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William the Silent (1533–84) was a curious product of Habsburg Europe: a sixteenth-century German prince, he inherited the French princedom of Orange, spoke French and liberated the Dutch, who have called him ever since the ‘Father of our Nation’.
William, whose full title was William I, Prince of Orange, Count of Nassau-Dillenburg, was introduced as a boy to the court of the Holy Roman Emperor, Charles V. Charles grew to trust William, charging him with important negotiations and military engagements in the Netherlands. But William, an important member of the Dutch political elite (he held the title of ‘Stadtholder’), was far less enamoured with Charles’s son, Philip II, who became King of Spain in 1556. William disliked Philip’s religious intolerance towards Protestants and his encroachments on the Dutch nobility’s tradition of autonomy.
William’s upbringing as a Lutheran and then a Catholic (he would finally settle on Calvinism in 1573) taught him the importance of freedom of religion. ‘I cannot approve of monarchs who want to rule over the conscience of the people,’ he once said, ‘and take away their freedom of choice and religion.’ William’s nickname ‘Silent’ is thought to have developed in this context. According to one story, while out hunting, the French king, Henry III, revealed a secret agreement to eradicate Protestant heretics, believing William, who was present but kept silent, to be a party to it.
William’s combination of political reality and idealism prompted him to rebel against the Habsburgs in 1567. He led the Dutch to several military successes culminating in the Union of Utrecht in 1579 and a formal declaration of independence by the renegade Dutch provinces in 1581. But he declined the crown, hoping instead that the French Duke of Anjou would become the monarch. His support of the Frenchman, who left the Netherlands after a short and unhappy stay, made William unpopular with many of his fellow countrymen although he remained the Stadtholder of the two important provinces of Holland and Zeeland. Meanwhile Philip II offered 25,000 crowns for William’s assassination. A French Catholic, Balthasar Gérard, took up the offer and, in a private audience with the prince, shot him in the chest. ‘My God have pity on my soul,’ he is supposed to have cried as he died. ‘My God have pity on this poor people.’
Many Dutch crews were lost without trace.
Van Oldenbarneveldt was the raadpensionaris – the Secretary of State – of the province of Holland. By all accounts a rather imperious character with a stiff and difficult manner, he had a fine legal mind, great vision and indomitable determination. In his view, war brought ‘little glory and great expense’. The provinces needed to be sure they could make money. The way to do that was to form their own company so that they could spread the cost of investment in ships and capital equipment. By pooling resources and sharing profits they would be able to build up the reserves necessary to fund the dangerous business of exploiting the East. They had not only the Spanish and Portuguese to contend with, but the English too. An English East India Company had been founded in 1600. Oldenbarneveldt set about trying to persuade the leaders of the different Dutch provinces to adopt his idea.
The desperate situation in which they found themselves speeded up their willingness to bury their differences and Oldenbarneveldt was able to devise a common plan for their commercial salvation. He then drew up the new company’s statutes and charter, and the Dutch East India Company came into being in Amsterdam in January 1602. It had six chambers, one each in the main ports of the United Provinces. Each of these chambers elected delegates who sat as the company’s directors. There were seventeen of them, the ‘Heeren XVII’ or Seventeen Gentlemen, who had the responsibility of guiding the fortunes of this semi-political, totally commercial and all-powerful corporation. Although the directors reported to the States General of the Dutch Republic, they were given enormous powers. In order to support their monopoly on trade in the Far East they were given the authority to raise armies, start wars, capture territory, build garrisons, negotiate with local chiefs and build their own ships. In the first instance their charter was to run for twenty-one years.
Nothing explains the success of the Dutch East India Company better than the exploits of Jan Pieterszoon Coen. An adventurer in the mould of Francis Drake or Robert Clive, Coen was harsh, clever and brave. Carefully controlled by the diligent burghers of the company for which he worked, he laid the foundations of the Dutch Empire in the East Indies and established its lucrative trading monopoly in Indonesia. He trained as a bookkeeper and sailed on his first voyage to Asia in 1607 where he experienced the rough and dangerous conditions in which the Dutch East India Company’s employees worked. The merchants had nothing but contempt for the sailors who risked their lives to make them rich. They called them ‘cats’ and ‘dogs’ and forced them to sign contracts in which they agreed to reimburse their employers for their food and equipment, amounts that could take as much as a year’s service to pay back. On his first journey, Coen’s commander was killed on the Banda Islands in the Indian Ocean. Coen came to realise that nothing less than conquest would give the Dutch ownership of the valuable territory they wanted and in 1614 sent the Seventeen Gentlemen of the Dutch East India Company a paper setting out his views about how this could be achieved. What was required, he told them, was ‘a grand resolution in our fatherland’ to send ships and men to subdue the area and bring it into the ownership of the company. It is extraordinary to think that a group of merchants sitting in the coastal towns of the Netherlands could simply set about conquering a large part of the world. But that is what they did, and Jan Pieterszoon Coen was their agent in this task.
He captured Jakarta from the British, which the Seventeen renamed ‘Batavia’. He subdued the Islands of Banda with great savagery – although he proposed the use of ‘justice backed up by force’, force tended to be the main method of achieving his aims – and established a thriving capitalist economy. This was to be the pattern of European colonial expansion for many years to come. Native peoples were coerced into conforming to the economic rules of their new masters. Coen called for higher quality settlers to emigrate to the East Indies rather than the ‘scum’ who normally travelled in Dutch ships. He encouraged Chinese workers to come and help the work of empire-building, and used slaves to swell their numbers. For all this he was rewarded with 23,000 guilders (a considerable amount, given that the daily wage for a skilled worker was about 1 guilder); each of his achievements was carefully itemised, valued and rewarded by the meticulous merchants for whom he worked. He died of dysentery in Batavia during his second tour of duty in 1629.
Native peoples were coerced into conforming to the economic rules of their new masters.
The Dutch East India Company provided much of the wealth of the Netherlands throughout the seventeenth century. At its height it had a presence in Persia, Bengal, Taiwan, Malaysia and Sri Lanka. It also expanded beyond Asia into South Africa when, in 1652, it sent a detachment of men to establish a base on the Cape. Its intention was to protect the passage of ships on their way east, rather than to colonise the area, but full settlement inevitably followed from this first expedition. By this time there were 1,700 Dutch ships involved in international trade, more than England and France combined. The accession of William of Orange to the English throne in 1688 began the long process of decline as, bit by bit, power and influence transferred from the Netherlands to Britain, and the Dutch became the junior partners in the alliance. The British East India Company became a serious competitor to the Dutch Company, as did the French Compagnie des Indes founded in 1664. The French were late entrants into the scramble for the riches of the Orient, but highly successful once they recognised the opportunity. Between 1780–84, the Anglo-Dutch alliance was over and the two countries went to war. The result was a disaster for the Netherlands which finally lost its monopoly over East Indies trade.
