In economics, the money supply is the total value of monetary assets available in an economy at a specific time. There are several ways to define "money", but standard measures include currency in circulation and demand deposits. Money supply data are recorded and published by the government or the central bank of the country. Public and private sector analysts have long monitored changes in the money supply because of the belief that it affects the price level, the exchange rate and the business cycle; that relation between money and prices is associated with the quantity theory of money. There is strong empirical evidence of a direct relation between money-supply growth and long-term price inflation, at least for rapid increases in the amount of money in the economy. For example, a country such as Zimbabwe which saw rapid increases in its money supply saw rapid increases in prices; this is one reason for the reliance on monetary policy as a means of controlling inflation. The nature of this causal chain is the subject of contention.
Some heterodox economists argue that the money supply is endogenous and that the sources of inflation must be found in the distributional structure of the economy. In addition, those economists seeing the central bank's control over the money supply as feeble say that there are two weak links between the growth of the money supply and the inflation rate. First, in the aftermath of a recession, when many resources are underutilized, an increase in the money supply can cause a sustained increase in real production instead of inflation. Second, if the velocity of money changes, an increase in the money supply could have either no effect, an exaggerated effect, or an unpredictable effect on the growth of nominal GDP. See European Central Bank for other approaches and a more global perspective. Money is used as a medium of exchange, a unit of account, as a ready store of value, its different functions are associated with different empirical measures of the money supply. There is no single "correct" measure of the money supply.
Instead, there are several measures, classified along a spectrum or continuum between narrow and broad monetary aggregates. Narrow measures include only the most liquid assets, the ones most used to spend. Broader measures add less liquid types of assets; this continuum corresponds to the way that different types of money are more or less controlled by monetary policy. Narrow measures include those more directly affected and controlled by monetary policy, whereas broader measures are less related to monetary-policy actions, it is a matter of perennial debate as to whether narrower or broader versions of the money supply have a more predictable link to nominal GDP. The different types of money are classified as "M"s; the "M"s range from M0 to M3 but which "M"s are focused on in policy formulation depends on the country's central bank. The typical layout for each of the "M"s is as follows: M0: In some countries, such as the United Kingdom, M0 includes bank reserves, so M0 is referred to as the monetary base, or narrow money.
MB: is referred to total currency. This is the base from which other forms of money are created and is traditionally the most liquid measure of the money supply. M1: Bank reserves are not included in M1. M2: Represents M1 and "close substitutes" for M1. M2 is a broader classification of money than M1. M2 is a key economic indicator used to forecast inflation. M3: M2 plus large and long-term deposits. Since 2006, M3 is no longer published by the US central bank. However, there are still estimates produced by various private institutions. MZM: Money with zero maturity, it measures the supply of financial assets redeemable at par on demand. Velocity of MZM is a accurate predictor of inflation; the ratio of a pair of these measures, most M2 / M0, is called an money multiplier. The different forms of money in government money supply statistics arise from the practice of fractional-reserve banking. Whenever a bank gives out a loan in a fractional-reserve banking system, a new sum of money is created; this new type of money is.
In short, there are two types of money in a fractional-reserve banking system: central bank money commercial bank money In the money supply statistics, central bank money is MB while the commercial bank money is divided up into the M1-M3 components. The types of commercial bank money that tend to be valued at lower amounts are classified in the narrow category of M1 while the types of commercial bank money that tend to exist in larger amounts are categorized in M2 and M3, with M3 having the largest. In the United States, a bank's reserves consist of U. S. currency held by the bank plus the bank's balances in Federal Reserve accounts. For this purpose, paper currency on hand and balances in Federal Reserve accounts are interchangeable. Reserves may come from any source, including the federal funds market, deposits by the public, borrowing from the Fed itself. A reserve requirement is a ratio a bank must maintain between deposit reserves. Reserve
Free trade is a trade policy that does not restrict imports or exports. In government, free trade is predominantly advocated by political parties that hold liberal economic positions while economically left-wing and nationalist political parties support protectionism, the opposite of free trade. Most nations are today members of the World Trade Organization multilateral trade agreements. Free trade is additionally exemplified by the European Economic Area and the Mercosur which have established open markets. However, most governments still impose some protectionist policies that are intended to support local employment, such as applying tariffs to imports or subsidies to exports. Governments may restrict free trade to limit exports of natural resources. Other barriers that may hinder trade include import quotas and non-tariff barriers, such as regulatory legislation. There is a broad consensus among economists that protectionism has a negative effect on economic growth and economic welfare while free trade and the reduction of trade barriers has a positive effect on economic growth.
