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

The nineteenth century had accepted as one of its basic faiths the theory of uthe harmony of interests.” This held that what was good for the individual was good for society as a whole and that the general advancement of society could be achieved best if individuals were left free to seek their own individual advantages. This harmony was assumed to exist between one individual and another, between the individual and the group, and between the short run and the long run. In the nineteenth century, such a theory was perfectly tenable, but in the twentieth century it could be accepted only with considerable modification. As a result of persons seeking their individual advantages, the economic organization of society was so modified that the actions of one such person were very likely to injure his fellows, the society as a whole, and his own long-range advantage. This situation led to such a conflict between theory and practice, between aims and accomplishments, between individuals and groups that a return to fundamentals in economics became necessary. Unfortunately, such a return was made difficult because of the conflict between interests and principles and because of the difficulty of finding principles in the extraordinary complexity of twentieth-century economic life.

The factors necessary to achieve economic progress are supplementary to the factors necessary for production. Production requires the organization of knowledge, time, energy, materials, land, labor, and so on. Economic progress requires three additional factors. These are: innovation, savings, and investment. Unless a society is organized to provide these three, it will not expand economically. “Innovation” means devising new and better ways of performing the tasks of production; “saving” means refraining from consumption of resources so that they can be mobilized for different purposes; and “investment” means the mobilization of resources into the new, better ways of production.

The absence of the third factor (investment) is the most frequent cause of a failure of economic progress. It may be absent even when both of the other factors are working well. In such a case, the savings accumulated are not applied to inventions but are spent on consumption, on ostentatious social prestige, on war, on religion, on other nonproductive purposes, or even left unspent.

Economic progress has always involved shifts in productive resources from old methods to new ones. Such shifts, however beneficial to certain groups and however welcome to people as a whole, were bound to be resisted and resented by other groups who had vested interests in the old ways of doing things and in the old ways of utilizing resources. In a progressive period, these vested interests are unable to defend their vested interests to the point of preventing progress; but, obviously, if the groups in a society who control the savings which are necessary for progress are the same vested interests who benefit by the existing way of doing things, they are in a position to defend these vested interests and prevent progress merely by preventing the use of surpluses to finance new inventions. Such a situation is bound to give rise to an economic crisis. From one narrow point of view, the twentieth century’s economic crisis was a situation of this type. To understand how such a situation could arise, we must examine the development in the chief capitalist countries and discover the causes of the crisis.

Great Britain

In Britain, throughout the nineteenth century, the supply of capital was so plentiful from private savings that industry was able to finance itself with little recourse to the banking system. The corporate form was adopted relatively slowly, and because of the benefits to be derived from limited liability rather than because it made it possible to appeal to a widespread public for equity capital. Savings were so plentiful that the surplus had to be exported, and interest rates fell steadily. Promoters and investment bankers were not much interested in domestic industrial securities (except railroads), and for most of the century concentrated their attention on government bonds (both foreign and domestic) and on foreign economic enterprises. Financial capitalism first appeared in foreign securities, and found a fruitful field of operations. The corporation law (as codified in 1862) was very lenient. There were few restrictions on formations of companies, and none on false prospectuses or false financial reports. Holding companies were not legally recognized until 1928, and no consolidated balance sheet was required then. As late as 1933, of 111 British investment trusts only 52 published a record of their holdings.

This element of secrecy is one of the outstanding features of English business and financial life. The weakest “right” an Englishman has is the “right to know,” which is about as narrow as it is in American nuclear operations. Most duties, powers, and actions in business are controlled by customary procedures and conventions, not by explicit rules and regulations, and are often carried out by casual remarks between old friends. No record perpetuates such remarks, and they are generally regarded as private affairs which are no concern of others, even when they involve millions of pounds of the public’s money. Although this situation is changing slowly, the inner circle of English financial life remains a matter of “whom one knows,” rather than “what one knows.” Jobs are still obtained by family, marriage, or school connections; character is considered far more important than knowledge or skill; and important positions, on this basis, are given to men who have no training, experience, or knowledge to qualify them.

As part of this system and at the core of English financial life have been seventeen private firms of “merchant bankers” who find money for established and wealthy enterprises on either a long-term (investment) or a short-term (“acceptances”) basis. These merchant bankers, with a total of less than a hundred active partners, include the firms of Baring Brothers, N. M. Rothschild, J. Henry Schroder, Morgan Grenfell, Hambros, and Lazard Brothers. These merchant bankers in the period of financial capitalism had a dominant position with the Bank of England and, strangely enough, still have retained some of this, despite the nationalization of the Bank by the Labour government in 1946. As late as 1961 a Baring (Lord Cromer) was named governor of the bank, and his board of directors, called the “Court” of the bank, included representatives of Lazard, of Hambros, and of Morgan Grenfell, as well as of an industrial firm (English Electric) controlled by these.

The heyday of English financial capitalism is associated with the governorship of Montagu Norman from 1920 to 1944, but it began about a century after the advent of industrial capitalism, with the promotion of Guinness, Ltd., by Barings in 1886, and continued with the creation of Allsopps, Ltd., by the Westminster Bank in 1887. In the latter year, only 10,000 companies were in existence although the creation of companies had been about 1,000 a year in the 1870’s and about 2,000 a year in the 1880’s. Of the companies registered, about a third fell bankrupt in their first year. This is a very large fraction when we consider that about one-half the companies created were private companies which did not offer securities to the public and presumably already were engaged in a flourishing business. Financial capitalism really took root in Britain only in the i89o’s. In two years (1894-1896) E. T. Hooley promoted twenty-six corporations with various noble lords as the directors of each. The total capital of this group was £ 18.6 million, of which Hooley took £5 million for himself.

From this date onward, financial capitalism grew rapidly in Britain, without ever achieving the heights it did in the United States or Germany. Domestic concerns remained small, owner-managed, and relatively unprogressive (especially in the older lines like textiles, iron, coal, shipbuilding). One chief field of exploitation for British financial capitalism continued to be in foreign countries until the crash of 1931. Only after 1920 did it spread tentatively into newer fields like machinery, electrical goods, and chemicals, and in these it was superseded almost at once by monopoly capitalism. As a result, the period of financial capitalism was relatively weak in Britain. In addition, its rule was relatively honest (in contrast to the United States but similar to Germany). It made little use of holding companies, exercising its influence by interlocking directorates and direct financial controls. It died relatively easily, yielding control of the economic system to the new organizations of monopoly capitalism constructed by men like William H. Lever, Viscount Lever-hulme (1851-1925) or Alfred M. Mond, Lord Melchett (1868-1930). The former created a great international monopoly in vegetable oils centering upon Unilever, while the latter created the British chemical monopoly known as Imperial Chemical Industries.