C H A P T E R E I G H T E E N
From such uniformity of underlying institutional arrangements derived the intriguing similarity in the pattern of events which in the half-century 1879–1929 was spread out over an enormous expanse.
An endless variety of personalities and backgrounds, mentalities and historical antecedents gave local color and topical emphasis to the vicissitudes of many countries, and yet, over its greater part the civilized world was of the same fabric. This affinity transcended that of the culture traits common to peoples using similar tools, enjoying similar amusements, and rewarding effort with similar prizes. Rather, the similarity concerned the function of concrete events in the historical context of life, the time-bound component of collective existence. An analysis of these typical strains and stresses should reveal much of the mechanism that produced the singularly uniform pattern of history during this period.
The strains can be readily grouped according to the main institutional spheres. In the domestic economy the most varied symptoms of disequilibrium—as decline of production, employment, and earnings—shall be represented here by the typical scourge of unemployment. In domestic politics there was the struggle and deadlock of social forces, which we shall typify by tension of classes. Difficulties in the field of international economics, which centered around the so-called balance of payment and comprised a falling off of exports, unfavorable terms of trade, dearth of imported raw materials, and losses on foreign investments, we shall designate as a group by a characteristic form of strain, namely, pressure on exchanges. Lastly, tensions in international politics will be subsumed under imperialist rivalries.
Now let us consider a country which, in the course of a business depression, is stricken by unemployment. It is easy to see that any measure of economic policy which the banks may decide upon will have to conform to the requirement of stable exchanges. The banks will not be able to expand or further extend credits to industry, without appealing to the central bank which, on its part, will refuse to follow suit since the safety of the currency requires the opposite course. On the other hand, if the strain spread from industry to state—trade unions might induce affiliated political parties to raise the issue in parliament—the scope of any policy of relief or public works will be limited by the requirements of budgetary equilibrium, another precondition of stable exchanges. The gold standard will thus check the action of the Treasury as effectively as that of the bank of issue, and the legislature will find itself confronted with identically the same limitations that applied to industry.
Within the compass of the nation the strain of unemployment can, of course, be borne alternatively in the industrial or the governmental zone. If in a particular instance the crisis was overcome by a deflationary pressure on wages, then, it might be said, the burden fell primarily on the economic sphere. If, however, that painful measure was avoided with the help of public works subsidized from death duties, the brunt of the tension would fall on the political sphere (the same would be the case if the decrease in wages was forced upon the trade unions by some governmental measure in defiance of acquired rights). In the first instance—deflationary pressure on wages—the tension remained within the market zone, and was expressed in a shift of incomes transmitted by a change in prices; in the latter instance—public works or trade union restrictions—there was a shift in legal status or in taxation which affected primarily the political position of the group concerned.
Eventually, the strain of unemployment might have spread outside the confines of the nation and affected foreign exchanges. This again might happen whether political or economic methods of combating unemployment had been used. Under the gold standard—which we all the time assume to be in force—any governmental measure that caused a budgetary deficit might start a depreciation of the currency: if, on the other hand, unemployment was being fought by the expansion of bank credit, rising domestic prices would hit exports and affect the balance of payment in that way. In either case exchanges would slump and the country feel the pressure on its currency.
Alternatively, the strain which sprang from unemployment might induce foreign tension. In the case of a weak country this had sometimes the gravest consequences for its international position. Its status deteriorated, its rights were disregarded, foreign control was foisted upon it, its national aspirations were foiled. In the case of strong states the pressure might be deflected into a scramble for foreign markets, colonies, zones of influence, and other forms of imperialist rivalry.
The strains emanating from the market were thus shifting to and fro between the market and the other main institutional zones, sometimes affecting the working of the field of government, sometimes that of the gold standard or that of the balance-of-power system, as the case might be. Each field was comparatively independent of the other and tended toward an equilibrium of its own; whenever this balance was not achieved, the imbalance spread over into the other spheres. It was the relative autonomy of the spheres that caused the strain to accumulate and to generate tensions which eventually exploded in more or less stereotyped forms. While in imagination the nineteenth century was engaged in constructing the liberal utopia, in reality it was handing over things to a definite number of concrete institutions the mechanisms of which ruled the day.