There is one other sad footnote to the history of the Dutch East India Company. The man who had been its chief architect, Johan van Oldenbarneveldt, became a victim of his country’s religious struggles. The majority of the Dutch people were Calvinist, believing in John Calvin’s stern form of Protestantism. This taught that God elected those he wanted to serve with him in heaven: man’s fate was predestined. By following God’s law he might hope to be elected, but there was no guarantee of this. We know from our own time how this sense of being entirely in God’s hands adds strength to a political cause: in seventeenth-century Europe it helped fuel the Dutch revolt against their Spanish masters. Oldenbarneveldt and his followers came to believe in a more moderate approach than that which Calvin decreed, arguing for a greater degree of religious liberty. This brought them into conflict with powerful elements in Dutch society, and when Oldenbarneveldt decided to raise a militia to help protect the peace in his home province of Holland, his enemies pounced. He was already unpopular for supporting a truce with Spain and the Dutch Stadtholder, William the Silent’s son, Prince Maurits, ordered his arrest. In a trial that was a mockery of justice he was found guilty, sentenced to death and executed at the age of seventy-one in 1619. ‘Is this the wages,’ he asked, ‘of the thirty-three years’ service I have given to the country?’
Today we can still look at him in the portrait by Michiel van Miereveld who, like his great contemporaries Rembrandt and Frans Hals, painted the men and women who led the Netherlands in its golden age. He looks towards us, serious, intelligent and sombrely dressed, a white ruff the only splash of brightness in a picture of unbending resolution. He showed his countrymen how the wealth of the world could be theirs for the taking. It was a lesson they learned with enthusiasm.
CHAPTER 6 (#)
The Invention of the Flying Shuttle 1733 (#)
In 1733 John Kay patented an invention called the Flying Shuttle. It transformed the cloth-weaving industry, the first of a train of events that came to be known as the Industrial Revolution.
In the early 1840s a young German called Friedrich Engels was despatched to Manchester to work in a family business. His father hoped that the experience would relieve him of his radical tendencies, but it had the opposite effect. In 1845, Engels published a book, The Condition of the Working Class in England, which has survived ever since as one of the great classic texts of socialist theory. In it he argued that the Industrial Revolution had transformed the lives of the English working classes. The workers’ pre-industrial condition, he wrote, was ‘not worthy of human beings’: labourers could barely read or write and existed in a state of docile obedience to the so-called superior classes. ‘Intellectually,’ he said, ‘they were dead; lived only for their petty, private interest; for their looms and gardens; and knew nothing of the mighty movement, which beyond their horizon, was sweeping through mankind.’ They were woken from their submissive torpor, Engels argued, by the invention by James Hargreaves of the Spinning Jenny in 1764; this was the year that Engels took as the moment the Industrial Revolution began. Though it is true that large-scale industrialisation in Britain did not begin until the last quarter of the eighteenth century, the process really started much earlier – in 1733, when John Kay invented the Flying Shuttle.
Britain led the way in the Industrial Revolution and its history is essentially the history of Britain from the last years of the eighteenth century to the middle of the nineteenth. It was a revolution because it transformed everything. It changed people’s lives – where they lived, how they worked and how they were organised. It changed the status of the nation, catapulting Britain into a great power that dominated world trade. Most importantly, it changed attitudes, ultimately creating a working class that demanded proper involvement in the affairs of the state in return for its role as an essential engine of prosperity. Britain today is a country that, aside from London, is built around its great industrial cities – Manchester, Birmingham, Leeds, Newcastle, Belfast and Glasgow. At the beginning of the eighteenth century this structure was very different. The main provincial centres were York, Exeter, Bristol (because of its importance as a port), Norwich and Newcastle. When the Industrial Revolution got under way, most of these places, all ancient cathedral cities and big market towns with a long history of being at the centre of their communities, began to lose their influence as factories and the jobs that went with them grew up elsewhere. Many new towns grew tenfold during the course of the eighteenth century. Manchester had a population of 10,000 in 1701 which grew to 84,000 by 1801; Liverpool increased from 6,000 to 78,000 in the same period; and Birmingham from 7,000 to 74,000. By the middle of the nineteenth century the population growth had accelerated even more: Liverpool’s stood at 443,000, Manchester at 338,000 and Birmingham at 296,000. York had only 40,000 people, Exeter and Norwich less than that. Between 1750 and 1850 the axis of regional life in Britain swung and settled in a completely new position.
This great cycle of change was unique in Europe. In other countries, particularly France, the German states and Belgium, industrialisation followed the British lead and there was expansion and rapid growth. But it did not have the same effect of disrupting the influence of those countries’ traditional urban centres. In Britain this experience was intensified by the realisation that steam power could be used for transport as well as manufacturing and the age of the railways began. From the 1840s new railway companies sprouted up all over the place. Like the emergence of the internet in our own time, the railway network became the epitome of achievement, a vital ingredient in a modern, aspiring society. The big difference was that railways, like the pulsating new towns they connected, required civil engineering on an enormous scale. Bridges, embankments, sidings and warehouses littered the countryside, while in the towns splendid new stations were built alongside other gothic monuments of civic self-confidence – town halls, libraries, museums and churches. The Industrial Revolution was like one long, relentless, burgeoning economic boom. But like all booms it eventually went into decline, leaving behind the people it had lured into its success and the buildings that accompanied its astonishing growth. It took barely two generations for a vision of the future to be seen, built, celebrated and lost. Today Britain’s ‘industrial heritage’ is a central part of what the nation is. The memorials of the Industrial Revolution are a formidable reminder of lost wealth, almost as precious as the thing itself.
The Industrial Revolution was like one long, relentless, burgeoning economic boom.
One of the finest of those memorials is Manchester Town Hall. Designed by Alfred Waterhouse (whose other masterpiece is the Natural History Museum, London), the Town Hall is decorated with murals by Ford Madox Brown, a painter who enjoyed depicting moral and historical scenes. The Manchester murals tell the story of the city’s history through some of its most-celebrated events. One of these is the occasion in 1753, legend has it, when machine-breakers raided John Kay’s home to try to destroy his invention, forcing him to run for his life.
John Kay came from near Bury in Lancashire where he worked as a reed maker. Reeds are combs used to hold apart the crosswise threads (or ‘weft’) in a weaving loom. Until John Kay came up with his invention of the Flying Shuttle weavers used their hands to pass a shuttle containing the crosswise threads across the downward thread (or ‘warp’) on their looms. Building up pieces of cloth in this way was time-consuming. Weavers always had to change the position of their hands, and two or more of them were needed to make pieces of cloth bigger than the span of an individual’s arms. There was also a lack of consistency. The quality of each piece of cloth depended entirely on the skill of its weaver. Kay simplified the whole process by automating the movement of the shuttle. He put it on wheels and mounted it on the edge of the loom’s comb, allowing it to run quickly in a completely straight line between two spring-loaded boxes at either end. In this way a single weaver could make pieces of cloth to any size required by giving the shuttle a quick flick with a piece of string attached to a stick that sent the mechanism flying back and forth across the loom. Suddenly one weaver could make much more cloth than he could before and build it up on his own to any size required. The productivity of the weaving industry was dramatically increased.
At the time Kay was viewed as just another clever man with expensive ideas.
