As rich as an Argentine

At the turn of the 20th century a common phrase used to describe wealth in London was to be “rich as an Argentine”. The impressive no-expense-spared, period buildings of Buenos Aires attest to its opulence. Not only did this out of the way place at the end of the earth become rich but, by 1929, Argentina had the 4th highest income per capita in the world.

How did this country become so rich, so quickly?

In 1870, the Argentinian army set about slaughtering the last of the native peoples in a genocidal campaign, which is now euphemistically known as the “Reconquest of the Desert”. As it cleared the Indians, huge tracks of fertile land became available for cultivation. A combination of soil and climate made the vast Pampas of Argentina extraordinarily productive for all sorts of agriculture. What’s more, to new settlers the land was free.

But an Argentina made up of a cluster of Spanish aristocracy and a few British adventurers didn’t have enough people to farm this land. Argentina needed farmers and workers. It opened its doors to all comers. By this stage the United States was open but the east coast was already well populated, so Europeans looked south as an alternative.

Between 1880 and 1915 the population of Buenos Aires exploded from 200,000 to 1.5 million. Migrants from all places came to the River Plate delta.

Taking a leaf out of the Americans’ book (and unlike their European rural cousins), the new Argentinian farmers began to mechanise. They were the first to introduce industrial scale slaughterhouses and meat packing plants. In fact, the area of Buenos Aires where Boca Juniors come from is called La Boca, ‘the mouth’, because it is the mouth of the Río Mataderos or The River of Slaughterhouses.

However, what really spurred Argentina was disruptive technology.

In 1876 a ship called the Frigorifique left La Boca bound for London. This voyage changed the world. It was the first floating fridge, a refrigerated vessel that could transport huge quantities of frozen beef from Argentina to Europe.

Suddenly, Argentina wasn’t 13,000 miles away; it was next door. Argentinian beef was our beef. The international price of beef collapsed. But the Argentinians exported everything that they could cultivate. So the price of cereal collapsed too because the Pampas, like the American mid-west, produced everything at a fraction of the cost of European agriculture. While the American mid-west was opened up to Europe via the extraordinary canal network built in the US to link the prairies with the great lakes and the port cities of the Eastern seaboard, the Argentinian Pampas were opened up by the railway and the fridge.

Deflationary effects

Think about these developments in a 21st century context. Replace Argentina with China. And replace agriculture with manufacturing. You can see the same deflationary process is happening all over the world.

Technology in the late 19th century, while not exactly making geography history, made geography and distance a lot less significant. Today, technology and massive leaps in the efficiency of supply chain management means that Chinese industrial might is felt throughout the world, in every product line and in every market.

It is a massively deflationary process, which (like the Argentinian deflationary shock in the late 19th century) will have serious political and social ramifications.

The Pampas more than doubled the European agricultural land mass. Just to put the size of Argentina in context for you, the province of Buenos Aires alone – one of many provinces in Argentina – is bigger than France. The disruptive technology of the fridge changed everything. What was once far away was now next door.

Between 1870 and 1910, freight costs from Argentina to Europe fell 0.7% per year. Together with rapid railway building, export costs from Argentina fell by 70% in total. Efficient railways were to late 19th century trade what online shopping is to retail today. Railways slashed the cost of doing real business and each time track was laid, more land supply was opened up for cultivation.

Like China today, this dramatic shift in trade was accompanied by a massive surge in investment flows to Argentina.

More than half of all loans from Europe and the USA to Latin America went to Argentina. US lending to Argentina rose from $306 million in 1902 to $1.6 billion in 1912. By 1913, the French and Germans were investing roughly the same as the Americans, while the British bet the house on Argentina, lending $5.8 billion in 1913 alone.

Like Chinese stocks today, with all this cash sloshing around, asset prices in Argentina went through the roof. Like the Chinese property bubble, land prices in Argentina rose by 300% from 1900 to 1910.

And of course, the money, the action and the heat of economic success attracted millions of people, who in turn created the dynamics for more migration. Europe’s loss was Argentina’s gain.

Between 1881 and 1931, 8.4 million migrants arrived in Argentina. This is a huge number and they came from all over Europe, but the Italians made up a significant chunk and whereas, the Irish, Welsh and Scandinavians came to farm the Pampas and Patagonia, the waves of Italians came as industrial labour, settling in the cities and became the industrial working class of this immigrant nation.