However, liberalization of trade can cause significant and unequally distributed losses, the economic dislocation of workers in import-competing sectors. Free trade policies may promote the following features: Trade of goods without taxes or other trade barriers. Trade in services without taxes or other trade barriers; the absence of "trade-distorting" policies that give some firms, households, or factors of production an advantage over others. Unregulated access to markets. Unregulated access to market information. Inability of firms to distort markets through government-imposed monopoly or oligopoly power. Trade agreements which encourage free trade. Two simple ways to understand the proposed benefits of free trade are through David Ricardo's theory of comparative advantage and by analyzing the impact of a tariff or import quota. An economic analysis using the law of supply and demand and the economic effects of a tax can be used to show the theoretical benefits and disadvantages of free trade.
Most economists would recommend that developing nations should set their tariff rates quite low, but the economist Ha-Joon Chang, a proponent of industrial policy, believes higher levels may be justified in developing nations because the productivity gap between them and developed nations today is much higher than what developed nations faced when they were at a similar level of technological development. Underdeveloped nations today, Chang believes, are weak players in a much more competitive system. Counterarguments to Chang's point of view are that the developing countries are able to adopt technologies from abroad whereas developed nations had to create new technologies themselves and that developing countries can sell to export markets far richer than any that existed in the 19th century. If the chief justification for a tariff is to stimulate infant industries, it must be high enough to allow domestic manufactured goods to compete with imported goods in order to be successful; this theory, known as import substitution industrialization, is considered ineffective for developing nations.
The chart at the right analyzes the effect of the imposition of an import tariff on some imaginary good. Prior to the tariff, the price of the good in the world market is Pworld; the tariff increases the domestic price to Ptariff. The higher price causes domestic production to increase from QS1 to QS2 and causes domestic consumption to decline from QC1 to QC2; this has three main effects on societal welfare. Consumers are made worse off. Producers are better off; the government has additional tax revenue. However, the loss to consumers is greater than the gains by the government; the magnitude of this societal loss is shown by the two pink triangles. Removing the tariff and having free trade would be a net gain for society. An identical analysis of this tariff from the perspective of a net producing country yields parallel results. From that country's perspective, the tariff leaves producers worse off and consumers better off, but the net loss to producers is larger than the benefit to consumers. Under similar analysis, export tariffs, import quotas and export quotas all yield nearly identical results.
Sometimes consumers are better off and producers worse off and sometimes consumers are worse off and producers are better off, but the imposition of trade restrictions causes a net loss to society because the losses from trade restrictions are larger than the gains from trade restrictions. Free trade creates winners and losers, but theory and empirical evidence show that the size of the winnings from free trade are larger than the losses. According to mainstream economics theory, the selective application of free trade agreements to some countries and tariffs on others can lead to economic inefficiency through the process of trade diversion, it is economically efficient for a good to be produced by the country, the lowest cost producer, but this does not always take place if a high cost producer has a free trade agreement while the low cost producer faces a high tariff. Applying free trade to the high cost producer and not the low cost producer as well can lead to trade diversion and a net economic loss.
