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 ฃ5 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 ฃ17 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.
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