Christopher Hollis
Two Nations

Chapter XVI — Machine Running Down

After Beaconsfield's fall in 1880 Gladstone came back to power. Throughout his rule the steady fall in prices continued, as it was to continue almost for the rest of the century. In Beaconsfield's last year, wholesale prices had, it is true, taken an exceptional jump-up from 1879's 98 to 1880's 103. But from 1880 onwards they fell gradually and steadily to 1898's 75. Wages, on the other hand, during that period were slightly but steadily on the rise. According to the Ministry of Labour's figures, in 1880 they stood at 77 to 1914's 100. By 1898 they had risen to 86. From that point of view the period was one of considerable and steady improvement, though even after all this improvement Charles Booth still found that in London "a million and a quarter persons fell habitually below the poverty line." "32 per cent of the whole population of London (in some large districts over 60 per cent) were found to be living in a state of chronic poverty, which precluded not only the elementary conditions of civilization and citizenship but was incompatible with physical health or industrial efficiency."(164)

The story which the unemployment statistics tell is a less simple one. On Gladstone's accession to power the percentage of Trades Unionists unemployed was very low — only 3.5 per cent in 1881. Throughout his rule it rose steadily until in 1886 it reached 10.2 per cent. There were probably more unemployed in 1879, when official statistics were not yet kept, but this is the highest percentage ever touched between 1880, when the statistics were first kept, and our present post-war years. It was the year of the Trafalgar Square riots and of the trial of Hyndman, Burns, and the Socialist leaders. The cause of the unemployment, in so far as the alternation of slump and boom was not merely inevitable under the double-money system, was the very rapid growth of the limited liability company, the establishment of large factories or stores, which produced the same quantity of goods or rendered the same services as had previously been produced by a number of small competitors,(165) and employed less labour in doing so. In fact, the cause of it was, surprising as it still is to this day to many people, that labour-saving devices save labour. That "rationalization," as we should call it, was favoured by the financial interests for the following reason. Lord Grey, the bimetallist, son of the Prime Minister of the Reform Bill, demonstrated at the time quite convincingly that, in the years immediately before 1886, the country's productivity was increasing more rapidly than its gold supply.(166) Therefore, unless people were suddenly to change their monetary habits, a fall in prices was necessary if that increased productivity was to be sold, and, as we have seen, prices were in fact steadily falling throughout all the early years of the 1880's. 103, 100, 99, 96, 89, 85, 81, run the price-indexes of the years from 1880 to 1886. This meant that every debtor had to repay to his creditor a principal considerably larger than that which he had originally borrowed. He could only pay more in debts to the creditor, if he paid less in wages to the employee. Trades Unions were now strong enough to make wage reductions difficult. Therefore the only alternative was to economize in the quantity of labour — to create unemployment. Therefore the banks, seeing that if they did not do so they might never get repaid, foreclosed on the small man, who was in debt to them, and sold up his business to large combine factories or multiple stores.

The readjustment was made, and in 1887 unemployment was down to 7.6 per cent, in 1888 to 4.9 per cent, and in 1889 to 2.1 per cent. In the next year there was the Baring crisis, caused by the excessive investment of the House of Baring in unrealizable South American securities. Owing to "the over-borrowing of the new" countries, there was, according to Sir George Paish,(167) a "partial breakdown of credit," which "lasted for seven years from 1890 to 1897 and was felt by every country. The price of food fell to a level which reduced the farmers of all nations to poverty. Cotton, wool, and other raw materials became so cheap that those who produced them had scarcely enough to live upon." This completed the ruin of British agriculture, but, on the other hand, the urban worker, as has been shown, steadily improved his position. The shortage of gold would have probably brought victory to the bimetallists in the currency controversy had not the situation been altered by the appearance on the market of South African gold in the years from 1893 onwards. Unemployment never again touched the 1886 figures.