Kay went on to invent several other pieces of equipment that were used to improve the efficiency of the textile industry, but he does not appear to have made any money out of any of them. He seems to have been a rather difficult and quarrelsome individual. He tried to charge hefty royalties for his Flying Shuttle, but manufacturers either refused to pay or simply copied his invention. Kay went to France to try his luck there, but ran up against the same problems as he had at home. His genius for invention does not seem to have transferred to the world of business and his death in France in about 1780 went unrecorded. Only time has given him his place in history. While he lived he was viewed as just another clever man with expensive ideas.
His ideas, and many of those that followed, such as Richard Arkwright’s Spinning Jenny, helped create the Industrial Revolution – described by the historian E. J. Hobsbawm as ‘the most important event in world history’. Britain was perfectly placed to lead it. During the second half of the eighteenth century, at the same time as industrialisation began to increase, large parts of its agricultural land fell into the hands of only a few landlords. The Enclosure Acts created a system of large estates farmed by tenants or smallholders who no longer owned the land themselves. The peasant class, like the one in France that played an important part in the French Revolution of 1789, did not exist in Britain. Farming had succumbed to the power of the market. The country was a nation of traders – or ‘shopkeepers’ in Napoleon’s famously dismissive phrase – where labour moved comparatively freely to support each new commercial opportunity. The textile industry provided many of these. The Industrial Revolution was built on the colossal expansion of the manufacture of cotton, as Britain became its biggest exporter throughout the world. The mill became a symbol of both prosperity and despair, the scene of many famous Victorian novels about life in Britain in the nineteenth century. Coketown in Charles Dickens’s Hard Times is typical. It had, he tells us, ‘a river that ran purple with ill-smelling dye’, and in the mills where ‘the hands’ worked long, cramped and unhealthy hours, ‘the piston of the steam-engine worked monotonously up and down, like the head of an elephant in a state of melancholy madness’. Dickens, writing ten years after Engels published his book about the working classes, echoed his concern for the state of Britain’s labouring poor, although he probably would not have agreed with Engels’s observation that the result of its exploitation had to be ‘a revolution in comparison with which the French Revolution, and the year 1794 (the year of the Great Terror), will prove to have been child’s play’.
That revolution eventually happened, but in Russia, not Britain. The country managed to absorb the surge in population and prosperity that the long cycle of industrialisation created. By the second half of the nineteenth century, many British writers and thinkers had come to realise that it had resulted in an unequal distribution of wealth that needed reform. The economic historian and passionate social reformer, Arnold Toynbee, whose book The Industrial Revolution was highly influential when it came out in 1884, set the tone when, talking about the working classes in a lecture in London, said, addressing them directly:
We – the middle classes, I mean not merely the very rich – we have neglected you; instead of justice we have offered you charity, and instead of sympathy we have offered you hard and unreal advice … You have – I say it clearly and advisedly – you have to forgive us, for we have wronged you; we have sinned against you grievously but if you will forgive us, nay whether you will or not, we will serve you, we will devote our lives to your service, and we cannot do more.
Such highly emotional and deeply felt calls for a change helped alleviate the social distress that accompanied the nation’s riches. The Victorian Age was often harsh and hypocritical, but it was fuelled by a determination for improvement as well.
By the end of the nineteenth century, Britain’s commercial supremacy around the world was beginning to face strong competition as other European countries began to catch up. After the end of the First World War in 1918, although Britain still called itself an empire, its problems were predominately national rather than global. But the Industrial Revolution continued, and is still continuing. New forms of energy – oil, gas and nuclear – have replaced steam. In our own time, the microchip has transformed our whole world of technology. If this sprawling, never-ending march of mechanisation can be said to have a beginning, it can be found as well as anywhere in John Kay’s simple invention which, as the bulky memorial to him in his home town of Bury observes, ‘quadrupled human power in weaving and placed England in the front rank as the best market in the world for textile manufactures’. Unveiled in 1908, the thirty-four-feet high monument is testament to the pride Bury feels for its famous son who died in France, though no one knows quite when, and is buried, though no one knows where.
CHAPTER 7 (#)
The Foundation of Oil City, Pennsylvania 1859 (#)
In 1859 the world’s first commercially successful oil well was drilled in Titusville, Pennsylvania. The world discovered a commodity that would become one of the most valuable it had ever known.
In the late 1850s a former railway conductor called Edwin Drake turned up in the small community of Titusville, Pennsylvania in the United States. He had been sent there by a speculator who wanted him to see if oil could be extracted from the rocks in the area. Local farmers had complained for years that oil seepage polluted their wells. If its source could be located and extracted it could turn out to be a lucrative business opportunity. The speculator, James Townsend, had seen a report from a Yale University chemistry professor which said that oil, once refined, could be used for lighting, lubrication and other purposes. Townsend seems to have liked running his investments on a shoestring. The story goes that he only hired Drake because as a former employee he had a free pass on the railway.
Drake used his steam engine to drill for six days a week.
For the best part of a year Drake experimented with ways of trying to get to the oil, including using the money from his backer and his associates to buy a steam engine to bore down into the rock. They decided against giving him any more advances once he had spent the equivalent of $2,000 without any results – so Drake pressed on with funding the exploration from his own savings. Throughout the summer of 1859 he used his steam engine to drill for six days a week. When water flooded his borehole he drove down an iron pipe to protect his drill. On 27th August, at a depth of nearly seventy feet, he found what he had been looking for. Oil bubbled up to meet him: the world had discovered a new supply of fuel.
Oil bubbled up to meet him [Drake]: the world had discovered a new supply of fuel.
The Pennsylvania oil well was the first successful commercial enterprise, but drilling for oil had already begun on the other side of the world. Russian engineers had started sinking wells ten years earlier on the Aspheron Peninsula near Baku in Azerbaijan. In 1846 they reported to the Tsar that they had been successful, but development thereafter was rather slow. Imperial permission for drilling more wells was not given until more than twenty years later when Azerbaijan began to grow into a huge oil-producing area. By the end of the nineteenth century, Russia was competing with the United States as the world’s biggest producer of oil: in 1900 it was producing 11.5 million tons a year compared to America’s 9.1 million, but after the Bolshevik Revolution, oil production was diverted to domestic needs. The market, and the money that went with it, was left to America.
As is often the way with these things, no money found its way into Edwin Drake’s pocket. He eventually retired with a pension of $1,500 a year. Others, however, became fabulously wealthy as they learned how to own and distribute the vast reserves of oil that lay beneath the American continent. In the same year that Drake found oil in Pennsylvania, two young ambitious businessmen, John D. Rockefeller and an Englishman called Maurice Clark, opened a wholesale trading business a hundred miles away from Titusville in Cleveland, Ohio. Four years later, with the American Civil War still in full force, oil had turned the region into a fuming and disreputable place, thick with oil leaks, bars and brothels, known locally as ‘Sodden Gomorrah’. Rockefeller, a stern Baptist and anti-slavery campaigner, stayed out of the war for fear of losing his business. ‘Those vast stores of oil were the gifts of the great Creator,’ he said later, without adding that he was determined to turn the Lord’s benevolence to his own advantage. He set up an oil-refining business with Clark and several other associates, and on 14th February 1865, exactly two months before Abraham Lincoln was assassinated following the defeat of the Confederate Army, bought out his partners for $72,500. ‘It was,’ he recalled, ‘the day that determined my career.’ Within four years, helped by an economy that had started to grow again in a country at peace at last, Rockefeller was running the world’s biggest oil-refining business, producing ten percent of its output. At the age of thirty he changed his company’s name to Standard Oil.
