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THE GREAT TRANSFORMATION:
the political and economic origins of our time
- PART ONE KARL POLANYI
- The International System
- THE HUNDRED YEARS' PEACE
- CONSERVATIVE TWENTIES, REVOLUTIONARY THIRTIES
- PART TWO
- Rise and Fall of Market Economy
- I.SATANIC MILL
- "HABITATION VERSUS IMPROVEMENT"
- SOCIETIES AND ECONOMIC SYSTEMS
- EVOLUTION OF THE MARKET PATTERN
- LAND, AND MONEY THE SELF-REGULATING MARKET AM THE FICTITIOUS COMMODITIES: LABOR,
- SPEENHAMLAND,
- ANTECEDENTS AND CONSEQUENCES
- PAUPERISM AND UTOPIA
- POLITICAL ECONOMY AND THE DISCOVERY OF SOCIETY
- II. SELF-PROTECTION OF SOCIETY
- MAN, NATURE, AND PRODUCTIVE ORGANIZATION
- BIRTH OF THE LIBERAL CREED
- CHANGE BIRTH OF THE LIBERAL CREED (Continued): CLASS INTEREST AND SOCIAL
- MARKET AND MAN
- MARKET AND NATURE
- MARKET AND PRODUCTIVE ORGANIZATION
- SELF-REGULATIOJV IMPAIRED
- DISRUPTIVE STRAINS
- PART THREE..........................................................................................................................
- Transformation In Progress
- POPULAR GOVERNMENT AND MARKET ECONOMY
- HISTORY IM THE GEAR OF SOCIAL CHANGE
- FREEDOM IN A COMPLEX SOCIETY
- Additional Note
- SUBJECT INDEX
- AUTHORS' INDEX
- AUTHOR'S ACKNOWLEDGMENTS
PART ONE
The International System
THE HUNDRED YEARS' PEACE
NINETEENTH CENTURY Civilization has collapsed. This book is concerned with the political and economic origins of this event, as well as with the great transformation which it ushered in. Nineteenth century civilization rested on four institutions. The first was the balance-of-power system which for a century prevented the occurrence of any long and devastating war between the Great Powers. The second was the international gold standard which symbolized a unique organization of world economy. The third was the self-regulating market which produced an unheard-of material welfare. The fourth was the liberal state. Classified in one way, two of these institutions were economic, two political. Classified in another way, two of them were national, two international. Between them they determined the characteristic outlines of the history of our civilization. Of these institutions the gold standard proved crucial; its fall was the proximate cause of the catastrophe. By the time it failed most of the other institutions had been sacrificed in a vain effort to save it. But the fount and matrix of the system was the self-regulating market. It was this innovation which gave rise to a specific civilization. The gold standard was merely an attempt to extend the domestic market system to the international field; the balance-of-power system was a superstructure erected upon and, partly, worked through the gold standard; the liberal state was itself a creation of the self-regulating market. The key to the institutional system of the nineteenth century lay in the laws governing market economy. Our thesis is that the idea of a self-adjusting market implied a stark Utopia. Such an institution could not exist for any length of time without annihilating the human and natural substance of society; it would have physically destroyed man and transformed his surroundings into a wilderness. Inevitably, society took measures to protect itself, but whatever measures it took impaired the self-regulation of the market, disorganized industrial life, and thus endangered society in yet another [3] way. It was this dilemma which forced the development of the market system into a definite groove and finally disrupted the social organization based upon it. Such an explanation of one of the deepest crises in man’s history just appears all too simple. Nothing could seem more inept than the attempt to reduce a civilization, its substance and ethos, to a hard and last number of institutions; to select one of them as fundamental and proceed to argue the inevitable self-destruction of civilization on account of some technical quality of its economic organization. Civilizations, like life itself) spring from the interaction of a great number of independent factors which are not, as a rule, reducible to circumscribed institutions. To trace the institutional mechanism of the downfall of a civilization may well appear as a hopeless endeavor. Yet it is this we are undertaking. In doing so we are consciously adjusting our aim to the extreme singularity of the subject matter. For the civilization of the nineteenth century was unique precisely in that it centered on a definite institutional mechanism. No explanation can satisfy which does not account for the suddenness of the cataclysm. As if the forces of change had been pent up for & century, a torrent of events is pouring down on mankind. A social transformation of planetary range is being topped by wars of an unprecedented type in which a score of states crashed, and the contours of new empires are emerging out of a sea of blood. But this fact of demoniac violence is merely superimposed on a swift, silent current of change which
Great Powers. Regardless of how the methods changed, the result was the same. While in the first part of the century constitutionalism was banned and the Holy Alliance suppressed freedom in the name of peace, during the other half—and again in the name of peace—constitutions were foisted upon turbulent despots by business-minded bankers. Thus under varying forms and ever-shifting ideologies— sometimes in the name of progress and liberty, sometimes by the authority of the throne and the altar, sometimes by grace of the stock exchange and the checkbook, sometimes by corruption and bribery, sometimes by moral argument and enlightened appeal, sometimes by the broadside and the bayonet—one and the same result was attained: peace was preserved. This almost miraculous performance was due to the working of the balance of power, which here produced a result which is normally foreign to it. By its nature that balance effects an entirely different result, namely, the survival of the power units involved; in fact, it merely postulates that three or more units capable of exerting power will always behave in such a way as to combine the power of the weaker units against any increase in power of the strongest. In the realm of universal history balance of power was concerned with states whose independence it served to maintain. But it attained this end only by continuous war between changing partners. The practice of the ancient Greek or the Northern Italian city-states was such an instance; wars between shifting groups of combatants maintained the independence of those states over long stretches of time. The action of the same principle safeguarded for over two hundred years the sovereignty of the states forming Europe at the time of the Treaty of Mimster and Westphalia (1648). When, seventy-five years later, in the Treaty of Utrecht, the signatories declared