Christopher Hollis
Two Nations



Chapter XII — The Turn Of The Tide

Elderly people sometimes find it difficult to accept a full denunciation of the iniquity of the financial system, because in their own lifetime they have seen so great an improvement in the standard of living of the poor. It is true that there has been such an improvement, though it is also true that the rise in the standard of living has by no means kept pace with the increase in productivity. But it is necessary to remember how great was the depth from which improvement had to be won, how miserable was the condition of the poor in the 1840's, how wretched was the share which they were allowed to enjoy of the country's vast productivity.

There was no immediate recovery from the calamity of 1847. 1848 was indeed the year of European revolution, of Smith O'Brien in Ireland, and of the Chartists in England. It was with the new decade that the great increase in productivity began. That increase was mainly due to the discoveries of gold in California and Australia. As has been shown, the Bank Charter Act of 1844, had restricted the private banks' power to issue bank-notes. The result, as has been said, was to give a great impulse to the cheque habit. Yet the public cannot develop new habits overnight and therefore, until that habit was developed, it was not safe for the banks to lend widely beyond their cash holdings.

The bank deposits — which are merely the bank-loans in another form — did indeed increase somewhat but not nearly rapidly enough. As a result, it was not possible to finance the new production which science had made possible and the last five years of the 1840's were years of gross under-production and consequent unemployment.

Then with the Californian and Australian discoveries the world's gold supply jumped suddenly forward. The world's output of gold, which had been £5½ million in 1847, had risen by 1857 to over £30 million. The English, along with other banks elsewhere and especially those of France, became masters of larger cash-holdings and could lend more freely to finance production. Their loans and deposits jumped up, and the total bank-deposits of British banks, which in 1846 were £55 million, had by 1856 risen to £120 million. This increased monetary supply was to some extent, it is true, answered by a rise in prices. The price of the 4 lb. loaf rose from 6.8d. in 1852 to 8.3d. in 1853 and to 10.5d. in 1854. According to the Encyclopoedia Britannica index, collated so as to make 1913 100, wholesale prices, which in 1852 were 92, rose in 1853 to 106, and in 1854 to 119. But that was but a small rise. For the most part increased monetary supply was answered by an increase of goods — of consumable goods within the country in addition to the capital goods that were exported from it.

Now, according to the Ricardian gospel, the working-classes, living at their subsistence wage, could have had no share in that increased productivity. All that could have happened would have been that there would have been an increase of foreign loans, an increased production of capital goods, an increase of exports and a still larger favourable balance of trade. There was indeed a great — not to say a gross — increase of exports which jumped from about £50 million per annum in the late 1840's to nearly £120 million in the late 1850's. Wages rose, according to G. H. Wood's figures, taking one industry with another, from 50 in 1852 to 55 in 1853 and 57 in 1854 — that is to say, they rose substantially less than prices. The result of the boom of the 1850's was therefore to reduce unemployment but also to make the standard of the living of the worker in employment slightly lower than it was before.

Then in 1857, after the conclusion of the Crimean War, the boom came to its usual slump. The cessation of the war had caused dislocation among firms engaged upon the supply of war material. On top of that came the break in the American railway market. There had been a rage of railway investment in America. More than half of all the capital of that investment came, it is said, from Great Britain and one-fifth of all the goods exported from the United Kingdom went to the United States.(129) It became evident that there was no prospect of the railways paying any dividends in the near future. The American banks which had lent money to the railways, found that they could not get repaid. They thus had not the cash to meet the demands of their other creditors and all but one of the banks of New York, Boston, Philadelphia, and Baltimore had to close their doors.

English houses, which had accepted the bills of exporters to America, now in their turn found it impossible to collect their debts. But they had developed the habit of borrowing, mostly at call, from the English banks. The banks called in the money — and it was not there. The English banks, therefore, deprived of cash upon which they reckoned, called for cash from the Bank of England without which they could not feel safe. But the gold was not in the Bank of England either. By raising the bank rate to 10 per cent the bank vainly tried to attract it from abroad. But it was too late for such a manoeuvre. The acceptance houses had not got the money with which they professed to discount the bills. The joint-stock banks had not got the money with which they professed to lend to the acceptance houses. The Bank of England had not got the money which it professed to lend to the joint-stock banks. And now down, tumbling down, came the whole fantastic pack of cards. On 11th November, 1857, the Bank Charter Act was once more suspended, and the failure of double money once more confessed.