If it is true that the smooth working of the party system demands essential agreement between the two parties, then it clearly follows that a statesman of vigorous personality, who imposes a policy on his own party, inevitably imposes it also on the other party as well. This was eminently true of Disraeli and his Imperialism. No one could have been by natural taste more antipathetic to Imperialism than Gladstone. Yet Disraeli's policy left to him a set of problems which caused him to be inevitably involved in the affairs of Egypt, Afghanistan, and the Transvaal, which were far from his interests. His Liberalism was strong enough to compel him to bungle these problems; it was not strong enough to enable him to arrest the eventual advance of British Imperialism. After him the Liberal party passed under the leadership of a professed Imperialist, Lord Rosebery, from which it was only rescued at the price of excluding itself from office.

We come thus to the beginning of the twentieth century. Before considering its developments, it is important to recall to mind the generalizations upon the condition of the poor which the statistics of the previous four hundred years have allowed us to form. Whatever disputes there may have been about the interpretation of the facts, there is no real dispute about the facts themselves. They are that for just short of three hundred years from the reign of Henry VIII, taking into account changes of prices and wages and the incidence of rent, the condition of the English poor was getting steadily worse. From about 1820 to about 1860 it remained substantially stationary. The last forty years of the nineteenth century were, in spite of their ups and downs, on the whole years of steady improvement. Whether wages increased as much as productivity may be debated, and debate would lead on to disputes about the exact meaning of increased productivity. In any event the certain fact remains that wages did increase in their real values.

"To what purpose," it may be asked, "is all this history ? We all know that horrible things were done in England in the early years of the last century. But nobody wants to return to those conditions. Do you seriously suggest that there is anybody who wants to return to them ?" To this purpose. These conditions existed in the past not because our ancestors were ogres of wickedness but because they were driven along in spite of themselves by a remorseless system which they had come to believe to be a necessary system. If you had asked the Englishman of Henry VIII's time, he would have repudiated with horror the notion that the poor would ever be forced to live as they were forced to live in Cromwell's England, the Cromwellian Puritan would never have dreamed of the degradations of George II's England, the nobleman of 1688, little as were his illusions about the gloriousness of his revolution, at least was not so cynical as to believe that the conditions of the early factory system would come as its inevitable results. Under the rule of two men, Gladstone and Disraeli, there was a counter-attack, a regaining of some of the vast ground that had been lost. But these two men did not challenge the system at its roots. They merely took advantage of some fortuitously fortunate circumstances to shield the poor from some of the system's worst consequences. The fortuitous circumstances passed away; the system remained with money's great right to find its own level, and with the turn of the century and the passing of the circumstances the curve of the standard of living resumed its monotonous downward drop. It is true that you will never get wages down again to the level of the Hungry Forties, but it is also true that the working of the system inevitably demands that you shall get them down. And therefore, unless we smash the system, the attempt to make it work will inevitably smash us.

Because of the catastrophe in which they culminated, there is a great deal of nonsense talked about the first fourteen years of this century. Let us get clear the certain facts about them. With the turn of the century the rise in the real value of wages ceased. Instead they began to fall. In 1899 wages stood at 90; by 1913 they had risen to 100. In 1899, on the other hand, prices stood at 8o and by 1913 had risen to 100. To keep pace with the rise in prices wages should have risen to 112.5. It is a truism that to-day the financial system lies in ruins around us, and people of short memories often speak as if the years before 1914 were halcyon years and as if it was the War that smashed the system. It was not so. The War did not break down the system; the War was itself one of the consequences of the fact that the system was already breaking down. If any war smashed the system, it was not the European War but the Boer War.

Let us understand why.