their formal adherence to this principle, they thereby embodied it in a system, and thus established mutual [6] guarantees of survival for the strong and the weak alike through the medium of war. The fact that in the nineteenth century the same mechanism resulted in peace rather than war is a problem to challenge the historian. The entirely new factor, we submit, was the emergence of an acute peace interest. Traditionally, such an interest was regarded as outside the scope of the state system. Peace with its corollaries of crafts and arts ranked among the mere adornments of life. The Church might pray for peace as for a bountiful harvest, but in the realm of state action it would nevertheless advocate armed intervention; governments subordinated peace to security and sovereignty, that is, to intents that could not be achieved otherwise than by recourse to the ultimate means. Few things were regarded as more detrimental to a community than the existence of an organized peace interest in its midst. As late as the second half of the eighteenth century, J. J. Rousseau arraigned trades people for their lack of patriotism because they were suspected of preferring peace to liberty. After 1815 the change is sudden and complete. The backwash of the French Revolution reinforced the rising tide of the Industrial Revolution in establishing peaceful business as a universal interest. Mettemich proclaimed that what the people of Europe wanted was not liberty but peace. Gentz called patriots the new barbarians. Church and throne started out on the denationalization of Europe. Their arguments found support both in the ferocity of the recent popular forms of warfare and in the tremendously enhanced value of peace under the nascent economies. The bearers of the new "peace interest" were, as usual, those who chiefly benefited by it, namely, that cartel of dynasts and feudalists whose patrimonial positions were threatened by the revolutionary wave of patriotism that was sweeping the Continent. Thus, for approximately a third of a century the Holy Alliance provided the coercive force and the ideological impetus for an active peace policy; its armies were roaming up and down Europe putting down minorities and repressing majorities. From 1846 to about 1871—"one of the most confused and crowded quarter centuries of European history"^1 —peace was less safely established, the ebbing strength of reaction meeting the
(^1) Sontag, R. J., European Diplomatic History, 1871-1933, l
growing strength of industrialism. In the quarter century following the Franco-Prussian War we find the revived peace interest represented by that new powerful entity, the Concert of Europe. [7] Interests, however, like intents, necessarily remain platonic unless they are translated into politics by the means of some social instrumentality. Superficially, such a vehicle of realization was lacking; both the Holy Alliance and the Concert of Europe were, ultimately, mere groupings of independent sovereign states, and thus subject to the balance of power and its mechanism of war. How then was peace maintained? True, any balance-of-power system will tend to prevent such wars as spring from one nation's failure to foresee the realignment of powers, which will result from its attempt to alter the status quo. Famous instances were Bismarck's calling off of the press campaign against France, in 1875, on Russian and British intervention (Austria's aid to France was taken for granted). This time the Concert of Europe worked against Germany who found herself isolated. In 1877-78 Germany was unable to prevent a Russo-Turkish War, but succeeded in localizing it by backing up England's jealousy of a Russian move towards the Dardanelles; Germany and England supported Turkey against Russia—thus saving the peace. At the Congress of Berlin a long-term plan for the liquidation of the European possessions of the Ottoman Empire was launched; this resulted in averting wars between the Great Powers in spite of all subsequent changes in the status quo, as the parties concerned could be practically certain in advance of the forces they would have to meet in battle. Peace in these instances was a welcome by-product of the balance-of-power system. Also, wars were sometimes avoided by deliberately removing their causes, if the fate of small powers only was involved. Small nations were checked and prevented from disturbing the status quo in any way, which might precipitate war. The Dutch invasion of Belgium in 1831 eventually led to the neutralization of that country. In 1855 Norway was neutralized. In 1867 Luxembourg was sold by Holland to France; Germany protested and Luxembourg was neutralized. In 1856 the integrity of the Ottoman Empire was declared essential to the equilibrium of Europe, and the Concert of Europe endeavored to maintain that empire; after 1878, when its disintegration was deemed essential to that equilibrium, its dismemberment was provided for in a similarly orderly manner, though in both cases the decision meant life and death to several small peoples. Between 1852 and 1863 Denmark, between 1851 and 1856 the Germanies threatened to disturb the balance; each time the small states were forced by the Great Powers to conform. In these instances, the liberty of action offered to them by the system was used by the Powers to achieve a joint interest—which happened to be peace. [8] But it is a far cry from the occasional averting of wars either by a timely clarification of the power situation or by the coercing of small states to the massive fact of the Hundred Years' Peace. International disequilibrium may occur for innumerable reasons—from a dynastic love affair to the silting of an estuary, from a theological controversy to a technological invention. The mere growth of wealth and population, or, eventually, their decrease, is bound to set political forces in motion; and the external balance will invariably reflect the internal. Even an organized balance-of-power system can ensure peace without the permanent threat of war only if it is able to act upon these internal factors directly and prevent imbalance in statu nascendi. Once the imbalance has gathered momentum only force can set it right. It is a commonplace that to insure peace one must eliminate the causes of war; but it is not generally realized that to do so the flow of life must be controlled at its source. The Holy Alliance contrived to achieve this with the help of instruments peculiar to it. The kings and aristocracies of Europe formed an international of kinship; and the Roman Church provided them with a voluntary civil service ranging from the highest to the lowest rung of the social ladder in Southern and Central Europe. The hierarchies of blood and grace were fused into an instrument of locally effective rule, which needed only to be supplemented by force to ensure conti- nental peace.
