Tragedy and Hope
A History of The
World in our Time
Carroll Quigley
Part Two—
A History of The
World in our Time
Carroll Quigley
Part Two—
Western Civilization to 1914
Chapter 4—
The Pattern of Change
In order to obtain perspective we sometimes divide the culture of a society, in a
somewhat arbitrary fashion, into several different aspects. For example, we can divide a
society into six aspects: military, political, economic, social, religious, intellectual.
Naturally there are very close connections between these various aspects; and in each
aspect there are very close connections between what exists today and what existed in an
earlier day. For example, we might want to talk about democracy as a fact on the political
level (or aspect). In order to talk about it in an intelligent way we would not only have to
know what it is today we would also have to see what relationship it has to earlier facts
on the political level as well as its relationship to various facts on the other five levels of
the society. Naturally we cannot talk intelligently unless we have a fairly clear idea of
what we mean by the words we use. For that reason we shall frequently define the terms
we use in discussing this subject.
The Organization of Power
The military level is concerned with the organization of force, the political level with
the organization of power, and the economic level with the organization of wealth. By the
"organization of power" in a society we mean the ways in which obedience and consent
(or acquiescence) are obtained. The close relationships between levels can be seen from
the fact that there are three basic ways to win obedience: by force, by buying consent
with wealth, and by persuasion. Each of these three leads us to another level (military,
economic, or intellectual) outside the political level. At the same time, the organization of power today (that is, of the methods for obtaining obedience in the society) is a
development of the methods used to obtain obedience in the society in an earlier period.
Major Change in the 20th Century
These relationships are important because in the twentieth century in Western
Civilization all six levels are changing with amazing rapidity, and the relationships
between levels are also shifting with great speed. When we add to this confusing picture
of Western Civilization the fact that other societies are influencing it or being influenced
by it, it would seem that the world in the twentieth century is almost too complicated to
understand. This is indeed true, and we shall have to simplify (perhaps even
oversimplify) these complexities in order to reach a low level of understanding. When we
have reached such a low level perhaps we shall be able to raise the level of our
understanding by bringing into our minds, little by little, some of the complexities which
do exist in the world itself.
The Military Level in
Western Civilization
On the military level in Western Civilization in the twentieth century the chief
development has been a steady increase in the complexity and the cost of weapons. When
weapons are cheap to get and so easy to use that almost anyone can use them after a short
period of training, armies are generally made up of large masses of amateur soldiers.
Such weapons we call "amateur weapons," and such armies we might call "mass armies
of citizen-soldiers." The Age of Pericles in Classical Greece and the nineteenth century in
Western Civilization were periods of amateur weapons and citizen-soldiers. But the
nineteenth century was preceded (as was the Age of Pericles also) by a period in which
weapons were expensive and required long training in their use. Such weapons we call
"specialist" weapons. Periods of specialist weapons are generally periods of small armies
of professional soldiers (usually mercenaries). In a period of specialist weapons the
minority who have such weapons can usually force the majority who lack them to obey;
thus a period of specialist weapons tends to give rise to a period of minority rule and
authoritarian government. But a period of amateur weapons is a period in which all men
are roughly equal in military power, a majority can compel a minority to yield, and
majority rule or even democratic government tends to rise. The medieval period in which
the best weapon was usually a mounted knight on horseback (clearly a specialist weapon)
was a period of minority rule and authoritarian government. Even when the medieval
knight was made obsolete (along with his stone castle) by the invention of gunpowder
and the appearance of firearms, these new weapons were so expensive and so difficult to
use (until 1800) that minority rule and authoritarian government continued even though
that government sought to enforce its rule by shifting from mounted knights to
professional pike-men and musketeers. But after 1800, guns became cheaper to obtain
and easier to use. By 1840 a Colt revolver sold for $27 and a Springfield musket for not
much more, and these were about as good weapons as anyone could get at that time.
Thus, mass armies of citizens, equipped with these cheap and easily used weapons, began
to replace armies of professional soldiers, beginning about 1800 in Europe and even
earlier in America. At the same time, democratic government began to replace
authoritarian governments (but chiefly in those areas where the cheap new weapons were
available and local standards of living were high enough to allow people to obtain them).
The arrival of the mass army of citizen-soldiers in the nineteenth century created a
difficult problem of control, because techniques of transportation and of communications
had not reached a high-enough level to allow any flexibility of control in a mass army.
Such an army could be moved on its own feet or by railroad; the government could
communicate with its various units only by letter post or by telegram. The problem of
handling a mass army by such techniques was solved partially in the American Civil War
of 1861-1865 and completely by Helmuth von Moltke for the Kingdom of Prussia in the
Austro-Prussian War of 1866. The solution was a rigid one: a plan of campaign was
prepared beforehand against a specific opponent, with an established timetable and
detailed instructions for each military unit; communications were prepared and even
issued beforehand, to be used according to the timetable. This plan was so inflexible that
the signal to mobilize was practically a signal to attack a specified neighboring state
because the plan, once initiated, could not be changed and could hardly even be slowed
up. With this rigid method Prussia created the German Empire by smashing Austria in
1866 and France in 1871. By 1900 all the states of Europe had adopted the same method
and had fixed plans in which the signal for mobilization constituted an attack on some
neighbor—a neighbor, in some cases (as in the German invasion of Belgium), with whom
the attacker had no real quarrel. Thus, when the signal for mobilization was given in 1914
the states of Europe leaped at each other.
The Rise of
Authoritarian Government
In the twentieth century the military situation was drastically changed in two ways. On
the one hand, communications and transportation were so improved by the invention of
the radio and the internal-combustion engine that control and movement of troops and
even of individual soldiers became very flexible; mobilization ceased to be equivalent to
attack, and attack ceased to be equivalent to total war. On the other hand, beginning with
the first use of tanks, gas, high-explosive shells, and tactical bombing from the air in
1915-1918, and continuing with all the innovations in weapons leading up to the first
atomic bomb in 1945, specialist weapons became superior to amateur weapons. This had
a double result which was still working itself out at mid-century: the drafted army of
citizen-soldiers began to be replaced by a smaller army of professional specialist soldiers,
and authoritarian government began to replace democratic government.
The Political Level in
Western Civilization
On the political level equally profound changes took place in the twentieth century.
These changes were associated with the basis on which an appeal for allegiance could be
placed, and especially with the need to find a basis of allegiance which could win loyalty
over larger and larger areas from more numerous groups of people. In the early Middle
Ages when there had been no state and no public authority, political organization had
been the feudal system which was held together by obligations of personal fealty among a
small number of people. With the reappearance of the state and of public authority, new
patterns of political behavior were organized in what is called the "feudal monarchy."
This allowed the state to reappear for the first time since the collapse of Charlemagne's
Empire in the ninth century, but with restricted allegiance to a relatively small number of
persons over a relatively small area. The development of weapons and the steady
improvement in transportation and in communications made it possible to compel
obedience over wider and wider areas, and made it necessary to base allegiance on
something wider than personal fealty to a feudal monarch. Accordingly, the feudal
monarchy was replaced by the dynastic monarchy. In this system subjects owed
allegiance to a royal family (dynasty), although the real basis of the dynasty rested on the
loyalty of a professional army of pike-men and musketeers.
The Rise of the Nation State
The shift from the professional army of mercenaries to the mass army of citizen soldiers, along with other factors acting on other levels of culture, made it necessary to
broaden the basis of allegiance once again after 1800. The new basis was nationalism,
and gave rise to the national state as the typical political unit of the nineteenth century.
This shift was not possible for the larger dynastic states which ruled over many different
language and national groups. By the year 1900 three old dynastic monarchies were being
threatened with disintegration by the rising tide of nationalistic agitation. These three, the
Austro-Hungarian Empire, the Ottoman Empire, and the Russian Empire of the
Romanovs, did disintegrate as a consequence of the defeats of the First World War. But
the smaller territorial units which replaced them, states like Poland, Czechoslovakia, or
Lithuania, organized largely on the basis of language groups, may have reflected
adequately enough the nationalistic sentiments of the nineteenth century, but they
reflected very inadequately the developments in weapons, in communications, in
transportation, and in economics of the twentieth century.
By the middle of this latter
century these developments were reaching a point where states which could produce the
latest instruments of coercion were in a position to compel obedience over areas much
larger than those occupied by peoples speaking the same language or otherwise regarding
themselves as sharing a common nationality. Even as early as 1940 it began to appear
that some new basis more continental in scope than existing nationality groups must be
found for the new super-states which were beginning to be born. It became clear that the
basis of allegiance for these new super-states of continental scope must be ideological
rather than national. Thus the nineteenth century's national state began to be replaced by
the twentieth century's ideological bloc. At the same time, the shift from amateur to
specialist weapons made it likely that the new form of organization would be
authoritarian rather than democratic as the earlier national state had been. However, the
prestige of Britain's power and influence in the nineteenth century was so great in the first
third of the twentieth century that the British parliamentary system continued to be
copied everywhere that people were called upon to set up a new form of government.
This happened in Russia in 1917, in Turkey in 1908, in Czechoslovakia and Poland in
1918-1919 and in most of the states of Asia (such as China in 1911).
The Economic Level of
Western Civilization
When we turn to the economic level, we turn to a series of complex developments. It
would be pleasant if we could just ignore these, but obviously we cannot, because
economic issues have been of paramount importance in the twentieth century, and no one
can understand the period without at least a rudimentary grasp of the economic issues. In
order to simplify these somewhat, we may divide them into four aspects: (a) energy; (b)
materials; (c) organization; and (d) control.
It is quite clear that no economic goods can be made without the use of energy and of
materials. The history of the former falls into two chief parts each of which is divided
into two sub-parts. The main division, about 1830, separates an earlier period when
production used the energy delivered through living bodies and a later period when
production used energy from fossil fuels delivered through engines. The first half is
subdivided into an earlier period of manpower (and slavery) and a later period using the
energy of draft animals. This subdivision occurred roughly about A. D. 1000. The second
half (since 1830) is subdivided into a period which used coal in steam engines, and a
period which used petroleum in internal-combustion engines. This subdivision occurred
about 1900 or a little later.
The development of the use of materials is familiar to everyone. We can speak of an
age of iron (before 1830), an age of steel (1830-1910), and an age of alloys, light metals,
and synthetics (since 1910). Naturally, all these dates are arbitrary and approximate, since
the different periods commenced at different dates in different areas, diffusing outward
from their origin in the core area of Western Civilization in northwestern Europe.
Six Periods of Development
When we turn to the developments which took place in economic organization, we
approach a subject of great significance. Here again we can see a sequence of several
periods. There were six of these periods, each with its own typical form of economic
organization. At the beginning, in the early Middle Ages, Western Civilization had an
economic system which was almost entirely agricultural, organized in self-sufficient
manors, with almost no commerce or industry. To this manorial-agrarian system there
was added, after about 1050, a new economic system based on trade in luxury goods of
remote origin for the sake of profits. This we might call commercial capitalism. It had
two periods of expansion, one in the period 1050-1270, and the other in the period 1440-
1690. The typical organization of these two periods was the trading company (in the
second we might say the chartered trading company, like the Massachusetts Bay
Company, the Hudson's Bay Company, or the various East India companies).
The next
period of economic organization was the stage of industrial capitalism, beginning about
1770, and characterized by owner management through the single-proprietorship or the
partnership. The third period we might call financial capitalism. It began about 1850,
reached its peak about 1914, and ended about 1932. Its typical forms of economic
organization were the limited-liability corporation and the holding company. It was a
period of financial or banker management rather than one of owner management as in the
earlier period of industrial capitalism.
This period of financial capitalism was followed by
a period of monopoly capitalism. In this fourth period, typical forms of economic
organization were cartels and trade associations. This period began to appear about 1890,
took over control of the economic system from the bankers about 1932, and is
distinguished as a period of managerial dominance in contrast with the owner
management and the financial management of the two periods immediately preceding it.
Many of its characteristics continue, even today, but the dramatic events of World War II
and the post-war period put it in such a different social and historical context as to create
a new, sixth, period of economic organization which might be called "the pluralist
economy." The features of this sixth period will be described later.
Stages of Economic Development
Two things should be noted. In the first place, these various stages or periods are
additive in a sense. and there are many survivals of earlier stages into later ones. As late
as 1925 there was a manor still functioning in England, and Cecil Rhodes's chartered
company which opened up Rhodesia (the British South Africa Company) was chartered as late as 1889. In the same way owner-managed private firms engaging in industrial
activities, or corporations and holding companies engaging in financial activities, could
be created today. In the second place all the later periods are called capitalism. This term
means "an economic system motivated by the pursuit of profits within a price system."
The commercial capitalist sought profits from the exchange of goods; the industrial
capitalist sought profits from the manufacture of goods; the financial capitalist sought
profits from the manipulation of claims on money; and the monopoly capitalist sought
profits from manipulation of the market to make the market price and the amount sold
such that his profits would be maximized.
1. Automatic control: manorial custom, 650-1150
2. Conscious control
a. municipal mercantilism, 1150-1450
b. state mercantilism, 1450- 1815
3. Automatic control: laissez-faire in the competitive market, 1815-1934
4. Conscious control: planning (both public and private), 1934
It should be evident that these five stages of economic control are closely associated with the stages previously mentioned in regard to kinds of weapons on the military level or the forms of government on the political level. The same five stages of economic control have a complex relationship to the six stages of economic organization already mentioned, the important stage of industrial capitalism overlapping the transition from state mercantilism to laissez-faire.
In the first place, each stage created the conditions which tended to bring about the next stage; therefore we could say, in a sense, that each stage committed suicide. The original economic organization of self-sufficient agrarian units (manors) was in a society organized so that its upper ranks—the lords, lay and ecclesiastical—found their desires for necessities so well met that they sought to exchange their surpluses of necessities for luxuries of remote origin. This gave rise to a trade in foreign luxuries (spices, fine textiles, fine metals) which was the first evidence of the stage of commercial capitalism. In this second stage, mercantile profits and widening markets created a demand for textiles and other goods which could be met only by application of power to production. This gave the third stage: industrial capitalism. The stage of industrial capitalism soon gave rise to such an insatiable demand for heavy fixed capital, like railroad lines, steel mills, shipyards, and so on, that these investments could not be financed from the profits and private fortunes of individual proprietors. New instruments for financing industry came into existence in the form of limited-liability corporations and investment banks. These were soon in a position to control the chief parts of the industrial system, since they provided capital to it. This gave rise to financial capitalism. The control of financial capitalism was used to integrate the industrial system into ever-larger units with interlinking financial controls. This made possible a reduction of competition with a resulting increase in profits. As a result, the industrial system soon found that it was again able to finance its own expansion from its own profits, and, with this achievement, financial controls were weakened, and the stage of monopoly capitalism arrived. In this fifth stage, great industrial units, working together either directly or through cartels and trade associations, were in a position to exploit the majority of the people. The result was a great economic crisis which soon developed into a struggle for control of the state—the minority hoping to use political power to defend their privileged position, the majority hoping to use the state to curtail the power and privileges of the minority. Both hoped to use the power of the state to find some solution to the economic aspects of the crisis. This dualist struggle dwindled with the rise of economic and social pluralism after 1945.
