Chapter Sixteen
In December 1882, the four-masted sailing ship Dunedin docked in the sheltered harbor of Port Chalmers on the South Island of New Zealand and began to load a strange cargo. About five thousand calico parcels, each weighing almost as much as a human being and trailing a plume of condensation in the summer warmth, were carried into the ship’s holds. Between the main masts protruded a small funnel, and the boiler below it, consuming three tons of coal a day, led many to believe that steam power was to help the Dunedin on her voyage to London. But wind alone drove the ship.
What the engine turned was the compressor of a refrigeration plant that kept the temperature of the hold and its cargo of chilled sheep carcases below freezing even during the long hot weeks as the ship drifted through the tropics. When this first delivery of frozen New Zealand lamb was put on sale in London in April, The Times of London hailed it as “such a triumph over physical difficulties, as would have been incredible, even unimaginable, a very few days ago.” But the voyage of the Dunedin was not just a technical feat. It completed a network of food, and other landed produce, that had already spread east and west, and now tied the southern hemisphere to the north.
The east-west connection had been made possible by steam-power operating on land and sea. From the 1850s, more efficient marine engines that reduced coal consumption by two thirds made transatlantic crossings with predictable passage times instantly cheaper and more profitable. In the United States a web of 150,000 miles of railroad track, almost sixty-five thousand of them west of the Mississippi, carried the produce of wheat fields and cattle ranches to the eastern, increasingly industrialized states. As Jules Verne conjectured in his 1873 tale Around the World in Eighty Days, it took no longer than that to circle the globe simply using scheduled services operated by steamship lines and railroad companies in the United States, Europe, and across India’s newly opened Bombay (Mumbai) to Calcutta (Kolkata) route.
The basic justification for this network was to carry the commodities of the earth. Almost twelve million bushels of wheat were shipped to Britain in 1880 from the United States alone, and another eight million from Russia, Canada, Australia, and India; about six hundred thousand “loads” of timber, each consisting of 1.5 million cubic meters, came from Canada every year along with perhaps two hundred thousand more from Russia and Sweden; and five million bales, or some three hundred million pounds, of American cotton a year, supplemented by another seventy million pounds from India and Egypt. And between the first sailing of the Dunedin and the outbreak of the First World War, 150 million frozen sheep arrived in Britain from New Zealand and Australia, and another seventy million from Argentina.
A similar pattern operated inside the territory of the United States. As the railroads provided swifter access to markets in the rapidly growing eastern and midwestern cities, the acreage under cereals in the Western states grew by a 100 percent between 1870 and 1890, and in turn wheat production doubled to half a billion bushels a year. The third transcontinental railroad in the United States, the Northern Pacific, was completed in the year of the Dunedin’s pioneering voyage, adding cereals from the Dakotas as well as Pacific Coast lumber to the supply. Fanning out from Chicago, more railroads connected ranchers and livestock farmers to the Union stockyards where four hundred million animals were slaughtered between 1865 and 1900 to be redistributed as meat to the rest of the country. Before the end of the century, California fruit growers would be packing a quarter of a million tons of oranges, grapes, lettuces, and almonds into refrigerated railroad cars to add to the cascade of eastward-heading food. The flood of produce from the Midwest, railroaded into Chicago then shipped east in freight trains or by barge down the Erie Canal, prompted one New York observer to boast that the city “may call Ohio her kitchen garden, Michigan her pastures, and Indiana, Illinois and Iowa her harvest fields.”
The opening up of the food network destroyed the basic Malthusian calculation that sex would always produce more than the earth could supply. Along the path covered by Verne’s Phileas Fogg, it allowed explosive growth in a string of cities, London and Paris, Mumbai and Yokohama, Chicago and New York: from 1850 to 1880, the largest of them, London, doubled in size to 6.5 million, Paris to 2.7 million, and New York tripled to 1.5 million; Calcutta’s population grew from perhaps 300,000 to 848,000 and the smallest, Yokohama, was transformed from a drowsy fishing village to a thriving port with more than four hundred thousand inhabitants.