This is why many economists place such high importance on negotiations for global tar
Social policy is policy within a governmental or political setting, such as the welfare state and study of social services. Social policy consists of guidelines, principles and activities that affect the living conditions conducive to human welfare, such as a person's quality of life; the Department of Social Policy at the London School of Economics defines social policy as "an interdisciplinary and applied subject concerned with the analysis of societies' responses to social need", which seeks to foster in its students a capacity to understand theory and evidence drawn from a wide range of social science disciplines, including economics, psychology, history, law and political science. The Malcolm Wiener Center for Social Policy at Harvard University describes social policy as "public policy and practice in the areas of health care, human services, criminal justice, inequality and labor". Social policy might be described as actions that affect the well-being of members of a society through shaping the distribution of and access to goods and resources in that society.
Social policy deals with wicked problems. The discussion of'social policy' in the United States and Canada can apply to governmental policy on social issues such as tackling racism, LGBT issues and the legal status of abortion, euthanasia, recreational drugs and prostitution. In other countries, these issues would be classified under domestic policy; the earliest example of direct intervention by government in human welfare dates back to Umar ibn al-Khattāb's rule as the second caliph of Islam in the 6th century. He used zakat collections and other governmental resources to establish pensions, income support, child benefits, various stipends for people of the non-Muslim community. In the West, proponents of scientific social planning such as the sociologist Auguste Comte, social researchers, such as Charles Booth, contributed to the emergence of social policy in the first industrialised countries following the industrial revolution. Surveys of poverty exposing the brutal conditions in the urban slum conurbations of Victorian Britain supplied the pressure leading to changes such as the decline and abolition of the poor law system and Liberal welfare reforms.
Other significant examples in the development of social policy are the Bismarckian welfare state in 19th century Germany, social security policies in the United States introduced under the rubric of the New Deal between 1933 and 1935, the National Health Service Act 1946 in Britain. Social policy in the 21st century is complex and in each state it is subject to local and national governments, as well as supranational political influence. For example, membership of the European Union is conditional on member states' adherence to the Social Chapter of European Union law and other international laws. Social policy is an academic discipline focusing on the systematic evaluation of societies' responses to social need, it was established in the early-to-mid part of the 20th century as a complement to social work studies. One can reasonably argue there is not a single comprehensive definition of social policy; this is because social policy is more an area of study than a discipline, because the meaning of social policy has evolved over time.
For this reason, the founding fathers of the discipline defined the domain by looking at its aims: to reduce poverty, insure against social risks, provide equal opportunity for all, enhance economic growth, foster the expansion of social citizenship and social rights. Scholars studied and categorized social security systems on the basis of their'modes of intervention'. Of course, each welfare state system includes a mixture of these elements, but certain systems are geared toward universal principles, i.e. Sweden and Denmark. Others emphasize i.e. Germany and France. Still other focus on social assistance for the poor. Social policy aims to improve human welfare and to meet human needs for education, health and economic security. Important areas of social policy are wellbeing and welfare, poverty reduction, social security, unemployment insurance, living conditions, animal rights, health care, social housing, family policy, social care, child protection, social exclusion, education policy and criminal justice, urban development, labor issues.
Religious, ideological and philosophical movements and ideas have influenced American social policy, for example, John Calvin and his idea of pre-destination and the Protestant Values of hard work and individualism. Moreover, Social Darwinism helped mold America's ideas of capitalism and the survival of the fittest mentality; the Catholic Church's social teaching has been influential to the development of social policy. United States politicians who have favored increasing government observance of social policy do not frame their proposals around typical notions of welfare or benefits. Insurance has been a growing policy topic, a recent example of health care law as social policy is the Patient Protection and Affordable Care Act formed by the 111th U. S. Congress and signed into law by President Barack Obama, a Democrat, on March 23, 2010. Moreover, former president Franklin D. Roosevelt's ground b
A central bank, reserve bank, or monetary authority is the institution that manages the currency, money supply, interest rates of a state or formal monetary union, oversees their commercial banking system. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the monetary base in the state, generally controls the printing/coining of the national currency, which serves as the state's legal tender. A central bank acts as a lender of last resort to the banking sector during times of financial crisis. Most central banks have supervisory and regulatory powers to ensure the solvency of member institutions, to prevent bank runs, to discourage reckless or fraudulent behavior by member banks. Central banks in most developed nations are institutionally independent from political interference. Still, limited control by the executive and legislative bodies exists. Functions of a central bank may include: implementing monetary policies. Setting the official interest rate – used to manage both inflation and the country's exchange rate – and ensuring that this rate takes effect via a variety of policy mechanisms controlling the nation's entire money supply the Government's banker and the bankers' bank managing the country's foreign exchange and gold reserves and the Government bonds regulating and supervising the banking industry Central banks implement a country's chosen monetary policy.
