Those crazy Merchant Bankers - Part II
Professor Quigley suggests an evolutionary model of Capitalism that sees Capitalism evolving through 5 distinct phases:
1 - Commercial capitalism (approx 1050 - 1690)
2 - Industrial capitalism (1770-1870)
3 - Financial capitalism (1850-1932)
4 - Monopoly capitalism (1890-1950)
5 - Pluralist economy (1934 to present)
This series of posts will begin with stage #2, Industrial Capitalism.
Industrial Capitalism, 1770-1850
Britain’s victories over Louis XIV in the period 1667-1715 and over the French Revolutionary governments and Napoleon in 1792-1815 had many causes … Among these numerous causes, there were a financial one and an economic one. Financially, England had discovered the secret of credit. Economically, England had embarked on the Industrial Revolution.
Credit had been known to the Italians and Netherlanders long before it became one of the instruments of English world supremacy. Nevertheless, the founding of the Bank of England by William Paterson and his friends in 1694 is one of the great dates in world history.
… In effect, this creation of paper claims greater than the reserves available meant that bankers were creating money out of nothing. … William Paterson, however, on obtaining the charter of the Bank of England in 1694, to use the moneys he had won in privateering, said, “The Bank hath benefit of interest on all moneys which it creates out of nothing.”
This organizational structure for creating means of payment out of nothing, which we call credit, was not invented by England but was developed by her to become one of the chief weapons in the victory over Napoleon in 1815. The emperor, as the last great mercantilist, could not see money in any but concrete terms, and was convinced that his efforts to fight wars on the basis of “sound money,” by avoiding the creation of credit, would ultimately win him a victory by bankrupting England. He was wrong, although the lesson has had to be relearned by modern financiers in the twentieth century.
Britain’s victory over Napoleon was also helped by two economic innovations: the Agricultural Revolution, which was well established there in 1720, and the Industrial Revolution, which was equally well established there by 1776, when Watt patented his steam engine. The Industrial Revolution, like the Credit Revolution, has been much understood, both at the time and since. This is unfortunate, as each of these has great significant, both to advanced and to underdeveloped countries, in the twentieth century. … the essential feature of industrialism … was, in fact, the application of nonliving power to the productive process. This application, symbolized in the steam engine and the water wheel, in the long run served to reduce or eliminate the relative significance of unskilled labor and the use of human or animal energy in the productive process (automation) …
In this continuing process, Britain’s early achievement of industrialism gave it such great profits that these, combined with the profits derived earlier from commercial capitalism and the simultaneous profits derived from the unearned rise in land values from new cities and mines made its early industrial enterprises largely self-financed or at least locally financed. They were organized in proprietorships and partnerships, had contact with local deposit banks for short-term current loans, but had little to do with international bankers, investment banks, central governments, or corporative forms of business organization.
This early stage of industrial capitalism, which lasted in England from about 1770 to about 1850, was shared to some extent with Belgium and even France, but took quite different forms in the United States, Germany, and Italy, and almost totally different forms in Russia or Asia. The chief reason for these differences was the need for raising funds (capital) to pay for the rearrangement of the factors of production (land, labor, materials, skill, equipment, and so on) which industrialism required. Northwestern Europe, and above all England, had large savings for such new enterprises. Central Europe and North America had much less, while eastern and southern Europe had very little in private hands.
The more difficult an area had in mobilizing capital for industrialization, the more significant was the role of investment bankers and of governments in the industrial process. In fact, the early forms of industrialism based on textiles, iron, coal, and steam spread so slowly from England to Europe that England was itself entering upon the next stage, financial capitalism, by the time Germany and the United States (about 1850) were just beginning to industrialize. This new stage of financial capitalism, which continued to dominate England, France, and the United States as late as 1930, was made necessary by the great mobilization of capital needed for railroad building after 1830. The capital needed for railroads, with their enormous expenditures on track and equipment could not be raised from single proprietorships or partnerships or locally, but, instead, required a new form of enterprise – the limited-liability stock corporation – and a new source of funds – the international investment banker who had, until then, concentrated his attention almost entirely on international flotations of government bonds. The demands of railroads for equipment carried this same development, almost at once, into steel manufacturing and coal mining.
(continued in Part III) |
