EXPLORATIONS IN ECONOMIC HISTORY 20, 163-182 (1983)

Eighteenth-century British Trade: Homespun

or Empire Made?

T. J. HATTON
University of Essex

JOHN S. LYONS

University of Edinburgh

AND

S. E. SATCHELL
University of Essex

In their pioneering work, British Economic Growth, 1588-1959 (1969),

Phyllis Deane and W. A. Cole offered an interpretation of the role of
foreign trade in eighteenth-century British growth that contrasted sharply
with views of earlier scholars concerning the importance of the export
sector, Their view was that expansion of the export industries contributed
greatly to overall economic growth but that this expansion was a con-
sequence of growth of demand for imports, transmitted through a closed,
dependent trading block with Britain as the dynamic hub. Although directed
to establishing trends over the century, their argument was, largely based
on examination of short term movements in terms of trade and suggested
that variations in trade volumes were led by variations in imports.
Here we examine this view, using the data provided by Deane and
Cole in a set of “causality” regressions and suggest that their short-run
hypothesis should be rejected. We show in Section I that the assumptions
underlying their approach are not tenable and illustrate in Section II an
alternative approach. Section III outlines our procedure in the “causality
tests,” reporting results which do not support, indeed contradict, the
Deane-Cole view: at least for the latter half of the eighteenth century,
export variation systematically preceded import variation. Section IV
summarizes our conclusions.

163
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164 HATTON, LYONS, AND SATCHELL

I. DEANE AND COLE ON EIGHTEENTH-CENTURY BRITISH

FOREIGN TRADE
In Chap. II of British Economic Growth, Deane and Cole present their
estimates of the general rates and broad sectoral composition of growth
over the eighteenth century: an increase in real product of over 150%
and of real product per capita of 60%; more than half the increase in
the index of total product is contributed by the expansion of exports
which was based in the developing industrial sector and, while home
consumption of these products trebled, exports grew by a factor of six
so that the proportion exported rose from about a fifth at the beginning
of the century to a third at the end (Deane and Cole 1969, pp. 76-78;
Cole 1981, p. 40). This expansion was concentrated mainly in the second
half of the century, particularly after 1780, and both the extent and timing
of the changes have led some observers to place special emphasis on
exports as a decisive and largely independent force in the process of
industrialization (Berrill 1960; Kindleberger 1962; Habakkuk and Deane
1963; Hobsbawm 1969; Rostow 1971.)
In the view of Deane and Cole, however, the economic dynamism of
eighteenth-century Britain is seen as firmly rooted in the domestic economy.
An examination of the growth and structure of foreign trade and of
movements in the terms of trade led them to an alternative view of the
role of foreign trade: “that, if there were a causal relationship between
the growth of foreign trade and the growth of national income, it was
of a more complex character and operated in a different direction than
has usually been supposed, We shall argue here that the expansion of
British export trade was limited by the purchasing power of Britain’s
customers and that this, in turn, was limited by what they could earn
from exports to Britain” (1969, p. 83). This view, which formed an
integral part of their analysis of the “mechanics of eighteenth century
growth,” has met with considerable dissent (Hughes 1964; Whitehead
1964; Wright 1965; Thompson 1973) but little effort has been made to
rigorously test the propositions advanced. Only Cole (1973) has conducted
further empirical work in an effort to support the original conclusions
but this evidence remains unconvincing. Though he has recently accepted
some of the theoretical criticisms raised against Deane and Cole’s approach,
he has argued that, with the appropriate qualifications, the original ar-
guments can still be sustained (Cole 1981, pp. 42-44).
The basic data are the foreign trade statistics collected by the Inspectors
General of Imports and Exports, which, with adjustments provided by
Deane and Cole, provide measures of the annual volumes of British
imports, exports, and reexports at “official values”; i.e., at prices prevailing
at the beginning of the eighteenth century. From these figures they calculate
the gross barter terms of trade as simply the ratio of the volume index
 EIGIITEENTH-CENTURY BRITISH TRADE 165

