Charles A. Conant, Surplus Capital and Economic Imperialism
The years shortly before and after 1900 proved to be the beginnings of the drive toward the
establishment of a Federal Reserve system.
It was also the origin of the gold exchange standard, the fateful system imposed upon
the world by the British in the 1920s and by the United States after World War II at
Bretton Woods.
Given more than the case of a gold standard with a central bank, the gold exchange standard
establishes a system in the name of gold which in reality manages to install coordinated
international inflationary paper money.
The idea was to replace a genuine gold standard in which each country or domestically each
bank maintains its reserves in gold by a pseudo gold standard in which the central bank of
The client country maintains its reserves in some key or base currency, say pounds or dollars.
Thus, during the 1920s, most countries maintained their reserves in pounds, and only Britain
purported to redeem pounds in gold.
This meant that these other countries were really on a pound rather than a gold standard,
although they were able, at least temporarily, to acquire the prestige of gold.
It also meant that when Britain inflated pounds, there was no danger of losing gold to these
other countries, who, quite the contrary, happily inflated their own currencies on top of their
expanding balances in pound sterling.
Thus, there was generated an unstable inflationary system, all in the name of gold, in which client
states pyramided their own inflation on top of Great Britain's.
The system was eventually bound to collapse, as did the gold exchange standard in the Great
Depression and Bretton Woods by the late 1960s.
In addition, the close ties based on pounds and then dollars meant that the key or base
currency was able to exert a form of economic imperialism joined by its common paper and
pseudo-gold inflation upon the client states using the key money.
By the late 1890s, groups of theoreticians in the United States were working on what
would later be called the quote, Leninist theory of capitalist imperialism.
The theory was originated not by Lenin, but by advocates of imperialism, centering around
such Morgan-oriented friends and brain-trusters of Theodore Roosevelt as Henry Adams, Brooks
Adams, Admiral Alfred T. Mahon, and Massachusetts Senator Henry Cabot Lodge.
The idea was that capitalism in the developed countries was, quote, overproducing, not
simply in the sense that more purchasing power was needed in recessions, but more deeply
in that the rate of profit was therefore inevitably falling.
The ever-lower rate of profit from the, quote, surplus capital was in danger of crippling
capitalism, except that salvation loomed in the form of foreign markets and especially
foreign investments.
New and expanded foreign markets would increase profits, at least temporarily, while investments
in undeveloped countries would be bound to bring a high rate of profit.
Hence, to save advanced capitalism, it was necessary for Western governments to engage
in outright imperialist or neo-imperialist ventures, which would force other countries
to open their markets for American products and would force open investment opportunities
abroad.
Even this doctrine, based on the fallacious, Ricardian view that the rate of profit is
determined by the stock of capital investment, instead of by the time preferences of everyone
in society, there was little for Lenin to change except to give an implicit moral condemnation
instead of approval and to emphasize the necessarily temporary nature of the respite imperialism
could furnish for capitalists.
Charles Conant set forth the theory of surplus capital in his A History of Modern Banks of
Issue and developed it in subsequent essays.
The existence of fixed capital and modern technology, Conant claimed, invalidated Say's
law and the concept of equilibrium and led to chronic, quote, over-savings, which he
defined as savings in excess of profitable investment outlets in the developed Western
capitalist world.
Business cycles, opined Conant, were inherent in the unregulated activity of modern industrial
capitalism.
Hence the importance of government-encouraged monopolies and cartels to stabilize markets
and the business cycle, and in particular the necessity of economic imperialism to force
open profitable outlets abroad for American and other Western surplus capital.
The United States' bold venture into an imperialist war against Spain in 1898 galvanized the energies
of Conant and other theoreticians of imperialism.
Conant responded with his call for imperialism in The Economic Basis of Imperialism in the
September 1898 North American Review and in other essays collected in the United States
in the Orient, The Nature of the Economic Problem and published in 1900.
S. J. Chapman, a distinguished British economist, accurately summarized Conant's argument as
follows.
1.
In all advanced countries there has been such excessive saving that no profitable investment
for capital remains.
2.
Since all countries do not practice a policy of commercial freedom,
3.
America must be prepared to use force if necessary.
to open up profitable investment outlets abroad, and 3.
The United States possesses an advantage in the coming struggle since the organization
of many of its industries, quote, in the form of trusts, will assist it greatly in the fight
for commercial supremacy, end quote.
The war successfully won, Conant was particularly enthusiastic about the United States keeping
in the Philippines, The Gateway to the Great Potential Asian Market.
The United States, he opined, should not be held back by, quote, an abstract theory to
adopt, quote, extreme conclusions on applying the doctrines of the Founding Fathers on the
importance of the consent of the governed.
