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NOTE 35. Charles A. Conant, Surplus Capital, and Economic Imperialism

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Charles A. Conant, Surplus Capital and Economic Imperialism

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The years shortly before and after 1900 proved to be the beginnings of the drive toward the

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establishment of a Federal Reserve system.

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It was also the origin of the gold exchange standard, the fateful system imposed upon

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the world by the British in the 1920s and by the United States after World War II at

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Bretton Woods.

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Given more than the case of a gold standard with a central bank, the gold exchange standard

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establishes a system in the name of gold which in reality manages to install coordinated

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international inflationary paper money.

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The idea was to replace a genuine gold standard in which each country or domestically each

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bank maintains its reserves in gold by a pseudo gold standard in which the central bank of

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The client country maintains its reserves in some key or base currency, say pounds or dollars.

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Thus, during the 1920s, most countries maintained their reserves in pounds, and only Britain

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purported to redeem pounds in gold.

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This meant that these other countries were really on a pound rather than a gold standard,

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although they were able, at least temporarily, to acquire the prestige of gold.

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It also meant that when Britain inflated pounds, there was no danger of losing gold to these

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other countries, who, quite the contrary, happily inflated their own currencies on top of their

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expanding balances in pound sterling.

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Thus, there was generated an unstable inflationary system, all in the name of gold, in which client

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states pyramided their own inflation on top of Great Britain's.

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The system was eventually bound to collapse, as did the gold exchange standard in the Great

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Depression and Bretton Woods by the late 1960s.

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In addition, the close ties based on pounds and then dollars meant that the key or base

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currency was able to exert a form of economic imperialism joined by its common paper and

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pseudo-gold inflation upon the client states using the key money.

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By the late 1890s, groups of theoreticians in the United States were working on what

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would later be called the quote, Leninist theory of capitalist imperialism.

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The theory was originated not by Lenin, but by advocates of imperialism, centering around

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such Morgan-oriented friends and brain-trusters of Theodore Roosevelt as Henry Adams, Brooks

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Adams, Admiral Alfred T. Mahon, and Massachusetts Senator Henry Cabot Lodge.

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The idea was that capitalism in the developed countries was, quote, overproducing, not

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simply in the sense that more purchasing power was needed in recessions, but more deeply

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in that the rate of profit was therefore inevitably falling.

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The ever-lower rate of profit from the, quote, surplus capital was in danger of crippling

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capitalism, except that salvation loomed in the form of foreign markets and especially

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foreign investments.

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New and expanded foreign markets would increase profits, at least temporarily, while investments

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in undeveloped countries would be bound to bring a high rate of profit.

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Hence, to save advanced capitalism, it was necessary for Western governments to engage

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in outright imperialist or neo-imperialist ventures, which would force other countries

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to open their markets for American products and would force open investment opportunities

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abroad.

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Even this doctrine, based on the fallacious, Ricardian view that the rate of profit is

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determined by the stock of capital investment, instead of by the time preferences of everyone

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in society, there was little for Lenin to change except to give an implicit moral condemnation

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instead of approval and to emphasize the necessarily temporary nature of the respite imperialism

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could furnish for capitalists.

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Charles Conant set forth the theory of surplus capital in his A History of Modern Banks of

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Issue and developed it in subsequent essays.

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The existence of fixed capital and modern technology, Conant claimed, invalidated Say's

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law and the concept of equilibrium and led to chronic, quote, over-savings, which he

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defined as savings in excess of profitable investment outlets in the developed Western

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capitalist world.

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Business cycles, opined Conant, were inherent in the unregulated activity of modern industrial

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capitalism.

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Hence the importance of government-encouraged monopolies and cartels to stabilize markets

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and the business cycle, and in particular the necessity of economic imperialism to force

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open profitable outlets abroad for American and other Western surplus capital.

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The United States' bold venture into an imperialist war against Spain in 1898 galvanized the energies

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of Conant and other theoreticians of imperialism.

