The Law of Civilization and Decay

Possibly since the world began, no investment has ever yielded the profit reaped from the Indian plunder, because for nearly fifty years Great Britain stood without a competitor. That she should have so long enjoyed a monopoly seems at first mysterious, but perhaps the condition of the Continent may suggest an explanation. Since Italy had been ruined by the loss of the Eastern trade, she had ceased to breed the economic mind; consequently no class of her population could suddenly and violently accelerate their movements. In Spain the priest and soldier had so thoroughly exterminated the sceptic, that far from centralizing during the seventeenth century, as England and France had done, her empire was in full decline at the revolution of 1688. In France something similar had happened, though in a much less degree. After a struggle of a century and a half, the Church so far prevailed in 1685 as to secure the revocation of the Edict of Nantes. At the revocation many Huguenots went into exile, and thus no small proportion of the economic class, who should have pressed England hardest, were driven across the Channel, to add their energy to the energy of the natives. Germany lacked capital. Hemmed in by enemies, and without a seacoast, she had been at a disadvantage in predatory warfare; accordingly she did not accumulate money, and failed to consolidate until, in 1870, she extorted a treasure from France. Thus, in 1760, Holland alone remained as a competitor, rich, maritime, and peopled by Protestants. But Holland lacked the mass possessed by her great antagonist, beside being without minerals; and accordingly, far from accelerating her progress, she proved unable to maintain her relative rate of advance.

Thus isolated, and favoured by mines of coal and iron, England not only commanded the European and American markets, at a time when production was strained to the utmost by war, but even undersold Hindoo labour at Calcutta. In some imperfect way her gains may be estimated by the growth of her debt, which must represent savings. In 1756, when Clive went to India, the nation owed £74,575,000, on which it paid an interest of £2,753,000. In 1815 this debt had swelled to £861,000,000, with an annual interest charge of £32,645,000. In 1761 the Duke of Bridgewater finished the first of the canals which were afterward to form an inland water-way costing £50,000,000, or more than two-thirds of the amount of the public debt at the outbreak of the Seven Years’ War. Meanwhile, also, steam had been introduced, factories built, turnpikes improved, and bridges erected, and all this had been done through a system of credit extending throughout the land. Credit is the chosen vehicle of energy in centralized societies, and no sooner had treasure enough accumulated in London to offer it a foundation, than it shot up with marvellous rapidity.

From 1694 to Plassey, the growth had been relatively slow. For more than sixty years after the foundation of the Bank of England, its smallest note had been for £20, a note too large to circulate freely, and which rarely travelled far from Lombard Street. Writing in 1790, Burke mentioned that when he came to England in 1750 there were not “twelve bankers’ shops” in the provinces, though then, he said, they were in every market town.340 Thus the arrival of the Bengal silver not only increased the mass of money, but stimulated its movement; for at once, in 1759, the bank issued £10 and £15 notes, and, in the country, private firms poured forth a flood of paper. At the outbreak of the Napoleonic wars, there were not far from four hundred provincial houses, many of more than doubtful solvency. Macleod, who usually does not exaggerate such matters, has said, that grocers, tailors, and drapers inundated the country with their miserable rags.341

The cause of this inferiority of the country bankers was the avarice of the Bank of England, which prevented the formation of joint stock companies, who might act as competitors; and, as the period was one of great industrial and commercial expansion, when the adventurous and producing classes controlled society, enough currency of some kind was kept in circulation to prevent the prices of commodities from depreciating relatively to coin. The purchasing power of a currency is, other things being equal, in proportion to its quantity. Or, to put the proposition in the words of Locke, “the value of money, in general, is the quantity of all the money in the world in proportion to all the trade.”342 At the close of the eighteenth century, many causes combined to make money plentiful, and therefore to cheapen it. Not only was the stock of bullion in England increased by importations from India, but, for nearly a generation, exports of silver to Asia fell off. From an average of £600,000 annually between 1740 and 1760, the shipments of specie by the East India Company fell to £97,500 between 1760 and 1780; nor did they rise to their old level until after the close of the administration of Hastings, when trade returned to normal channels. After 1800 the stream gathered volume, and between 1810 and 1820 the yearly consignment amounted to £2,827,000, or to nearly one-half of the precious metals yielded by the mines.