Oil became a vital ingredient in national survival.
Rockefeller was not the only entrepreneur to recognise the value of oil. In 1864, a young Scotsman called Andrew Carnegie who had made money by building sleeping cars for first-class travel on the railways, invested $40,000 in a Pennsylvania oil well. The huge profits he made provided him with the foundation of a business empire on a similar scale to Rockefeller’s. Carnegie eventually made most of his money from iron and steel, though it was oil that set him on the road to enormous wealth. Rockefeller always stuck with oil, first forming a cartel with the railroad companies to control distribution and, when public protest forced that to disband, simply buying out his rivals. By the end of the nineteenth century, Standard Oil was the biggest private business corporation the world had ever seen. In 1911, the United States Supreme Court ruled that its existence contravened anti-trust legislation and ordered that it be broken up. Standard Oil metamorphosed into household names such as Mobil, Exxon, Amoco and Chevron. John D. Rockefeller, no longer an active corporate executive but still a major shareholder with holdings in all of these new companies, became even richer.
Oil was not the ‘driving’ energy of the world when Rockefeller’s huge corporation was broken up. Its main use was for lighting and lubrication –Vaseline was one of Standard Oil’s most successful products – and although valuable it was not seen as an essential part of a nation’s strategic needs. Coal was the fuel that drove the steam engines that kept manufacturing and transport on the move. But as the First World War developed and the motor car and the diesel engine came into use, oil became not just a commodity that made money, but a vital ingredient in national survival. It was Britain, a country without any oil of its own, that first recognised the importance of securing and maintaining oil supplies.
In May 1908, a British engineer called George Reynolds was looking for oil in Iran. Rather like Edwin Drake in Pennsylvania nearly fifty years before, he had been sent there by an English millionaire, William Knox D’Arcy, who had bought the country’s oil concession from the Shah. Armed with his pipe, pet dog and pith helmet, and sustaining his work force with supplies of cider and library books, Reynolds was one of those indefatigable Englishmen who never chooses to give up. Money was running out, conditions were becoming intolerable and he was about to be called home, when he found what he was looking for. His employers founded the Anglo-Persian Oil Company which, by 1912, had built the world’s largest oil refinery at Abadan on the Persian Gulf.
In 1914 the British government, prompted by Winston Churchill, who as First Lord of the Admiralty was determined to modernise the Royal Navy by moving it into oil-fuelled technology, secretly took a majority share in the company. Oil now lubricated the national interest. In 1951 the republican government of Iran nationalised the country’s oilfields, but fearing that it might align with the Communist East rather than the West, in 1953 the United States sanctioned the CIA to support a military coup that returned the Shah to the throne. Oil had also been discovered in Saudi Arabia, in 1938, and then in other parts of the Middle East. After the Second World War republican regimes that were hostile to Western interests came to power in countries such as Egypt and Libya. To defend their interests, America and Britain threw their support behind the old established kingdoms of Saudi Arabia and Jordan. The West’s crucial dependence on oil has kept it closely involved in the politics of the Middle East ever since.
The enormous wealth created by the discovery of oil became an important issue for the two men who had first gained most profit from it. John D. Rockefeller and Andrew Carnegie were probably the two richest men the world has ever known. As businessmen they were ruthless, sometimes prepared to bribe or threaten to get their way: the expanding world of American commerce was a cruder place than it is today. At the same time a greater awareness of the responsibilities of wealth was beginning to appear. In 1894, the US journalist and progressive reformer Henry Demarest Lloyd, who attacked Standard Oil for its business practices, published a book called Wealth Against Commonwealth in which he observed: ‘Liberty produces wealth, and wealth destroys liberty.’ In an attempt to head off such stinging and potentially damaging criticism both Rockefeller and Carnegie poured hundreds of millions of dollars into public works. In Rockefeller’s case the money went to Chicago University, the Rockefeller Institute for Medical Research (today Rockefeller University), and the General Education Board that announced it would teach children ‘to do in a perfect way the things their fathers and mothers are doing in an imperfect way’. In 1913 he and his son established the Rockefeller Foundation that remains one of the richest charitable organisations in the world. Carnegie too used his money to encourage education. His grand scheme was to fund the opening of libraries, and between 1883 and 1929 more than 2,000 were founded all over the world. In many small towns in America and in Britain, the Carnegie Library is still one of their most imposing buildings, always specially designed and built in a wide variety of architectural styles. In 1889, Carnegie wrote his Gospel of Wealth first published in America and then, at the suggestion of Gladstone, in Britain. He said that it was the duty of a man of wealth to set an example of ‘modest, unostentatious living, shunning display or extravagance’, and, once he had provided ‘moderately’ for his dependents, to set up trusts through which his money could be distributed to achieve in his judgement, ‘the most beneficial result for the community’. Carnegie believed that the huge differences between rich and poor could be alleviated if the administration of wealth was judiciously and philanthropi-cally managed by those who possessed it. Rich men should start giving away money while they lived, he said. ‘By taxing estates heavily at death, the state marks its condemnation of the selfish millionaire’s unworthy life.’
The names of Rockefeller and Carnegie live on through the philanthropic trusts their money endowed, permanent reminders of the wealth generated by oil and steel. In Azerbaijan, where the oilfields once competed with and might have overtaken their American counterparts, they remember another philanthropist. Zeynalabdin Taghiyev, the son of a shoemaker, went drilling for oil on rented land near Baku. In a repetition of what happened in other parts of the world, his partners gave up and sold him their shares. In 1873 he struck oil and became one of the richest men in Imperial Russia. He could neither read nor write, but used his money to build schools and theatres and to help pay for the pipeline that still brings water to the city of Baku from the Caucasus Mountains a hundred miles away. When the Red Army reached the city in 1920, Taghiyev’s house was seized. He was allowed to live the last four years of his life in his summer cottage not far away, but his second wife was not so fortunate. She died in poverty on the streets of Baku in 1938. The Bolsheviks turned his splendid residence into the Azerbaijan National History Museum, which is what it still is today. The fortunes of the world’s first oil tycoons were very different. In capitalist America their wealth was their greatest protector: in Bolshevik Russia it destroyed them.
CHAPTER 8 (#)
The Treaty of Versailles 1919 (#)
The Treaty of Versailles formally brought the First World War of 1914–18 to an end. Its terms had the effect of making a defeated Germany feel impoverished and resentful. In trying to build a world of peace it laid down foundations that would lead to another war.
