(From Chapter 13, Follow the Money)

<123>In a well-known passage, John Maynard Keynes provided a lucid picture of the pre-1914 era:

The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages; or he could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend. He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality, could despatch his servant to the neighboring office of a bank for such supply of the precious metals as might seem convenient, and could then proceed abroad to foreign quarters, without knowledge of their religion, language, or customs, bearing coined wealth upon his person, and would consider himself greatly aggrieved and much surprised at the least interference. But, most important of all, he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable. The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion, which were to play the serpent to this paradise, were little more than the amusements of his daily newspaper, and appeared to exercise almost no influence at all on <124>the ordinary course of social and economic life, the internationalization of which was nearly complete in practice. (1)

This easy internationalism was by no means the whole story. (2) Free trade was indeed the corollary to the gold standard, otherwise the entire system would fall flat. But free trade, combined with fixed exchange rates – fixed because all currencies were tied to gold – meant that gold outflows could only be compensated by falling prices, which then would cause the trade deficit to swing to surplus, thus bringing gold back into the country. Behold the automatic mechanism, so highly thought of – in Quigley’s view, “one of the greatest social instruments ever devised by man.” (3) It is astounding to realize that such a system, embodying as it did such massive swings in domestic price levels, could ever have been accepted as normative.

The U.S. Senate Report of the Monetary Commission of 1876 had earlier elucidated the devastating effect falling prices have on the economy. The report was presented three years into a debilitating recession in the wake of the U.S. demonetizing silver in 1873. “The great and still continuing fall in prices in the United States has proved most disastrous to nearly every industrial enterprise,” said the Report. “The bitter experience of the last few years has been an expensive but most thorough teacher. It has taught capitalists neither to invest in nor loan money on such enterprises, and just as thoroughly has it taught business men not to borrow for the purpose of inaugurating or prosecuting them.” (4) Businessmen, entrepreneurs, stockholders, indeed all forms of capital put out for profitable ventures, suffered <125>under the regime of deflation. The sole beneficiary was the holder of specie, whose holdings gain in value as the surrounding economy collapses. “Money in shrinking volume … is the fruitful source of political and social disturbance. It foments strife between labor and other forms of capital, while itself hidden away in security gorges on both. It rewards close-fisted lenders and filches from and bankrupts enterprising borrowers. It circulates freely in the stock exchange but avoids the labor exchange. It has in all ages been the worst enemy with which society has had to contend.” (5)

The hardest hit in such a shrinking economy is the laborer, who has no property to fall back on, whose only capital is his labor. It is this which led to the pitched battle in the 19th century between capital and labor. And here the Report makes a most significant point: the relationship between these two is not foreordained to absolute conflict. It all depends on the “money-system.”

Under any money-system whatever, labor, money, and other forms of capital confront each other as opposing forces, each seeking through a natural instinct to secure as much as possible of the others in exchange. These forces, although always operating against, are not necessarily inimical to or destructive of each other. On the contrary, under a just money-system, they are not even harmful to each other.… But under an unjust money-system, under a system which through law or accident fails to regulate the quantity of money so as to preserve the equilibrium between money and the other factors of production, the conflict between money and labor and other forms of capital becomes destructive and ruinous. (6)

Indeed, how much of the rise of communism and socialism can be attributed simply to just such unjust monetary arrangements?

It is in the shadow of a shrinking volume of money that disorders social and political gender and fester, that communism organizes, that riots threaten and destroy, that labor starves, that capital<126>ists conspire and workmen combine, and that the revenues of governments are dissipated in the employment of laborers, or in the maintenance of increased standing armies to overawe them. The peaceful conflict which under a just money-system is continually waged between money capital and labor, and which tends only to secure the rights of each, and is essential to the progress of society, is changed under a shrinking volume of money to an unrelenting war, threatening the destruction of both. (7)

This was the situation under the regime of free trade combined with the gold standard, what Polanyi referred to as the “self-regulating market.” (8) With national currencies providing no buffers against the vagaries of foreign exchange, there was simply no means to absorb shocks; growth in one country triggered gold influxes, removing gold from other countries, precipitating deflationary decline there; and the producing and laboring classes bore the brunt of it.

This obviously benefitted the creditor class; but in the interest of fairness it must be noted that not all members of this class pursued this myopic strategy. In fact, there were big money men, financiers of the first rank, who opposed this movement and wished to retain silver as a component of the money base, precisely because they recognized the claims of the greater good. For example, contrary to claims made in the populist conspiracy-oriented literature, the Rothschild bank in Paris was opposed to the exclusive gold standard. (9) Another leading financier, Ernest Seyd, campaigned against an exclusive international gold standard. Seyd displayed <127> keen insight into the working of a restricted, controlled money supply. This practical understanding lends his analysis the penetration that was lacking in writers at one remove, such as Karl Marx. As Seyd clearly explained, “unless … means could be devised to compensate those who lose by this depreciation and demonetisation of Silver, and to reorganise the whole of society upon this reduced basis of value (tasks utterly impossible of accomplishment), we must face the plain patent fact that the loss suffered by property and by labour will correspondingly benefit the holder of money – the capitalist.” (10) This is the key to the entire social question of the 19th century, and the truth behind Marx’s critique.

