Manipulation of Money & Credit - Part VII
Banking & Credit – The Period of Stabilization (1922-1930) cont'd
The bankers’ point of view was clearly expressed in a series of government reports and international conferences from 1918 to 1933. … These and many other statements and reports called vainly for a free international gold standard, for balanced budgets, for restoration of the exchange rates and reserve ratios customary before 1914, for reduction in taxes and government spending, and for a cessation of all government interference in economic activity either domestic or international. But none of these studies made any effort to assess the fundamental changes in economic, commercial, and political life since 1914. And none gave any indication of a realization that a financial system must adapt itself to such changes.
Accordingly, the financial efforts of the period after 1918 became concentrated on a very simple (and superficial) goal – to get back to the gold standard – not “a” gold standard but “the” gold standard, by which was meant the identical exchange ratios and gold contents that monetary units had had in 1914.
Restoration of the gold standard was not something which could be done by a mere act of government. It was admitted even by the most ardent advocates of the gold standard that certain financial relationships would require adjustment before the gold standard could be restored. There were three chief relationships involved. These were (i) the problem of inflation, or the relationship between money and goods; (ii) the problem of public debts, or the relationship between governmental income and expenditure; and (iii) the problem of price parities, or the relationship between price levels of different countries. That these three problems existed was evidence of a fundamental disequilibrium between real wealth and claims on wealth, caused by a relative decrease in the former and increase in the latter.
The problem of public debts arose from the fact that as money (credit) was created during the war period, it was usually made in such a way that it was not in the control of the state or the community but was in the control of private financial institutions which demanded real wealth at some future date for the creation of claims on wealth in the present.
… Since the third method (devaluation) was rejected by orthodox theorists, and no one could see how to get the first (increase of real wealth), only the second (deflation) was left as a possible method for dealing with the problem of inflation. To many people it seemed axiomatic that the cure for inflation was deflation, especially since bankers regarded deflation as a good thing in itself. Moreover, deflation as a method for dealing with the problem of inflation went hand in hand with taxation as a method for dealing with the problem of public debts. Theorists did not stop to think what the effects of both would be on the production of real wealth and on the prosperity of the world.
The third financial problem which had to be solved before stabilization became practical was the problem of price parities. This differed because it was primarily an international question while the other two problems were primarily domestic.
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As a result of this fiscal policy, Britain found herself faced with deflation and depression for the whole period 1920-1933. These effects were drastic in 1920-1922, moderate in 1922-1929, and drastic again in 1929-1933. … At the same time, the inadequacy of the British gold reserve during most of the period placed Britain in financial subjection to France (which had a plentiful supply of gold because of her different financial policy). This subjection served to balance the political subjection of France to Britain arising from French insecurity, and ended only with Britain’s abandonment of the gold standard in 1931.
Britain was the only important European country which reached stabilization through deflation. East of her, a second group of countries, including Belgium, France, and Italy, reached stabilization through devaluation. This was a far better method. It was adopted, however, not because of superior intelligence but because of financial weakness. In these countries, the burden of war-damage reconstruction made it impossible to balance a budget, and this made deflation difficult. These countries accepted orthodox financial ideas and tried to deflate in 1920-1921, but, after the depression which resulted, they gave up the task.
The group of countries which reached stabilization through devaluation prospered in contrast with those who reached stabilization through deflation. The prosperity was roughly equal to the degree of devaluation.
A third group of countries reached stabilization through reconstruction. These were the countries in which the old monetary unit had been wiped out and had to be replaced by a new monetary unit. Among these were Austria, Hungary, Germany, and Russia. … Germany had her system reorganized as a consequence of the Dawes Plan. The Dawes Plan, as we have seen in our discussion of reparations, provided the gold reserves necessary for a new currency and provided a control of foreign exchange which served to protect Germany from the accepted principles of orthodox finance. These controls were continued until 1930, and permitted Germany to borrow from foreign sources, especially the United States, the funds necessary to keep her economic system functioning with an unbalanced budget and an unfavorable balance of trade. In the period 1924-1929, by means of these funds, the industrial structure of Germany was largely rebuilt so that, when the depression arrived, Germany had the most efficient industrial machine in Europe and probably the second most efficient in the world (after the United States). The German financial system had inadequate controls over inflation and almost none over deflation because of the Dawes Plan restrictions on the open-market operations of the Reichsbank and the generally slow response of the German economy to changes in the discount rate.
The stabilization period did not end until about 1931 … The chief change [from the system that existed prior to 1914] was the use of the “gold exchange standard” or the “gold bullion standard” in place of the old gold standard. Under the gold exchange standard, foreign exchange of gold standard countries could be used as reserves against notes or deposits in place of reserves in gold. In this way, the world’s limited supplies of gold could be used to support a much greater volume of fictitious wealth in the world as a whole since the same quantity of gold could act as bullion reserve for one country and as gold exchange reserve for another.