became in some sort the mirror and counterpart. Besides the international center, haute finance proper, there were some half dozen national centers hiving around their banks of issue and stock exchanges. Also, international banking was not restricted to the financing of governments, their adventures in war and peace; it comprised foreign investment in industry, public utilities, and banks, as well as long-term loans to public and private corporations abroad. National finance again was a microcosm. England alone counted half a hundred different types of banks; France's and Germany's banking organization, too, was specific; and in each of these countries the practices of the Treasury and its relations to private finance varied in the most striking, and, often, as to detail, most subtle way. The money market dealt with a multitude of commercial bills, overseas acceptances, pure financial bills, as well as call money and other stockbrokers' facilities. The pattern was checkered by an infinite variety of national groups and personalities, each with its peculiar type of prestige and standing, authority and loyalty, its assets of money and contact, of patronage and social aura. Haute finance was not designed as an instrument of peace; this function fell to it by accident, as historians would say, while the sociologist might prefer to call it the law of availability. The motive of haute finance was gain; to attain it, it was necessary to keep in with the governments whose end was power and conquest. We may safely neglect at this stage the distinction between political and economic power, between economic and political purposes on the part of the governments; in effect, it was the characteristic of the nation-states in this period that such a distinction had but little reality, for whatever their aims, the governments strove to achieve them through the use and increase of national power. The organization and personnel of haute finance, on the other hand, was international, yet not, therefore, altogether independent of national organization. For haute finance as an activating center of bankers' participation in syndicates and consortia, [11] investment groups, foreign loans, financial controls, or other transactions of an ambitious scope, was bound to seek the co-operation of national banking, national capital, national finance. Though national finance, as a rule, was less subservient to government than national industry, it was still sufficiently so to make international finance eager to keep in touch with the governments themselves. Yet to the degree to which—in virtue of its position and personnel, its private fortune and affiliations—it was actually independent of any single government, it was able to serve a new interest, which had no specific organ of its own, for the service of which no other institution happened to be available, and which was nevertheless of vital importance to the community: namely, peace. Not peace at all cost, not even peace at the price of any ingredient of independence, sovereignty, vested glory, or future aspirations of the powers concerned, but nevertheless peace, if it was possible to attain it without such sacrifice. Not otherwise. Power had precedence over profit. However closely their realms interpenetrated, ultimately it was war that laid down the law to business. Since 1870 France and Germany, for example, were enemies. This did not exclude noncommittal transactions between them. Occasional banking syndicates were formed for transitory purposes ; there was private participation by German investment banks in enterprises over the border, which did not appear in the balance sheets; in the short-term loan market there was a discounting of bills of exchange and a granting of short-term loans on collateral and commercial papers on the part of French banks; there was direct investment as in the case of the marriage of iron and coke, or of Thyssen's plant in Normandy, but such investments were restricted to definite areas in France and were under a permanent fire of criticism from both the nationalists and the socialists; direct investment was more frequent in the colonies, as exemplified by Germany's tenacious efforts to secure high-grade ore in Algeria, or by the involved story of participations in Morocco. Yet it remains a stern fact that at no time after 1870 was the official though tacit ban on German securities at the Bourse of Paris lifted. France simply "chose not to risk having the force of loaned capital"^3 turned upon herself. Austria also was suspect;
(^3) Feis, H. op. cit., p. 201.
in the Moroccan crisis of 1905-06 the ban was extended to Hungary. Financial circles in Paris pleaded for the admission of Hungarian securities, but industrial circles supported the government in its staunch opposition to any concession to a possible military antagonist. Politico-diplomatic [12] rivalry continued unabated. Any move that might increase the presumptive enemy's potential was vetoed by the governments. Superficially, it more than once appeared as if the conflict had been quashed, but the inside circles were aware that it had been merely shifted to points even more deeply hidden under the amicable surface. Or take Germany's Eastern ambitions. Here also politics and finance intermingled, yet politics was supreme. After a quarter of a century of perilous bickering, Germany and England signed a comprehensive agreement on the Baghdad railway, in June, 1914 —too late to prevent the Great War, it was often said. Others argued that, on the contrary, the signing of the agreement proved conclusively that the war between England and Germany was not caused by a clash of economic expansionism. Neither view is borne out by the facts. The agreement actually left the main issue undecided. The German railway line was still not to be carried on beyond Basra without the consent of the British government, and the economic zones of the treaty were bound to lead to a head-on collision at a future time. Meanwhile, the Powers would continue to prepare for The Day, which was even nearer than they reckoned.^4 International finance had to cope with the conflicting ambitions and intrigues of the great and small powers; its plans were thwarted by diplomatic maneuvers, its long-term investments jeopardized, its constructive efforts hampered by political sabotage and backstairs obstruction. The national banking organizations without which it was helpless often acted as the accomplices of their respective governments, and no plan was safe which did not carve out in advance the booty of each participant. However, power finance just as often was not the victim, but the beneficiary of Dollar diplomacy which provided the steel ribs to the velvet glove of finance. For business success involved the ruthless use of force against weaker countries, wholesale bribing of backward administrations, and the use of all the underhand means of gaining ends familiar to the colonial and semicolonial jungle. And yet by functional determination it fell to haute finance to avert general wars. The vast majority of the holders of government securities, as well as other investors and traders, were bound to be the first losers in such wars, especially if the currencies were affected. The influence that haute finance exerted on the Powers was consistently favorable to European peace. And this influence was effective to the degree to which the governments themselves depended upon its co-operation in more than one [13] direction. Consequently, there was never a time when the peace interest was unrepresented in the councils of the Concert of Europe. If we add to this the growing peace interest inside every nation where the investment habit had taken root, we shall begin to see why the awful innovation of an armed peace of dozens of practically mobilized states could hover over Europe from 1871 to 1914 without bursting forth in a shattering conflagration. Finance—this was one of its channels of influence—acted as a powerful moderator in the councils and policies of a number of smaller sovereign states. Loans, and the renewal of loans, hinged upon credit, and credit upon good behavior. Since, under constitutional government (unconstitutional ones were severely frowned upon), behavior is reflected in the budget and the external value of the currency cannot be detached from the appreciation of the budget, debtor governments were well advised to watch their exchanges carefully and to avoid policies which might reflect upon the soundness of the budgetary position. This useful maxim became a cogent rule of conduct once a country had adopted the gold standard, which limited permissible fluctuations to a minimum. Gold standard and constitutionalism were the instruments which made the voice of the
(^4) Cf. Notes on Sources, page 264.
