Those crazy Merchant Bankers - Part IV
Financial Capitalism (Credit and Banking) – 1850 – 1931 cont'd
… The supply of money in a single country was subject to no centralized, responsible control in most countries over recent centuries … the various parts of the pyramid of money were but loosely related to each other. … [financial] controls were compulsive in a deflationary direction and were only permissive in an inflationary direction.
Central Banks can usually vary the amount of money in circulation by “open market operations” or by influencing the discount rates of lesser banks. In open market operations, a central bank buys or sells government bonds in the open market. If it buys, it releases money into the economic system; if its sells it reduces the amount of money in the community. The change is greater than the price paid for the securities. For example, if the Federal Reserve Bank buys government securities in the open market, it pays for these by check which is soon deposited in a bank. It thus increases the bank’s reserves with the Federal Reserve Bank. Since banks are permitted to issue loans for several times the value of their reserves with the Federal Reserve Bank, such a transaction permits them to issue loans for a much larger sum.
Central Banks can also change the quantity of money by influencing the credit policies of other banks. This can be done by various methods, such as changing the rediscount rate or changing reserve requirements.
Changing the reserve requirements as a method by which central banks can influence the credit policies of other banks is possible only in those places (like the United States) where there is a statutory limit on reserves.
It is to be noted that the control of the central bank over the credit policies of local banks are permissive in one direction and compulsive in the other. They can compel these local banks to curtail credit and can only permit them to increase credit. This means that they have control powers against inflation and not deflation …
The powers of governments over the quantity of money are of various kinds, and include (a) control over a central bank, (b) control over public taxation, and (c) control over public spending. This control of governments over central banks varies greatly from one country to another, but on the whole has been increasing.
In the various actions which increase or decrease the supply of money, governments, bankers, and industrialists have not always seen eye to eye. On the whole, in the period up to 1931, bankers, especially the Money Power controlled by the international investment bankers, were able to dominate both business and government. They could dominate business, especially in activities and in areas where industry could not finance its own needs for capital, because investment bankers had the ability to supply or refuse to supply such capital. Thus, Rothschild interests came to dominate many of the railroads in Europe, while Morgan dominated at least 26,000 miles of American railroads. Such bankers went further than this. In return for flotations of securities of industry, they took seats on the boards of directors of industrial firms, as they had already done on commercial banks, savings banks, insurance firms, and finance companies. From these lesser institutions they funneled capital to enterprises which yielded control and away from those who resisted. These firms were controlled through interlocking directorships, holding companies, and lesser banks. They engineered amalgamations and generally reduced competition, until by the early twentieth century many activities were so monopolized that they could raise their noncompetitive prices above costs to obtain sufficient profits to become self-financing and were thus able to eliminate the control of bankers. But before that stage was reached a relatively small number of bankers were in positions of immense influence in European and American economic life. As early as 1909, Walter Rathenau, who was in a position to know (since he had inherited from his father control of the German General Electric Company and held scores of directorships himself), said, “Three hundred men, all of whom know one another, direct the economic destiny of Europe and choose their successors from among themselves.”
The power of investment bankers over governments rests on a number of factors, of which the most significant, perhaps, is the need of governments to issue short-term treasury bills as well as long-term government bonds. Just as businessmen go to commercial banks for current capital advances to smooth over the discrepancies between their irregular and intermittent incomes and their periodic and persistent outgoes, so a government has to go to merchant bankers (or institutions controlled by them) to tide over the shallow places caused by irregular tax receipts.
Naturally, the influence of bankers over governments during the age of financial capitalism (roughly 1850-1931) was not something about which anyone talked freely, but it had been admitted frequently enough by those on the inside, especially in England. In 1852, Gladstone, chancellor of the Exchequer, declared, “The hinge of the whole situation was this: the government itself was not to be a substantive power in matters of Finance, but was to leave the Money Power supreme and unquestioned.”
