Tragedy and Hope
A History of the World in Our Time
By Carroll Quigley
PART TWO
Part Two: Western Civilization to 1914
Chapter 4: The Pattern of Change
In order to obtain perspective we sometimes divide the culture of a society, in a somewhat arbitrary fashion, into several different aspects. For example, we can divide a society into six aspects: military, political, economic, social, religious, intellectual. Naturally there are very close connections between these various aspects; and in each aspect there are very close connections between what exists today and what existed in an earlier day. For example, we might want to talk about democracy as a fact on the political level (or aspect). In order to talk about it in an intelligent way we would not only have to know what it is today we would also have to see what relationship it has to earlier facts on the political level as well as its relationship to various facts on the other five levels of the society. Naturally we cannot talk intelligently unless we have a fairly clear idea of what we mean by the words we use. For that reason we shall frequently define the terms we use in discussing this subject.
The Organization of Power
The military level is concerned with the organization of force, the political level with the organization of power, and the economic level with the organization of wealth. By the "organization of power" in a society we mean the ways in which obedience and consent (or acquiescence) are obtained. The close relationships between levels can be seen from the fact that there are three basic ways to win obedience: by force, by buying consent with wealth, and by persuasion. Each of these three leads us to another level (military, economic, or intellectual) outside the political level. At the same time, the organization of power today (that is, of the methods for obtaining obedience in the society) is a development of the methods used to obtain obedience in the society in an earlier period.
Major Change in the 20th Century
These relationships are important because in the twentieth century in Western Civilization all six levels are changing with amazing rapidity, and the relationships between levels are also shifting with great speed. When we add to this confusing picture of Western Civilization the fact that other societies are influencing it or being influenced by it, it would seem that the world in the twentieth century is almost too complicated to understand. This is indeed true, and we shall have to simplify (perhaps even oversimplify) these complexities in order to reach a low level of understanding. When we have reached such a low level perhaps we shall be able to raise the level of our understanding by bringing into our minds, little by little, some of the complexities which do exist in the world itself.
The Military Level in Western Civilization
On the military level in Western Civilization in the twentieth century the chief development has been a steady increase in the complexity and the cost of weapons. When weapons are cheap to get and so easy to use that almost anyone can use them after a short period of training, armies are generally made up of large masses of amateur soldiers. Such weapons we call "amateur weapons," and such armies we might call "mass armies of citizen-soldiers." The Age of Pericles in Classical Greece and the nineteenth century in Western Civilization were periods of amateur weapons and citizen-soldiers. But the nineteenth century was preceded (as was the Age of Pericles also) by a period in which weapons were expensive and required long training in their use. Such weapons we call "specialist" weapons. Periods of specialist weapons are generally periods of small armies of professional soldiers (usually mercenaries). In a period of specialist weapons the minority who have such weapons can usually force the majority who lack them to obey; thus a period of specialist weapons tends to give rise to a period of minority rule and authoritarian government. But a period of amateur weapons is a period in which all men are roughly equal in military power, a majority can compel a minority to yield, and majority rule or even democratic government tends to rise. The medieval period in which the best weapon was usually a mounted knight on horseback (clearly a specialist weapon) was a period of minority rule and authoritarian government. Even when the medieval knight was made obsolete (along with his stone castle) by the invention of gunpowder and the appearance of firearms, these new weapons were so expensive and so difficult to use (until 1800) that minority rule and authoritarian government continued even though that government sought to enforce its rule by shifting from mounted knights to professional pike-men and musketeers. But after 1800, guns became cheaper to obtain and easier to use. By 1840 a Colt revolver sold for $27 and a Springfield musket for not much more, and these were about as good weapons as anyone could get at that time. Thus, mass armies of citizens, equipped with these cheap and easily used weapons, began to replace armies of professional soldiers, beginning about 1800 in Europe and even earlier in America. At the same time, democratic government began to replace authoritarian governments (but chiefly in those areas where the cheap new weapons were available and local standards of living were high enough to allow people to obtain them).