From the crusades to Waterloo, the producers dominated Europe, the money-lenders often faring hardly, as is proved by the treatment of the Jews. From the highest to the lowest, all had wares to sell; the farmer his crop, the weaver his cloth, the grocer his goods, and all were interested in maintaining the value of their merchandise relatively to coin, for they lost when selling on a falling market. By degrees, as competition sharpened after the Reformation, a type was developed which, perhaps, may be called the merchant adventurer; men like Child and Boulton, bold, energetic, audacious. Gradually energy vented itself more and more freely through these merchants, until they became the ruling power in England, their government lasting from 1688 to 1815. At length they fell through the very brilliancy of their genius. The wealth they amassed so rapidly, accumulated, until it prevailed over all other forms of force, and by so doing raised another variety of man to power. These last were the modern bankers.

With the advent of the bankers, a profound change came over civilization, for contraction began. Self-interest had from the outset taught the producer that, to prosper, he should deal in wares which tended rather to rise than fall in value, relatively to coin. The opposite instinct possessed the usurer; he found that he grew rich when money appreciated, or when the borrower had to part with more property to pay his debt when it fell due, than the cash lent him would have bought on the day the obligation was contracted. As, toward the close of the eighteenth century, the great hoards of London passed into the possession of men of the latter type, the third and most redoubtable variety of the economic intellect arose to prominence, a variety of which perhaps the most conspicuous example is the family of Rothschild.

In one of the mean and dirty houses of the Jewish quarter of Frankfort, Mayer Amschel was born in the year 1743. The house was numbered 152 in the Judengasse, but was better known as the house of the Red Shield, and gave its name to the Amschel family. Mayer was educated by his parents for a rabbi; but, judging himself better fitted for finance, he entered the service of a Hanoverian banker named Oppenheim, and remained with him until he had saved enough to set up for himself. Then for some years he dealt in old coins, curiosities and bullion, married in 1770, returned to Frankfort, established himself in the house of the Red Shield, and rapidly advanced toward opulence. Soon after he gave up his trade in curiosities, confining himself to banking, and his great step in life was made when he became “Court Jew” to the Landgrave of Hesse. By 1804 he was already so prosperous that he contracted with the Danish Government for a loan of four millions of thalers.

Mayer had five sons, to whom he left his business and his wealth. In 1812 he died, and, as he lay upon his death-bed, his last words were, “You will soon be rich among the richest, and the world will belong to you.”343 His prophecy came true. These five sons conceived and executed an original and daring scheme. While the eldest remained at Frankfort, and conducted the parent house, the four others migrated to four different capitals, Naples, Vienna, Paris, and London, and, acting continually in consort, they succeeded in obtaining a control over the money market of Europe, as unprecedented as it was lucrative to themselves.

Of the five brothers, the third, Nathan, had commanding ability. In 1798 he settled in London, married in 1806 the daughter of one of the wealthiest of the English Jews, and by 1815 had become the despot of the Stock Exchange; “peers and princes of the blood sat at his table, clergymen and laymen bowed before him.” He had no tastes, either literary, social, or artistic; “in his manners and address he seemed to delight in displaying his thorough disregard of all the courtesies and amenities of civilized life”; and when asked about the future of his children he said, “I wish them to give mind, soul, and heart, and body – everything to business. That is the way to be happy.”344 Extremely ostentatious, though without delicacy or appreciation, “his mansions were crowded with works of art, and the most gorgeous appointments.” His benevolence was capricious; to quote his own words, “Sometimes to amuse myself I give a beggar a guinea. He thinks it is a mistake, and for fear I shall find it out off he runs as hard as he can. I advise you to give a beggar a guinea sometimes. It is very amusing.”345

Though an astonishingly bold and unscrupulous speculator, Nathan probably won his chief successes by skill in lending, and, in this branch of financiering, he was favoured by the times in which he lived. During the long wars Europe plunged into debt, contracting loans in depreciated paper, or in coin which was unprecedentedly cheap because of the abundance of the precious metals.

