COMMERCIAL CAPITALISM, by Professor Carroll Quigley

 ... from: Tragedy and Hope, A History of the World in Our Time,
by Professor Carroll Quigley, p. 42 -47

EUROPEAN ECONOMIC DEVELOPMENTS

Commerical Capitalism

Western civilization is the richest and most powerful social organization ever made by man.  One reason for this success has been its economic organization.  This, as we have said, has passed through six successive stages, of which at least four are called "capitalism."  Three features are notable about this development as a whole.

In the first place, each stage created the conditions which tended to bring about the next stage; therefore we could say , in a sense, that each stage committed suicide.  The original economic organization of self-sufficient agrarian units (manors) was in a society organized so that its upper ranks--the lords, lay and  ecclesiastical -- found their desires for necessities so well met that they sought to exchange their surpluses of necessities for luxuries of remote origin.  This gave rise to a trade in foreign luxuries (spices, fine textiles, fine metals) which was the first evidence of the stage of commercial capitalism.  In this second stage, mercantile profits and widening markets created a demand for textiles and other goods which could be met only by application of pwoer to production.  This gave the third stage: industrial capitalism.  The stage of industrial capitalism soon gave rise to such an insatiable demand for heavy fixed capital, like railroad lines,  steel mills, shipyards, and so on, that these investments could not be financed from the profits and private fortunes of individual proprietors.  New instruments for financing industry came into existence in the form of limited-liability corporations and investment banks.  These were soon in a position to control the chief parts of the industrial system into ever-larger units with interlinking financial controls.  This made possible a reduction of competition with a resulting increase in profits.  As a result, the industrial system soon found that it was again able to finance its own expansion from its own profits, and, with this achievement, financial controls were weakened, and the stage of monopoly capitalism arrived.  In this fifth stage, great industrial units, working together either directly or through cartels and  trade associations, were in a position to exploit the majority of the people.  The result was a great economic crisis which soon developed into a struggle for control of the state -- the minority hoping to use political power to defend their privileged position, the majority hoping to use the state to curtail the power and privileges of the minority.  Both hoped to use the power of the state to find some solution to the economic aspects of the crisis.  The dualist struggle dwindled with the rise of economic and social pluralism after 1945.

The second notable feature of this whole development is that the transition of each stage to the next was associated with a period of depression or low economic activity.  This was because each stage, after an earlier progressive phase, became later, in its final phase, an organization of vested interests more concerned with protecting its established modes of action than in continuing progressive changes by the application of resources to new, improved methods.  This is inevitable in any social organization, but is peculiarly so in regard to capitalism.  The third notable feature of the whole development is closely related to this special nature of capitalism.  Capitalism provides very powerful motivations for economic activity because it associates economic motivations so closely with self-interest.  But this same feature, which is a source of strength in providing economic motivation through the pursuit of profits, is also a source of weakness owing to the fact that so self-centered a motivation contributes very readily to a loss of economic coordination.  Each individual, just because he is so powerfully motivated by self-interest, easily looses sight of the role which his own activities play in the economic system as a whole, and tends to act as if his activities were the whole, with inevitable injury to that whole.  We could indicate this by pointing out that capitalism, because it seeks profits as its primary goal, is never primarily seeking to achieve prosperity, high production, high consumption, political power, patriotic improvement, or moral uplift.  Any of these may be achieved under capitalism, and any (or all) of them may be sacrificed and lost under capitalism, depending on this relationship to the primary goal of capitalist activity -- the pursuit of profits.  During the nine-hundred-year history of capitalism, it has, at various times, contributed both to the achievement and to the destruction of these other social goals.

The different stages of capitalism have sought to win profits by different kinds of economic activities.  The original stage, which we call commercial capitalism, sought profits by moving goods from one place to another.  In this effort, goods went from places where they were less valuable to places where they were more valuable, while money, doing the same thing, moved in the opposite direction.  This valuation, which determined the movement of both of goods and of money and which made them move in opposite directions, was measured by the relationship between these two things.  Thus the value of goods was expressed in money, and the value of money was expressed in goods.  Goods moved from low-price areas to high-price areas, and money moved from high-price areas to low-price areas, because goods were more
valuable where prices were high and money was more valuable where prices were low.

