The relentless revolution: a history of capitalism

by Joyce Appleby

  A great deal of attention has been given to the excellence of the English and American corporation as a vehicle for capitalist expansion, but for small and medium-size enterprises, the costs could be discouragingly high. So much so that at the end of the nineteenth century, German legislators introduced a new business form, the private limited liability company in which partners could write legally enforceable contracts that specified the terms of the partners’ relationship. This eliminated the principal drawback of partnerships, the unexpected incapacity or irresponsible acts of a partner. The private limited liability company found a happier home in France and Germany with their civil code legal systems than in Great Britain and the United States, where the common law, favoring individual rights over state concerns, prevailed. So uncongenial was this type of partnership to common law countries that it was not available to entrepreneurs until 1907 in Great Britain or in the United States until the second half of the twentieth century.47

  German industrialists and their bankers coalesced into a new class, not the gentry elite or the urban, professional middle class but one composed of industrial giants and their lucky associates who had been made millionaires. They were willing to raise the money for railroad projects; they supplied the cargoes to be shipped out as well as the new customers for the freight coming in. They mined coal and fabricated iron ore just as the European machine industry heated up. This global economy promoted specialization and an international division of labor. If the Junkers, who still dominated politics, sneered at these new men, they did so privately because most Germans saw these big industrialists as public-spirited men contributing to the great cause of strengthening the German Empire.48 Where enterprise became a kind of national pastime in the United States, in Germany it was confined to a class still inclined to admire aristocratic tastes.

  The Protracted Depression of 1873

  The year 1873 proved to be a bad one in the history of capitalism. A depression began that lasted in some areas for another twenty-six years! One of the problems with the free enterprise system comes from its dispersed decision making. With individuals and private companies acting on what they calculate as their best interest, it’s hard to know what’s going on generally. No one, as it were, is in charge. Prices and rates deliver information, but the causes behind the decisions that produced those particular prices and rates have to be interpreted. When things are going well, there’s little incentive to explore the meaning of market behavior. Only when things go sour do people clamor for explanations. In 1873 the challenge was greater.

  Efficiencies in production outpaced effective demand. That is, there were more goods than people ready to buy them.49 In what you might call the adolescence of capitalism, trouble spots could gather like black clouds before a summer storm. People called them slumps, the word itself conveying an image that things would soon right themselves. Not so this time. A stock market crash in Vienna and the failure of a major bank in New York marked the beginning of two decades of economic instability. Added to the manufacturers’ inventory problems were bounteous harvests from America, Argentina, and Russia. Low grain prices wiped out thousands of those farmers throughout Europe who were still following traditional methods. Even French and English agriculture tanked.

  The crisis of 1873 proved the integration of world markets when downturns in the United States and Europe plagued economies in South Africa, Australia, and the West Indies. The cumulative impact of long-term developments kicked in to prostrate most Western economies. America’s output increased in the last decades of the nineteenth century, but prices stagnated. Most industrialists had worked hard to keep wages low, inadvertently impoverishing potential buyers of their goods. Conservative attitudes toward the importance of thrift contributed to the problem. Still dominated by an aristocratic ethic, upper-class Europeans looked down upon the spending of ordinary people, especially if the display of their purchases threatened to blur the lines between people of refined taste and their social inferiors. Today we would just say that a trade glut caused the excess of goods over purchasers, but we would be wrong. There was also a cultural lag.

  When the price of silver began to fluctuate wildly in the 1870s, the awkwardness of using both silver and gold as currency became apparent. Great Britain had maintained a single source of value, gold, to settle accounts, and Germany, the Scandinavian countries, France, Belgium, the Netherlands, and the United States followed suit in the 1870s. Now each country’s currency—mark, franc, pound, dollar—had a fixed exchange rate with gold. If a German investor sent two hundred marks to the United States, he or she could be sure exactly how many dollars it would be worth. The gold standard proved to be an invisible taskmaster, nanny, jailer, and seer. It influenced everything from imports and exports to the price of wages. If a country ran a trade deficit, gold left the country, causing a drop in the domestic purchasing power, which in turn hurt sales. Manufacturers had to lower costs to gain back customers. They generally did this by pushing down wages.50

  The gold standard underwrote a new intensification of global trade, greatly aided by telegraphy, international business news, and improved oceanic transportation. People became more confident that their money would be fairly exchanged in other countries; they started investing abroad, especially in the United States, now the largest economy and also the land of the best opportunities for high returns on capital. Argentina and Egypt also benefited from the endless search for the best investment. The speculation that had buoyed Germans before the depression of 1873 began came to a halt. Still, the forward momentum of pent-up entrepreneurial energies proved stronger than the depression’s brakes. By 1880 the German economy was again in ascendance. But the 1880s and 1890s were also decades of hardship.

