Table of Contents

Tragedy and Hope

A History of the World in Our Time

By Carroll Quigley

PART ELEVEN







Part Eleven: Changing Economic Patterns

Chapter 31: Introduction

     An economic system does not have to be expansive—that is, constantly increasing its production of wealth—and it might well be possible for people to be completely happy in a non-expansive economic system if they were accustomed to it. In the twentieth century, however, the people of our culture have been living under expansive conditions for generations. Their minds are psychologically adjusted to expansion, and they feel deeply frustrated unless they are better off each year than they were the preceding year. The economic system itself has become organized for expansion, and if it does not expand it tends to collapse.

     The basic reason for this maladjustment is that investment has become an essential part of the system, and if investment falls off, consumers have insufficient incomes to buy the consumers' goods which are being produced in another part of the system because part of the flow of purchasing power created by the production of goods was diverted from purchasing the goods it had produced into savings, and all the goods produced could not be sold until those savings came back into the market by being invested. In the system as a whole, everyone sought to improve his own position in the short run, but this jeopardized the functioning of the system in the long run. The contrast here is not merely between the individual and the system, but also between the long run and the short run.

The Harmony of Interests

     The nineteenth century had accepted as one of its basic faiths the theory of "the harmony of interests." This held that what was good for the individual was good for society as a w hole and that the general advancement of society could be achieved best if individuals were left free to seek their own individual advantages. This harmony was assumed to exist between one individual and another, between the individual and the group, and between the short run and the long run. Tn the nineteenth century, such a theory was perfectly tenable, but in the twentieth century it could be accepted only with considerable modification. As a result of persons seeking their individual advantages, the economic organization of society was so modified that the actions of one such person were very likely to injure his fellows, the society as a whole, and his own long-range advantage. This situation led to such a conflict between theory and practice, between aims and accomplishments, between individuals and groups that a return to fundamentals in economics became necessary. Unfortunately, such a return was made difficult because of the conflict between interests and principles and because of the difficulty of finding principles in the extraordinary complexity of twentieth-century economic life.

The Factors of Economic Progress

     The factors necessary to achieve economic progress are supplementary to the factors necessary for production. Production requires the organization of knowledge, time, energy, materials, land, labor, and so on. Economic progress requires three additional factors. These are: innovation, savings, and investment. Unless a society is organized to provide these three, it will not expand economically. "Innovation" means devising new and better ways of performing the tasks of production; "saving" means refraining from consumption of resources so that they can be mobilized for different purposes; and "investment" means the mobilization of resources into the new, better ways of production.

     The absence of the third factor (investment) is the most frequent cause of a failure of economic progress. It may be absent even when both of the other factors are working well. In such a case, the savings accumulated are not applied to inventions but are spent on consumption, on ostentatious social prestige, on war, on religion, on other nonproductive purposes, or even left unspent.

Powerful Groups Seek to Maintain Status Quo

     Economic progress has always involved shifts in productive resources from old methods to new ones. Such shifts, however beneficial to certain groups and however welcome to people as a whole, were bound to be resisted and resented by other groups who had vested interests in the old ways of doing things and in the old ways of utilizing resources. In a progressive period, these vested interests are unable to defend their vested interests to the point of preventing progress; but, obviously, if the groups in a society who control the savings which are necessary for progress are the same vested interests who benefit by the existing way of doing things, they are in a position to defend these vested interests and prevent progress merely by preventing the use of surpluses to finance new inventions. Such a situation is bound to give rise to an economic crisis. From one narrow point of view, the twentieth century's economic crisis was a situation of this type. To understand how such a situation could arise, we must examine the development in the chief capitalist countries and discover the causes of the crisis.

Chapter 32: Great Britain

     In Britain, throughout the nineteenth century, the supply of capital was so plentiful from private savings that industry was able to finance itself with little recourse to the banking system. The corporate form was adopted relatively slowly, and because of the benefits to be derived from limited liability rather than because it made it possible to appeal to a widespread public for equity capital. Savings were so plentiful that the surplus had to be exported, and interest rates fell steadily. Promoters and investment bankers were not much interested in domestic industrial securities (except railroads), and for most of the century concentrated their attention on government bonds (both foreign and domestic) and on foreign economic enterprises. Financial capitalism first appeared in foreign securities, and found a fruitful field of operations. The corporation law (as codified in 1862) was very lenient. There were few restrictions on formations of companies, and none on false prospectuses or false financial reports. Holding companies were not legally recognized until 1928, and no consolidated balance sheet was required then. As late as 1933, of 111 British investment trusts only 52 published a record of their holdings.

Secrecy Is One of the Elements of the English

Business and Financial Life

     This element of secrecy is one of the outstanding features of English business and financial life. The weakest "right" an Englishman has is the "right to know," which is about as narrow as it is in American nuclear operations. Most duties, powers, and actions in business are controlled by customary procedures and conventions, not by explicit rules and regulations, and are often carried out by casual remarks between old friends. No record perpetuates such remarks, and they are generally regarded as private affairs which are no concern of others, even when they involve millions of pounds of the public's money. Although this situation is changing slowly, the inner circle of English financial life remains a matter of "whom one knows," rather than "what one knows." Jobs are still obtained by family, marriage, or school connections; character is considered far more important than knowledge or skill; and important positions, on this basis, are given to men who have no training, experience, or knowledge to qualify them.

The Core of English Financial Society Consists of 17 Private

International Banking Firms

     As part of this system and at the core of English financial life have been seventeen private firms of "merchant bankers" who find money for established and wealthy enterprises on either a long-term (investment) or a short-term ("acceptances") basis. These merchant bankers, with a total of less than a hundred active partners, include the firms of Baring Brothers, N. M. Rothschild, J. Henry Schroder, Morgan Grenfell, Hambros, and Lazard Brothers. These merchant bankers in the period of financial capitalism had a dominant position with the Bank of England and, strangely enough, still have retained some of this, despite the nationalization of the Bank by the Labour government in 1946. As late as 1961 a Baring (Lord Cromer) was named governor of the bank, and his board of directors, called the "Court" of the bank, included representatives of Lazard, of Hambros, and of Morgan Grenfell, as well as of an industrial firm (English Electric) controlled by these.

The Heyday of English Financial Capitalism

     The heyday of English financial capitalism is associated with the governorship of Montagu Norman from 1920 to 1944, but it began about a century after the advent of industrial capitalism, with the promotion of Guinness, Ltd., by Barings in 1886, and continued with the creation of Allsopps, Ltd., by the Westminster Bank in 1887. In the latter year, only 10,000 companies were in existence although the creation of companies had been about 1,000 a year in the 1870's and about 1,000 a year in the 1880's. Of the companies registered, about a third fell bankrupt in their first year. This is a very large fraction when we consider that about one-half the companies created were private companies which did not offer securities to the public and presumably already were engaged in a flourishing business.... In two years (1894-1896) E. T. Hooley promoted twenty-six corporations with various noble lords as the directors of each. The total capital of this group was ฃ18.6 million, of which Hooley took 5 million for himself.

Money Power Exercises Its Influence through Interlocking

Directorates and Direct Financial Controls

     From this date onward, financial capitalism grew rapidly in Britain, without ever achieving the heights it did in the United States or Germany. Domestic concerns remained small, owner-managed, and relatively unprogressive (especially in the older lines like textiles, iron, coal, shipbuilding). One chief field of exploitation for British financial capitalism continued to be in foreign countries until the crash of 1931. Only after 1920 did it spread tentatively into newer fields like machinery, electrical goods, and chemicals, and in these it was superseded almost at once by monopoly capitalism.... In addition, its rule was relatively honest (in contrast to the United States but similar to Germany). It made little use of holding companies, exercising its influence by interlocking directorates and direct financial controls. It died relatively easily, yielding control of the economic system to the new organizations of monopoly capitalism constructed by men like William H. Lever, Viscount Leverhulme (1851-1925) or Alfred M. Mond, Lord Melchett (1868-1930). The former created a great international monopoly in vegetable oils centering upon Unilever, while the latter created the British chemical monopoly known as Imperial Chemical Industries.

Banking Control of Government throughout the World

     Financial capitalism in Britain, as elsewhere, was marked not only by a growing financial control of industry but also by an increasing concentration of this control and by an increasing banking control of government. As we have seen, this influence of the Bank of England over the government was an almost unmitigated disaster for Britain. The power of the bank in business circles was never as complete as it was in government, because British businesses remained self-financing to a greater extent than those of other countries. This self-financing power of business in Britain depended on the advantage which it held because of the early arrival of industrialism in England. As other countries became industrialized, reducing Britain's advantage and her extraordinary profits, British business was forced to seek outside financial aid or reduce its creation of capital plant. Both methods were used, with the result that financial capitalism grew at the same time as considerable sections of Britain's capital plant became obsolete.

The Money Trust Became Increasingly Concentrated and

Powerful in the Twentieth Century

     The control of the Bank of England over business was exercised indirectly through the joint-stock banks. These banks became increasingly concentrated and increasingly powerful in the twentieth century. The number of such banks decreased through amalgamation from 109 in 1866 to 35 in 1919 and to 33 in 1933. This growth of a "money trust" in Britain led to an investigation by a Treasury Committee on Bank Amalgamations. In its report (Colwyn Report, 1919) this committee admitted the danger and called for government action. A bill was drawn up to prevent further concentration but was withdrawn when the bankers made a "gentlemen's agreement" to ask Treasury permission for future amalgamations. The net result was to protect the influence of the Bank of England, since this might have been reduced by complete monopolization of joint-stock banking, and the bank was always in a position to influence the Treasury's attitude on all questions. Of the 33 joint-stock banks existing in 1933, 9 were in Ireland and 8 in Scotland, leaving only 16 for England and Wales. The 33 together had over ฃ2,500 million in deposits in April 1933, of which ฃ1,773 million were in the so-called "Big Five" (Midland, Lloyds, Barclays, Westminster, and National Provincial). The Big Five controlled at least 7 of the other 28 (in one case by ownership of 98 percent of the stock). Although competition among the Big Five was usually keen, all were subject to the powerful influence of the Bank of England, as exercised through the discount rate, interlocking directorships, and above all through the intangible influences of tradition, ambition, and prestige.

Finance Capitalism Paves the Way for Monopoly

Capitalism to Flourish

     In Britain, as elsewhere, the influence of financial capitalism served to create the conditions of monopoly capitalism not only by creating monopoly conditions (which permitted industry to free itself from financial dependency on banks) but also by insisting on those deflationary, orthodox financial policies which eventually alienated industrialists from financiers. Although monopoly capitalism began to grow in Britain as far back as the British Salt Union of 1888 (which controlled 91 percent of the British supply), the victory of monopoly capitalism over financial capitalism did not arrive until 1931. By that year the structure of monopoly capitalism was well organized. The Board of Trade reported in 1918 that Britain had 500 restrictive trade associations. In that same year the Federation of British Industries (FBI) had as members 129 trade associations and 704 firms. It announced that its goals would be the regulation of prices, the curtailment of competition, and the fostering of cooperation in technical matters, in politics, and in publicity. By 1935 it had extended this scope to include (a) elimination of excess productive capacity, (b) restrictions on entry of new firms into a field, and (c) increasing duress on both members and outsiders to obey minimum-price regulations and production quotas. This last ability was steadily strengthened in the period 1931-1940. Probably the greatest achievement in this direction was a decision of the House of Lords, acting as a Supreme Court, which permitted the use of duress against outsiders in order to enforce restrictive economic agreements (the case of Thorne v. Motor Trade Association decided June 4, 1937).

Giant Monopolies Control the Banking System

     The year 1931 represented for Britain the turning point from financial to monopoly capitalism. In that year financial capitalism, which had held the British economy in semi-depression for a decade, achieved its last great victory when the financiers led by Montagu Norman and J. P. Morgan forced the resignation of the British Labour government. But the handwriting was already on the wall. Monopoly had already grown to such a degree that it aspired to make the banking system its ... [ally] instead of its master. The deflationary financial policy of the bankers had alienated politicians and industrialists and driven monopolist trade unions to form a united front against the bankers.

The Revolt of the British Fleet

     This was clearly evident in the Conference on Industrial Reorganization and Relationships of April 1928. This meeting contained representatives of the Trade Union Congress and the Employers' Federation and issued a Memorandum to the chancellor of the Exchequer signed by Sir Alfred Mond of Imperial Chemicals and Ben Turner of the trade unions. Similar declarations were issued by other monopolist groups, but the split of monopolist capitalists and of financial capitalists could not become overt until the latter were able to get rid of the Labour government. Once that was achieved, labor and industry were united in opposition to the continuance of the bankers' economic policy with its low prices and high unemployment. The decisive event which caused the end of financial capitalism in Britain was the revolt of the British fleet at Invergordon on September 15, 1931, and not the abandonment of gold six days later. [Actually the powers of financial capitalism and monopoly capitalism have been cooperating to build and sustain the international financial system and the international economic system.]The mutiny made it clear that the policy of deflation must be ended. As a result, no real effort was made to defend the gold standard.

The Adoption of Protective Tariffs

     With the abandonment of gold and the adoption of a protective tariff, monopolist capital and labor joined in an effort to raise both wages and profits by a program of higher prices and restrictions on production. The old monopolies and cartels increased in strength and new ones were formed, usually with the blessing of the government. These groups enforced restrictive practices on their members and on outsiders even to the extent of buying up and destroying productive capacity in their own lines. In some cases, as in agricultural products and in coal, these efforts were based on statute law, but in most cases they were purely private ventures. In no case did the government make any real effort to protect consumers against exploitation. In 1942 a capable observer, Hermann Levy, wrote, "Today Britain is the only highly industrialized country in the world where no attempt has yet been made to restrict the domination of quasi-monopolist associations in industry and trade." It is true that the government did not accept the suggestions of Lord Melchett and of the Federation of British Industries that cartels and trade associations be made compulsory, but it gave such free rein to these groups in the use of their economic power that the compulsory aspect became largely unnecessary. By economic and social pressure individuals who refused to adopt the restrictive practices favored by the industry as a whole were forced to yield or were ruined. This, for example, was done to a steel manufacturer who insisted on constructing a continuous-strip steel mill in 1940.

Restrictive Practices

     Among the producing groups, social pressures were added to economic duress to enforce restrictive practices. A tradition of inefficiency, high prices, and low output became so entrenched that anyone who questioned it was regarded as socially unacceptable and almost a traitor to Britain. As The Economist, the only important voice in the country which resisted this trend, said (on January 8, 1944) " . . . too few British business men are trying to compete. In these days, to say that a firm has so increased its efficiency that it can sell at low prices is not to give praise for initiative and enterprise, but to criticize it for breaking the rules of 'fair' trading and indulging in the ultimate sin of 'cut-throat' competition."

     No detailed analysis of the methods or organization of these restrictive groups can be made here, but a few examples may be indicated. The Coal Mines Act of 1930 set up an organization which allotted production quotas to each colliery and fixed minimum prices. The National Shipbuilders Security, Ltd., was set up in 1930 and began to buy up and destroy shipyards, using funds from a million-pound bond issue whose service charges were met from a 1 percent levy on construction contracts. By 1934 one-quarter of Britain's shipbuilding capacity had been eliminated. The Millers' Mutual Association (1920) entirely suppressed competition among its members, and set up the Purchase Finance Company to buy up and destroy flour mills, using funds secured by a secret levy on the industry. By 1933 over one-sixth of the flour mills in England had been eliminated. In textiles the Lancashire Cotton Corporation acquired ro million cotton spindles in three years (1934-1937) and scrapped about half of these, while the Spindles Board scrapped about 2 million spindles in one year (1936-1937). In spite of the growing international crisis, these restrictive actions continued unabated until May 1940, but the drive toward total mobilization by the Churchill government brought a fuller utilization of resources in Britain than in any other country.

The Conservative Party in Britain Represent the Bankers

     This wartime experience with full employment made it impossible to return to the semi-stagnation and partial use of resources which had prevailed under financial capitalism in the 1930'5. However, the economic future of Britain in the postwar period was much hampered by the fact that the two opposing political parties represented entrenched economic interests and were not a rather amorphous groupings of diverse interests as in the United States. The Labour Party, which held office from 1945 to 1951 under Clement Attlee, represents the interests of labor unions and, in a more remote fashion, of consumers The Conservative Party, which held office under Churchill, Eden, Macmillan, and Douglas-Home after 1951 represents the propertied classes, and still continues to show strong banking influence. This has created a kind of balance in which a welfare state has been established, but at the cost of slow inflation and slack use of resources.