order to invest in railways, public utilities, ports, and other permanent establishments on which their heavy industries made profits. Actually, business and finance were responsible for many colonial wars, but also for the fact that a general conflagration was avoided. Their affiliations with heavy industry, though really close only in Germany, accounted for both. Finance capital as the roof organization of heavy industry was affiliated with the various branches of industry in too many ways to allow one group to determine its policy. For every one interest that was furthered by war, there were a dozen that would be adversely affected. International capital, of course, was bound to be the loser in case of war; but even national finance could gain only exceptionally, though frequently enough to account for dozens of colonial wars, as long as they remained isolated. Every war, almost, was organized by financiers; but peace also was organized by them. The precise nature of this strictly pragmatic system, which guarded with extreme rigor against a general war while providing for peaceful business amidst an endless sequence of minor ones, is best demonstrated by the changes it brought about in international law. While nationalism and industry distinctly tended to make wars more ferocious and total, effective safeguards were erected for the continuance of peaceful business in wartime. Frederick the Great is on record for having "by reprisal" refused, in 1752, to honor the Silesian loan due to British subjects.^5 "No attempt of this sort has been made since," says Hershey. "The wars of the French Revolution furnish us with the last important examples of the confiscation of the private property of enemy subjects found in belligerent territory upon the outbreak of hostilities." After the outbreak of the Crimean War enemy merchantmen were allowed to leave port, a practice which was adhered to by Prussia, France, Rus- sia, Turkey, Spain, Japan, and the United States during the fifty following years. Since the beginning of that war a very large indulgence in commerce between belligerents was allowed. Thus, in the Spanish-American War, neutral vessels, laden with American-owned cargoes [16] other than contraband of war, cleared for Spanish ports. The view that eighteenth century wars were in all respects less destructive than nineteenth century ones is a prejudice. In respect to the status of enemy aliens, the service of loans held by enemy citizens, enemy property, or the right of enemy merchantmen to leave port, the nineteenth century showed a decisive turn in favor of measures to safeguard the economic system in wartime. Only the twentieth century reversed this trend. Thus the new organization of economic life provided the background of the Hundred Years' Peace. In the first period, the nascent middle classes were mainly a revolutionary force endangering peace as witnessed in the Napoleonic upheaval; it was against this new factor of national disturbance that the Holy Alliance organized its reactionary peace. In the second period, the new economy was victorious. The middle classes were now themselves the bearers of a peace interest, much more powerful than that of their reactionary predecessors had been, and nurtured by the national- international character of the new economy. But in both instances the peace interest became effective only because it was able to make the balance-of-power system serve its cause by providing that system with social organs capable of dealing directly with the internal forces active in the area of peace. Under the Holy Alliance these organs were feudalism and the thrones, supported by the spiritual and material power of the Church; under the Concert of Europe they were international finance and the national banking systems allied to it. There is no need to overdo the distinction. During the Thirty Years' Peace, 1816-46, Great Britain was already pressing for peace and business, nor did the Holy Alliance disdain the help of the Rothschilds. Under the Concert of Europe, again, international finance had often to rely on its dynastic and aristocratic affiliations. But such facts merely tend to strengthen our argument that in every case peace was maintained not simply through the chancelleries of the Great Powers but with the help of concrete organized agencies acting in the service of general interests. In other words, only on the background of the new economy could the
(^5) Hershey, A. S., Essentials of International Public Law and Organization, 1927, PP. 565-69.
