FINANCIAL CAPITALISM, 1850 -- 1931, by Professor Caroll Quigley

... from Tragedy and Hope, A History of the World in Our Time, by Professor Caroll Quigley p. 50 - 54

FINANCIAL CAPITALISM, 1850 -- 1931

This third stage of capitalism is of such overwhelming significance in the history of the twentieth century , and its ramifications and influences have been so subterranean and even occult, that we may be excused if we devote considerate attention to its organization and methods.  Essentially what it did was to take the old disorganized and localized methods of handling money and credit and organize them into an integrated system, on an international basis, which worked with incredible and well-oiled facility for many decades.  The center of that system was in London, with major offshoots in New York and Paris, and it has left, as its greatest achievement, an integrated banking system and a heavily capitalized -- if now largely obsolescent -- framework of heavy industry, reflected in railroads, steel mills, coal mines, and electric utilities.

This system had its center in London for four chief reasons.  First was the great volume of savings in England, resting on England's early successes in commercial and industrial capitalism.  Second was England's oligarchic social structure (especially as reflected in its concentrated landownership and limited access to educational opportunities) which provided a very inequitable distribution of incomes with large surpluses coming to the control of a small, energetic upper class.  Third was the fact that this upper class was aristocratic but not noble, and thus, based on traditions rather than birth, was quite willing to recruit both money and ability from lower levels of society and even from outside the country, welcoming American heiresses and central-European Jews to its ranks, almost as willingly as it welcomed monied, able, and conformist recruits from the lower classes of Englishmen, whose disabilities from education deprivation, provincialism, and Nonconformist (that is non-Anglican) religious background generally excluded them from the privileged aristocracy.  Fourth (and by no means last) in significance was the skill in financial manipulation, especially on the international scene, which the small group of merchant bankers of London had acquired in the period of commercial and industrial capitalism and which lay ready for use when the need for financial capitalist innovation became urgent.

The merchant bankers of London had already at hand in 1810-1850 the Stock Exchange, the Bank of England, and the London money market when the needs of advancing industrialism called all of these into the industrial world which they had hitherto ignored.  In time they brought into their financial network the provincial banking centers, organized as commercial banks and savings banks, as well as insurance companies, to form all of these into a single financial system on an international scale which manipulated the quantity and flow of money so that they were able to influence, if not control, governments on one side and industries on the other.  The men who did this, looking backward toward the period of dynastic monarchy in which they had their own roots, aspired to establish dynasties of international bankers and were at least as successful at this as were many of the dynastic political rulers.  The greatest of these dynasties, of course, were the descendants of Meyer Amschel Rothschild (1743-1812) of Frankfort, whose male descendants, for at least two generations, generally married first cousins or even nieces.  Rothschild's five sons, established at branches in Vienna, London, Naples, and Paris, as well as Frankfort, cooperated together in ways which other international banking dynasties copied by rarely excelled.

In concentrating, as we must, on the financial or economic activities of international bankers, we must not totally ignore their other attributes.  They were especially in later generations, cosmopolitan rather than nationalistic; they were a constant, if weakening, influence for peace, a pattern established in 1830 and 1840 when the Rothschilds threw their whole tremendous influence successfully against European wars.  They were usually highly civilized, cultured gentlemen, patrons of education and of the arts, so that today colleges, professorships, opera companies, symphonies, libraries, and museum collections still reflect their munificence.  For these purposes they set a pattern of endowed foundations which still surround us today.

The names of some of these banking families are familiar to all of us and should be more so.  They include Baring, Lazard, Erlanger, Warburg, Schroder, Seligman, the Speyers, Mirabaud, Mallet, Fould and above all Rothschild and Morgan.  Even after these banking families became fully involved in domestic industry by the emergence of financial capitalism, they remained different from ordinary bankers in distinctive ways: (1) they were cosmopolitan and international; (2) they were close to governments and particularly concerned with questions of government debts, including foreign government debts, even in areas which seemed, at first glance, poor risks, like Egypt, Persia, Ottoman Turkey, Imperial China, and Latin America; (3) their interests were almost exclusively in bonds and very rarely in goods, since they admired "liquidity" and regarded commitments in commodities or even real estate as the first step towards bankruptcy; (4) they were, accordingly, fanatical devotees of deflation (which they called "sound" money from its close associations with high interest rates and a high value of money) and of the gold standard, which, in their eyes, symbolized and ensured these values; and (5) they were almost equally devoted to secrecy and the secret use of financial influence in political life.  These bankers came to be called "international bankers" and, more particularly, were known as "merchant bankers" in England, "private bankers" in France, and "investment bankers" in the United States.  In all countries they carried on various kinds of banking and exchange activities, but everywhere they were sharply distinguishable from other, more obvious, kinds of banks, such as savings banks or commercial banks.