Economic historians often focus on the revenues generated by the trade between what they usually term the core and the periphery—the mother-country and the colonies, developed economies and undeveloped, cities and their hinterland—and they point to the advantages enjoyed by the core exporting high value industrial goods that were paid for by importing low value earth produce from the periphery. But this limited perspective misses the unique capacity of the periphery in private property economies to benefit from the most important commodity that traveled down the network.
Even before the railroads, emigration societies and Wakefieldian land companies in both the United States and the British Empire encouraged large-scale migration. But once the railroads were built, the people network became so efficient that a company like the Kansas Pacific railroad employed permanent agents in Britain and Germany to help migrants buy combined steamer and railroad tickets straight through to Kansas and Nebraska. Carl B. Schmidt, an agent of the Atchison, Topeka, and Santa Fé railroad with three million acres of publicly surveyed land to sell, brought in twelve thousand Volga-based Mennonites in 1874, who not only spent $332,509.72 buying land from the company, but, as a local newspaper reported in September that year, “They are also purchasing horses, cattle, wagons and agricultural implements as well as household goods, and their purchases will aggregate a very handsome sum.”
The Mennonites attracted attention for their foreign habits, but the 1850 census showed that 1.5 million immigrants to territories west of the Mississippi had come from eastern states, above all New England, the starting point for an entire swath of settlement reaching to Minnesota and beyond. Many arrived cash poor—unable to afford a wooden-frame house, the poorest in Nebraska dug dwellings in the ground, known as “sod houses”—but most had sold up and brought capital to invest in land and goods.
Similar networks operated internationally. Steamers carrying timber, cotton, wool, and wheat one way filled their holds with immigrants for the return voyage. Track that bore freight trains into the cities rattled to passenger trains heading out. By one recent estimate, the unprecedented churning of population in the late nineteenth and early twentieth centuries threw out an estimated twelve million migrants from Britain to the United States and the empire, about twelve million more from Germany and Ireland to North America and Australia, and a further twelve million from the long-settled U.S. Atlantic states to the newly settled territories and states in the west. Even compared to the imperial diasporas that scattered seven million Spaniards to Latin America, fifteen million Russians to Siberia and central Asia, and thirty million Chinese to Manchuria and along the Pacific rim, the dispersal of private property inhabitants was unparalleled.
Every migrant added to the capital of a new settlement. The estimated one million dollars spent by wealthy Mennonites in Kansas was at the top of migrant expenditure at roughly $8,300 per person, but even the landless laborers who paid twenty-five dollars for an assisted passage from Scotland to Tasmania in 1854 and came ashore with no more than their belongings had sufficient economic value to persuade the colonial government to pay the $120 outstanding on their fares.
But the migrants brought something more immediately valuable, the energy and optimism of the young. The 1860 census showed that only a thousand people in Kansas were over forty-four years old, and in 1845 a Melbourne reporter noted that on the streets, “there are no old people, and not many even who are advanced enough to come within the denomination of middle-aged.” Their confidence and verve as well as the ease of acquiring property could only have added to the extremes of boom and bust that characterized landed economies during the nineteenth century. The pattern was most obvious in the United States, where five abrupt busts in 1819, 1837, 1857, 1873, and 1893 brought ends to periods of boom. Within each boom, there was a general upward rise in land prices over the period, at first gradual but then steepening as mortgage-lending accelerated to keep up, thereby fuelling an unsustainable burst of demand, and a final price explosion.
Similar cycles occurred in Australia, South Africa, and New Zealand, with similar symptoms of euphoric confidence. In Melbourne, a house boom in the 1830s enabled one speculator to buy a town lot for £150 in 1836 and sell it three years later for £9,280. But to make money systematically, rather than as a one-time speculation, it was necessary to think as John Jacob Astor did while amassing a fortune of twenty-five million dollars from the growth of Manhattan in the early nineteenth century. When a customer asked why he chose to sell a Wall Street location for $8,000 rather than hold on for a few years to get $12,000, Astor explained, “See what I intend doing with these $8,000. I shall buy eighty lots above Canal Street [the city limits at the time], and by the time your one lot is worth $12,000, my eighty lots will be worth $80,000.”