balance-of-power system make general conflagrations avoidable. But the achievement of the Concert of Europe was incomparably greater than that of the Holy Alliance; for the latter maintained peace in a limited region in an unchanging Continent, while the former succeeded in the same task on a world scale while social and economic progress was revolutionizing the map of the globe. This great political feat was the result of the emergence of a specific [17] entity, haute finance, which was the given link between the political and the economic organization of international life. It must be clear by this time that the peace organization rested upon economic organization. Yet the two were of very different consistency. Only in the widest sense of the term was it possible to speak of a political peace organization of the world, for the Concert of Europe was essentially not a system of peace but merely of independent sovereignties protected by the mechanism of war. The contrary is true of the economic organization of the world. Unless we defer to the uncritical practice of restricting the term "organization" to centrally directed bodies acting through functionaries of their own, we must concede that nothing could be more definite than the universally accepted principles upon which this organization rested and nothing more concrete than its factual elements. Budgets and armaments, foreign trade and raw material supplies, national independence and sovereignty were now the functions of currency and credit. By the fourth quarter of the nineteenth century, world commodity prices were the central reality in the lives of millions of Continental peasants; the repercussions of the London money market were daily noted by businessmen all over the world; and governments discussed plans for the future in light of the situation on the world capital markets. Only a madman would have doubted that the international economic system was the axis of the material existence of the race. Because this system needed peace in order to function, the balance of power was made to serve it. Take this economic system away and the peace interest would disappear from politics. Apart from it, there was neither sufficient cause for such an interest, nor a possibility of safeguarding it, in so far as it existed. The success of the Concert of Europe sprang from the needs of the new international organization of economy, and would inevitably end with its dissolution. The era of Bismarck (1861-90) saw the Concert of Europe at its best. In two decades immediately following Germany's rise to the status of a Great Power, she was the chief beneficiary of the peace interest. She had forced her way into the front ranks at the cost of Austria and France; it was to her advantage to maintain the status quo and to prevent a war which could be only a war of revenge against herself. Bismarck deliberately fostered the notion of peace as a common venture of the Powers, and avoided commitments which might force Germany out of the position of a peace power. He opposed expansionist ambitions in the Balkans or overseas; he used the free trade weapon consistently against Austria, and even against France; he thwarted Russia's and [18] Austria's Balkan ambitions with the help of the balance-of-power game, thus keeping in with potential allies and averting situations which might involve Germany in war. The scheming aggressor of 1863-70 turned into the honest broker of 1878, and the deprecator of colonial adventures. He consciously took the lead in what he felt to be the peaceful trend of the time in order to serve Germany's national interests. However, by the end of the seventies the free trade episode (1846- 79) was at an end; the actual use of the gold standard by Germany marked the beginnings of an era of protectionism and colonial expansion.^6 Germany was now reinforcing her position by making a hard and fast alliance with Austria-Hungary and Italy; not much later Bismarck lost control of Reich policy. From then onward Great Britain was the leader of the peace interest in a Europe which still remained a group of independent sovereign states and thus subject to the balance of power. In the nineties haute finance was at its peak and peace seemed more secure than ever. British and French interests differed in
(^6) Eulenburg, F„ Aussenhandel and Ausse nhandelspotitik. In "Grundriss der Sozialokonornik," Abt. VIII, 1929, P- 209.
Politically, the Treaties harbored a fatal contradiction. Through the unilateral disarmament of the defeated nations they forestalled any reconstruction of the balance-of-power system, since power is an indispensable requisite of such a system. In vain did Geneva look towards the restoration of such a system in an enlarged and improved Concert of Europe called the League of Nations; in vain were facilities for consultation and joint action provided in the Covenant of the League, for the essential precondition of independent power units was now lacking. The League could never be really established; neither Article 16 on the enforcement of Treaties, nor Article 19 on their peaceful revision was ever implemented. The only viable solution of the burning problem of peace—the restoration of the balance-of-power system —was thus completely out of reach; so much so that the true aim of the most constructive statesmen of the twenties was not even understood by the public, which continued to exist in an almost indescribable state of confusion. Faced by the appalling fact of the disarmament of one group of nations, while the other group remained armed—a situation which precluded any constructive step towards the organization of peace—the emotional attitude prevailed that the League was in some mysterious way the harbinger of an era of peace which needed only frequent verbal encouragement to become permanent. In America there was a widespread idea that if only America had joined the League, matters would have turned out quite differently. No better proof than this could be adduced for the lack of understanding of the organic weaknesses of the so- called postwar system—so-called, because, if words have a meaning, Europe was now without any political system whatever. A bare status quo such as this can last only as long as the physical exhaustion of the parties lasts; no wonder that a return to the nineteenth century system appeared as the only way out. In the [21] meantime the League Council might have at least functioned as a kind of European directorium, very much as the Concert of Europe did at its zenith, but for the fatal unanimity rule which set up the obstreperous small state as the arbiter of world peace. The absurd device of the permanent disarmament of the defeated countries ruled out any constructive solution. The only alternative to this disastrous condition of affairs was the establishment of an international order endowed with an organized power which would transcend national sovereignty. Such a course, however, was entirely beyond the horizon of the time. No country in Europe, not to mention the United States, would have submitted to such a system. Economically, the policy of Geneva was much more consistent in pressing for the restoration of world economy as a second line of defense for peace. For even a successfully re-established balance-of-power system would have worked for peace only if the international monetary system was restored. In the absence of stable exchanges and freedom of trade