Capital to-day; a study of recent economic development

Preface

The following study has been written with special reference to the present economic situation in the United States, the essential features of which have been developed since the Civil War. But as the laws underlying the capitalist mode of production and its tendencies are the same everywhere, such special reference to one country partakes of the character of an illustration of conditions obtaining or shaping themselves to-day in all advanced industrial countries.

The most momentous developments during this period are the centralization of control of capital and the modification of the money system. The latter is by far the more portentous. Yet it is the former which occupies public attention, while silence reigns concerning the menacing money question. True, when things financial are at sixes and sevens the facts are published and the means for overcoming the emergency discussed ; but the theoretic treatment of this important subject is neglected or avoided by those whose particular function it is to study such subjects theoretically, namely, the paid specialists in political economy at the universities.

The seemingly mystic nature of money cannot be cleared up alone, that is, disconnected from the

VI

Preface general economics of the commodity -producing society, especially of its capitalist form. Such a society exists only by the exchange of the products of individuals; therefore value is the foundation of its economics. The theoretic analysis of value has been the work of the great economist Karl Marx. But, some readers may say, almost every economist has his own theory of value. Such a bewilderment of mind in our own time is tolerated only in that discipline which treats of the material interests of different classes. The investigators in the natural sciences can afford to employ methods and proofs which, consciously or unconsciously, are dictated by a theory of knowledge or human understanding. Are human affairs then the only thing closed to scientific understanding, the only thing in which truth cannot be positively distinguished from untruth, and regarding which there may therefore exist different theories? If the Marxian theory of value can be tested by the rules of science, based on the theory of understanding, then all deviating theories of value are unscientific and false. As a matter of fact the latter have merely the "marginal utility " of a barrier against the spread of scientific economics.

The foregoing considerations are responsible for the form of this book. Obviously it was necessary to start with an exposition of the foundation of all knowledge. Armed with this understanding the reader himself will be able to judge whether Marx's method was scientific, and whether or not in the further sequence of facts submitted by me I have been successful in following his method.

Preface vii

Shortly after the completion of my manuscript occurred the outbreak of the great war. It brought with it economic perturbations which, in spite of the fact that they have been partly overcome at this writing, have left behind them their portentous symptomatic significance. Such were the precipitous fall of stock exchange securities and the closing of the world's stock exchanges to prevent further official depreciation ; the dropping of the gold reserve of the Bank of England in the course of a few days from about 52% to 14%; the decrees of moratoria or suspension of the laws for the collection of debts, including bank deposits, almost all over the world, except the United States; the practical cessation of foreign exchange as a medium for settling obligations, the rates for sterling having risen in New York at one time to $6 @ $7 ; the suspension of discounting by the English banks and its resum.ption by them under guaranty of payment of the private bills by the government, which also assumed the shipping risk on English commerce; the large issues of circulating notes in various countries, those of the Reichsbank increasing between July 23d and August 31st from $472,500,000 to $1,058,500,000 while its metallic stock fell off slightly, those of the Bank of France increasing from 6683 million francs on July 30th to 9299 millions on October ist; the subsequent movement of exchange against neutral as well as belligerent European countries, so that for instance Germany and Italy could for some time past have saved one million dollars out of every eight of the cost of their purchases in the United States, had they been willing viii Preface

to come forward with their gold; the universal industrial depression which in important industries in the United States reached the low point of 25% of capacity.

Some of these happenings have been referred to in this book as contingencies. But I flatter myself with the hope that the thoughtful reader will be assisted by its perusal in understanding the significance of all these past events, as well as of others that may follow in the future. In a few instances new statistics were published between the completion of my manuscript and the printing of this book. Of these I have not hesitated to avail myself.

I realize that the dialectics of the first few chapters make somewhat difficult reading, but this was hardly avoidable.

Herman Cahn.

New York, May, 1915.

Contents

PAGE

Introduction ...... i

CHAPIER

Introduction

The economic developments of overshadowing importance produced by the last fifty years are the high degree of concentration of capital attained in the leading industrial countries of the world, the United States and Germany, and the creation of a vast amount of nominal money consisting of tokens and bank deposits, all of which represent gold, notwithstanding the non-existence of the latter as their counterpart.

It is to-day plainly observable that concentration of capital tends to increase the control of the social forces of production by the capitalist class. The question is whether this tendency can continue to operate also in the future as a result of continued concentration, or whether there exist factors which will at a certain stage of development of the industrial countries halt the further progress of capitalist control of the productive forces.

