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from HISTORY OF CAPITALISM Timeline

The origins of capitalism: 13th - 16th century

The underlying theme of capitalism is the use of wealth to create more wealth. The
simplest form of this is lending money at interest, reviled in the Middle Ages as
the sin of usury. At a more sophisticated level capitalism involves investing money
in a project in return for a share of the profit .

In the case of a single owner of an industrial enterprise (such as a factory), the

system reveals a characteristic distinction. All the profits go to one man, though
many others share the work.
Full-scale capitalism results in an inevitable divide between employer and
employed, or capital and labour.

In the Middle Ages the attitude of the church to usury means that capitalism has
little chance of developing. Even so, this is the period in which its roots lie.

With the rapid development of European trade and prosperity in the 13th century,
cities in Italy and the Netherlands witness a creation of wealth which is
capitalist in kind - because any merchant is in essence a capitalist, risking his
pot of money each time he buys in one place to sell in another.

Florence in the 14th century demonstrates more familiar indications of capitalism.

It has its great banking families, engaging in transactions across the breadth of
Europe. It even has a successful strike, by underpaid day workers in the cloth
industry who want a share in the benefits enjoyed by their employers.

In the following century, in France, the story of Jacques Coeur provides an

astonishing individual example of the rapid creation of wealth through skilful
investment in foreign merchandise.

Such cases contain elements of later capitalism, but their limited scale makes them
in a certain way different. There have always been markets, and no doubt in every
civilization canny individuals have been able to use the markets to amass a quick
fortune.

The essential characteristics of capitalism only become evident with an increase in

scale - in two quite separate contexts. One is the formation of joint-stock
companies, in which investors pool their resources for a major commercial
undertaking. The other, not evident until the Industrial Revolution, is the
development of factories in which large numbers of workers are employed in a single
private enterprise.

Chartered companies and joint stock: 16th-17th c.

Speculative trading enterprises in the Middle Ages are undertaken by individual
merchants, operating in family groups or partnerships but acting essentially on
their own behalf. Some, such as as the Polo family, are entirely independent.
Others bind themselves voluntarily into guilds, such as the Hanseatic League,
accepting certain regulations on their trade in return for the support of a
powerful organization.

In the 16th century, with the expanding energies of the Atlantic kingdoms in a new
era of ocean voyages, the situation changes. In long expeditions to distant and
dangerous places, both the risk and the potential profit are greatly increased. A
new system is called for.

Merchants risking their fortunes in these unpredictable adventures need a special

level of support. Equally it suits governments to encourage their endeavours, for
the sake of increasing trade but also to extend the nation's reach through
settlements and colonies overseas.

The result is the chartered company. A charter, granted by the crown, gives the
merchants in a company the monopoly on trade with a specific region for a given
number of years - together with strong legal powers to enforce order in distant
places while carrying out its business.

Such undertakings tie up large sums for money for long periods before any profit
can be realized, in the capital cost of ships and the expense of their crews on
journeys lasting months and sometimes years. A large number of speculators need to
be persuaded to share the risk.

The resulting organization is the joint-stock company, in which investors can

contribute variable sums of money to fund the venture. In doing so they become
joint holders of the trading stock of the company, with a right to share in any
profits in proportion to the size of their holding.

The first joint-stock enterprise established in Britain is the Muscovy Company,

which receives its royal charter in 1555. Of later ventures launched on a similar
basis, the best known are the East India Company (1600), the Hudson's Bay Company
(1670) and the South Sea Company (1711).

Even the Bank of England, when founded in 1694, is organized at first on joint-
stock lines. The merchants whose funds provide the bank's initial loan to the
government acquire thereby a share in the stock of the new company.

The joint-stock principle can equally well be applied to unincorporated companies

(trading without a royal charter), many of which are set up in the 17th century.
Investors can buy into a company even if they have no personal link with its
trading activities. By the same token an investor's share in the company's stock
can be sold at whatever price buyer and seller may agree upon. With this concept,
one of the basic elements of capitalism evolves.