The way in which commercial capitalism (an expanding economic organization) was transformed into mercantilism (a restrictive economic organization) twice in our past history is very revealing not only of the nature of economic systems, and of men themselves, but also of the nature of economic crisis and what can be done about it.
Two things are notable in this mercantilist situation. In the first place, the merchant, by his restrictive practices, was, in essence, increasing his own satisfaction by reducing that of the producer at one end and of the consumer at the other end; he was able to do this because he was in the middle between them. ln the second place, so long as the merchant, in his home port, was concerned with goods, he was eager that the prices of goods should be, and remain, high.
Bankers Obsessed With Maintaining Value of Money The redistribution of wealth by changing prices is equally important but attracts much less attention. Rising prices benefit debtors and injure creditors, while falling prices do the opposite. A debtor called upon to pay a debt at a time when prices are higher than when he contracted the debt must yield up less goods and services than he obtained at the earlier date, on a lower price level when he borrowed the money. A creditor, such as a bank, which has lent money—equivalent to a certain quantity of goods and services—on one price level, gets back the same amount of money—but a smaller quantity of goods and services—when repayment comes at a higher price level, because the money repaid is then less valuable. This is why bankers, as creditors in money terms, have been obsessed with maintaining the value of money, although the reason they have traditionally given for this obsession—that "sound money" maintains "business confidence"—has been propagandist rather than accurate.[bulls#^t,they need to keep us the illusion that their 'money' has value.DC]
These efforts ... [were accelerated] with the shift of commercial capitalism into mercantilism and the destruction of the whole pattern of social organization based on dynastic monarchy, professional mercenary armies, and mercantilism, in the series of wars which shook Europe from the middle of the seventeenth century to 1815. Commercial capitalism passed through two periods of expansion each of which deteriorated into a later phase of war, class struggles, and retrogression. The first stage, associated with the Mediterranean Sea, was dominated by the North Italians and Catalonians but ended in a phase of crisis after 1300, which was not finally ended until 1558. The second stage of commercial capitalism, which was associated with the Atlantic Ocean, was dominated by the West Iberians, the Netherlanders, and the English. It had begun to expand by 1440, was in full swing by 1600, but by the end of the seventeenth century had become entangled in the restrictive struggles of state mercantilism and the series of wars which ravaged Europe from 1667 to 1815.
This early stage of industrial capitalism, which lasted in England from about 1770 to about 1850, was shared to some extent with Belgium and even France, but took quite different forms in the United States, Germany, and Italy, and almost totally different forms in Russia or Asia. The chief reason for these differences was the need for raising funds (capital) to pay for the rearrangement of the factors of production (and, labor, materials, skill, equipment, and so on) which industrialism required. Northwestern Europe, and above all England, had large savings for such new enterprises. Central Europe and North America had much less, while eastern and southern Europe had very little in private hands.
Financial Capitalism, 1850 - 1931
This third stage of capitalism is of such overwhelming significance in the history of the twentieth century, and its ramifications and influences have been so subterranean and even occult, that we may be excused if we devote considerate attention to its organization and methods. Essentially what it did was to take the old disorganized and localized methods of handling money and credit and organize them into an integrated system, on an international basis, which worked with incredible and well-oiled facility for many decades. The center of that system was in London, with major offshoots in New York and Paris, and it has left, as its greatest achievement, an integrated banking system and a heavily capitalized—if now largely obsolescent—framework of heavy industry, reflected in railroads, steel mills, coal mines, and electrical utilities.
This system had its center in London for four chief reasons. First was the great volume of savings in England, resting on England's early successes in commercial and industrial capitalism. Second was England's oligarchic social structure (especially as reflected in its concentrated landownership and limited access to educational opportunities) which provided a very inequitable distribution of incomes with large surpluses coming to the control of a small, energetic upper class. Third was the fact that this upper class was aristocratic but not noble, and thus, based on traditions rather than birth, was quite willing to recruit both money and ability from lower levels of society and even from outside the country, welcoming American heiresses and central-European Jews to its ranks, almost as willingly as it welcomed monied, able, and conformist recruits from the lower classes of Englishmen, whose disabilities from educational deprivation, provincialism, and Nonconformist (that is non-Anglican) religious background generally excluded them from the privileged aristocracy. Fourth (and by no means last) in significance was the skill in financial manipulation, especially on the international scene, which the small group of merchant bankers of London had acquired in the period of commercial and industrial capitalism and which lay ready for use when the need for financial capitalist innovation became urgent.
Exchanges were stabilized on the gold standard because by law, in various countries, the monetary unit was made equal to a fixed quantity of gold, and the two were made exchangeable at that legal ratio. In the period before 1914, currency was stabilized in certain countries as follows:
In Britain: 77s. 10 ½ d. equaled a standard ounce (11/12 pure gold).
In the United States: $20.67 equaled a fine ounce (12/12 pure gold).
In France: 3,447.74 francs equaled a fine kilogram of gold.
In Germany: 2,790 marks equaled a fine kilogram of gold.
These relationships were established by the legal requirement that a person who brought gold, gold coins, or certificates to the public treasury (or other designated places) could convert any one of these into either of the others in unlimited amounts for no cost. As a result, on a full gold standard, gold had a unique position: it was, at the same time, in the sphere of money and in the sphere of wealth. In the sphere of money, the value of all other kinds of money was expressed in terms of gold: and, in the sphere of real wealth, the values of all other kinds of goods were expressed in terms of gold as money. If we regard the relationships between money and goods as a seesaw in which each of these was at opposite ends, so that the value of one rose just as much as the value of the other declined, then we must see gold as the fulcrum of the seesaw on which this relationship balances, but which does not itself go up or down.
Naturally, these arrangements vary greatly from place to place, especially as the division of banking functions and powers are not the same in all countries. In France and England the private bankers exercised their powers through the central bank and had much more influence on the government and on foreign policy and much less influence on industry, because in these two countries, unlike Germany, Italy, the United States, or Russia, private savings were sufficient to allow much of industry to finance itself without recourse either to bankers or government. In the United States much industry was financed by investment bankers directly, and the power of these both on industry and on government was very great, while the central bank (the New York Federal Reserve Bank) was established late (1913) and became powerful much later (after financial capitalism was passing from the scene). In Germany industry was financed and controlled by the discount banks, while the central bank was of little power or significance before 1914. In Russia the role of the government was dominant in much of economic life, while in Italy the situation was backward and complicated.
This last point can be seen in the fact that the supply of gold could be decreased but could hardly be increased. If an ounce of gold was added to the point of the pyramid in a system where law and custom allowed To percent reserves on each level, it could permit an increase of deposits equivalent to $2067 on the uppermost level. If such an ounce of gold were withdrawn from a fully expanded pyramid of money, this would compel a reduction of deposits by at least this amount, probably by a refusal to renew loans.
It is to be noted that the control of the central bank over the credit policies of local banks are permissive in one direction and compulsive in the other. They can compel these local banks to curtail credit and can only permit them to increase credit. This means that they have control powers against inflation and not deflation—a reflection of the old banking idea that inflation was bad and deflation was good.
A government can also change the amount of money in a community by other, more drastic, methods. By changing the gold content of the monetary unit they can change the amount of money in the community by a much greater amount. If, for example, the gold content of the dollar is cut in half, the amount of gold certificates will be able to be doubled, and the amount of notes and deposits reared on this basis will be increased many fold, depending on the customs of the community in respect to reserve requirements. Moreover, if a government goes off the gold standard completely—that is, refuses to exchange certificates and notes for specie—the amount of notes and deposits can be increased indefinitely because these are no longer limited by limited amounts of gold reserves.
On the whole, in the period up to 1931, bankers, especially the Money Power controlled by the international investment bankers, were able to dominate both business and government.
They could dominate business, especially in activities and in areas where industry could not finance its own needs for capital, because investment bankers had the ability to supply or refuse to supply such capital.
Thus, Rothschild interests came to dominate many of the railroads of Europe, while Morgan dominated at least 26,000 miles of American railroads. Such bankers went further than this. In return for flotations of securities of industry, they took seats on the boards of directors of industrial firms, as they had already done on commercial banks, savings banks, insurance firms, and finance companies.
From these lesser institutions they funneled capital to enterprises which yielded control and away from those who resisted. These firms were controlled through interlocking directorships, holding companies, and lesser banks.
They engineered amalgamations and generally reduced competition, until by the early twentieth century many activities were so monopolized that they could raise their noncompetitive prices above costs to obtain sufficient profits to become self-financing and were thus able to eliminate the control of bankers.
But before that stage was reached a relatively small number of bankers were in positions of immense influence in European and American economic life. As early as 1909, Walter Rathenau, who was in a position to know (since he had inherited from his father control of the German General Electric Company and held scores of directorships himself), said, "Three hundred men, all of whom know one another, direct the economic destiny of Europe and choose their successors from among themselves."
In 1852 Gladstone, chancellor of the Exchequer, declared, "The hinge of the whole situation was this: the government itself was not to be a substantive power in matters of Finance, but was to leave the Money Power supreme and unquestioned."
On September 26, 1921, The Financial Times wrote, "Half a dozen men at the top of the Big Five Banks could upset the whole fabric of government finance by refraining from renewing Treasury Bills." In 1924 Sir Drummond Fraser, vice-president of the Institute of Bankers, stated, "The Governor of the Bank of England must be the autocrat who dictates the terms upon which alone the Government can obtain borrowed money."
As the value of the domestic currency sagged below par in relationship to that of some foreign currency, domestic exporters to that foreign country will increase their activities, because when they receive payment in the form of a bill of exchange they can sell it for more of their own currency than they usually expect and can thus increase their profits. A surplus of imports, by lowering the foreign-exchange value of the importing country's money, will lead eventually to an increase in exports which, by providing more bills of exchange, will tend to restore the relationship of the moneys back toward par. Such a restoration of parity in foreign exchange will reflect a restoration of balance in international obligations, and this in turn will reflect a restored balance in the exchange of goods and services between the two countries. This means, under normal conditions, that a trade disequilibrium will create trade conditions which will tend to restore trade equilibrium.
Since the cost of packing, shipping and insuring gold used to be about ½ percent of its value, the gold export and import points were about this amount above and below the parity point. In the case of the dollar-pound relationship, when parity was at £ 1 = $4.866, the gold export point was about $4.885 and the gold import point was about $4.845. Thus:
Gold export point $4.885
(excess demand for bills by importers)
Parity $4.866
Gold import point $4.845
(excess supply of bills by exporters)
The situation which we have described is overly simplified. In practice the situation is made more complicated by several factors. Among these are the following: (1) middlemen buy and sell foreign exchange for present or future delivery as a speculative activity; (2) the total supply of foreign exchange available in the market depends on much more than the international exchange of commodities. It depends on the sum total of all international payments, such as interest, payment for services, tourist spending, borrowings, sales of securities, immigrant remittances, and so on; (3) the total exchange balance depends on the total of the relationships of all countries, not merely between two.
When the gold standard is abandoned, gold flows between countries like any other commodity, and the value of foreign exchanges (no longer tied to gold) can fluctuate much more widely. In theory an unbalance of international payments can be rectified either through a shift in exchange rates or through a shift in internal price levels. On the gold standard this rectification is made by shifts in exchange rates only between the gold points. When the unbalance is so great that exchanges would be forced beyond the gold points, the rectification is made by means of changing internal prices caused by the fact that gold flows at the gold points, instead of the exchanges passing beyond the gold points. On the other hand, when a currency is off the gold standard, fluctuation of exchanges is not confined between any two points but can go indefinitely in either direction. In such a case, the unbalance of international payments is worked out largely by a shift in exchange rates and only remotely by shifts in internal prices. In the period of 1929-1936, the countries of the world went off gold because they preferred to bring their international balances toward equilibrium by means of fluctuating exchanges rather than by means of fluctuating price levels. They feared these last because changing (especially falling) prices led to declines in business activity and shifts in the utilization of economic resources (such as labor, land, and capital) from one activity to another.
To her supremacy in these spheres, won in the period before 1815, Britain added new spheres of dominance in the period after 1815. These arose from her early achievement of the Industrial Revolution. This was applied to transportation and communications as well as to industrial production. In the first it gave the world the railroad and the steamboat; in the second it gave the telegraph, the cable, and the telephone; in the third it gave the factory system.
These conditions, which made the international financial and commercial system function so beautifully before 1914, had begun to change by 1890. The fundamental economic and commercial conditions changed first, and were noticeably modified by 1910; the group of secondary characteristics of the system were changed by the events of the First World War. As a result, the system of early international financial capitalism is now only a dim memory. Imagine a period without passports or visas, and with almost no immigration or customs restrictions. Certainly the system had many incidental drawbacks, but they were incidental. Socialized if not social, civilized if not cultured, the system allowed individuals to breathe freely and develop their individual talents in a way unknown before and in jeopardy since.
The ability of the people of the United States to make this readjustment of social outlook and behavior at the "ending of the frontier" about 1900 was hampered by a number of factors from its earlier historical experience. Among these we should mention the growth of sectionalism, past political and constitutional experiences, isolationism, and emphasis on physical prowess and unrealistic idealism.
Three Major Geographic Sections Arise in U.S. The occupation of the United States had given rise to three chief geographic sections: a commercial and later financial and industrial East, an agrarian and later industrial West, and an agrarian South. Unfortunately, the two agrarian sections were organized quite differently, the South on the basis of slave labor and the West on the basis of free labor. On this question the East allied with the West to defeat the South in the Civil War (1861- 1865) and to subject it to a prolonged military occupation as a conquered territory (1865- 1877). Since the war and the occupation were controlled by the new Republican Party, the political organization of the country became split on a sectional basis: the South refused to vote Republican until 1928, and the West refused to vote Democratic until 1932. In the East the older families which inclined toward the Republican Party because of the Civil War were largely submerged by waves of new immigrants from Europe, beginning with Irish and Germans after 1846 and continuing with even greater numbers from eastern Europe and Mediterranean Europe after 1890. These new immigrants of the eastern cities voted Democratic because of religious, economic, and cultural opposition to the upper-class Republicans of the same eastern section. The class basis in voting patterns in the East and the sectional basis in voting in the South and West proved to be of major political significance after 1880.