The increase of control so far gained by the capitalists appears, for the time being, as a refutation of Marx's prediction that they would ultimately reach a state of inability to cope with the social forces of production growing irresistibly under the compulsion of competition. What he apprehended was that this inability would lead to unbearable conditions before a high degree of concentration of capital could be accomplished by the competitive method, then the main operating force. The industries of England, in his time the only industrial country in the world, had grown up spontaneously from small beginnings and were then owned, as were also the banks, by individuals and partnerships, many of which, to be sure, had grown very rich. The competitive struggle, resulting in the survival of a few giants, was evidently to be long and painful, unless terminated by the intelligent action of the proletariat. We shall, however, find that among the advanced industrial countries of the present day it is only the United States in which economic conditions have developed that may present the possibility of an exception to the fulfillment of that prediction. Fifty years ago this country had only just emerged from colonial conditions, taken the reins of government out of the hands of the free-trade agrarians, and placing them into those of the protectionist industrial capitalists, begun its wonderful industrial career.

Since that time, under customs tariffs designed originally as a protection against England's wellestablished industries, we have seen the rise of the United States and Germany to leadership in the organization of industrial and banking capital, although England still remains the international financial center and clearing house. The new industrial countries were spared the early stages of industrial evolution in England and could start their plants at once on a scale called for by modem technique. When success was assured, the tariffs, which had been instituted for the protection of "infant industries," furnished the condition for something entirely different — the combining of industries into trusts or kartells. The present purpose of protective tariffs is to secure for the combinations monopolistic extra profits in the home markets, thereby enabling them to export the surplus of a production, conducted without limits as to the scale necessary to attain the minimum cost of their products, at whatever might be the world market price, even if it entailed a loss. Both the United States and Germany have evolved a high degree of identity of banking and industrial capital and both countries are still on the ascending curve of capitalist development. Nothing proves the latter statement better than the fact that Germany has ceased to be a country of emigration and has instead become one rather of immigration, as also the United States continues to be.

So far the economic development of both countries has been parallel. Is it possible for this parallelism to continue?

Large-scale production by any nation is dependent on two conditions: first, the assurance of the supply of its raw and accessory materials; second, a sufficient market for its products.

Only territorially very extensive economic units may possibly be so situated as to approximate these conditions. In this most important respect the contrast between this country and Germany could scarcely be much greater. And this remark holds good also in comparing this country with the other new industrial countries, all of whom are under the necessity of maintaining protective tariffs at least as high as the leading nations.

The United States is a country of continental dimensions producing, or able to produce, all important raw and accessory materials with few exceptions (such as silk, tin, and rubber). It has a large and growing population accustomed to a high standard of comfort. On such a basis an orderly continuance of the process of concentration and increasing control of the forces of production by the capitalist class must be admitted, so far as the merely technical conditions of industry are concerned.

Germany, on the other hand, is a country so small in area that it would only equal Texas after a slice as large as New England had been cut off that State, Aside from coal and iron it is deficient in all important raw and accessory materials. Its home market has been growing, but has narrow limitations.

How to overcome the precariousness of the supply of materials and to secure a reliable market, commensurate with production on the largest scale, is therefore Germany's problem. But a market, in the mind of the German trust magnates, is no longer identical with the old-fashioned conception of a place where you try to sell a little cheaper than your competitor. They have outgrown the idea of competition and become accustomed to monopolistic extra profits.

Also these extra profits seek investment, not to be lent out to foreigners at simple interest in the manner of the French and the Dutch, and to a certain extent by the English, but as industrial capital operating in more backward countries to the exclusion of competition. A leading role is played in this movement of industrial capital by the metal and other heavy industries which export to such countries rails and rolling stock for railroads and tramways, machinery and chemicals for the mining of metals and other minerals, apparatus and wire for electrical plants, etc. Thus these industries have become most efficient agents for the introduction of the capitalist mode of production into every part of the world, and have gained the most influential position in shaping the economic policies of their countries. For the part they play in revolutionizing the world the textile industry, up to fifty years ago the leader, was not adapted, — its products having been adapted only for exportation as merchandise, and not for exportation as capital.

But permanent industrial investment requires an entirely different degree of security from that of commerce in which the relation is ended by the mere changing hands of commodities and money. That degree of security can be obtained only by the exercise of control over the regions to which products or money are to be exported as capital investments, aside from the exportation to them of products as merchandise on a non-competitive price basis.