At the most basic level, monetary policy involves establishing what form of currency the country may have, whether a fiat currency, gold-backed currency, currency board or a currency union. When a country has its own national currency, this involves the issue of some form of standardized currency, a form of promissory note: a promise to exchange the note for "money" under certain circumstances; this was a promise to exchange the money for precious metals in some fixed amount. Now, when many currencies are fiat money, the "promise to pay" consists of the promise to accept that currency to pay for taxes. A central bank may use another country's currency either directly in a currency union, or indirectly on a currency board. In the latter case, exemplified by the Bulgarian National Bank, Hong Kong and Latvia, the local currency is backed at a fixed rate by the central bank's holdings of a foreign currency. Similar to commercial banks, central banks incur liabilities. Central banks create money by issuing interest-free currency notes and selling them to the public in exchange for interest-bearing assets such as government bonds.
When a central bank wishes to purchase more bonds than their respective national governments make available, they may purchase private bonds or assets denominated in foreign currencies. The European Central Bank remits its interest income to the central banks of the member countries of the European Union; the US Federal Reserve remits all its profits to the U. S. Treasury; this income, derived from the power to issue currency, is referred to as seigniorage, belongs to the national government. The state-sanctioned power to create currency is called the Right of Issuance. Throughout history there have been disagreements over this power, since whoever controls the creation of currency controls the seigniorage income; the expression "monetary policy" may refer more narrowly to the interest-rate targets and other active measures undertaken by the monetary authority. Frictional unemployment is the time period between jobs when a worker is searching for, or transitioning from one job to another. Unemployment beyond frictional unemployment is classified as unintended unemployment.
For example, structural unemployment is a form of unemployment resulting from a mismatch between demand in the labour market and the skills and locations of the workers seeking employment. Macroeconomic policy aims to reduce unintended unemployment. Keynes labeled any jobs that would be created by a rise in wage-goods as involuntary unemployment: Men are involuntarily unemployed if, in the event of a small rise in the price of wage-goods to the money-wage, both the aggregate supply of labour willing to work for the current money-wage and the aggregate demand for it at that wage would be greater than the existing volume of employment.—John Maynard Keynes, The General Theory of Employment and Money p11 Inflation is defined either as the devaluation of a currency or equivalently the rise of prices relative to a currency. Since inflation lowers real wages, Keynesians view inflation as the solution to involuntary unemployment. However, "unanticipated" inflation leads to lender losses as the real interest rate will be lower than expected.
Thus, Keynesian monetary policy aims for a steady rate of inflation. A publication from the Austrian School, The Case Against the Fed, argues that the efforts of the central banks to control inflation have been counterproductive. Economic growth can be enhanced by investment such as more or better machinery. A low interest rate implies that firms can borrow money to invest in their capital stock and pay less interest for it. Lowering the interest is therefore considered to encourage economic growth and is used to alleviate times of low economic growth. On the other hand, raising the interest rate is used in times of high economic growth as a contra-cyclical device to keep the economy from overheating and avoid market bubbles. Further goals of monetary policy are stability of interest rates, of the financial market, of the foreign exchange market. Goals cannot be separated fr
The United States federal budget is divided into three categories: mandatory spending, discretionary spending, interest on debt. Known as entitlement spending, in US fiscal policy, mandatory spending is government spending on certain programs that are mandated by law. Congress established mandatory programs under authorization laws. Congress legislates spending for mandatory programs outside of the annual appropriations bill process. Congress can only reduce the funding for programs by changing the authorization law itself; this requires a 60-vote majority in the Senate to pass. Discretionary spending on the other hand will not occur unless Congress acts each year to provide the funding through an appropriations bill. Mandatory spending has taken up a larger share of the federal budget over time. In fiscal year 1965, mandatory spending accounted for 5.7 percent of gross domestic product. In FY 2016, mandatory spending accounted for about 60 percent of the federal budget and over 13 percent of GDP.