The whole effect of the catastrophe was of course deflationary, and therefore naturally down came prices. Wholesale prices fell from 121 in 1857 to 109 in 1858. The 4 lb. loaf, which had already fallen from 1856's to 10.8d. to 1857's 9.0d., came down in 1858 to 7.5d. But — and this is the interesting point — it was not found possible to get wages down in proportion. According to G.H. Wood's index wages, which were 56 in 1857, were still 55 in 1858. The poor were able to gain on the slump what they had lost on the boom. 50 is to 55 exactly what 68 is to 75, and therefore the wages of the poor, reckoned in terms of bread, were in 1858 exactly what they had been in 1852. In the intervening years they had been worse. The moral to be drawn was an important one. It was that, for any workman who held a job in which he had any reasonable security against unemployment, it was a positive advantage for trade to be bad. However that was an intolerable paradox, as intelligent employers were quick to see.

With the 1860s employment got better again; wholesale prices rose to the high level of 120 in 1866, the 4 lb. loaf to 88d., but wages were allowed to rise from 55 in 1858 to 66 in 1868 — that is to say, for the first time they rose substantially more than prices. To some extent this rise was due to the new, growing Trades Unions. Most of their great strikes, as, for instance, the strike in the London building trades in 1859-60, and the Sheffield strikes made famous by Charles Reade's Put Yourself in his Place, ended in failure. Indeed, in all but quite exceptional circumstances, such as those of war in which the governing class cannot afford even a temporary check to productivity, the weapon of the strike usually does do more harm to those who use it than to those against whom it is used. The capitalist has his fat on which to live while the workman has nothing. Strike pay empties the coffers of the Trades Union and in more cases than not the men are eventually defeated and forced back to work on the old conditions and with the situation unchanged save that they have now a bankrupt instead of a solvent Trades Union behind them. The working man is also a consumer. He cannot possibly starve anybody else without also starving himself.

The Trades Union can then almost always be beaten so long as the united opinion of the masters wants to beat it. But that is by no means always so. It was not so in the early 1860s. The work of Shaftesbury had begun to have its effect. Palmerston, his father-in-law, was Prime Minister. Disraeli, his disciple, was the leader of the opposition in the House of Commons. The folly of the paradox of the slump of 1857 had had its effect on those of the employers who were capable of learning from experience and had converted them not indeed to what could with any reason be called high wages but yet at least to the wisdom of giving the working man some share in the country's increased productivity. Those wiser employers, who understood the mutual advantage of good relations with the employees, were glad to use the Trades Unions as weapons with which to break their own stupider colleagues.

The new marginal school of economists had begun to criticize Ricardo, and, though their criticisms were in reality no challenge at all to his fundamental philosophy, yet the effect of them was to shake a little men's faith in the full infallibility of the laws of political economy. The Northern blockade of the South in the American Civil War caused some people to wonder whether there was wisdom in a system which made the poor of Lancashire suffer for the quarrel of other men an ocean away, in which they had no concern, and which, making the reduction of purchasing power the punishment of unemployment, punished the poverty of one man in such a way as inevitably to impose poverty on his neighbour as well.

The employers and the politicians could do a little. It was soon proved that it was only a little that they could do. Under the system money only came into existence by invented loans. The employers, with all the goodwill in the world, could only pay on as wages what money the banks lent either to them to produce their goods or to their customers to buy from them. It is merely useless to promise that you will pay £3 a week, if the banks have determined to put only £2 10s. into circulation. And over all there reigned the great law that money was to be allowed to find its own level. If English wages rose high, it ceased to be profitable to lend to English producers at all. The banks would not even put the £2 10s. into circulation. The Argentinian borrower would draw his loan out in gold and spend it by buying the capital goods he needed in Germany.