This is the modern animus of industrial countries for the acquisition of colonies and the annexation of contiguous territory. To expansion by these means have been added protectorates, spheres of influence, financial control of dependent countries, and special concessions, contracts, and treaties as collateral conditions of loans. It needs political power to back up a policy by which the former commercial competition has been changed into political competition in which military power lends support to the demand of economic advantages, as well as the promise of protection against others. Modern industrial states must therefore above all else be ''powers.'* At present the "powers" stand at the gates of China, their eyes greedily directed at her fabulous resources, but each power waiting the favorable moment for compassing the undoing of its competitors in order to grab as much as possible of this greatest prize in the world.

The customs barriers erected around everv country by the flood tide of capitalism in the last halfcentury and the striking success of protectionism, especially in Germany, produce a favorable milieu for engendering a nationalistic spirit (as evidenced by the ever-increasing armaments) which is a standing menace to the peace of Europe. The spirit of national antagonism has again decidedly gained the upper hand over the cosmopolitan tendencies of the bourgeoisie of the free-trade era of Cobden and Bright.

It is therefore evident that an orderly development of industrial and financial concentration in Germany and the other aspiring industrial countries of Europe, a development such as is technically possible in the

United States, meets with insurmountable political obstacles. With regard to all European industrial countries no factors have developed since Marx to modify his prediction of the coming inability of the capitalist class to cope with the forces of production.

But even in the United States the attainment of the ultimate goal of the present centralizing tendencies, namely capitalist oligarchy, though technically unimpeded, is likely to be crossed by developments which are in store in relation to the financial mechanism of all capitalist countries, including the United States.

The development of this mechanism has reached a pass where it has become the most momentous fact in economics. Money has been a fundamental and indispensable tool ever since use-values were produced to any considerable extent for exchange, instead of for consumption by the family or community, as theretofore. The commodity -producing society effected first the social division of labor (the distribution of the products being effected by exchange) and later, during its capitalist period, the partial socialization of the means of production. This socialization consists :

First, in the working out of an average profit rate for all industrial capital, so that the profit of each special capital or sphere is not determined by its own rate of surplus value, but by the total surplus value produced by the total industrial capital, in which each special capital participates pro rata, as in a social dividend. The fact that the social dividend has more recently been apportioned according to two average rates of profit, one for competitive capital and the other for monopoHes, is not to be interpreted as reactionary and as nulHfying socialization, but on the contrary as the powerful lever, employed by evolution, to advance the socialization of the means of production to a higher form by concentration.

Second, in the function of the banks as agents for placing the social money capital at the disposal of the industrial capitalists, so that the lenders are not the owners of the money. It is the depositors' money which the banks are lending. On the other hand the borrowers of the great bulk of the money are not its users. The users, from the president of a corporation down to the flagman or floor-sweeper, are only employees.

But social production, without social control, is possible in no other way than by the social recognition of a single exclusive commodity as the standard of value and the universal medium of exchange. This recognition has been the only absolutely social act of the human race. By this act gold became the world's money.

But the above-mentioned two functions of money are contradictory, the first requiring scarcity, the second abundance. The contradiction did not manifest itself with any severity during the long period of small production. Nor even when the needs of capitalist machine production on a large scale led to the invention of paper money and of bookkeeping money, called bank deposits, as an addition to the required, but delinquent gold, did the purely nominal money excite any particular suspicion. Marx, of course, distinguished between the reality and the fiction, and also recognized the latter' s capacity for producing crises. Yet it was impossible in his England of the sixties, when bookkeeping money was in its infancy, to suspect that this infant would grow up into a Frankenstein, threatening to destroy its maker, and that it was just the necessity of commodity money which would prove to be the most fatal defect of the commodity -producing society. The development of the financial mechanism since then makes it plain that the phenomenon of money, the basis of every form of commodity-producing society, is of more fundamental and momentous import than that of the mere accumulation and concentration of capital, which latter phenomenon accompanies only the latest development of that society, the capitalist system. When the financial mechanism gives way under the strain of its inherent contradictions, the only remaining obstacle will have been removed to the social control of social production.

Now, this commodity money, gold, is woefully insufficient in every country for the performance of its functions of medium of exchange and means of deferred payment, the latter being an additional function added in modern times. These two functions are again contradictory, but we need not enter into details at present.

In spite of the tariff walls with which the capitalist countries have surrounded themselves, they were never so interdependent on each other as they are to-day. Especially are they all extremely sensitive to any disturbance of a financial nature in one among them. This is so, because they all stand in relation to each other not only as sources of materials and customers for products, in spite of tariffs, but also because the money capitalists everywhere make their investments with little regard to country.

