THE passage of the Reform Bill made Free Trade certain. For the only power which had an interest in maintaining English agriculture was now deprived of its political ascendancy. More and more the views of the leaders of finance and industry were bound to prevail.
The leaders of finance had two chief reasons for demanding Free Trade—namely, that they wished their foreign debtors to be able to pay in goods the interests on the loans made to them and that they wished to keep wages as low as possible in the home market. At the risk of repetition it must be insisted that the Money system is a system whereby human productiveness is made to yield advantage not to mankind as a whole but to the owners of gold. The owners of gold can obtain advantage only by lending their gold to producers and obtaining from producers interest upon it.
Now producers produce not gold, but goods of various kinds. It follows that, unless these goods can be sold for money, interest on loans cannot be paid in money. An Australian farmer who has borrowed 1,000 at 5 per cent., for example, must sell at least 50 worth of his products in order to be able to pay the interest on his loans. Farmers do not usually sell to farmers; they sell to people engaged in industry or business. Consequently when a man lends money to a farmer he wants to be assured that the farmer has a market in some industrial area. The greatest industrial area in the world, during the first half of the Nineteenth Century, was Great Britain. It was therefore to the interest of every lender to agricultural countries that the British market should be open to farm produce of all sorts.
But the lender to agricultural countries, as has been shown, does not usually send money to those who borrow from him. What he does is to place a credit at the disposal of the borrowers. The borrowers, as farmers, use this credit to buy ploughs, reaping machines, and so on, in the lenders' home market and thus increase the total of exports from that market. It is obvious that the more ploughs and reaping machines they can get for their money the larger will be the profits they can earn and the more desirable, therefore, they will be as borrowers. The lender to these farmers is concerned consequently that industrial production shall be carried on as cheaply as possible.
Now industrial production cannot be carried on cheaply if wages are high. And wages cannot be lowered if food is dear. A free market therefore, in which every farmer must needs compete with every other farmer, secures the double advantage of enabling interest on loans to be paid and of placing the borrowers of these loans in a good position to pay them. It serves, further, as a check on these borrowers. For a farmer whose prices are too high, by reason, for example, of high wages, will not be able to sell his goods. Farmers no less than industrialists are compelled, in consequence, to keep wages as low as possible.
And what applies to lenders to farmers, applies with equal force to lenders to industrialists. Industrialists spend the loans made to them in buying machinery and raw materials and in paying wages. The lower the wages paid by them, the more cheaply can they sell in foreign markets and the more, therefore, can they export to the farmers who have obtained loans.
It will be seen that, in both these cases, there is laid upon the borrower (farmer or industrialist) the necessity not only of selling at a profit, but of selling cheaply at a profit. For if the industrialist does not maintain the balance of exports against imports gold will leave the country, as has already been explained, and if the farmer does not maintain his exports (which include the interest on the loans made to him) gold will leave his country also. The free market, as has been seen, pits farmer against farmer ; it also pits industrialist against industrialist, seeing that foreign manufactured goods can be imported if home goods are not cheap enough.
In each instance the borrower, therefore, is forced to keep wages down to the lowest possible level and use every means to secure that wages never rise above this level. Thus the lender, usually a lender of unreal money, derives his advantage from the poverty and wretchedness of the working population, who are not permitted to share, except in so far as body and soul must be kept together, in the vast wealth they have helped to create.
Farmers have not, as a rule, been allowed to obtain much of this wealth for themselves, because they have fallen into the hands of middlemen equally concerned with the usurers to exploit them. But the great industrialists did certainly obtain immense profits as a result of working in the closest association with the Money power. Upon their shoulders, if to a less extent than upon the shoulders of Money, must rest the shame of the exploitation for gain of helpless men and women of their own blood and race.
Nevertheless the interests of producers and lenders, however closely these may work together at times, cannot permanently become identified. Although many of the leaders of industry have been, and still are, directors of banks and finance houses, a borrower and a lender become antagonists the moment the soundness of the borrower is in doubt. In the eyes of the Money power a borrower is unsound whenever his costs (wages) begin to rise. For this reason there is a constant ebb and flow of lending (the so-called "Credit Cycle"). Not only do the owners of gold change the incidence of their investments ; at times, also, they cease to lend because their money seems unlikely to be safe or to earn enough interest. When this happens a world slump occurs. The conditions which prevail after a slump has continued for a time are very favourable, as will be shown later, to a resumption of lending on a substantial scale.