Great Britain emerged from the Napoleonic Wars the naval mistress of the world, the possessor of all the important ports of call on all the great inter-continental trade-routes, the mistress of by far the greatest Empire of the world, the only country in a position to export capital on any considerable scale. Whatever unimportant overseas possessions other powers owned, they owned only, as it were, by the contemptuous permission of Great Britain. For practical purposes we may consider her in the early years of the century as the only Imperial power and the problems of the export of capital as purely British problems. The volume of British extra-European investments in the first years after Waterloo was kept within comparatively moderate bounds by a purely physical reason. Adam Smith shrewdly pointed out — as was undoubtedly the truth in the world that he knew — that, whatever the law might permit, whatever the dividends offered, most people would not be willing to invest their savings in concerns in distant countries because of the difficulty of keeping any control over their agents there and of getting any assurance that they were not being defrauded. "Every individual," he wrote,(168) "endeavours to employ his capital as near home as he can and consequently as much as he can in the support of domestic industry." The telegraph changed all that, making possible a communication between London and Bombay more rapid than previous communication had been between London and Birmingham and thus abolishing the bias in favour of domestic investment. Thanks to the telegraph there was a period of some fifty years of extensive British foreign investments. As yet, however — that is to say, up till the 1870's — no other country had developed its manufactures of capital goods sufficiently to be able seriously to challenge Britain's monopoly in that foreign investment market. The economic problems of the Continental countries were still predominantly internal problems and international conflicts were fought on issues that were genuinely nationalist and political.

After the Franco-Prussian War of 1870 however, a new situation began to emerge. The new German Empire was essentially a class Empire. Its peculiar strength required the preservation of the prestige of the ruling class — a prestige which was dependent — or so it was thought — upon the existence of wide inequalities of income. It was therefore important to keep German wages low. And, that being so, naturally enough, as Germany began to develop industrially, she found herself faced with the problem how she could sell her products, if she was unwilling to give to her people the money with which to buy them. It was clear that under such a circumstance they could only be sold abroad and the money with which to buy them must be lent to the foreign purchaser. For, if they were exchanged for foreign goods, there would, of course, still be the problem that the home market would be so highly stocked that increased wages would be necessary to get rid of its goods. Hence the emergence in the last quarter of the century of Germany as a large exporter of capital, the growth of the German colonial party, the Kaiser's demand for a "place in the sun," and the division of the continent of Africa between the European powers.

Yet it was not only into the German colonies that German capital penetrated. Large quantities went into Turkey, and larger quantities still, that were subscribed with the intention of their going to Turkey, went into the pockets of the promoting financiers both at the borrowing and the lending ends. Baron Hirsch, for instance, a member of that tribe, bought the bonds for the Orient Railway from the Turkish Government at 128.5 francs and sold them on to the public for 170 and 180.(169) Of the external debt which Turkey contracted between 1854 and 1875 "a bare 10 per cent," it is calculated,(170) was ever used for the country's economic development. Large quantities of German capital went also into the Transvaal. And therefore, naturally enough, the growth of an Imperial policy in Great Britain, leading to the Boer War and the annexation of the Transvaal, aroused furious anger in Germany. Germany did not intervene in favour of the Boers because it was impossible for her to do so owing to her not possessing an important fleet, but the lesson that she imagined the war to have taught her was the necessity of building such a fleet. The only alternative would have been to have raised wages at home. Without a fleet, she thought, all colonial possessions, all overseas investments were at the mercy of the British.

Hence the German naval programme, to which the British had to reply — the race in armaments. As a result, the cost of the British navy and army rose from £40 million in 1899 to £75 million in 1913, and labour was diverted from the production of consumable to the production of non-consumable goods. Yet the amount of direct expenditure on British armaments was but a small item. A larger cause of expenditure was the redoubled, feverish eagerness to push British loans into every corner of the world so that every country might be dependent on those loans and grappled by them, as was fondly hoped, to British interests. Whereas from 1900 to 1904 the average annual export of capital of long-term or permanent character had been only £21.3 million, from 1904 to 1909 it jumped to £109.5 million and from 1910 to 1913 to £185 million.(171)

It is true that our income on foreign investments was also on the increase but it was not increasing nearly so rapidly as were our new investments. In the 1890's we were able temporarily to make a substantial profit on foreign investments. We received about £100 million a year in dividends and only sent out about £25 million in long-term investments and a trifle more on short-term loans. By 1913 we were receiving £210 million, but we were sending out £185 million on long-term investments and on short term a sufficient sum to make us substantial losers on the bargain.(172) Before the German menace we no longer dared to make use even of the profits of our usury. They must be stored against the day of war. It is true that, when war came, they were of use to us for the purchase of munitions in America and other services. But would it not have been a better plan not to have had a war?