The nearest approach to the realization of the true position was perhaps the rhetorical query of an economist who, as late as 1933, arraigned the protectionist policies of “the overwhelming majority of governments.” Can a policy, he asked, be right which is being unanimously condemned by all experts as utterly mistaken, grossly fallacious, and contrary to all principles of economic theory? His answer was an unconditional “No.”* But in vain would one seek in liberal literature for anything in the nature of an explanation for the patent facts. An unending stream of abuse of the governments, politicians, and statesmen whose ignorance, ambition, greed, and shortsighted prejudice were supposedly responsible for the consistently followed policies of protectionism in an “overwhelming majority” of countries was the only answer. Rarely was as much as a reasoned argument on the subject to be found. Not since the schoolmen’s defiance of the empirical facts of science was sheer prejudice displayed in so fearful array. The only intellectual response was to supplement the myth of the protectionist conspiracy by the myth of the imperialist craze.
The liberal argument, in so far as it became articulate, asserted that sometime in the early 1880s imperialist passions began to stir in the Western countries, and destroyed the fruitful work of economic thinkers by their emotional appeal to tribal prejudice. These sentimental policies gradually gathered strength and finally led to World War I. After the Great War the forces of Enlightenment had another chance of restoring the reign of reason but an unexpected outburst of imperialism, especially on the part of the small new countries, later on also of the “have-nots,” such as Germany, Italy, and Japan, upset the wagon of progress. The “crafty animal,” the politician, had defeated the brain centers of the race—Geneva, Wall Street, and the City of London.
In this piece of popular political theology imperialism stands for the old Adam. States and empires are held to be congenitally imperialist; they will eat up their neighbors without moral conpunction. The latter half of the contention is true, but not the former. While imperialism, when and where it appears, does not wait on rational or moral justification for expansion, it is contrary to fact that states and empires are always expansionist. Territorial associations are not necessarily eager to extend their boundaries; neither cities, nor states, nor empires stand under such compulsion. To argue the opposite is to mistake some typical situations for a general law. In effect, contrary to popular preconceptions, modern capitalism started with a long period of contractionism; only late in its career did the turn toward imperialism happen.
Anti-imperialism was initiated by Adam Smith, who thereby not only anticipated the American Revolution but also the Little England movement of the following century. The reasons for the break were economic: the rapid expansion of markets started by the Seven Years’ War made empires go out of fashion. While geographical discoveries, combined with comparatively slow means of transportation, favored overseas plantations, fast communications turned colonies into an expensive luxury. Another factor unfavorable to plantations was that exports now eclipsed imports in significance; the ideal of the buyer’s market gave way to the seller’s market, an aim attainable now by the simple means of underselling one’s competitors, including, eventually, the colonists themselves. Once the Atlantic seaboard colonies were lost, Canada hardly managed to have herself retained in the Empire (1837); even a Disraeli advocated the liquidation of the West African possessions; the Orange State vainly offered to join the empire; and some islands in the Pacific, regarded today as pivots of world strategy, were consistently refused admission. Free traders and protectionists, liberals and ardent Tories joined in the popular conviction that colonies were a wasting asset destined to become a political and financial liability. Anybody who talked colonies in the century between 1780 and 1880 was looked upon as an adherent of the ancien régime. The middle class denounced war and conquest as dynastic machinations, and pandered to pacifism (François Quesnay had been the first to claim for laissez-faire the laurels of peace). France and Germany followed in England’s wake. The former slowed down her rate of expansion appreciably, and even her imperialism was now more Continental than colonial. Bismarck contemptuously declined to pay the price of one single life for the Balkans and put all his influence behind anti-colonial propaganda. Such was governmental attitude at the time when capitalistic companies were invading whole continents; when the East India Company had been dissolved at the insistence of eager Lancashire exporters, and anonymous piece-goods dealers replaced in India the resplendent figures of Clive and Warren Hastings. The governments held aloof. Canning ridiculed the notion of intervention on behalf of gambling investors and overseas speculators. The separation of politics and economics now spread into international affairs. While Queen Elizabeth had been loath to distinguish too strictly between her private income and privateer’s income, Gladstone would have branded it a calumny that British foreign policy was being put at the service of foreign investors. To allow state power and trading interests to fuse was not a nineteenth-century idea; on the contrary, early Victorian statesmen had proclaimed the independence of politics and economics as a maxim of international behavior. Only in narrowly defined cases were diplomatic representatives supposed to be active on behalf of the private interests of their nationals, and the surreptitious extension of these occasions was publicly denied, and if proven, reprimanded accordingly. Not only at home but also abroad, the principle of nonintervention of the state in the affairs of private business was maintained. The home government was not supposed to intervene in private trade, nor were foreign offices expected to regard private interests abroad otherwise than on broad national lines. Investments were overwhelmingly agricultural and located at home; foreign investments were still deemed a gamble, and the frequent total losses incurred by investors were regarded as amply compensated for by the scandalous terms of usurious lending.
