The Frying Pan or the Fire
Henry VII's seizure of the throne started England down the path that led eventually to nations making a choice between being ruled by a political elite with the military power to take over property (socialism), or an economic elite with the property or financial might to take power (capitalism). Except when imposed from outside, neither capitalism nor socialism is possible when property, and thus power, is broadly distributed throughout society. In England as a result of the confiscations and consequent concentration of ownership of the means of production during the Reformation, the choice went in favor of the economic elite. Consequently, as Walter Bagehot pointed out in his study of the structure of the English State, The English Constitution (1867), this made both parliament and the monarchy an effective nullity.
Power ended up right where Bagehot believed it belonged, in the "Upper Ten Thousand": the wealthy commercial and financial classes who really ran the British Empire as a commercial enterprise. As a result of the Crown being able to finance at least some of its operations by recourse to the Bank of England instead of taxes voted by parliament, the economic elite now had a monopoly on both economic and political power through control of the public credit. (Walter Bagehot, The English Constitution. Portland, Oregon: Sussex Academic Press, 1997, 21-49, 66-67, 72-96.)
This, according to Henry C. Adams, is the chief danger in having a country ruled by a plutocracy: "The broad theory of constitutional liberty is that the people have the right to govern themselves; but the historical fact is that, in the attempt to realize this theory, the actual control of public affairs has fallen into the hands of those who possess property." (Henry C. Adams, Public Debts, An Essay in the Science of Finance. New York: D. Appleton and Company, 1898, 9.) When ownership of the means of production, "property," is concentrated, then "control of public affairs" is concentrated in the hands of the wealthy. In the case of the British Empire (and, later, the United States), this meant those who controlled the money market.
The Slavery of Savings
The question is how this situation could have arisen. As Kelso and Adler were to explain in The New Capitalists, the increasing concentration of ownership of industrial and commercial capital was the result of the way in which capital formation was financed. The reliance on existing accumulations of savings, termed "slavery" by Kelso and Adler in no uncertain terms, ensured that ownership of virtually all new capital formed would go to those who already owned most of it in the first place.
This is due to the fixed belief (as false as it is unshakeable) that investors use their savings directly to finance capital formation, and the fixed reality that no reputable or honest bank will lend money for even the soundest capital project without adequate collateral. Consequently, ownership of the means of production is, given an absolute and dogmatic faith in these constraints, properly a monopoly of a financial or economic elite — which is also (if things are to be run "properly") the political elite as well.
This brings us to Bagehot's work, and the two books for which he is most famous, The English Constitution (1867) and Lombard Street (1873). In the history of finance, Lombard Street qualifies as a brilliant examination of a system of banking and finance that assumes concentrated ownership of the means of production, oppression, exclusion, and the degradation of individual human dignity and personal sovereignty as givens. It is a classic of economic injustice. Paradoxically, Lombard Street is lauded as a pillar of laissez faire capitalism, considered by its proponents to be the system that best embodies "freedom." Is, however, Bagehot the champion of freedom that he has been made out to be?
Whatever the shabby reality of laissez faire capitalism, Lombard Street describes the operation of a financial system based on exclusionary barriers to participation, State control of the money supply, mercantilism, a permanent outstanding State "floating debt," and economic subjugation of colonies to the mother country, among a great number of other systemic violations of essential human dignity and personal sovereignty. Bagehot's book is, in short, a literary pillar and financial justification of the British Empire under the absolute rule of the House of Commons. God is an Englishman ("probably educated at Eton" — E. M. Delafield), and His Holy Temple is the Imperial financial market centered in Lombard Street in the City of London.
Power Follows Property
Not surprisingly, on investigation we find that Lombard Street from 1873 is an application of Bagehot's theories of sovereignty described in The English Constitution. In this, we can draw an analogy: The English Constitution is to Lombard Street, as Adam Smith's The Theory of Moral Sentiments (1759) is to The Wealth of Nations (1776). Both men applied their philosophical orientation more or less consistently in books that attempt to describe the way economic society works.