the governments of the various nations, as in the past, would regard peace as a minor interest, for which they would strive only as long as it did not interfere with any of their major interests. First among the statesmen of the time, Woodrow Wilson appears to have realized the interdependence of peace and trade, not only as a guarantee of trade, but also of peace. No wonder that the League persistently strove to reconstruct the international currency and credit organization as the only possible safeguard of peace among sovereign states, and that the world relied as never before on haute finance. J. P. Morgan had replaced N. M. Rothschild as the demiurge of a rejuvenated nineteenth century. According to the standards of that century the first postwar decade appeared as a revolutionary era; in the light of our own recent experience it was precisely the contrary. The intent of that decade was deeply conservative and expressed the almost universal conviction that only the re-establishment of the pre-1914 system, "this time on solid foundations," could restore peace and prosperity. Indeed, it was out of the failure of this effort to return to the past that the transformation of the thirties sprang. Spectacular though the revolutions and counterrevolutions of the post-war decade were, they represented either mere mechanical reactions to military defeat or, at most, a re- enacting of the familiar liberal and constitutionalist drama of Western civilization on the Central and
Eastern European scene; it was only in the thirties that entirely new elements entered the pattern of Western history. [22] The Central and Eastern European upheavals and counter upheavals of 1917—20 in spite of their scenario were merely roundabout ways of recasting the regimes that had succumbed on the battlefields. When the counterrevolutionary smoke dissolved, the political systems in Budapest, Vienna, and Berlin were found to be not very far different from what they had been before the War. This was true, roughly, of Finland, the Baltic states, Poland, Austria, Hungary, Bulgaria, and even Italy and Germany, up to the middle of the twenties. In some countries a great advance was made in national freedom and land reform—achievements which had been common to Western Europe since
- Russia, in this respect, formed no exception. The tendency of the times was simply to establish (or re-establish) the system commonly associated with the ideals of the English, the American, and the French revolutions. Not only Hindenburg and Wilson, but also Lenin and Trotzky were, in this broad sense, in the line of Western tradition. In the early thirties, change set in with abruptness. Its landmarks were the abandonment of the gold standard by Great Britain; the Five-Year Plans in Russia; the launching of the New Deal; the National Socialist Revolution in Germany; the collapse of the League in favor of autarchist empires. While at the end of the Great War nineteenth century ideals were paramount, and their influence dominated the following decade, by 1940 every vestige of the international system had disappeared and, apart from a few enclaves, the nations were living in an entirely new international setting. The root cause of the crisis, we submit, was the threatening collapse of the international economic system. It had only haltingly functioned since the turn of the century, and the Great War and the Treaties had wrecked it finally. This became apparent in the twenties when there was hardly an internal crisis in Europe that did not reach its climax on an issue of external economy. Students of politics now grouped the various countries, not according to continents, but according to the degree of their adherence to a sound currency. Russia had astonished the world by the destruction of the rouble, the value of which was reduced to nothing by the simple means of inflation. Germany repeated this desperate feat in order to give the lie to the Treaty; the expropriation of the rentier class, which followed in its wake, laid the foundation for the Nazi revolution. The prestige of Geneva rested on its success in helping Austria and Hungary to restore their currencies, and Vienna became the Mecca of liberal economists on account of a brilliantly successful operation on Austria's krone which the patient, [23] unfortunately, did not survive. In Bulgaria, Greece, Finland, Latvia, Lithuania, Esthonia, Poland, and Roumania the restoration of the currency provided counterrevolution with a claim to power. In Belgium, France, and England the Left was thrown out of office in the name of sound monetary standards. An almost unbroken sequence of currency crises linked the indigent Balkans with the affluent United States through the elastic band of an international credit system, which transmitted the strain of the imperfectly restored currencies, first, from Eastern Europe to Western Europe, then from Western Europe to the United States. Ultimately, the United States itself was engulfed by the effects of the premature stabilization of European currencies. The final breakdown had begun. The first shock occurred within the national spheres. Some currencies, such as the Russian, the German, the Austrian, the Hungarian, were wiped out within a year. Apart from the unprecedented rate of change in the value of currencies there was the circumstance that this change happened in a completely monetarized economy. A cellular process was introduced into human society, the effects of which were outside the range of experience. Internally and externally alike, dwindling currencies spelled disruption. Nations found themselves separated from their neighbors, as by a chasm, while at the same time the various strata of the population were affected in entirely different and often opposite ways. The intellectual middle class was literally pauperized; financial
position of the leading gold country, the United States. This preoccupation which spanned the Atlantic brought America unexpectedly into the danger zone. The point seems technical, but must be clearly understood. American support of the pound sterling in 1927 implied low rates of interest in New York in order to avert big movements of capital from London to New York. The Federal Reserve Board accordingly promised the Bank of England to keep its rate low; but presently America herself was in need of high rates as her own price system began to be perilously inflated (this fact was obscured by the existence of a stable price level, maintained in spite of tremendously diminished costs). When the usual swing of the pendulum after seven years of prosperity brought on the long overdue slump in 1929, matters were immeasurably aggravated by the existing state of cryptoinflation. Debtors, emaciated by deflation, lived to see the inflated creditor collapse. It was a portent. America, by an instinctive gesture of liberation, went off gold in 1933) and the last vestige of the traditional world economy vanished. Although hardly anybody discerned the deeper meaning of the event at the time, history almost at once reversed its trend. For over a decade the restoration of the gold standard had been the symbol of world solidarity. Innumerable conferences from Brussels to Spa and Geneva, from London to Locarno and Lausanne met in order to achieve the political preconditions of stable currencies. The League of Nations itself had been supplemented by the International Labor Office partly in order to equalize