… As we shall see, the powers of these international bankers reached their peak in the last decade of their supremacy, 1919-1931, when Montagu Norman and J.P. Morgan dominated not only the financial world but international relations and other matters as well. … On one occasion, just before international financial capitalism ran, at full speed, on the rocks which sank it, Mr. Norman is reported to have said, “I hold the hegemony of the world.” … It might be added that Governor Norman rarely acted in major world problems without consulting with J.P. Morgan’s representatives.
This conflict of interest between bankers and industrialists has resulted in most European countries in the subordination of the former either to the latter or to the government (after 1931). This subordination was accomplished by the adoption of “unorthodox financial polices” – that is, financial policies not in accordance with the short-run interests of bankers. This shift by which bankers were made subordinate reflected a fundamental development in modern economic history – a development which can be described as the growth from financial capitalism to monopoly capitalism. This took place in Germany earlier than in any other country and was well under way by 1926. It came to Britain only after 1931 and in Italy only in 1934. It did not occur in France to a comparable extent at all, and this explains the economic weakness of France in 1938-1940 to a considerable degree.
International Financial Practices
The financial principles which apply to the relationships between different countries are an expansion of those which apply within a single country. When goods are exchanged between countries, they must be paid for by commodities or gold [mine: or currency exchange!]. They cannot be paid for by the notes, certificates, and checks of the purchaser’s country, since these are of value only in the country of issue. To avoid shipment of gold with every purchase, bills of exchange are used. … Thus, payment for goods in an international trade is made by merging single transactions involving two persons into double transactions involving four persons. In many cases, payment is made by involving a multitude of transactions, frequently in several different countries. These transactions were carried on in the so-called foreign-exchange market.
Under normal conditions a foreign-exchange market served to pay for goods and services of foreigners without any international shipment of money (gold). It also acted as a regulator of international trade.
This wonderful, automatic mechanism of international payments represents one of the greatest social instruments ever devised by man. It requires, however, a very special group of conditions for its effective functioning and, as well shall show, these conditions were disappearing by 1900 and were largely wiped away as a result of the economic changes brought about by the First World War. Because of these changes it became impossible to restore the financial system which had existed before 1914. Efforts to restore it were made with great determination, but by 1933 they had obviously failed, and all major countries had been forced to abandon the gold standard and automatic exchanges.
When the gold standard is abandoned, gold flows between countries like any other commodity, and the value of foreign exchanges (no longer tied to gold) can fluctuate much more widely. … In the period of 1929-1936, the countries of the world went off gold because they preferred to bring their international balances toward equilibrium by means of fluctuating exchanges rather than by means of fluctuating price levels. They feared these last because changing (especially falling) prices led to declines in business activity and shifts in the utilization of economic resources (such as labor, land, and capital) from one activity to another.
The Situation before 1914
The key to the world situation in the period before 1914 is to be found in the dominant position of Great Britain. This position was more real than apparent. In many fields (such as naval or financial) the supremacy of Britain was so complete that it almost never had to be declared by her or admitted by others. It was tacitly assumed by both.
The United States to 1917
... As a result [the U.S.] government was controlled with varying degrees of completeness by the forces of investment banking and heavy industry from 1884 to 1933.
This period, 1884-1933, was the period of financial capitalism in which investment bankers moving into commercial banking and insurance on one side and into railroading and heavy industry on the other were able to mobilize enormous wealth and wield enormous economic, political, and social power.
The structure of financial control created by the tycoons of “Big Banking” and “Big Business” in the period 1880-1933 was of extraordinary complexity, one business fief being built on another, both being allied with semi-independent associates, the whole rearing upward into two pinnacles of economic and financial power, of which one, centered in New York, was headed by J.P. Morgan and Company, and the other, in Ohio, was headed by the Rockefeller family.
… These are but examples of the discovery by financial capitalists that they made money out of issuing and selling securities rather than out of the production, distribution, and consumption of goods and accordingly led them to the point where they discovered that the exploiting of an operating company by excessive issuance of securities or the issuance of bonds rather than equity securities not only was profitable to them but made it possible for them to increase their profits by bankruptcy of the firm, providing fees and commissions of reorganization as well as the opportunity to issue new securities.