A natural next step is the emergence of specialist brokers, willing to arrange

deals between buyers and sellers of shares in return for a cut on each transaction.
In London the brokers gather at first in Jonathan's coffee house.

Calvinism and capitalism: 17th century

The development of capitalism in northern Protestant countries, such as the

Netherlands and England, has prompted the theory that the Reformation is a cause of
capitalism. But this states the case rather too strongly, particularly since the
beginnings of capitalism can be seen far earlier.

Nevertheless there are elements in Reformation thought which greatly help the
development of capitalism. This is particularly true of the Calvinist variety of
the reformed faith, which becomes the state religion of the Netherlands after the
Great Assembly of 1651.

The most immediate way in which the Reformation aids the capitalist is by removing
the stigma which the Catholic church has traditionally attached to money-lending -
or usury, in the pejorative Biblical term.

Calvinism positively encourages the purposeful investment of money, by presenting

luxury and self-indulgence as vices and thrift as a virtue. It even subtly
contrives to suggest that wealth may itself be a sign of virtue. This useful slight
of hand is contrived with the help of the Calvinist doctrine of predestination. If
certain virtuous people are predestined to be saved in the next world, then perhaps
success in this one is an advance indication of God's favour.

Speculation: from the 17th century

Speculation is an intrinsic part of capitalism, since the capitalist must risk

money in the hope of making more. When the risk is undertaken as a direct part of a
productive enterprise (buying a machine to make something with, or a ship with
which to trade overseas), it is easily recognizable as a straightforward business
activity.

But once a system of stockbroking is in place, enabling people to buy and sell a
share in an enterprise or commodity with which they have no direct connection, the
procedure becomes much closer to gambling - with all its attendant excitements and
dangers.

History's first example of a speculative run on the market is the famous Dutch
tulip mania of 1633-7. The first tulips seen in northern Europe arrive in Antwerp
in 1562 as a cargo of bulbs from Istanbul. Though native in many parts of the world
(from Italy to Japan), these flowers strike a particular chord in the Netherlands.
Demand soon exceeds supply. Prices soar for a rare specimen. In the early 17th
century a single bulb of a new species is recorded as constituting a bride's entire
dowry.

In 1633 the tulip market in Holland goes into a speculative spasm.

In a craze lasting four years, precious objects are pawned and houses and estates
are mortgaged to buy rare tulip bulbs - not to grow them or enjoy the flowers, but
to sell them on unseen at a higher price. Fortunes are made until the market
crashes, in the spring of 1637, whereupon equivalent fortunes are lost.

Tulip mania is like a satirical parody of a stockmarket boom and bust. Yet it
happens in the real world well before any similar bubble in stocks and shares. The
two earliest and most famous of such bubbles (dealing in pieces of paper of even
less use than tulip bulbs if no one else wants to buy them) burst in the same year
- in France and England in 1720.
London's coffee houses: from1652

The first coffee house in London opens in 1652. Soon much of England's business is
being conducted in these congenial establishments where merchants can gather to
strike their bargains over a cup of the newly fashionable liquid.

Individual coffee houses, like clubs, acquire their own identity and clientele.
Ship owners and sea captains congregate at Edward Lloyd's. Here they discuss terms
with men who are prepared to take a gamble on the success of the next voyage,
insuring it against disaster in return for a premium. Their circle develops into
the insurance giant Lloyd's of London, retaining the name of the coffee-house
owner.

At Jonathan's coffee-house there are customers with money to risk in a different

way. These are the investors who take a share in a trading venture, accepting part
of the risk in return for part of the profit. The enterprises in which they
participate are joint-stock companies, of which the East India Company is one of
the first. Others, chartered when the coffee-houses are already in business,
include companies with monopolies for Hudson's Bay (1670), Africa (1672) and the
South Sea (1711).