  Midwestern American farmers almost threw a spanner into the new regime when they began railing against the new specie tyrant. Suffering from low prices in the 1890s, they blamed the fixed exchange of the gold standard for their woes. They advertised a list of the people’s enemies, starting with the British financial elite, followed by international bankers in general. They found a champion in the Democratic Party’s standard-bearer William Jennings Bryan, who brought delegates to the party’s convention in 1896 to their feet with his dramatic injunction to the money masters: “You shall not crucify mankind upon a cross of gold.” Things were touch and go until the Republicans triumphed over these renegade populists in the fall presidential election.

  Though we rarely think of it this way, the United States too was undergoing a process of unification in the 1870s.51 The American Civil War—no eight-month romp like the Franco-Prussian War—had taken a terrible toll in lives, property, and peaceful pursuits during the four years between 1861 and 1865. By 1870 the last of the southern states had been readmitted into the union, and the North was ready to call it quits on reconstructing the states that had joined the Confederacy. Turning toward the West, in 1871 Congress passed the Indian Appropriation Act, which made Native Americans national wards and nullified all previous Indian treaties. The Civil War had interrupted the efforts to integrate California into the nation; four years after Appomattox, the Central Pacific tracks joined those of the Union Pacific from the east. A gold spike attached the two at Promontory Point, Utah. The transcontinental railroad connected the two coasts of the United States, pulling in all the sparsely settled places in between. The victorious North was ready to impose its national vision upon both the South and the West.

  With the Civil War behind it, the United States could turn toward developing the vast tracks of unoccupied land acquired in 1803 in the Louisiana Purchase and through the treaty that ended the Mexican-American War in 1848. Meanwhile its urban population had been exploding. Total population grew twelvefold between 1800 and 1890 while those living in cities increased an astonishing eighty-seven times. Gustavus Franklin Swift helped forge economic ties across the continent with his invention of refrigerated railroad cars. Now the cattle ranging over the grazing lands west of the Mississippi River cou
ld be driven to Omaha, Kansas City, and Chicago to be slaughtered and their dressed meat shipped to the densely populated, urbanized East. In a society where almost everyone could afford to eat meat, refrigeration furnished the missing link between supply and demand.

  Prosperity in the second half of the century, if not steady, still brought positive improvements in wages, public health, and food costs. The United States has long been viewed as the paradigmatic capitalist country. Its persistent economic advance has been laid to the favorable ratio of people to land, the absence of a feudal past, the rich endowment of just the right mineral resources needed in industry, and the hardworking, disciplined young men and women issuing from America’s family-owned farms.

  Washington Irving coined the phrase “the almighty dollar” in the 1820s. A century later President Calvin Coolidge famously announced: “The chief business of the American people is business.” The insight buried in that rather banal observation should not be dismissed. There were very few competing values or career options in the nineteenth century. The father of Henry and William James, who was independently wealthy, bemoaned the fact that people in his country always asked him what he did for a living, an inquisitiveness that sent him sailing back to Europe.

  In capitalism, the cumulative private decisions of participants exercised coercive force throughout the economy. Denied the protection of monopoly control, the most efficient operators forced the less efficient to imitate them or retreat from the active management of their resources. Capitalist activity was not dependent upon any particular person, region, or family. If one passed up a moneymaking opportunity, another would see the potential gain in it. This is an optimal assessment that has to be balanced against the fact that capitalist wealth also created rich opportunities for graft such as the bribing of politicians by the builders of the American transcontinental railroads.

  At the beginning of the century the United States had fewer than four million people, almost all of whom lived on the Atlantic shelf on the North American continent. They had shared a common history for a very brief period. Germany, like the United States, was composed of disparate parts in 1776, but those disparate parts shared a history going back to the time of Charlemagne in the ninth century. Americans loved novelty; Germans feared it. The American practiced religious toleration; Germans had fought bitter wars over differences within the Christian faith. Germans accepted authoritarian politics; Americans celebrated the weakness of their political institutions. Still, Germany almost equaled the American economic record without its “exceptional” advantages.

  Nothing undermined the dominance of inherited wealth more than this capitalist principle of the interchangeability of participants. A son who depleted his family’s fortune created opportunities for someone else more attuned to making than to spending money. Unlike an aristocracy, capitalism didn’t depend upon the virtue, prudence, or boldness of anyone’s progeny for growth. Americans accepted and admired these capitalist imperatives. Germans were less convinced of their virtue. Throughout the nineteenth century engineers and manufacturers struggled against the contempt of upper-class Germans toward parvenus, a word with hardly any meaning in the United States.52 But it didn’t really matter because impersonal forces would maintain capitalism’s momentum once enough key players had jump-started the development process. Americans more easily took risks in keeping with the entrepreneurial spirit of capitalism, but Germans had a disciplined tenacity that contributed to their country’s successful economic development.