     Consumption and enjoyment of leisure rather than production have been the marks of the British economy even under the Conservative Party, which has shown more concern for the value of the pound in the foreign exchanges than it has for productive investment. The middle classes and, above all, the professional and educated groups are not directly represented by either party. By their shift from one of these alien parties to the other, they can determine the outcome of elections, but they are not really at home in either and may, ultimately, turn back to the Liberal Party, although they are reluctant to embark upon the period of coalition, and the relatively irresponsible governments this might entail.

Class Structure in Britain

     The class structure in Britain, which has survived the war in spite of steady attrition, is still being eroded, not by any drastic increase in working-class people rising into the upper class; but by the development of the third class which belongs to neither of the old classes. This new group included the people with "know-how," managers, scientists, professional men, imaginative parvenu entrepreneurs in lines which the older possessing class had ignored. These newly established rich now try to ignore the older upper class, and frequently show surprising resentments toward it. As this new, amorphous, vigorous group ... blurs the outlines of the two older classes. Much of this blurring has been the result of adoption of upper-class characteristics by non-upperclass persons. Increasing numbers of young people are adopting the British Broadcasting Corporation accent, which makes it increasingly difficult to establish the class, educational, and geographic origin of a speaker. Closely related to this is the improved appearance and health of the ordinary Englishman as a consequence of rising standards of living in general and the advent of the National Health service in particular. The loss of these two identifying characteristics leaves clothing as the chief class distinctive mark, but this applies only to men. Many women, as the result of the wide spreading of style magazines and the influence of the cinema, wear similar dresses, use the same cosmetics, and adopt the same hair arrangements. Today, even relatively poor shop-girls are often well dressed and invariably are attractively clean and carefully coiffured.

Large Blocks of Interest Groups

     As in most other countries in the postwar world, Britain's economy is increasingly made up of large blocs of interest groups whose shifting alignments determine economic policy within the three-cornered area of consumers' living standards, investment needs, and governmental expenditures (chiefly defense). All these diverse interest groups are increasingly monopolistic in organization, and increasingly convinced of the need for planning for their own interests, but the major factor in the picture is no longer the banking fraternity, as it was before the war, but the government through the Treasury. [The bankers are now sharing power with the new groups of wealth and the transnational corporations.]

The Increase in Power of the Giant Monopolies

     This decrease in the power of the bankers, [power is now being shared with new financial groups] with a corresponding increase in that of other groups, including the government, is not the result of any new laws, such as the nationalization of the Bank of England, but of shifts in the flows of investment funds, which increasingly bypass the banks. Many of the largest industrial enterprises, such as British Imperial Chemicals or Shell Oil, are largely self-financing as a result of monopolistic conditions based on cartels, patent controls, or control of scarce resources. At the same time, the great mass of investment funds come from non-banking sources. About half of such funds now comes from government and public authorities, such as the National Coal Board, which produces 17 million a year in new money seeking investment. Insurance companies (concerned with non-life policies) are fairly closely linked with the older banking structure, as they are in most countries, but the banks ignored insurance on lives, which in England developed as a lower-class concern, paid by weekly or monthly premiums through door-to-door collections. These insurance companies in Britain provide ฃ1.5 million a day in money seeking investment (1961), and the largest company' the Prudential, pours out ฃ2 million a week. Much of this goes into industrial shares. In 1953, when the Conservative Party denationalized the steel industry, which Labour had nationalized in 1948, much of its shares were bought up by funds from insurance companies. These enormous funds create a great danger that the handful of unknown men who handle the investment of such funds could become a centralized power in British economic life. So far they have made no effort to do so, since they supply funds without interfering in the existing management of the corporations in which they invest. They are satisfied with an adequate return on their money, but the possibility of such control exists.

Lower Class Distaste for Banks

     Another source of funds from lower-class sources is the Postal Savings system. This has expanded because the lower classes in England regard banks as alien, upper-class institutions, and prefer to put their savings somewhere else. As a result, Postal Savings at over ฃ6,000 millions are about the same size as the deposits of all the eleven joint-stock banks.

     Somewhat similar in character are the investments of pension funds, which reached a total of about ฃ2,000 million at the end of 1960 and are increasing at about ฃ150 million a year.

Pressure Upon Britain by International Institutions

     Two other lower-class non-banking innovations which have been having revolutionary influences on British life are the building societies (called "building and loan" in the United States) and "hire-purchase" associations (installment-buying organizations) which help the lower classes to acquire homes and to equip them. Together, these have wiped away much of the traditional dinginess of English lower-class life, brightening it up with amenities which have contributed to increase the solidarity of family life. Slum clearance and rebuilding by local government bodies (the so-called Council houses) have added to this. One consequence of the flowing of investment funds outside the control of the banks has been that the traditional controls on consumption and investment by the use of changes of bank rates have become decreasingly effective. This has had the double effect of damping down the movements of the business cycle and shifting such controls to the government, which can regulate consumption by such devices as changes in the terms of installment buying (larger down payments and carrying charges). At the same time, Britain's formerly independent role in all these matters has come increasingly under the influence of outside, uncontrollable influences, such as business conditions in the United States, the competition of the European Common Market, and the pressures of various international agencies, such as the International Monetary Fund. The final result is a complex and increasingly feudalized social-welfare economy in which managers ... [and] owners share power in a complicated dynamic system whose chief features are still largely unknown even to serious students.

Chapter 33: Germany

     While Britain passed through the stages of capitalism in this fashion, Germany was passing through the same stages in a different way.

     In Germany, capital was scarce when industrialism arrived. Because savings from commerce, overseas trade, or small artisan shops were much less than in Britain, the stage of owner-management was relatively short. Industry found itself dependent upon banks almost at once. These banks were quite different from those in England, since they were "mixed" and not divided into separate establishments for different banking functions. The chief German credit banks, founded in the period 1848-1881, were at the same time savings banks, commercial banks, promotion and investment banks, stockbrokers, safety deposits, and so on. Their relationship to industry was close and intimate from the creation of the Darmstไdter Bank in 1853. These banks floated securities for industry by granting credit to the firm, taking securities in return. These securities were then slowly sold to the investing public as the opportunity offered, the bank retaining enough stock to give it control and appointing its men as directors of the enterprise to give that control final form.

The Importance of Interlocking Directorates

     The importance of the holding of securities by banks can be seen from the fact that in 1908 the Dresdner Bank was holding 2 billion marks' worth. The importance of interlocking directorates can be seen from the fact that the same bank had its directors on the boards of over two hundred industrial concerns in 1913. In 1929, at the time of the amalgamation of the Deutsche Bank and the Disconto Gesellschaft, the two together had directorships in 660 industrial firms and held the chairmanship of the board in 192 of these. Before 1914, examples of individuals with thirty or even forty directorships were not uncommon.

Banking Control of Industry

     This banking control of industry was made even closer by the use which the banks made of their positions as brokers and depositories for securities. The German credit banks acted as stockbrokers, and most investors left their securities on deposit with the banks so that they could be available for quick sale if needed. The banks voted all this stock for directorships and other control measures, unless the owners of the stock expressly forbade it (which was very rare). In 1929 a law was passed preventing the banks from voting stocks deposited with them unless this had been expressly permitted by the owners. The change was of little significance, since by 1929 financial capitalism was on the wane in Germany. Moreover, permission to vote deposited stock was rarely refused. The banks also voted as a right all stock left as collateral for loans and all stock bought on margin. Unlike the situation in America, stocks bought on margin were considered to be the property of the bank (acting as stockbrokers) until the whole price has been paid. The importance of the stock-brokerage business to German banks may be seen in the fact that in the twenty-four years 1885-1908 one-quarter of the gross profits of the large credit banks came from commissions. This is all the more remarkable when we consider that the brokerage commissions charged by German banks were very small (sometimes as low as one-half per thousand).

A Highly Centralized Financial Capitalism Built in Germany

     By methods such as these, a highly centralized financial capitalism was built up in Germany. The period begins with the founding of the Darmstไdter Bank in 1853. This was the first bank to establish a permanent, systematic control of the corporations it floated. It also was the first to use promotion syndicates (in 1859). Other banks followed this example, and the outburst of promotion reached a peak of activity and corruption in the four years 1870-1874. In these four years, 857 stock companies with 3,306,810,000 marks of assets were floated, compared to 295 companies with 2,405,000,000 in assets in the preceding nineteen years (1851-1870). Of these 857 companies founded in 1870-1874, 123 were in the process of liquidation and 37 were bankrupt as early as September 1874.

German Bankers Consolidate Control of Industrial Corporations

     These excesses of financial capitalist promotion led to a governmental investigation which resulted in a strict law regulating promotion in 1883. This law made it impossible for German bankers to make fortunes out of promotion and made it necessary for them to seek the same ends by consolidating their control of industrial corporations on a long-term basis. This was quite different from the United States, where the absence of any legal regulation of promotion previous to the SEC Act of 1933 made it more likely that investment bankers would seek to make short-term "killings" from promotions rather than long-term gains from the control of industrial companies. Another result is to be seen in the relatively sounder financing of German corporations through equity capital rather than through the more burdensome (but promoter-favored) method of fixed interest bonds.

Germany Was Controlled by a Highly Centralized Oligarchy

     The financial capitalism of Germany was at its peak in the years just before 1914. It was controlled by a highly centralized oligarchy. At the center was the Reichsbank whose control over the other banks was relatively weak at all times. This was welcomed by the financial oligarchy, for the Reichsbank, although privately owned, was controlled by the government to a considerable degree. The weakness of the Reichsbank's influence over the banking system arose from the weakness of its influence over the two usual instruments of central-banking control—the re-discount rate and open-market operations. The weakness of the former was based on the fact that the other banks rarely came to the Reichsbank for re-discounts, and usually had a discount rate below that of the Reichsbank. A law of 1899 tried to overcome this weakness by forcing the other banks to adjust their discount rates to that of the Reichsbank, but it was never a very effective instrument of control. Open-market control was also weak because of an official German reluctance "to speculate" in government securities and because the other banks were more responsive to the condition of their portfolios of commercial paper and securities than they were to the size of their gold reserves. In this they were like French rather than British banks. Only in 1909 did the Reichsbank begin a deliberate policy of control through open-market operations, and it was never effective. It was ended completely from 1914 to 1929 by the war, the inflation, and the restrictions of the Dawes Plan.

Control of German Financial Capitalism Rested in Private Hands

     Because of these weaknesses of the Reichsbank, the control of German financial capitalism rested in the credit banks. This is equivalent to saying that it was largely beyond the control of the government, and rested in private hands.

     Of the hundreds of German credit banks, the overwhelming preponderance of power was in the hands of the eight so-called "Great Banks." These were the masters of the German economy from 1865 to 1915. Their overwhelming position can be seen from the fact that of 421 German credit banks in 1907 with 13,204,220,000 marks capital, the eight Great Banks held 44 percent of the total capital of the group. Moreover, the position of the Great Banks was better than this because the Great Banks controlled numerous other banks. In consequence, Robert Franz, editor of Der Deutsche Oekonomist, estimated in 1907 that the eight Great Banks controlled 74 percent of the capital assets of all 421 banks.

The Power and Control of the Stinnes Combine

     ... The turning point from financial to monopoly capitalism was in the year or so following the end of the inflation (1924). In that year the inflation was ended, cartels were given a special legal status with their own Cartel Court to settle disputes, and the greatest creation of financial control ever constructed by German financial capitalism collapsed. The inflation ended in November 1923. The Cartel Decree was November ', 1923. The great control structure was the Stinnes combine, which began to fall apart at the death of Hugo Stinnes in April 19.4. At that time Stinnes had complete control of 107 large enterprises (mostly heavy industry and shipping) and had important interests in about 4,500 other companies. The attempt (and failure) of Stinnes to turn this structure of financial controls into an integrated monopoly marks the end of financial capitalism in Germany.

     To be sure, the great need for capital on the part of German industry in the period after 1924 (since so much of German savings was wiped out by the inflation) gave a false afterglow to the setting sun of German financial capitalism. In five years, billions of marks were supplied to German industry through financial channels from loans made outside Germany. But the depression of 1929 to 1934 revealed the falsity of this appearance. As a result of the depression, all the Great Banks but one had to be rescued by the German government, which took over their capital stock in return. In 1937 these banks that had come under government ownership were "re-privatized," but by that time industry had largely escaped from financial control.

German Oligarchy Uses Direct Financial Pressure and Interlocking

Directorates to Integrate Enterprises and Reduce Competition

     The beginnings of monopoly capitalism in Germany goes back at least a generation before the First World War. As early as 1870, the financial capitalists, using direct financial pressure as well as their system of interlocking directors, were working to integrate enterprises and reduce competition. In the older lines of activity, such as coal, iron, and steel, they tended to use cartels. In the newer lines, like electrical supplies and chemicals, they tended to use great monopolistic firms for this purpose. There are no official figures on cartels before 1905 but it is believed that there were 250 cartels in 1896, of which 80 were in iron and steel. The official investigation of cartels made by the Reichstag in 1905 revealed 385, of which 92 were in coal and metals. Shortly after this, the government began to help these cartels, the most famous example of this being a law of 1910 which forced potash manufacturers to become members of the potash cartel.

The Financial Oligarchy Takes Over Complete Control of the

German Economic System

     In 1923 there were 1,500 cartels, according to the Federation of German Industrialists. They were, as we have seen, given a special legal status and a special court the following year. By the time of the financial collapse of 1931 there were 2,500 cartels, and monopoly capitalism had grown to such an extent that it was prepared to take over complete control of the German economic system. As the banks fell under government control, private control of the economic system was assured by releasing it from its subservience to the banks. This was achieved by legislation such as that curtailing interlocking directorates and the new corporation law of 1937, but above all by the economic fact that the growth of large enterprises and of cartels had put industry in a position where it was able to finance itself without seeking help from the banks.

The German Oligarchy Was Organized in a Highly Complex

and Intricate Hierarchy

     This new privately managed monopoly capitalism was organized in an intricate hierarchy whose details could be unraveled only by a lifetime of study. The size of enterprises had grown so big that in most fields a relatively small number were able to dominate the field. In addition, there was a very considerable amount of interlocking directorates and ownership by one corporation of the capital stock of another. Finally, cartels working between corporations fixed prices, markets, and output quotas for all important industrial products. An example of this—not by any means the worst—could be found in the German coal industry in 1937. There were 260 mining companies. Of the total output, 21 companies had 90 percent, 5 had 50 percent, and 1 had 14 percent. These mines were organized into five cartels of which I controlled 81 percent of the output, and 2 controlled 94 percent. And finally, most coal mines (69 percent of total output) were owned subsidiaries of other corporations which used coal, producers either of metals (54 percent of total coal output) or of chemicals (10 percent of total output).

     Similar concentration existed in most other lines of economic activity. In ferrous metals in 1929, 3 firms out of 26 accounted for 68.8 percent of all German pig-iron production; 4 out of 49 produced 68.3 percent of all crude steel; 3 out of 59 produced 55.8 percent of all rolling mill products. In 1943, one firm (United Steel Works) produced 40 percent of all German steel production, while 12 firms produced over 90 percent. Competition could never exist with concentration as complete as this, but in addition the steel industry was organized into a series of steel cartels (one for each product). These cartels, which began about 1890, by 1930 had control of 100 percent of the German output of ferrous metal products. Member firm had achieved this figure by buying up the nonmembers in the years before 1930. These cartels managed prices, production, and markets within Germany, enforcing their decisions by means of fines or boycotts. They were also members of the International Steel Cartel, modeled on Germany's steel cartel and dominated by it. The International Cartel controlled two-fifths of the world's steel production and five-sixths of the total foreign trade in steel. The ownership of iron and steel enterprises in Germany is obscure but obviously highly concentrated. In 1932, Friedrich Flick had majority ownership of Gelsen-Kirchner Bergwerke, which had majority control of the United Steel Works. He sold his control to the German government for 167 percent of its value by threatening to sell it to a French firm. After Hitler came into power, this ownership by the government was "re-privatized" so that government ownership was reduced to 25 percent. Four other groups had 41 percent among them, and these were closely interwoven. Flick remained as director of United Steel Works and was chairman of the boards of four other great steel combines. In addition, he was director or chairman of the boards in six iron and coal mines, as well as of numerous other important enterprises. It is very likely that the steel industry of Germany in 1937 was controlled by no more than five men of whom Flick was the most important.