During the twenty-year Australian boom that would bust spectacularly in 1867, this kind of thinking provoked what was generally termed “land mania” in Sydney, but the brash optimism of its rival, Melbourne, went further. “The Melbournians,” wrote one commentator in 1855, “have shown themselves from the beginning of their brief history, a most mercurial race—the maddest speculators in the world.”
Throughout the first three quarters of the century, the rhythm of boom and bust was unsynchronized. Each land market generated its own conditions, and although a boom would draw in immigrants and investment from outside, it did so in its own time. Thus, in 1842 Australia went bust as Canada was booming, and in 1865 non-Boer South Africa blew up spectacularly just as the United States production was beginning to boom after the Civil War.
The first coordinated global crash came in 1873. It was also the first where measures taken to deal with financial instability in one country—Germany’s attempt to stave off inflation by tying its currency to gold rather than silver—rippled through others, destabilizing their booming, credit-swollen economies from Austria to Zanzibar. Silver-backed currencies like the dollar lost credibility, triggering runs on banks and a rolling wave of company failures. In the United States, bankruptcies totaled $775 million in four years, including that of the great tycoon Jay Cooke. American railroads defaulted on bonds worth $790 million, 65 percent of which were held by foreign investors, setting off crashes in Europe.
The “Great Depression,” as it was known until displaced by the 1930s version, created a sense of gloom that lingered on into the 1880s, was briefly dispersed, then gathered again in 1893. The prolonged nature of the slump, with steadily falling prices that cut profits and inhibited investment, marked it out as different from earlier, more localized crashes. In fact the 1873 recession proved to be of critical importance to those parts of the earth occupied by private property economies. By the time its effects had cleared away, it was apparent that the theory of free-enterprise capitalism described by Adam Smith had a flaw.
Rural capitalism had offered Smith a model of a free enterprise system based on a myriad of small producers competing on price and delivery in a market where overproduction of one product brought a fall in price and profit, leading either to more efficient production or to a switch to a more profitable item. In The Wealth of Nations, he noted that it was fully working in England, reasonably developed in Scotland, evolving in France, and well-grounded in colonial America. Although he did not predict the egalitarian nature of the societies that followed the expansion of private property, his theory did demand the absence of any artificial barriers hindering access to capital, credit, and productive capacity. Thus, he would presumably have welcomed the entrepreneurial enterprise, the freedom and equality that characterized the United States in the early nineteenth century, and the post-Wakefieldian British Empire. Nevertheless, inequality was intrinsic to his economic model and consequently, as his writing repeatedly made clear, he expected government to protect the property of the rich as effectively as it did the dignity of the poor.
In the United States, unlimited resources had allowed the intrinsically unequal mechanism of property rights and free-market capitalism to create an egalitarian society like none other in history. Once a limit on resources began to make itself felt, the conditions for this egalitarian state began to crumble. Those with land grew wealthier from its rising price, the poorest no longer found it possible to buy what had once been available to everyone. Wealth became concentrated in fewer hands, and the inequality inherent in private property rights made itself apparent. No one perceived this more clearly than the most influential critic of rural capitalism, the journalist and self-taught economist Henry George.
By the end of the 1870s, it was impossible to avoid seeing extremes of poverty—nothing shocked George more than the appearance after 1873 of children begging on the streets of New York and San Francisco—accompanied by the unparalleled opulence of the champagne-swilling Gilded Age. Central to the argument that he put forward in Progress and Poverty, published in 1879, was the assumption that the way the earth was owned provided the key to correcting what had gone wrong both socially and economically. “The ownership of land,” he wrote, “is the great fundamental fact which ultimately determines the social, the political and consequently the intellectual and moral condition of a people.”