  Along with the obvious advantages of being a first mover in economic development like Great Britain, there came some distinct disadvantages that rivals might exploit. Britain had a heavy investment in its trailblazing textile industry, but success made its entrepreneurial class timid. English investors looked elsewhere for opportunities. The United States and Germany benefited from this. They could move into new industries and tap the pools of capital, looking for promising new investments. Nation building, important to both countries throughout the nineteenth century, acted as a catalyst for economic development. America had a pervasive entrepreneurial spirit and a vast continent lying ready for cultivation. In Germany a rising class of industrialists was ready to integrate economically the nation that the aristocratic Junkers had brought into being. Both countries were rich in the natural resources vital to railroad building and heavy industry. Their citizens proved to be amazingly adept at copying and modifying English inventions. More important, they soon started innovating in chemistry, electricity, and automobile making. In retrospect, their surpassing Great Britain seems almost overdetermined. The British economy didn’t decline; it simply lost its relative position while maintaining an impressive level of productivity, as the Dutch had earlier.53 The mystery is why France did not step up to the mat.54

  The relentless revolution of capitalism kept up a fast pace during the nineteenth century. The size and scope of enterprise had penetrated every continent. As the twentieth century began, the philosopher Max Weber called capitalism an “iron cage.” If people really wished to live as their forebears had, they could find a way, but fewer and fewer wanted to live that way. Behind the bars of the iron cage, products and services expanded. Life expectancy increased; improvements in public health enhanced the quality of life. Quite naturally people would like to have it both ways: enjoy the fruits of the enormous wealth that capitalism created but without suffering the loss of old ways of life.

  At the end of the nineteenth century scarcity in capitalist countries was just beginning to yield to abundance. With this cushion, the capitalist world was poised to demonstrate just how wasteful, rapacious, and indifferent to the long-run consequences of its habits could be. In the ratcheted-up use of fossil fuel, that essential element in economic development, capitalist aggressiveness would pass beyond the earth’s surface to its life-sustaining atmosphere. We still might have it both ways if we could build in restraints without killing the goose that laid the golden egg of prosperity.

  THE INDUSTRIAL LEVIATHANS AND THEIR OPPONENTS

  THE PREEMINENT INDUSTRIAL powers of the nineteenth century—Great Britain and its two rivals, Germany and the United States—transformed the physical world. They laid iron tracks across thousands and thousands of miles. They built enormous factories, to which they drew millions of men and women, most of them recently off the farm. They collected capital in banks, consumed coal, finished steel, dug minerals from the earth, leveled hills, diverted the water from rivers into canals, and generally displayed the previously undetected strength and ingenuity of human beings. Despite the impersonality of all these changes, particular people brought them about: swashbuckling heroes of enterprise and the workingmen and women whose lives industrialization had turned upside down. A few men so completely grasped the dynamics of capitalism that they established firms that are still among the world’s largest. The initiative lay with these industrialists, yet their workers found ways with courage and determination to organize vibrant oppositions to the new rulers of their universe. The success of these labor movements depended upon the political tactics, ideological assumptions, and historical precedents within the different capitalist countries. The story begins with the entrepreneurs.

  Because capitalism created unparalleled freedom of action in the economy, its history is studded with stories of personal endeavors. Major accomplishments in science and engineering gave direction to nineteenth-century entrepreneurs who scoured these advances for their commercial potential. As the scope of enterprise grew larger and larger, a few individuals carved out large economic domains of their own. Cornelius Vanderbilt, Andrew Carnegie, and John D. Rockefeller in the United States and August Thyssen, Carl Zeiss, and Siemens in Germany were the giants who carried their nations to economic preeminence in the nineteenth century. They founded the companies of Carl Zeiss, Thyssen, Krupp, and Siemens in Germany and the New York Central Railroad, U.S. Steel, and Standard Oil in the United States. These leviathans of industry created powers as sweeping a
s those of monarchs, which ironically meant that these hyper-competitors shrank competition because of the size of the market share they commanded. Too large to be run by a single man or even a family, they formed giant corporations that came to characterize capitalism in the twentieth century.

  These men didn’t just make huge fortunes; they pioneered the industries that were to dominate their age: railroads, steel, oil, electrical-powered tools, scientific apparatuses, pharmaceuticals, and dyes. American entrepreneurs like Vanderbilt, Rockefeller, and the Scottish-born Carnegie were fierce competitors who beat down prices as they simultaneously drove rival companies out of business. German leaders like Zeiss and Siemens more typically relied on institutional support for research to advance and diversify Germany’s economy. Thyssen was called the American, a sobriquet that doubled as criticism of his ferocious individualism more typical of American entrepreneurs than German ones.

  Often these founders of megafirms came from prominent families. The German industrialist Alfred Krupp took over the management of his father’s ironworks firm. Thyssen’s was a family of successful entrepreneurs. In our own time, Bill Gates got a boost from a wealthy father. Yet other industrial giants sprang de novo into the world of trade with little in their backgrounds to suggest a future fabulous success. The perfect example, Cornelius Vanderbilt, began his ascent from a modest waterside farm on Staten Island. Carnegie came from a poor immigrant family, and Rockefeller started at the bottom of the business hierarchy. Siemens got his start through service in the German Army, and Zeiss grew up in a family of toymakers.