At loggerheads with Germany, it appeared the obvious plan for Great Britain to seek the friendship of France. But that friendship was not so easily come by. France, defeated and robbed of Alsace-Lorraine, was anxious for revenge on Germany. Bismarck, from the German side, so long as he was in power, had seen that, in order to prevent this war of revenge, it was necessary to prevent France from gaining any important ally. He therefore cultivated friendly German relations with the two other Continental Great Powers, Austria and Russia, forming with them the Dreikaiserbund. Great Britain at that date was still content with her position of "splendid isolation."

Unfortunately for Germany the ambitions of Austria and Russia were in direct antagonism with one another in the Balkans. And, after Bismarck's instruction to the Reichsbank to refuse to accept Russian bonds as collateral security for loans in 1887 and the accession of the Emperor Wilhelm II in 1888, Germany found it necessary to choose between the friendship of Austria and that of Russia. She chose Austria, and Russia was thus thrown into the arms of France. Now all that the Germans had wanted of Russia had been an assurance that she would not make common cause with France. So long as that was assured, they had no great wish to see her militarily efficient. The 1,200 million roubles of German capital that had found their way into Russia had therefore been investments for the genuine industrial development of the country. France's interest in Russia was wholly different. She wanted Russia to be an efficient military ally when the war of revenge came. Now militarily Russia's strength was her enormous man-power and the impossibility for an enemy of conquering so vast a territory. Her weakness was her lack of railways and of the scientific equipment which would make possible the conduct of offensive operations against such a power as Germany. With every year that passed, with every advance in scientific technique, a mere superiority in numbers came to be of less and less value. France's strength, on the other hand, was that, of all the Continental countries, she was at this date industrially the most developed. She alone was in a position to export capital goods on a serious scale. A Danish financier, called Hoskier, saw his opportunity and acted as the underwriter for a series of loans by which the French investors were induced to subscribe their savings in order to equip Russia as a first-class military power.

There is no reason to think that Hoskier was not a man of honour. Yet it was, in the nature of things, nothing to him whether the Franco-Russian alliance proved political wisdom or political folly. Why should it have been? It was nothing to him even whether the Russians paid their debts or whether they did not. His only concern was that they should look like paying their debts for long enough for him to be able to induce the French public to take up the loans at a higher figure than that at which he had subscribed them. In this he was successful. But, when it came to the remission of the dividends, the situation was a difficult one. The loans had not been used to any large extent for genuine development of the country's resources; they had been used rather for such things as the building of strategic railways. According to Count Witte, the Russian minister, 37 per cent of the Russian railways were built for military rather than for economic reasons.(173) As a result the country's foreign indebtedness had increased out of proportion to any increase in its productivity and therefore, had the dividends been genuinely paid, a larger quantity of the country's products would have had to have been exported abroad, and indeed during Alexander III's reign, which lasted from 1881 to 1894, taxation was increased by 29 per cent and the allotments of the peasants were drastically cut down.(174) But it was impossible to lay hands on any great quantity of the country's products precisely because they were in the hands of the peasants, and it is physically impossible to extract from peasants an important proportion of their products. Therefore the French were only able to get paid by the Russians by the time-honoured absurdity of lending them some more money to pay with, while the Russians on their side, according to no less an authority than Raymond Poincaré,(175) spent a proportion of their old loans in bribing the French press to advocate the granting to them of new loans. Thus up to the War Russia used to borrow from abroad some 200 million roubles, or £20 million, every year, mostly from France. However, this was not sufficient to pay the interest which she owed on a debt which by 1914 had mounted up to between 7,000 million and 8,000 million roubles. Therefore the only solution lay in territorial expansion. The Russians knew from experience that attempts at expansion either in the direction of Constantinople or in that of India would lead to complications as a result of which they were unlikely to be financially profitable. They therefore turned their eyes to the Far East, making it their policy to step in to prevent Japan from seizing the Liao-Tung Peninsula, the reward which she proposed to herself for her victory over China in 1895. As the note which the Russians submitted jointly with France and Germany put it, "they would give a new proof of their sincere friendship for the Government of His Majesty the Emperor of Japan by advising him to renounce the definite possession of the Peninsula of Liao-Tung."(176)