Long before Frederick Jackson Turner’s 1893 essay, Henry George identified the frontier as the critical agency in creating the old egalitarian America. Using the same arguments, and indeed the very phrases Turner would employ fourteen years later, he pointed to the impact of its limitless resources. “This great public domain is the key fact that has formed our national character and colored our thought,” he wrote. “Whence comes our general intelligence, our comfort, our active invention, and our power of adaptation and assimilation? And further, our free, independent spirit, the energy and hopefulness that have marked our people? They are not causes—they are results. They have sprung from unfenced land. Our vast public domain has been the force that transforms unambitious European peasants into self-reliant Western farmers.”
But with the filling up of the continent that era was ending. And just as the social equality of the early nineteenth century had come from the equal distribution of the land, so “the great cause of inequality in the distribution of wealth is inequality in the ownership of land.” To eliminate poverty and revive the egalitarian nature of American society, George argued, it was necessary to redistribute land more fairly. The method was taxation.
In his analysis of rural capitalism, Henry George made a clear distinction between the increase in the value of land that was earned by labor, and the unearned rise in its price that came from growing demand created by a larger population. The latter, he argued, “represents a value created by the whole community . . . So it necessarily belongs to the whole community.” To recover the value, this unearned profit should be taxed at 100 percent, leaving the owner only with the value of whatever improvements he had actually made. George estimated that the money raised would be enough to abolish all other taxes. And with the escalating ingredient of speculation removed, the price of land would drop to a level where anyone prepared to work hard could once more afford it.
Progress and Poverty sold more than three million copies on publication, and in the years since, a variety of state and provincial governments around the world have experimented with Georgist land taxes. Nowhere has society been transformed in the way he predicted, but the experiments have shown that it is notoriously difficult to arrive at a valuation system that can clearly separate earned from unearned capital appreciation. Georgists point out accurately enough that their beliefs have never been properly put into practice, but perhaps they cannot be.
George’s analysis of rural capitalism was incisive, but it neglected one element that was taking shape even as he wrote. Landed values were gradually being displaced as the most powerful force shaping private property economies. The new engine was neither egalitarian nor subject to the sort of competitive pressure that determined price and profit in the marketplace described by Adam Smith.
The theoretical problem posed by the 1873 recession was that while prices of goods fell in the next five years and profit margins were squeezed pancake thin for a record sixty-five months, with unparalleled numbers of manufacturers, farmers, and producers driven to bankruptcy, the economies of major industrial states such as the United States, the British Empire, and Germany actually grew, albeit more slowly than before. Indeed, their economies enjoyed a short-lived land boom in the late 1880s before collapsing into recession again in 1893.
What became clear to later economists was that in the course of the long depression the rules of the marketplace had ceased to apply to the largest participants in an industrial economy. The scale of investment, the power of the financial industry, and the rewards of monopoly simply made Adam Smith’s model unworkable. The crisis of capitalism predicted by Karl Marx had arrived. It did not come in the form of a proletarian revolution, however, but from the productive capacity of the system itself.
One of the first to appreciate what had happened was the outstanding American economist of the 1890s, David A. Wells. A severe academic with an obsessive interest in systems of production rather than grand theories, he believed firmly in free trade and free enterprise. Very early on he argued that capitalism’s great strength lay in its capacity to modernize itself constantly through an inexorable process of destructive innovation. Just as powered looms had destroyed the usefulness of professional handloom weavers who had earlier displaced part-time cottage weavers, so railroads pushed aside the canals that had made wagon trains redundant. And deep-pocketed, publicly listed companies had bankrupted those private entrepreneurs who had only their own securities to fall back on.
But these new industries, the chemical factories and advanced steel manufacturers of the second industrial revolution, were different, Wells pointed out. “Those engaged in great industrial enterprises,” he wrote, “whether they form joint-stock companies or are simply wealthy individuals, are invested with such economic powers that none of them can be easily pushed to the wall.”