The Tremendous Power of the I. G. Farben Monopoly

     These examples of the growth of monopoly capitalism in Germany are merely picked at random and are by no means exceptional. Another famous example can be found in the growth of I. G. Farbenindustrie, the German chemical organization. This was formed in 1904 of three chief firms, and grew steadily until after its last reorganization in 1926 it controlled about two-thirds of Germany's output of chemicals. It spread into every branch of industry, concentrating chiefly on dyes (in which it had 100 percent monopoly), drugs, plastics, explosives, and light metals. It had been said that Germany could not have fought either of the world wars without I. G. Farben. In the first war, by the Haber process for extracting nitrogen from the air, it provided supplies of explosives and fertilizers when the natural sources in Chile were cut off. In the second war, it provided numerous absolute necessities, of which artificial rubber and synthetic motor fuels were the most important. This company by the Second World War was the largest enterprise in Germany. It had over 2,332.8 million reichsmarks in assets and 1,165 million in capitalization in 1942. It had about 100 important subsidiaries in Germany, and employed 350,000 persons in those in which it was directly concerned. It had interests in about 700 corporations outside Germany and had entered into over 500 restrictive agreements with foreign concerns.

The European Dye Cartel

     Among these agreements the most significant was the European Dyestuff Cartel. This grew out of a Swiss cartel formed in 1918. When I. G. Farben was reorganized in 1925 and a similar French organization (Kuhlmann group) was set up in 1927, these two formed a French-German cartel. All three countries set up the European Cartel in 1929. Imperial Chemicals, which had won a near monopoly in British territory in 1926, joined the European Cartel in 1931. This British group already had a comprehensive agreement with du Pont in the United States (made in 1929 and revised in 1939). An effort by I. G. Farben to create a joint monopoly with du Pont within the United States broke down after years of negotiation in a dispute over whether division of control should be 50-50 or 51-49. Nevertheless, I. G. Farben made many individual cartel agreements with du Pont and other American corporations, some formal, others "gentlemen's agreements." In its own field of dyestuffs, it set up a series of subsidiaries in the United States which were able to control 40 percent of the American output. To ensure I. G. Farben control of these subsidiaries, a majority of Germans was placed on each board of directors, and Dietrich Schmitz was sent to the United States to become a naturalized American citizen and become the managing head of the chief I. G. Farben subsidiary here. Dietrich Schmitz was a brother of Hermann Schmitz, chairman of the board of I. G. Farben, director of the United Steel Works. of Metallgesellschaft (the German light-metals trust), of the Bank for International Settlements, and of a score of other important firms. This policy of penetration into the United States was also used in other countries.

The Entire German Industrial System Controlled by the Elite through

Personal Friendships and Secret Agreements

     While I. G. Farben was the greatest example of concentrated control in German monopoly capitalism, it was by no means untypical. The process of concentration by 1939 had been carried to a degree which can hardly be overemphasized. The Kilgore Committee of the United States Senate in 1945 decided, after a study of captured German records, that I. G. Farben and United Steel Works together could dominate the whole German industrial system. Since so much of this domination was based on personal friendships and relationships, on secret agreements and contracts, on economic pressures and duress as well as on property and other obvious control rights, it is not something which can be demonstrated by statistics. But even the statistics give evidence of a concentration of economic power. In Germany in 1936 there were about 40,000 limited-liability companies, with total nominal capitalization of about 20,000 million reichsmarks. I. G. Farben and United Steel Works had 1,344 million reichsmarks of this capital. A mere 18 companies out of the 40,000 had one-sixth of the total working capital of all companies.

Powerful Monopolies Hidden in Various Countries of the World

     While monopolistic organization of economic life reached its peak in Germany, the differences in this respect between Germany and other countries have been overemphasized. It was a difference of degree only, and, even in degree, Britain, Japan, and a number of smaller countries were not so far behind the German development as one might believe at first glance. The error arose from two causes. On the one hand, German cartels and monopolies were well publicized, while similar organizations in other countries remained in hiding. As the British Committee on Trusts reported in 1929, "What is notable among British consolidations and associations is not their rarity or weakness so much as their unobtrusiveness." It is possible that the British vegetable-oil monopoly around Unilever was as powerful as the German chemical monopoly around I. G. Farben, but, while much has been heard about the latter, very little is heard about the former. After an effort to study the former, Fortune magazine wrote, "No other industry, perhaps, is quite so exasperatingly secretive as the soap and shortening industries."

I. G. Farben Used Espionage and Economic Sabotage to Enhance

Power of the Money Trust in Germany

     On the other hand, Germany monopolistic organizations have built up disfavor because of their readiness to be used for nationalistic purposes. German cartel managers were ... first ... businessmen seeking profits and [patriotic Germans] ... second. In most other countries (especially the United States), monopoly capitalists are businessmen first and patriots later. As a result, the goals of German cartels were as frequently political as economic. I. G. Farben and others were constantly working to help Germany in its struggle for power, by espionage, by gaining economic advantages for Germany, and by seeking to cripple the ability of other countries to mobilize their resources or to wage war.

The Money Power Used Nazism to Check Bolshevism

     This difference in attitude between German and other capitalists became increasingly evident in the 1930's. In that decade the German found his economic and his patriotic motives impelling him in the same direction (to build up the power and wealth of Germany against Russia and the West). The capitalists of France, Britain, and the United States, on the other hand, frequently experienced conflicting motives. Bolshevism presented itself as an economic threat ... at the same time that Nazism presented itself as a political threat to their countries. Many persons were willing to neglect or even increase the latter threat in order to use it against the former danger.

Powerful Figures Maintain Favorable Attitude Toward Nazism

     This difference in attitude between German and other capitalists arose from many causes. Among these were (a) the contrast between the German tradition of a national economy and the Western tradition of laissez-faire, (b) the fact that world depression caused the threat of social revolution to appear before Nazism rose as a political danger to the West, (c) the fact that cosmopolitan financial capitalism was replaced more rapidly by nationalist monopoly capitalism in Germany than in the West, and (d) the fact that many wealthy and influential persons like Montagu Norman, Ivar Kreuger, Basil Zaharoff, and Henri Deterding directed public attention to the danger of Bolshevism while maintaining a neutral, or favorable, attitude toward Nazism.

German Economic Revival After World War II

     The impact of the war on Germany was quite different from its effects on most other countries. In France, Britain, and the United States, the war played a significant role in demonstrating conclusively that economic stagnation and underemployment of resources were not necessary and could be avoided if the financial system were subordinated to the economic system. In Germany this was not necessary, since the Nazis had already made this discovery in the 1930's. On the other hand, the destruction of the war left Germany with a large task to do, the rebuilding of the German industrial plant. But, since Germany could not get to that task until it had its own government, the masses of Germans suffered great hardships in the five years 1945-1950, so that, by the time the proper political conditions arrived to allow the task of rebuilding, these masses of German labor were eager for almost any job and were more concerned with making a living wage than they were with seeking to raise their standards of living. This readiness to accept low wages, which is one of the essential features of the German economic revival, was increased by the influx of surging millions of poverty-stricken refugees from the Soviet-occupied East. Thus a surplus of labor, low wages, experience in unorthodox financial operations, and an immense task to be done all contributed to the German revival.

The Development of the European Economic Community

     The signal for this to begin was given by the West German currency reform of 1950, which encouraged investment and offered entrepreneurs the possibility of large profits from the state's tax policies. The whole developed into a great boom when the establishment of the European Common Market of seven western European states offered Germany a mass market for mass production just as the rebuilding of German industry was well organized. The combination of low wages, a docile labor force, new equipment, and a system of low taxes on producers, plus the absence of any need for several years to assume the expense of defense expenditures, all contributed to make German production costs low on the world's markets and allowed Germany to build up a flourishing and profitable export trade. The German example was copied in Japan and in Italy, and, on a different basis, in France, with the result that the Common Market area enjoyed a burst of economic expansion and prosperity which began to transform western European life and to raise most of its countries to a new level of mobility and affluence such as they had never known before. One result of this was the development of what had been backward areas within these countries, most notably in southern Italy, where the boom caught on by 1960. The only area within the Common Market where this did not occur was in Belgium, which was hampered by obsolescent equipment and domestic social animosities, while in France the boom was delayed for several years by the acute political problems associated with the death of the Fourth Republic (1958).

Chapter 34: France

     Financial capitalism lasted longer in France than in any other major country. The roots of financial capitalism there, like Holland but unlike Germany, go back to the period of commercial capitalism which preceded the Industrial Revolution. These roots grew rapidly in the last half of the eighteenth century and were well established with the founding of the Bank of France in 1800. At that date, financial power was in the hands of about ten or fifteen private banking houses whose founders, in most cases, had come from Switzerland in the second half of the eighteenth century. These bankers, all Protestant, were deeply involved in the agitations leading up to the French Revolution. When the revolutionary violence got out of hand, they were the chief forces behind the rise of Napoleon, whom they regarded as the restorer of order. As a reward for this support, Napoleon in 1800 gave these bankers a monopoly over French financial life by ... [allowing] them [to] control of the new Bank of France.

Financial Power Resides in Private Banking Houses Who

Control the Bank of France

     By 1811 most of these bankers had gone over to the opposition to Napoleon because they objected to his continuation of a warlike policy. France at that time was still in the stage of commercial capitalism, and constant war was injurious to commercial activity. As a result, this group shifted its allegiance from Bonaparte to Bourbon, and survived the change in regime in 1815. This established a pattern of political agility which was repeated with varying success in subsequent changes of regime. As a result, the Protestant bankers, who had controlled financial life under the First Empire, were still the main figures on the board of regents of the Bank of France until the reform of 1936. Among these figures the chief bore the names Mirabaud, Mallet, Neuflize, and Hottinguer.

Rivalry Between Older Protestant and Jewish Bankers

     In the course of the nineteenth century, a second group was added to French banking circles. This second group, largely Jewish, was also of non-French origin, the majority Germanic (like Rothschild, Heine, Fould, Stern, and Worms) and the minority of Iberian origin (like Pereire and Mires). A rivalry soon grew up between the older Protestant bankers and the newer Jewish bankers. This rivalry was largely political rather than religious in its basis, and the lines were confused by the fact that some of the Jewish group gave up their religion and moved over to the Protestant group (such as Pereire and Heine).

Mirabaud and Rothschild Dominate the Entire

German Financial System

     The rivalry between these two groups steadily increased because of their differing political attitudes toward the July Monarchy (1830-1848), the Second Empire (1852-1870), and the Third Republic 1871-1940). In this rivalry the Protestant group was more conservative than the Jewish group, the former being lukewarm toward the July Monarchy, enthusiastic toward the Second Empire, and opposed to the Third Republic. The Jewish group, on the other hand, warmly supported the July Monarchy and the Third Republic but opposed the Second Empire. In this rivalry the leadership of each group was centered in the richest and more moderate banking family. The leadership of the Protestant group was exercised by Mirabaud, which was on the left wing of the group. The leadership of the Jewish group was held by Rothschild, which was on the right wing of that group. These two wings were so close that Mirabaud and Rothschild (who together dominated the whole financial system, being richer and more powerful than all other private banks combined) frequently cooperated together even when their groups as a whole were in competition.

Catholic Bankers

     This simple picture was complicated, after 1838, by the slow rise of a third group of bankers who were Catholics. This group (including such names as Demachy, Seilli่re, Davillier, de Germiny, Pillet-Will, Gou๏n, and de Lubersac) rose slowly and late. It soon split into two halves. One half formed an alliance with the Rothschild group and accepted the Third Republic. The other half formed an alliance with the rising power of heavy industry (largely Catholic) and rose with it, forming under the Second Empire and early Third Republic a powerful industrial-banking group whose chief overt manifestation was the Comit้ des Forges (the French steel "trust").

Rothschild's French Investment Bank

     Thus there were, in the period 1871-1900, three great groups in France: (a) the alliance of Jews and Catholics dominated by Rothschild; (b) the alliance of Catholic industrialists and Catholic bankers dominated by Schneider, the steel manufacturer; and (c) the group of Protestant bankers dominated by Mirabaud. The first of these accepted the Third Republic, the other two rejected the Third Republic. The first waxed wealthy in the period 1871-1900, chiefly through its control of the greatest French investment bank, the Banque de Paris et des Pays Bas (Paribas). This Paribas bloc by 1906 had a dominant position in French economic and political life.

Banking Groups Paralyze the French Political and Economic System

     In opposition to Paribas the Protestant bankers established an investment bank of their own, the Union Parisienne, in 1904. In the course of the period 1904-1919 the Union Parisienne group and the Comit้ des Forges group formed an alliance based on their common opposition to the Third Republic and the Paribas bloc. This new combination we might call the Union-Comit้ bloc. The rivalry of these two great powers, the Paribas bloc and the Union-Comit้ bloc, fills the pages of French history in the period 1884-1940. It paralyzed the French political system, reaching the crisis stage in the Dreyfus case and again in 1934-1938. It also partially paralyzed the French economic system, delaying the development from financial capitalism to monopoly capitalism, and preventing economic recovery from the depression in the period 1935-1940. It contributed much to the French defeat in 1940. At present, we are concerned only with the economic aspects of this struggle.

     In France the stage of commercial capitalism continued much longer than in Britain, and did not begin to be followed by industrial capitalism until after 1830. The stage of financial capitalism in turn did not really begin until about 1880, and the stage of monopoly capitalism became evident only about 1925.

The Greatest Bankers Had Intimate Connections with Governments

     During all this period the private bankers continued to exist and grow in power. Founded in commercial capitalism, they were at first chiefly interested in governmental obligations both domestic and foreign. As a result, the greatest private bankers, like the Rothschilds or Mallets, had intimate connections with governments and relatively weak connections with the economic life of the country. It was the advent of the railroad in the period 1830-1870 which changed this situation. The railroads required capital far beyond the ability of any private banker to supply from his own resources. The difficulty was met by establishing investment banks, deposit banks, saving banks, and insurance companies which gathered the small savings of a multitude of persons and made these available for the private banker to direct wherever he thought fitting. Thus, the private banker became a manager of other persona' funds rather than a lender of his own. In the second place, the private banker now became much more influential and must less noticeable. He now controlled billions where formerly he had controlled millions, and he did it unobtrusively, no longer in the open in his own name, but acting from the background, concealed from public view by the plethora of financial and credit institutions which had been set up to tap private savings. The public did not notice that the names of private bankers and their agents still graced the list of directors of the new financial enterprises. In the third place, the advent of the railroad brought into existence new economic powers, especially in iron-making and coal mining. These new powers, the first powerful economic influences in the state free from private banking control, arose in France from an activity very susceptible to governmental favor and disfavor: the armaments industry.

Private Proprietorships and Partnerships

     Industrial capitalism began in France, as elsewhere, in the fields of textiles and iron-making. The beginning may be discerned before 1830, but the growth was slow at all times. There was no lack of capital, since most Frenchmen were careful savers, but they preferred fixed-interest obligations (usually government bonds) to equity capital, and would rather invest in family enterprises than in securities of other origin. The use of the corporation form of business organization grew very slowly (although it was permitted by French law in 1807, earlier than elsewhere). Private proprietorships and partnerships remained popular, even in the twentieth century. Most of these were financed from profits and family savings (as in England). When these were successful and increased in size, the owners frequently cut off the growth of the existing enterprise and started one or more new enterprises alongside the old one. These sometimes engaged in the identical economic activity but more frequently engaged in a closely related activity. Strong family feeling hampered the growth of large units or publicly owned corporations because of reluctance to give outsiders an influence in family businesses. The preference for fixed-interest obligations over equity securities as investments made it difficult for corporations to grow in size easily and soundly. Finally, the strong feeling against public authority, especially the tax collector, increased the reluctance to embark in public rather than private forms of business organization.