Shares in such companies can be bought and sold at Jonathan's coffee house. The
brokers who arrange the deals here call themselves (from 1773) the Stock Exchange.
Mississippi Bubble: 1720

In 1716 the French royal finances are heavily in deficit after the expensive wars
of Louis XIV. The regent, the duke of Orl�ans, is persuaded by a Scotsman, John
Law, to undertake an experiment in banking. Law has published in 1705 a treatise
entitled Money and trade considered, with a proposal for supplying the nation with
money.

Law's theory is that a national bank issuing notes as currency will have the effect
of stimulating the economy, while also lowering the public debt. He is allowed to
set up the Banque G�n�rale in 1716 for this purpose. In 1717 he launches a separate
venture, the Louisiana Company, to develop the French territories in the
Mississippi valley.
At first both enterprises thrive, and Law acquires ever greater responsibilities
and commercial power. All the French chartered trading companies, to the East
Indies and China, to Africa and the West Indies, are brought under his control, as
also is the national mint and the collection of taxes. As more and more people rush
to invest in this octopus of an enterprise, Law has the power and the freedom to
issue shares and bank notes at will to keep his creature alive and well.

The result, by 1719, is rapid inflation and speculative hysteria. The price of
Law's shares rise 36-fold, from 500 to 18000 livres. At the end of 1720 the bubble
bursts. Law flees from France, dying in penury nine years later in Venice.

The experience of 1720 leaves the French with a lasting distrust of national banks
with the power to issue paper money. Not until Napoleon needs funds for his war
effort, in 1800, is the Banque de France finally established - long after the same
step is taken in other European countries.

While Law's shares are still rising, in the early months of 1720, the same
phenomenon is occurring across the Channel in England - where the shares of the
South Sea Company have an equally irresistible allure to speculative investors.

South Sea Bubble: 1720

The company at the centre of England's notorious bubble of 1720 has been in
business for nearly ten years. It was established in 1711 as the South Sea Company,
with a monopoly of British trade to South America and the Pacific. It first becomes
a fashionable share to buy in 1718, when the king becomes a governor.

The bubble begins only in 1720, prompted by a scheme for the company to take over
much of the national debt. This is done by offering holders of government bonds the
chance to exchange them, at an extremely beneficial rate, for shares in the
company. The price of the shares begins to rise, in a self-perpetuating frenzy of
excitement which takes no account of any underlying value.

By August the price is eight times higher than in January, but the slump once it
begins is even more rapid. In December the shares are back to their January level,
representing a fall of nearly 90% in a few months (even so, this is a modest crash
in percentage terms compared to the contemporary Mississippi Bubble in France).

As many fortunes are made on the way up as are lost on the way down. But in an age
without financial regulation the turmoil and the pain inevitably raise suspicions
of corruption. The king and his German mistresses, along with certain government
ministers, are noticed to have done well.

Meanwhile the investment frenzy has made possible the launch of a great many other
speculative schemes, the majority of which (unlike the South Sea Company itself)
are fraudulent. In these cases fortunes pass directly from the gullible to the
criminal.

The bad taste left by these experiences leads to the rapid passing of the Bubble
Act before the end of the year. For a little over a century, until repealed in
1825, it restricts the forming of joint-stock companies, harming the honest
entrepreneur as much as deterring the confidence trickster. In practice legal
loopholes are found. Many joint-stock companies are set up under other names in
Britain during the 18th century, particularly in insurance.

The Bubble Act is repealed in England in 1825 because it is a time of economic boom
and there is increasing public pressure to invest. But the act is repealed without
any alternative regulation to replace it.

The public is exposed anew to the dangers inherent in fraudulent schemes,

particularly with the Industrial Revolution gathering pace and requiring ever more
capital. Not until the Joint-Stock Companies Act of 1844 are effective regulations
introduced.

The Wealth of Nations: 1776

During the second half of the 18th century visible changes are occurring in Britain
as a result of the developing Industrial Revolution. Where previously land has been
the traditional source of wealth, and the purchase of land the natural investment
for anyone with a spare fortune, money is now being put into manufacturing
enterprises.