In place of the Peninsula the Japanese were to receive from China an indemnity. This indemnity China was in no position to pay, and the Russians, therefore, lent them at 4 per cent 400,000,000 francs, which they had themselves borrowed on the Paris market. The condition of the loan was the establishment of the Russo-Chinese Bank, endowed with a lien on Chinese taxes, Imperial and local, and the profits of Chinese railways and telegraphs. By further treaties the Russians established themselves as virtually the masters of Northern China. The Germans acquiesced on the condition of their being allowed to seize Kiao-Chau; the British seized Wei-hei-wei. Then in its turn, to quote Vladimir, the Russian author, the German seizure of Kiao-Chau "forced" Russia "to claim some equivalent compensation," and therefore she occupied Port Arthur, the ice-free terminus of the Trans-Siberian railway, whose occupation by Japan she had forbidden five years before on the ground that it would be destructive to the integrity of China.(177)

There seemed every sign that the Far East was going the way of Africa and that but a few years would be required for its partitioning up among the European powers. So doubtless it would have been but for the rise of Japan. While French capitalists had been pouring their money into Russia, British capitalists had been pouring their money into Japan. If the expansion of Russia was necessary so that the French investor might get his dividends, the expansion of Japan was equally necessary so that the British investor might get his dividends. Hence the Russo-Japanese War — or at least one of the main causes of it — and the acquisition by Japan of those rights in China which the Russian Government had secured from China. Beggars cannot be choosers, and before the menace of the German army and the German navy the Governments of Great Britain and France had to sink their differences and make friends. France had to agree to see her ally baulked of any opportunity for territorial expansion and to bid her collect her dividends from her ancient territory as best she could. The result was an attempt to extract dividends by driving down the standard of living of the Russian poor — an attempt which led to consequences with which we are all familiar.

Thus came on the mad years. There was nowhere in the world so distant, so barren, so God-forsaken, but that some capitalists had some interest there, which any foreign movement must threaten. Day after day we were woken from our beds to hear that some foreigners had occupied some uncouth hovel, of which we had previously never heard but the possession of which by a foreigner was, we were told, a dreadful menace to all English life. In the old days it had been the Russians in Merv and the French in Fashoda. Now the Russians and the French were our friends, so we did not say so much about them. Instead it was the Austrians in Bosnia, the Germans in Morocco, Walfisch Bay, Zanzibar, Heligoland — the Lord knows where. The Japanese were sometimes our gallant allies and at other times a Yellow Peril, who any day might be found landing on our Eastern shores. It was a mad time, the madness of which was only not understood because people did not understand that the age was really an age of plenty — that there was really ample for all. Gentle reader of tender years, do not believe your admirable parents when they tell you of the staid and halcyon years before the War. They were years of lunacy, years of a breaking age, of a Heartbreak House, years in which only a few people were happy, and they because they were very stupid.

The truth is simple and can be stated in terms of a general proposition. The financial system can only work so long as there is in the world only a single important base for foreign lending. Had the Continental countries which started to export capital been only such countries as Holland, Belgium, or Switzerland, the system might have worked, for the financiers of those countries, seeing the feebleness of the Governments which they controlled, would doubtless have been willing to work within the system which operated from London. Up till the Boer War there was even a possibility that the German financiers would be willing to operate through the London system. The Boer War, as they thought, showed that they could not hope for fair treatment from such a system. From that moment the unity of the money-power was broken and the breakdown of its rule certain. The only question was whether it would be succeeded by chaos or by another system — a question that is not even yet certainly answered.