It is necessary to hold these facts in mind if the history of the booms and slumps which marked the first half of the Nineteenth Century is to be understood. And it is necessary above all to remember that the owners of gold were concerned, before everything else, to secure that money should never become divorced from their commodity. A rise of the prices of goods alarmed them therefore both as moneylenders and as gold-owners, for it was their constant fear that, if the rise was not checked, it might lead, through excessive borrowing by prosperous producers, to such a fall in the value of money as to drag the country off the gold standard. Their constant object was to obtain legislation compelling the Bank of England to make money scarcer the moment prices and wages showed any sign of rising. How they achieved this object is a story of much interest at the present time.
Naturally enough the producers of goods always offered resistance to attempts to lower the price of them. They favoured a plentiful supply of money. In periods of rising prices, before "costs" had begun to rise, they were usually favourably disposed to Finance ; but in times of falling prices hostility tended to show itself until it was quenched by the lively fear of ruin.
During the years which immediately followed the passage of the Reform Act the leaders of industry were in evil case and therefore very humble ; most of them had been so shaken and terrified by the crisis of 1825 that they had accepted the views of Money without reservation. They asked no longer for plentiful money and high prices of goods, but concentrated instead, as the economists advised them, on cheapness and the reduction of "costs"—i.e., wages. Free imports, as has been said, promised lower wages and cheaper raw material. England might become the "workshop of the world," for nowhere else in Europe would money buy more.
The leaders of industry found their natural spokesman in Peel. Like him they were, for the most part, of conservative mind, deeply suspicious of the "Radicals," who had close affinities with the Whigs of the City of London, and, except in matters of finance, strongly imbued with nationalist feeling. It became Peel's business, therefore, after the passage of the Reform Bill, to change the old Tory party of the landlords into the modern Conservative party of the manufacturers, without, in the process, effecting any open rupture. The same kind of work was going on among the Whigs, where the landed interest was being superseded by the party of Financial Liberalism. Thus differences which were purely political were replaced by differences which had an economic complexion.
Robert Owen, as has been said, saw the nature of these differences at a very early period. As he pointed out, it was in the interests of the manufacturer that his home market should be able to buy his goods. He had everything to gain by a flourishing agriculture and high wages. The interest of Money, on the contrary, was to hold down the price of goods and so increase its own value. Not the manufacturer, but the financier, as has been shown, has chief need of the export trade, and it is only when money has been made scarce in the home market, so that there is insufficient buying power, that the manufacturer becomes frantically concerned to cut wages, to "rationalize," to combine, and to find and develop foreign markets. If he could make a profit at home, he would not need to expend these exertions.
But in 1832, as has been said, the manufacturers were convinced that their best interests dictated humble duty to the City of London. They began, therefore, to agitate for the repeal of the Corn Laws and for Free Trade. Peel himself declared that he had been "converted" to Free Trade by Richard Cobden. The rump of the old Tory party naturally offered opposition to a policy which threatened what they believed to be the highest interest of the nation, but they stood no chance now that the representation of the Commons had been "reformed." Finance, indeed, was able to make of every protest which they uttered a fresh nail in their coffin. What, were they really in favour of unrepresentative government ? Of privilege ? Away with squire and parson politics. Those men who had no scruples about inflicting starvation on millions of their fellows actually appeared before the world as the champions of human right and of human happiness and spoke with unction of themselves as the "protectors of the people's food."
They were busy, in the year of reform, in "reforming" their enemy the Bank of England, which had now fallen into their clutches. A Parliamentary Committee on the Bank Charter (which Charter was due for renewal) was constituted and Jeremiah Harman, who had been Governor during the crisis of 1825, was called to explain his conduct. He stated that—
"The first principle was attention to the security of the Bank itself, in which we considered the safety of the public, of course, very much involved ; to render as much service as we could to the commercial community with propriety, always having reference to the means which we possessed of fulfilling our engagements."