In 1918, on the eleventh hour of the eleventh day of the eleventh month, an armistice was signed that ended the fighting of the First World War. Barely a month later, on 10th December, 75,000 soldiers of the German army marched back into Berlin. They were greeted at the Brandenburg Gate by Friedrich Ebert, a socialist politician who was the new Chancellor of the nation. ‘Welcome to the German Republic,’ he shouted. ‘Welcome home. You should march home with your heads held high. Never have men achieved greater things.’ Warming to his theme, he continued: ‘Your sacrifices have been unparalleled. No enemy has conquered you.’ With those words the mood of the new Germany was born. It was an undefeated country that had either been sold out by conspirators in its own ranks or was suffering from difficulties imposed by the punitive terms of an unfair treaty. The Kaiser’s Fatherland was not just a memory. It still existed. It could rise again.
The Kaiser’s Fatherland still existed … it could rise again.
Ebert was facing a situation that was in danger of running out of control. He and the other moderate socialists that he led, had supported the war as a necessary patriotic measure. He had not wanted to see the end of the monarchy and felt that the proclamation of Germany as a republic following the Kaiser’s abdication had been premature and needed to be ratified by a nationally elected assembly. But he was overtaken by events. By the time he addressed the first meeting of Germany’s new national assembly the following year, 1919, the German Republic was a fact and the country’s mood of resentment more entrenched. To maintain power he needed to respond to it. Germany’s enemies, he told the assembly in his opening speech, were seeking ‘to indemnify themselves at the cost of the German people … These plans of revenge and oppression call for the sharpest protest. The German people cannot be made the wage slaves of other nations for twenty, forty or sixty years.’ His remarks were met with loud applause. Ebert wanted above all to create a true democracy in his defeated homeland – but the task he faced proved hopeless. In the end the German people looked to the right-wing parties to redress their sense of grievance. Within fifteen years, the Nazis had assumed power, democracy died and Europe was on the road to war once more.
The victorious Allies who met in Paris at the end of the First World War wanted above all else to destroy German militarism. They also wanted to establish world peace, rearranging the fragments of disintegrated empires in a way that would ensure the future happiness and prosperity of their subjects. The task they faced was immense and probably impossible. The Habsburg Empire of Austria-Hungary had arisen out of the old Holy Roman Empire established by Charlemagne in 800 AD, and, in various forms, governed the whole of central and Eastern Europe for centuries. The Hohenzollern Empire of the German Kaiser, the Allies’ main enemy, had used its Prussian base to unite the German states during the second half of the nineteenth century, creating a formidable military machine intent on expansion and conquest. These two great engines of state had collapsed and the people they had once governed were looking for new, democratic freedoms. The Allies recognised these ambitions, but they also wanted to punish the aggressor. Graciousness in victory is the greatest of all political virtues but it requires a degree of altruism unusual in human beings. At Versailles the Allies’ understandable desire for punishment outweighed their careful consideration of the future and undermined the hopes of those who thought they had been liberated from imperial control.
Bismarck and the Creation of the German Empire
On 18th January 1871, German princes gathered in the Hall of Mirrors in the Palace of Versailles. They had come to witness the crowning of the Prussian King, Wilhelm I, as Emperor of a newly-formed nation – Germany. Before 1871, Germany was a patchwork of independent states over which Austria exerted the predominant influence. But German nationalism was growing. In 1848 revolutionaries demanded unification, offering the Prussian King the imperial throne. He refused, worried that it would lead to military intervention from Austria. But as Prussia’s military, diplomatic and economic power grew, the whole idea of unifying Germany without Austria started to become a real possibility.
The principal architect of this extraordinary achievement was a skilful and loyal diplomat called Otto von Bismarck (1815–98). During the 1850s he became convinced that unification could be achieved in Prussia’s interests. When in 1862 he was appointed Prime Minister and Foreign Minister of Prussia he began to employ astute diplomacy blended with timely military intervention to secure his ends. With the assistance of two Prussian soldiers, Albrecht von Roon and Helmuth von Moltke, the army was reorganised into an impressive fighting force. In 1866 it defeated the Austrian army at Königgrätz, east of Prague. This enabled Bismarck to annex the north German states including Hanover, Frankfurt and Saxony. France, frightened of being encircled by the growing power of Prussia, declared war in 1870. Prussia pounced. Having defeated France in the Franco-Prussian War, Bismarck wasted no time in negotiating with the leaders of the southern German states to complete unification.
Bismarck’s political system ensured strong monarchical authority. As Imperial Chancellor, he pursued a policy of pragmatic, peace-oriented diplomacy that made the new German Empire a powerful country. But his approach met with criticism, not least from Wilhelm II, who became German Emperor in 1888. Wilhelm’s politics were more expansionist and militarist than his Chancellor’s and he forced Bismarck to resign in 1890. The man who more than any other built the modern German state lived in restless retirement until his death in 1898.
‘It was,’ said Troeltsch, ‘reminiscent of the way Rome treated Carthage.’
The terms of the Treaty of Versailles were imposed upon Germany. The Germans took no part in any of the discussions prior to their being told what the Allies had agreed. Apart from being forced to reduce their army to 100,000 volunteers and to severely restrict their manufacture of weapons, the Treaty demanded that Germany accept sole responsibility for starting the war. It also insisted on severe economic penalties, forcing the country to make reparations – in the first instance settled at about $31.5 billion – stripped it of all its overseas colonies and reassigned a large part of its European territory to France, Belgium, Denmark, Czechoslovakia and Poland. France was also given all rights for fifteen years over the German coalfields in the Saar on the eastern border between the two countries. Some of these conditions were to be expected: Germany was bound, for instance, to have to hand back Alsace to France and to restore the land it had taken from Belgium. But the economic demands, combined with the requirement to accept all the guilt for causing the war in the first place, aroused the anger of the defeated nation. ‘It was,’ said the German writer, Ernst Troeltsch, ‘reminiscent of the way Rome treated Carthage.’ He was not the only person to feel that the Treaty was unfair. In Britain the economist John Maynard Keynes urged re-negotiation of the terms. In his book, The Economic Consequences of the Peace, published in 1919, he said that: ‘Great privation and great risks to society have become unavoidable.’ A new approach was needed to ‘promote the re-establishment of prosperity and order, instead of leading us deeper into misfortune.’ And he quoted the writer Thomas Hardy, whose long verse-drama, The Dynasts, is set in the Napoleonic war that had engulfed Europe a hundred years previously:
… Nought remainsBut vindictiveness here amid the strong,And there amid the weak an impotent rage.
The economic demands aroused the anger of a defeated nation.
In fact France was treated rather more carefully in 1815 than Germany a hundred years later, not least because the French negotiator, Talleyrand, participated in the Congress of Vienna where the peace terms were agreed. Talleyrand was the great survivor of the European politics of his day, a famous prince who had played an important part in the early days of the French Revolution, served as Napoleon’s Foreign Secretary, fallen out with him and then, after his defeat, planned the restoration of the Bourbon monarchy. The German representative at Versailles, Ulrich Graf von Brockdorff Rantzau had no such pedigree. Summoned to hear the terms of the peace the Allies had agreed, he and his delegation were kept waiting for several days before they were read out to them. They were shocked at what they heard. Brockdorff Rantzau wrote a letter to the President of the Peace Conference, the French Prime Minister, Georges Clemenceau, describing the attitude of the Allies as ‘victorious violence’. He declared that the ‘exactions of this treaty are more than the German people can bear’.