As a result of the confusion of the financial system, of the necessity for this vast increase in foreign investments, there was in these first fourteen years of the century no longer an increasing sum to be distributed in wages. The difficulty of working the system caused discontent, and discontent in its turn made it yet more difficult to work the system. The world was no longer the world in which Castlereagh had lived and against which Cobbett had thundered. Gladstone and Disraeli had given to the poor a distant vision of better things, and under universal suffrage it was necessary that politicians should pretend that they had some benefits to distribute to those who had voted for them. But what was there to be done ? We did not dare to reduce the standard of living of the poor for fear of domestic revolution. We did not dare to check the flow of foreign investments for fear of foreign war. Luckily the influx of South African gold raised the price-level, and, therefore, it was possible by raising wages, but raising them less than prices, to pretend that you were increasing the standard of living of the poor when you were really decreasing it. But it was a mean and desperate game, nor did the governing class dare to dock the poor of the necessities of life. All that they dared to do was to economize a little by the substitution of payment in kind for payment in cash. Therefore, while reducing real wages, they made up the balance by giving them back the goods of which they had been deprived through the social services which the Government undertook under the inspiration of Mr. Lloyd George.

Yet the trick manifestly did not work. Discontent was on the increase, so much so that, as we can see from Lord Riddell's Diaries, shrewd observers were speculating which war would come first — the international or the social. Indeed, it is perhaps at first sight hard to see why it was that the system did not collapse, why in these years of "increasing misery" there was indeed so little serious effort even to understand what was the system which was bringing this misery to mankind. The answer, I have little doubt, is that suggested by Mr. H.G. Wells in his chapters on the Fabian Society in his Experiment in Autobiography. The answer was that the Socialists had succeeded in establishing themselves in the public mind as the alternatives to capitalism. And, as Mr. Wells shows, and as indeed all subsequent history has shown, the Socialists neither understood nor wished to understand the workings of the monetary machine. Of the credit system they had no criticism to make save the meaningless palaver that in the Socialist State it would be worked in the interest of the community. They had no notion of the Disraelian doctrine of credit as "the exceptional auxiliary." The international financier could always say to the international Socialist, as Charles II is alleged to have said to his brother James, "No one would be such a damned fool as to kill me to make you king." The retired spinster and the aged colonel might tremble in their beds at the thought that the wicked Socialists would seize their savings if they got the chance, but the masters of the system knew very well that there was someone a great deal nearer than Moscow who was prepared to seize those savings and that the colonel and the spinster would lose them any way when the inevitable collapse of foreign lending should come. They were content enough that there should be Socialists about, on whom the loss could be conveniently blamed, as indeed it was in 1931.

There is in Mr. Feis's book(178) a pleasant sentence on Greek finance, which is the epitome of so much of modern history. "This debt burden was plainly beyond Greek capacity, and Greek currency was falling in value, but the banks, in return for large commissions and extensive pledges, found loyal investors to furnish the funds to pay interest on all old debts." Loyal to whom ?


proceed !


164. History of Trade Unionism, Webb, p. 31.

165. Growth of Modern England, Slater, pp. 511-13.

166. See Nicholson's Money and Monetary Problems.

167. The Road to Prosperity.

168. Wealth of Nations, ed. Thorold Rogers, ii, 26.

169. Corps de Droit Ottoman, G. Young, vol. iv.

170. Europe, the World's Banker, Feis, p. 313.

171. Ibid., p. 11.

172. Export of Capital, Hobson.

173. Op. cit., Feis, p. 211.

174. See article on Russia in Encyclopadia Britannica.

175. Au Service de la France, iii, 97.

176. Modern Japan, Inayo Nitobe, p. 130.

177. Ibid.

178. Op. cit., Feis, p. 285.