#35 Monopoly Cartels: Concentration of Capital

Introduction

The growth of urban-industrial capitalism in western Europe and the USA in the 19th century had at least three characteristic modes of activity that distinguish the system from all previous societies:

• The growth of monopoly as the chief tendency of industrial and financial growth

• The instability of the monetary system; rapid growth turned to rapid decline and back again to growth

• New levels of social inequality

None of these characteristics were new in and of themselves. Monopoly, instability, and inequality had been the characteristics of many older pre-capitalistic societies, but it was their regularity and intensity that defined industrial capitalism as a system that was distinctly different to all older societies. It is these three elements in this and the next blog that I will be discussing.

Monopoly Cartels: Concentration of Capital

Marx (in the 1850s) was perhaps the first economists to recognise the powerful trend towards concentration and centralisation of capital inherent in a competitive economy...

- Paul Baran and Paul Sweezy in Monopoly Capital, Penguin 1966, page 18.

Monopoly itself was hardly new. The nature of monopoly varies with time and place. Today, for instance, there are only 3 or 4 huge companies in every sector globally. Monopoly or oligopoly exists when a very small number of huge enterprises dominate a marketplace. The chartered companies established in Europe in the late 16th century and continuing through to the end of the 19th were privatised monopoly companies, which allowed shareholding from outside wealthy individuals. The old feudal system had also created monopolies through land use, in feudal land tenure systems. Colonies created monopolies for the invading country. A colonial power had monopoly importing and exporting rights. Their ships had total control of the important and export trade, all aspects of the colonised State were tied closely to the coloniser, including law and language. A colony was considered to be an extension of the coloniser’s economy.

And, of course, feudal monarchs had a monopoly of power. Both the old feudal landlords and new ruling bankers, trading companies, and wealthy members of society were used to monopoly.

Monopoly and oligopoly have always been the natural tendency of industrial capitalism. The ideology that has accompanied the system, in the form of economic theory, has argued since Adam Smith in the 1770s that free markets and competition lead to the best outcomes. Of course, there has always been a plethora of small and medium-sized businesses. Despite the evidence of everyday observation, monopoly and oligopoly have accompanied capital as the system has grown and flourished.

The early 16th century chartered trading companies were created as intentional monopolies by the government of each state: the Hudson Bay and the East Indian companies by Holland and Britain, and many more. Monopoly was an attempt to eliminate competition, fix prices, and remove middlemen. Colonies were monopolies for the owning countries for their banks, traders, and services. The East Indian Company, for instance, created a monopoly on opium. The raw opium was grown by Indian smallholders. The company created factories to process the opium and then sold it off at auction to traders for export to China. Growers had a single market and had to accept the prices offered. Monopoly was second nature to the entrepreneurs and politicians of Europe at the beginning of the 19th century.

Monopoly companies and the concentration of capital have been discussed by many of the important theorists of the left, namely Marx and Lenin, and from the USA, Paul Baran and Paul Sweezy in their important work Monopoly Capital. In the 21st century, global monopoly and oligopoly are again characteristics of the economic landscape in almost every field, from publishing books or newspapers and producing food to digital companies.

The question rarely posed is: what is the dynamic within the capitalist systems that tend towards concentration? Is monopoly inevitably part of the framework? It is one thing for a monopoly to be intentionally created by government, another for the tendency of capital to move towards concentration.

In 1844 and 1855 laws created the Joint Stock Company and ‘limited liability’. The first allowed any number of owners of a company limited by shareholding, and limited liability means that if you invest $10 in a company, you are never liable for any of the debts of the business beyond $10. Your liability is limited to the amount you invested. Both elements are crucial to the growth of all forms of industry and commerce in all major capitals.

At the same time, money markets were institutionalised into stock exchanges in all major capitals of Europe. These exchanges attracted companies to offer their stocks for sale to the public and provided a safe place for the public to buy shares. The City of London became a world centre to attract share capital, which was then offered for sale on the London stock exchange. Paris and Amsterdam offered parallel facilities, New York followed some years later.