The Founding Fathers, he declared, surely meant that self-government could only apply
Only by the firm hand of the responsible governing races can the assurance of uninterrupted progress
be conveyed to the tropical and undeveloped countries.
and also was bold enough to derive important domestic conclusions from his enthusiasm for imperialism.
Domestic society, he claimed, would have to be transformed to make the nation as, quote, efficient as possible.
Efficiency, in particular, meant centralized concentration of power.
Concentration of power, in order to permit prompt and efficient action, will be an almost
essential factor in the struggle for world empire."
In particular, it was important for the United States to learn from the magnificent centralization
of power and purpose in Tsarist Russia.
The government of the United States would require,
"...a degree of harmony and symmetry which will permit the direction of the whole power
Power of the State Toward Definite and Intelligent Policies."
The U.S. Constitution would have to be amended to permit a form of czarist absolutism, or
at the very least an enormously expanded executive power in foreign affairs.
An interesting case study of business opinion energized and converted by the lure of imperialism
was the Boston Weekly, The U.S. Investor.
Before the outbreak of the war with Spain in 1898, the U.S. investor denounced the idea
of war as a disaster to business, but after the United States launched its war and Commodore
Dewey seized Manila Bay, the investor totally changed its tune.
Now it hailed the war as excellent for business and as bringing about recovery from the previous
recession.
Soon, the investor was happily advocating a policy of quote, imperialism, to make the
US prosperity permanent.
Imperialism conveyed marvelous benefits to the country.
At home, a big army and navy would be valuable in curbing the tendency of democracy to enjoy
quote, a too great freedom from restraint, both of action and of thought, end quote.
The Investor added that, quote, European experience demonstrates that the Army and Navy are admirably
adopted to inculcate orderly habits of thought and action, end quote.
But an even more important benefit from a policy of permanent imperialism is economic.
To keep, quote, capital at work, stern necessity requires that, quote, an enlarged field for
for its product must be discovered, end quote.
Specifically, quote, a new field had to be found for selling the growing flood of goods
produced by the advanced nations and for investment of their savings at profitable rates.
The investor exalted in the fact that this new, quote, field lies ready for occupancy.
It is to be found among the semi-civilized and barbarian races, end quote, in particular,
The Beckoning Country of China
Particularly interesting was the colloquy that ensued between the investor and the Springfield
Massachusetts Republican, which still propounded the older theory of free trade and laissez-faire.
The Republican asked why free trade with undeveloped countries was not sufficient without burdening
U.S. taxpayers with administrative and military overhead.
The Republican also attacked the new theory of surplus capital, pointing out that only
two or three years earlier, businessmen had been loudly calling for more European capital
to be invested in American ventures.
To the first charge, the investor fell back on, quote, the experience of the race for
perhaps 90 centuries, which has been in the direction of foreign acquisitions as a means
of national prosperity, end quote.
But more practically, the investor delighted over the goodies that imperialism would bring
to American business in the way of government contracts and the government development that
would now be called the quote, infrastructure of the colonies.
Furthermore, as in Britain, a greatly expanded diplomatic service would provide quote, a
new calling for our young men of education and ability, end quote.
To the Republicans' second charge on surplus capital, the investor, like Conant, developed
the idea of a new age that had just arrived in American affairs, an age of large scale
and hence overproduction, an age of a low rate of profit and consequent formation of
trusts in a quest for higher profits through suppression of competition.
As the investor put it, The excess of capital has resulted in an unprofitable competition.
To employ Franklin's witticism, the owners of capital are of the opinion they must hang
together or else they will all hang separately.
But while trust may solve the problem of specific industries, they did not solve the great problem
of a general congestion of capital.
Indeed wrote the investor,
Finding employment for capital is now the greatest of all economic problems that confront us.
To the investor, the way out was clear,
The logical path to be pursued is that of the development of the natural riches of the
tropical countries.
These countries are now peopled by races incapable of their own initiative of extracting its
full riches from their own soil.
This will be attained in some cases by the mere stimulus of governments and direction
by men of the temperate zones, but it will be attained also by the application of modern
machinery and methods of culture to the agricultural and mineral resources of the undeveloped countries."
By the spring of 1901, even the eminent economic theorist John Bates Clark of Columbia University
was able to embrace the new creed.
Reviewing the pro-imperialist works by Conant, Brooks Adams, and the Reverend Josiah Strong
in a single celebratory review in March 1901 in the Political Science Quarterly, Clark
emphasized the importance of opening foreign markets and particularly of investing American
capital with an even larger and more permanent profit.
J.B. Clark was not the only economist ready to join in Apologia for the strong state.
Throughout the land by the turn of the 20th century, a legion of economists and other social
scientists had arisen, many of them trained in graduate schools in Germany to learn the
virtues of the inductive method, the German historical school, and a collectivist, organicist
state.