The arrival of the mass army of citizen-soldiers in the nineteenth century created a difficult problem of control, because techniques of transportation and of communications had not reached a high-enough level to allow any flexibility of control in a mass army. Such an army could be moved on its own feet or by railroad; the government could communicate with its various units only by letter post or by telegram. The problem of handling a mass army by such techniques was solved partially in the American Civil War of 1861-1865 and completely by Helmuth von Moltke for the Kingdom of Prussia in the Austro-Prussian War of 1866. The solution was a rigid one: a plan of campaign was prepared beforehand against a specific opponent, with an established timetable and detailed instructions for each military unit; communications were prepared and even issued beforehand, to be used according to the timetable. This plan was so inflexible that the signal to mobilize was practically a signal to attack a specified neighboring state because the plan, once initiated, could not be changed and could hardly even be slowed up. With this rigid method Prussia created the German Empire by smashing Austria in 1866 and France in 1871. By 1900 all the states of Europe had adopted the same method and had fixed plans in which the signal for mobilization constituted an attack on some neighbor—a neighbor, in some cases (as in the German invasion of Belgium), with whom the attacker had no real quarrel. Thus, when the signal for mobilization was given in 1914 the states of Europe leaped at each other.
The Rise of Authoritarian Government
In the twentieth century the military situation was drastically changed in two ways. On the one hand, communications and transportation were so improved by the invention of the radio and the internal-combustion engine that control and movement of troops and even of individual soldiers became very flexible; mobilization ceased to be equivalent to attack, and attack ceased to be equivalent to total war. On the other hand, beginning with the first use of tanks, gas, high-explosive shells, and tactical bombing from the air in 1915-1918, and continuing with all the innovations in weapons leading up to the first atomic bomb in 1945, specialist weapons became superior to amateur weapons. This had a double result which was still working itself out at mid-century: the drafted army of citizen-soldiers began to be replaced by a smaller army of professional specialist soldiers, and authoritarian government began to replace democratic government.
The Political Level in Western Civilization
On the political level equally profound changes took place in the twentieth century. These changes were associated with the basis on which an appeal for allegiance could be placed, and especially with the need to find a basis of allegiance which could win loyalty over larger and larger areas from more numerous groups of people. In the early Middle Ages when there had been no state and no public authority, political organization had been the feudal system which was held together by obligations of personal fealty among a small number of people. With the reappearance of the state and of public authority, new patterns of political behavior were organized in what is called the "feudal monarchy." This allowed the state to reappear for the first time since the collapse of Charlemagne's Empire in the ninth century, but with restricted allegiance to a relatively small number of persons over a relatively small area. The development of weapons and the steady improvement in transportation and in communications made it possible to compel obedience over wider and wider areas, and made it necessary to base allegiance on something wider than personal fealty to a feudal monarch. Accordingly, the feudal monarchy was replaced by the dynastic monarchy. In this system subjects owed allegiance to a royal family (dynasty), although the real basis of the dynasty rested on the loyalty of a professional army of pike-men and musketeers.
The Rise of the Nation State
The shift from the professional army of mercenaries to the mass army of citizen-soldiers, along with other factors acting on other levels of culture, made it necessary to broaden the basis of allegiance once again after 1800. The new basis was nationalism, and gave rise to the national state as the typical political unit of the nineteenth century. This shift was not possible for the larger dynastic states which ruled over many different language and national groups. By the year 1900 three old dynastic monarchies were being threatened with disintegration by the rising tide of nationalistic agitation. These three, the Austro-Hungarian Empire, the Ottoman Empire, and the Russian Empire of the Romanovs, did disintegrate as a consequence of the defeats of the First World War. But the smaller territorial units which replaced them, states like Poland, Czechoslovakia, or Lithuania, organized largely on the basis of language groups, may have reflected adequately enough the nationalistic sentiments of the nineteenth century, but they reflected very inadequately the developments in weapons, in communications, in transportation, and in economics of the twentieth century. By the middle of this latter century these developments were reaching a point where states which could produce the latest instruments of coercion were in a position to compel obedience over areas much larger than those occupied by peoples speaking the same language or otherwise regarding themselves as sharing a common nationality. Even as early as 1940 it began to appear that some new basis more continental in scope than existing nationality groups must be found for the new super-states which were beginning to be born. It became clear that the basis of allegiance for these new super-states of continental scope must be ideological rather than national. Thus the nineteenth century's national state began to be replaced by the twentieth century's ideological bloc. At the same time, the shift from amateur to specialist weapons made it likely that the new form of organization would be authoritarian rather than democratic as the earlier national state had been. However, the prestige of Britain's power and influence in the nineteenth century was so great in the first third of the twentieth century that the British parliamentary system continued to be copied everywhere that people were called upon to set up a new form of government. This happened in Russia in 1917, in Turkey in 1908, in Czechoslovakia and Poland in 1918-1919 and in most of the states of Asia (such as China in 1911).