The whole approach to peace was also very different in Vienna in 1815 from that which existed in Paris in 1919. The monarchs and princes who set about rearranging Europe at the end of the Napoleonic Wars were trying to put things back to where they were before Napoleon’s attempt to create a European continent in his own image. Talleyrand helped them by supporting the return of the Bourbons even though he knew, in his own phrase, that ‘they had learned nothing and forgotten nothing’. After the First World War, the politicians making peace wanted to look forward, and to build a world in which war would not happen again. The American President, Woodrow Wilson, was intent on forming a ‘League of Nations’, a multinational body designed to discuss and debate grievances rather than allow them to slide inevitably into conflict. He got what he wanted, even though America did not join the organisation because Congress refused to ratify its membership. The victors also created new countries out of the fragments of dismembered empires. Czechoslovakia and Yugoslavia came into existence as new independent states; Poland was given independent statehood for the first time in more than a hundred and twenty years; and two small and severely weakened countries, Austria and Hungary, came into being as separate entities. All this seemed fair and proper, responding to Woodrow Wilson’s ‘fourteen points’ for peace in which he explained how he believed Europe should be divided up to give autonomy and self-determination to its different ethnic groups.
The League of Nations
The carnage of the First World War generated widespread international agreement ‘to develop cooperation among nations and to guarantee them peace and to avoid future bloodshed’. The League of Nations was established by the Treaty of Versailles to pursue this aim. It was the brainchild of the American President, Woodrow Wilson, who saw it as a mechanism for the promotion of diplomacy, the prevention of war through collective security, and a way of safeguarding human rights for minority groups. But he failed to persuade the American Senate of its value, and the United States never joined it. During its first ten years of operation, the League successfully resolved several disagreements and international diplomatic activity began to be conducted through it. It oversaw an international judiciary as well as a number of agencies dealing with pressing international issues such as refugees, health, disarmament, opium and slavery.
Structurally, though, the League was flawed; it was bureaucratic and unwieldy, and lacked teeth. In 1931 it declared the Japanese invasion of Manchuria in northern China to be wrong but was unable to enforce a withdrawal when Japan withdrew its membership from the organisation. Nor did it halt Hitler’s militarism, which directly contravened its commitment to disarmament and failed to prevent the German invasion of Austria, Czechoslovakia and Poland. The outbreak of the Second World War was final proof of the League’s ultimate powerlessness. It was eventually disbanded in 1946 following the foundation of the United Nations, which the Americans joined, and which inherited the League’s ideals as well as many of its agencies.
Germany seethed with resentment. Stripped of much of its territory and saddled with the enormous cost of reparation it seemed to have been treated very harshly. In fact, however, its position was rather stronger than it first appeared, not least because the new countries that had been created were so weak. Furthermore it never repaid all the money that the Treaty of Versailles demanded. France and Britain put great pressure on Germany to pay its debts – they needed the money because they themselves owed $10 billion to the United States. When eventually Germany defaulted on the reparations, the country was leant $200 million in a loan floated on the American market by the banker, J. P. Morgan in 1924. It was quickly over-subscribed. The Great Depression of the 1930s brought further hardship to all the countries struggling with the aftermath of the war, and in 1932 the Allies agreed to cancel reparations altogether in return for one final payment. The German economy started to recover, the new, struggling countries surrounding it became victims of Hitler’s demands for national Lebensraum – living space – and Europe was once again in conflict.
The destruction of empires, whether well-intentioned or not, is never easy. The Treaty of Versailles made two fundamental mistakes. First of all, it imposed economic terms on Germany that proved impossible to fulfil. Secondly, it created a patchwork of weak countries that ultimately fell prey to their aggressive neighbour, Germany. Czechoslovakia, Poland and Austria had all come under German control by the time the Second World War broke out in 1939. Implicit in both of these mistakes was a lack of economic common sense. In trying to repair a broken world, the Allies had thought hard about rewards and punishment, but had given little consideration to how any of it was to be paid for. They overlooked the fact that in the years leading up to the war, Germany, as the biggest industrial nation on the continent of Europe, was an important source of wealth for the countries that surrounded it. Their aims were almost entirely political – and in the case of Woodrow Wilson, almost religious. Of the Allies’ approach to the post-war reconstruction, Keynes wrote that ‘that the fundamental economic problems of a Europe starving and disintegrating before their eyes, was the one question in which it was impossible to arouse (their) interest’. The First World War destroyed the wealth of nineteenth-century imperial Europe. The Treaty of Versailles failed to provide a framework in which it could be replaced.
CHAPTER 9 (#)
The Model T Ford 1908 (#)
The Model T Ford turned America into a nation of motorists and put luxury within the reach of many. The sophisticated pleasures of life were no longer just for the wealthy.
An owner’s manual is not an obvious place in which to look for lofty observations on life, but the one that the Ford Motor Company published at the end of the First World war was not shy about attempting such things. ‘It is a significant fact,’ it warbled, ‘that nearly all Ford cars are driven by laymen – by owners, who in the great majority of cases have little or no practical experience with things mechanical.’ They were, however, not to feel threatened by such ignorance. They had ‘a singular freedom from mechanical annoyances’ owing to the superior craftsmanship of their vehicle, but were still urged to indulge in a little gentle study of its working parts because ‘it is a truism that the more one knows about a thing the more one enjoys it’. Homilies from a manufacturer to its customers reveal a lot. The Ford Motor Company seemed to know that it was in the process of changing the world.
‘I will build a car for the great multitude’ said Ford.
Henry Ford was a visionary in two ways. Firstly, and most importantly, he realised that it was possible to provide ordinary people with what seemed at that time to be an unobtainable luxury – a motor car. ‘I will,’ he declared, ‘build a car for the great multitude.’ Secondly, his manufacturing methods transformed industry by introducing an assembly line capable of mass production. His sturdy little car was a significant invention in its own right. What made it revolutionary was that Ford built a factory capable of distributing it to millions of people. In 1908, the year the first Model T Ford rolled off the production lines, the car cost $825. By 1927, when the last one was built, seventeen million of them had been sold and its price was just $275. The factory at Highland Park in Detroit had reduced the time taken to build each car from around thirteen hours to just over an hour and a half, and was capable of producing one every minute. One of every two cars in the world was a Model T. These are astonishing statistics. In 1927 the population of the whole of the United States was a little over 119 million: by selling seventeen million cars, Henry Ford had unquestionably realised his ambition of bringing the power of motoring to the multitude. The writer E. B. White looked back with wistful humour at the age of the Model T in an article for New Yorker magazine in 1936:
‘Mechanically uncanny, it was like nothing that had ever come to the world before.’
The car is fading from the American scene – which is an understatement because to a few million people who grew up with it, the old Ford practically was the American scene. It was the miracle God had wrought. And it was patently the sort of thing that could only happen once. Mechanically uncanny, it was like nothing that had ever come to the world before.
For other writers the age of the Model T was not something to be celebrated, even teasingly. In Aldous Huxley’s novel Brave New World, published in 1932, the characters live in an era known as ‘AF’ – after Ford – inhabiting a uniform world of drug use and recreational sex where everything is reduced to relentless monotony like the work on an assembly line. For some, Henry Ford’s American dream was the beginning of a universal nightmare.