His successor in the office of Governor, John Horsley Palmer, expressed different views. Palmer criticized the action of the Bank in supplying credit directly to commerce, saying :
"It is competition with private bankers and individuals in London which seems to me so objectionable."
The merchant, in other words, was in future to go to the Money market for loans and not to the Bank of England. The Bank of England was to become a Central Bank. If gold was leaving the country the Bank must raise its rate and so at once reduce buying power and bring down prices and wages ; if, on the contrary, gold was coming in, the opposite process must be employed.
Palmer's views were soon incorporated in an Act which freed the Bank-rate from the operation of a Usury Law that forbade rates of interest above 5 per cent. and turned the Bank itself into the chief agent of Money.
In 1835 large quantities of gold were shipped to America, where a high price was obtainable for the metal, and smaller quantities went to Ireland. The Bank of England obediently raised its rate from 4 to 4½ per cent. In September 1836 the rate was raised again to 5 per cent. This raising of the interest payable on loans happened to occur at a moment when a great number of railways were being built throughout England and Europe and when, in consequence, borrowing was active. A stout resistance was offered by the industrialists and they actually managed to compel their local banks to accommodate them. The Bank of England, in consequence, was forced to lend 1,300,000 to the Northern and Central Bank. It seemed for a moment as if industry had successfully defied finance.
In truth, however, the defiance was more apparent than real. It was made possible only by the accident of an influx of gold from the Continent which offset the efflux to America. The moment this influx stopped, in 1838, the Bank-rate was advanced again to 5 per cent.; then, in August 1838, to 6 per cent.; finally—the efflux to America continuing—the Bank of England was compelled to obtain a credit of £2,000,000 from the Bank of France to avoid being driven off gold. The prosperity which had returned to the industrial areas was destroyed by the fall in the prices of goods caused by the scarcity of money, and masters and men were plunged once more into gloom and despair. Further checks on borrowing and borrowers were now demanded by the Money power. These checks were supplied by the Bank Charter Act of 1844, the important clause of which was that which ordained that, if gold left the country, pounds, shillings and pence to the value of the departing gold must be withdrawn from circulation. Thus the danger that country banks dealing with industrialists might be tempted to make matters easy for their clients in defiance of the will of the Money power and to the detriment of the value of money was, it was supposed, finally removed.
But the demand for railways continued in spite of these measures, and the means of meeting the demand became available. Thanks to the fact that the demand for English goods outside of England was very great, employers were making profits on their exports. They began to invest their profits at home. The year 1844, therefore, saw a renewal of the "railway boom." It witnessed also a bad harvest which caused the price of wheat to rise. There was another bad harvest in 1845 and the Irish potato crop failed. Labour was in demand to build railways and was, therefore, relatively dear. Employers viewed with anxiety the possibility that it might become dearer still if the price of bread was advanced. They clamoured for the repeal of the Corn Laws, joining their voices to those of the financiers. Peel, now Prime Minister, gave them the Free Trade they desired.
The effect was to increase activity in every branch of industry, and this continued until all the capital available had been drawn into production. Prices and wages now rose and gold began to flow out. With the recollection of the panic of 1838 fresh in its mind the Bank of England hesitated to act, and proceeded so gently that nearly two years elapsed before the Bank-rate reached 5 per cent. When that happened, however, credit was everywhere restricted, prices fell, and failures began. In August 1847 the rate was raised again to 5½. Then on October 18, 1847, the Royal Bank of Liverpool closed its doors. The Government now ordered the Bank of England to lend freely without regard to the Bank Charter Act and suggested 8 per cent. as the rate of interest. The panic passed and gloom once more descended.
It is probable that these "Hungry Forties," as their victims of the working class called them, would have been continued as "Hungry Fifties" had not the discovery in California and Australia of rich deposits of gold effected a sudden and dramatic change. The Californian gold began to arrive in 1849, the Australian in 1851. The owners of gold were now much more numerous. There were more lenders than borrowers of a satisfactory type. Money became plentiful. Immediately prices throughout the world rose sharply and the dead weight of debt was everywhere lightened.