All these countries are mortally afraid of parting with any material part of their stock of gold. This is largely concentrated in the central bank of each country, partly in order to sustain the social faith in the parity with it of various kinds of token money, and partly for the emergency of an adverse balance of international obligations. In some countries the central bank's gold reserve is looked on besides as a possible emergency fund in case of war to serve for the purchase in foreign countries of army supplies and foodstuffs. The business of the other banks consists mainly in receiving deposits and employing them as loan capital by discounting the bills receivable of manufacturers and merchants.

When the alarm sounds, either in the due course of the cycle of crises, inseparable from competitive capitalism, or in consequence of the outbreak of war, the first thought of the productive and mercantile capitalists is to get possession of the money which they have on deposit in the banks. This cannot be done by drawing a check on the bank and depositing the same in another bank. It must be drawn in cash. But the banks of deposit keep on hand as little unproductive money as possible and now turn to the central (national) bank for the re-discounting of their bulging portefeuilles. In an endeavor to

Introduction ii

keep the demand for re-discount within bounds the central bank doubles or trebles its discount rate. But the dire need of the banks of deposit breaks down this barrier and threatens to deplete the central bank of its holdings of paper currency and even of its gold reserve. At this juncture governments are obliged to decree the abrogation of laws fixing the limit of note issues by the central banks and to open the gates wider for the issue of fiat money which they endow with the quality of a forced currency. Understanding well enough what a great inflation would mean to the national economy, if not to the social fabric, the governments reduce the need of money by decreeing moratoria, i, e., the suspension for a certain period of the legal enforcement of private money obligations, including bank deposits, except such percentage of the latter as may be fixed by governments both for commercial and savings banks. During the regime of the moratorium the further extension of merchandise credits must be in the main suspended, as it becomes too difficult to distinguish between the solvent and insolvent buyer. Therefore the moratorium actually means just this, that a great reduction of production is considered the lesser evil, compared with the widespread bankruptcy that would follow were payments to be enforced.

The social faith in credit is shaken. There seems to be nothing real but gold. Everybody tries to hoard as much of it as possible. Paper money is looked at askance by many. On the stock exchanges paper titles fall tremendously. In his fear of much greater depreciation to come only one thought obsesses the money capitalist: sell as quickly as possible! And the cables transmit an avalanche of selling orders to the New York stock exchange.

Quickly the situation here likewise becomes critical. What is to become of the value of our paper currency, if we are to ship gold against all the American securities which Europe might be willing to unload here? And if this debacle of quotations is to continue what is to become of the solvency of our banks, whose assets largety consist of, or have been loaned against, stock exchange securities — solvency not in the sense of the economist who knows that it cannot exist, who knows that insolvency is the normal condition of all banks in the world, but solvency according to the rules laid down for bank examiners. There is only one escape from these two terrible contingencies and their consequences — the annihilation of the market for securities, the closing of the stock exchange.

But what a costly escape ! It resembles the European escape by moratorium in that it is effected at the cost of a partial paralysis of industry^ The conversion, where needed, of revenue titles (stocks, bonds, short term notes) into money and as such into industrial capital, for which conversion the stock exchange is the agency, stagnates.

The foregoing is far from being a vision of capitalist society in its death struggle. It presents merely the sequence of the symptoms during an acute attack of a disease which is congenital to the capitalist system, from which the United States is not exempt, in spite of its industrial advantages. Every one of these symptoms has already been recorded in the history of crises. But the attacks of the disease must grow more virulent in the future under the growing strain of the contradictions of money.

It follows, then, that the orderly development of capitalist society in the United States, while possible industrially, is dependent not only on the development of its own money system, but on that of international finance.

For an understanding of these subjects we must turn to Economics, the science which treats of the laws governing the production and exchange of the material means of life in human society.

Chapter I

In the realm of the natural sciences any new discovery must submit to the test of universally recognized rules of proof, by means of which not only the result claimed but also the methods employed in arriving at the result may be verified. The requirements of these rules of proof serve to preclude any possibility of error, sophistry, or mystery, and that discovery which has stood the test is recognized by all men as an established scientific fact. Hence, while scientists may entertain different hypotheses regarding the problems on the solution of which they are engaged, there is no room left for individual opinions among them concerning the positive results already secured by the various natural sciences. There are no opposing schools of chemistry, astronomy, etc., and we do not read that in relation to gravitation or evolution Mr. A. holds one view, while Prof. B. differs from it, and Dr. C. denies altogether that such phenomena exist.

