The Second Industrial Revolution and the Spanish Economy (1890-1914)
The Second Industrial Revolution and Big Business
The loss of the colonies had both negative and positive effects on the Spanish economy. The negative effect stemmed from losing the captive market that Spain had enjoyed in its colonies, particularly in the U.S. colonies, which were now competing with Spain.
However, there was also a positive impact. The investments made in Cuba were repatriated to Spain, leading to a massive influx of capital, equivalent to a quarter of the national income. This influx enabled new business projects and fostered the creation of the modern corporation with a sound organizational structure.
During this period, numerous societies and companies were created, and business was profitable. These companies were often formed through mergers, aiming to fend off competition and exploit economies of scale and location to gain a competitive advantage.
To carry out these mergers, companies needed banks to invest. Initially hesitant, banks eventually began investing in companies, leading to a knock-on effect on stock markets. Capital was raised, and the Spanish people started investing in debt securities.
This process resulted in excessive concentration within industries, leading to the emergence of monopolies and oligopolies.
Among the first major companies were the Bank of Spain and two railway companies, all large national enterprises. This marked the beginning of a modern corporate structure in Spain, a change made possible by the loss of the colonies. However, this process had a unique characteristic: by 1898, the majority of major Spanish companies had been financed by foreign capital. Gradually, there was a growing disapproval of foreign capital, which was eventually replaced by national capital.
The Financial System
In 1898, Spain lost its remaining colonies, including Cuba. The underlying reason was the mercantilist system where the mother country sold its products to the colonies, restricting their ability to trade with other nations. This led to the war in Cuba, which ultimately resulted in a crisis for Spain.
Spain had intended to finance the war with potential reparations from the U.S., believing that the U.S. would lose the war and be forced to pay. However, Spain lost the war.
To cover the war debt, the Spanish government issued public debt. Due to low interest rates and a sense of patriotism, savers readily bought government bonds.
However, this was not enough, and the Spanish government had to increase the money supply by printing more currency (which was easy because the currency was already depreciated). Even this proved insufficient, necessitating a reform of fiscal policy. Finance Minister Fernández Villaverde revised the 1845 tax policy, introducing new taxes on officials’ salaries, interest, and debt obligations.
These measures did not significantly impact the welfare of society due to a prevailing sense of unity and patriotic fervor.
New excise taxes were also introduced on emerging technologies and income from domestic products. The reform was successful in managing the substantial war debt.
The Nationalist Path (1890-1914)
The Turn Towards Protectionism and Nationalism
In 1873, the Great Depression, triggered by the expansion of railroads and the application of new technologies (steam engines, ships, etc.), impacted Europe. To address this crisis, many European countries adopted protectionist strategies. In Spain, the key element was the Tariff of 1892, a result of negotiations between Spain and France. This tariff marked a shift in trade policy and signaled a new strategy known as “nationalist economic policy,” aimed at promoting domestic production by shielding it from foreign competition.
While this protectionist trend was seen across Europe, it was particularly intense in Spain, ultimately proving detrimental to the Spanish economy as it led to divergence.
This policy was implemented through various measures:
- Allowing companies to import raw materials duty-free.
- Providing direct subsidies.
- Offering premium contracts and exemptions.
- Devaluing the peseta (which spontaneously reinforced protectionism).
- Marginalizing the gold standard.
- The loss of the colonies further contributed to this trend.
Agriculture
The transportation revolution facilitated the import of agricultural products from overseas into Europe, leading to a collapse in prices, particularly for staple crops like wheat. This triggered an agrarian crisis, especially impacting cereal production, as it was difficult to increase production efficiency or reduce costs. Many farms saw rents reduced by 50%, unemployment surged, and many unemployed individuals migrated abroad.
The crisis was temporarily mitigated during the period when France experienced the phylloxera epidemic, which devastated its vineyards. Spain benefited by exporting wine to France to fill the gap.
From 1884 to 1890, agricultural production decreased by 16%.
The primary consequence of the crisis was mass migration, as the agricultural labor force dwindled. The main destinations for these migrants were Argentina and Cuba. The remittances sent back by these migrants had a positive impact on the Spanish economy.
However, the long-term consequence for the agricultural sector was a decline in efficiency and technological backwardness. Gains in productivity through increased fertilizer use were nullified. Necessary structural changes were postponed, and wages remained low.
While the horticulture and fruit sectors had evolved and were capable of exporting, they faced difficulties due to protectionist measures implemented by other countries.