goods begins. Viner's study of Canadian experience exhibited evidence which confirmed the Hume specie-flow mechanism. Since that study was made, there have been a number of suggestions of alternative theories which could have fit the evidence equally well. However, it wasn't until recently that Meier explicitly examined new data applicable this period in Canadian development and attempted to supplement Professor Viner's study by recognizing the relevance of income analysis and the historical context of economic development.4 Meier's sugges* I am indebted Moses Abramovitz, David C. Cole and Millard F. Long for their useful comments. They are not responsible, of course, for any errors remaining. 1See for instance Harry G. Johnson, The Transfer Problem and Exchange Stability, Journal of Political Economy, June 1956, pp. 21225; Paul A. Samuelson, The Transfer Problem and Transportation Costs, Journal, June 1952, pp. 278-304 and Samuelson's subsequent article in the same journal, June 1954, pp. 264-89. 2G. M. Meier, Economic Development and the Transfer Mechanism, Canadian Journal of Economics and Political Science, February 1953, pp. 1-19. James C. Ingram, Growth in Capacity and Canada's Balance of Payments, American Review, March 1957, pp. 93-104. 'Jacob Viner, Canada's Balance of Indebtedness, 1900-13 (Cambridge, Mass., 1924). For a more modern inductive study of the classical model of the transfer mechanism see George Macesich, Sources of Monetary Disturbances in the United States, 1834-1845, Journal of History, September 1960, pp. 40734. 'Meier, Economic Development and the Transfer Mechanism, op. cit., p. 1, italics mine. present author reached a similar conclusion in International Trade and United States Eco-