The Economic Level of Western Civilization
When we turn to the economic level, we turn to a series of complex developments. It would be pleasant if we could just ignore these, but obviously we cannot, because economic issues have been of paramount importance in the twentieth century, and no one can understand the period without at least a rudimentary grasp of the economic issues. In order to simplify these somewhat, we may divide them into four aspects: (a) energy; (b) materials; (c) organization; and (d) control.
It is quite clear that no economic goods can be made without the use of energy and of materials. The history of the former falls into two chief parts each of which is divided into two sub-parts. The main division, about 1830, separates an earlier period when production used the energy delivered through living bodies and a later period when production used energy from fossil fuels delivered through engines. The first half is subdivided into an earlier period of manpower (and slavery) and a later period using the energy of draft animals. This subdivision occurred roughly about A. D. 1000. The second half (since 1830) is subdivided into a period which used coal in steam engines, and a period which used petroleum in internal-combustion engines. This subdivision occurred about 1900 or a little later.
The development of the use of materials is familiar to everyone. We can speak of an age of iron (before 1830), an age of steel (1830-1910), and an age of alloys, light metals, and synthetics (since 1910). Naturally, all these dates are arbitrary and approximate, since the different periods commenced at different dates in different areas, diffusing outward from their origin in the core area of Western Civilization in northwestern Europe.
Six Periods of Development
When we turn to the developments which took place in economic organization, we approach a subject of great significance. Here again we can see a sequence of several periods. There were six of these periods, each with its own typical form of economic organization. At the beginning, in the early Middle Ages, Western Civilization had an economic system which was almost entirely agricultural, organized in self-sufficient manors, with almost no commerce or industry. To this manorial-agrarian system there was added, after about 1050, a new economic system based on trade in luxury goods of remote origin for the sake of profits. This we might call commercial capitalism. It had two periods of expansion, one in the period 1050-1270, and the other in the period 1440-1690. The typical organization of these two periods was the trading company (in the second we might say the chartered trading company, like the Massachusetts Bay Company, the Hudson's Bay Company, or the various East India companies). The next period of economic organization was the stage of industrial capitalism, beginning about 1770, and characterized by owner management through the single-proprietorship or the partnership. The third period we might call financial capitalism. It began about 1850, reached its peak about 1914, and ended about 1932. Its typical forms of economic organization were the limited-liability corporation and the holding company. It was a period of financial or banker management rather than one of owner management as in the earlier period of industrial capitalism. This period of financial capitalism was followed by a period of monopoly capitalism. In this fourth period, typical forms of economic organization were cartels and trade associations. This period began to appear about 1890, took over control of the economic system from the bankers about 1932, and is distinguished as a period of managerial dominance in contrast with the owner management and the financial management of the two periods immediately preceding it. Many of its characteristics continue, even today, but the dramatic events of World War II and the post-war period put it in such a different social and historical context as to create a new, sixth, period of economic organization which might be called "the pluralist economy." The features of this sixth period will be described later.