America's entrance upon the stage as a world power continued with the annexation of Hawaii in 1808, the intervention in the Boxer uprising in 1900, the seizure of Panama in 1903, the diplomatic intervention in the Russo-Japanese War in 1905, the round-the world cruise of the American Navy in 1908, the military occupation of Nicaragua in 1912, the opening of the Panama Canal in 1914, and military intervention in Mexico in 1916.
next
Part Three—The Russian Empire to 1917
Four Major Stages of
Economic Expansion
It is interesting to note that, as a consequence of these various stages of economic
organization, Western Civilization has passed through four major stages of economic
expansion marked by the approximate dates 970-1270, 1440-1690, 1770-1928, and since
1950. Three of these stages of expansion were followed by the outbreak of imperialist
wars, as the stage of expansion reached its conclusion. These were the Hundred Years'
War and the Italian Wars (1338-1445, 1494-1559), the Second Hundred Years' War
(1667-1815), and the world wars (1914-1945). The economic background of the third of
these will be examined later in this chapter, but now we must continue our general survey
of the conditions of Western Civilization in regard to other aspects of culture. One of
these is the fourth and last portion of the economic level, that concerned with economic
control.
Four Stages of
Economic Control
Economic control has passed through four stages in Western Civilization. Of these the
first and third were periods of "automatic control" in the sense that there was no
conscious effort at a centralized system of economic control, while the second and fourth
stages were periods of conscious efforts at control. These stages, with approximate dates,
were as follows: 1. Automatic control: manorial custom, 650-1150
2. Conscious control
a. municipal mercantilism, 1150-1450
b. state mercantilism, 1450- 1815
3. Automatic control: laissez-faire in the competitive market, 1815-1934
4. Conscious control: planning (both public and private), 1934
It should be evident that these five stages of economic control are closely associated with the stages previously mentioned in regard to kinds of weapons on the military level or the forms of government on the political level. The same five stages of economic control have a complex relationship to the six stages of economic organization already mentioned, the important stage of industrial capitalism overlapping the transition from state mercantilism to laissez-faire.
The Social Level of a Culture
When we turn to the social level of a culture, we can note a number of different
phenomena, such as changes in growth of population, changes in aggregates of this
population (such as rise or decline of cities), and changes in social classes. Most of these
things are far too complicated for us to attempt to treat them in any thorough fashion
here. We have already discussed the various stages in population growth, and shown that
Europe was, about 1900, generally passing from a stage of population growth with many
persons in the prime of life (Type B), to a stage of population stabilization with a larger
percentage of middle-aged persons (Type C). This shift from Type B to Type C
population in Europe can be placed most roughly at the time that the nineteenth century
gave rise to the twentieth century. At about the same time or shortly after, and closely
associated with the rise of monopoly capitalism (with its emphasis on automobiles,
telephones, radio, and such), was a shift in the aggregation of population. This shift was
from the period we might call "the rise of the city" (in which, year by year, a larger
portion of the population lived in cities) to what we might call "the rise of the suburbs" or
even "the period of megapolis" (in which the growth of residential concentration moved
outward from the city itself into the surrounding area).
Changes in Social Classes
The third aspect of the social level to which we might turn our attention is concerned
with changes in social classes. Each of the stages in the development of economic
organization was accompanied by the rise to prominence of a new social class. The
medieval system had provided the feudal nobility based on the manorial agrarian system.
The growth of commercial capitalism (in two stages) gave a new class of commercial
bourgeoisie. The growth of industrial capitalism gave rise to two new classes, the
industrial bourgeoisie and the industrial workers (or proletariat, as they were sometimes
called in Europe). The development of financial and monopoly capitalism provided a new
group of managerial technicians. The distinction between industrial bourgeoisie and
managers essentially rests on the fact that the former control industry and possess power
because they are owners, while managers control industry (and also government or labor
unions or public opinion) because they are skilled or trained in certain techniques. As we
shall see later, the shift from one to the other was associated with a separation of control
from ownership in economic life. The shift was also associated with what we might call a
change from a two-class society to a middle-class society. Under industrial capitalism
and the early part of financial capitalism, society began to develop into a polarized two class society in which an entrenched bourgeoisie stood opposed to a mass proletariat. It
was on the basis of this development that Karl Marx, about 1850, formed his ideas of an
inevitable class struggle in which the group of owners would become fewer and fewer
and richer and richer while the mass of workers became poorer and poorer but more and
more numerous, until finally the mass would rise up and take ownership and control from
the privileged minority. By 1900 social developments took a direction so different from that expected by Marx that his analysis became almost worthless, and his system had to
be imposed by force in a most backward industrial country (Russia) instead of occurring
inevitably in the most advanced industrial country as he had expected.
The Shift of Control
The social developments which made Marx's theories obsolete were the result of
technological and economic developments which Marx had not foreseen. The energy for
production was derived more and more from inanimate sources of power and less and
less from human labor. As a result, mass production required less labor. But mass
production required mass consumption so that the products of the new technology had to
be distributed to the working groups as well as to others so that rising standards of living
for the masses made the proletariat fewer and fewer and richer and richer. At the same
time, the need for managerial and white-collar workers of the middle levels of the
economic system raised the proletariat into the middle class in large numbers. The spread
of the corporate form of industrial enterprise allowed control to be separated from
ownership and allowed the latter to be dispersed over a much wider group, so that, in
effect, owners became more and more numerous and poorer and poorer. And, finally,
control shifted from owners to managers. The result was that the polarized two-class
society envisaged by Marx was, after 1900, increasingly replaced by a mass middle-class
society, with fewer poor and, if not fewer rich, at least a more numerous group of rich
who were relatively less rich than in an earlier period. This process of leveling up the
poor and leveling down the rich originated in economic forces but was speeded up and
extended by governmental policies in regard to taxation and social welfare, especially
after 1945.
The Religious and Intellectual
Stages of Culture
When we turn to the higher levels of culture, such as the religious and intellectual
aspects, we can discern a sequence of stages similar to those which have been found in
the more material levels. We shall make no extended examination of these at this time
except to say that the religious level has seen a shift from a basically secularist,
materialist, and anti-religious outlook in the late nineteenth century to a much more
spiritualist and religious point of view in the course of the twentieth century. At the same
time a very complex development on the intellectual level has shown a profound shift in
outlook from an optimistic and scientific point of view in the period 1860-1890 to a much
more pessimistic and irrationalist point of view in the period following 1890. This shift in
point of view, which began in a rather restricted group forming an intellectual vanguard
about 1890, a group which included such figures as Freud, Sorel, Bergson, and Proust,
spread downward to larger and larger sections of Western society in the course of the
new century as a result of the devastating experience of two world wars and the great
depression. The results of this process can be seen in the striking contrast between the
typical outlook of Europe in the nineteenth century and in the twentieth century as
outlined in the preceding chapter.
Chapter 5
European Economic Developments
Commercial Capitalism
Western Civilization is the richest and most powerful social organization ever made
by man. One reason for this success has been its economic organization. This, as we have
said, has passed through six successive stages, of which at least four are called
"capitalism." Three features are notable about this development as a whole.In the first place, each stage created the conditions which tended to bring about the next stage; therefore we could say, in a sense, that each stage committed suicide. The original economic organization of self-sufficient agrarian units (manors) was in a society organized so that its upper ranks—the lords, lay and ecclesiastical—found their desires for necessities so well met that they sought to exchange their surpluses of necessities for luxuries of remote origin. This gave rise to a trade in foreign luxuries (spices, fine textiles, fine metals) which was the first evidence of the stage of commercial capitalism. In this second stage, mercantile profits and widening markets created a demand for textiles and other goods which could be met only by application of power to production. This gave the third stage: industrial capitalism. The stage of industrial capitalism soon gave rise to such an insatiable demand for heavy fixed capital, like railroad lines, steel mills, shipyards, and so on, that these investments could not be financed from the profits and private fortunes of individual proprietors. New instruments for financing industry came into existence in the form of limited-liability corporations and investment banks. These were soon in a position to control the chief parts of the industrial system, since they provided capital to it. This gave rise to financial capitalism. The control of financial capitalism was used to integrate the industrial system into ever-larger units with interlinking financial controls. This made possible a reduction of competition with a resulting increase in profits. As a result, the industrial system soon found that it was again able to finance its own expansion from its own profits, and, with this achievement, financial controls were weakened, and the stage of monopoly capitalism arrived. In this fifth stage, great industrial units, working together either directly or through cartels and trade associations, were in a position to exploit the majority of the people. The result was a great economic crisis which soon developed into a struggle for control of the state—the minority hoping to use political power to defend their privileged position, the majority hoping to use the state to curtail the power and privileges of the minority. Both hoped to use the power of the state to find some solution to the economic aspects of the crisis. This dualist struggle dwindled with the rise of economic and social pluralism after 1945.
A Depression Accompanies
Transition to Various Stages
The second notable feature of this whole development is that the transition of each
stage to the next was associated with a period of depression or low economic activity.
This was because each stage, after an earlier progressive phase, became later, in its final
phase, an organization of vested interests more concerned with protecting its established
modes of action than in continuing progressive changes by the application of resources to
new, improved methods. This is inevitable in any social organization, but is peculiarly so
in regard to capitalism.
The Primary Goal of Capitalism
The third notable feature of the whole development is closely related to this special
nature of capitalism. Capitalism provides very powerful motivations for economic
activity because it associates economic motivations so closely with self-interest. But this
same feature, which is a source of strength in providing economic motivation through the
pursuit of profits, is also a source of weakness owing to the fact that so self-centered a
motivation contributes very readily to a loss of economic coordination. Each individual,
just because he is so powerfully motivated by self-interest, easily loses sight of the role
which his own activities play in the economic system as a whole, and tends to act as if his
activities were the whole, with inevitable injury to that whole. We could indicate this by
pointing out that capitalism, because it seeks profits as its primary goal, is never primarily
seeking to achieve prosperity, high production, high consumption, political power,
patriotic improvement, or moral uplift. Any of these may be achieved under capitalism,
and any (or all) of them may he sacrificed and lost under capitalism, depending on this
relationship to the primary goal of capitalist activity—the pursuit of profits. During the
nine-hundred-year history of capitalism, it has, at various times, contributed both to the
achievement and to the destruction of these other social goals.
Commercial Capitalism
The different stages of capitalism have sought to win profits by different kinds of
economic activities. The original stage, which we call commercial capitalism, sought
profits by moving goods from one place to another. In this effort, goods went from places
where they were less valuable to places where they were more valuable, while money,
doing the same thing, moved in the opposite direction. This valuation, which determined
the movement both of goods and of money and which made them move in opposite
directions, was measured by the relationship between these two things. Thus the value of
goods was expressed in money. and the value of money was expressed in goods. Goods
moved from low-price areas to high-price areas, and money moved from high-price areas
to low-price areas, because goods were more valuable where prices were high and money
was more valuable where prices were low.
Money and Goods
Are Different
Thus, clearly, money and goods are not the same thing but are, on the contrary,
exactly opposite things. Most confusion in economic thinking arises from failure to
recognize this fact. Goods are wealth which you have, while money is a claim on wealth
which you do not have. Thus goods are an asset; money is a debt. If goods are wealth;
money is not wealth, or negative wealth, or even anti-wealth. They always behave in
opposite ways, just as they usually move in opposite directions. If the value of one goes
up, the value of the other goes down, and in the same proportion. The value of goods,
expressed in money, is called "prices," while the value of money, expressed in goods, is
called "value."
The Rise of Commercial Capitalism
Commercial capitalism arose when merchants, carrying goods from one area to
another, were able to sell these goods at their destination for a price which covered
original cost, all costs of moving the goods, including the merchant's expenses, and a
profit. This development, which began as the movement of luxury goods, increased
wealth because it led to specialization of activities both in crafts and in agriculture, which
increased skills and output, and also brought into the market new commodities.
The Development of Mercantilism
Eventually, this stage of commercial capitalism became institutionalized into a
restrictive system, sometimes called "mercantilism," in which merchants sought to gain
profits, not from the movements of goods but from restricting the movements of goods.
Thus the pursuit of profits, which had earlier led to increased prosperity by increasing
trade and production, became a restriction on both trade and production, because profit
became an end in itself rather than an accessory mechanism in the economic system as a
whole. The way in which commercial capitalism (an expanding economic organization) was transformed into mercantilism (a restrictive economic organization) twice in our past history is very revealing not only of the nature of economic systems, and of men themselves, but also of the nature of economic crisis and what can be done about it.
Merchants Restrict Trade
to Increase Profits
Under commercial capitalism, merchants soon discovered that an increasing flow of
goods from a low-price area to a high-price area tended to raise prices in the former and
to lower prices in the latter. Every time a shipment of spices came into London, the price
of spices there began to fall, while the arrival of buyers and ships in Malacca gave prices
there an upward spurt. This trend toward equalization of price levels between two areas
because of the double, and reciprocal, movement of goods and money jeopardized profits
for merchants, however much it may have satisfied producers and consumers at either
end. It did this by reducing the price differential between the two areas and thus reducing
the margin within which the merchant could make his profit. It did not take shrewd
merchants long to realize that they could maintain this price differential, and thus their
profits, if they could restrict the flow of goods, so that an equal volume of money flowed
for a reduced volume of goods. In this way, shipments were decreased, costs were
reduced, but profits were maintained. Two things are notable in this mercantilist situation. In the first place, the merchant, by his restrictive practices, was, in essence, increasing his own satisfaction by reducing that of the producer at one end and of the consumer at the other end; he was able to do this because he was in the middle between them. ln the second place, so long as the merchant, in his home port, was concerned with goods, he was eager that the prices of goods should be, and remain, high.
Merchants Became Concerned
with Lending of Money
In the course of time, however, some merchants began to shift their attention from the
goods aspect of commercial interchange to the other, monetary, side of the exchange.
They began to accumulate the profits of these transactions, and became increasingly
concerned, not with the shipment and exchange of goods, but with the shipment and
exchange of moneys. In time they became concerned with the lending of money to
merchants to finance their ships and their activities, advancing money for both, at high
interest rates, secured by claims on ships or goods as collateral for repayment.