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Conant responded with his call for imperialism in The Economic Basis of Imperialism in the

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September 1898 North American Review and in other essays collected in the United States

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in the Orient, The Nature of the Economic Problem and published in 1900.

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S. J. Chapman, a distinguished British economist, accurately summarized Conant's argument as

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follows.

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1.

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In all advanced countries there has been such excessive saving that no profitable investment

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for capital remains.

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2.

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Since all countries do not practice a policy of commercial freedom,

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3.

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America must be prepared to use force if necessary.

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to open up profitable investment outlets abroad, and 3.

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The United States possesses an advantage in the coming struggle since the organization

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of many of its industries, quote, in the form of trusts, will assist it greatly in the fight

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for commercial supremacy, end quote.

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The war successfully won, Conant was particularly enthusiastic about the United States keeping

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in the Philippines, The Gateway to the Great Potential Asian Market.

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The United States, he opined, should not be held back by, quote, an abstract theory to

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adopt, quote, extreme conclusions on applying the doctrines of the Founding Fathers on the

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importance of the consent of the governed.

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The Founding Fathers, he declared, surely meant that self-government could only apply

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Only by the firm hand of the responsible governing races can the assurance of uninterrupted progress

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be conveyed to the tropical and undeveloped countries.

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and also was bold enough to derive important domestic conclusions from his enthusiasm for imperialism.

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Domestic society, he claimed, would have to be transformed to make the nation as, quote, efficient as possible.

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Efficiency, in particular, meant centralized concentration of power.

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Concentration of power, in order to permit prompt and efficient action, will be an almost

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essential factor in the struggle for world empire."

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In particular, it was important for the United States to learn from the magnificent centralization

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of power and purpose in Tsarist Russia.

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The government of the United States would require,

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"...a degree of harmony and symmetry which will permit the direction of the whole power

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Power of the State Toward Definite and Intelligent Policies."

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The U.S. Constitution would have to be amended to permit a form of czarist absolutism, or

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at the very least an enormously expanded executive power in foreign affairs.

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An interesting case study of business opinion energized and converted by the lure of imperialism

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was the Boston Weekly, The U.S. Investor.

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Before the outbreak of the war with Spain in 1898, the U.S. investor denounced the idea

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of war as a disaster to business, but after the United States launched its war and Commodore

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Dewey seized Manila Bay, the investor totally changed its tune.

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Now it hailed the war as excellent for business and as bringing about recovery from the previous

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recession.

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Soon, the investor was happily advocating a policy of quote, imperialism, to make the

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US prosperity permanent.

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Imperialism conveyed marvelous benefits to the country.

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At home, a big army and navy would be valuable in curbing the tendency of democracy to enjoy

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quote, a too great freedom from restraint, both of action and of thought, end quote.

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The Investor added that, quote, European experience demonstrates that the Army and Navy are admirably

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adopted to inculcate orderly habits of thought and action, end quote.

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But an even more important benefit from a policy of permanent imperialism is economic.

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To keep, quote, capital at work, stern necessity requires that, quote, an enlarged field for

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for its product must be discovered, end quote.

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Specifically, quote, a new field had to be found for selling the growing flood of goods

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produced by the advanced nations and for investment of their savings at profitable rates.

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The investor exalted in the fact that this new, quote, field lies ready for occupancy.

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It is to be found among the semi-civilized and barbarian races, end quote, in particular,

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The Beckoning Country of China

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Particularly interesting was the colloquy that ensued between the investor and the Springfield

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Massachusetts Republican, which still propounded the older theory of free trade and laissez-faire.

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The Republican asked why free trade with undeveloped countries was not sufficient without burdening

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U.S. taxpayers with administrative and military overhead.

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The Republican also attacked the new theory of surplus capital, pointing out that only

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two or three years earlier, businessmen had been loudly calling for more European capital

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to be invested in American ventures.

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To the first charge, the investor fell back on, quote, the experience of the race for

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perhaps 90 centuries, which has been in the direction of foreign acquisitions as a means

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of national prosperity, end quote.