The merchant banks became the middlemen. They acted between successful companies wanting to sell or buy shares and the wider rich upper classes. They acted between companies buying other companies. Merchant banks used the stock exchanges for this purpose. So long as a person or a company could easily buy shares, they could buy in principle the entire company: the system was designed with a tendency towards monopoly and oligopoly.

Banks became the core and the heart of the system of capital throughout the 19th century and after. Money became the lifeblood that needed to be pumped around the whole system. The banks were the pumps that distributed the money to wherever it was required. Both governments and industries needed capital to grow and to act. The government needed short-term capital to run the affairs of the state: to go to war, to pay for infrastructure, roads, railways or other projects. The merchant banks provided this service. Governments who used private banks were always limited in what they could achieve and were limited by how much money privately owned banks would lend.

British Library digitised image from page 189 of "Metropolitan Improvements ... From original drawings by T. H. Shepherd, etc". Date of publication: 1830. Sourced from the British Library via Flickr.

The state needed compliant banks. The private sector needed banks too; manufacturers needed money to buy machinery and raw materials, and then to see them through the period between the time when they had sold the goods and when they received their money in return.

The structure and ownership of the banking industry reflected the wider national context. For instance, British banks were international in the 19th century; Britain was an industrial importing and exporting country, with a limited middle class. Banks were able to provide a connection between India and Britain. German and Japanese banks reflected the growth of their respective industrialising economies. Germany did not have a colonial empire in the 19th century; she developed through large city banks that had their origin in the period before 1870 and Germany's unification. Their banks were able to work closely with their regional industries, and buy growing company shares and sit on their boards, thus stimulating growth. German banks stimulated industrial growth.

Banking had been a haphazard feature of feudal societies. Governments scrabbled for loans. Interest was forbidden by Church law. Wealthy Jewish families had been encouraged to enter European feudal societies, as their rules did not forbid interest. As a consequence of this, successful Jewish families owned banks that had developed across Europe. By the 19th century, Protestant families had also moved into banking. By 1850, London had a mixture of privately owned merchant and international investment banks.

In no specific order, there were: the Rothchild’s, the oldest of them all; Barring, Lazard’s, Morgan Warburg’s and Hambros in London. In the USA, France, and Germany, similar banks began developing from the 1850s, they were all providing short-term bonds to the government and long-term loans for the latter to industry. They were all interested in government debt, including foreign debts. The banks, for instance, had provided the debt in the form of government bonds paid to Egypt for the building of the Suez Canal, or to governments in Persia, the Ottomans Turks, imperial China for specific activities.

The Suez Canal, Port Said, Egypt. Photographed and published by B.W. Kilburn, c1899. Retrieved from the Library of Congress.

The stability of the system depended on the Gold Standard, crucial to the security of these bonds.

The banks were all generally privately owned, unincorporated, close partnerships of family. The Rothchild’s are best known, sending their sons to the key cities of Europe. Each Rothchild bank was private and secret; they kept their knowledge of government affairs anonymous. They all knew each other, of course. The relationship between banks and the state were very close. So, the banks expected their governments to support them when foreign governments defaulted on loans and in extremis that meant invasion, as happened in Egypt in 1882.

By the middle of the 19th century, the members of the Court at the Bank of England were the old merchant banking firms Barings, Morgan Grenfell, Lazard’s, and others.

They all knew each other as many sat on the board of the central bank and advised governments on what they could or could not do. Schroders, for instance, created $3 million bonds to the Confederates to fight the civil war. Rockefeller made his fortune in petroleum and controlled the Chase Manhattan Bank. J.P Morgan invested in US industry on a huge scale, Barings facilitated the Louisiana purchase of land. Rothchild’s financed the British government during the Napoleonic Wars and dominated investment in European railways in the 19th century.