The New Bankers Were Eager
for High Interest Rates
In this process the attitudes and interests of these new bankers became totally opposed
to those of the merchants (although few of either recognized the situation). Where the
merchant had been eager for high prices and was increasingly eager for low interest rates,
the banker was eager for a high value of money (that is, low prices) and high interest
rates. Each was concerned to maintain or to increase the value of the half of the
transaction (goods for money) with which he was directly concerned, with relative
neglect of the transaction itself (which was of course the concern of the producers and the
consumers)
The Operations of Banking
and Finance Were Concealed So
They Appeared Difficult to Master
In sum, specialization of economic activities, by breaking up the economic process,
had made it possible for people to concentrate on one portion of the process and, by
maximizing that portion, to jeopardize the rest. The process was not only broken up into
producers, exchangers, and consumers but there were also two kinds of exchangers (one
concerned with goods, the other with money), with almost antithetical, short-term, aims.
The problems which inevitably arose could be solved and the system reformed only by
reference to the system as a whole. Unfortunately, however, three parts of the system,
concerned with the production, transfer, and consumption of goods, were concrete and
clearly visible so that almost anyone could grasp them simply by examining them, while
the operations of banking and finance were concealed, scattered, and abstract so that they
appeared to many to be difficult. To add to this, bankers themselves did everything they
could to make their activities more secret and more esoteric. Their activities were
reflected in mysterious marks in ledgers which were never opened to the curious outsider.
The Relationship Between Goods
and Money
Is Clear to Bankers
In the course of time the central fact of the developing economic system, the
relationship between goods and money, became clear, at least to bankers. This relationship, the price system, depended upon five things: the supply and the demand for
goods, the supply and the demand for money, and the speed of exchange between money
and goods. An increase in three of these (demand for goods, supply of money, speed of
circulation) would move the prices of goods up and the value of money down. This
inflation was objectionable to bankers, although desirable to producers and merchants.
On the other hand, a decrease in the same three items would be deflationary and would
please bankers, worry producers and merchants, and delight consumers (who obtained
more goods for less money). The other factors worked in the opposite direction, so that
an increase in them (supply of goods, demand for money, and slowness of circulation or
exchange) would be deflationary.
Inflationary and Deflationary Prices Have Been a Major
Force
in History for 600 Years
Such changes of prices, either inflationary or deflationary, have been major forces in
history for the last six centuries at least. Over that long period, their power to modify
men's lives and human history has been increasing. This has been reflected in two ways.
On the one hand, rises in prices have generally encouraged increased economic activity,
especially the production of goods, while, on the other hand, price changes have served to
redistribute wealth within the economic system. Inflation, especially a slow steady rise in
prices, encourages producers, because it means that they can commit themselves to costs
of production on one price level and then, later, offer the finished product for sale at a
somewhat higher price level. This situation encourages production because it gives
confidence of an almost certain profit margin. On the other hand, production is
discouraged in a period of falling prices, unless the producer is in the very unusual
situation where his costs are falling more rapidly than the prices of his product. Bankers Obsessed With Maintaining Value of Money The redistribution of wealth by changing prices is equally important but attracts much less attention. Rising prices benefit debtors and injure creditors, while falling prices do the opposite. A debtor called upon to pay a debt at a time when prices are higher than when he contracted the debt must yield up less goods and services than he obtained at the earlier date, on a lower price level when he borrowed the money. A creditor, such as a bank, which has lent money—equivalent to a certain quantity of goods and services—on one price level, gets back the same amount of money—but a smaller quantity of goods and services—when repayment comes at a higher price level, because the money repaid is then less valuable. This is why bankers, as creditors in money terms, have been obsessed with maintaining the value of money, although the reason they have traditionally given for this obsession—that "sound money" maintains "business confidence"—has been propagandist rather than accurate.[bulls#^t,they need to keep us the illusion that their 'money' has value.DC]
The Two Major Goals of Bankers
Hundreds of years ago, bankers began to specialize, with the richer and more
influential ones associated increasingly with foreign trade and foreign-exchange
transactions. Since these were richer and more cosmopolitan and increasingly concerned
with questions of political significance, such as stability and debasement of currencies,
war and peace, dynastic marriages, and worldwide trading monopolies, they became the
financiers and financial advisers of governments. Moreover, since their relationships with
governments were always in monetary terms and not real terms, and since they were
always obsessed with the stability of monetary exchanges between one country's money
and another, they used their power and influence to do two things: (1) to get all money
and debts expressed in terms of a strictly limited commodity—ultimately gold; and (2) to
get all monetary matters out of the control of governments and political authority, on the
ground that they would be handled better by private banking interests in terms of such a
stable value as gold.[yeah # 2 worked real pisser...not DC]These efforts ... [were accelerated] with the shift of commercial capitalism into mercantilism and the destruction of the whole pattern of social organization based on dynastic monarchy, professional mercenary armies, and mercantilism, in the series of wars which shook Europe from the middle of the seventeenth century to 1815. Commercial capitalism passed through two periods of expansion each of which deteriorated into a later phase of war, class struggles, and retrogression. The first stage, associated with the Mediterranean Sea, was dominated by the North Italians and Catalonians but ended in a phase of crisis after 1300, which was not finally ended until 1558. The second stage of commercial capitalism, which was associated with the Atlantic Ocean, was dominated by the West Iberians, the Netherlanders, and the English. It had begun to expand by 1440, was in full swing by 1600, but by the end of the seventeenth century had become entangled in the restrictive struggles of state mercantilism and the series of wars which ravaged Europe from 1667 to 1815.
Supremacy of Charter Companies
The commercial capitalism of the 1440-1815 period was marked by the supremacy of
the Chartered Companies, such as the Hudson's Bay, the Dutch and British East Indian
companies, the Virginia Company, and the Association of Merchant Adventurers
(Muscovy Company). England's greatest rivals in all these activities were defeated by
England's greater power, and, above all, its greater security derived from its insular
position.
Industrial Capitalism 1770-1850
Britain's victories over Louis XIV in the period 1667-1715 and over the French
Revolutionary governments and Napoleon in 1792-1815 had many causes, such as its
insular position, its ability to retain control of the sea, its ability to present itself to the
world as the defender of the freedoms and rights of small nations and of diverse social
and religious groups. Among these numerous causes, there were a financial one and an
economic one. Financially, England had discovered the secret of credit. Economically,
England had embarked on the Industrial Revolution.
The Founding of the Bank
of England Is One of the
Great Dates in World History
Credit had been known to the Italians and Netherlanders long before it became one of
the instruments of English world supremacy. Nevertheless, the founding of the Bank of
England by William Paterson and his friends in 1694 is one of the great dates in world
history. For generations men had sought to avoid the one drawback of gold, its heaviness,
by using pieces of paper to represent specific pieces of gold. Today we call such pieces of
paper gold certificates. Such a certificate entitles its bearer to exchange it for its piece of
gold on demand, but in view of the convenience of paper, only a small fraction of
certificate holders ever did make such demands. It early became clear that gold need be
held on hand only to the amount needed to cover the fraction of certificates likely to be
presented for payment; accordingly, the rest of the gold could be used for business
purposes, or, what amounts to the same thing, a volume of certificates could be issued
greater than the volume of gold reserved for payment of demands against them. Such an
excess volume of paper claims against reserves we now call bank notes.
Bankers Create Money
Out of Nothing
In effect, this creation of paper claims greater than the reserves available means that
bankers were creating money out of nothing. The same thing could be done in another
way, not by note-issuing banks but by deposit banks. Deposit bankers discovered that
orders and checks drawn against deposits by depositors and given to third persons were
often not cashed by the latter but were deposited to their own accounts. Thus there were
no actual movements of funds, and payments were made simply by bookkeeping
transactions on the accounts. Accordingly, it was necessary for the banker to keep on
hand in actual money (gold, certificates, and notes) no more than the fraction of deposits
likely to be drawn upon and cashed; the rest could be used for loans, and if these loans
were made by creating a deposit for the borrower, who in turn would draw checks upon it
rather than withdraw it in money, such "created deposits" or loans could also be covered
adequately by retaining reserves to only a fraction of their value. Such created deposits
also were a creation of money out of nothing, although bankers usually refused to express
their actions, either note issuing or deposit lending, in these terms. William Paterson,
however, on obtaining the charter of the Bank of England in 1694, to use the moneys he
had won in privateering, said, "The Bank hath benefit of interest on all moneys which it
creates out of nothing." This was repeated by Sir Edward Holden, founder of the Midland
Bank, on December 18, 1907, and is, of course, generally admitted today.
The Creation of Credit
This organizational structure for creating means of payment out of nothing, which we
call credit, was not invented by England but was developed by her to become one of her
chief weapons in the victory over Napoleon in 1815. The emperor, as the last great
mercantilist, could not see money in any but concrete terms, and was convinced that his
efforts to fight wars on the basis of "sound money," by avoiding the creation of credit,
would ultimately win him a victory by bankrupting England. He was wrong, although the
lesson has had to be relearned by modern financiers in the twentieth century.
Britain's Victory Over Napoleon
Britain's victory over Napoleon was also helped by two economic innovations: the
Agricultural Revolution, which was well established there in 1720, and the Industrial
Revolution, which was equally well established there by 1776, when Watt patented his
steam engine. The Industrial Revolution, like the Credit Revolution, has been much
misunderstood, both at the time and since. This is unfortunate, as each of these has great
significance, both to advanced and to underdeveloped countries, in the twentieth century.
The Industrial Revolution was accompanied by a number of incidental features, such as
growth of cities through the factory system, the rapid growth of an unskilled labor supply
(the proletariat), the reduction of labor to the status of a commodity in the competitive
market, and the shifting of ownership of tools and equipment from laborers to a new
social class of entrepreneurs. None of these constituted the essential feature of
industrialism, which was, in fact, the application of nonliving power to the productive
process. This application, symbolized in the steam engine and the water wheel, in the
long run served to reduce or eliminate the relative significance of unskilled labor and the
use of human or animal energy in the productive process (automation) and to disperse the
productive process from cities, but did so, throughout, by intensifying the vital feature of
the system, the use of energy from sources other than living bodies.
The Rise of Large Industrial
Enterprises in Britain
In this continuing process, Britain's early achievement of industrialism gave it such
great profits that these, combined with the profits derived earlier from commercial
capitalism and the simultaneous profits derived from the unearned rise in land values
from new cities and mines, made its early industrial enterprises largely self-financed or at
least locally financed. They were organized in proprietorships and partnerships, had
contact with local deposit banks for short-term current loans, but had little to do with
international bankers, investment banks, central governments, or corporate forms of
business organization. This early stage of industrial capitalism, which lasted in England from about 1770 to about 1850, was shared to some extent with Belgium and even France, but took quite different forms in the United States, Germany, and Italy, and almost totally different forms in Russia or Asia. The chief reason for these differences was the need for raising funds (capital) to pay for the rearrangement of the factors of production (and, labor, materials, skill, equipment, and so on) which industrialism required. Northwestern Europe, and above all England, had large savings for such new enterprises. Central Europe and North America had much less, while eastern and southern Europe had very little in private hands.
The Role of the
International Investment Banker
The more difficulty an area had in mobilizing capital for industrialization, the more
significant was the role of investment bankers and of governments in the industrial
process. In fact, the early forms of industrialism based on textiles, iron, coal, and steam
spread so slowly from England to Europe that England was itself entering upon the next
stage, financial capitalism, by the time Germany and the United States (about 1850) were
just beginning to industrialize. This new stage of financial capitalism, which continued to
dominate England, France, and the United States as late as 1930, was made necessary by
the great mobilizations of capital needed for railroad building after 1830. The capital
needed for railroads, with their enormous expenditures on track and equipment, could not
be raised from single proprietorships or partnerships or locally, but, instead, required a
new form of enterprise—the limited-liability stock corporation—and a new source of
funds—the international investment banker who had, until then, concentrated his
attention almost entirely on international flotations of government bonds. The demands of
railroads for equipment carried this same development, almost at once, into steel
manufacturing and coal mining.Financial Capitalism, 1850 - 1931
This third stage of capitalism is of such overwhelming significance in the history of the twentieth century, and its ramifications and influences have been so subterranean and even occult, that we may be excused if we devote considerate attention to its organization and methods. Essentially what it did was to take the old disorganized and localized methods of handling money and credit and organize them into an integrated system, on an international basis, which worked with incredible and well-oiled facility for many decades. The center of that system was in London, with major offshoots in New York and Paris, and it has left, as its greatest achievement, an integrated banking system and a heavily capitalized—if now largely obsolescent—framework of heavy industry, reflected in railroads, steel mills, coal mines, and electrical utilities.
This system had its center in London for four chief reasons. First was the great volume of savings in England, resting on England's early successes in commercial and industrial capitalism. Second was England's oligarchic social structure (especially as reflected in its concentrated landownership and limited access to educational opportunities) which provided a very inequitable distribution of incomes with large surpluses coming to the control of a small, energetic upper class. Third was the fact that this upper class was aristocratic but not noble, and thus, based on traditions rather than birth, was quite willing to recruit both money and ability from lower levels of society and even from outside the country, welcoming American heiresses and central-European Jews to its ranks, almost as willingly as it welcomed monied, able, and conformist recruits from the lower classes of Englishmen, whose disabilities from educational deprivation, provincialism, and Nonconformist (that is non-Anglican) religious background generally excluded them from the privileged aristocracy. Fourth (and by no means last) in significance was the skill in financial manipulation, especially on the international scene, which the small group of merchant bankers of London had acquired in the period of commercial and industrial capitalism and which lay ready for use when the need for financial capitalist innovation became urgent.
The Dynasties of
International Bankers
The merchant bankers of London had already at hand in 1810-1850 the Stock
Exchange, the Bank of England, and the London money market when the needs of
advancing industrialism called all of these into the industrial world which they had
hitherto ignored. In time they brought into their financial network the provincial banking
centers, organized as commercial banks and savings banks, as well as insurance
companies, to form all of these into a single financial system on an international scale
which manipulated the quantity and flow of money so that they were able to influence, if
not control, governments on one side and industries on the other. The men who did this,
looking backward toward the period of dynastic monarchy in which they had their own
roots, aspired to establish dynasties of international bankers and were at least as
successful at this as were many of the dynastic political rulers. The greatest of these
dynasties, of course, were the descendants of Meyer Amschel Rothschild (1743-1812) of
Frankfort, whose male descendants, for at least two generations, generally married first
cousins or even nieces. Rothschild's five sons, established at branches in Vienna, London,
Naples, and Paris, as well as Frankfort, cooperated together in ways which other
international banking dynasties copied but rarely excelled.
