The Terms of Trade
WHATEVER view we take of the causes of price movements, they in turn affected the economy in several important ways and we look first of all at the relative movements of the prices of imports and exports, or the terms of trade (see Diagram II). Though they fluctuated considerably, these movements fitted the traditional turning-points of the ‘Great Depression’ no better than other series. They tended to move in Britain’s favour from the mid-1850s onwards (export prices rose more than import) and soared dramatically during the years of high coal and iron prices from 1871 to 1873. Thereafter they fell back again, so that by the late 1870s they were at the level of a decade earlier. From about 1885 they began to improve slowly but distinctly and, ignoring the Boer War boom, held the gain to 1914. It is more important with the terms of trade than with any other index to have regard to the effect of these high boom years. Professor Kindleberger has shown that fluctuations in the price of coal were a major influence and these together with iron prices were peculiarly volatile in the early 1870s and around 1900 (22, pp. 133–7). If we exclude these years of high export prices and the American Civil War period, our general analysis changes shape considerably.
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