of exports to the volume index of net imp0rts.l Their conclusion cited

above is based on the following observations.
(a) One would expect the terms of trade to move in favor of Britain
if the expansion of foreign trade were exogenous, given either by an
increase in external demand for British goods or an expansion of foreign
supply of imported goods. However, in the periods of most rapid export
expansion, the terms of trade moved adversely to Britain, Price data for
a small number of import and export commodities lead Deane and Cole
to conclude that variations in net barter terms of trade were due to
variations in import prices; rising import prices were associated with the
various wars of the eighteenth century and also with the very rapid trade
expansion of the 1780s and 1790s (1969, pp. 48, 83-85). On this basis
they state, “it is difficult to see the expansion of trade as a largely
exogenous factor which quickened the pace of industrial growth” (1969,
p. 85).
(b) This conclusion is reinforced by their interpretation of the dramatic
changes in the pattern of British trade which took place in the eighteenth
century: very little growth of trade with Europe and substantial growth
of trade “with the new, colonial markets in Ireland, America, Africa
and the Far East.” Expansion of exports was almost entirely due to
growth of trade with these areas, especially North America and the West
Indies, which were “virtually a closed system from which competitors
were rigorously excluded” via the Navigation Acts and Britain’s dominance
in reexportmg colonial staples. Thus, “the chief limiting factor to the
growth of [British] exports was the restricted purchasing power of her
colonial customers” and therefore “the rate of expansion of the combined
totals of imports and exports mainly depended on Britain’s demand for
imports, which seemsto have been fairly elastic in the eighteenth century”
(1969, pp. 86-88).’
This interpretation can be illustrated using a simple diagram in which
British imports Ms and exports X, are determined at the intersection of
the British and foreign offer curves, respectively, OCB and OCr. In this
approach, trade is always balanced and the gross and net barter terms
of trade are identical and given by the slope of the line T for offer curves
QCr and QCB. An exogenous change affecting British trade wouhd be a
movement of the foreign offer curve to a new position such as OG; and
’ The indices used for these calculations are three-year moving averages centered on
the year specified “to eliminate random fluctuations due to the comparatively slow pace
of ocean shipping in the eighteenth century” (Deane and Cole 1969, p. 48; p, 322, note
9, for quotation). Further discussion of the data, including a definition of net impotis, is
deferred to Section III.
’ It is not clear what is meant here by “fairly elastic,” since neither price nor income
elasticity is specified. In fact, if one adopts their view that exports depended on imports,
then the opposite movement of export and import volumes for 1715-1754, cited on p. 8&,
is consistent ordy with price inelastic demand for imported goods in Britain.
166 HATTON, LYONS, AND SATCHELL

73
FIG. 1

in the case illustrated, this would cause both imports and exports to rise
from MS to ML and X, to Xi, respectively, and an improvement of the
British terms of trade from T to T’.
This approach is appropriate as a tool of analysis for the growth of
trade in the long run when it might be expected that the economy would
not be systematically underemployed and when the values of trade how
would be approximately balanced. Given the foreign offer curve, import
demand and export supply are reconciled by the terms of trade; they
are not independent and separable. As Thompson has pointed out, for
the expansion to have taken the form of only outward movements of
either the British or the foreign offer curve, the terms of trade would
have had to worsen or improve continuously with the growth of trade
and it therefore appears that both curves must have been shifting si-
multaneously (Thompson 1973, pp. 93-103; Cole 1981, p. 45). On trend,
the gross barter terms of trade deteriorated during the first half of the
century and improved in the second half-the reverse of what would
have been expected if domestic expansion dominated in the later period.3
Deane and Cole recognized this but focused on the relatively short term

3 It should be noted that North (1968) and Shepherd and Walton (1972) have shown that
the eighteenth century was a period of substantial reduction in ocean freight costs and it
could well be that in some periods of stagnant British imports the net terms of trade were
moving favorably for Britain’s trading partners as well as to Britain itself.
 EIGHTEENTH-CENTURY BRITISH TRADE 167