Stages of Economic Development
The approximate relationship of these various stages may be seen in the following table:
Typical
Name Dates Organization Management
Manorial 6701 Manor Custom
Commercial capitalism a. 1050-1270 Company Municipal mercantilism
b. 440-1690 Chartered State mercantilism
company
Industrial capitalism 1770-1870 Private firm Owners
or partnership
Financial capitalism 1850-1932 Corporation and Bankers
holding company
Monopoly capitalism 1890-1950 Cartels and trade Managers
association
Pluralist economy 1934-present Lobbying groups Technocrats
Finance and Monopoly Capitalism
Two things should be noted. In the first place, these various stages or periods are additive in a sense. and there are many survivals of earlier stages into later ones. As late as 1925 there was a manor still functioning in England, and Cecil Rhodes's chartered company which opened up Rhodesia (the British South Africa Company) was chartered as late as 1889. In the same way owner-managed private firms engaging in industrial activities, or corporations and holding companies engaging in financial activities, could be created today. In the second place all the later periods are called capitalism. This term means "an economic system motivated by the pursuit of profits within a price system." The commercial capitalist sought profits from the exchange of goods; the industrial capitalist sought profits from the manufacture of goods; the financial capitalist sought profits from the manipulation of claims on money; and the monopoly capitalist sought profits from manipulation of the market to make the market price and the amount sold such that his profits would be maximized.
Four Major Stages of Economic Expansion
It is interesting to note that, as a consequence of these various stages of economic organization, Western Civilization has passed through four major stages of economic expansion marked by the approximate dates 970-1270, 1440-1690, 1770-1928, and since 1950. Three of these stages of expansion were followed by the outbreak of imperialist wars, as the stage of expansion reached its conclusion. These were the Hundred Years' War and the Italian Wars (1338-1445, 1494-1559), the Second Hundred Years' War (1667-1815), and the world wars (1914-1945). The economic background of the third of these will be examined later in this chapter, but now we must continue our general survey of the conditions of Western Civilization in regard to other aspects of culture. One of these is the fourth and last portion of the economic level, that concerned with economic control.
Four Stages of Economic Control
Economic control has passed through four stages in Western Civilization. Of these the first and third were periods of "automatic control" in the sense that there was no conscious effort at a centralized system of economic control, while the second and fourth stages were periods of conscious efforts at control. These stages, with approximate dates, were as follows:
1. Automatic control: manorial custom, 650-1150
2. Conscious control a. municipal mercantilism, 1150-1450 b. state mercantilism, 1450-1815
3. Automatic control: laissez-faire in the competitive market, 1815-1934
4. Conscious control: planning (both public and private), 1934
It should be evident that these five stages of economic control are closely associated with the stages previously mentioned in regard to kinds of weapons on the military level or the forms of government on the political level. The same five stages of economic control have a complex relationship to the six stages of economic organization already mentioned, the important stage of industrial capitalism overlapping the transition from state mercantilism to laissez-faire.
The Social Level of a Culture
When we turn to the social level of a culture, we can note a number of different phenomena, such as changes in growth of population, changes in aggregates of this population (such as rise or decline of cities), and changes in social classes. Most of these things are far too complicated for us to attempt to treat them in any thorough fashion here. We have already discussed the various stages in population growth, and shown that Europe was, about 1900, generally passing from a stage of population growth with many persons in the prime of life (Type B), to a stage of population stabilization with a larger percentage of middle-aged persons (Type C). This shift from Type B to Type C population in Europe can be placed most roughly at the time that the nineteenth century gave rise to the twentieth century. At about the same time or shortly after, and closely associated with the rise of monopoly capitalism (with its emphasis on automobiles, telephones, radio, and such), was a shift in the aggregation of population. This shift was from the period we might call "the rise of the city" (in which, year by year, a larger portion of the population lived in cities) to what we might call "the rise of the suburbs" or even "the period of megapolis" (in which the growth of residential concentration moved outward from the city itself into the surrounding area).