The Schneider Monopoly Over Arms

     Nonetheless, industry grew, receiving its greatest boost from the advent of the railroad, with its increased demand for steel and coal, and from the government of Napoleon III (1852-1870), which added a new demand for armaments to the industrial market. Napoleon showed special favor to one firm of iron and armaments makers, the firm of Schneider at Le Creusot. Eugene Schneider obtained a monopoly in supplying arms to the French government, sold materials to government-encouraged railway construction, become president of the Chamber of Deputies, and minister of agriculture and commerce. It is hardly surprising that the industrialists looked back on the period of the Second Empire as a kind of golden age.

Clash Between Two Economic Blocs

     The loss of political influence by the heavy industrialists after 1871 reduced their profits, and drove them to ally with the Catholic bankers. Thus, the struggle between financial capitalism and monopoly capitalism which appeared in most countries was replaced in France by a clash between two economic blocs, both of which were interested in both industry and banking and neither of which was prepared to accept the unorthodox banking procedures which become one of the chief goals of monopoly capitalism. As a result, monopoly capitalism appeared late in France and, when it did, arose between the two great blocs, with ramifications in both, but largely autonomous from the central control of either. This new autonomous and rather amorphous group which reflected the rise of monopoly capitalism may be called the Lille-Lyons Axis. It rose slowly after 1924, and took over the control of France after the defeat of 1940.

The Rise of Financial Capitalism in France

     The rise of financial capitalism in France, as elsewhere, was made possible by the demand for capital for railroad building. The establishment of the Cr้dit Mobilier in 1852 (with 60 million francs in assets) may be taken as the opening date for French financial capitalism. This bank was the model for the credit banks established in Germany later, and, like them, conducted a mixed business of savings accounts, commercial credit, and investment banking. The Credit Mobilier failed in 1867, but others were founded afterward, some mixed, others more specialized on the British or American pattern.

Over 300 Billion Francs Taken from the French People

by Worthless Securities

     Once begun, financial capitalism in France displayed the same excesses as elsewhere. In France these were worse than those in Britain or Germany (after the reforms of 1884), although they were not to be compared with the excesses of frenzy and fraud displayed in the United States. In France, as in Britain, the chief exploits of financial capitalism in the nineteenth century were to be found in the foreign field, and in government rather than in business securities. The worst periods of delirium were in the early 1850's, again in the early 1880's, and again in much of the twentieth century. In one year of the first period (July 1, 1854 to July 1, 1855) no less than 457 new companies with combined capital of 1 billion francs were founded in France. The losses to security buyers were so great that on March 9, 1856, the government had to prohibit temporarily any further issue of securities in Paris. Again in the period 1876 to 1882 over I billion francs of new stocks were issued, leading to a crash in 1882. And finally, in the whole period 1900-1936, financial capitalism was clearly in control in France. In 1929 a Paris newspaper estimated that in a period of thirty years (from the Humbert embezzlement of 1899) more than 300 billion francs (equivalent to the total public and private debt of France in 1929) had been taken from the French people by worthless securities.

     The center of the French economic system in the twentieth century was not to be found, as some have believed, in the Bank of France, but, instead, resided in a group of almost unknown institutions—the private banks. There were over a hundred of these private banks, but only about a score were of significance, and even in this restricted group two (Rothschild and Mirabaud) were more powerful than all the others combined. These private banks were known as the Haute Banque, and acted as the High Command of the French economic system. Their stock was closely held in the hands of about forty families, and they issued no reports on their financial activities. They were, with a few exceptions, the same private banks which had set up the Bank of France. They were divided into a group of seven Jewish banks (Rothschild, Stern, Cahen d'Anvers, Propper, Lazard, Spitzer, and Worms), a group of seven Protestant banks (Mallet, Mirabaud, Heine, Neuflize, Hottinguer, Odier, and Vernes), and a group of five Catholic banks (Davillier, Lubersac, Lehideux, Goudchaux, and Demachy). By the twentieth century the basic fissure to which we have referred had appeared between the Jews and the Protestants, and the Catholic group had split to ally itself either with the Jews or with the forces of monopolistic heavy industry. None the less, the various groups continued to cooperate in the management of the Bank of France.

The Bank of France Was Controlled by Forty Families

     The Bank of France was not the center of French financial capitalism except nominally, and possessed no autonomous power of its own. It was controlled until 1936, as it had been in 1813, by the handful of private banks which created it, except that in the twentieth century some of these were closely allied with an equally small but more amorphous group of industrialists. In spite of the fissure, the two blocs cooperated with each other in their management of this important instrument of their power.

     The Bank of France was controlled by the forty families (not two hundred, as frequently stated) because of the provision in the bank's charter that only the 200 largest stockholders were entitled to vote for the members of the board of regents (the governing board of the bank). There were 182,500 shares of stock outstanding, each with face value of 1,000 francs but usually worth five or ten times that. In the twentieth century there were 30,000 to 40,000 stockholders. Of the 200 who could vote for the twelve elected regents, 78 were corporations or foundations and 122 were individuals. Both classes were dominated by the private banks, and had been for so long that the regents' seats had become practically hereditary. The chief changes in the names of regents were caused by the growth of heavy industry and the transfer of seats through female lines. Three seats were held by the same families for well over a century. In the twentieth century the names of Rothschild, Mallet, Mirabaud, Neuflize, Davillier, Vernes, Hottinguer, and their relatives were consistently on the board of regents.

Forty Families Control Nineteen Chief Banks

     The Bank of France acted as a kind of general staff for the forty families which controlled the nineteen chief private banks. Little effort was made to influence affairs by the re-discount rate, and open-market operations were not used until 1938. The state was influenced by the Treasury's need for funds from the Bank of France. Other banks were influenced by methods more exclusively French: by marriage alliances, by indirect bribery (that is, by control of well-paying sinecures in banking and industry), and by the complete dependence of French banks on the Bank of France in any crisis. This last arose from the fact that French banks did not emphasize gold reserves but instead regarded commercial paper as their chief reserve. In any crisis where this paper could not be liquidated fast enough, the banks resorted to the unlimited note-issuing power of the Bank of France.

Investment Bank Supplied Long-Term Capital to Industry

     In the third line of control of the French economy were the investment banks called "barques d'affaires." These were dominated by two banks: the Banque de Paris et des Pays Bas set up by the Rothschild group in 1872 and the Banque de l'Union Parisienne founded by the rival bloc in 1904. These investment banks supplied long-term capital to industry, and took stock and directorships in return. Much of the stock was resold to the public, but the directorships were held indefinitely for control purposes. In 1931, Paribas held the securities of 357 corporations, and its own directors and top managers held 180 directorships in 120 of the more important of these. The control was frequently made easier by the use of nonvoting stock, multiple-voting stock, cooptative directorships, and other refinements of financial capitalism. For example, the General Wireless Company set up by Paribas distributed 200,000 shores of stock worth 500 francs a share. Of these, 181,818 shares, sold to the public, had one-tenth vote each while 18,182 shares, held by the insider group, had one vote each. A similar situation was to be found in Havas stock, also issued by Paribas.

Interlocking Directorships

     The investment bank of the non-Jewish private banks and their industrial allies was the Union Parisienne. Among its sixteen directors were to be found such names as Mirabaud, Hottinguer, Neuflize, Vernes, Wendel, Lubersac, and Schneider in the period before 1934. The two largest stock-holders in 1935-1937 were Lubersac and Mallet. The directors of this bank held 124 other directorships on 90 important corporations in 1933. At the same time it held stock in 338 corporations. The value of the stock held by the Union Parisienne in 1932 was 482.1 million francs and of that held by Paribas was 548.8 million francs, giving a total for both of 1,030.9 million francs.

Decline of Jewish Group of Private Bankers

     In the fourth line of control were five chief commercial banks with 4,416 branches in 1932. At the beginning of the century these had all been within the "Paribas Consortium," but after the founding of the Union Parisienne in 1904 they slowly drifted over to the new bloc, the Comptoir National d'Escompte going over almost at once, with the others following more slowly. As a result, the control of the two great blocs over the great deposit banks was rather mixed during the twentieth century, with the old Jewish group of private bankers losing ground rather steadily. The decline of this group was closely related to the decline of international financial capitalism, and received its worse blow in the losses in foreign bonds resulting from the First World War Regional deposit banks were controlled in varying degrees by one or the other of the two blocs, the Paribas control being stronger in the north, west, and south, while the Union-Comit้ bloc was stronger in the northeast, east, and southeast. Control of savings banks and insurance companies was also shared, especially where they had been founded before the two blocs achieved their modern form. For example, the largest insurance company in France, with capital and reserves of 2,463 million francs in 1931, had as directors such names as Mallet, Rothschild, Neuflize, Hottinguer, and so on.

Banking Families Divide Up Their Spheres of Interest in Various

Industries and Public Utilities

     This cooperation between the two blocs in regard to the lower levels of the banking system (and the Bank of France itself) did not usually extend to industrial or commercial activity. There, competition outside the market was severe, and became a struggle to the death in 1932-1940. In some activities, spheres of interest were drawn between the two groups, and thus competition was reduced. Inside France, there was the basic division between east and west, the Jewish group emphasizing shipbuilding, transatlantic communications and transportation, and public utilities in the west, while the Protestant-Catholic group emphasized iron, steel, and armaments in the east. Outside France, the former group dominated the colonies, North Africa, and the eastern Mediterranean, while the latter group emphasized central and eastern Europe (chiefly through the Union europ้ene industrielle et financi่re, created in 1920 to be the economic counterpart of the Little Entente).

Worldwide Ramifications of Rivalry Between Banking Groups

     In some fields the rivalry of the two groups had worldwide ramifications. In petroleum products, for example, the Jewish bankers, through the Banque de Paris et des Pays Bas, controlled the Compagnie fran็aise des p้troles, which was allied to Standard Oil and Rockefeller, while the Catholic-Protestant bankers, through the Union Parisienne, controlled Petrofina, which was allied to Royal Dutch Shell and Deterding. Jules Exbrayat, partner of Demachy et Cie. (in which Fran็ois de Wendel was majority owner) was a director of Union Parisienne and of Petrofina, and Alexandre Bungener, partner of Lubersac et Cie., was also a director of Union Parisienne and of Petrofina. Charles Sergeant, once undersecretary of the Ministry of Finance and sub-governor of the Bank of France, was for years chairman of the Union Parisienne, and played a role in one bloc similar to that played by Horace Finaly in the other bloc. He was a director of Petrofina and of the Union europ้ene industrielle et financi่re. When he retired for reasons of health in 1938 he was replaced in several positions (including Petrofina and Union Parisienne) by Jean Tannery, honorary governor of the Bank of France. At the same time, Joseph Courcelle, former inspector of finances, was a director of seventeen companies including Petrofina and Union Parisienne. On the other side, Horace Finaly was general manager of Paribas and director of Standard Franco-Am้ricaine, while his son, Boris, was a director of Cie. fran็aise des p้troles. Former ambassador Jules Cambon and Emile Oudot, both directors of Parisbas, were respectively directors of Standard Franco-Am้ricaine and Standard fran็aise des p้troles (before these merged in 1938).

French Economy Organized into Trade Association,

Industrial Monopolies and Cartels

     Outside the banking system which we have sketched, the French economy was organized in a series of trade associations, industrial monopolies, and cartels. These were usually controlled by the Catholic-Protestant bloc of private bankers, since the Jewish group continued to use the older methods of financial capitalism while their rivals moved forward to the more obvious methods of monopoly capitalism. In such cases, individual companies controlled by the Jewish group frequently jointed the cartels and associations set up by the rival bloc.

The Center of the Monopolistic Industrial Controls

     At the center of the system of monopolistic industrial controls was the Conf้d้ration g้n้rale du patronat fran็ais, which after 1936 (Matignon agreements) did the collective bargaining for most French industry. The Conf้d้ration was divided into sections for different branches of industry. Around the Conf้d้ration was a series of general trade associations and cartels such as the Comit้ des Forges, Comit้ centrale des Houill่res, Union des industries m้tallurgiques et mini่res, Soci้t้ de l'industrie min้rale, and so on. Below these were a large number of regional associations and local cartels. These were integrated into a single whole by financial controls, family alliances, and interlocking positions.

Monopolies in the Metal Industry

     In this system the Comit้ des Forges, trade association of the metallurgical industry, held a key position. In France the iron industry was originally widely scattered in small enterprises. Of these, the factories at Le Creusot, acquired by the Schneider family in 1838, were so favored by Napoleon III that they began to emerge as the chief metal company in France. As a result of the loss of governmental privileges by the shift from Second Empire to Third Republic and the blow to Schneider's prestige from the victory of Krupp steel cannon over Le Creusot's bronze cannon in 1870, the whole metal industry of France began to turn toward monopoly and to seek capital from private bankers. The turn toward monopoly appeared almost at once, especially in the typical French form of the comptoir (a joint selling agency).

     In 1884, as we have said, the Comit้ des Forges was formed as an association of all the metallurgical industries of France, using a single comptoir to prevent price competition. By the twentieth century, the Comit้ des Forges consisted of representatives of over 200 companies with nominal capital of about 8 billion francs, but whose securities were worth almost 100 billion francs in 1939. Of the 200 corporations the chief perhaps were ษtablissements Schneider; Les Forges et Aci้ries de la Marine et Hom้court; La Soci้t้ des Petits-Fils de Fran็ois de Wendel; Les Aci้ries de Longwy, and so on. By the year 1939, 75 percent of French steel production was from six companies. The monopolistic influences, however, were much stronger than these figures would indicate. Of the 200 firms in the Comit้ des Forges, only 70 were of importance in iron and steel. These 70 had an aggregate capitalization of about 4 billion francs. Of these firms, 51 with 2,727,054,000 francs of capital in 1939 were in the Union-Comit้ bloc and were controlled by a Schneider-Mirabaud alliance. Eleven corporations with 506 million francs of capital were in the Paribas bloc. Eight firms with 749 million francs of capital were in neither bloc or doubtful.

Monopolies in the Coal Industry

     A somewhat similar development is to be found in the French coal industry. This, perhaps, is not surprising, as the coal industry was largely dominated by the same groups as the steel industry. By 1938, 77 percent of French coal production came from 14 companies. Three of these companies were owned by Wendel, who thus controlled 15.3 percent of French coal output directly, and considerably more indirectly. Parallel to the Comit้ des Forges in steel, and controlled by the same group, was the Comit้-centrale des Houill่res in coal. This was supported by taxes on collieries based on output. Voting power within the organization was based on this financial contribution, so that 13 companies controlled over three-fourths of the votes and Wendel over one-sixth. The French coal industry was controlled nearly as completely by the Union-Comit้ bloc as was the steel industry. Coal in France was found chiefly in two areas —the northwest around Lille and the southeast about Lyons. The latter was controlled almost completely by the Union-Comit้ bloc, but the Paribas influence was very great in the far richer northern area. It was these Paribas coal mines of the north which gradually drifted away and became one of the chief elements in the monopolistic Lille-Lyons Axis.

The Paribas Bloc Had Taken Control of the Strategic Fields

of Communications and Publicity

     The preponderant influence of the Union-Comit้ bloc in such important fields as iron, steel, and coal was balanced to some extent by the skillful fashion in which the Paribas bloc had taken control of the strategic points in the fields of communications and publicity.

     There were only 1,506 corporations registered on the stock exchange in Paris in 1936. Of this number only about 600 were important. If we add to these about 150 or 200 important corporations not registered in Paris, we have a total of about 800 firms. Of these 800, the Paribas bloc controlled, in 1936, almost 400 and the Union-Comit้ bloc about 300. The rest were controlled by neither bloc. The superior number of firms controlled by Paribas was counterbalanced by the much heavier capitalization of the Union-Comit้ firms. This in turn was counterbalanced by the fact that the Parisbas firms were in strategic positions.

The Paribas system Was Headed by Baron Edouard de Rothschild

     The whole Paribas system in the twentieth century was headed by the Baron Edouard de Rothschild, but the active head was Ren้ Mayer, manager of the Rothschild bank and nephew by marriage of James Rothschild. The chief center of operations for the system was in the Banque de Paris et des Pays Bas, which was managed, until 1937, by Horace Finaly of a Hungarian-Jewish family brought to France by Rothschild in 1880. From this bank was ruled much of the section of the French economy controlled by this bloc. Included in this section were many foreign and colonial enterprises, utilities, ocean shipping, airlines, shipbuilding and, above all, communications. In this latter group were Cie. g้n้rale transatlantique, Cie. g้n้rale de t้l้graphie sans fils, Radio-France, Cie. fran็aise de cโbles t้l้graphiques, Cie. internationale des wagon-lits, Havas, and Hachette.