movements which reveal the expected deterioration of the terms of trade

at times when both imports and exports expanded. Hence they clearly
distinguished between long run trends and the short run interaction between
the British and foreign economies. Over the long term, growth of income
and trade are likely to have been determined by changes in the supply
of factors of production and the improvement in techniques but in the
short term, variations in the level of demand and the utilization of resources
are likely to have been more important.
It has often been pointed out that the gross barter terms of trade are
an unreliable guide to changes in relative prices unless it is possible to
assume that the balance of trade was approximately constant (Deane and
Cole 1969, p. 84; Whitehead 1964, p. 74; Cole 1981, p* 44). To apply
the reasoning in Fig. 1 to the short run, when trade balances might be
expected to fluctuate, Deane and Cole invoked the closed nature of the
colonial trading system which, they argued, limited the colonies to virtually
bilateral trade with Britain. In addition, they attempted to support making
a correspondence between the gross and net barter terms of trade by
assembling fragmentary data on prices of goods entering foreign trade.
However, these efforts are not convincing support for the hypothesis
since the model of bilateral trade applies more to the colonies than to
Britain and hence it would be the terms of trade facing them rather than
those facing the mother country which should move in the fashion predicted
by the analysis. Further, it is probably inappropriate even for the colonies
since there are reasons to believe that, in the short run, they were not
entirely dependent on current payments from Britain to express their
current demands for British exports. First, it is clear that British trade
with her North American colonies was not in balance; Shepherd and
Walton (1972) have shown that on average over 1768-1772, the colonies
had a substantial trade deficit with Britain; half the deficit was paid for
by the sale of ships (not included in the British trade accounts) and by
net invisible earnings, mostly from shipping. Much af the remainder was
paid by means of British government expenditure in the colonies for
defense and administration, with a relatively small capital inflow (Chaps.
7 and 8). Thus, at least for these years, the foreign purchasing power
of the colonies was not limited to sale of exportables. Second, there is
no reason to believe that this trade imbalance was constant in previous
years. Thomas (1978) suggests that long term variations in eighteenth-
century British trade were associated with variations in overseas lending
and repatriation of funds, and Kulikoff (1979) adduces evidence suggesting
substantial inflows of capital to the Chesapeake tobacco region in the
176Os, primarily from Scottish tobacco merchants. There are, therefore,
good grounds for thinking that capital inflows to the colonies from Britain
were variable and occasionally substantial. Third, the development of
the colonial shipping sector would suggest that flows of invisible earnings
168 HATTON, LYONS, AND SATCHELL

to the colonies was rising-certainly not constant. Fourth, as shown by

Shepherd and Walton, the North American colonies as a group had a
substantial surplus on the trading account with southern Europe and the
Wine Islands. That is, the foreign purchasing power of the North American
colonies was augmented not only by nontrade financial flows but also
by a substantial amount of trade undertaken with areas outside the allegedly
closed British colonial trading system.4
The conventional channel of trade with non-British countries which
provided a major source of revenue to the colonies was through reexports.
According to Deane and Cole’s estimates, the value of reexports was
equal to nearly a third of the c.i.f. value of net imports at the beginning
of the century-a proportion which rose to over a half in midcentury
before declining again towards the end. Through this indirect route, non-
British markets bulked large among those served by colonial producers
and, to a considerable extent, were independent of British demand. In
his defense of Deane and Cole’s original view, Cole (1973) attempted to
obtain a comparison of the growth of independent markets in Europe
by reweighting the reexport index using alternative sets of weights given
by the area composition of exports and the commodity composition of
retained imports. These were compared with the actual index of retained
imports as an indicator of home market growth.5 At best this can be
regarded as measuring the relative growth of markets for goods which
were reexported, and then only until the 1770s but British exports consisted
overwhelmingly of manufactured goods. Thus, such comparisons simply
obscure the fact that it was in markets for the products of the emerging
industrial sector that the growth of demand had its major impact.
We conclude that the gross barter terms of trade are an unsatisfactory
indicator of short run shifts in supply and demand for tradable goods
because of the significant nonmerchandise components in the balances
of payments of Britain and its colonies. Neither were the colonies’ trading

4 This point was raised by Hughes in his early review article (1964, p. 77, note 43). For
1768-1772, Shepherd and Walton estimate that the North American deficit of commodity
trade with Britain and Ireland was 52% of the value of imports from those places. The
deficit was financed as follows.

Proportion of deficit met by % Shepherd & Walton

(19721 p.
Trade surplus with other areas 26 115
Shipping earnings 34 I28
Other invisibles I2 134
Sales of ships 4 96
Immigration of slaves & indentured servants -15 143-148
British government expenditure 22 148-151
Residual (Capital and monetary flows, errors. etc.) I7 151-154

’ Two alternative indices were computed on this basis; these constitute, Cole argues,
a rough measure of the demand for imported commodities which can be compared with
British demand for such commodities in those independent markets which were also the
major consumers of British domestic exports (1973, Table I, p. 334 and pp. 337-338).
 EIGHTEENTH-CENTURY BRITISH TRADE 16