Mandatory spending received $2.4 trillion of the total $3.9 trillion of federal spending in 2016. Entitlement programs are social welfare programs with specific requirements. Congress sets eligibility benefits for entitlement programs. If the eligibility requirements are met for a specific mandatory program, outlays are made automatically. Entitlement programs such as Social Security and Medicare make up the bulk of mandatory spending. Together they account for nearly 50 percent of the federal budget. Other mandatory spending programs include Income Security Programs such as the Earned Income Tax Credit, Supplemental Nutrition Assistance Program, Supplemental Security Income, Temporary Assistance for Needy Families, Unemployment Insurance. Federal Retirement programs for Federal and Civilian Military Retirees, Veterans programs, various other programs that provide agricultural subsidies are included in mandatory spending. Included is smaller budgetary items, such as the salaries of Members of Congress and the President.
The graph to the right shows a breakdown on the percent of mandatory spending each entitlement program receives. Many mandatory spending programs spending levels are determined by eligibility rules. Congress sets criteria for determining, eligible to receive benefits from the program, the benefit level for people who are eligible; the amount of money spent on each program each year is determined by how many people are eligible and apply for benefits. Congress does not decide each year to increase or decrease the budget for Social Security or other earned benefit programs; some mandatory spending programs are in effect indefinitely, but some, like agriculture programs, expire at the end of a given period. Legislation that affects mandatory spending is subject to Senate points of order. Congress can periodically review the eligibility rules and may change them in order to include or exclude more people or offer more or less generous benefits to those who are eligible and can therefore change the amount spent on the program.
Most mandatory spending is used on entitlement programs. Prior to the Great Depression, nearly all federal expenditures were discretionary. Mandatory spending grew following the passage of the Social Security Act in 1935. An increasing percentage of the federal budget became devoted to mandatory spending. In 1947, Social Security accounted for just under five percent of the federal budget and less than one-half of one percent of GDP. By 1962, 13 percent of the federal budget and half of all mandatory spending was committed to Social Security. Less than 30 percent of all federal spending was mandatory; this percentage continued to increase when Congress amended the Social Security Act to create Medicare in 1965. Medicare is a government administered health insurance program for senior citizens. In the 10 years following the creation of Medicare, mandatory spending increased from 30 percent to over 50 percent of the federal budget; the graph to the right shows the larger share of the Federal Budget that mandatory spending has taken up over time.
Though the rate of increase has since slowed, mandatory spending composed about 60 percent of the federal budget since FY 2012. Social Security spending has grown relative to the economy. In 1962, before the passage of Medicare and Medicaid, Social Security spending accounted for 13 percent of the total mandatory spending; this was about half of all mandatory spending. In FY 2016, Social Security accounted for 38 percent of mandatory spending; this accounts for about a little more than one third of all mandatory spending and around 4.3 to 4.8 percent of GDP in the US. Social Security has fluctuated around this level since the 1980s. Medicare and Medicaid have taken up an larger share of mandatory spending. Persistent increases in health care spending have been the main drivers in increases in mandatory spending. Mandatory spending has grown from 4.9 percent of federal spending in FY 1970, to 25.7 percent of federal spending in FY 2016. Health care cost per capita has grown much faster than the economy.