The Financial Activities
of International Bankers
In concentrating, as we must, on the financial or economic activities of international
bankers, we must not totally ignore their other attributes. They were, especially in later
generations, cosmopolitan rather than nationalistic.... They were usually highly civilized,
cultured gentlemen, patrons of education and of the arts, so that today colleges,
professorships, opera companies, symphonies, libraries, and museum collections still
reflect their munificence. For these purposes they set a pattern of endowed foundations
which still surround us today.
The Key International
Banking Families
The names of some of these banking families are familiar to all of us and should he
more so. They include Raring, Lazard, Erlanger, Warburg, Schroder, Seligman, the
Speyers, Mirabaud, Mallet, Fould, and above all Rothschild and Morgan. Even after these
banking families became fully involved in domestic industry by the emergence of
financial capitalism, they remained different from ordinary bankers in distinctive ways:
(1) they were cosmopolitan and international; (2) they were close to governments and
were particularly concerned with questions of government debts, including foreign
government debts, even in areas which seemed, at first glance, poor risks, like Egypt,
Persia, Ottoman Turkey, Imperial China, and Latin America; (3) their interests were
almost exclusively in bonds and very rarely in goods, since they admired "liquidity" and
regarded commitments in commodities or even real estate as the first step toward
bankruptcy; (4) they were, accordingly, fanatical devotees of deflation (which they called "sound" money from its close associations with high interest rates and a high value of
money) and of the gold standard, which, in their eyes, symbolized and ensured these
values; and (5) they were almost equally devoted to secrecy and the secret use of
financial influence in political life. These bankers came to be called "international
bankers" and, more particularly, were known as "merchant bankers" in England, "private
bankers" in France, and "investment bankers" in the United States. In all countries they
carried on various kinds of banking and exchange activities, but everywhere they were
sharply distinguishable from other, more obvious, kinds of banks, such as savings banks
or commercial banks.
The International Banking
Fraternity Operates
As
Secretive Private Firms
One of their less obvious characteristics was that they remained as private
unincorporated firms, usually partnerships, until relatively recently, offering no shares, no
reports, and usually no advertising to the public. This risky status, which deprived them
of limited liability, was retained, in most cases, until modern inheritance taxes made it
essential to surround such family wealth with the immortality of corporate status for tax avoidance purposes. This persistence as private firms continued because it ensured the
maximum of anonymity and secrecy to persons of tremendous public power who dreaded
public knowledge of their activities as an evil almost as great as inflation. As a
consequence, ordinary people had no way of knowing the wealth or areas of operation of
such firms, and often were somewhat hazy as to their membership. Thus, people of
considerable political knowledge might not associate the names Walter Burns, Clinton
Dawkins, Edward Grenfell, Willard Straight, Thomas Lamont, Dwight Morrow, Nelson
Perkins, Russell Leffingwell, Elihu Root, John W. Davis, John Foster Dulles, and S.
Parker Gilbert with the name "Morgan," yet all these and many others were parts of the
system of influence which centered on the J. P. Morgan office at :3 Wall Street. This
firm, like others of the international banking fraternity, constantly operated through
corporations and governments, yet remained itself an obscure private partnership until
international financial capitalism was passing from its deathbed to the grave. J. P.
Morgan and Company, originally founded in London as George Peabody and Company
in 1838, was not incorporated until March 21, 1940, and went out of existence as a
separate entity on April 24, 1959, when it merged with its most important commercial
bank subsidiary, the Guaranty Trust Company. The London affiliate, Morgan Grenfell,
was incorporated in , and still exists.
International Bankers Felt
Politicians Could Not Be
Trusted
With Control
of the Monetary System
The influence of financial capitalism and of the international bankers who created it
was exercised both on business and on governments, but could have done neither if it had
not been able to persuade both these to accept two "axioms" of its own ideology. Both of
these were based on the assumption that politicians were too weak and too subject to
temporary popular pressures to be trusted with control of the money system; accordingly,
the sanctity of all values and the soundness of money must be protected in two ways: by
basing the value of money on gold and by allowing bankers to control the supply of
money. To do this it was necessary to conceal, or even to mislead, both governments and
people about the nature of money and its methods of operation.[So then the question becomes,if we now know the truth about this pond scum posing as human beings,why are they still in control of the worthless paper they are passing off as money??? DC]
The Gold Standard
For example, bankers called the process of establishing a monetary system on gold
"stabilization," and implied that this covered, as a single consequence, stabilization of
exchanges and stabilization of prices. It really achieved only stabilization of exchanges,
while its influence on prices were quite independent and incidental, and might be unstabilizing (from its usual tendency to force prices downward by limiting the supply of
money). As a consequence, many persons, including financiers and even economists,
were astonished to discover, in the twentieth century, that the gold standard gave stable
exchanges and unstable prices. It had, however, already contributed to a similar, but less
extreme, situation in much of the nineteenth century. Exchanges were stabilized on the gold standard because by law, in various countries, the monetary unit was made equal to a fixed quantity of gold, and the two were made exchangeable at that legal ratio. In the period before 1914, currency was stabilized in certain countries as follows:
In Britain: 77s. 10 ½ d. equaled a standard ounce (11/12 pure gold).
In the United States: $20.67 equaled a fine ounce (12/12 pure gold).
In France: 3,447.74 francs equaled a fine kilogram of gold.
In Germany: 2,790 marks equaled a fine kilogram of gold.
These relationships were established by the legal requirement that a person who brought gold, gold coins, or certificates to the public treasury (or other designated places) could convert any one of these into either of the others in unlimited amounts for no cost. As a result, on a full gold standard, gold had a unique position: it was, at the same time, in the sphere of money and in the sphere of wealth. In the sphere of money, the value of all other kinds of money was expressed in terms of gold: and, in the sphere of real wealth, the values of all other kinds of goods were expressed in terms of gold as money. If we regard the relationships between money and goods as a seesaw in which each of these was at opposite ends, so that the value of one rose just as much as the value of the other declined, then we must see gold as the fulcrum of the seesaw on which this relationship balances, but which does not itself go up or down.
It Is Impossible to Understand
World History Without an
Understanding of Money
Since it is quite impossible to understand the history of the twentieth century without
some understanding of the role played by money in domestic affairs and in foreign
affairs, as well as the role played by bankers in economic life and in political life, we
must take at least a glance at each of these four subjects.
Central Banks Were
Private Institutions
Owned by Shareholders
In each country the supply of money took the form of an inverted pyramid or cone
balanced on its point. In the point was a supply of gold and its equivalent certificates; on
the intermediate levels was a much larger supply of notes; and at the top, with an open
and expandable upper surface, was an even greater supply of deposits. Each level used
the levels below it as its reserves, and, since these lower levels had smaller quantities of
money, they were "sounder." A holder of claims on the middle or upper level could
increase his confidence in his claims on wealth by reducing them to a lower level,
although, of course, if everyone, or any considerable number of persons, tried to do this
at the same time the volume of reserves would be totally inadequate. Notes were issued
by "banks of emission" or "banks of issue," and were secured by reserves of gold or
certificates held in their own coffers or in some central reserve. The fraction of such a
note issue held in reserve depended upon custom, banking regulations (including the
terms of a bank's charter), or statute law. There were formerly many banks of issue, but
this function is now generally restricted to a few or even to a single "central bank" in each
country. Such banks, even central banks, were private institutions, owned by shareholders
who profited by their operations. In the 1914-1939 period, in the United States, Federal
Reserve Notes were covered by gold certificates to 40 percent of their value, but this was
reduced to 25 percent in 1945. The Bank of England, by an Act of 1928, had its notes
uncovered up to [250 million, and covered by gold for 100 percent value over that
amount. The Bank of France, in the same year, set its note cover at 35 percent. These
provisions could always be set aside or changed in an emergency, such as war.
Determining the Volume of
Money in the Community
Deposits on the upper level of the pyramid were called by this name, with typical
bankers' ambiguity, in spite of the fact that they consisted of two utterly different kinds of
relationships: (1) "lodged deposits," which were real claims left by a depositor in a bank,
on which the depositor might receive interest, since such deposits were debts owed by the
bank to the depositor; and (2) "created deposits," which were claims created by the bank
out of nothing as loans from the bank to "depositors" who had to pay interest on them,
since these represented debt from them to the bank. In both cases, of course, checks could
be drawn against such deposits to make payments to third parties, which is why both
were called by the same name. Both form part of the money supply. Lodged deposits as a
form of savings are deflationary, while created deposits, being an addition to the money
supply, are inflationary. The volume of the latter depends on a number of factors of
which the chief are the rate of interest and the demand for such credit. These two play a
very significant role in determining the volume of money in the community, since a large
portion of that volume, in an advanced economic community, is made up of checks
drawn against deposits. The volume of deposits banks can create, like the amount of
notes they can issue, depends upon the volume of reserves available to pay whatever
fraction of checks are cashed rather than deposited. These matters may be regulated by
laws, by bankers' rules, or simply by local customs. In the United States deposits were
traditionally limited to ten times reserves of notes and gold. In Britain it was usually
nearer twenty times such reserves. In all countries the demand for and volume of such
credit was larger in time of a boom and less in time of a depression. This to a
considerable extent explains the inflationary aspect of a depression, the combination
helping to form the so-called "business cycle."
Central Banks Surrounded
by Invisible Private
Investment Banking Firms
In the course of the nineteenth century, with the full establishment of the gold standard
and of the modern banking system, there grew up around the fluctuating inverted pyramid
of the money supply a plethora of financial establishments which came to assume the
configurations of a solar system; that is, of a central bank surrounded by satellite
financial institutions. In most countries the central bank was surrounded closely by the
almost invisible private investment banking firms. These, like the planet Mercury, could
hardly be seen in the dazzle emitted by the central bank which they, in fact, often
dominated. Yet a close observer could hardly fail to notice the close private associations
between these private, international bankers and the central bank itself. In France, for
example, in 1936 when the Bank of France was reformed, its Board of Regents
(directors) was still dominated by the names of the families who had originally set it up in
1800; to these had been added a few more recent names, such as Rothschild (added in
1819); in some cases the name might not be readily recognized because it was that of a
son-in-law rather than that of a son. Otherwise, in 1914, the names, frequently those of
Protestants of Swiss origin (who arrived in the eighteenth century) or of Jews of German
origin (who arrived in the nineteenth century), had been much the same for more than a
century.
The Bank of England and Its
Private Banking Firms
In England a somewhat similar situation existed, so that even in the middle of the
twentieth century the Members of the Court of the Bank of England were chiefly
associates of the various old "merchant banking" firms such as Baring Brothers, Morgan
Grenfell, Lazard Brothers, and others.
Commercial Banks Operate
Outside Central Banks and
Private Banking Firms
In a secondary position, outside the central core, are the commercial banks, called in
England the "joint-stock banks," and on the Continent frequently known as "deposit
banks." These include such famous names as Midland Bank, Lloyd's Bank, Barclays
Bank in England, the National City Bank in the United States, the Credit Lyonnais in
France, and the Darmstädter Bank in Germany.
Savings Banks, Insurance
Funds and Trust Companies
Operate on the Outside Ring
Outside this secondary ring is a third, more peripheral, assemblage of institutions that
have little financial power but do have the very significant function of mobilizing funds
from the public. This includes a wide variety of savings banks, insurance firms, and trust
companies. Naturally, these arrangements vary greatly from place to place, especially as the division of banking functions and powers are not the same in all countries. In France and England the private bankers exercised their powers through the central bank and had much more influence on the government and on foreign policy and much less influence on industry, because in these two countries, unlike Germany, Italy, the United States, or Russia, private savings were sufficient to allow much of industry to finance itself without recourse either to bankers or government. In the United States much industry was financed by investment bankers directly, and the power of these both on industry and on government was very great, while the central bank (the New York Federal Reserve Bank) was established late (1913) and became powerful much later (after financial capitalism was passing from the scene). In Germany industry was financed and controlled by the discount banks, while the central bank was of little power or significance before 1914. In Russia the role of the government was dominant in much of economic life, while in Italy the situation was backward and complicated.
The Supply of Money
We have said that two of the five factors which determined the value of money (and
thus the price level of goods) are the supply and the demand for money. The supply of
money in a single country was subject to no centralized, responsible control in most
countries over recent centuries. Instead, there were a variety of controls of which some
could be influenced by bankers, some could be influenced by the government, and some
could hardly be influenced by either. Thus, the various parts of the pyramid of money
were but loosely related to each other. Moreover, much of this looseness arose from the
fact that the controls were compulsive in a deflationary direction and were only
permissive in an inflationary direction. This last point can be seen in the fact that the supply of gold could be decreased but could hardly be increased. If an ounce of gold was added to the point of the pyramid in a system where law and custom allowed To percent reserves on each level, it could permit an increase of deposits equivalent to $2067 on the uppermost level. If such an ounce of gold were withdrawn from a fully expanded pyramid of money, this would compel a reduction of deposits by at least this amount, probably by a refusal to renew loans.
The Money Power Persuaded
Governments to Establish
a Deflationary Monetary Unit
Throughout modern history the influence of the gold standard has been deflationary,
because the natural output of gold each year, except in extraordinary times, has not kept
pace with the increase in output of goods. Only new supplies of gold, or the suspension of
the gold standard in wartime, or the development of new kinds of money (like notes and
checks) which economize the use of gold, have saved our civilization from steady price
deflation over the last couple of centuries. As it was, we had two long periods of such
deflation from 1818 to 1850 and from 1872 to about 1897. The three surrounding periods
of inflation (1790-1817, 1850-1872, 1897-1921) were caused by (1) the wars of the
French Revolution and Napoleon when most countries were not on gold; (2) the new gold
strikes of California and Alaska in 1849-1850, followed by a series of wars, which
included the Crimean War of 1854-1856, the Austrian-French War of 1859, the American
Civil War of 1861-1865, the Austro-Prussian and Franco-Prussian wars of 1866 and
1870, and even the Russo-Turkish War of 1877; and (3) the Klondike and Transvaal gold
strikes of the late 1890's, supplemented by the new cyanide method of refining gold
(about 1897) and the series of wars from the Spanish-American War of 1898-1899, the
Boer War of 1899-1902, and the Russo-Japanese War of 1904-1905, to the almost
uninterrupted series of wars in the decade 1911-1921. In each case, the three great
periods of war ended with an extreme deflationary crisis (1819, 1873, 1921) as the
influential Money Power persuaded governments to reestablish a deflationary monetary
unit with a high gold content.