links with third countries restricted enough to preclude variations in their

demand for British exports independent of trade with or finance from
Britain. It is therefore advisable to treat British exports and imports
separately both because trade balances were probably highly variably
and because imbalances could be settled via a relatively well-developed
international payments system.6
II. EIGHTEENTH-CENTURY TRADE: AN ALTERNATIVE AFP~OA~~
Since the use of the terms of trade as an indicator appear to be ruled
out by lack of an appropriate measure, we turn, in this section, to
developing an alternative approach to examining the short run interaction
of the British and foreign economies. We have argued that the assumption
that the British trade accounts were continually in balance is likely to
be misleading for the short run and this observation provides the key to
an alternative approach. To elaborate in full on the relationship between
imports and exports in the short run, one would need to specify a theory
of balance of payments adjustment. A variety of approaches are possible,
some of which emphasize merchandise trade as the active part of t
accounts and relegate other terms to a passive or accommodating role,
while in others it is the monetary flows which are elevated to the active
role. In what follows we adopt the former approach in suggesting that
while imports and exports are clearly not independent in the long run,
in the short run they may be sufficiently independent that one or the
other may initiate a change which calls forth longer run adjustments of
income, prices, and supplies and demands for traded goods, some of
which may serve to enhance and others to offset the original change.
Hence we turn to examining supply and demand for imports and exports
when they are not strictly constrained by Say’s Law.
For the short run then, consider an autonomous increase
for exports as shown in Fig. 2(a) by the shifts from I&, to
volume and price increase from X1 to X, and Px, to Pxz) respectively,
and hence the total value of exports increases. In so far as this raises
income and demand in the domestic economy, this will tend to cause
an outward shift in the demand curve for imports as ili~st~ted by the
movement from DMi to D, in Fig. 2(b). Similarly, the process might be
initiated from the import side in the home economy in which the line of
causation running from import to export expansion may be interpreted
as the process depicted in Fig. 2 operating in the foreign economy. From
this it is clear that a rise in both imports and exports could be initiated
by a demand shift either at home or abroad. The extent to which an

6 Shepherd and Walton (1972, p. 153) and Thomas (1978, p. 333 both cite J. Sperling,
“The International Payments Mechanism in the 17th and 18th Centuries,” Economic History
Review, Series 2 14, 446-468.
170 HATTON, LYONS, AND SATCHELL

es ..-.
 EIGHTEENTH-CENTURY BRITISH TRADE 171

original demand shock on the export side will be transmitted through

the economy depends on the degree to which the utilization of resources
can be increased. If the economy is fully employed, then exports can
only be increased by the diversion of resources from alternative uses.
In this case, domestic income will only rise by the amount’ 1/2(Xt + X,)
(Px, - Px,) rather than the full amount of the revenue change Px2X, -
Px,X,. However, it is not necessary to postulate persistent involuntary
unemployment for the potential effects to be large provided that, in the
short run, the supply of factors of production or, more appropriately,
their utilization rates, were relatively elastic.
Many writers have followed Ashton (1945, p. 203) in emphasizing the
underemployment of the labor force, particularly in the domestic sector,
as accommodating short run variations in demand. In a recent study,
Rule observed that “[tlhe putting out system was by its nature likely to
bring into existence a pool of labor equal to the employers’ needs at
brisk times, and hence produce a ‘natural’ redundancy whenever trade
turned down” (1981, p. 49). Not only in this sector, dominated by the
family as the unit of labor supply, but also in the factories and workshops
of the towns, the independent labor/leisure choice of a relatively unregulated
work force is often stressed. This would depend on the trade-off between
current income and leisure and between current and future leisure and,
therefore, on the relation between current rewards and those expected
in the future (Lucas and Rapping, 1969). This approach seems appropriate
to eighteenth century conditions and suggests that unanticipated demand
shocks will lead initially to quantity adjustments and only over subsequent
periods to full adjustment in prices.
Transmission of disturbances from one sector to responses in the other
will clearly involve time for the intermediate revenue streams to be
modified and for changes in expenditure decisions to be reflected in
changes in the volume of transactions in the other market. Thus, given
time series data, we should be able to determine whether the two series
are causally related by observing whether variations in one series sys-
tematically precede the other.7 An approach analogous to this was used
by Kravis (1972, p. 394) in an effort to examine the causal nexus between
variations in exports and income for the United States in the nineteenth
century. However, neither of these approaches discriminates between
shifts in demand and shifts in supply as the original shock. In Fig. 2(a)
a downward shift in the supply curve of exports would increase quantity
but would only raise total revenue if demand was elastic. Thus we have
more chance of observing the effects of demand shifts and we return to