This is why its footballers have Italian names. The men who worked in the factories and foundries played football, so too did their great grandchildren.

History doesn’t repeat itself…

In Europe of the late 19th century, the ramifications of this massive deflationary shock and falling agricultural incomes were profound and long lasting. With agricultural incomes falling, the price of land fell too because the income and rent from land fell.

This reduced the livelihood of both landlords and tenants, prompting (1) a massive move to the cities, creating the industrial working class that would soon become the battleground for the great left/right battles of the early 20th century and (2) increased agrarian agitation to break up the quasi-feudal massive land holdings of the European landlord class who had ruled Europe for centuries.

The mass movements of populations created the instability that nationalism and modernism thrives on. In the arts, modernism – from Joyce to Picasso – was the artistic response to the breakdown of old certainties, but nationalism and socialism, both linked to the fragility of the old order and the need for a new modern ideology flourished in the new urban centres, now brimming with displaced farmers who had been the first victims of the Argentinian shock. These cities would later become the crucible for 20th century ideologies such as Marxism and later fascism.

In addition, the improved and cheaper nutrition – with protein now more accessible – created the conditions for a population boom. Population booms and a lack of opportunity breed instability. Arguably, this boom in births also meant there was no shortage of young fighting men for the subsequent slaughter on the killing fields of World War One.

With all this upheaval comes revolution. The newly impoverished agrarian classes became much more politically assertive, which set the political and economic scene for the breakup of huge land-based political domination of families, princes, kings and ultimately empires, most of whom lost their grip on power in the opening decades of the 20th century. The legitimacy of the landlords was inextricably linked to agricultural prosperity and once deflation set in, the days of the landlord were numbered.

Finally, of course, the collapse in income from European land, prompted millions to leave Europe and migrate to the New World in search of a better life. These people became the Italian communities of La Boca.

This chain of events – political, social and economic – was triggered by a massive deflationary shock to the world stemming from the opening up of South American agriculture. Buenos Aires was ground zero but the tremors were felt all over the world.

…but it often rhymes

In the early 21st century, China is exerting similar deflationary pressures. The impact will prove similarly profound and long lasting. Much of what we now term “secular stagnation” derives from the original China effect. The floor of incomes of industrial workers all over the western world is now set in Shanghai rather than Stoke. Countries that respond to this competitive threat by trying to borrow to maintain lifestyles will find themselves choked by low growth and rising debts.

In the 1890s, the response to Argentina was emigration. Millions of Europeans, who had neither a safety net nor a viable alternative, simply uprooted themselves and headed to the South Atlantic to where the action was. However, this time around, there is no American or European emigration to Asia. Europeans don’t move to Shenzhen, they stay put and seethe as their opportunities diminish.

There are no easy solutions to this deflationary shock.

The UK and the US are creating jobs, but they are low productivity, low wage jobs. This development further diminishes the average guy’s stake in the society. The response to the financial crisis has been QE, which is benefitting rich people because poor people don’t own assets. This wealth disparity drives a wedge between those in society who depend on dividends for their income and those who depend on wages for their income.

This inequality pushes people into the arms of easy-fix populist or nationalist movements such as we have seen in Greece, Poland, Spain and, arguably, Scotland.

Germany is one of the few wealthy countries that, via enormous capital investment and an education system that rewards industrial apprentices, has managed to create a high productivity, high wage society capable of meeting the Chinese threat head-on and beating the Asians hands-down in the quality stakes. But Germany is the exception rather than the rule.

And typically, it was an exceptionally organised, fit and talented German team that broke Argentinian footballing hearts in Brazil last year. Argentina, the better team with the better players, simply couldn’t compete with a clinical, high-tempo Germany.

Leo Messi, whose ancestor Angelo Messi from Ancona, emigrated to Argentina in 1882, was reduced to looking to the skies, seeking answers from the Almighty.

Funnily enough, that expression – a quizzical face looking to the heavens, hands joined in prayer seeking divine guidance – was everywhere the other night on the terraces of La Bombonera in Buenos Aires. It must be, like so many things, in the genes.