Henry Ford’s own life provides a similar contrast between the bleak and the sunny. Born in Dearborn, Michigan, in 1863, he had little schooling and eventually set up a small business repairing farm machinery. He was a natural engineer and found a job with the Edison Illuminating Company where he was rapidly promoted. He and Thomas Edison became good friends, but Ford left to set up his own company building cars. To begin with his companies failed, even though he and a partner designed and built a racing car that set the world land speed record in 1902. A year later he was able to start a new company. His backers wanted to build luxury cars, but Ford was convinced that the opportunity lay at the other end of the market. He won the boardroom battle and after producing a series of small cars came up with the Model T. The car, and the way in which it was produced, became the epitome of industrial progress. Ford introduced a minimum wage for his workers of $5 a day, double the going rate at the time. His competitors thought he was mad, but he stuck to his principles and followed up his wages policy with, first, a sociology department, and then an education department to try and help his workers spend their new-found wealth wisely. Autocratic but benevolent, it was one of industry’s first recognitions that the welfare of employees was an important component in commercial success. ‘There can be no true prosperity,’ Ford announced, ‘until the worker upon an ordinary commodity can buy what he makes.’
Ford introduced a minimum wage of $5 a day, double the going rate at the time.
Like all autocrats, Henry Ford found change difficult and challenge impossible. He refused to respond to the need to manage his business in a more structured way, preferring to rely on the instinct and touch that had made it successful in the first place. Good managers left, and when after 1927 the production of his new car, the Model A, ran into difficulties, he hired thugs to terrorise union members and break up their meetings. At the same time he gave vent to his anti-semitic feelings by running a newspaper, The Dearborn Independent, that contained articles hostile to Jews. Hitler would be one of Henry Ford’s strongest admirers. The brilliant mechanic who had put America – and the world – on a road from which it would never look back died in 1947 as a rather disagreeable example of a paranoid tycoon.
The life of Henry Ford provides a good description of the way in which the world changed during the twentieth century. It was a change that hinged on one thing above all others: the role of the individual as a consumer. Anyone was entitled to anything as long as he could pay for it. Wealth, even luxury, was within the grasp of all. The role of business, supported by new management techniques, was to ensure that consumers received the marketing messages that would encourage them to participate in this new opportunity.
At the same time as Henry Ford was beginning to manufacture his popular car, another mechanical engineer called Frederick Winslow Taylor published a short book called Principles of Scientific Management. Taylor was one of the world’s first management consultants. A talented tennis player – he was a winning partner in the doubles competition for the first American National Championships in 1881 – he wanted to bring to industry the same precision and efficiency he applied to his sport. Good management, he argued, was the result of carefully designed rules and principles. Workers in America, he said, suffered from the delusion that improved efficiency reduced the amount of labour required; their methods of working encouraged ‘soldiering’ or taking as long as possible to complete each job; and they were organised on a ‘rule-of-thumb’ basis rather than by clear and precise systems. Taylor wanted to achieve the maximum amount of prosperity for both employer and employee and explained how properly defined tasks and responsibilities could achieve this. His ideas followed those of another pioneer in the field of management consultancy, Frank Gilbreth, who not only came up with ideas for improving efficiency but tried to organise his twelve children by the same principles (his efforts were turned into the film Cheaper by the Dozen based on a humorous book written by his son). But the effects of the ideas of men like Taylor and Gilbreth were serious and permanent. They brought to industry – particularly American industry – a belief in the idea of management as a science, even an art, deserving of recognition on the same level as other human activities hitherto regarded as more important or refined. Henry Ford remained very much his own man – an industrial dictator to the end of his working life–but in creating the car plants based on mass production he used many of the principles of ‘scientific management’.
With mass production went mass consumption. Henry Ford made sure that people bought his cars by setting up a system of dealer franchises across America: there were 7,000 of them by 1912. At the same time he campaigned for better roads and more petrol stations to ensure that his customers had all they needed to enjoy his products more. As his competitors – Chrysler, Packard, Dodge and others – entered the market, the motor car became the symbol of middle-class prosperity. The consumer boom stretched beyond tarmac and gas pumps to shops, cinema and home appliances. In the same year that Ford launched the Model T, Richard Sears was making $41 million a year in sales by offering the nation what it wanted to buy through his mailorder business. Later, as the suburbs sprawled out of the towns, he built department stores all over the country. In Britain, Marks and Spencer began a similar operation, but much more limited in size and with a smaller range of goods for sale. In 1927 the first talking movie, The Jazz Singer, appeared. Six years later, American families could watch a film from their cars as the first drive-in movie theatres were built. Meanwhile radios, refrigerators and sewing machines were selling in huge numbers – often bought on long-term credit plans. The liquid embodiment of American consumerism, Coca-Cola, was a worldwide brand by the end of the 1920s.
There were attempts to turn the relentless tide of acquisitive prosperity. The American temperance movement successfully lobbied for the introduction of Prohibition in 1919, which for fourteen years, until it was repealed in 1933, banned the manufacture, sale or transport of alcohol. This attempt at applied morality – its supporters called it ‘The Noble Experiment’ – was ultimately unsuccessful. Illegal bars, ‘speakeasys’, mushroomed in their thousands and, as with the modern drug trade, gangsters cashed in on the high profits to be made from illegal but much-wanted goods. In 1929 an economic theorist and writer called Ralph Borsodi inveighed against the way of life that America had adopted in a book called This Ugly Civilisation. ‘America,’ he wailed, ‘is a respecter of things only, and time – why time is only something to be killed, or butchered into things which can be bought and sold.’ Borsodi came from a family of Hungarian immigrants – one of millions that had been attracted to America because of its freedom, particularly its wide, open spaces. For men like him, the nation’s founding fathers had been people who combined qualities of intellectual strength, physical vigour and a belief in the land – virtues that were being strangled in a jungle of greed.
The consumer the spender – was to be the agent of renewal.
America, happy and free in its new motor car, was not to be sidetracked. Even when its economy went into severe decline from 1929 as a result of the worldwide depression, the role of the new consumer was actually strengthened rather than weakened. President Roosevelt’s ‘New Deal’, the economic legislation designed to resurrect the nation’s fortunes, provided for consumers to participate in the new authorities he created in order to encourage industrial and financial reform. In the election campaign that first brought him to power he announced that: ‘I believe we are at the threshold of a fundamental change in our popular economic thought, that in the future we are going to think less about the producer and more about the consumer.’ The consumer – the spender – was to be the agent of renewal. The irony was that Henry Ford, who did more than anyone to create the acquisitive citizen whose willingness to spend lay at the heart of economic reconstruction, disliked the idea of government involvement in business and never supported Roosevelt’s reforms.
The Model T Ford was by some accounts an exasperating car to own. Its popular name was the ‘Tin Lizzie’ and as E. B. White recalled in the New Yorker magazine: ‘The lore and legend that governed the Ford were boundless. Owners had their own theories about everything; they discussed mutual problems in that wise, infinitely resourceful way old women discuss rheumatism.’ Cantankerous, strange, cheap and constantly available, it became a fixture of the American way of life – a symbol of wealth that everyone could aspire to own.