Havas–a Great Monopolistic News Agency

     Havas was a great monopolistic news agency, as well as the most important advertising agency in France. It could, and did, suppress or spread both news and advertising. It usually supplied news reports gratis to those papers which would print the advertising copy it also provided. It received secret subsidies from the government for almost a century (a fact first revealed by Balzac), and by the late 1930's these subsidies from the secret funds of the Popular Front had reached a fantastic size. Hachette had a monopoly on the distribution of periodicals and a sizable portion of the distribution of books. This monopoly could be used to kill papers which were regarded as objectionable. This was done in the 1930's to Francois Coty's reactionary L'Ami du peuple.

Rothschilds Desire to Form an Alliance with Russia

     After 1934, the Union-Comit้ bloc was badly injured by the world depression, which fell on heavy industry more severely than on other segments of the economy. After 1937, the Paribas bloc was badly split by the rise of anti-Semitism, the controversy over orthodox and unorthodox financial methods for dealing with depression, and, above all, by the growing foreign crisis. The Rothschild desire to form an alliance with Russia and adopt a policy of resistance to Hitler while supporting Loyalist Spain, continuing orthodox financial policies, and building up the labor unions against the Comit้ des Forges, collapsed from its own internal contradictions, their own lack of faith in it, and the pressure of Great Britain.

     As the two older blocs thus weakened, a new bloc rose rapidly to power between them. This was the Lille-Lyons Axis. It was constructed about two regional groups—one in the north about Lille and the other in the southeast and east about Lyons and in Alsace. The former had a branch running to Brussels in Belgium, while the latter had a branch running to Basle in Switzerland. The Lille end was originally under Rothschild influence, while the Lyons end was originally under Mirabaud influence. The two ends were integrated into a single unit by the activities of several private banks and two deposit banks in Paris. The private banks included Odier, Sautter et Cie., S. Propper et Cie., and Worms et Cie. The credit banks included the Cr้dit Commercial de France and the Banque fran็aise pour le commerce et l'industrie.

Monopolies Over Electrical Utilities, Chemicals, Textiles and Light Metals

     This Lille-Lyons Axis was built up about four economic activities: electrical utilities, chemicals, artificial textiles, and light metals. These four were monopolistic and interrelated, chiefly for technological reasons. They were monopolistic either by nature (public utilities) or because they were based on narrowly controlled natural resources (utilities and chemicals), or because they required large-scale operation utilizing by-products and affiliated activities for profitable operation (utilities, chemicals, artificial textiles, and light metals), or because they required use of closely held patents (chemicals, artificial textiles, and light metals).

The Lille-Lyons Axis

     These activities were interrelated for various reasons. The public utilities of the north were based on coal, while those of the southeast were based on waterpower. The manufacture of light metals concentrated in the southeast because of the available water power. These metals, chiefly aluminum, were made by electrolysis, which provided chemical by-products. Thus the two light-metals firms in France moved into the field of chemicals. The textile industry was already centered in the north (about Lille) and in the southeast (about Lyons). When this textile industry turned to artificial fibers, it had to ally with chemical firms. This was easy because the chemical firms of the southeast were already in close contact with the textile firms of Lyons (chiefly the Gillet family), while the chemical firms of the north were already in close contact with the textile firms of the area (chiefly the Motte family and its relatives). These textile firms of the north already controlled, in cooperation with Paribas, the richest coal mines of the area. These coal mines began to generate electric power at the mine, utilizing all by-products for chemicals and artificial textiles. Since the textile families of the north (like Motte) were already related to the textile families of the southeast (like Gillet) by marriage and by trade associations, it was easy for the Lille-Lyons Axis to grow up along these lines.

The Lille-Lyons Axis Take Over the Whole Economy of France

     As a result of the stalemate between the two great blocs, between financial capitalists and monopoly capitalists, between supporters of the Russian alliance and supporters of appeasement, between orthodox and unorthodox financial measures, between Jews and anti-Semites, France was completely paralyzed and went down to defeat in 1940. This was quite acceptable to the Lille-Lyons Axis. It accepted the defeat with satisfaction, and, with German help, began to take over the whole economy of France. The Paribas bloc was destroyed by the anti-Semite laws, and many of its chief strong points taken over. The Union-Comit้ bloc was badly crippled by a series of severe blows, including the forced sale of all Schneider's foreign holdings, and of most of Wendel's domestic holdings to the Germans (chiefly to the Hermann G๖ring Werke), the seizure of the other Lorraine iron properties, and the abolition of the Comit้ des Forges itself.

Giant Monopolies Control the Economy of France

     At the same time, the Lille-Lyons Axis strengthened itself. The French chemical industry, already largely monopolized by Etablissements Kuhlmann, was forced into a single corporation (Soci้t้ Francolor) controlled by the Lille-Lyons Axis and I. G. Farben. The light-metals industry, already largely monopolized by Alais, Froges, et Camargue, was centralized almost completely in this firm. The artificial textile industry, already largely monopolized by the Gillet clique, was centralized under a single corporation, France-Rayonne, under joint Gillet-German control. The automobile industry was subjected to a single control—the Comit้ d'organization d'automobiles—and set up a joint manufacturing company—Soci้t้ g้n้rale fran็aise de construction d'automobiles. The whole system was controlled by a small group in Lyons centering about the Gillet family and represented on the political scene chiefly by Pierre Laval.

The Struggles Between the Three Great Economic Power Blocs

     The struggles between these three great economic power blocs in France are rather difficult for Americans to understand because they were not reflected in price competition in the market where Americans would normally expect economic competition to appear. In the field of price policies, the three blocs generally cooperated. They also cooperated in their attitudes toward labor, although to a lesser degree. Their rivalries appeared in the fields of economic and political power as struggles to control sources of raw materials, supplies of credit and capital, and the instruments of government. Price competition, which to an American always has seemed to be the first, and even the only, method of economic rivalry, has, in Europe, generally been regarded as the last possible method of economic rivalry, a method so mutually destructive as to be tacitly avoided by both sides. In fact, in France, as in most European countries, competing economic groups saw nothing inconsistent in joining together to use the power of the state to enforce joint policies of such groups toward prices and labor.

     The French defeat in 1940 shattered the stalemate between the economic power blocs which had paralyzed France in the 1930's and done so much to make the defeat possible. The two older blocs were disrupted under the German occupation and the Vichy regime, the Paribas bloc by the anti-Semitic laws and the Union-Comit้ bloc because its holdings were desirable to the Germans and their French collaborators. The Lille-Lyons Axis, led by the associates of the Banque Worms and the Banque de l'Indochine, sought to take over most of the French economy as the willing collaborators of the Germans and their old associate, Pierre Laval, and were fairly successful in doing so, but the economic confusions of the occupation and the burden of the German occupation costs made it impossible to win any significant benefits from their position. Moreover, as collaborators with the Nazis the Lille-Lyons Axis could not expect to survive a German defeat, and did not do so.

Ren้ Mayer

     ... [S]ome of the personnel of Paribas have [played a significant role in France since 1945] ... notably Ren้ Mayer, active head of the Rothschild family interests who was minister of finance in the early postwar government. Later, in 1962, De Gaulle made the director of the Rothschild bank, George Pompidou, prime minister. The rather prominent role played by bankers such as these did not prevent France from following the pattern of new economic procedures which we have observed in other countries. The process was delayed by the political paralysis arising from the French parliamentary system, especially the instability of Cabinets arising from the multiplicity of parties. The military crisis in Indochina, followed by the protracted and frustrating civil war in Algeria, prevented France from establishing any satisfactory economic system until 1958.

The European Economic Community

     The only achievement of the earlier period was, however, a very great one—the French role in establishing the European Common Market, which was decisive. This was established by the Treaty of Rome of 1957, with six members (France, West Germany, Belgium, the Netherlands, Italy, and Luxembourg). It planned to remove the internal customs barriers among its members by stages over at least a dozen years, while adopting a common external tariff against outsiders. In this way a mass market would be provided which would allow mass production with lower costs. France was unable to contribute much to this new market until its political instability was ended by the establishment of the Fifth Republic, on a more authoritarian pattern, in 1958 (constitution of October 4th). In December of that year, the franc was devalued and a program of fiscal austerity was inaugurated. At once economic activity began to rise. The rate of growth of industrial production reached 6.3 percent in 1961 and almost 8.5 percent in 1962. The gold reserves doubled within two years of the devaluation.

     The resulting prosperity, called an "economic miracle" in the 1962 Report of the twenty-nation Organization for Economic Cooperation and Development (the successor organization to the Marshall Plan), was unevenly spread in that farmers and government employees obtained less than a fair share of it, and it was accompanied by an undesirable inflation of the cost of living (with 1953 as 100) to 103 in 1956, up to 138 in 1961, and to 144 in 1962. However, it brought France and the other Common Market countries to an unprecedented level of prosperity which was in striking contrast to the drab conditions in the unfortunate countries within the Iron Curtain. The British, who had formed a European Free Trade Association of the "Outer Seven" (Austria, Denmark, Norway, Portugal, Sweden, Switzerland) to seek free trade among members but no common external tariff against others, sought to lift its rather lethargic economy by joining the Common Market in 1962, but was rebuffed by De Gaulle, who required as a price that Britain renounce its efforts, going back over decades, to establish a special relationship with the United States.

Chapter 35: The United States of America

          ... From the beginning, the United States had a shortage of labor in the face of an unprecedented richness of resources. As a result, it sought labor-saving devices and high output per man-day of work, even in agriculture. This means that the amount of capital equipment per man was unusually high throughout American history, even in the earliest period, and this undoubtedly presented a problem in an undeveloped country where private savings were, for many generations, scarce. The accumulation of such savings for investment in labor-saving mechanisms brought an opportunity to financial capitalism at an early date. Accordingly, the United States had financial capitalism over a longer period and in a more extreme form than any other country. Moreover, the size of the country made the problem of transportation so acute that the capital necessary for the early canals, railroads, and iron industry was large and had to be found from sources other than local private persons. Much of it came from government subsidies or from foreign investors. It was observable as early as 1850 and had overseas connections which were still in existence in the 1930's.

The Techniques of Finance Capitalism Reach Levels of Corruption into

America Higher Than Any Country in the World

          By the 1880's the techniques of financial capitalism were well developed in New York and northern New Jersey, and reached levels of corruption which were never approached in any European country. This corruption sought to cheat the ordinary investor by flotations and manipulations of securities for the benefit of "insiders." Success in this was its own justification, and the practitioners of these dishonesties were as socially acceptable as their wealth entitled them to be, without any animadversions on how that wealth had been obtained. Corrupt techniques, associated with the names of Daniel Drew or Jay Gould in the wildest days of railroad financial juggling, were also practiced by Morgan and others who became respectable from longer sustained success which allowed them to build up established firms.

Close Alliance of Wall Street with Two Major Parties

          Any reform of Wall Street practices came from pressure from the hinterlands, especially from the farming West, and was long delayed by the close alliance of Wall Street with the two major political parties, which grew up in 1880-1900. In this alliance, by 1900, the influence of Morgan in the Republican Party was dominant, his chief rivalry coming from the influence of a monopoly capitalist, Rockefeller of Ohio. By 1900 Wall Street had largely abandoned the Democratic Party, a shift indicated by the passage of the Whitney family from the Democrats to the Republican inner circles, shortly after they established a family alliance with Morgan. In the same period, the Rockefeller family reversed the ordinary direction of development by shifting from the monopoly fields of petroleum to New York banking circles by way of the Chase National Bank. Soon family as well as financial alliances grew up among the Morgans, Whitneys, and Rockefellers, chiefly through Payne and Aldrich family connections.

Finance Capitalism in New York Resembles a Feudal Structure

          For almost fifty years, from 1880 to 1930, financial capitalism approximated a feudal structure in which two great powers, centered in New York, dominated a number of lesser powers, both in New York and in provincial cities. No description of this structure as it existed in the 1920's can be given in a brief compass, since it infiltrated all aspects of American life and especially all branches of economic life.

          At the center were a group of less than a dozen investment banks, which were, at the height of their powers, still unincorporated private partnerships. These included J. P. Morgan; the Rockefeller family; Kuhn, Loeb and Company; Dillon, Read and Company; Brown Brothers and Harriman; and others. Each of these was linked in organizational or personal relationships with various banks, insurance companies, railroads, utilities, and industrial firms. The result was to form a number of webs of economic power of which the more important centered in New York, while other provincial groups allied with these were to be found in Pittsburgh, Cleveland, Chicago, and Boston.

J. P. Morgan Dominates Corporate America

          J. P. Morgan worked in close relationship to a group of banks and insurance companies, including the First National Bank of New York, the Guaranty Trust Company, the Bankers Trust, the New York Trust Company, and the Metropolitan Life Insurance Company. The whole nexus dominated a network of business firms which included at least one-sixth of the two hundred largest nonfinancial corporations in American business. Among these were twelve utility companies, five or more railroad systems, thirteen industrial firms, and at least five of the fifty largest banks in the country. The combined assets of these firms were more than $30 billion. They included American Telephone and Telegraph Company, International Telephone and Telegraph, Consolidated Gas of New York, the groups of electrical utilities known as Electric Bond and Share and as the United Corporation Group (which included Commonwealth and Southern, Public Service of New Jersey, and Columbia Gas and Electric), the New York Central railway system, the Van Sweringen railway system (Allegheny) of nine lines (including Chesapeake and Ohio; Erie; Missouri Pacific; the Nickel Plate; and Pere Marquette); the Santa Fe; the Northern system of five great lines (Great Northern; Northern Pacific; Burlington; and others); the Southern Railway; General Electric Company; United States Steel; Phelps Dodge; Montgomery Ward; National Biscuit; Kennecott Copper; American Radiator and Standard Sanitary; Continental Oil; Reading Coal and Iron; Baldwin Locomotive; and others.

The Rockefeller Group Was a Monopoly Capitalist Organization

          The Rockefeller group, which was really a monopoly capitalist organization investing only its own profits, functioned as a financial capitalist unit in close cooperation with Morgan. Allied with the country's largest bank, the Chase National, it was involved as an industrial power in the various Standard Oil firms and the Atlantic Refining Company, but it controlled over half the assets of the oil industry, plus the $2 1/3 billion assets in Chase National Bank.

Kuhn Loeb Dominates Railroads

          Kuhn, Loeb was chiefly interested in railroads, where it dominated the Pennsylvania, the Union Pacific, the Southern Pacific, the Milwaukee, the Chicago Northwestern, the Katy (Missouri-Kansas-Texas Railroad Company), and the Delaware and Hudson. It also dominated the Bank of Manhattan and the Western Union Telegraph Company for a total of almost $11 billion in assets.

Mellon Group Assets Reach 3.3 Billion

          The Mellon group centered in Pittsburgh dominated Gulf Oil, Koppers, Alcoa, Westinghouse Electric, Union Trust Company, the Mellon National Bank, Jones and Laughlin Steel, American Rolling Mill, Crucible Steel, and other firms for total assets of about $3.3 billion.

Four Economic Blocs Dominate Corporate America

          It has been calculated that the 200 largest nonfinancial corporations in the United States, plus the fifty largest banks, in the mid-1930's, owned 34 percent of the assets of all industrial corporations, 48 percent of the assets of all commercial banks, 75 percent of the assets of all public utilities, and 95 percent of the assets of all railroads. The total assets of all four classes were almost $100 billion, divided almost equally among the four classes. The four economic power blocs which we have mentioned (Morgan; Rockefeller; Kuhn, Loeb and Company; and Mellon) plus du Pont, and three local groups allied with these in Boston, Cleveland, and Chicago, together dominated the following percentages of the 250 corporations considered here: of industrial firms 58 percent of their total assets, of railroads 82 percent, and utilities 58 percent. The aggregate value of the assets controlled by the eight power groups was about $61,205 million of the total assets of $198,351 million in these 250 largest corporations at the end of 1935.