In the year 1809, prices reached the greatest altitude they ever attained in modern, or even, perhaps, in all history. There is something marvellously impressive in this moment of time, as the world stood poised upon the brink of a new era. To the contemporary eye Napoleon had reached his zenith. Everywhere victorious, he had defeated the English in Spain, and forced the army of Moore to embark at Corunna; while at Wagram he had brought Austria to the dust. He seemed about to rival Cæsar, and establish a military empire which should consolidate the nations of the mainland of Europe. Yet in reality one of those vast and subtle changes was impending, which, by modifying the conditions under which men compete, alter the complexion of civilizations, and which has led in the course of the nineteenth century to the decisive rejection of the martial and imaginative mind.

In April 1810 Bolivar obtained control at Caracas, and, with the outbreak of the South American revolutions, the gigantic but imaginative empire of Spain passed into the acute stage of disintegration. On December 19 of the same year, the Emperor Alexander opened the ports of Russia to neutral trade. By so doing Alexander repudiated the “continental system” of Napoleon, made a breach with him inevitable, and thus brought on the campaign of Moscow, the destruction of the Grand Army, and the close of French military triumphs on the hill of Waterloo. From the year 1810, nature has favoured the usurious mind, even as she favoured it in Rome, from the death of Augustus.

Moreover, both in ancient and modern life, the first symptom of this profound economic and intellectual revolution was identical. Tacitus has described the panic which was the immediate forerunner of the rise of the precious metals in the first century; and in 1810 a similar panic occurred in London, when prices suddenly fell fifteen per cent,346 and when the most famous magnate of the Stock Exchange was ruined and killed. The great houses of Baring and of Goldsmid had undertaken the negotiation of a government loan of £14,000,000. To the surprise of these eminent financiers values slowly receded, and, in September, the death of Sir Francis Baring precipitated a crisis; Abraham Goldsmid, reduced to insolvency, in despair committed suicide; the acutest intellects rose instantaneously upon the corpses of the weaker, and the Rothschilds remained the dictators of the markets of the world. From that day to this the slow contraction has continued, with only the break of little more than twenty years, when the gold of California and Australia came in an overwhelming flood; and, from that day to this, the same series of phenomena have succeeded one another, which eighteen hundred years ago marked the emasculation of Rome.

At the peace, many causes converged to make specie rise; the exports of bullion to the East nearly doubled; America grew vigorously, and mining was interrupted by the revolt of the Spanish colonies. Yet favourable as the position of the creditor class might be, it could be improved by legislation, and probably no financial policy has ever been so ably conceived, or so adroitly executed, as that masterpiece of state-craft which gave Lombard Street control of the currency of Great Britain.

Under the reign of the producers, values had generally been equalized by cheapening the currency when prices fell. In the fourteenth, fifteenth, and sixteenth centuries, the penny had been systematically degraded, to keep pace with the growing dearth of silver. When the flood of the Peruvian bullion had reached its height in 1561, the currency regained its fineness; but in 1601 the penny lost another half-grain of weight, and, though not again adulterated at the mint, the whole coinage suffered so severely from hard usage that, under the Stuarts, it fell to about two-thirds of its nominal value. A re-coinage took place under William, but then paper came in to give relief, and the money in circulation continued to degenerate, as there was no provision for the withdrawal of light pieces. By 1774, the loss upon even the guinea had become so great that Parliament intervened, and Lord North recommended “that all the deficient gold coin should be called in, and re-coined” and also that the “currency of the gold coin should, in future, be regulated by weight as well as by tale … and that the several pieces should not be legal tender, if they were diminished, by wearing or otherwise, below a certain weight, to be determined by proclamation.”347

By such means as this, the integrity of the metallic money was at length secured; but the emission of paper remained unlimited, and in 1797 even the Bank of England suspended cash payments. Then prices advanced as they had never advanced before, and, during the first ten years of the nineteenth century, the commercial adventurers reached their meridian. From 1810 they declined in power; but for several preceding generations they had formed a true aristocracy, shaping the laws and customs of their country. They needed an abundant currency, and they obtained it through the Bank. On their side the directors recognized this duty to be their chief function, and laid it down as a principle that all legitimate commercial paper should always be discounted. If interest rose, the rise proved a dearth of money, and they relieved that dearth with notes.