7 We ignore the possibility of results preceding “causes” as might arise when information
flows after expectations and change behavior before the “cause” occus. Our justification
is that in the eighteenth century both goods and information moved at the same speed, at
least overseas.
172 HATTON, LYONS, AND SATCHELL

this issue again below. However, we suggest at this stage that year to
year fluctuations in quantities are more a reflection of variations in demand
than in supply and this appears to be consonant with Cole’s recent
discussion of the issue under the heading “Home versus Overseas Demand”
(1981, p. 38).
Given our approach to this question, we use the terms “causality” or
“cause” in the purely statistical sense of systematic intertemporal
relationships between time series variables.* The definition is provided
by Sims (1972, p. 545) based on Granger’s (1969) criterion according to which
“the time series X is said to “cause” Y relative to the universe U (U
is a vector of time series including X and Y as components) if and only
if predictions of Yf based on U, for all s < t are better than predictions
based on all components of U, except X, for all s < t.” In terms of the
bivariate relationship, X causes Y if
a2(YrIY,+ .*., xt-1, . ..) < u2(Y,IY,-,, . ..) (1)
where u* is the variance of the prediction error. Thus if the inclusion
of lagged X significantly reduces the variance and increases the predictive
power of the equation, it is an independent cause of Y on Granger’s
criterion.
Tests of this kind must be conducted with time series which are jointly
covariance stationary and which are free from serial correlation. Hence
the first step is to convert the data to logarithms to reduce heteroskedasticity
and filter to remove the systematic element in each data series such that
the filtered data are, as far as possible, pure “white noise.” Using the
transformed variables we then regress values of Y on past and future
values of X and test whether the future values of X are insignificant as
a group. If the null hypotheses can be rejected, then X is said not to
cause Y. Before proceeding to apply the test to data in the manner
outlined above, we should examine its appropriateness for the task in
hand and its limitations as a statistical tool.
First, the statistical test is performed on filtered data or innovations
of the time series which, by definition, is the nonsystematic part of the
variation in the data in that it could not be predicted from its own past
history. The test is therefore performed on the deviations of variables
from trends and not on the trends themselves. If, as we have suggested,
different models are appropriate at different levels of time aggregation,
then the relationship between deviations will not necessarily provide
information about the trends. By using the variables in this way, we will
be pushing the cumulative effects of one variable on another into the
background. This is consistent with our interpretation of the distinctions
implicitly drawn by Deane and Cole but not followed in their analysis.

a For a discussion of the methodological and philosophical issues raised by causality

testing, see Zellner (1979), Schwert (1979), Nelson (1979), and Sims (1979).
 EIGHTEENTH-CENTURY BRITISH TRADE 173

Second, by using this approach we sidestep the issue of specifying a

full model of the British economy and her trading partners which would
take into account all the short run and long run constraints. Since we
do not have the necessary data to test competing structural models, it
seems preferable to remain agnostic on this score rather than elaborate
on a theory which we cannot hope to test properly. Thus the results do
not give estimates of structural parameters of key relationships but merely
test for the appropriate general reduced form between two variables.
More importantly for the question at hand, it is the reduced form relationship
rather than any particular theory which is at issue and hence, given our
objective, the methodology we use is appropriate.
Third, the technique used has been described as “a sophisticatedversion
of the post hoc ergo propter hoc principle” (Sims 1972, p. 543) and, as
such, it might seem to be deliberately employing a methodology which
a generation of economic historians have been warned might contain
dangerous fallacies. The underlying difficulty is in the interpretation of
the word “cause,” and it has been argued that Granger’s definition is
not consistent with the conventional meaning of this concept (Zellner
1979). Granger (1980) has suggested that it might be better to use terms
which relate only to specifically defined concepts such as “Granger Caus-
ality” or “Prima Facie Causality” to emphasize that the definition should
not be construed more widely. Our use of this term is therefore only
consistent with this more modest interpretation and is fitting for the
hypotheses we attempt to investigate.
Fourth, while the literature using this technique has been limited largely
to examining the relationship between money and income, differences
in the methods used have been found to alter the results and, in many
cases, it has been found that the data yield no causal relationship of the
kind sought (Pierce 1977; Sims 1977). Yet in the light of a vast macro-
economic literature, there is little support for the view that no causal
relationship exists between money and income and the tests therefore
appear to be biased towards finding no causality. Sims, in his comments
on Pierce’s paper, gives cogent mathematical arguments why these tests
should lead us to believe that pairs of variables are only weakly related.
For our purposes this is an advantage since, if we do uncover a relationship
between the two variables, we are unlikely to reject the null hypothesis
wrongly. On the other hand, if we fail to find results which support
Deane and Cole’s hypothesis that imports “cause” exports, we need to
be more cautious. While we would be reluctant to conclude that no such
relationship existed, we can at least say that insofar as their conclusions
rest upon the analysis of the time series of imports and exports, statistical
tests do not lend support to these conclusions.
174 HATTON, LYONS, AND SATCHELL