… This would indicate that even in its most superficial aspects the international gold standard of 1914 was not reestablished by 1930. … Yet financiers, businessmen, and politicians tried to pretend to themselves and to the public that they had restored the financial system of 1914. They had created a façade of cardboard and tinsel which had a vague resemblance to the hold system, and they hoped that, if they pretended vigorously enough, they could change this façade into the lost reality for which they yearned. At the same time, while pursuing policies (such as tariffs, price controls, production controls, and so on) which drove this underlying reality ever farther from that which had existed in 1914, they besought other governments to do differently. Such a situation, with pretense treated as if it were reality and reality treated as if it were a bad dream, could lead only to disaster. This is what happened. The period of stabilization merged rapidly into a period of deflation and depression.
As we have said, the stage of financial capitalism did not place emphasis on the exchange of goods or the production of goods as the earlier stages of commercial capitalism and industrial capitalism had done. In fact, financial capitalism had little interest in goods at all, but was concerned entirely with claims on wealth – stocks, bonds, mortgages, insurance, deposits, proxies, interest rates, and such.
It invested capital not because it desired to increate the output of goods or services but because it desired to float issues (frequently excess issues) of securities on this productive basis. It built railroads in order to sell securities, not in order to transport goods; it constructed great steel corporations to sell securities, not in order to make steel, and so on. But, incidentally, it greatly increased the transport of goods, the output of steel, and the production of other goods. By the middle of the stage of financial capitalism, however, the organization of financial capitalism had evolved to a highly sophisticated level of security promotion and speculation which did not require any productive investment as a basis. Corporations were built upon corporations in the form of holding companies so that securities were issued in huge quantities, bringing profitable fees and commissions to financial capitalists without any increase in economic production whatever. Indeed, these financial capitalists discovered they could not only make a killing out of the issuing of such securities, they could also make killings out of the bankruptcy of such corporations, through the fees and commissions of reorganization. A very pleasant cycle of flotation, bankruptcy, flotation, bankruptcy began to be practiced by these financial capitalists. The more excessive the flotation, the greater the profits, and the more immenent the bankruptcy. The more frequent the bankruptcy, the greater the profits of reorganization and the sooner the opportunity of another excessive flotation with its accompanying profits. This excessive stage reached its highest peak only in the United States. In Europe it was achieved only in isolated cases.
The growth of financial capitalism made possible a centralization of world economic control and a use of this power for the direct benefit of financiers and the indirect injury of all other economic groups. This concentration of power, however, could be achieved only by using methods which planted the seeds which grew into monopoly capitalism. Financial control could be exercised only imperfectly through credit control and interlocking directorates. In order to strengthen such control, some measure of stock ownership was necessary. But stock ownership was dangerous to banks, because their funds consisted more of deposits (that is, short-term obligations) than of capital (or long-term obligations). This meant that banks which sought economic control through stock ownership were putting short-term obligations into long-term holdings. This was safe only so long as these latter could be liquidated rapidly at a price high enough to pay short-term obligations as they presented themselves. But these holdings of securities were bound to become frozen because both the economic and financial systems were deflationary. The economic system was deflationary because power production and modern technology gave a great increase in the supply of real wealth. This meant that in the long run the control of banks was doomed by the progress of technology. The financial system was also deflationary because of the bankers’ insistence on the gold standard, and all that this implies.
To escape from this dilemma, the financial capitalists acted upon two fronts. On the business side, they sought to sever control from ownership of securities, believing they could hold the former and relinquish the latter. On the industrial side, they sought to advance monopoly and restrict production, thus keeping prices up and their security holdings liquid.
The efforts of financiers to separate ownership from control were aided by the great capital demands of modern industry. Such demands for capital made necessary the corporation form of business organization. This inevitably brings together the capital owned by a large number of persons to create an enterprise controlled by a small number of persons. The financiers did all they could to make the former number as large as possible and the latter number as small as possible. The former was achieved by stock splitting, issuing securities at low par value, and by high-pressure security salesmanship. The latter was achieved by plural-voting stock, nonvoting stock, pyramiding of holding companies, election of directors by cooptation, and similar techniques. The result of this was that larger and larger aggregates of wealth fell into the control of smaller and smaller groups of men.
While financial capitalism was thus weaving the intricate pattern of modern corporation law and practice on the one side, it was establishing monopolies and cartels on the other. Both helped did the grave of financial capitalism and pass the reins of economic control on to the newer monopoly capitalism. On one side, the financiers freed the controllers of business from the owners of the business, but, on the other side, this concentration gave rise to monopoly conditions which freed the controllers from the banks.
The date at which any country shifted from financial capitalism and later shifted to monopoly capitalism depended on the supply of capital available to business. These dates could be hastened or retarded by government action. In the United States the onset of monopoly capitalism was retarded by the government’s antimonopoly legislation, while in Germany it was hastened by the cartel laws. The real key to the shift rested on the control of money flows, especially of investment funds. These controls, which were held by investment bankers in 1900, were eclipsed by other sources of funds and capital, such as insurance, retirement and investment funds, and, above all, by those flows resulting from the fiscal policies of governments.
… in general, financial capitalism was destroyed by two events: (1) the ability of industry to finance its own capital needs because of the increase profits arising from the decreased competition established by financial capitalism, and (2) the economic crisis engendered by the deflationary policies resulting from financial capitalism’s obsession with the gold standard.
(Cont'd in Part VIII) |