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The problem arose from the complexities of industrial production. At the end of the nineteenth century, a manufacturer of basic steel plate had to source iron ore with the right phosphorous content, coked coal with the right carbon content, alloys of copper and manganese in the right ratio, acquire land close to water and a railroad, build factories of the most efficient design, construct furnaces to withstand temperatures of 3,500 degrees fahrenheit, recruit and train scores of workers with skills ranging from accountancy to hammering, and find markets for the product. Above all, the manufacturers needed a bank with the right attitude. To fund such a project required a different sort of finance from the kind that had driven the undirected, helter-skelter spread of private property economies across the globe.
The need had first been made apparent in Britain by the exceptionally high and long-term cost of building railways. A term of twenty years might be needed to pay off investment on this scale but the rewards—up to 15 percent annually for rail companies in densely populated areas—were attractive. In response to the need to bring in more investment, two pieces of legislation, the 1855 Limited Liability Act and 1856 Joint Stock Companies Act, offered protection to investors by restricting their liabilities, should a company fail, to the loss of their investment. The birth of the modern financial industry may be said to have begun in that decade. Hundreds of limited liability companies were launched and financed their operation by issuing shares. But railway companies and other high borrowers with a monopoly of operations in a particular area also chose to raise money through bonds, a method of funding once largely confined to the payment of government debt, as a way of financing their capital needs.
Very quickly, British banks began to exploit their connections with property-owning communities overseas to create an international financial hub centered in London. Some of the earliest loans were made to the United States government, including the fifteen million dollars lent to the federal government to finance the Louisiana Purchase in 1803. But state governments also borrowed heavily with more than half the two hundred million dollars that was raised up to 1841 to pay for canals, roads, and early railroads coming from British investors. Between the end of the Civil War and the 1873 crash, almost two thirds of the $1.5 billion corporate borrowing for American railroad construction was raised in London. Russian government bonds and Argentine railway shares were issued there, and across the newly settled empire, investment in colonial land, railways, and construction came from the capital. By 1872 more than half of all the national debt in the world was quoted on the London Stock Exchange.
Backed by resources on this scale, the railroads, big steel plants, and chemical companies of the second Industrial Revolution were almost too big to fail. So much money was invested in them, it made more sense to continue trading at a loss rather than wipe out their entire capital worth by closing down. The result was uneconomic overproduction and a waste of both capital and labor. This was the crisis that bedevilled capitalism in the wake of the 1873 crash.
The solution, Wells suggested, was to abandon the basic competitive premise of free-market enterprise and to let “the great producers come to some understanding as to the prices they will ask; which in turn naturally implies agreements as to the extent to which they will produce.”
In the United States, a collection of big producers who fixed prices amongst themselves, and adjusted production accordingly was known as a trust. Most of the rest of the industrial world used the word “cartel,” but the practice spread rapidly everywhere during the hard times after 1873, when large-scale manufacturers maximized production in order to service their debts. On razor-thin margins at best and chronic losses at worst, many were effectively owned by their banks and creditors. In order not to lose their investment, their financial backers seized at the opportunity offered by more powerful competitors, notably such industrial titans as Cornelius Vanderbilt, Andrew Carnegie, and John D. Rockefeller, to arrange price agreements, production targets, and trusts and so to be absorbed into existing webs of railroads, steel factories, and oil refineries. No one understood the new order of capitalism more clearly than J. P. Morgan, who used his influence as a banker to set up trusts in railroads, electricity generation, and steel manufacture—his creation, United States Steel, capitalized in 1901 at $1.2 billion, was the first billion-dollar industrial producer in the world, and had two thirds of the market.