conditions of competition amongst the nations so that trade might be liberated without danger to standards of living. Currency was at the heart of the campaigns launched by Wall Street to overcome the transfer problem and, first, to commercialize, then, to mobilize reparations; Geneva acted as the sponsor of a process of rehabilitation in which the combined pressure of the City of London and of the neo-classical monetary purists of Vienna was put into the service of the gold standard; every international endeavor was ultimately directed to this end, while national governments, as a rule, accommodated their policies to the need of [26] safeguarding the currency, particularly those policies which were concerned with foreign trade, loans, banking, and exchange. Although everybody agreed that stable currencies ultimately depended upon the freeing of trade, all except dogmatic free traders knew that measures had to be taken immediately which would inevitably restrict foreign trade and foreign payments. Import quotas, moratoria and stand-still agreements, clearing systems and bilateral trade treaties, barter arrangements, embargoes on capital exports, foreign trade control, and exchange equalization funds developed in most countries to meet the same set of circumstances. Yet the incubus of self- sufficiency haunted the steps taken in protection of the currency. While the intent was the freeing of trade, the effect was its strangulation. Instead of gaining access to the markets of the world, the governments, by their own acts, were barring their countries from any international nexus, and ever- increasing sacrifices were needed to keep even a trickle of trade flowing. The frantic efforts to protect the external value of the currency as a medium of foreign trade drove the peoples, against their will, into an autarchized economy. The whole arsenal of restrictive measures, which formed a radical departure from traditional economics, was actually the outcome of conservative free trade purposes. This trend was abruptly reversed with the final fall of the gold standard. The sacrifices that were made to restore it had now to be made once more in order that we might live without it. The same institutions which were designed to constrict life and trade in order to maintain a system of stable currencies were now used to adjust industrial life to the permanent absence of such a system. Perhaps that is why the mechanical and technological structure of modern industry survived the impact of the collapse of the gold standard. For in the struggle to retain it, the world had been unconsciously preparing for the kind of efforts and the type of organizations necessary to adapt itself to its loss. Yet the intent was now the opposite; in the countries that had suffered most during the long-drawn fight for the unattainable, titanic forces were released on the rebound. Neither the League of Nations nor international haute finance outlasted the gold standard; with its disappearance both
the organized peace interest of the League and its chief instruments of enforcement—the Rothschilds and Morgans — vanished from politics. The snapping of the golden thread was the signal for a world revolution. But the failure of the gold standard did hardly more than set the date of an event which was too big to have been caused by it. No less [27] than a complete destruction of the national institutions of nineteenth century society accompanied the crisis in a great part of the world, and everywhere these institutions were changed and re-formed almost out of recognition. The liberal state was in many countries replaced by totalitarian dictatorships, and the central institution of the century— production based on free markets—was superseded by new forms of economy. While great nations recast the very mold of their thought and buried themselves into wars to enslave the world in the name of unheard-of conceptions of the nature of the universe, even greater nations rushed to the defense of freedom which acquired an equally unheard-of meaning at their hands. The failure of the international system, though it triggered the transformation, could certainly not have accounted for its depth and content. Even though we may know why that which happened happened suddenly, we may still be in the dark about why it happened at all. It was not by accident that the transformation was accompanied by wars on an unprecedented scale. History was geared to social change; the fate of nations was linked to their role in an institutional transformation. Such a symbiosis is no exception in history; though national groups and social institutions have origins of their own, they tend to hitch on to one another in their struggle for survival. A famous instance of such a symbiosis linked capitalism and the seaboard nations of the Atlantic. The Commercial Revolution, so closely connected with the rise of capitalism, became the vehicle to power for Portugal, Spain, Holland, France, England and the United States, each of them benefiting from the chances offered by that broad and deep-seated movement, while, on the other hand, capitalism itself was spreading over the planet through the instrumentality of these rising Powers. The law applied also in the reverse. A nation may be handicapped in its struggle for survival by the fact that its institutions, or some of them, belong to a type that happens to be on the down grade—the gold standard in World War II was an instance of such an antiquated outfit. Countries, on the other hand, which, for reasons of their own, are opposed to the status quo, would be quick to discover the weaknesses of the existing institutional order and to anticipate the creation of institutions better adapted to their interests. Such groups are pushing that which is falling and holding on to that which, under its own steam, is moving their way. It may then seem as if they had originated the process of social change, while actually they were merely its beneficiaries, and may be even perverting the trend to make it serve their own aims. [28] Thus Germany, once defeated, was in the position to recognize the hidden shortcomings of the nineteenth century order, and to employ this knowledge to speed the destruction of that order. A kind of sinister intellectual superiority accrued to those of her statesmen in the thirties who turned their minds to this task of disruption, which often extended to the development of new methods of finance, trade, war, and social organization, in the course of their attempt to force matters into the trend of their policies. However, these problems themselves were emphatically not created by the governments which turned them to their advantage; they were real—objectively given—and will remain with us whatever be the fate of the individual countries. Again, the distinction between World Wars I and II is apparent: the former was still true to nineteenth century type—a simple conflict of powers, released by the lapse of the balance-of-power system; the latter already is part of the world upheaval. This should allow us to detach the poignant national histories of the period from the social transformation that was in progress. It will then be easy to see in what manner Germany and Russia,
PART TWO
Rise and Fall of Market Economy
I. SATANIC MILL
"HABITATION VERSUS IMPROVEMENT"