The Economic Power of the Money Trust in America

Is Almost Beyond Imagination

          The economic power represented by these figures is almost beyond imagination to grasp, and was increased by the active role which these financial titans took in politics. Morgan and Rockefeller together frequently dominated the national Republican Party, while Morgan occasionally had extensive influence in the national Democratic Party (three of the Morgan partners were usually Democrats). These two were also powerful on the state level, especially Morgan in New York and Rockefeller in Ohio. Mellon was a power in Pennsylvania and du Pont was obviously a political power in Delaware.

The Morgan Hierarchy

          In the 1920's this system of economic and political power formed a hierarchy headed by the Morgan interests and played a principal role both in political and business life. Morgan, operating on the international level in cooperation with his allies abroad, especially in England, influenced the events of history to a degree which cannot be specified in detail but which certainly was tremendous....

     

Finance and Monopoly Capitalism Dominate America

          In the United States, however, the ... [system] of financial capitalism was much more protracted than in most foreign countries, and was not followed by a clearly established system of monopoly capitalism. This blurring of the stages was caused by a number of events of which three should be mentioned: (1) the continued personal influence of many financiers and bankers ... ; (2) the decentralized condition of the United States itself, especially the federal political system; and (3) the long-sustained political and legal tradition of antimonopoly going back at least to the Sherman Antitrust Act of 1890. As a consequence, the United States did not reach a clearly monopolistic economy, and was unable to adopt a fully unorthodox financial policy capable of providing full use of resources. Unemployment, which had reached 13 million persons in 1933, was still at 10 million in 1940. On the other hand, the United States did take long steps in the direction of balancing interest blocs by greatly strengthening labor and farm groups and by sharply curtailing the influence and privileges of finance and heavy industry.

The Interlock Between Bankers and Industrialists

          Of the diverse groups in the American economy, the financiers were most closely related to heavy industry because of the latter's great need for capital for its heavy equipment. The deflationary policies of the bankers were acceptable to heavy industry chiefly because the mass labor of heavy industry in the United States, notably in steel and automobile manufacturing, was not unionized, and the slowly declining prices of the products of heavy industry could continue to be produced profitably if costs could be reduced by large-scale elimination of labor by installing more heavy equipment. Much of this new equipment, which led to assembly-line techniques such as the continuous-strip steel mill, were financed by the bankers. With unorganized labor, the employers of mass labor could rearrange, curtail, or terminate labor without notice on a daily basis and could thus reduce labor costs to meet falls in prices from bankers' deflation. The fact that reductions in wages or large layoffs in mass-employment industries also reduced the volume of purchasing power in the economy as a whole, to the injury of other groups selling consumers' goods, was ignored by the makers of heavy producers' goods. In this way, farmers, light industry, real estate, commercial groups, and other segments of the society were injured by the deflationary policies of the bankers and by the employment policies of heavy industry, closely allied to the bankers. When these policies became unbearable in the depression of 1929-1933, these other interest blocs, who had been traditionally Republican (or at least, like the western farmers, had refused to vote Democratic and had engaged in largely futile third-party movements), deserted the Republican Party, which remained subservient to high finance and heavy industry.

The Democratic Party

          This shift of the farm bloc, light industry, commercial interests (notably department stores), real estate, professional people, and mass, unskilled, labor to the Democratic Party in 1932 resulted in the election of Franklin D. Roosevelt and the New Deal. The new administration sought to ... reward and help the groups which had elected it. The farmers were helped by subsidies; labor was helped by government spending to make jobs and provide purchasing power and by encouragement of unionization; while real estate, professional people, and commercial groups were helped by the increasing demand from the increased purchasing power of farmers and labor.

The New Deal

          The New Deal's actions against finance and heavy industry were chiefly aimed at preventing these two from ever repeating their actions of the 1920-1933 period. The SEC Act sought to supervise securities issues and stock-exchange practices to protect investors. Railroad legislation sought to reduce the financial exploitation and even the deliberate bankruptcy of railroads by financial interests (as William Rockefeller had done to the Chicago, Milwaukee, and St. Paul or as Morgan had done to the New York, New Haven and Hartford). The Banking Act of 1933 separated investment banking from deposit banking. The wholesale manipulation of labor by heavy industry was curtailed by the National Labor Relations Act of 1933, which sought to protect labor's rights of collective bargaining. At the same time, with the blessings of the new administration, a drive was made by labor groups allied with it to unionize the masses of unskilled labor employed by heavy industry to prevent the latter from adopting any policy of mass layoffs or sharp and sudden wage reductions in any future period of decreasing demand. To this end a Committee for Industrial Organization was set up under the leadership of the one head of a mass labor union in the country, John L. Lewis of the United Mine Workers, and a drive was put on to organize the workers of the steel, automobile, electrical, and other industries which had no unions.

The New Deal Greatly Benefitted the Bankers

          All this served to create more highly organized and more self-conscious interest blocs in American life, especially among farmers and labor, but it did not represent any victory for unorthodox financing, the real key to either monopoly capitalism or to a managed pluralist economy. The reason for this was that the New Deal, because of President Roosevelt, was fundamentally orthodox in its ideas on the nature of money. Roosevelt was quite willing to unbalance the budget and to spend in a depression in an unorthodox fashion because he had grasped the idea that lack of purchasing power was the cause of the lack of demand which made unsold goods and unemployment, ... and had quite orthodox ideas on the nature of money. As a result, his administration treated the symptoms rather than the causes of the depression and, while spending unorthodoxly to treat these symptoms, did so with money borrowed from the banks in the accepted fashion. The New Deal allowed the bankers to create the money, borrowed it from the banks, and spent it. This meant that the New Deal ran up the national debt to the credit of the banks, and spent money in such a limited fashion that no drastic re-employment of idle resources was possible.

A Failure to Grasp the Nature of Money

          One of the most significant facts about the New Deal was Its orthodoxy on money. For the whole twelve years he was in the White House, Roosevelt had statutory power to issue fiat money in the form of greenbacks printed by the government without recourse to the banks. This authority was never used. As a result of such orthodoxy, the depression's symptoms of idle resources were overcome only when the emergency of the war in 1942 made it possible to justify a limitless increase in the national debt by limitless borrowing from private persons and the banks. But the whole episode showed a failure to grasp the nature of money and the function of the monetary system, of which considerable traces remained in the postwar period.

Roosevelt's Theory of Pump Priming

          One reason for the New Deal's readiness to continue with an orthodox theory of the nature of money, along with an unorthodox practice in its use, arose from the failure of the Roosevelt administration to recognize the nature of the economic crisis itself. This failure can be seen in Roosevelt's theory of "pump priming." He ... believed, as did his secretary of the Treasury, that there was nothing structurally wrong with the economy, that it was simply temporarily stalled, and would keep going of its own powers if it could be restarted. In order to restart it, all that was needed, in New Deal theory, was a relatively moderate amount of government spending on a temporary basis. This would create purchasing power (demand) for consumers' goods, which, in turn, would increase the confidence of investors who would begin to release large unused savings into investment. This would, again, create additional purchasing power and demand, and the economic system would take off of its own power. The curtailment of the powers of finance and heavy industry would then prevent any repetition of the collapse of 1929.

The Public Debt Rises Under Roosevelt's Erroneous Theories

          The inadequacy of this theory of the depression was shown in 1937 when the New Deal, after four years of pump priming and a victorious election in 1936, stopped its spending. Instead of taking off, the economy collapsed in the steepest recession in history. The New Deal had to resume its treatment of symptoms but now ... the spending program could [never] ... be ended, ... since the administration ... lacked the ... [determination] to reform the system or ... to escape from borrowing bank credit with its mounting public debt, and the administration ... [decided not to] to adopt ... [a] really large-scale spending necessary to give full employment of resources. The administration was saved from this impasse by the need for the rearmament program followed by the war. Since 1947 the Cold War and the space program have allowed the same situation to continue, so that even today prosperity is not the result of a properly organized economic system but of government spending, and any drastic reduction in such spending would give rise to an acute depression.

Chapter 36: The Economic Factors

          From an analytical point of view there are a number of important elements in the economic situation of the twentieth century. These elements did not all come into existence at the same time, nor did any single one come into existence everywhere simultaneously. The order in which these elements came into existence is roughly that in which we list them here:

          1. rising standards of living

          2. industrialism

          3. growth of size of enterprises

          4. dispersal of ownership of enterprises

          5. separation of control from ownership

          6. concentration of control

          7. decline of competition

          8. increasing disparity in the distribution of incomes

          9. declining rate of expansion leading to crisis

Rising Standards of Living

          1. A rise in the general or average standard of living in modern times is obvious and, with intermittent breaks, goes back for a thousand years. Such progress is welcome, but it obviously brings with it certain accompanying factors which must be understood and accepted. A rising standard of living, except in its earliest stages, does not involve any increase in consumption of necessities but instead involves an increase in the consumption of luxuries even to the point of replacing basic necessities by luxuries. As average incomes rise, people do not, after a certain level, eat more and more black bread, potatoes, and cabbage, or wear more and more clothing. Instead, they replace black bread with wheaten bread and add meat to their diet and replace coarse clothing by finer apparel; they shift their emphasis from energy foods to protective foods.

          This process can be continued indefinitely. A number of students have divided goods from this point of view into three levels: (a) necessities, (b) industrial products, and (c) luxuries and services. The first would include food and clothing; the second would include railroads, automobiles, and radios; the third would include movies, books, amusements, yachts, leisure, music, philosophy, and so on. Naturally, the dividing lines between the three groups are very vague, and the position of any particular item will vary from society to society and even from person to person.

          As standards of living rise, decreasing proportions of attention and resources are devoted to primary or secondary types of products, and increasing proportions to secondary and tertiary types of products. This has very important economic consequences. It means that luxuries tend to become relatively more important than necessities. It also means that attention is constantly being shifted from products for which the demand is relatively inelastic to products for which the demand is relatively elastic (that is, expansible). There are exceptions to this. For example, housing, which is obviously a necessity, is a product for which demand is fairly elastic and might continue to be so until most persons lived in palaces, but, on the whole, the demand for necessities is less elastic than the demand for luxuries.

          A rising standard of living also means an increase in savings (or accumulation of surplus) out of all proportion to the rise in incomes. It is a fairly general rule both for societies and for individuals that savings go up faster than incomes as the latter rise, if for no other reason than the fact that a person with an adequate supply of necessities will take time to make up his mind on which luxuries he will expend any increase in income.

          Finally, a shift from primary to secondary production usually entails a very great increase in capital investment, while a shift from secondary to tertiary production may not result in any increase in capital investment proportionately as great. Leisure, amusements, music, philosophy, education, and personal services are not likely to require capital investments comparable to those required by the construction of railroads, steel factories, automotive plants, and electrical stations.

          As a result of these factors, it may well arise that a society whose rising standards of living have brought it to the point where it is passing from emphasis on secondary to emphasis on tertiary production will be faced with the necessity of adjusting itself to a situation which includes more emphasis on luxuries than on necessities, more attention to products of elastic demand than inelastic, and increased savings with decreasing demands for investment.

Industrialism

          2. Industrialization is an obvious element in modern economic development. As used here, it has a very specific meaning, namely, the application of inanimate power to production. For long ages, production was made by using power from animate sources such as human bodies, slaves, or draft animals, with relatively little accomplished by power from such inanimate sources as wind or falling water. The so-called Industrial Revolution began when the energy from coal, released through a nonliving machine—the steam engine—became an important element in the productive process. It continued through improvements in the use of wind power and waterpower to the use of oil in internal-combustion engines and finally to power from atomic sources.

          The essential aspect of industrialism has been the great rise in the use of energy per capita of population. No adequate figures are available for most European countries, but in the United States the energy used per capita was:

          Year               Energy Per Capita          Index

          1830               6 million BTU          1

          1890               80 million BTU          13

          1930               245 million BTU          40

          As a result of this increase in the use of energy per capita, industrial output per man-hour rose significantly (in the United States 96 percent from 1899 to 1929). It was this increase in output per man-hour which permitted the rise in standards of living and the increases in investment associated with the process of industrialization.

          The Industrial Revolution did not reach all parts of Europe, or even all parts of any single country, at the same moment. In general, it began in England late in the eighteenth century (about 1776) and spread slowly eastward and southward across Europe, reaching France after 1830, Germany after 1850, Italy and Russia after 1890. This eastward movement of industrialism had many significant results, among them the belief on the part of the newer countries that they were at a disadvantage in comparison with England because of the latter's head start. This was untrue, for, from a strictly temporal point of view, these newer countries had an advantage over England, since their newer industrial installations were less obsolescent and less hampered by vested interests. Whatever advantage England had arose from better natural resources, more plentiful supply of capital, and skilled labor.

Growth of Size of Enterprises

          3. The growth of size of enterprise was a natural result of the process of industrialism. This process required very considerable outlays for fixed capital, especially in the activities most closely associated with the early stages of industrialism, such as railroads, iron foundries, and textile mills. Such great outlays required a new legal structure for enterprise. This was found in the corporation or limited-liability joint-stock company. In this company large capital installations could be constructed and run, with ownership divided into small fractions among a large number of persons.

     This increase in size of units was apparent in all countries, but chiefly in the United States, Britain, and Germany. The statistics on this are incomplete and tricky to use, but, in general, they indicate that, while the number of corporations has been increasing, and the average size of all corporations has been falling, the absolute size of the largest corporations has been increasing rapidly in the twentieth century, and the share of total assets or of total output held h! the largest corporations has been rising. As a result, the output of certain products, notably chemicals, metals, artificial fibers, electrical equipment, and so on, has been dominated in most countries by a few great firms.

          In the United States, where this process has been studied most carefully, it was found that from 1909 to 1930 the number of billion-dollar corporations rose from 1 to 15, and the share of all corporation assets held by the 200 largest rose from 32 percent to over 49 percent. By 1939 this figure reached 57 percent. This meant that the largest 200 corporations were growing faster than other corporations (5.4 percent a year compared to 2.0 percent a year) and faster than total national wealth. As a result, by 1930 these 200 largest corporations had 49.2 percent of all corporate assets (or $81 billion out of $165 billion); they had 38 percent of all business wealth (or $81 billion out of $212 billion); they held 22 percent of all wealth in the country (or $81 billion out of $367 billion). In fact in 1930, a single corporation (American Telephone and Telegraph) had greater assets than the total wealth in 21 states. No such figures are available for European countries, but there can be no doubt that similar growth was taking place in most of them during this period.

Dispersal of Ownership of Enterprises

          4. Dispersal of ownership of enterprise was a natural result of the growth of size of enterprise, and was made possible by the corporate method of organization. As corporations increased in size, it became less and less possible for any individual or small group to own any important fractions of their stocks. [An individual or family can maintain control of a corporation by holding as little as 5-10 percent of the stock.] In most countries the number of security holders increased faster than the number of outstanding securities. In the United States the former increased in numbers seven times as fast as the latter from 1900 to 1928. This was a greater spread than in other countries, but elsewhere there was also a considerable spreading out of corporate ownership. This was exactly contrary to the prediction of Karl Marx that the owners of industry would get fewer and fewer as well as richer and richer.

Separation of Control from Ownership

          5. The separation of ownership from control has already been mentioned. It was an inevitable counterpart of the advent of the corporate form of business organization; indeed, the corporate form was devised for this very purpose—that is, to mobilize the capital owned by many persons into a single enterprise controlled by a few. As we have seen, this inevitable counterpart was carried to a quite unexpected degree by the devices invented by financial capitalism.

Concentration of Control

          6. The concentration of control was also inevitable in the long run, but here also was carried by special devices to an extraordinary degree. As a result, in highly industrialized countries, the economic systems were dominated by a handful of industrial complexes. The French economy was dominated by three powers (Rothschild, Mirabaud, and Schneider); the German economy was dominated by two (I. G. Farben and Vereinigte Stahl Werke); the United States was dominated by two (Morgan and Rockefeller). Other countries, like Italy or Britain, were dominated by somewhat larger numbers....