The change came suddenly, and this time simultaneously in all leading Western countries. While Germany repeated England’s domestic development only after a lag of half a century, external events of world scope would necessarily affect all trading countries alike. Such an event was the increase in the rhythm and volume of international trade as well as the universal mobilization of land, implied in the mass transportation of grain and agricultural raw materials from one part of the planet to another, at a fractional cost. This economic earthquake dislocated the lives of dozens of millions in rural Europe. Within a few years free trade was a matter of the past, and the further expansion of market economy took place under utterly new conditions.
These conditions themselves were set by the “double movement.” The pattern of international trade which was now spreading at an accelerated rate was crossed by the introduction of protectionist institutions designed to check the all-round action of the market. The agrarian crisis and the Great Depression of 1873–86 had shaken confidence in economic self-healing. From now onward the typical institutions of market economy could usually be introduced only if accompanied by protectionist measures, all the more so because since the late 1870s and early 1880s nations were forming themselves into organized units which were apt to suffer grievously from the dislocations involved in any sudden adjustment to the needs of foreign trade or foreign exchanges. The supreme vehicle of the expansion of market economy, the gold standard, was thus usually accompanied by the simultaneous introduction of the typical protectionist policies of the age such as social legislation and customs tariffs.
On this point also the traditional liberal version of the collectivist conspiracy was a misrepresentation of the facts. The free trade and gold standard system was not wantonly wrecked by selfish tariff mongers and soft-hearted legislators; on the contrary, the coming of the gold standard itself hastened the spreading of these protectionist institutions, which were the more welcome the more burdensome fixed exchanges proved. From this time onward tariffs, factory laws, and an active colonial policy were prerequisites of a stable external currency (Great Britain with her vast industrial superiority was the exception which proved the rule). Only when these prerequisites were given could now the methods of market economy be safely introduced. Where such methods were forced upon a helpless people in absence of protective measures, as in exotic and semicolonial regions, unspeakable suffering ensued.
Herein we hold the key to the seeming paradox of imperialism—the economically inexplicable and therefore allegedly irrational refusal of countries to trade with one another indiscriminately, and their aiming instead at the acquisition of overseas and exotic markets. What made countries act in this manner was simply the fear of consequences similar to those which the powerless peoples were unable to avert. The difference was merely that while the tropical population of the wretched colony was thrown into utter misery and degradation, often to the point of physical extinction, the Western country’s refusal to trade was induced by a lesser peril but still sufficiently real to be avoided at almost all cost. That the threat, as in the case of colonies, was not essentially economic made no difference; there was no reason, apart from prejudice, to seek the measure of social dislocation in economic magnitudes. Indeed, to expect that a community would remain indifferent to the scourge of unemployment, the shifting of industries and occupations and to the moral and psychological torture accompanying them, merely because economic effects, in the long run, might be negligible, was to assume an absurdity.