Lord Overstone has thus explained the system of banking which was accepted, without question, until 1810: “A supposed obligation to meet the real wants of commerce, and to discount all commercial bills arising out of legitimate transactions, appears to have been considered as the principle upon which the amount of the circulation was to be regulated.”348 And yet, strangely enough, even the adversaries of this system admitted that it worked well. A man as fixed in his opinions as Tooke, could not contain his astonishment that “under the guidance of maxims and principles so unsound and of such apparently mischievous tendency, as those professed by the governors and some of the directors of the Bank in 1810, such moderation and … such regularity of issue should, under chances and changes in politics and trade, unprecedented in violence and extent, have been preserved, as that a spontaneous readjustment between the value of the gold and the paper should have taken place, as it did, without any reduction of their circulation.”349

With such a system the currency tended to fall rather than to rise in value, in comparison with commodities, and for this reason the owners of the great hoards were at a disadvantage. What powerful usurers, like Rothschild, wanted, was a legal tender fixed in quantity, which, being unable to expand to meet an increased demand, would rise in price. Moreover, they needed a circulating medium sufficiently compact to be controlled by a comparatively small number of capitalists, who would thus, under favourable conditions, hold the whole debtor community at their mercy.

If the year 1810 be taken as the point at which the energy stored in accumulations of money began to predominate in England, the revolution which ended in the overthrow of the producers, advanced, with hardly a check, to its completion by the “Bank Act” of 1844. The first symptom of approaching change was the famous “Bullion Committee,” appointed on the motion of Francis Horner in 1810. This report is most interesting, for it marks an epoch, and in it the struggle for supremacy between the lender and the borrower is brought out in full relief. To the producer, the commodity was the measure of value; to the banker, coin. The producer sought a currency which should retain a certain ratio to all commodities, of which gold was but one. The banker insisted on making a fixed weight of the metal he controlled, the standard from which there was no appeal.

A distinguished merchant, named Chambers, in his evidence before the Committee, put the issue in a nutshell: —

Q. “At the Mint price of standard gold in this country, how much gold does a Bank of England note for one pound represent?

A. “5 dwts. 3 grs.

Q. “At the present market price of standard gold of £4 12. per ounce, how much gold do you get for a Bank of England note for one pound?

A. “4 dwts. 8 grs.

Q. “Do you consider that a Bank of England note for one pound, under these present circumstances, is exchangeable in gold for what it represents of that metal?

A. “I do not conceive gold to be a fairer standard for Bank of England notes than indigo or broadcloth.”

Although the bankers controlled the “Bullion Committee,” the mercantile interest still maintained itself in Parliament, and the resolutions proposed by the chairman in his report were rejected in the Commons by a majority of about two to one. The tide, however, had turned, and perhaps the best index of the moment at which the balance of power shifted, may be the course of Peel. Of all the public men of his generation, Peel had the surest instinct for the strongest force. Rarely, if ever, did this instinct fail him, and after 1812 his intuition led him to separate from his father; as, later in life, it led him to desert his party in the crisis of 1845. The first Sir Robert Peel, the great manufacturer, who made the fortune of the family, had the producer’s instinct and utterly opposed contraction. In 1811 he voted against the report of the Bullion Committee, and then his son voted with him. After 1816, however, the younger Peel became the spokesman of Lombard Street, and the story is told that when the bill providing for cash payments passed in July, 1819, the old man, after listening to his son’s great speech, said with bitterness: “Robert has doubled his fortune, but ruined his country.”350