          In the United States, Morgan ... [guided] the economic swing from financial to monopoly capitalism, and yielded quite gracefully to the rising power of du Pont. In Britain, likewise, the masters of financial capitalism yielded to the masters of chemical products and vegetable oils, once the inevitable writing on the wall had been traced out in a convincing fashion. But all these shifts of power within the individual economic systems indicate merely that individuals or groups are unable to maintain their positions in the complex flux of modern life, and do not indicate any decentralization of control. On the contrary, even as group succeeds group, the concentration of control becomes greater.

Decline of Competition

          7. A decline in competition is a natural consequence of the concentration of control. This decline in competition refers, of course, only to price competition in the market, since this was the mechanism which made the economic system function in the nineteenth century. This decline is evident to all students of modern economics, and is one of the most widely discussed aspects of the modern economic system. It is caused not only by the activities of businessmen but also by the actions of labor unions, of governments, of private social welfare organizations, and even of the herd-like behavior of consumers themselves.

Increasing Disparity in the Distribution of Incomes

          8. The increasing disparity in the distribution of income is the most controversial and least well-established characteristic of the system. The available statistical evidence is so inadequate in all European countries that the characteristic itself cannot be proved conclusively. An extensive study of the subject, using the available materials for both Europe and the United States, with a careful analysis of the much better American materials, will permit the following tentative conclusions. Leaving aside all government action, it would appear that the disparity in the distribution of the national income has been getting wider.

          In the United States, for example, according to the National Industrial Conference Board, the richest one-fifth of the population received 46.2 percent of the national income in 1910, 51.3 percent in 1929, and 48.5 percent in 1937. In the same three years, the share of the poorest one-fifth of the population fell from 8.3 percent to 5.4 percent to 3.6 percent. Thus the ratios between the portion obtained by the richest one-fifth and that obtained by the poorest one-fifth increased in these three years from 5.6 to 9.3 to 13.5. If, instead of one-fifths, we examine the ratios between the percentage obtained by the richest one-tenth and that obtained by the poorest one-tenth, we find that in 1910 the ratio was 10; in 1929 it was 21.7; and in 1937 it was 34.4. This means that the rich in the United States were getting richer relatively and probably absolutely while the poor were getting poorer both relatively and absolutely. This last is caused by the fact that the increase in the real national income in the period 1910-1937 was not great enough to compensate for the decrease in percentage going to the poor or for the increase in number of persons in that class.

     As a result of such an increase in disparity in the distribution of national income, there will be a tendency for savings to rise and for consumers' purchasing power to decline relative to each other. This is because the savings of a community are largely made by the richer persons in it, and savings increase out of all proportion as incomes rise. On the other hand, the incomes of the poor class are devoted primarily to expenditures for consumption. Thus, if it is correct that there is an increasing disparity in the distribution of the national income of a country, there will be a tendency for savings to rise and consumer purchasing power to decline relative to each other. If this is so, there will be an increasing reluctance on the part of the controllers of savings to invest their savings in new capital equipment, since the existing decline of purchasing power will make it increasingly difficult to sell the products of the existing capital equipment and highly unlikely that the products of any new capital equipment could be sold more easily.

          This situation, as we have described it, assumes that the government has not intervened in such a way as to change the distribution of the national income as determined by economic factors. If, however, the government does intervene to disturb this distribution, its actions will either increase the disparity in its distribution or will decrease it. If these actions increase it, the problem of the discrepancy to which we have referred between savings, on one hand, and the level of purchasing power and investment, on the other, will be made worse. If, on the other hand, the government adopts a program which seeks to reduce the disparity in the distribution of the national income, by, for example, adopting a program of taxation which reduces the savings of the rich while increasing the purchasing power of the poor, the same problem of insufficient investment will arise. Such a tax program as we have described would have to be based on a graduated income tax, and, because of the concentration of saving in the upper-income brackets, would have to be carried to such a sharp degree of graduation that the taxes of the very rich would be rapidly approaching the level of confiscation. This would, as the conservatives say, "kill incentive." Of this there can be no doubt, for any person with an income already large enough to satisfy his consumers' wants will be very unlikely to possess any incentive to invest if each dollar of profit made from such investment is to have all but a few cents of its value taken by the government in the form of taxation.

          In this way, the problem of increasing disparity in the distribution of national income leads to a single result (decline of investment relative to savings), whether the situation is left subject to purely economic factors or the government takes steps to decrease the disparity. The only difference is that, in the one ease, the decline in investment may be attributed to a leek of consumer purchasing power, while, in the other case, it may be attributed to a "killing of incentive" by government action. Thus, we see that the controversy which has raged in both Europe and America since 1932 between progressives and conservatives in regard to the causes of the lack of investment is an artificial one. The progressives, who insisted that the lack of investment was caused by lack of consumer purchasing power, w ere correct. But the conservatives, who insisted that the lack of investment was caused by a lack of confidence, were also correct. Each was looking at the opposite side of what is a single continuous cycle.

          This cycle runs roughly as follows: (a) purchasing power creates demand for goods; (b) demand for goods creates confidence in the minds of investors; (c) confidence creates new investment; and (d) new investment creates purchasing power, which then creates demand, and so on. To cut this cycle at any point and to insist that the cycle begins at that point is to falsify the situation. In the 1930's the progressives concentrated attention on stage (a), while the conservatives concentrated attention on stage (c). The progressives, who sought to increase purchasing po\ver by some redistribution of the national income, undoubtedly did increase purchasing power under stage (a), but they lost purchasing power under stage (c) by reducing confidence of potential investors. This decrease of confidence was especially noticeable in countries (like France and the United States) which were still deeply involved in the stage of financial capitalism.

     It would appear that the economic factors alone affected the distribution of incomes in the direction of increasing disparity. In no major country, however, were the economic factors alone allowed to determine the issue. In all countries government action noticeably influenced the distribution....

          In Italy the economic factors had relatively free rein until after the creation of the corporative state in 1934. The effect of government action was to increase the normal economic tendency toward an increasing disparity in distribution of the national income. This tendency had been allowed to work from an early period until the end of the war in 1918. A drastic effort by Leftish influences in the period 1918-1922 resulted in government action which reversed this tendency. As a result, a counterrevolution brought Mussolini to power in October 1922. The new government suppressed those government actions which had hampered the normal economic tendency, and as a result the trend toward greater disparity in distribution of the national income was resumed. This trend became more drastic after the creation of the dictatorship in 1925, after the stabilization of the lira in 1927, and after the creation of the corporative state in 1934.

          In Germany the changes in distribution of the national income were similar to those in Italy. although complicated by the efforts to create a social-service state (an effort going back to Bismarck) and by the hyperinflation. In general, the trend toward increasing disparity in distribution of the national income continued, less rapidly than in Italy, until after 1918. The inflation, by wiping out unemployment for the lower class and by wiping out the savings of the middle class, created a complex situation in which the wealth of the richest class was increased while the poverty of the poorest class was reduced, and the general trend toward increased disparity in income was probably reduced. This reduction became great under the social-service state of 1924-1930, but was drastically reversed because of the great increase in poverty in the lower classes after 1929. After 1934 the adoption of an unorthodox financial policy and a policy of benefits to monopoly capitalism reinforced the normal trend toward increasing disparity in distribution of income. This was in accord with the desires of the Hitler government, but the full impact of this policy was not apparent on the distribution of incomes until the period of full employment after 1937.

          Until 1938 Hitler's policy, although aimed at favoring the high-income classes, raised the standards of living of the lower-income levels even more drastically by shifting them from unemployment with incomes close to nothing into wage-earning positions in industry) so that the disparity in distribution of income was probably even reduced for a short-run period in 1934-1937. This was not unacceptable to the high-income classes, because it stopped the threat of revolution by the discontented masses and because it was obviously of long-run benefit to them. This long-run benefit began to appear when capacity employment of capital and labor was achieved in 1937. The continuance of the policy of rearmament after 1936 increased the incomes of the high-income groups while decreasing the incomes of the lower-income groups and thus served, from 1937 onward, to reinforce the normal economic tendency toward an increasing disparity int eh distribution of incomes. This, of course, is one of the essential features of a Fascist government, and is obvious not only in Germany since 1937, in Italy since 1927, but also in Spain since 1938.

          In France and Britain, the trend toward increasing disparity in the distribution of incomes was reversed in recent decades, although in Britain before 1945 and in France before 1936 there was no conscious effort to achieve this result.

          In France disparity increased until 1913, then decreased chiefly because of the increasing power of labor unions and actions of the government. The inflation and resulting devaluation badly injured the incomes of the possessing class, so that the disparity became less disperse; but the whole level of living standards was declining, savings were declining, and investment was decreasing more rapidly than either. This process became worse after the depression hit France about 1931 and even worse after the Popular Front adopted its welfare program in 1936. This decline of the general economic level continued quite steadily except for a brief revival after 1938, but the disparity in the distribution of incomes very likely became greater in 1940-1942.

          In Britain the disparity became greater, but at a slower rate (because of labor unions), until the First World War, and then almost stabilized, increasing only slightly, because of the severe efforts made in Britain to pay for much of the war's cost by taxation. The decrease in upper-level incomes by taxation, however, was more than overcome by the decrease in lower-level incomes from unemployment. This static condition of the disparity in distribution of the national income doubtless continued until after 1931. Since this last date the situation is confused. The revival of prosperity and the rapid development of new lines of activity combined with the peculiarities of the incidence of British taxation have likely reduced the disparity, but, until 1943, not by anything approaching the degree which one might expect from a first glance at the problem. Since 1943 and especially since 1946 the tax schedule and the government's social welfare program have drastically reduced the disparity in distribution of income and have also cut investment and even savings by private sources to a considerable degree.

          It would seem that in the twentieth century the disparity in the distribution of national income, which had been increasing for generations, slowed down and reversed as a result of government activities. This turning point appeared in different countries at different dates, probably earliest in Denmark and France, later in Germany and Italy, latest in Britain and Spain. In France and Britain the tendency was reversed by the action of the government, but in a hesitant fashion which was not able, in any decisive way, to overcome the sag in private enterprise by any upswing in government enterprise. In Germany, Italy, and Spain the governments fell into the hands of the possessing classes, and the desires of the peoples of these countries for a more equitable distribution of incomes were frustrated. In all three types of conditions, there was a decline in real economic progress until after 1950.

Declining Rate of Expansion Leading to Crisis

          9. A declining rate of economic expansion is the last important characteristic of the economic system of Europe in the present century up to 1950. This decline resulted almost inevitably from the other characteristics which we have already discussed. It varied from country to country, the countries of eastern Europe suffering less than those of western Europe on the whole, but chiefly because their previous rate of progress had been so much lower.

     The causes of this decline are basically to be found in a relative increase in the power of the vested interests within the community to defend the status quo against the efforts of the progressive and enterprising members of the community to change it. This was revealed in the market (the central mechanism of the economic system) as a result of a relative increase in savings in respect to investment. Savings have continued or have increased for several reasons. In the first place, a tradition which placed a high social esteem on savings existed in western Europe from the Protestant Reformation until the 1930'S. In the second place, there had grown up established institutionalized savings organizations like insurance companies. In the third place, the rising standards of living increased savings even more rapidly. In the fourth place, the increasing disparity in the distribution of incomes increased savings. In the fifth place, the increase in size of enterprises and the separation of ownership from control acted to increase the amount of corporate savings (undistributed profits).

          On the other hand, the inclination to invest did not rise so rapidly as savings, or even decreased. Here, again, the reasons are numerous. In the first place, the shift in advanced industrial countries from secondary to tertiary production reduces the demand for heavy capital investment. In the second place, declining rates of population increase, and geographic expansion may adversely affect the demand for investment. In the third place, the increasing disparity in the distribution of incomes, whether it is counteracted by government action or not, has a tendency to reduce the demand for investment capital. In the fourth place, the decrease in competition has served to reduce the amount of investment by making it possible for the controllers of existing capital to maintain its value by curtailing the investment of new capital which would make the existing capital less valuable. This last point may require additional explanation.

          In the past, investment was not only capital-creating but also capital-destroying—that is, it made some existing capital worthless by making it obsolete. The creation by investment, for example, of shipyards for making iron-hull steam vessels not only created this new capital but at the same time destroyed the value of the existing yards equipped to make wooden-hull sailing ships. In the past, new investment was made in only one of two cases: (a) if an old investor believed that the new capital would yield sufficient profit to pay for itself and for the old investment now made obsolete, or (b) if the new investor was completely free of the old one, so that the latter could do nothing to prevent the destruction of his existing capital holdings by the new investor. Both of these two alternatives, in the twentieth century tended to become less likely (until 1950), the former by the decline in consumer purchasing power and the latter by the decrease in competition.

          The way in which the relative decline of investment in respect to savings results in economic crisis is not difficult to see. In the modern economic community, the sum total of goods and services appearing in the market is at one and the same time the income of the community and the aggregate cost of producing the goods and services in question. The sums expended by the entrepreneur on wages, rents, salaries, raw materials, interest, lawyers' fees, and so on, represent costs to him and income to those who receive them. His own profits also enter the picture, since they are his income and the cost of persuading him to produce the wealth in question. The goods are offered for sale at a price which is equal to the sum of all costs (including profits). In the community as a whole, aggregate costs, aggregate incomes, and aggregate prices are the same, since they are merely opposite sides of the identical expenditures.

          The purchasing power available in the community is equal to income minus savings. If there are any savings, the available purchasing power will be less than the aggregate prices being asked for the products for sale and by the amount of the savings. Thus, all the goods and services produced cannot be sold as long as savings are held back. In order for all the goods to be sold, it is necessary for the savings to reappear in the market as purchasing power. The usual way in which this is done is by investment. When savings are invested, they are expended into the community and appear as purchasing power. Since the capital good made by the process of investment is not offered for sale to the community, the expenditures made by its creation appear completely as purchasing power. Thus, the disequilibrium between purchasing power and prices in which was created by the act of saving is restored completely by the act of investment, and all the goods can be sold at the prices asked. But whenever investment is less than savings, the available supply of purchasing power is inadequate by the same amount to buy the goods being offered. This margin by which purchasing power is inadequate because of an excess of savings over investment may be called the "deflationary gap." This '"deflationary gap" is the key to the twentieth century economic crisis and one of the three central cores of the whole tragedy of the century.

Chapter 37: The Results of Economic Depression

          The deflationary gap arising from a failure of investment to reach the level of savings can he closed either by lowering the supply of goods to the level of the available purchasing power or by raising the supply of purchasing power to a level able to absorb the existing supply of goods, or by a combination of both. The first solution will give a stabilized economy on a low level of economic activity; the second will give a stabilized economy on a high level of economic activity. Left to itself, the economic system under modern conditions would adopt the former procedure. This would work roughly as follows: The existence of the deflationary gap (that is, available purchasing power less than aggregate prices of available goods and services) will result in falling prices, declining economic activity, and rising unemployment. All this will result in a fall in national income, and this in turn will result in an even more rapid decline in the volume of savings. This decline continues until the volume of savings reaches the level of investment, at which point the fall is arrested and the economy becomes stabilized at a low level.

          As a matter of fact, this process did not work itself out in any industrial country during the great depression of 1929-1934, because the disparity in the distribution of the national income was so great that a considerable portion of the population would have been driven to zero incomes and absolute want before the savings of the richer segment of the population fell to the level of investment. Moreover, as the depression deepened, the level of investment declined even more rapidly than the level of savings. There can be little doubt that under such conditions the masses of the population would have been driven to revolution before the "automatic economic factors" were able to stabilize the economy, and the stabilization, if reached, would have been on a level so low that a considerable portion of the population would have been in absolute want. Because of this, in every industrial country, governments took steps to arrest the course of the depression before their citizens were driven to desperation.

          The methods used to deal with the depression and close the deflationary gap were of many different kinds, but all are reducible to two fundamental types: (a) those which destroy goods and (b) those which produce goods which do not enter the market.