This was the logic of Wells’s analysis. Only a handful of manufacturers were making real profits in the last decades of the nineteenth century, but, benefiting from the failure of their overstretched competitors, those few produced spectacular results even in the midst of an economic depression. More than eight thousand miles of railroad were constructed each year during the 1880s, and in 1890 the value of the United States’s industrial output reached $9.4 billion, outstripping Britain and Germany. In the 1890s, coal production, the yardstick of every industrial economy, topped two hundred million tons a year in the United States, finally overtaking the total mined throughout the British Empire.
The same economic forces altered the way that land was owned in private property societies, effectively removing the advantage of rural capital from the person who tilled the soil. The change was seen most starkly on American farms. “The only possible future for agriculture,” Wells concluded in 1895, “is to be found in large farms, worked with ample capital, especially in the form of machinery, and with labor organized somewhat after the factory system.”
Increasing mechanization had been a fact of agricultural life throughout the nineteenth century, but what Wells identified was a step-change. Tracing its effect from “the great wheat fields of the state of Dakota,” where machinery enabled one man to produce 5,500 bushels of wheat a year, to “the great mills of Minnesota,” where another worker converted that wheat to a thousand barrels of flour, and perhaps two railroad employees were needed to transport the flour to the port of New York, “where the addition of a fraction of a cent a pound to the price will . . . deliver it . . . to any port in Europe,” he demonstrated that labor, the ingredient that William Petty had identified as crucial for the creation of rural capital, had become “an insignificant factor in determining the market.” As in industry, the real factor was the capital needed to buy machinery and power.
Amid tumbling prices—between 1870 and 1900, the price of American wheat slumped by half to approximately fifty cents a bushel, and cotton by the same amount to about seven cents a pound—farmers were forced to borrow. And despite the lean returns, the availability of credit attracted enough newcomers to double the number of farms to more than six million between 1870 and 1900. In South Dakota, mortgages accounted for 46 percent of the value of the state’s farms, and other prairie states were not far behind, while nationwide 2.3 million farms, almost one third of the total in 1890, carried mortgages.
What underpinned the banks’ lending was the steadily rising price of American farmland as demand exceeded supply. By 1900 it was worth more than twenty billion dollars. About 15 percent of it was owned by mortgage lenders, and beyond them by Wall Street. More agricultural credit, amounting to $2.2 billion, allowed farmers to purchase machines that combined harvesting and threshing, automatic milkers and cream separators. Rural capital had always financed American farming, but for most of the century mortgages had been short-term loans from local banks, and the return on a sold-up farm was easily reinvested in cheaper land to the west. These new loans were long-term, financed on small margins, and, if they were called in, there was no unimproved land on which to start again. Trapped on their capital-rich, income-poor farms, a growing proportion of those who worked the soil now shared its ownership, in practical and theoretical terms, with the banks.
The era of cheap food, signalled by the sailing of the Dunedin, was pushing American farmers into a dependency on financial institutions far beyond their own neighborhoods. They were equally reliant on the transport system described by Wells, the combination of railroads, grain elevators, and shipping lines that was needed to carry their crops to markets in the eastern states and beyond the distant Atlantic. And within that system were the pioneers of what would, in the twenty-first century, become the biggest industry in the world, the food business.
Among the grain merchants was a canny Scots-American, William Wallace Cargill, who not only built grain elevators in his home state of Minnesota and at the head of the Erie Canal in Buffalo, but offered farmers insurance against crop failure, a real estate service to newcomers, and a flour milling process directly plugged into the metropolitan retailers in Chicago and New York. George Archer and John Daniels of Illinois specialized in crushing linseed to make oils for animal feed, and in 1902 would team up to provide the same combination of food processing and finance that joined retailers to farmers. Agriculture had become a hybrid, still part of the template for free-market capitalism, but also part of a larger trading web that bore a closer resemblance to the old mercantile capitalism so derided by Adam Smith and all his followers.