Changes in Social Classes
The third aspect of the social level to which we might turn our attention is concerned with changes in social classes. Each of the stages in the development of economic organization was accompanied by the rise to prominence of a new social class. The medieval system had provided the feudal nobility based on the manorial agrarian system. The growth of commercial capitalism (in two stages) gave a new class of commercial bourgeoisie. The growth of industrial capitalism gave rise to two new classes, the industrial bourgeoisie and the industrial workers (or proletariat, as they were sometimes called in Europe). The development of financial and monopoly capitalism provided a new group of managerial technicians. The distinction between industrial bourgeoisie and managers essentially rests on the fact that the former control industry and possess power because they are owners, while managers control industry (and also government or labor unions or public opinion) because they are skilled or trained in certain techniques. As we shall see later, the shift from one to the other was associated with a separation of control from ownership in economic life. The shift was also associated with what we might call a change from a two-class society to a middle-class society. Under industrial capitalism and the early part of financial capitalism, society began to develop into a polarized two-class society in which an entrenched bourgeoisie stood opposed to a mass proletariat. It was on the basis of this development that Karl Marx, about 1850, formed his ideas of an inevitable class struggle in which the group of owners would become fewer and fewer and richer and richer while the mass of workers became poorer and poorer but more and more numerous, until finally the mass would rise up and take ownership and control from the privileged minority. By 1900 social developments took a direction so different from that expected by Marx that his analysis became almost worthless, and his system had to be imposed by force in a most backward industrial country (Russia) instead of occurring inevitably in the most advanced industrial country as he had expected.
The Shift of Control
The social developments which made Marx's theories obsolete were the result of technological and economic developments which Marx had not foreseen. The energy for production was derived more and more from inanimate sources of power and less and less from human labor. As a result, mass production required less labor. But mass production required mass consumption so that the products of the new technology had to be distributed to the working groups as well as to others so that rising standards of living for the masses made the proletariat fewer and fewer and richer and richer. At the same time, the need for managerial and white-collar workers of the middle levels of the economic system raised the proletariat into the middle class in large numbers. The spread of the corporate form of industrial enterprise allowed control to be separated from ownership and allowed the latter to be dispersed over a much wider group, so that, in effect, owners became more and more numerous and poorer and poorer. And, finally, control shifted from owners to managers. The result was that the polarized two-class society envisaged by Marx was, after 1900, increasingly replaced by a mass middle-class society, with fewer poor and, if not fewer rich, at least a more numerous group of rich who were relatively less rich than in an earlier period. This process of leveling up the poor and leveling down the rich originated in economic forces but was speeded up and extended by governmental policies in regard to taxation and social welfare, especially after 1945.
The Religious and Intellectual Stages of Culture
When we turn to the higher levels of culture, such as the religious and intellectual aspects, we can discern a sequence of stages similar to those which have been found in the more material levels. We shall make no extended examination of these at this time except to say that the religious level has seen a shift from a basically secularist, materialist, and antireligious outlook in the late nineteenth century to a much more spiritualist and religious point of view in the course of the twentieth century. At the same time a very complex development on the intellectual level has shown a profound shift in outlook from an optimistic and scientific point of view in the period 1860-1890 to a much more pessimistic and irrationalist point of view in the period following 1890. This shift in point of view, which began in a rather restricted group forming an intellectual vanguard about 1890, a group which included such figures as Freud, Sorel, Bergson, and Proust, spread downward to larger and larger sections of Western society in the course of the new century as a result of the devastating experience of two world wars and the great depression. The results of this process can be seen in the striking contrast between the typical outlook of Europe in the nineteenth century and in the twentieth century as outlined in the preceding chapter.
Chapter 5: European Economic Developments
Commercial Capitalism
Western Civilization is the richest and most powerful social organization ever made by man. One reason for this success has been its economic organization. This, as we have said, has passed through six successive stages, of which at least four are called "capitalism." Three features are notable about this development as a whole.