          The destruction of goods will close the deflationary gap by reducing the supply of unsold goods through lowering the supply of goods to the level of the supply of purchasing power. It is not generally realized that this method is one of the chief ways in which the gap is closed in a normal business cycle. In such a cycle, goods are destroyed hy the simple expedient of not producing the goods which the system is capable of producing. The failure to use the economic system at the 1929 level of output during the years 1930-1934 represented a loss of goods worth $100,000,000,000 in the United States, Britain, and Germany alone. This loss was equivalent to the destruction of such goods. Destruction of goods by failure to gather the harvest is a common phenomenon under modern conditions, especially in respect to fruits, berries, and vegetables. When a farmer leaves his crop of oranges, peaches, or strawberries unharvested because the selling price is too low to cover the expense of harvesting, he is destroying the goods. Outright destruction of goods already produced is not common, and occurred for the first time as a method of combating depression in the years 1930-1934. During this period, stores of coffee, sugar, and bananas were destroyed, corn was plowed under, and young livestock was slaughtered to reduce the supply on the market. This destruction of goods in warfare is another example of this method of overcoming deflationary conditions int he economic system.

          The second method of filling the deflationary gap, namely, by producing goods which do not enter the market, accomplishes its purpose by providing purchasing power in the market, since the costs of production of such goods do enter the market as purchasing power, while the goods themselves do not drain funds from the system if they are not offered for sale. New investment was the usual way in which this was accomplished in the normal business cycle, but it is not the normal way of filling the gap under modern conditions of depression. We have already seen the growing reluctance to invest and the unlikely chance that the purchasing power necessary for prosperity will be provided by a constant stream of private investment. If this is so, the funds for producing goods which do not enter the market must be sought in a program of public spending.

          Any program of public spending at once runs into the problems of inflation and public debt. These are the same two problems which were mentioned in an earlier chapter in connection with the efforts of governments to pay for the First World War. The methods of paying for a depression are exactly the same as the methods of paying for a war, except that the combination of methods used may be somewhat different because the goals are somewhat different. In financing a war, we should seek to achieve a method which will provide a maximum of output with a minimum of inflation and public debt. In dealing with a depression, since a chief aim is to close the deflationary gap, the goal will be to provide a maximum of output with a necessary degree of inflation and a minimum of public debt. Thus, the use of fiat money is more justifiable in financing a depression than in financing a war. [Fiat money without gold and silver backing should not be used to finance either.] Moreover, the selling of bonds to private persons in wartime might well be aimed at the lower-income groups in order to reduce consumption and release facilities for war production, while in a depression (where low consumption is the chief problem) such sales of bonds to finance public spending would have to be aimed at the savings of the upper-income groups.

     These ideas on the role of government spending in combating depression have been formally organized into the "theory of the compensatory economy." This theory advocates that government spending and fiscal policies be organized so that they work exactly contrary to the business cycle, with lower taxes and larger spending in a deflationary period and higher taxes with reduced spending in a boom period, the fiscal deficits of the down cycle being counterbalanced in the national budget by the surpluses of the up cycle.

          This compensatory economy has not been applied with much success in any European country except Sweden. In a democratic country, it would take the control of taxing and spending away from the elected representatives of the people and place this precious "power of the purse" at the control of the automatic processes of the business cycle as interpreted by bureaucratic (and unrepresentative) experts. Moreover, all these programs of deficit spending are in jeopardy in a country with a private banking system. In such a system, the creation of money (or credit) is usually reserved for the private banking institutions, and is deprecated as a government action. The argument that the creation of funds by the government is bad while creation of funds by the banks is salutary is ... [made] in a system based on traditional laissez faire and in which the usual avenues of communications (such as newspapers and radio) are under private, or even banker, control.

          Public spending as a method of counteracting depression can vary very greatly in character, depending on the purposes of the spending. Spending for destruction of goods or for restriction of output, as under the early New Deal agricultural program, cannot be justified easily in a democratic country with freedom of communications, because it obviously results in a decline in national income and living standards. Spending for nonproductive monuments is ... hardly a long-run solution. Spending for investment in ... equipment (like the TVA) is ... a permanent departure from a system of private capitalism, and can be easily attacked in a country with a capitalistic ideology and a private banking system. Spending on armaments and national defense is the last method of fighting depression and is the one most readily and most widely adopted in the twentieth century.

          A program of public expenditure on armaments is a method for filling the deflationary gap and overcoming depression because it adds purchasing power to the market without drawing it out again later (since the armaments, once produced, are not put up for sale). From an economic point of view, this method of combating depression is not much different from the method listed earlier under destruction of goods, for, in this case also, economic resources are diverted from constructive activities or idleness to production for destruction. The appeal of this method for coping with the problem of depression does not rest on economic grounds at all, for, on such grounds, there is no justification. Its appeal is rather to be found on other, especially political, grounds.

          Among these grounds we may list the following: a rearmament program helps heavy industry directly and immediately. Heavy industry is the segment of the economy which suffers earliest and most drastically in a depression, which absorbs manpower most readily (thus reducing unemployment) and which is politically influential in most countries. Such a program is also easily justified to the public on grounds of national defense, especially if other countries are dealing with their economic crises by the same method of treatment.

          The adoption of rearmament as a method of combating depression does not have to be conscious. The country which adopts it may honestly feel that it is adopting the policy for good reasons, that it is threatened by aggression, and that a program of rearmament is necessary for political protection. It is very rare for a country consciously to adopt a program of aggression, for, in most wars, both sides are convinced that their actions are defensive. It is almost equally rare for a country to adopt a policy of rearmament as a solution for depression. But, unconsciously, the danger from a neighbor and the advantages to be derived from rearming in the face of such a danger are always more convincing to a country whose economic system is functioning below capacity than it is to a country which is riding a boom. Moreover, if a country adopts rearmament because of fear of another country's arms, and these last are the result of efforts to fill a deflationary gap, it can also be said that the rearmament of the former has a basic economic cause.

          As we have mentioned, Fascism is the adoption by the vested interests in a society of an authoritarian form of government in order to maintain their vested interests and prevent the reform of the society. In the twentieth century in Europe, the vested interests usually sought to prevent the reform of the economic system (a reform whose need was made evident by the long-drawn-out depression) by adopting an economic program whose chief element was the effort to fill the deflationary gap by rearmament.

Chapter 38: The Pluralist Economy and World Blocs

          The economic disasters of two wars, a world depression, and the post-war fluctuations showed clearly by 1960 that a new economic organization of society was ... [being developed by the Money Power]. The laissez-faire competitive system ... [had been destroyed by the Money Power]. The system of monopoly capitalism had helped in this ... [destruction], and clearly showed that its efforts, in Fascist countries, [and other nations] to protect its profits and privileges by authoritarian government and ultimately by war were ... [successful] .... [although the Fascist countries such as Germany and Italy were not able to win the war they started]. Moreover, Communism, on the winning side of the war, nonetheless showed that it, like any authoritarian system, failed to produce innovations, flexibility, and freedom; it could make extensive industrial advances only by copying freer peoples, and could not raise its standards of living substantially because it could not combine lack of freedom and force in political life and in the utilization of economic resources with the increased production of food and spiritual or intellectual freedom which were the chief desires of its own peoples.

Laissez Faire, Fascism and Communism Combined into a Common System

          This almost simultaneous failure of ... economic Fascism, and of Communism to satisfy the growing popular demand both for rising standards of living and for spiritual liberty has forced the mid-twentieth century to seek some new economic organization. This demand has been intensified by the arrival on the scene of new peoples, new nations, and new tribes who by their demands for these same goods have shown their growing awareness of the problems, and their determination to do something about them. As this new group of underdeveloped peoples look about, they have been struck by the conflicting claims of the two great super-Powers, the United States and the Soviet Union. The former offered the goods the new peoples wanted (rising standards of living and freedom), while the latter seemed to offer methods of getting these goods (by state accumulation of capital, government direction of the utilization of economic resources, and centralized methods of over-all social planning) which might tend to smother these goals. The net result of all this has been a convergence of all three systems toward a common, if remote, system of the future.

A New Economic Theory to Dominate the Earth

          The ultimate nature of that new system of economic and social life is ... [what] we might call it the "pluralist economy," and characterize its social structure as one which provides prestige, rewards, and power to managerial groups of experts whose contributions to the system are derived from their expertise and "know-how." These managers and experts, who clearly are a minority in any society, are recruited from the society as a whole, can be selected only by a process of "careers open to talent" on a trial-and-error basis, and require freedom of assembly, discussion, and decision in order to produce the innovations needed for the future success, or even the survival, of the system in which they function. Thus the pluralist economy and the managerial society, from the early 1940's, have forced the growth of a new kind of economic organization which will be totally unlike the four types of pre-1939 (American laissez faire, Stalinist Communism, authoritarian Fascism, and underdeveloped areas).

The Characteristics of the New Pluralist Managerial System

          The chief characteristics of the new pluralist managerial system are five in number:

          1. The central problem of decision-making in the new system will be concerned with the allotment of resources among three claimants: (a) consumers' goods to provide rising standards of living; (b) investment in capital goods to provide the equipment to produce consumers' goods; (c) the public sector covering defense, public order, education, social welfare, and all the central care of administrative activities associated with the young, the old, and public welfare as a whole.

          2. The process of decision-making among these three claimants will take the form of a complex, multilateral struggle among a number of interested groups. These groups, which differ from one society or area to another, are in constant flux in each society or area. In general, however, the chief blocs or groups involved will be: (a) the defense forces, (b) labor, (c) the farmers, (d) heavy industry, (e) light industry, (f) transport and communication groups, (g) finance, fiscal, and banking groups, (h) commercial, real-estate, and construction interests, (i) scientific, educational, and intellectual groups, (j) political party and government workers, and (k) consumers in general.

The Central Managerial Elite Operate the System

          3. The process of decision-making operates by the slow and almost imperceptible shifts of the various blocs, one by one, from support to neutralism to opposition toward the existing division of resources among the three claimant sectors by the central managerial elite. If, for example, there is excess allotment of resources to the defense or governmental sector, the farming groups, consumers, commercial groups, intellectuals, and others will become increasingly dissatisfied with the situation and gradually shift their pressures toward a reduction of the resources for defense and an increase of the resources for the consumer or the capital investment sectors. Such shifts are complex, gradual, reversible, and continuous.

          4. The working out of these shifts of resources to achieve the more concrete goals of the diverse interest blocs in the society will be increasingly dominated by rationalist and scientific methods emphasizing analytical and quantitative techniques. This means that emotional and intuitive forces will play, as always, a considerable role in the shifting of interest blocs which dominate the allotment of resources among the three sectors, but that rational rather than emotional methods, on quantitative rather than qualitative bases, will dominate the utilization of such resources within each sector for more specific objectives. This will require considerable freedom of discussion in such utilization even where, as in Communist states or in underdeveloped areas, authoritarian and secretive methods are used in reference to the allotments among sectors. And, in general, there will be a very considerable modification of the areas and objectives of freedom in all societies of the world, with gradual reduction of numerous personal freedoms of the past accompanied by the gradual increase of other fundamental freedoms, especially intellectual, which will provide the technical innovations, the clash of ideas, and the release of personal energy necessary for the success, or even the survival, of modern state systems.

     5. The details of the operations of this new system will inevitably differ from area to area and even from state to state. In the Western bloc of states the shifts of public opinion continue to be reflected very largely in shifting political parties. Within the Communist bloc these shifts will take place, as they have in the past, among a smaller group of insiders and on a much more personal basis, so that shifts of targets and direction of policy will be revealed to the public by shifts of personnel in the state's bureaucratic structure. And in the underdeveloped countries, where possession of power is frequently associated with support from the armed forces, the process may be reflected by changes in policy and direction by the existing elite and rulers who retain their power in spite of changing policies.

     In the most general way, the period since 1947 has shown that the differences between any two of the three blocs are becoming less; the three methods for achieving policy shifts (just mentioned) are becoming increasingly similar in essence and in fact, however different they continue to be in law. Moreover, in the same years since 1947, the solidarity of both the West and the Communists has become increasingly less, while the unity of outlook, policies, and interests of the uncommitted and underdeveloped peoples of the intermediary zone between the two great Power blocs become increasingly unified.

A Managed Economic System

     The method of operation of this newly formed pluralist-managerial system may be called "planning," if it be understood that planning may be both public and private and does not necessarily have to be centralized in either, but is rather concerned with the general method of a scientific and rational utilization of resources, in both time and space, to achieve consciously envisioned future goals.

Europe and Japan Serve as the Model for the New System

     In this process the greatest achievements have been by western Europe and by Japan. The latter, relieved to a great extent from the need to devote resources to defense, has been able to mobilize these for investment and, to a somewhat lesser degree, for rising standards of living, and has been able to achieve growth rates of gross national product of 7 to 9 percent a year. This has made Japan the only area of the non-Western world and of the underdeveloped countries able to pass into the higher level of industrialization capable of achieving substantial improvements in individual standards of living. These improvements, held back by the emphasis on reconstruction and investment in 1945-1962, have shifted slowly but steadily in the last few years toward consumers' benefits, including such intangibles as increased education, sports, leisure, and entertainment.

     Western Europe has had an experience somewhat similar to that of Japan except that its chief emphasis has been on improved standards of living (collectively known as "welfare"), with more emphasis on defense and less emphasis on investment than Japan. As a result, western Europe, especially West Germany, Italy, France, Scandinavia, and Britain, have, for the first time, come within striking distance of the very high standards of personal consumption found in the United States. In this process these countries have allowed the defensive power of their armed forces to suffer for the sake of their welfare goals, but have felt safe in doing so because of their reliance on American defensive power to deter any Soviet aggression.

Western Europe

     In this process western Europe has achieved growth rates in gross national product (GNP) of 4 to 8 percent a year as a consequence of three basic forces. These have been: (1) the skillful (and perhaps lucky) use of financial and fiscal techniques which have encouraged both investment and willingness to consume; (2) the economic and technical aid of the United States, beginning with the Marshall Plan of 1946 and continuing with United States government military aid and investments of savings coming in from the whole Western world; and (3) the growing integration of Europe's economy in the Common Market which has made it feasible to adopt mass-production techniques for a greatly enlarged market.

America

     In this same process the achievements of the United States and of the Soviet bloc have been much less spectacular from a purely economic point of view. In the United States, where the standard of living has reached unprecedented heights of affluence, the burdens of being a super-Power have hampered welfare because of the conflicting claims of defense, governmental expenses, prestige, and other rivalries with the Soviet Union, and the desire to contribute to the growth of the underdeveloped areas of the world. As a result, growth rates of GNP have been from 2 to 5 percent a year, and the burden of the governmental sector, including defense and increasing demands for such welfare items as education, health, and equalization of personal opportunities, have put great pressures on the growth of the consumers' sector.

Soviet Bloc

     The Soviet bloc as a whole, apart from the Soviet Union as the dominant member of that bloc, has been ambiguous in its economic growth. The demands of the defense sector and of other reflections of the Cold War, such as the "space race," have combined with the continued failures of Communist agricultural practices and the intrinsic inefficiency of the Communist system as a whole to limit severely the rise in standards of living. To be sure, the standards of living of the Soviet Union itself have reached the highest in Russia's history, while still lagging at only a fraction of those in the United States. But in the Communist bloc as a whole the picture has been far less happy. The non-Russian countries in the bloc have been exploited by the Soviet Union, have been treated as colonial areas (that is, sources of manpower, raw materials, and food based on claims arising from political relations), and have achieved little, if any, increase in GNP beyond that needed to sustain their increasing populations. In the cases of more western areas, such as East Germany, Hungary, and Poland, this has been reflected in absolute declines in living standards. The sharp contrast between this and the visible boom in West Germany has greatly increased the discontent in the European satellites.

Lower Developed Nations

     The position of the underdeveloped nations has also been generally ambiguous. As a whole, lack of know-how and trained manpower, lack of capital, waste of resources by small privileged elites, absolute shortages of resources in some areas, the rapid growth of populations almost everywhere, and hopelessly unprogressive social structures and ideologies have combined to prevent any considerable improvements in standards of living. These have, in fact, decreased in much of Indonesia, the Near East, and Latin America, and have kept only slightly ahead of the growing population in India, Southeast Asia, and Africa. Only in Japan, as we have said, has there been success from this point of view, while the failure of these desires in China and in Latin America have tended to lead both of these out of their former alignments with the Soviet bloc and the Western bloc toward the more ambivalent political position of the uncommitted nations. In fact, in this process China's enmity toward both the Soviet Union and the United States has tended to place her in a new position, apart from all the pre-1962 alignments of international politics, while Latin America's growing discontent has tended to lead it, from many points of view, toward the position of the Near East countries.

Table of Contents