During the 19th century, the creation of stock exchanges in London, Paris and Amsterdam provided the means for itinerant cash to be invested in stocks created by aspirant companies. Any company with access to these exchanges would create shares that could be bought or sold on the market by other buyers and sellers. This system allowed rapid growth with the investment available. Then, during downturns, a failing company would be bought by a parallel company. The system was ideally set to create a monopoly or oligopoly for companies dominating different sectors of the economy.

The sheer scale of the enterprise, first in railways and iron production followed by steel, copper, electrification, led in only one direction. The mergers involved that created the General Electric Company in the USA represent just one example of the process. Monopoly involved the consolidation and integration of machinery-making companies. Outside financiers played a vital role, connecting American industrialists and railroad companies to capital markets. General Electric was a merger of two or three electrical equipment manufacturers in the 1890s, and they had been the result of mergers.

Monopoly by the end of the 19th century was closely allied to Wall Street in the USA, and the London and Paris stock exchanges. It was driven by the scale of investments that were needed, by the desire to monopolise purchasing policies of both heavy equipment and raw materials. By the turn of the 19th century, General Electric, the German AEG and Siemens and Westinghouse were working together to systematically divide the world between them.

The rapid growth of concentration was fastest in the electrical equipment industry, but the trend was similar through the western world’s economic system. Firms operated on a global scale in transport and communication, not only in terms of exports, but in terms of vertical integration, raw material supplies, and control of manufacturing facilities, sales organisation and finance. Economies of scale were important in oil, metals, and chemicals.

It was clear by 1900 that industrial capitalism meant monopoly and oligopoly as the natural order of the day. Over 100 years later, the same processes are in operation across all major industries, commerce, and finance.

Instability: Regular Economic Crises

From the middle of the 19th century, economic crises of differing intensity began to settle into the dynamic of the growing economics. Most crises were relatively short in duration and confined to national borders. A few crises, though, became international and spread across borders to all the 19th century growing capitalist nation-states.

The years 1873-1896 were considered one of these long international downturns, known as the Long Depression. Another was the well-known economic crisis between 1929 and ‘31 known as the Great Depression.

During downturns, companies including banks went bust. Workers were thrown out of work and suffering was intense. There has always been plenty of evidence of what specific event or process began a crisis, but there is no agreement, even up to the present moment, on what 'causes' economic crises. Macro-economics was set up specifically in the 1940s to study the behaviour of economic systems to predict and therefore act before a downturn occurred. So far, despite learned argument over the last 170 years, there is no agreement, and downturns continue to surprise most economists.

A crowd at New York's American Union Bank during a “bank run” early in the Great Depression. Thousands of banks failed during the Depression causing anxious depositors to create "runs" on banks as they tried to withdraw their money before the banks collapsed. This Bank opened in 1917 and went out of business on June 30, 1931. Image sourced from Wikipedia.

Instability was built into the system as if the capitalist economies were really out of human control. Upswings and downturns appear as if by magic. The doctrine that the national and world economy should best be left to itself has had a long but not glorious past. Very similar arguments today, dressed in different ideological clothes, assume that the more wealth will be produced, the less it is interfered with by human hands.

Economists have attempted to examine cycles of growth alongside cycles of crises. The longest cycles, called Kondratieff waves - over roughly 50-year intervals - have kept economists in highly paid work.

Despite regular downturns, growth has been faster and lasted longer than the regular crises.

Growth rates in annual percentages of industrial production up to 1913 looked as follows:

                            1850s-1873             1873-1890             1890-1913

Germany              4.3                           2.9                         4.1

Britain                  3.0                           1.7                          2.0

Unities States      6.2                           4.7                          5.3

France                 1.7                           1.3                          2.5

Italy                                                      3.1                         3.5

Source: C. Freeman, Chapter 6, see suggested reading below.

These figures illustrate that the USA was the most dynamic economy over these 60 years, Germany coming a close second.

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Further Reading

On Monopoly:

Vladimir Lenin, Imperialism: The Highest Stage of Capitalism, 1917.

J.A Hobson, Imperialism; A Study, London 1902.

Paul Baran and Paul Sweezy, Monopoly Capital, Penguin 1966.

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