The nation was just as often the passive recipient as the active initiator of strain. If some external event weighed heavily on the country, its internal mechanism functioned in the usual way, shifting the pressure from the economic to the political zone or vice versa. Significant instances occurred in the postwar period. For some Central European countries defeat created highly artificial conditions which included fierce external pressure in the shape of reparations. During more than a decade the German domestic scene was dominated by a shifting of the external burden between industry and state—between wages and profits on the one hand, social benefits and taxes on the other. The nation as a whole was the bearer of reparations, and the domestic position changed according to the manner in which the country—government and business combined—tackled the job. National solidarity was thus anchored in the gold standard, which made the maintenance of the external value of the currency a paramount obligation. The Dawes Plan was expressly devised to safeguard the German currency. The Young Plan made the same condition absolute. But for the obligation to keep the external value of the reichsmark unimpaired, the course of German home affairs during this period would be unintelligible. Collective responsibility for the currency created the indestructible framework within which business and parties, industry and state adjusted to the strain. Yet what a defeated Germany had to put up with as a result of a lost war, all peoples up to the Great War had endured voluntarily, namely, the artificial integration of their countries through the pressure of stable exchanges. Only resignation to the inevitable laws of the market could explain the proud acquiescence with which the cross was borne.
It might be objected that this outline is the result of sustained oversimplification. Market economy did not start in a day, nor did the three markets run a pace like a troika, nor did protectionism have parallel effects in all markets, and so on. This, of course, is true; only, it misses the point at issue.
Admittedly, economic liberalism merely created a novel mechanism out of more or less developed markets; it unified various types of already existing markets, and coordinated their functions in a single whole. Also, the separation of labor and land was, by that time, well on the way, and so was the development of markets for money and credit. All along the line the present was linked with the past, and nowhere was a break to be found.
Yet institutional change, such is its nature, started to operate abruptly. The critical stage was reached with the establishment of a labor market in England, in which workers were put under the threat of starvation if they failed to comply with the rules of wage labor. As soon as this drastic step was taken, the mechanism of the self-regulating market sprang into gear. Its impact on society was so violent that, almost instantly, and without any prior change in opinion, powerful protective reactions set in.
Also, in spite of their widely different nature and origin, the markets for the various elements of industry now showed a parallel development. This could have hardly been otherwise. The protection of man, nature, and productive organization amounted to an interference with markets for labor and land as well as for the medium of exchange, money, and thereby, ipso facto, impaired the self-regulation of the system. Since the purpose of the intervention was to rehabilitate the lives of men and their environment, to give them some security of status, intervention necessarily aimed at reducing the flexibility of wages and the mobility of labor, giving stability to incomes, continuity to production, introducing public control of national resources, and the management of currencies in order to avoid unsettling changes in the price level.
The Depression of 1873–86 and the agrarian distress of the 1870s increased the strain permanently. At the beginning of the Depression, Europe had been in the heyday of free trade. The new German Reich had forced upon France the most-favored-nation clause between herself and the latter country, committed herself to the removal of tariffs on pig iron, and introduced the gold standard. By the end of the Depression, Germany had surrounded herself with protective tariffs, established a general cartel organization, set up an all-round social insurance system, and was practicing high-pressure colonial policies. Prussianism, which had been a pioneer of free trade, was evidently as little responsible for the change to protectionism as it was for the introduction of “collectivism.” The United States had even higher tariffs than the Reich and was just as “collectivistic” in its own way; it subsidized long-range railway building heavily and developed the elephantine formation of the trusts.
All Western countries followed the same trend, irrespective of national mentality and history.* With the international gold standard the most ambitious market scheme of all was put into effect, implying absolute independence of markets from national authorities. World trade now meant the organizing of life on the planet under a self-regulating market, comprising labor, land, and money, with the gold standard as the guardian of this gargantuan automaton. Nations and peoples were mere puppets in a show utterly beyond their control. They shielded themselves from unemployment and instability with the help of central banks and customs tariffs, supplemented by migration laws. These devices were designed to counteract the destructive effects of free trade plus fixed currencies, and to the degree in which they achieved this purpose they interfered with the play of those mechanisms. Although each single restriction had its beneficiaries whose super-profits or -wages were a tax on all other citizens, it was often only the amount of the tax that was unjustified, not also protection itself. In the long run there was an all-round drop in prices which benefited all.