The very prosperity of British industry was used to destroy it. People had developed the habit of depositing their savings with institutions known as finance companies. These institutions invested the money deposited with them, paying an interest to their depositors for the use of it. For the most part and in spite of the lesson of the previous decade they invested the money in new countries of the world and in enterprises such as railway building, which could not in the nature of things make any true profit for some years. Exports rose still further from £120 million a year to £138 million. The finance companies had however to pay their depositors immediately. It was clear then, once that these enterprises were financed on any considerable scale, that an appearance of dividends from, say, Canada or the Argentine could only be produced if somebody else in England could be induced, as he fondly imagined, to invest some more money in Canada and the Argentine — in reality, to give the finance companies the money with which to pay their depositor's interest. For the Canadians and the Argentinians themselves, so far from having an excess of exports over imports with which to pay dividends, on the contrary still needed an excess of imports over exports in order to live, and the people who travelled on the Canadian railways bought their tickets with money that came originally from the savings or creation of a British investor. Without those savings the Canadian railways could never have been made to appear to be earning a profit.

Now the effect of raising wages was to put money into the pockets of people who spent it on consumable goods and keep it out of the pockets of those who saved it and gave it to the finance companies. The finance companies, unable to collect new subscriptions, could only pay their dividends by selling their foreign investments. But who was there to buy them ?  There was nobody. The price of them collapsed. The companies went bankrupt. The depositors lost their money. Once more the cry was raised — the perfectly true cry — that the whole banking system was unsound. There was a rush for gold to the banks. The banks had not got the gold and demanded it from the Bank of England. The Bank of England had not got it. Once again the system of double-money collapsed, and for the third time the Bank Charter Act was suspended on 12th May, 1866. "Now their brief spring is over," wrote The Times(130) of the inhabitants of the East End of London. "There is no one to blame for this; it is the result of Nature's simplest laws."

There was, however, no important fall either in wholesale prices, in the price of bread, or in wages. Wholesale prices for 1865, 1866, and 1867 were 119, 120, 118. The 41b. loaf was 7.5d., 8.8d., and 10.3d. Wages were 66, 65, 65. The price of bread therefore immediately after the collapse was very high. It was indeed never again to be so high until the middle of the late War, 1917. The reason was that the harvest had failed. In spite of the Repeal of the Corn Laws there had been as yet no large reduction in the acreage in England under the plough, because owing to the Crimean War and the American Civil War there had been artificial obstacles to prevent the development of a large foreign supply of corn. As late as 1874 there were still 3,821,655 acres under wheat in comparison with about 4,000,000 before Repeal.(131) The price of corn was therefore still dependent on the British harvest, and the bad harvest of 1866 had sent that price up from just under 50s. a quarter to almost 64s. 6d. On top of the failure of the harvest came an outburst of rinderpest among cattle. Therefore in spite of deflation there was no fall in prices, because, since there was a reduction both of money and of goods, price, the proportion between them, was preserved. The working man in employment also was able to keep his wage — sometimes, as in the Sheffield murders, only by the aid of very desperate tactics. But there was less distributed in wages in sum total owing to the great increase of unemployment, which rose from 3 per cent to 7 per cent of the Trades Union membership.(132)

In 1868 began the first Prime Ministership of Gladstone, which lasted until 1874. At the time of his accession he found a country exporting indeed vastly more commodities than had been exported twenty years before but a country in which, in spite of that increase in productivity, the improvement in the working man's lot had been but trivial. If wages had been 50 in 1850, they were 65 in 1868 — that is to say, they had multiplied by 13/10. Prices, which were 92 in 1850, were 116 in 1868. Now 92 13/10 = 119.6. On the other hand by the time that Gladstone left office in 1874, wages had risen to 78 and prices only to 130. Now 92 78/50. = 143.5. Therefore during Gladstone's administration there was a substantial rise in real wages.

What was the cause of it ?  The cause was this. When the Corn Laws had been repealed, Cobden, a man of high sincerity but of small foresight, had prophesied that their Repeal would be followed by the abolition of tariffs in all the European countries. An era of peace would be ushered in, and for the future Great Britain would live by exchanging her manufactured goods for the food of Europe. His mind, obsessed with the notion that international trade was in fact an exchange of goods against goods, confused by the appearance that Britain imported more than she exported because a high proportion of her imports were paid for by the vast invisible export of shipping and financial and insurance services, revolved in orbits remote from reality. He neglected the influence of loans.