All over the world the universities which are the appointed institutions for the dissemination of scientific knowledge teach the identical unquestioned facts, so far as the natural sciences are concerned.

In certain other departments, however, the universities maintain courses of studies to which the application of the same rules of evidence as required in the case of the natural sciences is not enforced, but is allowed to go by default. Among these studies we single out Philosophy, History, and Economics as directly concerning us here.

What is there behind this difference in the attitude of the world's universities toward the natural sciences on the one hand and toward the above-mentioned three studies on the other hand?

In the first place be it noted in regard to Philosophy that what the universities are teaching is not a history of the development and final positive outcome of this discipline, which would be a highly useful pursuit, but they persist in teaching it still, the same as in former centuries, as a source of understanding. In other words the universities hold on to two sources of understanding, the scientific and the philosophic, and this dualism leaves them free to range the various studies under one head or the other. Thus, while having adopted the scientific source of understanding for each individual study treating of, or directly connected with, objects in nature, they have chosen to subordinate History and Economics to Philosophy, thus taking the ground, or at least implying, that these two disciplines, which treat of human society past and present, are not subjects capable of scientific analysis.

Karl Marx has said that Economics is capable of being analyzed with the exactness of a natural science and he gave to the world the amazing proof for this statement in his monumental work Das KapitaU in which the nature of the social processes of production and circulation, which together constitute the social alimentation, are disclosed. It is evident on every page that Marx consciously observed all rules of science, although he omitted to explain, just as all other great scientists have omitted to do, how the nature of the human mind is involved in scientific analysis or rather in human understanding generally. This missing feature in Marxism, in reality its foundation and that which renders its economic theory unassailable, was supplied by Joseph Dietzgen in a thorough and systematic manner in his two principal works. The Nature of Human Brain Work and The Positive Outcome of Philosophy, Therefore in order to realize fully the thoroughly scientific basis of Das Kapital as a product of thinking, it is necessary first to learn from Dietzgen what is correct thinking.

For thousands of years men, in their longing to understand the world they lived in, and aware that their senses often deceived them, turned to ''pure reason," that is, reason uninfluenced by the senses, as the source of understanding. Mankind had not yet succeeded in supplementing and correcting its endowment of senses and their impressions by instruments and processes, more sensitive than the human sensory organs. For instance the gauging of temperature by our sense of feeling is largely subjective and always inexact, therefore unreliable; the invention of the thermometer substituted for this purpose the sense of sight for that of feeling and made the measurement of temperature objective and exact.

While thus the paucity of their experiences and the distrust of their senses caused the great thinkers to rely on abstract reasoning, the horizon of their thought processes was further limited by the social conditions with which they were surrounded and which they conceived as static, the same as they did all phenomena. These social conditions, ever since the commodity-producing society had evolved out of primitive communism, had presented a dualism. The Greek philosophers could not conceive of society as consisting of anything else than clearly defined classes — a leisure class to rule and think and a slave class to do the work. The essentially identical milieu of social dualism, although in modified form, governed the abstract thinking of the modem philosophers. The social dualism, conceived as eternal, has been and remains the fountain-head of all dualisms supported by the philosophers, such as mind and body, matter and force, ethical and unethical. Such an accepted and imquestioned dualism we find to-day in the philosophico -economic conception of capital and labor.

As knowledge increased, the results arrived at by successive philosophic systems were successively found to be at variance with the facts of nature and of history. The sciences branched off from the parent philosophy, which originally included all intellectual activity, and they became specialized as distinct pursuits, each in its sphere setting up its own tests of truth. The successes of the sciences, contrasted with the unreliability and barrenness of practical results of philosophic speculation, lessened the estimation in which the exercise of "pure reason" had been held and reduced the function of philosophy more and more to an inquiry into the nature of the faculty of thought. This problem was finally solved by Dietzgen, whose work (first published in 1869) concludes the history of philosophy, now transformed into the natural science of the human mind. The transformation is analogous to that of alchemy into chemistry.

The quintessence of science consists of the discovery that phenomena are not static and existing by themselves, but that they are in a constant change and exist only through the action of one thing on another. Thus it is not the static nature of a tree to be green; if we recede from it at a certain speed, its natural color is red, and at a certain greater speed the phenomenon of vision of the tree ceases altogether. Our senses are organs developed for the purpose of being acted on by other things. To our tongue vinegar tastes sour, but the phenomenon of acidity does not exist in the vinegar by itself. To our eyes vinegar is only either a liquid or a solid, according to the temperature; to iron or eggshells it is nothing but a solvent.