III. “CAUSALITY” AND VARIATIONS IN EIGHTEENTH-CENTURY

BRITISH FOREIGN TRADE

The trade data we use for testing “causality” are exactly those provided
by Deane and Cole (1969, pp. 312-322). These measure annual imports
and exports at official values from 1967, distinguishing exports of do-
mestically produced goods, reexports of foreign and colonial goods, and
gross imports which include goods subsequently reexported. From these
Deane and Cole constructed a series for net imports. An additional
adjustment was needed for the inclusion of Scottish trade in the statistics
from the mid 1770s which was made by a small proportionate increase
in the figures prior to 1772.’ In accordance with the periodization of
Deane and Cole, we divide the series at 1745-1746 when a major turning
point is said to have occurred.” This gives two sets of data of about 50
annual observations, and tests for shorter periods are effectively ruled
out by the limited amount of data available. Though the use of annual
data might, in principle, obscure the inter-temporal pattern, given the
relatively slow speed at which transport and communications traveled
in the eighteenth century, any relationships that exist should be reflected
in the annual series.”
Each of the six series (two each for net imports, exports, and reexports)
was made stationary using a preliminary filter for level and trend

Cn Y, = C + aT + y; (2)

where T is time and y: is the estimated residual. Four of the six sets of
residuals exhibited serial correlation and each of these residual series
was further “whitened” using an autoregressive filter with up to fifth-
order lags.12 Thus, a set of “innovations,” y*, -to the original series was

9 The series including and excluding Scotland overlap in 1772-1774. Observations for
1697 to 1771 were inflated by the average ratios of the series for the three years of overlap
as follows: net imports, 1.029; exports, 1.048; reexports 1.179.
” There is certainly a turning point in the volume of total foreign trade at this time.
See Hausman and Watts (1980).
‘I As Deane and Cole (1969, p. 322, note 9) themselves state. See also Shepherd and
Wahon (1972, pp. 77-80 and Appendix III, Tables 17-21) for ship speeds, voyage and
port times; the maximum annual number of return voyages they found was two, in the
Scottish tobacco trade (p. 79).
” Various lag structures were estimated before choosing the final forms of the second-
stage filters, which were based on including all lags up to seven where the coefficients
were greater than or equal to their standard errors, subject to the constraint that the
diagnostic statistics for serial correlation were satisfactory.
 EIGHTEENTH-CENTURY BRITISH TRADE 175

estimated, using

yi = i piy;-i + y:* (39

i= I

The “causality” tests are conducted on pairs of series of innovations

to the relevant series by means of an unrestricted versus a restricted
regression where yi = 0 for all i < 0.
4
y: = 2 yjx;-j + l4, (4)
; = -q

where y” is the “causal” variable, x* is the “caused” variable7 and q

is the number of leads and lags. Coefficients of the forward values of
x* are tested for significance by means of an F test and the null hypothesis
that Y does not “cause” X is rejected if these coefficients as a group
are found to be significant.
Tests were made for possible relationships between net imports and
exports for each subperiod setting, q, the number of leads and lags, at
three, five, and seven years. The results of the F tests are shown in
Table 1.13For the years 1697-1745, no significant relationship between
the series is revealed and there is therefore no evidence of import fluc-
tuations systematically preceding those of exports. This does not support
Deane and Coles’ view insofar as it is applied to the first half of the
century though, for this period, they laid rather more stresson unsystematic
causesof fluctuations and rather less on the relationship with the colonies.
For the period 1746-1800, significant F values are obtained with five and
seven leads and lags where exports are cast in the role of the “causal”
variable. Not only does this result fail to accord with the hypothesis of
Deane and Cole, but it suggests the opposite direction of causality for
just the time period when they stressed that this relationship would be
at its strongest.
To examine the sensitivity of the results to the choice of filter and the
method of testing, each test was repeated using Sim’s arbitrary filter,
the results of which are reported in Table 1, and Granger’s method, the
results of which are not reported. I4 These results strongly corroborated

I3 An additional appendix containing a complete summary of the econometric results is

available ftim T. J. Ratton, Department of Economics, University of Essex, Colckester
CO4 3SQ, United Kingdom.
I4 The filter used by Sims was quadratic in the lag operator L and took the form (1 -
0,7X)*. To provide comparability with the tests using estimated filters, the causality regressions
176 HATTON, LYONS, AND SATCHELL