One of their less obvious characteristics was that they remained as private unincorporated firms, usually partnerships, until relatively recently, offering no shares, no reports, and usually no advertising to the public. This risky status, which deprived them of limited liability, was retained, in most cases, until modern inheritance taxes made it essential to surround such family wealth with the immortality of corporate status for tax-avoidance purposes.  This persistence as private firms continued because it ensured the maximum of anonymity and secrecy to persons of tremendous public power who dreaded public knowledge of their activities as an evil almost as great as inflation.  As a consequence, ordinary people had no way of knowing the wealth or areas of operation of such firms, and often were somewhat hazy as to their membership.  Thus, people of considerable political knowledge might not associate names Walter Burns, Clinton Dawkins, Edward Grenfell, Willard Straight, Thomas Lamont, Dwight Morrow, Nelson Perkins, Russell Leffingwell, Elihu Root, John W. Davis, John Foster Dulles, and S. Parker Gilbert with the name "Morgan," yet all these and many others were parts of the system of influence which centered on the J.P. Morgan office at 23 Wall Street.  This firm, like others of the international banking fraternity, constantly operated through corporations and governments, yet remained itself an obscure private partnership until international financial capitalism was passing from its deathbed to the grave.  J.P. Morgan and Company, originally founded in London as George Peabody and Company in 1838, was not incorporated until March 21, 1940, and went out of existence as a separate entity on April 24, 1959, when it merged with its most important commerical bank subsidiary, the Guaranty Trust Company.  The London affiliate, Morgan Grenfell, was incorporated in 1934, and still exists.

The influence of financial capitalism and of the international bankers who created it was exercised both on business and on governments, but could have done neither if it had not been able to persuade both thse to accept two "axioms" of its own ideology.  Both of these were based on the assumption that politicians were too weak and too subject to temporary popular pressures to be trusted with control of the money system; accordingly, the sanctity of all values and the soundness of money must be protected in two ways: by basing the value of money on gold and by allowing bankers to control the supply of money.  To do this it was necessary to conceal, or even to mislead, both governments and people about the nature of money and its methods of operation.

For example, bankers called the process of establishing a monetary system on gold "stabilization," and implied that this covered, as a single consequence, stabilization of exchanges and stabilization of prices.  It really achieved only stabilization of exchanges, while its influence on prices were quite independent and incidental, and might be unstabilizing (from its usual tendency to force prices downward by limiting the supply of money).  As a consequence, many persons, including financiers and even economists, were astonished to discover, in the twentieth century, that the gold standard gave stable exchanges and unstable prices.  It had, however, already contributed to a similar, but less extreme, situation in much of the nineteenth century. Exchanges were stabilized on the gold standard because by law, in various countries, the monetary unit was made equal to a fixed quantity of gold, and the two were made exchangable at that legal ratio.  In the period before 1914, currency was stabilized in certain countries as follows:

In Britain:               77s. 10 1/2d. equaled a standard ounce (11/12 pure gold)
In the United States       $20.67 equaled a fine ounce (12/12 pure gold)
In France:               3,447.74 francs equaled a fine kilogram of gold.
In Germany:       2790 marks equaled a fine kilogram of gold.

These relationships were established by the legal requirement that a person who brought gold, gold coins, or certificates to the public treasury (or other designated places) could convert any one of these into either of the others in unlimited amounts for no cost.  As a result, on a full gold standard, gold had a unique position: it was, at the same time, in the sphere of money and in the sphere of wealth.  In the sphere of money, the value of all other kinds of money was expressed in terms of gold: and in the sphere of real wealth, the values of all other kinds of goods were expressed in terms of gold as money.  If we regard the relationships between money and goods as a seesaw on which this relationship balances, but which does not itself go up or down.  Since it is quite impossible to understand the history of the twentieth century without some understanding of the role played by money in domestic affairs and in foreign affairs, as well as the role played by bankers in economic life and in political life, we must take at least a galnce at each of these four subjects.