Thus, clearly, money and goods are not the same thing but are, on the contrary, exactly opposite things.  Most confusion in economic thinking arises from failure to recognize this fact.  Goods are wealth which you have, while money is a claim on wealth which you do not have.  Thus, goods are an asset; money is a debt.  If goods are wealth; money is not-wealth, or negative wealth, or even anti-wealth.  They always behave in opposite ways, just as they usually move in opposite directions.   If the value of one goes up, the value of the other goes down, and in the same proportion.  The value of goods, expressed in money, is called "prices," while the value of money, expressed in goods, is called "value."

Commerical capitalism arose when merchants, carrying goods from one area to another, were able to sell these goods at their destination for a price which covered the original cost, all costs of moving the goods, including the merchants' expenses, and a profit.  This development, which began as the movement of luxury goods, increased wealth because it led to specialization of activities both in crafts and in agriculture, which increased skills and output, and also brought into the market new commodities.

Eventually, this stage of commercial capitalism became institutionalized into a restrictive system, sometimes called "mercantilism," in which merchants sought to gain profits, not from the movement of goods but from restricting the movement of goods.  Thus the pursuit of profits, which had earlier led to increased prosperity by increasing trade and production, became a restriction on both trade and production, because profit became an end in itself rather than an accessory mechanism in the economic system as a whole.

The way in which commercial capitalism (an expanding economic organization) was transformed into mercantilism (a restrictive economic organization) twice in our past history is very revealing not only of the nature of economic systems, and of men themselves, but also of the nature of economic crisis and what can be done about it.

Under commercial capitalism, merchants soon discovered that an increasing flow of goods from a low-price area to a high-price area tended to raise prices in the former and to lower prices in the latter.  Every time a shipment of spices came into London, the price of spices there began to fall, while the arrival of buyers and ships in Malacca gave prices there an upward spurt.  This trend towards equalization of the price levels between two areas because of the double, and reciprocal, movement of goods and money jeopardized profits for merchants, however much it may have satisfied producers and consumers at either end.  It did this by reducing the price differential between the two areas and thus reducing the margin within which the merchant could make his profit.  It did not take shrewd merchants long to realize that they could maintain this price differential, and thus their profits, if they could restrict the flow of goods.  In this way, shipments were decreased, costs were reduced, but profits were maintained.

Two things are notable in this mercantilist situation.  In the first place, the merchant, by his restrictive practices, was, in essence, increasing his own satisfaction by reducing that of the producer at one end and of the consumer at the other end; he was able to do this because he was in the middle between them.  In the second place, so long as the merchant, in his home port, was concerned with goods, he was eager that the prices of goods should be, and remain, high.

In the course of time, however, some merchants began to shift their attention from the goods aspect of commercial interchange to the other, monetary, side of the exchange.  They began to accumulate the profits of these transaction, and became increasingly concerned, not with the shipment and exchange of goods, but with the shipment and exchange of moneys.  In time they became concerned with the lending of money to merchants to finance their ships and their activities, advancing money for both, at high interest rates, secured by claims on ships or goods as collateral for repayment.

In this process the attitudes and interests of these new bankers became totally opposed to those of the merchants (although few of either recognized the situation).  Where the merchant had been eager for high prices and was increasingly eager for low interest rates, the banker was eager for a high value of money (that is, low prices) and high interest rates.  Each was concerned to maintain or to increase the value of the galf of the transaction (goods for money) with which he was directly concerned, with relative neglect of the transaciton itself (which was of course the concern of the producers and the consumers).

In sum, specialization of economic activities, by breaking up the economic process, had made it possible for people to concentrate on one portion of the process and, by maximizing that portion, to jeopardize the rest.  The process was not only broken up into producers, exchangers, and consumers but there were also two kinds of exchangers (one concerned with goods, the other with money), with almost antithetical, short-term, aims.  The problems which inevitably arose could be solved and the system reformed only be reference to the system as a whole.  Unfortunately, however, three parts of the system, concerned with the production, transfer, and consumption of goods, were concrete and clearly visible so that almost anyone could grasp them simply by examining them. while the operations of banking and finance were concealed, scattered, and abstract so that they appeared to many to be difficult.  To add to this, bankers themselves did everything they could to make their activities more secret and more esoteric.  Their activities were reflected in mysterious marks in ledgers which were never opened to the curious outsider.