Whether protection was justified or not, a debility of the world market system was brought to light by the effects of interventions. The import tariffs of one country hampered the exports of another and forced it to seek for markets in politically unprotected regions. Economic imperialism was mainly a struggle between the Powers for the privilege of extending their trade into politically unprotected markets. Export pressure was reinforced by a scramble for raw material supplies caused by the manufacturing fever. Governments lent support to their nationals engaged in business in backward countries. Trade and flag were racing in one another’s wake. Imperialism and half-conscious preparation for autarchy were the bent of Powers which found themselves more and more dependent upon an increasingly unreliable system of world economy. And yet rigid maintenance of the integrity of the international gold standard was imperative. This was one institutional source of disruption.
A similar contradiction operated inside the national boundaries. Protectionism helped to transform competitive markets into monopolistic ones. Less and less could markets be described as autonomous and automatic mechanisms of competing atoms. More and more were individuals replaced by associations, men and capital united to non-competing groups. Economic adjustment became slow and difficult. The self-regulation of markets was gravely hampered. Eventually, unadjusted price and cost structures prolonged depressions, unadjusted equipment retarded the liquidation of unprofitable investments, unadjusted price and income levels caused social tension. And whatever the market in question—labor, land, or money—the strain would transcend the economic zone and the balance would have to be restored by political means. Nevertheless, the institutional separation of the political from the economic sphere was constitutive to market society and had to be maintained whatever the tension involved. This was the other source of disruptive strain.
We are nearing the conclusion of our narrative. Yet a considerable part of our argument remains to be unfolded. For even if we have succeeded in proving beyond any doubt that at the heart of the transformation there was the failure of the market utopia, it is still incumbent upon us to show in what manner actual events were determined by this cause.
In a sense, this is an impossible undertaking, since history is not shaped by any single factor. Yet in spite of all its wealth and variety, the flow of history has its recurrent situations and alternatives which account for the broad similarity in the texture of the events of an age. We need not trouble about the fringe of unpredictable eddies, if we can account to some degree for the regularities which governed currents and countercurrents under typical conditions.
In the nineteenth century such conditions were given by the mechanism of the self-regulating market, the requirements of which had to be met by national and international life. From that mechanism two peculiarities of civilization followed: its rigid determinism and its economic character. Contemporary outlook tended to link the two and to assume that the determinism derived from the nature of economic motivation, according to which individuals were expected to pursue their monetary interests. In point of fact there was no connection between the two. The “determinism” so prominent in many details was simply the outcome of the mechanism of a market society with its predictable alternatives, the stringency of which was erroneously attributed to the strength of economic motives. Actually, the supply-demand-price system will always balance, whatever the motives of the individuals, and economic motives per se are notoriously much less effective with most people than so-called emotional ones.
Mankind was in the grip, not of new motives, but of new mechanisms. Briefly, the strain sprang from the zone of the market; from there it spread to the political sphere, thus comprising the whole of society. But within the single nations the tension remained latent as long as world economy continued to function. Only when the last of its surviving institutions, the gold standard, dissolved was the stress within the nations finally released. Different as their responses to the new situation were, essentially they represented adjustments to the disappearance of the traditional world economy; when it disintegrated, market civilization itself was engulfed. This explains the almost unbelievable fact that a civilization was being disrupted by the blind action of soulless institutions the only purpose of which was the automatic increase of material welfare.
But how did the inevitable actually happen? How was it translated into the political events which are the core of history? Into this final phase of the fall of market economy the conflict of class forces entered decisively.
* Haberler, G., Der internationale Handel, 1933, p. vi.
* G. D. H. Cole calls the 1870s “by far the most active period for social legislation of the entire nineteenth century.”