There is, however, a significant difference between these two influential thinkers. Where Smith dismissed the idea of widespread ownership of the means of production as essentially irrelevant, falling into an inadvertent elitism, Bagehot embraced a political — and thus economic — system that assumed a political (and thereby financial) elite as a given and a positive good, as a necessity, in fact, if society is to advance socially, economically, and politically. Less than half a century later John Maynard Keynes would take Bagehot's assertions as proven fact, and base his entire economic theory on the assumption of the absolute necessity for existing accumulations of savings to finance capital formation.
As for Adam Smith, in his "invisible hand" argument, Smith posited that our possession of human labor adequately secures our fundamental human right to the opportunity to earn a living. Since he reasoned that those with property in capital will always require the labor of those without property in capital to satisfy their wants and needs, human labor will always be in demand. The worker who owns no capital will always be able to enjoy an adequate and secure income through the sale of his labor. Legal title to the means of production doesn't matter because (as others came to accept as a matter of course), "Neither capital can do without labor, nor labor without capital." (Pope Leo XIII, Rerum Novarum ("On the Condition of the Workers"), 1891, § 28.)
When Capital Displaces Labor
A problem surfaces, however, when technology begins to take over the bulk of the manual input to production, replacing human toil. As Charles Babbage pointed out in his essay, On the Economy of Machinery and Manufactures (1835), while technology makes for an independent (though not autonomous) addition to the mere animal power of humanity, it does not change a human being's physical capabilities:
(4.) The advantages which are derived from machinery and manufactures seem to arise principally from three sources: The addition which they make to human power. — The economy they produce of human time. — The conversion of substances apparently common and worthless into valuable products.Because the income generated by technology belongs by natural right to the owner(s) of the technology, the propertyless worker is left out in the cold. A similar problem happens when companies shift factories to areas or countries that have lower wage rates. Jobs disappear, and society is disrupted. Technological advance and globalization, morally neutral yet potentially beneficial things, become perceived as inherently and objectively evil.
(5.) Of additions to human power. With respect to the first of these causes, the forces derived from wind, from water, and from steam, present themselves to the mind of every one; these are, in fact, additions to human power, and will be considered in a future page: there are, however, other sources of its increase, by which the animal force of the individual is itself made to act with far greater than its unassisted power; and to these we shall at present confine our observations. (Charles Babbage, On the Economy of Machinery and Manufactures. London: Charles Knight, 1835, 6.)
What Smith might consider an unfortunate but inevitable working of economic laws (actually a distortion of economic laws), however, Bagehot, and Keynes after him, regarded as the proper ordering of society. Like Keynes after him, Bagehot rejected the idea of democracy, while calling his system democratic. As Bagehot explained in The English Constitution (in which there is a single reference to Magna Carta, and that dismissive of basic human rights), (Bagehot, The English Constitution, op. cit., 154.)
It is often said that men are ruled by their imaginations; but it would be truer to say they are governed by the weakness of their imaginations. The nature of a constitution, the action of an assembly, the play of parties, the unseen formation of a guiding opinion, are complex facts, difficult to know and easy to mistake. But the action of a single will, the fiat of a single mind, are easy ideas: anybody can make them out, and no one can ever forget them. When you put before the mass of mankind the question, "Will you be governed by a king, or will you be governed by a constitution? the inquiry comes out thus — "Will you be governed in a way you understand, or will you be governed in a way you do not understand?" (Ibid., 21.)In other words, most people are simply too stupid and incompetent to be able to govern themselves. They need a political and financial elite, endowed by a Creator, to make decisions and run things for them. It is easy to imagine that Bagehot was familiar with Lincoln's widely publicized Gettysburg Address, and was responding to the recently martyred Lincoln's definition of democracy in a manner calculated to undermine it. There is enough anti-American sentiment expressed in The English Constitution to justify the impression that Bagehot loathed the United States and everything for which it stood.