New medical technologies have led to increasing costs. Third-party reimbursement of health care costs by public and private insurance programs provided few incentives to control costs until the 1980s; the introduction of Medicare's prospective payment system for hospitals in 1983 and the increasing share of Health Maintenance Organizations in the mid-1980s helped to slow down health care costs. Other attempts such as the Balanced Budget Act of 1997 have only been temporarily or successful in slowing down the rate of increased health care spending. In 2010,the passage of the Affordable Care Act established a mandate for most US residents to obtain health insurance, set up insurance exchanges, ex
Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP. Growth is calculated in real terms - i.e. inflation-adjusted terms – to eliminate the distorting effect of inflation on the price of goods produced. Measurement of economic growth uses national income accounting. Since economic growth is measured as the annual percent change of gross domestic product, it has all the advantages and drawbacks of that measure; the economic growth rates of nations are compared using the ratio of the GDP to population or per-capita income. The "rate of economic growth" refers to the geometric annual rate of growth in GDP between the first and the last year over a period of time; this growth rate is the trend in the average level of GDP over the period, which ignores the fluctuations in the GDP around this trend. An increase in economic growth caused by more efficient use of inputs is referred to as intensive growth.
GDP growth caused only by increases in the amount of inputs available for use is called extensive growth. Development of new goods and services creates economic growth; the economic growth rate is calculated from data on GDP estimated by countries' statistical agencies. The rate of growth of GDP per capita is calculated from data on GDP and people for the initial and final periods included in the analysis of the analyst. In national income accounting, per capita output can be calculated using the following factors: output per unit of labor input, hours worked, the percentage of the working age population working and the proportion of the working-age population to the total population. "The rate of change of GDP/population is the sum of the rates of change of these four variables plus their cross products."Economists distinguish between short-run economic changes in production and long-run economic growth. Short-run variation in economic growth is termed the business cycle. Economists attribute the ups and downs in the business cycle to fluctuations in aggregate demand.
In contrast, economic growth is concerned with the long-run trend in production due to structural causes such as technological growth and factor accumulation. Increases in labor productivity have been the most important source of real per capita economic growth. "In a famous estimate, MIT Professor Robert Solow concluded that technological progress has accounted for 80 percent of the long-term rise in U. S. per capita income, with increased investment in capital explaining only the remaining 20 percent."Increases in productivity lower the real cost of goods. Over the 20th century the real price of many goods fell by over 90%. Economic growth has traditionally been attributed to the accumulation of human and physical capital and the increase in productivity and creation of new goods arising from technological innovation. Further division of labour is fundamental to rising productivity. Before industrialization technological progress resulted in an increase in the population, kept in check by food supply and other resources, which acted to limit per capita income, a condition known as the Malthusian trap.
The rapid economic growth that occurred during the Industrial Revolution was remarkable because it was in excess of population growth, providing an escape from the Malthusian trap. Countries that industrialized saw their population growth slow down, a phenomenon known as the demographic transition. Increases in productivity are the major factor responsible for per capita economic growth – this has been evident since the mid-19th century. Most of the economic growth in the 20th century was due to increased output per unit of labor, materials and land; the balance of the growth in output has come from using more inputs. Both of these changes increase output; the increased output included more of the same goods produced and new goods and services. During the Industrial Revolution, mechanization began to replace hand methods in manufacturing, new processes streamlined production of chemicals, iron and other products. Machine tools made the economical production of metal parts possible, so that parts could be interchangeable.
See: Interchangeable parts. During the Second Industrial Revolution, a major factor of productivity growth was the substitution of inanimate power for human and animal labor. There was a great increase in power as steam powered electricity generation and internal combustion supplanted limited wind and water power. Since that replacement, the great expansion of total power was driven by continuous improvements in energy conversion efficiency. Other major historical sources of productivity were automation, transportation infrastructures, new materials and power, which includes steam and internal combustion engines and electricity. Other productivity improvements included mechanized agriculture and scientific agriculture including chemical fertilizers and livestock and poultry management, the Green Revolution. Interchangeable parts made with machine tools powered by electric motors evolved into mass production, universally used today. Great sources of productivity improvement in the late 19th century were railroads, steam ships, horse-pulled reapers and combine harvesters, steam-powered factories.