In the first place, each stage crated the conditions which tended to bring about the next stage; therefore we could say, in a sense, that each stage committed suicide. The original economic organization of self-sufficient agrarian units (manors) was in a society organized so that its upper ranks—the lords, lay and ecclesiastical—found their desires for necessities so well met that they sought to exchange their surpluses of necessities for luxuries of remote origin. This gave rise to a trade in foreign luxuries (spices, fine textiles, fine metals) which was the first evidence of the stage of commercial capitalism. In this second stage, mercantile profits and widening markets created a demand for textiles and other goods which could be met only by application of power to production. This gave the third stage: industrial capitalism. The stage of industrial capitalism soon gave rise to such an insatiable demand for heavy fixed capital, like railroad lines, steel mills, shipyards, and so on, that these investments could not be financed from the profits and private fortunes of individual proprietors. New instruments for financing industry came into existence in the form of limited-liability corporations and investment banks. These were soon in a position to control the chief parts of the industrial system, since they provided capital to it. This gave rise to financial capitalism. The control of financial capitalism was used to integrate the industrial system into ever-larger units with interlinking financial controls. This made possible a reduction of competition with a resulting increase in profits. As a result, the industrial system soon found that it was again able to finance its own expansion from its own profits, and, with this achievement, financial controls were weakened, and the stage of monopoly capitalism arrived. In this fifth stage, great industrial units, working together either directly or through cartels and trade associations, were in a position to exploit the majority of the people. The result was a great economic crisis which soon developed into a struggle for control of the state—the minority hoping to use political power to defend their privileged position, the majority hoping to use the state to curtail the power and privileges of the minority. Both hoped to use the power of the state to find some solution to the economic aspects of the crisis. This dualist struggle dwindled with the rise of economic and social pluralism after 1945.
A Depression Accompanies Transition to Various Stages
The second notable feature of this whole development is that the transition of each stage to the next was associated with a period of depression or low economic activity. This was because each stage, after an earlier progressive phase, became later, in its final phase, an organization of vested interests more concerned with protecting its established modes of action than in continuing progressive changes by the application of resources to new, improved methods. This is inevitable in any social organization, but is peculiarly so in regard to capitalism.
The Primary Goal of Capitalism
The third notable feature of the whole development is closely related to this special nature of capitalism. Capitalism provides very powerful motivations for economic activity because it associates economic motivations so closely with self-interest. But this same feature, which is a source of strength in providing economic motivation through the pursuit of profits, is also a source of weakness owing to the fact that so self-centered a motivation contributes very readily to a loss of economic coordination. Each individual, just because he is so powerfully motivated by self-interest, easily loses sight of the role which his own activities play in the economic system as a whole, and tends to act as if his activities were the whole, with inevitable injury to that whole. We could indicate this by pointing out that capitalism, because it seeks profits as its primary goal, is never primarily seeking to achieve prosperity, high production, high consumption, political power, patriotic improvement, or moral uplift. Any of these may be achieved under capitalism, and any (or all) of them may he sacrificed and lost under capitalism, depending on this relationship to the primary goal of capitalist activity—the pursuit of profits. During the nine-hundred-year history of capitalism, it has, at various times, contributed both to the achievement and to the destruction of these other social goals.
Commercial Capitalism
The different stages of capitalism have sought to win profits by different kinds of economic activities. The original stage, which we call commercial capitalism, sought profits by moving goods from one place to another. In this effort, goods went from places where they were less valuable to places where they were more valuable, while money, doing the same thing, moved in the opposite direction. This valuation, which determined the movement both of goods and of money and which made them move in opposite directions, was measured by the relationship between these two things. Thus the value of goods was expressed in money. and the value of money was expressed in goods. Goods moved from low-price areas to high-price areas, and money moved from high-price areas to low-price areas, because goods were more valuable where prices were high and money was more valuable where prices were low.
Money and Goods Are Different
Thus, clearly, money and goods are not the same thing but are, on the contrary, exactly opposite things. Most confusion in economic thinking arises from failure to recognize this fact. Goods are wealth which you have, while money is a claim on wealth which you do not have. Thus goods are an asset; money is a debt. If goods are wealth; money is not wealth, or negative wealth, or even anti-wealth. They always behave in opposite ways, just as they usually move in opposite directions. If the value of one goes up, the value of the other goes down, and in the same proportion. The value of goods, expressed in money, is called "prices," while the value of money, expressed in goods, is called "value."