Money Power Is More Concerned
With Money Than Goods
The obsession of the Money Power with deflation was partly a result of their concern
with money rather than with goods, but was also founded on other factors, one of which
was paradoxical. The paradox arose from the fact that the basic economic conditions of
the nineteenth century were deflationary, with a money system based on gold and an
industrial system pouring out increasing supplies of goods, but in spite of falling prices
(with its increasing value of money) the interest rate tended to fall rather than to rise. This
occurred because the relative limiting of the supply of money in business was not
reflected in the world of finance where excess profits of finance made excess funds
available for lending. Moreover, the old traditions of merchant banking continued to
prevail in financial capitalism even to its end in 1931. It continued to emphasize bonds
rather than equity securities (stocks), to favor government issues rather than private
offerings, and to look to foreign rather than to domestic investments. Until 1825,
government bonds made up almost the whole of securities on the London Stock
Exchange. In 1843, such bonds, usually foreign, were 80 percent of the securities
registered, and in 1875 they were still 68 percent. The funds available for such loans were
so great that there were, in the nineteenth century, sometimes riots by subscribers seeking
opportunities to buy security flotations; and offerings from many remote places and
obscure activities commanded a ready sale. The excess of savings led to a fall in the price
necessary to hire money, so that the interest rate on British government bonds fell from
4.42 percent in 1820 to 3.11 in 1850 to 2.76 in 1900. This tended to drive savings into
foreign fields where, on the whole, they continued to seek government issues and fixed interest securities. All this served to strengthen the merchant bankers' obsession both with
government influence and with deflation (which would increase value of money and
interest rates).
Banker Policies Lead
to Inflation and Deflation
Another paradox of banking practice arose from the fact that bankers, who loved
deflation, often acted in an inflationary fashion from their eagerness to lend money at
interest. Since they make money out of loans, they are eager to increase the amounts of
bank credit on loan. But this is inflationary. The conflict between the deflationary ideas
and inflationary practices of bankers had profound repercussions on business. The
bankers made loans to business so that the volume of money increased faster than the
increase in goods. The result was inflation. When this became clearly noticeable, the
bankers would flee to notes or specie by curtailing credit and raising discount rates. This
was beneficial to bankers in the short run (since it allowed them to foreclose on collateral
held for loans), but it could be disastrous to them in the long run (by forcing the value of
the collateral below the amount of the loans it secured). But such bankers' deflation was
destructive to business and industry in the short run as well as the long run. [yeah and in 2020 a have a new word for banker folly...toxic...as in their investments DC]
Changing the Quality of Money
The resulting fluctuation in the supply of money, chiefly deposits, was a prominent
aspect of the "business cycle." The quantity of money could be changed by changing
reserve requirements or discount (interest) rates. In the United States, for example, an
upper limit has been set on deposits by requiring Federal Reserve member banks to keep
a certain percentage of their deposits as reserves with the local Federal Reserve Bank.
The percentage (usually from 7 to 26 percent) varies with the locality and the decisions of
the Board of Governors of the Federal Reserve System.[I am 1000% for the government creating the 'money',enough of this fraud.DC]
Central Banks Vary
Money in Circulation
Central banks can usually vary the amount of money in circulation by "open market
operations" or by influencing the discount rates of lesser banks. In open market
operations, a central bank buys or sells government bonds in the open market. If it buys,
it releases money into the economic system; if it sells it reduces the amount of money in
the community. The change is greater than the price paid for the securities. For example,
if the Federal Reserve Bank buys government securities in the open market, it pays for
these by check which is soon deposited in a bank. It thus increases this bank's reserves
with the Federal Reserve Bank. Since banks are permitted to issue loans for several times
the value of their reserves with the Federal Reserve Bank, such a transaction permits
them to issue loans for a much larger sum.
Central Banks Raise and
Lower Interest Rates
Central banks can also change the quantity of money by influencing the credit policies
of other banks. This can be done by various methods, such as changing the re-discount
rate or changing reserve requirements. By changing the re-discount rate we mean the
interest rate which central banks charge lesser banks for loans backed by commercial
paper or other security which these lesser banks have taken in return for loans. By raising
the re-discount rate the central bank forces the lesser bank to raise its discount rate in
order to operate at a profit; such a raise in interest rates tends to reduce the demand for
credit and thus the amount of deposits (money). Lowering the re-discount rate permits an
opposite result.
Central Banks Force Local
Banks to Decrease Credit
Changing the reserve requirements as a method by which central banks can influence
the credit policies of other banks is possible only in those places (like the United States)
where there is a statutory limit on reserves. Increasing reserve requirements curtails the
ability of lesser banks to grant credit, while decreasing it expands that ability. It is to be noted that the control of the central bank over the credit policies of local banks are permissive in one direction and compulsive in the other. They can compel these local banks to curtail credit and can only permit them to increase credit. This means that they have control powers against inflation and not deflation—a reflection of the old banking idea that inflation was bad and deflation was good.
The Powers of
Government Over Money
The powers of governments over the quantity of money are of various kinds, and
include (a) control over a central bank, (b) control over public taxation, and (c) control
over public spending. The control of governments over central banks varies greatly from
one country to another, but on the whole has been increasing. Since most central banks
have been (technically) private institutions, this control is frequently based on custom
rather than on law. In any case, the control over the supply of money which governments
have through centra! banks is exercised by the regular banking procedures we have
discussed. The powers of the government over the quantity of money in the community
exercised through taxation and public spending are largely independent of banking
control. Taxation tends to reduce the amount of money in a community and is usually a
deflationary force; government spending tends to increase the amount of money in a
community and is usually an inflationary force. The total effects of a government's policy
will depend on which item is greater. An unbalanced budget will be inflationary; a budget
with a surplus will be deflationary.[sorry professor but A. is an out and out lie,the government has no control over the Central Bank here in America,as we have 2008 as evidence as well as the current charade underway now in 2020.DC]A government can also change the amount of money in a community by other, more drastic, methods. By changing the gold content of the monetary unit they can change the amount of money in the community by a much greater amount. If, for example, the gold content of the dollar is cut in half, the amount of gold certificates will be able to be doubled, and the amount of notes and deposits reared on this basis will be increased many fold, depending on the customs of the community in respect to reserve requirements. Moreover, if a government goes off the gold standard completely—that is, refuses to exchange certificates and notes for specie—the amount of notes and deposits can be increased indefinitely because these are no longer limited by limited amounts of gold reserves.
The Money Power—Controlled by International Investment Bankers—
Dominates Business and Government
In the various actions which increase or decrease the supply of money, governments,
bankers, and industrialists have not always seen eye to eye. On the whole, in the period up to 1931, bankers, especially the Money Power controlled by the international investment bankers, were able to dominate both business and government.
They could dominate business, especially in activities and in areas where industry could not finance its own needs for capital, because investment bankers had the ability to supply or refuse to supply such capital.
Thus, Rothschild interests came to dominate many of the railroads of Europe, while Morgan dominated at least 26,000 miles of American railroads. Such bankers went further than this. In return for flotations of securities of industry, they took seats on the boards of directors of industrial firms, as they had already done on commercial banks, savings banks, insurance firms, and finance companies.
From these lesser institutions they funneled capital to enterprises which yielded control and away from those who resisted. These firms were controlled through interlocking directorships, holding companies, and lesser banks.
They engineered amalgamations and generally reduced competition, until by the early twentieth century many activities were so monopolized that they could raise their noncompetitive prices above costs to obtain sufficient profits to become self-financing and were thus able to eliminate the control of bankers.
But before that stage was reached a relatively small number of bankers were in positions of immense influence in European and American economic life. As early as 1909, Walter Rathenau, who was in a position to know (since he had inherited from his father control of the German General Electric Company and held scores of directorships himself), said, "Three hundred men, all of whom know one another, direct the economic destiny of Europe and choose their successors from among themselves."
The Power of Investment
Bankers Over Governments
The power of investment bankers over governments rests on a number of factors, of
which the most significant, perhaps, is the need of governments to issue short-term
treasury bills as well as long-term government bonds. Just as businessmen go to
commercial banks for current capital advances to smooth over the discrepancies between
their irregular and intermittent incomes and their periodic and persistent outgoes (such as
monthly rents, annual mortgage payments, and weekly wages), so a government has to go
to merchant bankers (or institutions controlled by them) to tide over the shallow places
caused by irregular tax receipts. As experts in government bonds, the international
bankers not only handled the necessary advances but provided advice to government
officials and, on many occasions, placed their own members in official posts for varied
periods to deal with special problems. This is so widely accepted even today that in 1961
a Republican investment banker became Secretary of the Treasury in a Democratic
Administration in Washington without significant comment from any direction.
The Money Power Reigns
Supreme and Unquestioned
Naturally, the influence of bankers over governments during the age of financial
capitalism (roughly 1850-1931) was not something about which anyone talked freely, but
it has been admitted frequently enough by those on the inside, especially in England. In 1852 Gladstone, chancellor of the Exchequer, declared, "The hinge of the whole situation was this: the government itself was not to be a substantive power in matters of Finance, but was to leave the Money Power supreme and unquestioned."
On September 26, 1921, The Financial Times wrote, "Half a dozen men at the top of the Big Five Banks could upset the whole fabric of government finance by refraining from renewing Treasury Bills." In 1924 Sir Drummond Fraser, vice-president of the Institute of Bankers, stated, "The Governor of the Bank of England must be the autocrat who dictates the terms upon which alone the Government can obtain borrowed money."
Montagu Norman and J. P. Morgan
Dominate the Financial World
In addition to their power over government based on government financing and
personal influence, bankers could steer governments in ways they wished them to go by
other pressures. Since most government officials felt ignorant of finance, they sought
advice from bankers whom they considered to be experts in the field. The history of the
last century shows, as we shall see later, that the advice given to governments by bankers,
like the advice they gave to industrialists, was consistently good for bankers, but was
often disastrous for governments, businessmen, and the people generally. Such advice
could be enforced if necessary by manipulation of exchanges, gold flows, discount rates,
and even levels of business activity. Thus Morgan dominated Cleveland's second
administration by gold withdrawals, and in 1936-1938 French foreign exchange
manipulators paralyzed the Popular Front governments. As we shall see, the powers of
these international bankers reached their peak in the last decade of their supremacy,
1919-1931, when Montagu Norman and J. P. Morgan dominated not only the financial
world but international relations and other matters as well. On November I l, 1927, the
Wall Street Journal called Mr. Norman "the currency dictator of Europe." This was
admitted by Mr. Norman himself before the Court of the Bank on March Zl, 1930, and
before the Macmillan Committee of the House of Commons five days later. On one
occasion, just before international financial capitalism ran, at full speed, on the rocks
which sank it, Mr. Norman is reported to have said, "I hold the hegemony of the world."
At the time, some Englishmen spoke of "the second Norman Conquest of England" in
reference to the fact that Norman's brother was head of the British Broadcasting
Corporation. It might be added that Governor Norman rarely acted in major world
problems without consulting with J. P. Morgan's representatives, and as a consequence he
was one of the most widely traveled men of his day.
The Development of
Monopoly Capitalism
This conflict of interests between bankers and industrialists has resulted in most
European countries in the subordination of the former either to the latter or to the government (after 1931). This subordination was accomplished by the adoption of
"unorthodox financial policies"—that is, financial policies not in accordance with the
short-run interests of bankers. This shift by which bankers were made subordinate
reflected a fundamental development in modern economic history—a development which
can be described as the growth from financial capitalism to monopoly capitalism. This
took place in Germany earlier than in any other country and was well under way by 1926.
It came in Britain only after 1931 and in Italy only in 1934. It did not occur in France to a
comparable extent at all, and this explains the economic weakness of France in 1938-
1940 to a considerable degree.
International Financial Practices
The financial principals which apply to the relationships between different countries
are an expansion of those which apply within a single country. When goods are
exchanged between countries, they must be paid for by commodities or gold. They
cannot be paid for by the notes, certificates, and checks of the purchaser's country, since
these are of value only in the country of issue. To avoid shipment of gold with every
purchase, bills of exchange are used. These are claims against a person in another country
which are sold to a person in the same country. The latter will buy such a claim if he
wants to satisfy a claim against himself held by a person in the other country. He can
satisfy such a claim by sending to his creditor in the other country the claim which he has
bought against another person in that other country, and let his creditor use that claim to
satisfy his own claim. Thus, instead of importers in one country sending money to
exporters in another country, importers in one country pay their debts to exporters in their
own country, and their creditors in the other country receive payment for the goods they
have exported from importers in their own country. Thus, payment for goods in an
international trade is made by merging single transactions involving two persons into
double transactions involving four persons. In many cases, payment is made by involving
a multitude of transactions, frequently in several different countries. These transactions
were carried on in the so-called foreign-exchange market. An exporter of goods sold bills
of exchange into that market and thus drew out of it money in his own country's units. An
importer bought such bills of exchange to send to his creditor, and thus he put his own
country's monetary units into the market. Since the bills available in any market were
drawn in the monetary units of many different foreign countries, there arose exchange
relationships between the amounts of money available in the country's own units (put
there by importers) and the variety of bills drawn in foreign moneys and put into the
market by exporters. The supply and demand for bills (or money) of any country in terms
of the supply and demand of the country's own money available in the foreign-exchange
market determined the value of the other countries' moneys in relation to domestic
money. These values could fluctuate—widely for countries not on the gold standard, but
only narrowly (as we shall see) for those on gold.
The Foreign Exchange
Market Acted as Regulator
of International Trade
Under normal conditions a foreign-exchange market served to pay for goods and
services of foreigners without any international shipment of money (gold). It also acted as
a regulator of international trade. If the imports of any country steadily exceeded exports
to another country, more importers would be in the market offering domestic money for
bills of exchange drawn in the money of their foreign creditor. There thus would be an
increased supply of domestic money and an increased demand for that foreign money. As
a result, importers would have to offer more of their money for these foreign bills, and
the value of domestic money would fall, while the value of the foreign money would rise
in the foreign-exchange market. This rise (or fall) on a gold relationship would be
measured in terms of "par" (the exact gold content equivalent of the two currencies). As the value of the domestic currency sagged below par in relationship to that of some foreign currency, domestic exporters to that foreign country will increase their activities, because when they receive payment in the form of a bill of exchange they can sell it for more of their own currency than they usually expect and can thus increase their profits. A surplus of imports, by lowering the foreign-exchange value of the importing country's money, will lead eventually to an increase in exports which, by providing more bills of exchange, will tend to restore the relationship of the moneys back toward par. Such a restoration of parity in foreign exchange will reflect a restoration of balance in international obligations, and this in turn will reflect a restored balance in the exchange of goods and services between the two countries. This means, under normal conditions, that a trade disequilibrium will create trade conditions which will tend to restore trade equilibrium.