The invention of processes for making cheap steel were important for many forms
A tariff is a tax on imports or exports between sovereign states. It is a form of regulation of foreign trade and a policy that taxes foreign products to encourage or protect domestic industry; the tariff is used to protect infant industries and to allow import substitution industrialization. Paul Bairoch argues that until the early 1960s, developed countries' international trade was characterized by an era of protectionism rather than a "golden era" of free trade, that in fact, periods of economic growth in the Western world were linked to protectionist policy, he explained that during the 19th century, European countries that were subject to higher tariffs had experienced faster growth. According to Paul Bairoch, the industrialized world of 1913 is similar to that of 1815: "An ocean of protectionism surrounding a few liberal islets", with the exception of a short free trade interlude in Europe between 1860 and 1892. Only two islands of liberalism emerged in the developed part: the Netherlands.
On the other hand, "the Third World was an ocean of liberalism", with Western countries imposing so-called "unequal" treaties on colonized and politically independent countries that required the lowering of customs barriers. Bairoch write that the "Third World" has in fact become underdeveloped because of the imposition of free trade while North America and Western Europe have been able to develop because they have rejected trade liberalism in their history, he notes that:in history, free trade is the exception and protectionism the rule. Trade liberalisation in the United Kingdom from 1846 onwards was the first example of large-scale liberalisation after the Industrial Revolution and was initiated by the dominant economy. However, it is the only country where over a specific period, free trade coincided with an increase in growth. Bairoch explains this by the fact that the country had a significant lead over the other countries in 1846, given that the country had emerged from at least half a century of protectionism.
It was in 1860 that free trade made a real breakthrough in continental Europe with the Cobden-Chevalier Treaty signed by Napoleon III. The agreement was considered in France as a coup d'état, since the parliament was opposed to it, the agreement was established by means of secret negotiations between Napoleon Ill's envoy Michel Chevalier and Britain's Richard Cobden; that agreement was the first of a series which Britain would establish with several European countries, known as the "Cobden agreements": the Franco-Belgian treaty was signed in 1861 and between 1861 and 1866 all European countries joined the Cobden treaty. Only a few countries on the continent had adopted a liberal trade policy before 1860: the Netherlands, Portugal, Switzerland and Belgium; the decades that followed were not a period of growth and prosperity, but on the contrary they were likened to "the Great Depression". Paul Bairoch notes in Myths and Paradoxes of Economic History that the Great European Depression began around 1870-1872 at the height of free trade in Europe between 1866 and 1877 and ended with the return to protectionism around 1892: The important point is not only that the crisis started at the height of free trade, but that it ended around 1892-1894, just as the return to protectionism became effective in continental EuropeIt is certain that free trade coincided with the depression for which it was the cause, while protectionism was at the origin of growth and development in most of the current developed countrie.
In Europe, the slowdown in GNP growth was the result of the decline in agricultural production growth. This agricultural crisis in continental Europe can be explained exclusively by the influx of foreign cereals, which became possible thanks to the abolition of tariff protection on cereals in continental Europe between 1866 and 1872, it was the farmers who suffered because cheap imports led to the collapse of agricultural commodity prices. But it affected overall demand for industrial goods and the construction sector. In France, an agrarian economy, wheat imports, which reached 0.3% of national production in 1851/1860, rose to 19% in 1888/1892. In Belgium, this percentage rose from 6% around 1850 to more than 100% around 1890. During the 1870s and 1880s, the United States was Europe's largest supplier of cereals. There was an increasing trade imbalance between Europe and the United States until the 1900s, given that the United States had higher tariffs. In the early 1860s, Europe and the United States pursued different trade policies.
The 1860s were a period of growing protectionism in the United States, while the European free trade phase lasted from 1860 to 1892. The tariff average rate on imports of manufactured goods was in 1875 from 40% to 50% in the United States against 9% to 12% in continental Europe at the height of free trade, it experienced a period of strong growth. Around 1870, Europe's trade deficit with America represented 5% to 6% of the region's imports, it reached 32% in 1890 and 59% around 1900. Germany was the first major European country to change its trade policy by adopting a new tariff in July 1879; this new German tariff meant the end of the period of free trade on the continent. Thus, the period 1879-1892 saw the gradual return of protectionism