In the course of time the central fact of the developing economic system, the relationship between goods and money, became clear, at least to bankers.  This relationship, the price system, depended upon five things: the supply and the demand for goods, the supply and demand for money, and the speed of exchange between money and goods.  An increase in three of these (demand for goods, supply of money, speed og circulation) would move the prices of goods up and the value of money down.  This inflation was objectionable to bankers, although desirable to producers and merchants.  On the other hand, a decrease in the same three items would be deflationary and would please bankers, worry producers and merchants, and delight consumers (who obtained more goods for less money).  The other factors worked in opposite direction, so that an increase in them (supply of goods, demand for money, and slowness of circulation or exchange) would be deflationary.

Such changes of prices, either inflationary or deflationary, have been major forces in history for the last six centuries at least.  Over that long period, their power to modify men's lives and human history has been increasing.  This has been reflected in two ways.  On the one hand, rises in prices have generally encouraged increased economic activity, especially the production of goods, while, on the other hand, price changes have served to redistribute wealth within the economic system.  Inflation, especially a slow steady rise in prices, encourages producers, because it means that they can commit themselves to costs of production on one price level and then, later, offer the finished product for sale at a somewhat higher price level.  This situation encourages production because it gives confidence of an almost certain profit margin.  On the other hand, production is discouraged in a period of falling prices, unless the producer is in the very unusual situation where his costs are falling more rapidly than the prices of his product.

The redistribution of wealth by changing prices is equally important but attracts much less attention.  Rising prices benefit debtors and injure creditors, while falling prices do the opposite.  A debtor called upon to pay a debt at a time when prices are higher than when he contracted the debt must yield up less goods and services than he obtained at the earlier date, on a lower price level, when he borrowed the money.  A creditor, such as a bank, which has lent money -- equivalent to a certain quantity of goods and services -- on one price level, gets back the same amount of money -- but a smaller quantity of goods and services -- when repayment comes at a higher price level, because the money repaid is then less valuable.  This is why bankers, as creditors in money terms, have been obsessed with maintaining the value of money, although the reason they have traditionally given for this obsession -- that "sound money" maintains "business confidence" -- has been propagandist rather than accurate.

Hundreds of years ago, bankers began to specialize, with the richer and more influential ones associated increasingly with foreign trade and foreign-exchange transactions.  Since these were richer and more cosmopolitan and increasingly concerned with questions of political significance, such as stability and debasement of currencies, war and peace, dynastic marriages, and worldwide trading monopolies, they became the financiers and financial advisors of governments.  Moreover, since their relationship with governments were always in monetary terms and not real terms, and since they were always obsessed with the stability of monetary exchanges between one country's money and another, they used their power and influence to do to things:  (1) to get all money and debts expressed in terms of a strictly limited commodity -- ultimately gold; and (2) to get all the monetary matters out of the control of governments and political authority, on the grounds that they would be handled better by private banking interests in terms of such a stable value as gold.

These efforts failed with the shift of commercial capitalism into mercantilism and the destruction of the whole pattern of social organization based on dynastic monarchy, professional mercenary armies, and mercantilism, in the series of wars which shook Europe from the middle of the seventeenth century to 1815.  Commercial
capitalism passed through two periods of expansion each of which deteriorated into a later phase of war, class struggles, and retrogression.  The first stage, associated with the Mediterranean Sea, was dominated by the North Italians and Catalonians but ended in a phase of crisis after 1300, which was not finally ended until 1558.  The second stage of commercial capitalism, which was associated with the Atlantic Ocean, was dominated by the West Iberians, the Netherlanders, and the English.  It had begun to expand by 1440, was in full swing by 1600, but by the end of the seventeenth century had become entangled in the restrictive struggles of state mercantilism and the series of wars which ravaged Europe from 1667 to 1815.

The commercial capitalism of the 1440-1815 period was marked by the supremacy of the Chartered Companies, such as the Hudson's Bay, the Dutch and British East Indian Companies, the Virginia Company, and the Association of Merchant Adventurers (Muscovy Company).  England's greatest rivals in all these activities were defeated by England's greater power, and, above all, its greatest security derived from its insular position.