It is hardly a matter for comment that, in light of his orientation, Bagehot made approving noises regarding the political theories of Thomas Hobbes, the totalitarian political philosopher: "Hobbes told us long ago, and everybody now understands, that there must be a supreme authority, a conclusive power, in every State on every point somewhere." (Ibid. 120.)
Bagehot then went on to attack the U.S. Constitution, indeed, the entire American political system, at one point calling one of its important institutions a "farce." (Ibid., 15.) Not surprisingly, the U.S. Constitution specifically acknowledges the sovereignty of the people against that of an absolute monarch or totalitarian State. In contrast to Bagehot's absolutist concept of State sovereignty, the U.S. Constitution embodies not only divided sovereignties between the states and the federal government, but checks and balances to secure oversight and accountability.
Property Takes Over Power
Understanding Lombard Street as an application of the theories of Statist absolutism found in The English Constitution, we find it incredible that anyone in favor of free markets, limited economic role of the State, the rights of private property, and the natural human right to have ownership of the means of production could use Bagehot's work to support his or her position without having a surfeit of ignorance, stupidity, or hypocrisy, or becoming violently ill. It thus becomes critical that we understand exactly where Bagehot stands, and thus why the system he described and effectively advocated must be restructured along more just lines and on a basis that respects the human dignity and individual sovereignty of each and every person.
A reading of The English Constitution — a virtual necessity if one is to understand Lombard Street — gives a very clear exposition of Bagehot's position. A relatively small elite — the "Upper Ten Thousand" as they were called — were in control of the country, and (according to Bagehot) properly so. Bagehot carefully distinguished leadership in "society" (meaning parties, balls, race meets, and so on) from leadership in government and the economy. The Queen (a "retired widow") and the Prince of Wales ("an unemployed youth") are the leaders of society and play an important role in providing the lower classes with the easily understood fallacy that the monarch rules the country. Bagehot called this the "dignified" aspect of the English Constitution, a social convention to pacify the unintelligent masses.
The real power resided in the House of Commons, the House of Lords being another "dignified" aspect of the Constitution of the country. The House of Commons is "efficient" as opposed to "dignified," and, so far as the traditional structures of government allowed, ran the country essentially as a business corporation. The propertied classes were (in a sense) the shareholders of the national corporation. Common unpropertied people, as well as aristocrats whose wealth and power were in decline as agriculture diminished in relative importance as the source of national wealth and employment, were to some extent supernumeraries, redundant employees and pensioners of the national corporate State.
The House of Commons, elected by a relatively small number of voters, was, essentially, the board of directors of the country, "a class . . . trained to thought, full of money, and yet trained to business." (Ibid., 66.) In other words, the governing body of the Empire was a carbon copy of the owners and upper management of the East India Company, a private enterprise that governed India for the Crown until 1858, eight years before Bagehot wrote The English Constitution.
Power Corrupts? Absolutely!
Do not assume, due to his assertion that ultimate power resided in the House of Commons, that Bagehot supported popular sovereignty. It must clearly be understood that the electorate at the time he wrote, 1867, was extremely small, and composed exclusively of men of property, a financial elite which thereby secured a self-perpetuating political power — the "pocket borough" system also described as the "rotten borough" system. This was only right, for Bagehot believed that the masses are too stupid to be able to vote or do anything other than take orders:
• "We have in a great community like England crowds of people scarcely more civilized than the majority of two thousand years ago; we have others, even more numerous, such as the best people were a thousand years since. The lower orders, the middle orders, are still, when tried by what is the standard of the educated 'ten thousand', narrow-minded, unintelligent, incurious." (Ibid., 6.)And so on. Evidently, democracy and fundamental human rights are bad for the IQ, and only a carefully selected elite is fit to run things for hoi polloi. As Bagehot declared, "The principle of popular government is that the supreme power, the determining efficacy in matters political, resides in the people — not necessarily or commonly in the whole people, in the numerical majority, but in a chosen people, a picked and selected people." (Ibid., 17.) [Emphasis in original.] Not surprisingly, one of the "defects" Bagehot listed in the American system is the impossibility of a dictatorship in times of national emergency. (Ibid., 20.)Another problem is that Americans do not accept the opinions of their betters without question: "They have not a public opinion finished and chastened as that of the English has been finished and chastened." (Ibid., 13.)