The Rise of Commercial Capitalism
Commercial capitalism arose when merchants, carrying goods from one area to another, were able to sell these goods at their destination for a price which covered original cost, all costs of moving the goods, including the merchant's expenses, and a profit. This development, which began as the movement of luxury goods, increased wealth because it led to specialization of activities both in crafts and in agriculture, which increased skills and output, and also brought into the market new commodities.
The Development of Mercantilism
Eventually, this stage of commercial capitalism became institutionalized into a restrictive system, sometimes called "mercantilism," in which merchants sought to gain profits, not from the movements of goods but from restricting the movements of goods. Thus the pursuit of profits, which had earlier led to increased prosperity by increasing trade and production, became a restriction on both trade and production, because profit became an end in itself rather than an accessory mechanism in the economic system as a whole.
The way in which commercial capitalism (an expanding economic organization) was transformed into mercantilism (a restrictive economic organization) twice in our past history is very revealing not only of the nature of economic systems, and of men themselves, but also of the nature of economic crisis and what can be done about it.
Merchants Restrict Trade to Increase Profits
Under commercial capitalism, merchants soon discovered that an increasing flow of goods from a low-price area to a high-price area tended to raise prices in the former and to lower prices in the latter. Every time a shipment of spices came into London, the price of spices there began to fall, while the arrival of buyers and ships in Malacca gave prices there an upward spurt. This trend toward equalization of price levels between two areas because of the double, and reciprocal, movement of goods and money jeopardized profits for merchants, however much it may have satisfied producers and consumers at either end. It did this by reducing the price differential between the two areas and thus reducing the margin within which the merchant could make his profit. It did not take shrewd merchants long to realize that they could maintain this price differential, and thus their profits, if they could restrict the flow of goods, so that an equal volume of money flowed for a reduced volume of goods. In this way, shipments were decreased, costs were reduced, but profits were maintained.
Two things are notable in this mercantilist situation. In the first place, the merchant, by his restrictive practices, was, in essence, increasing his own satisfaction by reducing that of the producer at one end and of the consumer at the other end; he was able to do this because he was in the middle between them. ln the second place, so long as the merchant, in his home port, was concerned with goods, he was eager that the prices of goods should be, and remain, high.
Merchants Became Concerned with Lending of Money
In the course of time, however, some merchants began to shift their attention from the goods aspect of commercial interchange to the other, monetary, side of the exchange. They began to accumulate the profits of these transactions, and became increasingly concerned, not with the shipment and exchange of goods, but with the shipment and exchange of moneys. In time they became concerned with the lending of money to merchants to finance their ships and their activities, advancing money for both, at high interest rates, secured by claims on ships or goods as collateral for repayment.
The New Bankers Were Eager for High Interest Rates
In this process the attitudes and interests of these new bankers became totally opposed to those of the merchants (although few of either recognized the situation). Where the merchant had been eager for high prices and was increasingly eager for low interest rates, the banker was eager for a high value of money (that is, low prices) and high interest rates. Each was concerned to maintain or to increase the value of the half of the transaction (goods for money) with which he was directly concerned, with relative neglect of the transaction itself (which was of course the concern of the producers and the consumers).
The Operations of Banking and Finance Were Concealed So
They Appeared Difficult to Master
In sum, specialization of economic activities, by breaking up the economic process, had made it possible for people to concentrate on one portion of the process and, by maximizing that portion, to jeopardize the rest. The process was not only broken up into producers, exchangers, and consumers but there were also two kinds of exchangers (one concerned with goods, the other with money), with almost antithetical, short-term, aims. The problems which inevitably arose could be solved and the system reformed only by reference to the system as a whole. Unfortunately, however, three parts of the system, concerned with the production, transfer, and consumption of goods, were concrete and clearly visible so that almost anyone could grasp them simply by examining them, while the operations of banking and finance were concealed, scattered, and abstract so that they appeared to many to be difficult. To add to this, bankers themselves did everything they could to make their activities more secret and more esoteric. Their activities were reflected in mysterious marks in ledgers which were never opened to the curious outsider.