TABLE 1
F Statistics for “Causality” Tests

RHS = exports, RHS = imports,

LHS = imports LHS = exports
Period” No. of leads/lags: 3 5 7 3 5 7

With estimated filters

1697-1745 0.721 0.295 1.119 0.752 0.303 0.616
1746-1800 2.400 4.224** 2.632* 0.367 0.024 0.420
With Sim’s filter
1697-1745 2.411 1.139 1.053 0.581 0.062 0.870
1746-1800 1.009 3.496* 2.076 0.281 0.268 0.411

a Because of the lags employed in filtering and in the causality regressions, the actual
sample periods used are as follows.
P Period 1 Period 2
3 1702-1742 1754-1797
5 1704-1740 175&1795
7 1706-1738 1758-1793
* denotes significance at 5% level
** at 1% level

the findings of the first set of tests although the regressions using the
Sim’s filter all exhibited serial correlation which undermines the test
statistic. Inspection of the coefficient values in the unrestricted regression
of exports on future, current and lagged imports revealed small and
insignificant coefficients on lagged imports but a large, positive, and
significant coefficient on imports at t + 1 which suggests the strongest
effect of exports on imports occurred with a one-year lag. To further
examine the robustness of these findings, we tried to make an allowance
for the impact of wars on the structure of the relationships.

using Sims-filtered data were run on the same sample periods as above; these regressions
exhibited considerable serial correlation. The Granger test was specified as follows.

en Y, = C + aT + i pi en Y,-; + D 2 yienX,-, + U,
i= I i=,

where 4 is the number of lags (from 1 to 5), D = 0 for the restricted regression, and
D = 1 for the unrestricted. Because lagged values of the dependent variable are used, we
use the test statistic

restricted sum of squares

0 = n . &r
unrestricted sum of squares

which, under the null hypothesis of all yi = 0, is asymptotically distributed as XT,,. The
test statistic exceeded the 5% critical values for q = 1, 2, and 5 and the 10% critical value
for 4 = 3 and 4.
 EIGHTEENTH-CENTURY BRITISH TRADE 177

In the period we are considering, Britain was at war for four years
out of every ten. In several cases, the shifts of trade in war years are
obvious from inspecting the data; for example, in the graphs plotted by
Deane and Cole (1969, p. 46) one can discern downturns in recorded
trade during the wars of the Austrian Succession (1738-1749) and the
American War for Independence (1776-1782) and an upturn in exports
in the early years of the French wars. Ideally, we would like to be able
to test for the intertemporal relationships between imports and exports
for war years and nonwar years as separate groups, but owing to the
need for a large number of lags in the regressions and the fact that the
wars were scattered evenly over the century this is not feasible. Instead
we attempted to take account of the wars in our preliminary filters so
that the “abnormal” effects of war would be removed from the innovations
upon which the tests are performed. Two alternative assumptions were
made: initially, that the effects of war could be captured by introducing
a separate dummy variable for each war into the first filter, and alternatively,
that the effects could be represented by dummy variables in the second
filter.15
The tests were repeated for each of the new sets of innovations and
the results obtained are given in the Appendix. In none of these tests
could the null hypothesis be rejected. Hence no new “causal” links
appear and the significant relationship running from exports to imports
in the second half of the century disappears.16 Some doubt surrounds
the adequacy of this rather arbitrary method of removing the effects of
war from the residuals but the results do suggest that the alternation of
periods of war and peace was an important element in our positive
finding. The finding only holds if wars are regarded as an integral part
of the pattern of growth rather than an exceptional circumstance, which
is perhaps appropriate in the context of the eighteenth century. It should
be emphasized, however, that although the leading role of exports in the
second half of the century is subject to this qualification, the results do
not yield a “causal” link running from imports to exports in support of
Deane and Cole.
In an effort to explore the relationships somewhat further in the spirit
of Cole (1973), we performed the tests between imports and exportsand
the reexport series with the war dummies excluded from the filters. No
very significant relationships were found between exports and reexports