The countries of Europe would have been mad had they thrown down their barriers. The awful experience of the years after Waterloo and the wisdom of List, the great German economist, were united to show to them what would necessarily be the result of such madness. Indeed, even had they wished to throw down their tariff barriers, it is doubtful if British manufacturing interests would have allowed them to do so. For there was an inherent contradiction in Cobdenite policy, which from the first made it certain that it would be wrecked by its adherents if it was not first wrecked by its opponents. The object of British policy, said the Cobdenites, must be to export as much as possible. And, if Britain was to export as much as possible, then she had to export not only manufactured goods but also machines. But, however cheaply the machine was put on the market, no foreigner could be found to buy it, unless he could use it profitably, nor could he use it profitably unless he had tariff protection against Great Britain. Thus the Nottingham lace-manufacturer wanted France to have free trade in order that he might sell his lace there, but the Leeds machine-manufacturer wanted France to have protection in order that she might build up her own industries by the use of his machines.

No European country except Russia had any large surplus of food to export, nor had Great Britain at that date any large need for their food. It was not possible for them to procure a surplus by the depression of the standard of living of the producers of food, for that food was produced not, as in England, by a wage-paid propertyless labourer but by peasants who were themselves the owners of what they produced and who would not produce unless they were allowed to keep sufficient for themselves and their families. It was to the interest both of Cobden and of Marx, the prophets of industrialism, to argue from the wage-statistics that the Continental peasant was less well-off than the English working man. But the Continental peasant did not live on wages, and the conclusion was false, as Cobbett who judged by bellies and not by purses had demonstrated a generation before. For these reasons there was no possibility of any immediate large increase of food imports into Great Britain. There was indeed a possibility of a considerable increase in the imports of raw materials. But, on the other hand, if tariffs were brought down, there would, to answer it, be an immediate and proportionately much larger increase in British exports to the Continent — dumped goods exported on loan. The effect of the abolition of the tariffs would have been the capture of Europe by the English acceptance houses. For this the Continental powers were unwilling.

Thus the development of English life took a turn which Cobden had not at all foreseen. Great Britain had to make her investments and look for her markets outside Europe altogether. Some invested, as has already been said, in American railways, others in the low-wage countries of native labour — it was the age of Dalhousie and western improvements in India. But, profitable as investments in these non-European countries were, they were not worth making unless there was in power in London a Government that was willing to use force in order to compel the observance of contracts. Thus it came about that the effect of the Repeal of the Corn Laws was not at all to usher in an era of universal peace but to establish for his life as Prime Minister of Great Britain Lord Palmerston, ready to chastise at will Persians and Indians, Chinamen and Greeks. There was a mutiny in India, and there was also a Government ready to suppress the mutiny. "What had been an embarrassment to Castlereagh, a subject to be virtuously shunned for Canning, was appearing to Palmerston as an opportunity and as a right to be employed with discretion and was foreshadowed as a possible national duty."(133)

After the death of Palmerston and the resignation of his successor, Russell, the leadership of the new Liberal Party passed into the hands of Gladstone. Gladstone was in no way the inheritor of any liberal anti-imperialist tradition. The Conservatives rather than the Liberals were then the pacific party. Of the tradition of liberal anti-imperialism Gladstone was the creator rather than the creature. But Gladstone, like Shaftesbury, was a sincere Christian. And, just as Shaftesbury on Christian grounds had insisted on pressing for factory reform, even though he could not clearly show how it was reconcilable with the dogmas of the financial system, so Gladstone on Christian grounds insisted on breaking with the Palmerstonian policy of Civis Romanus sum, even though he too could not clearly show how such a breach was reconcilable with the dogmas of the system.

Gladstone breathed entirely the ambient air around him. This creature of the Victorian compromise had no talent at all for putting himself outside his time and clime and viewing it objectively. So there was no dramatic breach. There was no public recantation of the faith that the children must be sacrificed to the great Moloch of the favourable balance of trade. There was no general understanding that the continuance of foreign investment was impossible unless a vigorously Imperialistic Government was to rule in London. Throughout these six years of his rule the balance was indeed still favourable. Foreign investments continued to mount up at an average rate of £61 million a year.(134) Our exports jumped up from some £180 million to £230 million — an increase, though not so large an increase as it seems when we remember that prices rose from 116 to 130.

But imports at the same time increased from £238 million to £291 million. Our so-called new foreign investments, large as they appeared, were not really doing much more than paying the dividends on our old foreign investments. They did not increase more rapidly because the investors could no longer feel that, whatever they did, the British navy would be lent them for nothing to fetch in their dividends. And, without such a knowledge, the number of safe foreign investments was severely limited. Thus foreign investments, while increasing, were not able to increase as rapidly as productivity. Therefore an increased quantity of goods was thrown on to the home market. These goods could only be sold if wages were allowed to rise. When the market is in a different country to the factory, it pays the manufacturer to give low wages. But, when the market is in the same country as the factory, it pays the manufacturer at least to see to it that all other manufacturers give high wages. Therefore the result of Gladstone's pacific foreign policy was the growth of a public opinion in favour of higher wages. The Trades Unions were able to take advantage of this in order to improve the workers' standard of life.