Wide Fluctuations in
Foreign Exchange Market
When countries are not on the gold standard, this foreign-exchange disequilibrium
(that is, the decline in the value of one monetary unit in relation to the other unit) can go
on to very wide fluctuations—in fact, to whatever degree is necessary to restore the trade
equilibrium by encouraging importers to buy in the other country because its money is so
low in value that the prices of goods in that country are irresistible to importers in the
other country.
Foreign Exchange Market
Does Not Fluctuate
on the Gold Standard
But when countries are on the gold standard, the result is quite different. In this case
the value of a country's money will never go below the amount equal to the cost of
shipping gold between the two countries. An importer who wishes to pay his trade
partner in the other country will not offer more and more of his own country's money for
foreign-exchange bills, but will bid up the price of such bills only to the point where it
becomes cheaper for him to buy gold from a bank and pay the costs of shipping and
insurance on the gold as it goes to his foreign creditor. Thus, on the gold standard,
foreign-exchange quotations do not fluctuate widely, but move only between the two
gold points which are only slightly above (gold export point) and slightly below (gold
import point) parity (the legal gold relationship of the two currencies). Since the cost of packing, shipping and insuring gold used to be about ½ percent of its value, the gold export and import points were about this amount above and below the parity point. In the case of the dollar-pound relationship, when parity was at £ 1 = $4.866, the gold export point was about $4.885 and the gold import point was about $4.845. Thus:
Gold export point $4.885
(excess demand for bills by importers)
Parity $4.866
Gold import point $4.845
(excess supply of bills by exporters)
The situation which we have described is overly simplified. In practice the situation is made more complicated by several factors. Among these are the following: (1) middlemen buy and sell foreign exchange for present or future delivery as a speculative activity; (2) the total supply of foreign exchange available in the market depends on much more than the international exchange of commodities. It depends on the sum total of all international payments, such as interest, payment for services, tourist spending, borrowings, sales of securities, immigrant remittances, and so on; (3) the total exchange balance depends on the total of the relationships of all countries, not merely between two.
Elimination of
the Gold Standard
The flow of gold from country to country resulting from unbalanced trade tends to
create a situation which counteracts the flow. If a country exports more than it imports so
that gold flows in to cover the difference, this gold will become the basis for an increased
quantity of money, and this will cause a rise of prices within the country sufficient to
reduce exports and increase imports. At the same time, the gold by flowing out of some
other country will reduce the quantity of money there and will cause a fall in prices
within that country. These shifts in prices will cause shifts in the flow of goods because
of the obvious fact that goods tend to flow to higher-priced areas and cease to flow to
lower-priced areas. These shifts in the flow of goods will counteract the original
unbalance in trade which caused the flow of gold. As a result, the flow of gold will cease,
and a balanced international trade at slightly different price levels will result. The whole
process illustrates the subordination of internal price stability to stability of exchanges. It
was this subordination which was rejected by most countries after 1931. This rejection
was signified by (a) abandonment of the gold standard at least in part, (b) efforts at
control of domestic prices, and (c) efforts at exchange control. All these were done
because of a desire to free the economic system from the restricting influence of a gold dominated financial system.
Major Countries Forced
to Abandon Gold Standard
This wonderful, automatic mechanism of international payments represents one of the
greatest social instruments ever devised by man. It requires, however, a very special
group of conditions for its effective functioning and, as we shall show, these conditions
were disappearing by 1900 and were largely wiped away as a result of the economic
changes brought about by the First World War. Because of these changes it became
impossible to restore the financial system which had existed before 1914. Efforts to
restore it were made with great determination, but by 1933 they had obviously failed, and
all major countries had been forced to abandon the gold standard and automatic
exchanges.When the gold standard is abandoned, gold flows between countries like any other commodity, and the value of foreign exchanges (no longer tied to gold) can fluctuate much more widely. In theory an unbalance of international payments can be rectified either through a shift in exchange rates or through a shift in internal price levels. On the gold standard this rectification is made by shifts in exchange rates only between the gold points. When the unbalance is so great that exchanges would be forced beyond the gold points, the rectification is made by means of changing internal prices caused by the fact that gold flows at the gold points, instead of the exchanges passing beyond the gold points. On the other hand, when a currency is off the gold standard, fluctuation of exchanges is not confined between any two points but can go indefinitely in either direction. In such a case, the unbalance of international payments is worked out largely by a shift in exchange rates and only remotely by shifts in internal prices. In the period of 1929-1936, the countries of the world went off gold because they preferred to bring their international balances toward equilibrium by means of fluctuating exchanges rather than by means of fluctuating price levels. They feared these last because changing (especially falling) prices led to declines in business activity and shifts in the utilization of economic resources (such as labor, land, and capital) from one activity to another.
Reestablishing the Balance
of International Payments
The reestablishment of the balance of international payments when a currency is off
gold can be seen from an example. If the value of the pound sterling falls to $4.00 or
$3.00, Americans will buy in England increasingly because English prices are cheap for
them, but Englishmen will buy in America only with reluctance because they have to pay
so much for American money. This will serve to rectify the original excess of exports to
England which gave the great supply of pound sterling necessary to drive its value down
to $3.00. Such a depreciation in the exchange value of a currency will cause a rise in
prices within the country as a result of the increase in demand for the goods of that
country.
The Situation before 1914
The key to the world situation in the period before 1914 is to be found in the dominant
position of Great Britain. This position was more real than apparent. In many fields (such
as naval or financial) the supremacy of Britain was so complete that it almost never had
to be declared by her or admitted by others. It was tacitly assumed by both. As an unchallenged ruler in these fields, Britain could afford to be a benevolent ruler. Sure of
herself and of her position, she could be satisfied with substance rather than forms. If
others accepted her dominance in fact, she was quite willing to leave to them
independence and autonomy in law.
The Supremacy of Britain
This supremacy of Britain was not an achievement of the nineteenth century alone. Its
origins go back to the sixteenth century—to the period in which the discovery of America
made the Atlantic more important than the Mediterranean as a route of commerce and a
road to wealth. In the Atlantic, Britain's position was unique, not merely because of her
westernmost position, but much more because she was an island. This last fact made it
possible for her to watch Europe embroil itself in internal squabbles while she retained
freedom to exploit the new worlds across the seas. On this basis, Britain had built up a
naval supremacy which made her ruler of the seas by 1900. Along with this was her
preeminence in merchant shipping which gave her control of the avenues of world
transportation and ownership of 39 percent of the world's oceangoing vessels (three times
the number of her nearest rival). To her supremacy in these spheres, won in the period before 1815, Britain added new spheres of dominance in the period after 1815. These arose from her early achievement of the Industrial Revolution. This was applied to transportation and communications as well as to industrial production. In the first it gave the world the railroad and the steamboat; in the second it gave the telegraph, the cable, and the telephone; in the third it gave the factory system.
The Industrial Revolution
The Industrial Revolution existed in Britain for almost two generations before it
spread elsewhere. It gave a great increase in output of manufactured goods and a great
demand for raw materials and food; it also gave a great increase in wealth and savings.
As a result of the first two and the improved methods of transportation, Britain developed
a world trade of which it was the center and which consisted chiefly of the export of
manufactured goods and the import of raw materials and food. At the same time, the
savings of Britain tended to flow out to North America, South America, and Asia,
seeking to increase the output of raw materials and food in these areas. By 1914 these
exports of capital had reached such an amount that they were greater than the foreign
investments of all other countries put together. In 1914 British overseas investment was
about $20 billion (or about one-quarter of Britain's national wealth, yielding about a tenth
of the total national income). The French overseas investment at the same time was about
$9 billion (or one-sixth the French national wealth, yielding 6 percent of the national
income), while Germany had about $5 billion invested overseas (one-fifteenth the
national wealth, yielding 3 percent of the national income). The United States at that time
was a large-scale debtor.
The World's Great Commercial
Markets Were in Britain
The dominant position of Britain in the world of 1913 was, as I have said, more real
than apparent. In all parts of the world people slept more securely' worked more
productively, and lived more fully because Britain existed. British naval vessels in the
Indian Ocean and the Far East suppressed slave raiders, pirates, and headhunters. Small
nations like Portugal, the Netherlands, or Belgium retained their overseas possessions
under the protection of the British fleet. Even the United States, without realizing it,
remained secure and upheld the Monroe Doctrine behind the shield of the British Navy.
Small nations were able to preserve their independence in the gaps between the Great
Powers, kept in precarious balance by the Foreign Office's rather diffident balance-ofpower tactics. Mos; of the world's great commercial markets, even in commodities like
cotton, rubber, and tin, which she did not produce in quantities herself, were in England,
the world price being set from the auction bidding of skilled specialist traders there. If a
man in Peru wished to send money to a man in Afghanistan, the final payment, as like as
not, would be made by a bookkeeping transaction in London. The English parliamentary
system and some aspects of the English judicial system, such as the rule of law, were
being copied, as best as could be, in all parts of the world.
Britain Was the Center of
World Finance and World Trade
The profitability of capital outside Britain—a fact which caused the great export of
capital—was matched by a profitability of labor. As a result, the flow of capital from
Britain and Europe was matched by a flow of persons. Both of these served to build up
non-European areas on a modified European pattern. In export of men, as in export of
capital, Britain was easily first (over 20 million persons emigrating from the United
Kingdom in the period 1815-1938). As a result of both, Britain became the center of
world finance as well as the center of world commerce. The system of international
financial relations, which we described earlier, was based on the system of industrial,
commercial, and credit relationships which we have just described. The former thus
required for its existence a very special group of circumstances—a group which could not
be expected to continue forever. In addition, it required a group of secondary
characteristics which were also far from permanent. Among these were the following: (1)
all the countries concerned must be on the full gold standard; (2) there must be freedom
from public or private interference with the domestic economy of any country; that is,
prices must be free to rise and fall in accordance with the supply and demand for both
goods and money; (3) there must also be free flow of international trade so that both
goods and money can go without hindrance to those areas where each is most valuable;
(4) the international financial economy must be organized about one center with
numerous subordinate centers, so that it would be possible to cancel out international
claims against one another in some clearinghouse and thus reduce the flow of gold to a
minimum; (5) the flow of goods and funds in international matters should be controlled
by economic factors and not be subject to political, psychological, or ideological
influences. These conditions, which made the international financial and commercial system function so beautifully before 1914, had begun to change by 1890. The fundamental economic and commercial conditions changed first, and were noticeably modified by 1910; the group of secondary characteristics of the system were changed by the events of the First World War. As a result, the system of early international financial capitalism is now only a dim memory. Imagine a period without passports or visas, and with almost no immigration or customs restrictions. Certainly the system had many incidental drawbacks, but they were incidental. Socialized if not social, civilized if not cultured, the system allowed individuals to breathe freely and develop their individual talents in a way unknown before and in jeopardy since.
Chapter 6—
The United States to 1917
Just as Classical culture spread westward from the Greeks who created it to the
Roman peoples who adopted and changed it, so Europe's culture spread westward to the
New World, where it was profoundly modified while still remaining basically European.
The central fact of American history is that people of European origin and culture came
to occupy and use the immensely rich wilderness between the Atlantic and the Pacific. In
this process the wilderness was developed and exploited area by area, the Tidewater, the
Piedmont, the trans-Appalachian forest, the trans-Mississippi prairies, the Pacific Coast,
and finally the Great Plains. By 1900 the period of occupation which had begun in 1607
was finished, but the era of development continued on an intensive rather than extensive
basis. This shift from extensive to intensive development, frequently called the "closing
of the frontier," required a readjustment of social outlook and behavior from a largely
individualistic to a more cooperative basis and from an emphasis on mere physical
prowess to emphasis on other less tangible talents of managerial skills, scientific training,
and intellectual capacity able to fill the
newly occupied frontiers with a denser population, producing a higher standard of living,
and utilizing more extensive leisure.The ability of the people of the United States to make this readjustment of social outlook and behavior at the "ending of the frontier" about 1900 was hampered by a number of factors from its earlier historical experience. Among these we should mention the growth of sectionalism, past political and constitutional experiences, isolationism, and emphasis on physical prowess and unrealistic idealism.
Three Major Geographic Sections Arise in U.S. The occupation of the United States had given rise to three chief geographic sections: a commercial and later financial and industrial East, an agrarian and later industrial West, and an agrarian South. Unfortunately, the two agrarian sections were organized quite differently, the South on the basis of slave labor and the West on the basis of free labor. On this question the East allied with the West to defeat the South in the Civil War (1861- 1865) and to subject it to a prolonged military occupation as a conquered territory (1865- 1877). Since the war and the occupation were controlled by the new Republican Party, the political organization of the country became split on a sectional basis: the South refused to vote Republican until 1928, and the West refused to vote Democratic until 1932. In the East the older families which inclined toward the Republican Party because of the Civil War were largely submerged by waves of new immigrants from Europe, beginning with Irish and Germans after 1846 and continuing with even greater numbers from eastern Europe and Mediterranean Europe after 1890. These new immigrants of the eastern cities voted Democratic because of religious, economic, and cultural opposition to the upper-class Republicans of the same eastern section. The class basis in voting patterns in the East and the sectional basis in voting in the South and West proved to be of major political significance after 1880.
Major Changes in
Government Occur in 1830
The Founding Fathers had assumed that the political control of the country would be
conducted by men of property and leisure who would generally know each other
personally and, facing no need for urgent decisions, would move government to action
when they agreed and be able to prevent it from acting, without serious damage, when
they could not agree. The American Constitution, with its provisions for division of
powers and selection of the chief executive by an electoral college, reflected this point of
view. So also did the use of the party caucus of legislative assemblies for nomination to
public office and the election of senators by the same assemblies. The arrival of a mass
democracy after 1830 changed this situation, establishing the use of party conventions for
nominations and the use of entrenched political party machines, supported on the
patronage of public office, to mobilize sufficient votes to elect their candidates.
Forces of Finance and Business
Grow in Wealth and Power
As a result of this situation, the elected official from 1840 to 1880 found himself
under pressure from three directions: from the popular electorate which provided him
with the votes necessary for election, from the party machine which provided him with
the nomination to run for office as well as the patronage appointments by which he could
reward his followers, and from the wealthy economic interests which gave him the
money for campaign expenses with, perhaps, a certain surplus for his own pocket. This
was a fairly workable system, since the three forces were approximately equal, the
advantage, if any, resting with the party machine. This advantage became so great in the
period 1865-1880 that the forces of finance, commerce, and industry were forced to
contribute ever-increasing largesse to the political machines in order to obtain the
services from government which they regarded as their due, services such as higher
tariffs, land grants to railroads, better postal services, and mining or timber concessions.