Probably Waterloo marked the opening of the new era, for after Waterloo the bankers met with no serious defeat. At first they hardly encountered opposition. They began by discarding silver. In 1817 the government made 123 374⁄1000 grs. of gold the unit of value, the coin representing this weight of metal ceasing to be a legal tender when deficient by about half a grain. The standard having thus been determined, it remained to enforce it. By this time Peel had been chosen by the creditor class as their mouthpiece, and in 1819 he introduced a bill to provide for cash payments. He found little resistance to his measure, and proposed 1823 as the time for the return; as it happened, the date was anticipated, and notes were redeemed in gold from May 1, 1821. As far as the coinage was concerned, this legislation completed the work, but the task of limiting discounts remained untouched, a task of even more importance, for, as long as the Bank continued discounting bills, and thus emitting an unlimited quantity of notes whenever the rate of interest rose, debtors not only might always be able to face their obligations, but the worth of money could not be materially enhanced. This question was decided by the issue of the panic of 1825, brought on by the Resumption Act.

At the suspension of 1797, paper in small denominations had been authorized to replace the coin which disappeared, but this act expired two years after the return to specie payments. Therefore, as time elapsed, the small issues began to be called in, and, according to Macleod, the country circulation, by 1823, had contracted about twelve per cent. The Bank of England also withdrew a large body of notes in denominations less than five pounds, and, to fill the gap, hoarded some twelve million sovereigns, a mass of gold about equal to the yield of the mines for the preceding seven or eight years. This gold had to be taken from the currency of Europe, and the sudden contraction caused a shock which vibrated throughout the West.

In France gold coinage almost ceased, and prices dropped heavily, declining twenty-four per cent between 1819 and 1822. Yet perhaps the most vivid picture of the distress caused by this absorption of gold, is given in a passage written by Macleod, to prove that Peel’s act had nothing to do with the catastrophe: —

“There was one perfectly satisfactory argument to show that the low prices of that year had nothing to do with the Act of 1819, namely, that prices of all sorts of agricultural produce were equally depressed all over the continent of Europe from the same cause. The fluctuations, indeed, on the continent were much more violent than even in England… The same phenomena were observed in Italy. A similar fall, but not to so great an extent, took place at Lisbon. What could the Act of 1819 have to do with these places?”351

The severe and protracted depression, while affecting all producers, bore with peculiar severity upon the gentry, whose estates were burdened with mortgages and all kinds of settlements, so much so that frequently properties sank below their encumbrances, and the owners were beggared. At the opening of Parliament, both Houses were overwhelmed with petitions for aid. Among these petitions, one of the best known was presented to the Commons in May, 1822, by Charles Andrew Thompson, of Chiswick, which serves to show the keenness of the distress among debtors owning land.

Thompson stated, in substance, that in 1811 he and his father, being wealthy merchants, purchased an estate in Hertfordshire for £62,000, and afterward laid out £10,000 more in improvements. That in 1812 they entered into a contract for another estate, whose price was £60,000, but, a question having arisen as to the title, a lawsuit intervened, and, before judgment, the petitioner and his father had experienced such losses that they could not pay the sum adjudged due by the court. Thereupon, to raise money, they mortgaged both estates for £65,000. In July, 1821, both estates were offered for sale, but they failed to bring the amount for which they were mortgaged. Estates in other counties which cost £33,166, had been sold for £12,000, and through the depression of trade the petitioners had become bankrupt. In 1822 the petitioner’s father died of a broken heart; and he himself remained a ruined man, with seven children of his own, ten of his brother’s, and seven of his sister’s all depending on him.352

The nation seemed upon the brink of some convulsion, for the gentry hardly cared to disguise their design of effecting a readjustment of both public and private debts. Passions ran high, and in June, 1822, a long debate followed upon a motion, made by Mr. Western, to inquire into the effects produced by the resumption of cash payments. The motion was indeed defeated, but defeated by a concession which entailed a catastrophe up to that time unequalled in the experience of Great Britain. To save the “Resumption Act” the ministry in July brought in a bill to respite the small notes until 1833, a measure which at once quieted the agitation, but which produced the most far-reaching and unexpected results.