The Relationship Between Goods and Money
Is Clear to Bankers
In the course of time the central fact of the developing economic system, the relationship between goods and money, became clear, at least to bankers. This relationship, the price system, depended upon five things: the supply and the demand for goods, the supply and the demand for money, and the speed of exchange between money and goods. An increase in three of these (demand for goods, supply of money, speed of circulation) would move the prices of goods up and the value of money down. This inflation was objectionable to bankers, although desirable to producers and merchants. On the other hand, a decrease in the same three items would be deflationary and would please bankers, worry producers and merchants, and delight consumers (who obtained more goods for less money). The other factors worked in the opposite direction, so that an increase in them (supply of goods, demand for money, and slowness of circulation or exchange) would be deflationary.
Inflationary and Deflationary Prices Have Been a Major
Force in History for 600 Years
Such changes of prices, either inflationary or deflationary, have been major forces in history for the last six centuries at least. Over that long period, their power to modify men's lives and human history has been increasing. This has been reflected in two ways. On the one hand, rises in prices have generally encouraged increased economic activity, especially the production of goods, while, on the other hand, price changes have served to redistribute wealth within the economic system. Inflation, especially a slow steady rise in prices, encourages producers, because it means that they can commit themselves to costs of production on one price level and then, later, offer the finished product for sale at a somewhat higher price level. This situation encourages production because it gives confidence of an almost certain profit margin. On the other hand, production is discouraged in a period of falling prices, unless the producer is in the very unusual situation where his costs are falling more rapidly than the prices of his product.
Bankers Obsessed With Maintaining Value of Money
The redistribution of wealth by changing prices is equally important but attracts much less attention. Rising prices benefit debtors and injure creditors, while falling prices do the opposite. A debtor called upon to pay a debt at a time when prices are higher than when he contracted the debt must yield up less goods and services than he obtained at the earlier date, on a lower price level when he borrowed the money. A creditor, such as a bank, which has lent money—equivalent to a certain quantity of goods and services—on one price level, gets back the same amount of money—but a smaller quantity of goods and services—when repayment comes at a higher price level, because the money repaid is then less valuable. This is why bankers, as creditors in money terms, have been obsessed with maintaining the value of money, although the reason they have traditionally given for this obsession—that "sound money" maintains "business confidence"—has been propagandist rather than accurate.
The Two Major Goals of Bankers
Hundreds of years ago, bankers began to specialize, with the richer and more influential ones associated increasingly with foreign trade and foreign-exchange transactions. Since these were richer and more cosmopolitan and increasingly concerned with questions of political significance, such as stability and debasement of currencies, war and peace, dynastic marriages, and worldwide trading monopolies, they became the financiers and financial advisers of governments. Moreover, since their relationships with governments were always in monetary terms and not real terms, and since they were always obsessed with the stability of monetary exchanges between one country's money and another, they used their power and influence to do two things: (1) to get all money and debts expressed in terms of a strictly limited commodity—ultimately gold; and (2) to get all monetary matters out of the control of governments and political authority, on the ground that they would be handled better by private banking interests in terms of such a stable value as gold.
These efforts ... [were accelerated] with the shift of commercial capitalism into mercantilism and the destruction of the whole pattern of social organization based on dynastic monarchy, professional mercenary armies, and mercantilism, in the series of wars which shook Europe from the middle of the seventeenth century to 1815. Commercial capitalism passed through two periods of expansion each of which deteriorated into a later phase of war, class struggles, and retrogression. The first stage, associated with the Mediterranean Sea, was dominated by the North Italians and Catalonians but ended in a phase of crisis after 1300, which was not finally ended until 1558. The second stage of commercial capitalism, which was associated with the Atlantic Ocean, was dominated by the West Iberians, the Netherlanders, and the English. It had begun to expand by 1440, was in full swing by 1600, but by the end of the seventeenth century had become entangled in the restrictive struggles of state mercantilism and the series of wars which ravaged Europe from 1667 to 1815.
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