CHAPTER 10 (#)
The Credit Crunch 2007 (#)
In 2007 the world’s financial markets began to face serious problems as owners of houses in America began to default on their loans. It became clear that banks all over the world had extended credit unwisely and were about to collapse. This, combined with a general market recession, created the most serious global economic crisis for nearly a century. It became known as the Credit Crunch.
It is with some caution that I decided to include the Credit Crunch in this book. When in the future people look back at the first years of the twenty-first century, the world’s economic problems that began in 2007 may not appear particularly significant. But for those who have lived and are living through them they represent a moment of reckoning. The Credit Crunch brought to a shuddering halt a cycle of prosperity and growth that had lasted, with one brief interlude, for more than thirty years. It seemed unstoppable and its sudden end sent waves of fear and panic round the world. As fear subsided it was replaced by sober reflection. Many people, particularly in the West, began to reassess their attitudes towards individual wealth. The chief executive of the Royal Bank of Scotland that lost more than £24 billion in 2008 – the biggest in Britain’s corporate history – was urged to relinquish part of his pension as the public mood turned against the big salaries and bonuses earned by senior managers.
Waves of fear and panic went round the world.
In 2009, in a BBC Reith Lecture, an American political philosopher argued that it was time that the self-interest of the individual was replaced by what he called ‘a new politics for the common good’. It is still too early to say whether these agonies of conscience have made a long-term difference to the way men and women behave. In part they are simply the result of the anxiety people always feel during a period of economic decline when wages and profits are falling, concerns that tend to evaporate once growth and prosperity return. That is why the Credit Crunch is important. Whether it was just another blip in the economic cycle, or something far more, only time will tell.
‘Banking,’ said Walter Bagehot, ‘is a watchful but not laborious trade.’
In 1873 the banker, journalist and author Walter Bagehot published a book about banking in Britain called Lombard Street. Britain was then the richest country in the world, its money markets a global hub for credit and exchange. Bagehot was a shrewd and lucid observer of British public life. ‘Banking,’ he said, ‘is a watchful but not a laborious trade.’ Watchfulness, however, had not been much in evidence in a recent banking scandal. In 1866 a private bank called Overend, Gurney & Company, collapsed. It had over-extended its lending and had invested heavily in the surging growth of the railways. When the market weakened it found itself unable to meet its liabilities. ‘In a short time,’ remarked Bagehot, its managers had ‘substituted ruin for prosperity and changed opulence into insolvency.’ Other banks followed Overend, Gurney & Co. into liquidation and a variety of companies also failed as the credit crisis took its toll on the country’s economy. The directors of Overend, Gurney & Co. asked the Bank of England for help, but were refused. They were eventually tried for fraud at the Old Bailey, though the court found them guilty of ‘a grave error’ rather than a crime. Twenty-four years later, in 1890, the bank of Baring Brothers nearly collapsed because of unwise investments it made in Argentina. This time the Bank of England did step in, averting a crisis that might have brought the whole of the British banking system to its knees. Bagehot had proposed this course of action: he believed the Bank of England should be used as a central bank whose reserves could help other banks and businesses weather the difficulties of the economic cycle.
These dramatic events shook the confidence of Britain’s powerful commercial interests, but they made few long-term differences to the way people behaved. Britain in 1900 was very similar to Britain in 1870 and its Prime Minister, the Marquess of Salisbury, a typical product of the grand Victorian world – aloof, patrician and suspicious of democratic change.
But by the time the next crisis arose, thirty years into the twentieth century, the situation had changed dramatically. As with the Credit Crunch, the Great Depression of the 1930s began in America when the country’s stock market crashed in 1929. Although America had enjoyed a period of booming economic growth, there was still a wide division between rich and poor. The rich pumped their surplus cash into speculative stocks. When these failed not only they, but the poor they had left behind, suffered terribly. This suffering, which spread into Europe and the rest of the world, meant that the Great Depression had enormous political consequences. In America, President Roosevelt’s New Deal introduced fierce banking regulations, farm subsidies and a more inclusive approach to many aspects of the economy. In Britain, Prime Minister Ramsay MacDonald formed a National Government to try to cope with the crisis. In Germany and Italy, Hitler and Mussolini used economic misfortune to strengthen their call for vigorous anti-democratic measures. The Great Depression did not create fascism, but it certainly helped.
Further afield the freedom movements that had begun to develop in the colonial territories of the great powers pointed to economic misery as the inevitable legacy of selfish, wealth-obsessed masters. The man who would become the first Prime Minister of an independent India, Jawaharlal Nehru, said in a speech in 1929: ‘Our economic programme must … be based on a human outlook and must not sacrifice man to money.’ In Brazil, where growing prosperity suddenly began to decline, Getulio Vargas, one of the country’s most influential leaders in the whole of the twentieth century, seized power in 1930 and became known as ‘The Father of the Poor’. Economic turmoil had a global impact. At the end of the nineteenth century, capitalist economies were controlled by a few people and their mistakes could generally be contained without triggering revolutionary reverberations. By the middle of the twentieth century, the widening of the democratic process that accompanied the continuing march of industrialisation meant that ‘the market’ was everybody’s concern. The whole world demanded answers when things went wrong.
‘The market’ ran free. Capitalism was the great conqueror.
Answers could no longer be heard above the noise of war by the end of the 1930s. But in the fifty years that followed peace the world economy was further transformed. To begin with reconstruction was slow and in many countries, including Britain, times were harsh and austere. Gradually, however, as the old Bolshevik Communist system in Russia collapsed, China began to open its doors, the European Community grew larger and communications improved through the growth of the internet and air travel, the privations of the past slipped away. ‘The market’ ran free. Capitalism was the great conqueror. In Britain and America emphasis on the power of individuals to control their economic destinies became the dominant feature of policy-making. This approach spawned attitudes that were satirised in the film Wall Street in 1987. One of the main characters is a ruthless corporate financier called Gordon Gekko. ‘Greed,’ he tells a shareholder meeting, ‘for lack of a better word is good. Greed is right, greed works.’
Gordon Gekko is a caricature used to capture a prevailing mood. But when the Credit Crunch struck twenty years after he first appeared on the screen, his speech had something of a prophetic ring to it. In the film Gekko gets his come-uppance. In real life, too, the good times stopped as lifestyles financed by credit were no longer sustainable. In this atmosphere what people had once applauded as a healthy aspiration for wealth-creation was now condemned as nothing better than careless greed. The banks were blamed for over-extending themselves and lending money to creditors whose earnings could not support the debts they were encouraged to take on. The BBC Reith Lecturer Michael Sandel described the end of what he called three decades of ‘market triumphalism’. It was time, he said, to think again about what ‘the market’ was for. Putting it all down to greed was too easy because greed, in the form of self-interest, was how markets functioned. What was wrong was allowing them to intrude into areas of public policy for which they were entirely inappropriate. Arguments like this are significant. If heeded, they mean that the Credit Crunch will result in a fundamentally different approach towards money and how it is made.