AT THE HEART Of the Industrial Revolution of the eighteenth century there was an almost miraculous improvement in the tools of production, which was accompanied by a catastrophic dislocation of the lives of the common people. We will attempt to disentangle the factors that determined the forms of this dislocation, as it appeared at its worst in England about a century ago. What "satanic mill" ground men into masses? How much was caused by the new physical conditions? How much by the economic dependencies, operating under the new conditions? And what was the mechanism through which the old social tissue was destroyed and a new integration of man and nature so unsuccessfully attempted? Nowhere has liberal philosophy failed so conspicuously as in its understanding of the problem of change. Fired by an emotional faith in spontaneity, the common-sense attitude toward change was discarded in favor of a mystical readiness to accept the social consequences of economic improvement, whatever they might be. The elementary truths o' political science and statecraft were first discredited, then forgotten. It should need no elaboration that a process of undirected change, the pace of which is deemed too fast, should be slowed down, if possible, so as to safeguard the welfare of the community. Such household truths of traditional statesmanship, often merely reflecting the teachings of a social philosophy inherited from the ancients, were in the nineteenth century erased from the thoughts of the educated by the corrosive of a crude utilitarianism combined with an uncritical reliance on the alleged self-healing virtues of unconscious growth. Economic liberalism misread the history of the Industrial Revolution because it insisted on judging social events from the economic [33] viewpoint. For an illustration of this we shall turn to what may at first seem a remote subject: to enclosures of open fields and conversions of arable land to pasture during the earlier Tudor period in England, when fields and commons were hedged by the lords, and whole counties were threatened by depopulation. Our purpose in thus evoking the plight of the people brought about by enclosures and conversions will be on the one hand to demonstrate the parallel between the devastations caused by the ultimately beneficial enclosures and those resulting from the Industrial Revolution, and on the other hand—and more broadly—to clarify the alternatives facing a community which is in the throes of unregulated economic improvement. Enclosures were an obvious improvement if no conversion to pasture took place. Enclosed land was worth double and treble the unenclosed. Where tillage was maintained, employment did not fall off, and the food supply markedly increased. The yield of the land manifestly increased, especially where the land was let. But even conversion of arable land to sheep runs was not altogether detrimental to the neighborhood in spite of the destruction of habitations and the restriction of employment it involved. Cottage industry was spreading by the second half of the fifteenth century, and a century later it began to be a feature of the countryside. The wool produced on the sheep farm gave employment to the small tenants and landless cottagers forced out of tillage, and the new centers of the woolen industry secured an income to a number of craftsmen.
But—this is the point—only in a market economy can such compensating effects be taken for granted. In the absence of such an economy the highly profitable occupation of raising sheep and selling their wool might ruin the country. The sheep which "turned sand into gold" could well have turned the gold into sand as happened ultimately to the wealth of seventeenth century Spain whose eroded soil never recovered from the overexpansion of sheep farming. An official document of 1607, prepared for the use of the Lords of the Realm, set out the problem of change in one powerful phrase: "The poor man shall be satisfied in his end: Habitation; and the gentleman not hindered in his desire: Improvement." This formula appears to take for granted the essence of purely economic progress, which is to achieve improvement at the price of social dislocation. But it also hints at the tragic necessity by which the poor man clings to his hovel, doomed by the rich man's desire for a public improvement which profits him privately. [34] Enclosures have appropriately been called a revolution of the rich is against the poor. The lords and nobles were upsetting the social order, breaking down ancient law and custom, sometimes by means of violence, often by pressure and intimidation. They were literally robbing the poor of their share in the common, tearing down the houses which, by the hitherto unbreakable force of custom, the poor had long regarded as theirs and their heirs'. The fabric of society was being disrupted; desolate villages and the ruins of human dwellings testified to the fierceness with which the revolution raged, endangering the defenses of the country, wasting its towns, decimating its population, turning its overburdened soil into dust, harassing its people and turning them from decent husbandmen into a mob of beggars and thieves. Though this happened only in patches, the black spots threatened to melt into a uniform catastrophe.^1 The King and his Council, the Chancellors, and the Bishops were defending the welfare of the community and, indeed, the human and natural substance of society against this scourge. With hardly any intermittence, for a century and a half— from the 1490's, at the latest, to the 1640's—they struggled against depopulation. Lord Protector Somerset lost his life at the hands of the counterrevolution which wiped the enclosure laws from the statute book and established the dictatorship of the grazier lords, after Kett's Rebellion was defeated with several thousand peasants slaughtered in the process. Somerset was accused, and not without truth, of having given encouragement to the rebellious peasants by his staunch denunciation of enclosures. It was almost a hundred years later when a second trial of strength came between the same opponents, but by that time the enclosers were much more frequently wealthy country gentlemen and merchants rather than lords and nobles. High politics, lay and ecclesiastical, were now involved in the Crown's deliberate use of its prerogative to prevent enclosures and in its no less deliberate use of the enclosure issue to strengthen its position against the gentry in a constitutional struggle, which brought death to Strafford and Laud at the hands of Parliament. But their policy was not only industrially but politically reactionary ; furthermore, enclosures were now much more often than before intended for tillage, and not for pasture. Presently the tide of the Civil War engulfed Tudor and early Stuart public policy forever. Nineteenth century historians were unanimous in condemning Tudor and early Stuart policy as demagogic, if not as outright reactionary. Their sympathies lay, naturally, with Parliament and that body [35] had been on the side of the enclosers. H. de B. Gibbins, though an ardent friend of the common people, wrote: "Such protective enactments were, however, as protective enactments generally be, utterly vain."^2 Innes was even more definite: "The usual remedies of punishing vagabondage and attempting to force industry into unsuited fields and to drive capital into less
(^1) Tawney, R, H„ The Agrarian Problem in the i6th Century, 1912 (^2) Gibbins, H. de B., The Industrial History of England, 1895.