Nevertheless in typically English fashion the foreign investing continued side by side with the pacific foreign policy and the attempt to combine the two was an attempt foredoomed to failure and clamouring for catastrophe. In 1873 the catastrophe came. A financial panic in America caused the New York Stock Exchange to be closed for ten days. The firm of Bischoffsheim and Goldschmidt — an English firm — underwrote a loan of £32 million for the Khedive of Egypt, and to their surprise were unable to unload it on the public. "The clever sponsors managed to get rid of the remainder in other ways."(135) Nevertheless the effect of the two incidents and of other similar incidents was to destroy at a blow any willingness in the public to invest its savings abroad.

In 1874 Gladstone fell from power and Disraeli succeeded to it. It is a commonplace that the life of late-nineteenth century England was dominated by the great figures of Gladstone and Disraeli, and many pages and many books have been filled with the pointing of the contrast between them. To our purpose it is enough to note this. Both of them were great men. A fool indeed may be pushed into a position of power by others or stumble into it. But a fool cannot impose himself on the minds of a nation as these two men did. The minds of both of them, as we can see from every line almost of Gladstone's diary and equally from all the most pregnant passages of Sybil and Coningsby and Tancred, were filled full with realization of the uniqueness of the greatest of all forces in history — the religion of Christianity. In that they stood together and stood against all those shallow creatures of a day who dismissed, or who dismiss, it carelessly as a man-made thing or have not the curiosity even to inquire what it may be. Grossly untheological as it is, yet the English nation is never permanently and deeply influenced by anyone whose primary interest is not in theology. But in their attitudes to that unique force these two men differed radically.

Gladstone quite lacked the talent for scepticism. He accepted the faith which he had learnt in childhood. He obeyed its teaching fearlessly, conscientiously, and without regard to consequences, when he saw that teaching overtly challenged. But his very incapacity for scepticism prevented him from recognizing as such a challenge that was not overt. Of usury's unending challenge to Christianity he had but little comprehension. Disraeli's was a deeper mind. If Gladstone was the better Christian, Disraeli had the clearer understanding what Christianity was. He saw clearly that, if this message was true at all, it was explosive. The consequences of its truth must be to destroy the whole cosy Victorian compromise, Liberals and Conservatives, the financial system, the division of the Two Nations. He saw with astounding clearness that the whole revolution of 1688 was an anti-Christian revolution. But then was Christianity true ?  It was not in his blood to believe it so. If it was true, then all must go. But if it was not quite certain whether it was true or not — well, fighting the rich was very exhausting work. Would it not perhaps be more fun just to be Conservative Prime Minister ?  Speculation on the Christian faith remained a fascinating exercise to him; the practice of it was never an overmastering compulsion.

Thirty years before he had confided to old Lord Melbourne his "wild ambition" that one day he might be Prime Minister of England. Lord Melbourne was at the time himself Prime Minister. To him the Premiership was "a damned bore," which could not decently be avoided if one happened to belong to one of the governing families and not to be a congenital idiot — qualities but rarely coincidental. To the old cynic the prizes of life came too inevitably to be at all highly valued. To the young Jew from nowhere, to the flaming fighter of Sybil the battle of life presented itself with a different aspect, and in 1874 his hour had at last come. But a certain price had been paid for the victory. It was not the Disraeli of the 1840s who was Prime Minister; if it had been the Disraeli of the 1840s, he would not have been Prime Minister.



proceed !


129. Pound Sterling, Feaveryear, p. 271.

130. Quoted by Matthew Arnold, Culture and Anarchy, ed. Dover Wilson, p. 190.

131. See Sir John Russell's The Farm and the Nation.

132. Short History of the British Working Class Movement, G.D.H. Cole, Appendix.

133. The Migration of British Capital to 1875, L.H. Jenks, p. 125.

134. Europe, the World's Banker, Feis, p. 11.

135. Short History of Investment, Ripley, p. 105.