The fact that these forces of finance and business were themselves growing in wealth and
power made them increasingly restive under the need to make constantly larger
contributions to party political machines. Moreover, these economic tycoons increasingly
felt it to be unseemly that they should be unable to issue orders but instead have to
negotiate as equals in order to obtain services or favors from party bosses.
The U.S. Government Was Controlled by the Forces of
Investment Banking and Industry
By the late 1870's business leaders determined to make an end to this situation by
cutting with one blow the taproot of the system of party machines, namely, the patronage
system. This system, which they called by the derogatory term "spoils system," was
objectionable to big business not so much because it led to dishonesty or inefficiency but
because it made the party machines independent of business control by giving them a
source of income (campaign contributions from government employees) which was
independent of business control. If this source could be cut off or even sensibly reduced,
politicians would be much more dependent upon business contributions for campaign
expenses. At a time when the growth of a mass press and of the use of chartered trains for
political candidates were greatly increasing the expense of campaigning for office, any
reduction in campaign contributions from officeholders would inevitably make
politicians more subservient to business. It was with this aim in view that civil service
reform began in the Federal government with the Pendleton Bill of 1883. As a result, the
government was controlled with varying degrees of completeness by the forces of
investment banking and heavy industry from 1884 to 1933.
A Group of 400
Individuals Mobilize
Enormous Wealth and Power
This period, 1884-1933, was the period of financial capitalism in which investment
bankers moving into commercial banking and insurance on one side and into railroading
and heavy industry on the other were able to mobilize enormous wealth and wield
enormous economic, political, and social power. Popularly known as "Society," or the
"400," they lived a life of dazzling splendor. Sailing the ocean in great private yachts or
traveling on land by private trains, they moved in a ceremonious round between their
spectacular estates and town houses in Palm Beach, Long Island, the Berkshires,
Newport, and Bar Harbor; assembling from their fortress-like New York residences to
attend the Metropolitan Opera under the critical eye of Mrs. Astor; or gathering for
business meetings of the highest strategic level in the awesome presence of J. P. Morgan
himself.
Big Banking and Business
Control the Federal Government
The structure of financial controls created by the tycoons of "Big Banking" and "Big
Business" in the period 1880-1933 was of extraordinary complexity, one business fief
being built on another, both being allied with semi-independent associates, the whole
rearing upward into two pinnacles of economic and financial power, of which one,
centered in New York, was headed by J. P. Morgan and Company, and the other, in Ohio,
was headed by the Rockefeller family. When these two cooperated, as they generally did,
they could influence the economic life of the country to a large degree and could almost
control its political life, at least on the Federal level. The former point can be illustrated
by a few facts. In the United States the number of billion-dollar corporations rose from
one in 1909 (United States Steel, controlled by Morgan) to fifteen in 1930. The share of
all corporation assets held by the 200 largest corporations rose from 32 percent in 1909 to
49 percent in 1930 and reached 57 percent in 1939. By 1930 these 200 largest
corporations held 49.2 percent of the assets of all 40,000 corporations in the country ($81 billion out of $165 billion); they held 38 percent of all business wealth, incorporated or
unincorporated (or $81 billion out of $212 billion); and they held 22 percent of all the
wealth in the country (or $81 billion out of $367 billion). In fact, in 1930, one corporation
(American Telephone and Telegraph, controlled by Morgan) had greater assets than the
total wealth in twenty-one states of the Union.
The Influence and Power of
the Morgan and Rockefeller Groups
The influence of these business leaders was so great that the Morgan and Rockefeller
groups acting together, or even Morgan acting alone, could have wrecked the economic
system of the country merely by throwing securities on the stock market for sale, and,
having precipitated a stock-market panic, could then have bought back the securities they
had sold but at a lower price. Naturally, they were not so foolish as to do this, although
Morgan came very close to it in precipitating the "panic of 1907," but they did not
hesitate to wreck individual corporations, at the expense of the holders of common
stocks, by driving them to bankruptcy. In this way, to take only two examples, Morgan
wrecked the New York, New Haven, and Hartford Railroad before 1914 by selling to it,
at high prices, the largely valueless securities of myriad New England steamship and
trolley lines; and William Rockefeller and his friends wrecked the Chicago, Milwaukee,
St. Paul, and Pacific Railroad before 1925 by selling to it, at excessive prices, plans to
electrify to the Pacific, copper, electricity, and a worthless branch railroad (the Gary
Line). These are but examples of the discovery by financial capitalists that they made
money out of issuing and selling securities rather than out of the production, distribution,
and consumption of goods and accordingly led them to the point where they discovered
that the exploiting of an operating company by excessive issuance of securities or the
issuance of bonds rather than equity securities not only was profitable to them but made it
possible for them to increase their profits by bankruptcy of the firm, providing fees and
commissions of reorganization as well as the opportunity to issue new securities.
Control of Political
Parties in America
When the business interests, led by William C. Whitney, pushed through the first
installment of civil service reform in 1883, they expected that they would be able to
control both political parties equally. Indeed, some of them intended to contribute to both
and to allow an alternation of the two parties in public office in order to conceal their
own influence, inhibit any exhibition of independence by politicians, and allow the
electorate to believe that they were exercising their own free choice. Such an alternation
of the parties on the Federal scene occurred in the period 1880-1896, with business
influence (or at least Morgan's influence) as great in Democratic as in Republican
administrations. But in 1896 came a shocking experience. The business interests
discovered that they could control the Republican Party to a large degree but could not be
nearly so confident of controlling the Democratic Party. The reason for this difference lay
in the existence of the Solid South as a Democratic section with almost no Republican
voters. This section sent delegates to the Republican National Convention as did the rest
of the country, but, since these delegates did not represent voters, they came to represent
those who were prepared to pay their expenses to the Republican National Convention. In
this way these delegates came to represent the business interests of the North, whose
money they accepted. Mark Hanna has told us in detail how he spent much of the winter
of 1895-1896 in Georgia buying over two hundred delegates for McKinley to the
Republican National Convention of 1896. As a result of this system, about a quarter of
the votes in a Republican Convention were "controlled" votes from the Solid South, not
representing the electorate. After the split in the Republican Party in 1912, this portion of
the delegates was reduced to about 17 percent.
The Monetary Tactics of
the Banking Oligarchy
The inability of the investment bankers and their industrial allies to control the
Democratic Convention of 1896 was a result of the agrarian discontent of the period
1868-1896. This discontent in turn was based, very largely, on the monetary tactics of the
banking oligarchy. The bankers were wedded to the gold standard for reasons we have
already explained. Accordingly, at the end of the Civil War, they persuaded the Grant
Administration to curb the postwar inflation and go back on the gold standard (crash of
1873 and resumption of specie payments in 1875). This gave the bankers a control of the
supply of money which they did not hesitate to use for their own purposes, as Morgan
ruthlessly pressurized Cleveland in 1893-1896. The bankers' affection for low prices was
not shared by the farmers, since each time prices of farm products went down the burden
of farmers' debts (especially mortgages) became greater. Moreover, farm prices, being
much more competitive than industrial prices, and not protected by a tariff, fell much
faster than industrial prices, and farmers could not reduce costs or modify their
production plans nearly so rapidly as industrialists could. The result was a systematic
exploitation of the agrarian sectors of the community by the financial and industrial
sectors. This exploitation took the form of high industrial prices, high (and
discriminatory) railroad rates, high interest charges, low farm prices, and a very low level
of farm services by railroads and the government. Unable to resist by economic weapons,
the farmers of the West turned to political relief, but were greatly hampered by their
reluctance to vote Democratic (because of their memories of the Civil War). Instead, they
tried to work on the state political level through local legislation (so-called Granger
Laws) and set up third-party movements (like the Greenback Party in 1878 or the
Populist Party in 1892). By 1896, however, agrarian discontent rose so high that it began
to overcome the memory of the Democratic role in the Civil War. The capture of the
Democratic Party by these forces of discontent under William Jennings Bryan in 1896,
who was determined to obtain higher prices by increasing the supply of money on a
bimetallic rather than a gold basis, presented the electorate with an election on a social
and economic issue for the first time in a generation. Though the forces of high finance
and of big business were in a state of near panic, by a mighty effort involving large-scale
spending they were successful in electing McKinley.
Money Power Seeks to
Control Both Political Parties
The inability of plutocracy to control the Democratic Party as it had demonstrated it
could control the Republican Party, made it advisable for them to adopt a one-party
outlook on political affairs, although they continued to contribute to some extent to both
parties and did not cease their efforts to control both. In fact on two occasions, in 1904
and in 1924, J. P. Morgan was able to sit back with a feeling of satisfaction to watch a
presidential election in which the candidates of both parties were in his sphere of
influence. In 1924 the Democratic candidate was one of his chief lawyers, while the
Republican candidate was the classmate and handpicked choice of his partner, Dwight
Morrow. Usually, Morgan had to share this political influence with other sectors of the
business oligarchy, especially with the Rockefeller interest (as was done, for example, by
dividing the ticket between them in 1900 and in 1920).
The Growth of Monopolies and
the Excesses of Wall Street
The agrarian discontent, the growth of monopolies, the oppression of labor, and the
excesses of Wall Street financiers made the country very restless in the period 1890-
1900. All this could have been alleviated merely by increasing the supply of money
sufficiently to raise prices somewhat, but the financiers in this period, just as thirty years
later, were determined to defend the gold standard no matter what happened. In looking
about for some issue which would distract public discontent from domestic economic
issues, what better solution than a crisis in foreign affairs? Cleveland had stumbled upon
this alternative, more or less accidentally, in 1895 when he stirred up a controversy with
Great Britain over Venezuela. The great opportunity, however, came with the Cuban
revolt against Spain in 1895. While the "yellow press," led by William Randolph Hearst,
roused public opinion, Henry Cabot Lodge and Theodore Roosevelt plotted how they
could best get the United States into the fracas. They got the excuse they needed when
the American battleship Maine was sunk by a mysterious explosion in Havana harbor in
February 1898. In two months the United States declared war on Spain to fight for Cuban
independence. The resulting victory revealed the United States as a world naval power,
established it is an imperialist power with possession of Puerto Rico, Guam, and the
Philippines, whetted some appetites for imperialist glory, and covered the transition from
the long-drawn age of semi-depression to a new period of prosperity. This new period of
prosperity was spurred to some extent by the increased demand for industrial products
arising from the war, but even more by the new period of rising prices associated with a
considerable increase in the world production of gold from. South Africa and Alaska after
1895. America's entrance upon the stage as a world power continued with the annexation of Hawaii in 1808, the intervention in the Boxer uprising in 1900, the seizure of Panama in 1903, the diplomatic intervention in the Russo-Japanese War in 1905, the round-the world cruise of the American Navy in 1908, the military occupation of Nicaragua in 1912, the opening of the Panama Canal in 1914, and military intervention in Mexico in 1916.
The Birth of the
Progressive Movement
During this same period, there appeared a new movement for economic and political
reform known as Progressivism. The Progressive movement resulted from a combination
of forces, some new and some old. Its foundation rested on the remains of agrarian and
labor discontent which had struggled so vainly before 1897. There was also, as a kind of
afterthought on the part of successful business leaders, a weakening of acquisitive
selfishness and a revival of the older sense of social obligation and idealism. To some
extent this feeling was mixed with a realization that the position and privileges of the
very wealthy could be preserved better with superficial concessions and increased
opportunity for the discontented to blow off steam than from any policy of blind
obstructionism on the part of the rich. As an example of the more idealistic impulse we
might mention the creation of the various Carnegie foundations to work for universal
peace or to extend scholarly work in science and social studies. As an example of the
more practical point of view we might mention the founding of The New Republic, a
"liberal weekly paper," by an agent of Morgan financed with Whitney money (1914).
Somewhat similar to this last point was the growth of a new "liberal press," which found
it profitable to print the writings of "muckrakers," and thus expose to the public eye the
seamy side of Big Business and of human nature itself. But the great opportunity for the
Progressive forces arose from a split within Big Business between the older forces of
financial capitalism led by Morgan and the newer forces of monopoly capitalism
organized around the Rockefeller bloc. As a consequence, the Republican Party was split
between the followers of Theodore Roosevelt and those of William Howard Taft, so that
the combined forces of the liberal East and the agrarian West were able to capture the
Presidency under Woodrow Wilson in 1912.
The Establishment of
the Income Tax and the
Federal Reserve System
Wilson roused a good deal of popular enthusiasm with his talk of "New Freedom" and
the rights of the underdog, but his program amounted to little more than an attempt to
establish on a Federal basis those reforms which agrarian and labor discontent had been
seeking on a state basis for many years. Wilson was by no means a radical (after all, he
had been accepting money for his personal income from rich industrialists like Cleveland
Dodge and Cyrus Hall McCormick during his professorship at Princeton, and this kind of
thing by no means ceased when he entered politics in 1910), and there was a good deal of
unconscious hypocrisy in many of his resounding public speeches. Be this as it may, his
political and administrative reforms were a good deal more effective than his economic
or social reforms. The Clayton Antitrust Act and the Federal Trade Commission Act
(1913) were soon tightly wrapped in litigation and futility. On the other hand, the direct
election of senators, the establishment of an income tax and of the Federal Reserve
System, and the creation of a Federal Farm Loan System (1916) and of rural delivery of
mail and parcel post, as well as the first steps toward various laboring enactments, like
minimum wages for merchant seamen, restrictions on child labor, and an eight-hour day
for railroad workers, justified the support which Progressives had given to Wilson.
The Wilson Administration
The first Administration of Wilson (1913-1917) and the earlier Administration of
Theodore Roosevelt (1901-1909) made a substantial contribution to the process by which
the United States redirected its aim from extensive expansion of physical frontiers to an
intensive exploitation of its natural and moral resources. The earlier Roosevelt used his
genius as a showman to publicize the need to conserve the country's natural resources,
while Wilson, in his own professorial fashion, did much to extend equality of opportunity
to wider groups of the American people. These people were so absorbed in the
controversies engendered by these efforts that they hardly noticed the rising international
tensions in Europe or even the outbreak of war in August, 1914, until by 1915 the
clamorous controversy of the threat of war quite eclipsed the older domestic
controversies. By the end of 1915 America was being summoned, in no gentle fashion, to
play a role on the world's stage. This is a story to which we must return in a later chapter. next
Part Three—The Russian Empire to 1917
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1 comment:
Don't I feel proud of having transcribed and posted the first of Quigley's Tragedy & Hope online back decades ago: http://SmartestMan.Ca/quig00
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