Eager for positions and power commensurate with their graduate training, these new social
Social scientists, in the name of professionalism and technical expertise, prepared to abandon
the old laissez-faire creed and take their places as apologists and planners in a new
centrally planned state.
Professor Edwin R. A. Seligman of Columbia University, of the prominent Wall Street investment
banking family of J. N. W. Seligman and Company, spoke for many of these social scientists
Seligman prophesied that in the new 20th century, the possession of economic knowledge would
grant economists the power to control and mold the material forces of progress.
As the economist proved able to forecast more accurately, he would be installed as the real
philosopher of social life and the public would pay deference to his views.
In his 1899 presidential address, Yale president Arthur Twining Hadley also saw economists
developing as society's philosopher kings.
The most important application of economic knowledge, declared Hadley, was leadership
in Public Life, Becoming Advisors and Leaders of National Policy, Hadley opined,
I believe that there, economists, largest opportunity in the immediate future lies not
in theories but in practice, not with students but with statesmen, not in the education of
individual citizens, however widespread and salutary, but in the leadership of an organized
body politic.
Sadly, perceptively saw the executive branch of the government as particularly amenable
to access of position and influence to economic advisors and planners.
Previously, executives were hampered in seeking such expert counsel by the importance of political
parties, their ideological commitments, and their mass base in the voting population.
But now, fortunately, the growing municipal reform, soon to be called the progressive
Executive Movement was taking power away from political parties and putting it into the
hands of administrators and experts.
The quote, increased centralization of administrative power was giving the expert a fair chance,
end quote.
And now, on the national scene, the new American leap into imperialism in the Spanish-American
War was providing an opportunity for increased centralization, executive power, and therefore
for Administrative and Expert Planning. Even though Hadley declared himself personally opposed
to imperialism, he urged economists to leap at this great opportunity for access to power.
The organized economic profession was not slow to grasp this new opportunity. Quickly,
the executive and nominating committees of the American Economic Association, or AEA,
created a five-man special committee to organize and publish a volume on colonial finance.
As Silva and Slaughter put it, this new, rapidly put together volume permitted the AEA to show
the power elite, quote, how the new social science could serve the interests of those
who made imperialism a national policy by offering technical solutions to the immediate
fiscal problems of colonies, as well as providing ideological justifications for acquiring
Chairman of the special committee was Professor Jeremiah W. Jenks of Cornell, the major economic
advisor to New York Governor Theodore Roosevelt.
Another member was Professor E.R.A. Seligman, another key advisor to Roosevelt.
A third colleague was Dr. Albert Shaw, influential editor of the Review of Reviews, progressive
reformer and social scientist, and longtime crony of Roosevelt's.
All three were long-time leaders of the American Economic Association.
The other two non-AEA leaders on the committee were Edward R. Strobel, former Assistant Secretary
of State and advisor to colonial governments, and Charles S. Hamlin, wealthy Boston lawyer
and Assistant Secretary of the Treasury who had long been in the Morgan ambit, and whose
wife was a member of the Pruan family, long-time investors in two Morgan-dominated concerns,
The New York Central Railroad and The Mutual Life Insurance Company of New York Essays
in Colonial Finance, the volume quickly put together by these five leaders, tried to advise
the United States how best to run its newly acquired empire.
First, just as the British government insisted when the North American states were its colonies,
the colonies should support their imperial government through taxation, whereas control
All should be tightly exercised by the United States Imperial Center.
Second, the Imperial Center should build and maintain the economic infrastructure of the
colony, canals, railroads, communications.
Third, where, as was clearly anticipated, native labor is inefficient or incapable of
management, the Imperial government should import white labor from the Imperial Center.
And finally, as Silva and Slaughter put it,
"...the Committee's fiscal recommendations strongly intimated the trained economists were
necessary for a successful empire.
It was they who must make a thorough study of local conditions to determine the correct
fiscal system, gather data, create the appropriate administrative design, and perhaps even implement
it.
In this way, the Committee seconded Hadley's views in seeing as an opportunity for economists
by identifying a large number of professional positions best filled by themselves."
With the volume written, the AEA cast the bout for financial support for its publication
and distribution.
The point was not simply to obtain the financing, but to do so in such a way as to gain the
imprimatur of leading members of the power elite on this bold move for power to economists
as Technocratic Expert Advisors and Administrators in the Imperial Nation-State.
The American Economic Association found five wealthy businessmen to put up $125, two-fifths
of the full cost of publishing essays in colonial finance.
By compiling the volume and then accepting corporate sponsors, several of whom had an
economic stake in the New American Empire, the AEA was signaling that the nation's
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.
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.
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.
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.
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.
Fourth was Thomas Shearman, a single taxer and an attorney for powerful railroad magnate
Jay Gould.
And last but not least, Stuart Wood, a manufacturer who had a Ph.D. in economics and had been
and a Vice President of the AEA.