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But more practically, the investor delighted over the goodies that imperialism would bring

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to American business in the way of government contracts and the government development that

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would now be called the quote, infrastructure of the colonies.

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Furthermore, as in Britain, a greatly expanded diplomatic service would provide quote, a

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new calling for our young men of education and ability, end quote.

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To the Republicans' second charge on surplus capital, the investor, like Conant, developed

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the idea of a new age that had just arrived in American affairs, an age of large scale

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and hence overproduction, an age of a low rate of profit and consequent formation of

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trusts in a quest for higher profits through suppression of competition.

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As the investor put it, The excess of capital has resulted in an unprofitable competition.

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To employ Franklin's witticism, the owners of capital are of the opinion they must hang

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together or else they will all hang separately.

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But while trust may solve the problem of specific industries, they did not solve the great problem

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of a general congestion of capital.

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Indeed wrote the investor,

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Finding employment for capital is now the greatest of all economic problems that confront us.

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To the investor, the way out was clear,

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The logical path to be pursued is that of the development of the natural riches of the

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tropical countries.

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These countries are now peopled by races incapable of their own initiative of extracting its

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full riches from their own soil.

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This will be attained in some cases by the mere stimulus of governments and direction

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by men of the temperate zones, but it will be attained also by the application of modern

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machinery and methods of culture to the agricultural and mineral resources of the undeveloped countries."

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By the spring of 1901, even the eminent economic theorist John Bates Clark of Columbia University

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was able to embrace the new creed.

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Reviewing the pro-imperialist works by Conant, Brooks Adams, and the Reverend Josiah Strong

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in a single celebratory review in March 1901 in the Political Science Quarterly, Clark

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emphasized the importance of opening foreign markets and particularly of investing American

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capital with an even larger and more permanent profit.

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J.B. Clark was not the only economist ready to join in Apologia for the strong state.

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Throughout the land by the turn of the 20th century, a legion of economists and other social

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scientists had arisen, many of them trained in graduate schools in Germany to learn the

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virtues of the inductive method, the German historical school, and a collectivist, organicist

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state.

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Eager for positions and power commensurate with their graduate training, these new social

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Social scientists, in the name of professionalism and technical expertise, prepared to abandon

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the old laissez-faire creed and take their places as apologists and planners in a new

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centrally planned state.

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Professor Edwin R. A. Seligman of Columbia University, of the prominent Wall Street investment

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banking family of J. N. W. Seligman and Company, spoke for many of these social scientists

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Seligman prophesied that in the new 20th century, the possession of economic knowledge would

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grant economists the power to control and mold the material forces of progress.

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As the economist proved able to forecast more accurately, he would be installed as the real

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philosopher of social life and the public would pay deference to his views.

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In his 1899 presidential address, Yale president Arthur Twining Hadley also saw economists

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developing as society's philosopher kings.

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The most important application of economic knowledge, declared Hadley, was leadership

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in Public Life, Becoming Advisors and Leaders of National Policy, Hadley opined,

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I believe that there, economists, largest opportunity in the immediate future lies not

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in theories but in practice, not with students but with statesmen, not in the education of

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individual citizens, however widespread and salutary, but in the leadership of an organized

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body politic.

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Sadly, perceptively saw the executive branch of the government as particularly amenable

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to access of position and influence to economic advisors and planners.

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Previously, executives were hampered in seeking such expert counsel by the importance of political

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parties, their ideological commitments, and their mass base in the voting population.

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But now, fortunately, the growing municipal reform, soon to be called the progressive

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Executive Movement was taking power away from political parties and putting it into the

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hands of administrators and experts.

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The quote, increased centralization of administrative power was giving the expert a fair chance,

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end quote.

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And now, on the national scene, the new American leap into imperialism in the Spanish-American

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War was providing an opportunity for increased centralization, executive power, and therefore

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for Administrative and Expert Planning. Even though Hadley declared himself personally opposed

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to imperialism, he urged economists to leap at this great opportunity for access to power.