Marx’s critique of capitalism stands and falls with the concept of surplus value. What this means is that the “value-added” generated in the production process by workers is siphoned off and deposited in the accounts of those who did not work for it. But this is incomplete; for not only did workers generate surplus value, so did foremen, managers, and entre<128>preneurs. The real conflict was between producers in general and the creditor class.

A money supply based on the gold standard guarantees the flow of “surplus value” toward the holders of money and away from the producers, whether manufacturer or laborer. “It is the property of the rich as well as the labour of the poor that will have to suffer from this reduction in the world’s currency, whilst the whole benefit of the operation will accrue exclusively to the capitalist alone, whose power it will increase, without any effort of his; nay, even despite any check he might himself feel inclined to oppose to the effects of this movement in his favour.” (11)

It was an odd combination of banking and financial interests on the one hand and doctrinaire political economists on the other that foisted the gold-standard agenda on the nations. The free-trade regime those economists championed was hijacked by this monetary system, in the process forever sullying the name of free trade. The classical economists then (and their followers now) never quite understood the underlying rationale for opposition to their program. In their view, all of this was simply natural law, and all those suffering under it were suffering due to their own misfortune, or vice, or laziness, or some combination thereof.

Here, too, is something to give one pause: the preaching of virtue and the desire to extend “tough love” to those disadvantaged by the system. The churches were harnessed to the cause, preaching submission and resignation in the face of what boiled down to inherent injustice – along the way, giving the labor and socialist movements reason enough to embrace Marx’s epithet that religion is “the opium of the people.”

Seyd foresaw the direction the system would take, once the majority of nations went on gold. “We have demonstrated before that if Silver is abandoned, and Gold is made to do its office, the value of Gold must rise very considerably. England cannot escape this any more than other States; she must either part with her Gold in return for the cheapened products coming to her shores, or the price of property and labour in the country must fall in obedience to the dictates of international trade.” That is, either <129>the banking system would come under severe stress paying for cheap imports, or domestic prices and wages would have to fall. “And, whilst thus the poor and labouring classes, as well as the holders of property, will suffer, the capitalist and the man of fixed income alone will profit (perhaps to the extent of 25 per cent.), which will give capital and fixed incomes so much the stronger hold.” (12)

Such reasoning led to an ineluctable conclusion: “The single Gold valuation, the writer believes, will bring misery to the world, and the curse of posterity will fall on its advocates if they succeed in carrying their theories into practice–theories which, blind to all opposing influences and considerations, they are weak-minded enough to hold supreme.” (13)

Go back to “The Automatic Mechanism”


1. John Maynard Keynes, The Economic Consequences of the Peace (New York: Harcourt, Brace, and Howe, Inc., 1920), II.4.

2. Keynes indeed paints a glowing picture even of the situation of the working classes: “The greater part of the population, it is true, worked hard and lived at a low standard of comfort, yet were, to all appearances, reasonably contented with this lot” (Keynes, Economic Consequences, II.4). An overly sanguine view, as we shall see.

3. Quigley, Tragedy and Hope, p. 65.

4. Report and Accompanying Documents of the United States Monetary Commission, organized under Joint Resolution of Aug. 15, 1876, 44th Cong., 2d sess., S. Rept. 703, GPO, 1877, pp. 53-54.

5. Report, p. 53.

6. Report, p. 57.

7. Report, p. 57.

8. Karl Polanyi, The Great Transformation: The Political and Economic Origins of Our Time (Boston: Beacon Press, 1944), p. 3. Because the market sets the value of the currency, Polanyi viewed this as the market in its purest form: hence, self-regulating. But this still begs various questions, such as, how does the market choose a currency? It is not the market but the state which, in the 19th century, chose gold. Legal tender was still very much a part of the gold-standard regime. Hence, self-regulation was never entirely the case. Nevertheless, Polanyi’s point is well-taken: the market did fix the value of the currency, once, of course, that currency was set apart.

9. On this point see Flandreau, The Glitter of Gold, pp. 151ff., 233-234.

10. Ernest Seyd, The Depreciation of Labour and Property Which Would Follow the Demonetisation of Silver (London: Eflingham Wilson, 1869), p. 56.

11. Seyd, The Depreciation of Labour and Property, p. 56.

12. Seyd, The Depreciation of Labour and Property, pp. 99-100.

13. Seyd, The Depreciation of Labour and Property, p. 82.