The crisis of American farming was quickly exported around the world, and especially to Europe. To meet mortgage payments, financially constricted prairie farms poured out a flood of cheap grain, lifting exports of American cereals from forty-four million tons in 1877 to more than 184 million tons in 1890. Competitors in Russia and Australia found their profits cut to the bone, while Europe’s cereal farmers reacted by throwing up tariff barriers in France and Germany, by switching to dairy farming in Denmark, and in Britain, relentlessly committed to free trade, by turning their faces to the wall and quietly giving up their bankrupt ghosts. Politically and economically, the descendants of Britain’s eighteenth-century aristocracy had finally become irrelevant.
The most significant reaction to the influx of cheap cereals was Germany’s. Its decision to protect its farmers by imposing duties of 40 percent on imported foreign grain flew in the face of Adam Smith orthodoxy on the importance of abolishing barriers to free trade. Indeed, its entire economic policy contradicted the ethos of free-enterprise capitalism, but results indicated that the German model provided the most effective solution to the problem of industrial overproduction.
In the years after 1873, Germany had developed more than three hundred cartels to control the production and pricing levels in every large industry from coal mines to the manufacture of ice skates. In 1913, nine Berlin banks commanded 83 percent of the nation’s working capital; ten mining corporations were responsible for 60 percent of coal production; the five largest chemical companies produced 95 percent of all dyes; and two giants, Siemens and AEG, held half the electricals market.
Sheltered by high tariffs and knowing in advance their profit margins and product runs, the German iron and steel cartel produced 20 percent more pig iron between 1893 and 1907 at lower cost and higher profit than Britain’s free-trade, free-market smelting plants as they attempted to upgrade old-fashioned technologies on paper-thin returns from oversupplied consumers.
In its most radical form, the policy of the country’s largest political party, the left-wing Social Democrats, showed vividly how different the shape of the new cartelized capitalism was from the classic free-enterprise model. Financing the industrial power concentrated in the cartels had become so critical, according to the Marxist economist Rudolf Hilferding that the banks now exercised a controlling influence over the markets. To solve the crisis of overproduction and to arrive at a fully planned economy, he argued, a government only needed to nationalize the banks.
“Even today,” he wrote in 1910, “taking possession of six large Berlin banks would mean taking possession of the most important spheres of large-scale industry . . . There is no need at all to extend the process of expropriation to the great bulk of peasant farms and small businesses, because as a result of the seizure of large-scale industry, upon which they have long been dependent, they would be indirectly socialized just as industry is directly socialized.”
The ultimate sources of finance, however, were further away than Berlin. In 1913, British financial institutions owned nine billion dollars of assets in the British empire; six billion in Africa, Latin America, Russia, and the Far East; and $3.8 billion in the United States. Until the First World War, the center of international finance was London, its dominance marked by the fact that American banks chose to locate more branches there than in New York. Acknowledging the financial reality in 1897, the New York Times confessed, “we are part, and a great part, of the Greater Britainwhich seems so plainly destined to dominate this planet.”
The American response to the new age of cartels was to turn back the clock. Outraged by the excesses and corruption of the Gilded Age, the still influential farming electorate—at the end of the century, agriculture supplied 20 percent of GNP compared to industry’s 30 percent—gave birth to the populist movement that pushed through the antitrust legislation known as the Sherman Act in 1890, and persuaded presidents Theodore Roosevelt and his successor, William Howard Taft, to use the act aggressively in the new century. The act might have helped break up some trusts, but it did nothing to solve the crisis of capitalism. And the most influential banker of the late twentieth century, Alan Greenspan, was scathing about the attempt to reintroduce the conditions of free-enterprise capitalism.
The Sherman Act, he wrote, “was a projection of the nineteenth century’s fear and economic ignorance . . . it is utter nonsense in the context of today’s economic knowledge.” Monopolies and cartel agreements were necessary to control excessive production, he insisted, and as an example, he praised the monopolistic trust organized by Standard Oil in the 1890s, because it “yielded obvious gains in efficiency, through the integration of divergent refining, marketing, and pipeline operations; it also made the raising of capital easier and cheaper.”