• "We have whole classes unable to comprehend the idea of a constitution." (Ibid., 23.)
• "A free nation rarely can be — and the English nation is not — quick of apprehension." (Ibid., 74.)
Natural rights, the judiciary, — such things are ignored. They are unimportant because they are not "efficient," that is, they do not increase the effectiveness of government, the purpose of which is to protect the interests of the propertied classes who run the country. Weaknesses appear in government to the extent that the State administration departs from the principles of business, e.g., lack of efficient structure, redundancy, etc. The fact that these structures were at least initially intended to provide accountability to the citizens is irrelevant. The capitalist of Bagehot's day was not accountable to his workforce or his customers, so the government should not be accountable to the citizens it governed.
Bagehot simply did not understand that the State is not a business corporation owned by a small capitalist elite. While principles of sound business (as opposed to the diseased structures that have grown up to support and protect capitalism and socialism) can be applied in government to great advantage, ultimately there comes a parting of the ways. A business corporation exists to make a profit and benefit the individual workers, shareholders, and customers, while a government exists to keep order and care for the common good; it is not an enterprise to be run for individual benefit or profit.
By focusing solely on what was expedient ("efficient"), Bagehot dismissed the importance of personal sovereignty and the dignity of the human person, the protection and development of which is the ultimate justification for government. When a government undermines or goes against the dignity of every person, or does not respect that of various individuals or groups by securing to them their natural rights, that government dissolves the contract that binds its citizens to it. This in turn justifies a change in rulers, or even in the form of government.
Bagehot v. Dicey
In sharp contrast to Bagehot's elitist position is that of another, far more astute commentator, Albert Venn Dicey (1835-1922). Dicey's major works may well have been inspired by the necessity of countering what he would consider Bagehot's undermining of the basis of rule of law, even of English civilization itself. Where Bagehot asserted that ultimate power rested in the House of Commons (where it had been transferred from the monarchy during the so-called "Glorious Revolution"), Dicey believed in the rule of law. Dicey's orientation was thus based on the dignity of the human person, personal sovereignty, and respect for the natural rights inherent in each human being.
The difference between Bagehot and Dicey is possibly best seen in the sharp contrast in their views of the United States. Unlike Bagehot, who simply read accounts by English travelers who made no effort to understand the system they observed, Dicey actually traveled to the United States in 1870 in company with James Bryce, 1st Viscount Bryce (1838-1922), who made the trip to research his monumental The American Commonwealth (1888). The primary goal of the trip (possibly to counter the vitriol Bagehot poured out on the American system in The English Constitution) was to understand the American Constitution. Unfortunately, neither Dicey nor Bryce followed up their work on the American Constitution with a similar analysis of the financial and economic system.
That left Bagehot's Lombard Street, with its basis in the Bank Charter Act of 1844, unchallenged, along with its basic premise that a system that concentrates wealth and power is the only way to advance economically and socially. This belief became so engrained that John Maynard Keynes was able to state it as self-evident in the book that made his reputation, The Economic Consequences of the Peace (1919), without a shred of proof or argument:
The immense accumulations of fixed capital which, to the great benefit of mankind, were built up during the half century before the war, could never have come about in a Society where wealth was divided equitably. (Keynes, The Economic Consequences of the Peace, 2.III.)A country that followed Bagehot's and, later, Keynes's analysis would find that it had achieved a uniform currency, albeit imposed by force and not naturally by the needs of trade . . . but hardly one that is stable or consistent in value. It would also find itself embroiled in constant political destabilization as the growing wealth gap forced government to assume an increasing role in the economy to keep the propertyless masses pacified.