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The organized economic profession was not slow to grasp this new opportunity. Quickly,

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the executive and nominating committees of the American Economic Association, or AEA,

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created a five-man special committee to organize and publish a volume on colonial finance.

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As Silva and Slaughter put it, this new, rapidly put together volume permitted the AEA to show

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the power elite, quote, how the new social science could serve the interests of those

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who made imperialism a national policy by offering technical solutions to the immediate

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fiscal problems of colonies, as well as providing ideological justifications for acquiring

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Chairman of the special committee was Professor Jeremiah W. Jenks of Cornell, the major economic

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advisor to New York Governor Theodore Roosevelt.

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Another member was Professor E.R.A. Seligman, another key advisor to Roosevelt.

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A third colleague was Dr. Albert Shaw, influential editor of the Review of Reviews, progressive

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reformer and social scientist, and longtime crony of Roosevelt's.

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All three were long-time leaders of the American Economic Association.

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The other two non-AEA leaders on the committee were Edward R. Strobel, former Assistant Secretary

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of State and advisor to colonial governments, and Charles S. Hamlin, wealthy Boston lawyer

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and Assistant Secretary of the Treasury who had long been in the Morgan ambit, and whose

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wife was a member of the Pruan family, long-time investors in two Morgan-dominated concerns,

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The New York Central Railroad and The Mutual Life Insurance Company of New York Essays

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in Colonial Finance, the volume quickly put together by these five leaders, tried to advise

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the United States how best to run its newly acquired empire.

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First, just as the British government insisted when the North American states were its colonies,

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the colonies should support their imperial government through taxation, whereas control

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All should be tightly exercised by the United States Imperial Center.

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Second, the Imperial Center should build and maintain the economic infrastructure of the

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colony, canals, railroads, communications.

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Third, where, as was clearly anticipated, native labor is inefficient or incapable of

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management, the Imperial government should import white labor from the Imperial Center.

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And finally, as Silva and Slaughter put it,

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"...the Committee's fiscal recommendations strongly intimated the trained economists were

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necessary for a successful empire.

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It was they who must make a thorough study of local conditions to determine the correct

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fiscal system, gather data, create the appropriate administrative design, and perhaps even implement

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it.

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In this way, the Committee seconded Hadley's views in seeing as an opportunity for economists

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by identifying a large number of professional positions best filled by themselves."

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With the volume written, the AEA cast the bout for financial support for its publication

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and distribution.

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The point was not simply to obtain the financing, but to do so in such a way as to gain the

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imprimatur of leading members of the power elite on this bold move for power to economists

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as Technocratic Expert Advisors and Administrators in the Imperial Nation-State.

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The American Economic Association found five wealthy businessmen to put up $125, two-fifths

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of the full cost of publishing essays in colonial finance.

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By compiling the volume and then accepting corporate sponsors, several of whom had an

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economic stake in the New American Empire, the AEA was signaling that the nation's

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In view of the symbolic as well as practical role for the sponsors, a list of the five donors for the Colonial Finance Volume is instructive.

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One was Isaac N. Seligman, head of the investment banking house of J. and W. Seligman & Company, a company with extensive overseas interests, especially in Latin America.

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Isaac's brother, E.R.A. Seligman, was a member of the Special Committee on Colonial Finance and an author of one of the essays in the volume.

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Another was William E. Dodge, a partner of the copper mining firm of Phelps, Dodge & Company, and member of a powerful mining family allied to the Morgans.

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A third donor was Theodore Marburg, an economist who was vice president of the AEA at the time and also an ardent advocate of imperialism as well as heir to a substantial American tobacco company fortune.

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Fourth was Thomas Shearman, a single taxer and an attorney for powerful railroad magnate

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Jay Gould.

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And last but not least, Stuart Wood, a manufacturer who had a Ph.D. in economics and had been

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and a Vice President of the AEA.