The inability of the investment bankers and their industrial allies to control the Democratic Convention of 1896 was a result of the agrarian discontent of the period 1868-1896. This discontent in turn was based, very largely, on the monetary tactics of the banking oligarchy. The bankers were wedded to the gold standard for reasons we have already explained. Accordingly, at the end of the Civil War, they persuaded the Grant Administration to curb the postwar inflation and go back on the gold standard (crash of 1873 and resumption of specie payments in 1875). This gave the bankers a control of the supply of money which they did not hesitate to use for their own purposes, as Morgan ruthlessly pressured Cleveland in 1893-1896. The bankers’ affection for low prices was not shared by farmers, since each time prices of farm products went down the burden of farmers’ debts (especially mortgages) became greater. Moreover, farm prices, being much more competitive than industrial prices, and not protected by a tariff, fell much faster than industrial prices, and farmers could not reduce costs or modify their production plans nearly so rapidly as industrialists could. The result was a systematic exploitation of the agrarian sectors of the community by the financial and industrial sectors. This exploitation took the form of high industrial prices, high (and discriminatory) railroad rates, high interest charges, low farm prices, and a very low level of farm services by railroads and the government. … By 1890, however, agrarian discontent rose so high that it began to overcome the memory of the Democratic role in the Civil War. The capture of the Democratic Party by these forces of discontent under William Jennings Bryan in 1896, who was determined to obtain higher prices by increasing the supply of money on a bimetallic rather than a gold basis, presented the electorate with an election on a social and economic issue for the first time in a generation. Though the forces of high finance and big business were in a state of near panic, by a mighty effort involving large-scale spending they were successful in electing McKinley.
The agrarian discontent, the growth of monopolies, the oppression of labor, and the excesses of Wall Street financiers made the country very restless in the period 1890-1900. All this could have been alleviated merely by increasing the supply of money sufficiently to raise prices somewhat, but the financiers of this period, just as thirty years later, were determined to defend the gold standard no matter what happened. In looking about for some issue which would distract public discontent from domestic economic issues, what better solution that a crisis in foreign affairs? Cleveland had stumbled upon this alternative, more or less accidentally, in 1895 when he stirred up a controversy with Great Britain over Venezuela. The great opportunity, however, came with the Cuban revolt against Spain in 1895. While the “yellow press,” led by William Randolph Hearst, roused public opinion, Henry Cabot Lodge and Theodore Roosevelt plotted how they could best get the United States into the fracas. They got the excuse they needed when the American battleship Maine was sunk by a mysterious explosion in Havana harbor in February 1898. In two months the United States declared war on Spain to fight for Cuban independence. The resulting victory revealed the United States as a world navy power, established it as an imperialist power with possession of Puerto Rico, Guam, and the Philippines, whetted some appetites for imperialist glory, and covered the transition from the long-drawn age of semidepression to a new period of prosperity.
During this same period, there appeared a new movement for economic and political reform known as Progressivism. The Progressive movement resulted from a combination of forces, some new and some old. Its foundation rested on the remains of agrarian and labor discontent which had struggled so vainly before 1897. There was also, as a kind of afterthought on the part of successful business leaders, a weakening of acquisitive selfishness and a revival of the older sense of social obligation and the idealism. To some extent this feeling was mixed with a realization that the position and privileges of the very wealthy could be preserved better with superficial concessions and increased opportunity for the discontented to blow off steam than from any policy of blind obstructionism on the part of the rich. … But the great opportunity for the Progressive forces arose from a split within Big Business between the older forces of financial capitalism led by Morgan and the newer forces of monopoly capitalism organized around the Rockefeller bloc. As a consequence, the Republican Party was split between the followers of Theodore Roosevelt and those of William Howard Taft, so that the combined forces of the liberal East and the agrarian West were able to capture the Presidency under Woodrow Wilson in 1912.
Wilson roused a good deal of popular enthusiasm with his talk of “New Freedom” and the rights of the underdog, but his program amounted to little more than an attempt to establish on a Federal basis those reforms which agrarian and labor discontent had been seeking on a state basis for many years.
(Cont'd in Part V) |