The deathblow to the nineteenth century’s free-market ways came from the new, predominantly urban class that suddenly mushroomed in the service of these industrial behemoths. The salary-earning, white-collar employees who worked the interlocking processes that enabled a modern corporation to function were evidently wage slaves, by Marx’s definition, but they tended to own or lease their own homes, suggesting they were members of the bourgeoisie. Even Madison’s more straightforward categories of propertied and unpropertied did not really fit since their homes belonged in large part to the financial institutions funding their mortgages.
Reacting against corporate corruption and the self-rewarding greed of big business, many in this hybrid class appeared sympathetic to the claims of the unpropertied and to demands for redistribution and social justice. Some joined the rapidly growing membership of trade unions to protect their interests against corporate employers. Across Europe, they voted for parties that espoused such social-democratic policies as old-age pensions and sickness benefits. In Britain, the Liberal government that was elected in 1905 introduced similar measures with popular support, imposing an inheritance tax on wealth and dallying with the idea of a Georgist land tax. And progressives in the United States received enough support to reform corporate-corrupted government at state and city level, introduce a federal income tax, and push through the wider provision of public education.
Yet at the very moment when economists were in broad agreement that government or corporate planning of the markets was the only way to solve the crisis of capitalism, another, more acceptable solution began to emerge. It depended critically upon the new, hybrid way of owning the earth.
The solution was half-apparent in the phrase “conspicuous consumption” used by Thorstein Veblen in his Theory of the Leisure Class published in 1899. Veblen coined the term as a jibe against the bloated plutocrats who flaunted their wealth by their “unremitting demonstration of the ability to pay.” But even at that date, the availability of credit was enabling white-collared, half-propertied wage slaves to do much the same, albeit on a reduced scale. As early as the 1880s, Boston furniture stores had allowed customers to buy expensive items, from beds to dining room tables, by paying in instalments. Sears Roebuck followed suit, and was copied by retailers of mass-produced sewing-machines. Most of the new automobile industry’s products could be purchased in the same way, although not the bestselling Model T Ford. As electricity became more widely available, the practice spread to the acquisition of household goods such as refrigerators, washing machines, and radios.
By 1914, it was becoming apparent in private property economies that overconsumption might provide a way out of the crisis of overproduction. The property of most urban dwellers might not provide an income, but its value did provide security. And this value, together with assured salaries from large-scale industry and expanding government, was beginning to generate what would become known as the consumer economy. The inherent flaw in the model was not yet apparent. But evidently a system that allowed the consumer’s buying power to be increased by the same financial markets that invested in the producer’s factories was liable to abuse. It was equally easy to overlook the danger that the new kind of property created for democracy.
The problem lay in the nature of hybrid ownership. Its conflicting aims provides the starting point of John Steinbeck’s tragedy of the Oklahoma dust bowl farmers, The Grapes of Wrath. To the human owner, possession of the earth is intimate and emotional: in Steinbeck’s famous phrase “it’s part of him . . . and in some way he’s bigger because he owns it.” But the business that owns his mortgage, and has now decided to foreclose, has no shape, no personality.
Desperate to defend his home, the farmer grabs a rifle and tells the tractor driver who is about to tear down the house that he is going to shoot the person responsible for taking his property away. “There’s the president of the bank,” the farmer says. “There’s a board of directors. I’ll fill up the magazine of the rifle and go into the bank.”
To which the tractor driver replies laconically, “Fellow was telling me that the bank got orders from the east. The orders were, ‘Make the land show profit or we’ll close you up.’ ”
“But where does it stop?” the farmer exclaims in despair, “Who can we shoot?”
When the first great depression of the twentieth century struck in the 1930s, the government in every private property society, avowedly based on representing the interests of owners, needed to know whether it should listen to the house dweller, the mortgage lender, or Wall Street. And those owners who shared their properties with the financiers needed to know who to shoot. In short, the crisis of nineteenth-century free-market capitalism evolved in the twentieth century into a crisis of democracy.