” The periods of war for which separate dummies were included were 1702-1713, 1739-
1748, 1756-1763, 1776-1782, 1793-1800.
I6 As in the original regressions, the coefficients of the forward values of imports tend
to be larger than those of lagging values, suggesting that a forward relationship is not
entirely eliminated by the use of the war dummies.
178 HAT-I-ON, LYONS, AND SATCHELL

for either period though, as shown in the Appendix, there is some indication
that exports led reexports.” We are not convinced that such a procedure
would adequately test for the impact of demand fluctuations in noncolonial
markets for British exports and it appears that adapting the general idea
suggested by Cole does not provide insights into the causal mechanism.
Interestingly, when tests were conducted between retained imports and
reexports no signihcant relationship emerged for the second half of the
century but for the first half the forward coefficients of imports could
not be rejected as jointly insignificant.“8 This suggests a ‘“causal” link
running from reexports to retained imports. This result is not easy to
explain but may simply be the result of the different points at which
gross imports and reexports were recorded. Alternatively, Deane has
recently argued &at “the immense importance of the tropical commodities
lay in the fact that they increased British purchasing power on the continent
of Europe. Britain needed her European imports for vital productive
purposes and not merely to meet the upper class demand for wine and
brandy”’ (f980, p. $5).
IV. CONCLWONS
Our purpose has been to test the propositions implied by the analysis
of Deane and Cole using the modern tune series method. We argue that
this is an appropriate and legitimate tool of analysis for the problem at
hand but that its limitations should not be overlooked. In our causality
tests we are unable, with the type and quality of information at hand,
to distinguish between the alternative subhypotheses of foreign demand
and domestic supply shifts. While we believe that demand is likely to
be the most important cause of short run fluctuations in normal times,
the picture may be complicated by major shifts in export oriented industries
occurrtng towards the end of the century.
Working from a perspective of demand induced change, Deane and
Cole argued that precedence in short run variations in trade should be
accorded to British demand for imports in the latter half of the eighteenth
century, with subsequent variation in British domestic exports being
determined largely by flows of purchasing power within a closed, dependent
trading block. We dispute that this representation is an appropriate one
and suggest that the evidence from the gross barter terms of trade is

” Although one test (q = 3) for 1697-1745 suggests that exports ‘kaused” reexports,
this result is undermined by the fact that this entire set of regressions was seriously marred
by serial correlation.
I8 The computed F ratios are significant at the 99% level for q = 3, 5 and at the 95%
level for q = 7. The alternative test employing war dummies in the second filter produces
the same pattern, although with lower significance levels. In both cases the coefficients
of the leading values of the “caused” variable (imports) are large relative to the lagged
ValUC2.S.
 EIGHTEENTH-CENTURY BRITISH TRADE 179

inadequate to establish a presumption in favor of the home demand

hypothesis.
To a large extent this view is supported by the results of our “causahty”
tests. We find no evidence that variations in British retained imports
systematically preceded variations in exports and, indeed, when no special
allowance is made for the effects of war the evidence points in the
opposite direction. This does not allow us to suggest that the industrial
revolution can be described in terms of export led growth but that exports
cannot be regarded as a purely passive element in eighteenth century
trade. For the century as a whole, short run variations in British imports
are related to variations in export activity: to reexports in the period
1697 to 1745 and to exports in the years 1746 to 1800. Whatever inter-
pretation may be placed on these results, they are unequivocal in rejecting
influences running from British imports to other parts of the trade accounts.
We would be hesitant to conclude that imports had no independent role
in the growth and fluctuation of British trade. What we have set out to
show is that such effects cannot be discerned from the existing data
along the lines suggested by Deane and Cole.
 APPENDIX: ADDITIONAL F STATISTICS FOR “CAUSALITY” TESTS
Period No. of leads/lags: 3 5 7 3 5 7

War dummies in first filter

RHS = exports LHS = imports RHS = imports LHS = exports EC
1697-1745 1.286 1.219 2.286 0.906 0.246 0.696 z
1746-1800 0.678 1.389 1.180 1.494 0.833 0.806 8
“2
War dummies in second filter
RHS = exports LHS = imports RHS = imports LHS = exports r
1697-1745
0.805 0.312 0.462 0.642 0.090 0.265 z
1746-1800 0.968 1.864 1.545 1.791 0.266 0.529 c”
War dummies excluded
RHS = exports LHS = reexports RHS = reexports LHS = exports z
1697-1745 2.927 2.052 1.580 0.079 0.643 0.211 g
1746-1800 1.815 2.108 1.133 1.494 0.799 0.651 2
RHS = imports LHS = reexports RHS = reexports LHS = imports 3
1697-1745 0.211 0.653 1.080 7.823 5.911 3.294 F
1746-1800 1.525 0.810 0.599 0.426 1.512 0.773
Critical values of F at 5% level
1697-1745 2.86 2.53 2.49 2.86 2.53 2.49
1746-1800 2.88 2.60 2.58 2.88 2.60 2.58
 EIGHTEENTH-CENTURY BRITISH TRADE 181

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