Carroll Quigley - Tragedy and Hope - A History of the World in Our Time

This would indicate that even in its most superficial aspects the international gold standard of 1914 was not reestablished by 1930. The legal provisions were different; the financial necessities and practices were quite different; the profound underlying economic and commercial conditions were entirely different, and becoming more so. 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 facade of cardboard and tinsel which had a vague resemblance to the old system, and they hoped that, if they pretended vigorously enough, they could change this facade 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 increase 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 that they could not only make killings 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 imminent 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 the 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 by banks was doomed by the progress of technology. The financial system was also deflationary because of the bankers’ insistence on the gold standard, with 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 of 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 one side, it was establishing monopolies and cartels on the other. Both helped to dig 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 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 to 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. Efforts by the older private investment bankers to control these new channels of funds had varying degrees of success, but, in general, financial capitalism was destroyed by two events: (1) the ability of industry to finance its own capital needs because of the increased 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.

The Period of Deflation, 1927-1936

The period of stabilization cannot be clearly distinguished from the period of deflation. In most countries, the period of deflation began in 1921 and, after about four or five years, became more rapid in its development, reaching after 1929 a degree which could be called acute. In the first part of this period (1921-1925), the dangerous economic implications of deflation were concealed by a structure of self-deception which pretended that a great period of economic progress would be inaugurated as soon as the task of stabilization had been accomplished. This psychological optimism was completely unwarranted by the economic facts, even in the United States where these economic facts were (for the short term, at least) more promising than anywhere else. After 1925, when the deflation became more deep-rooted and economic conditions worsened, the danger from these conditions was concealed by a continuation of unwarranted optimism. The chief symptom of the unsoundness of the underlying economic reality—the steady fall in prices —was concealed in the later period (1925-1929) by a steady rise in security prices (which was erroneously regarded as a good sign) and by the excessive lending abroad of the United States (which amounted to almost ten billion dollars in the period 1920-1931, bringing our total foreign investment to almost 27 billion dollars by the end of 1930). This foreign lending of the United States was the chief reason why the maladjusted economic conditions could be kept concealed for so many years. Before the World War, the United States had been a debtor nation and, to pay these debts, had developed an exporting economy. The combination of debtor and exporter is a feasible one. The war made the United States a creditor nation and also made her a greater exporter than ever by building up her acreage of cotton and wheat and her capacity to produce ships, steel, textiles, and so on. The resulting combination of creditor and exporter was not feasible. The United States refused to accept either necessary alternative—to reduce debts owed to her or to increase her imports. Instead, she raised tariffs against imports and temporarily filled the gap with huge foreign loans. But this was hopeless as a permanent solution. As a temporary solution, it permitted the United States to be both creditor and exporter; it permitted Germany to pay reparations with neither a budgetary surplus nor a favorable balance of trade; it permitted dozens of minor countries to adopt a gold standard they ^could not hold; it permitted France, Britain, Italy, and others to pay war debts to the United States without sending goods. In a word, it permitted the world to live in a fairyland of self-delusions remote from economic realities.