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

The end of financial capitalism may well be dated at the collapse of the gold standard in Britain in September 1931, but, on the personal side, it might be dated at the suicide of its most spectacular individual, the “Match King,” Ivar Kreuger, in Paris in April 1932.

Ivar Kreuger (1880-1932), after several years’ experience as an engineer in America and South Africa, set up in Stockholm in 1911 the contracting firm of Kreuger & Toll. By 1918 this firm was a financial company with a capital of 12 million kronor, and chiefly interested in the Swedish Match Company, a holding company organized by Kreuger. Within a decade, Kreuger had control of over 150 match companies in 43 countries. The securities of these firms were controlled through a Delaware corporation (called International Match Company). This holding company sold millions of dollars of securities with no voting rights, while control was exercised through a small bloc of voting stock held by Kreuger & Toll. By granting loans to the governments of various countries, Kreuger obtained match monopolies which brought in substantial sums. In all, £ 330 million was lent to governments in this way, including $75 million to France and $125 million to Germany. In return Kreuger obtained control of 80 percent of the world’s match ibdustry, most of Europe’s paper and wood-pulp production, fourteen telephone and telegraph companies in six countries, a considerable part of the farm-mortgage systems of Sweden, France, and Germany, eight iron-ore mines, and numerous other enterprises, including a considerable group of banks and newspapers in various countries. The whole system was financed in a sumptuous fashion by selling worthless and fraudulent securities to investors through the most prominent investment bankers of the world. In all, about $750 million in such securities was sold, about one-third in the United States. The respected Lee, Higginson, and Company of Boston sold $150 million of these securities to 600 banks and brokers without making any investigation into their value or honesty and received about $6 million in fees for doing so. The money thus raised by Kreuger was used to advance loans to various countries, to pay interest and dividends on securities issued previously, and to finance the further exploits of Mr. Kreuger. As examples of these exploits, we might mention that Kreuger & Toll paid dividends of 25 percent from 1919 to 1928 and 30 percent after 1929, mostly from capital; Swedish Match Company usually paid 15 percent dividends. This was done in order to persuade the investing public to buy more of Kreuger’s securities and thus keep the system going. In order to encourage this public, prospectuses were falsified, letters were forged, and the stock market was manipulated at heavy cost. Bonds were issued against the same security several times over. Most brazen of all, bonds were issued against the receipts of the match monopolies of Italy and Spain. Although Kreuger possessed neither of these, he carried them on his books for $80 million and had bonds forged by himself to substantiate the claim. The long-drawn out depression of 1929-1933 made it impossible to keep the system afloat, although Kreuger avoided no degree of corruption and deceit in his efforts to do so. In March 1932 a note for $11 million from International Telephone and Telegraph fell due, and Kreuger, unable to meet it, killed himself. He left claims against his estate of $700 million, while his personal debts were $179 million with assets of $18 million.

The death of Kreuger is merely a symbol of the end of European financial capitalism. For about fifty years before this event, the centralized control made possible by the financial system had been used to develop monopolistic tendencies in industry. These had been furthered by the growth of large combinations, by the formation of cartels and trade associations between units of enterprise, and by the increase of those less tangible restrictions on competition known as imperfect and monopolistic competition. As a result, competition had been declining, control of the market had been increasing, and self-financing by industrial units had been growing. This last development made it possible for industry once more to free itself from financial control as it had been in the owner-management period which preceded financial capitalism. But, unlike this earlier stage, control did not revert from financiers back to the owners of enterprise but instead tended to shift into the hands of a new class of bureaucratic managers whose powers of control were out of all relationship to the extent of their ownership of the enterprises concerned. In France, the bankers, although in retreat when war came in 1939, had been so strengthened by the unorthodox financial policies of the 1920’s that they were able to prevent any important victory for monopoly capitalism in the 1930’s, with the result that the shift from financial to monopoly capitalism did not appear in France until the 1940’s. In the United States, also, the transition was not complete when war came in 1939, with the result that the United States, like France, but unlike any other important country, had not shaken off the world depression even as late as 1940.

Reflation and Inflation 1933-1947

The period of reflation began in some countries (like Great Britain and the United States) long before the period of deflation had ended elsewhere (as in France). In most countries the recovery was associated with rising wholesale prices, with abandonment of the gold standard or at least devaluation, and with easy credit. It resulted everywhere in increased demand, rising production, and decreasing unemployment. By the middle of 1932, recovery was discernible among the members of the sterling bloc; by the middle of 1933 it was general except for the members of the gold bloc. This recovery was halting and uncertain. Insofar as it was caused by government actions, these actions were aimed at treatment of the symptoms rather than the causes of the depression, and these actions, by running contrary to orthodox economic ideas, served to slow up recovery by reducing confidence. Insofar as the recovery was caused by the normal working out of the business cycle, the recovery was slowed up by the continuation of emergency measures—such as controls over commerce and finance and by the fact that the economic disequilibriums which the depression had made were frequently intensified by the first feeble movements toward recovery. Finally, the recovery was slowed up by the drastic increase in political insecurity as a result of the aggressions of Japan, of Italy, and of Germany.

Except for Germany and Russia (both of which had isolated their economies from world fluctuations) the recovery continued for no more than three or four years. In most countries the latter half of 1937 and the early part of 1938 experienced a sharp “recession.” In no important country had prices reached the 1929 level at the beginning of the recession (although within 10 percent of it), nor had the percentage of persons unemployed fallen to the 1929 level. In many countries (but not the United States or the gold bloc), industrial production had reached 1929 levels.

The recession was marked by a break in wholesale prices, a decline in business activity, and an increase in unemployment. In most countries it began in the spring of 1937 and lasted for about ten months or a year. It was caused by several factors: (1) much of the price rise before 1937 had been caused by speculative buying and by the efforts of “panic money” to seek refuge in commodities, rather than by demand from either consumers or investors; (2) several international commodity cartels created in the period of depression and early recovery broke down with a resulting fall in prices; (3) there was a curtailment of public deficit spending in several countries, especially the United States and France; (4) the replacement of capital goods worn out in the period 1929-1934 had caused much of the revival of 1933-1937 and began to taper off in 1937; (5) the increase in political tension in the Mediterranean and the Far East as a result of the Civil War in Spain and the Japanese attack on North China had an adverse effect; and (6) a “gold scare” occurred. This last was a sudden fall in the demand for gold caused by the fact that the great increase in gold production resulting from the United States Treasury price of $35 an ounce gave rise to rumors that the Treasury would soon cut this price.