In 1771 the greatest of the new entrepreneurs, Richard Arkwright, opens the first
custom-built and water-powered cloth mill at Cromford. In the same decade the
investment of another entrepreneur, Matthew Boulton, shows signs of prospering. He
has put money into the manufacture of James Watt's steam engines. The first batch
are delivered to their purchasers in 1776.

The wealth of the nation is being diverted into new and productive channels, in a
process which will lead eventually to the emergence of a society organized on
capitalist principles. The process is observed with a clear analytical eye by the
Scottish philosopher Adam Smith. In the year when Boulton and Watt deliver their
first engines, Smith publishes a treatise which becomes the definitive statement of
classical capitalism and the free market.

In the five books of his Inquiry into the Nature and Causes of the Wealth of
Nations (1776) Smith ranges over many of the basic concerns of political economy.

The first book points to labour rather than land as the source of a nation's
productive wealth, and pinpoints two other elements which affect prices in a
developed society - rent and profit. The second book analyzes the role of capital
in enabling labour to be productive.

The remaining three books discuss broader issues of the proper role of government
in an economy. Smith comes down strongly against the prevailing theory of
mercantilism, which takes for granted that there is an economic advantage in
protecting one's own trade by restrictive measures against other nations' goods or
merchant ships.

Smith argues instead that economic benefit derives from the natural competition of
the market place, where people should be free to follow their own best interests
without government interference. He believes, with the optimism of the 18th
century, that public good will follow naturally from the untrammelled pursuit of
private interest.

Smith recognizes the necessary role of government in many fields - defence,

justice, and the infrastructure of canals and roads. His arguments against
interference relate to the economic sphere, where the government should merely
prevent monopolies (which distort the market). His treatise profoundly influences
the laissez faire policy of the 19th-century and its revival in the Thatcher-Reagan
era.

Sections are as yet missing at this point.

Boom and bust: 1877-1893

The pattern of boom and bust in late 19th-century America is a dramatic example of
what has since come to seem an endemic aspect of capitalism. This pattern is
different from speculative mania of a purely financial kind (as in the South Sea
Bubble, where investors are the only losers).

An almost invariable ingredient in each cycle is too much credit extended by banks.
Sometimes a sudden collapse in market prices triggers the panic which ends the boom
(a drop in the price of cotton has this effect in the USA in 1819 and 1837). A
natural disaster can have the same result. So can a single event of mainly symbolic
importance in the financial markets. All these characteristics are seen in America
between 1877 and 1893, in a saga beginning in the midwest.

It is a misfortune that during the boom years in the midwest, from 1877, there is
an unusually high level of rainfall on the plains. Growing crops here seems easy.
And land on which to grow them is easily come by, thanks to the Homestead Act of
1862 (granting 160 acres of public land in the west to any family farming it for
five years) and the lavish allocations of territory to the railway companies.

In practice land is often acquired from middlemen and speculators, but this does
not deter the streams of immigrants coming west on the railways (among them now
Scandinavians, Germans, Hungarians and Poles). In this mood of optimism mortgages
are easily available. Financiers on Wall Street also see profit in the west.

Loans are needed too for the livestock and seeds and implements and rolls of barbed
wire which a pioneer farmer needs before he can get to work (the family house is a
lesser priority - the 'sod cabin', cut from turf, becomes a feature of the plains).
Agents of eastern banks travel through Dakota, Nebraska, Kansas and western Texas
offering attractive terms.

The new towns borrow money too, for streets and buildings appropriate to their
growing wealth. Next year's crop will enable the pioneer families to pay their
local taxes and to service their debts, while the value of their land goes steadily
up. And for the ten years of good rainfall, from 1877, the crop duly plays its
part.

A double disaster strikes in 1887. In January an unprecedented blizzard sweeps the

plains, piling up vast snowdrifts against the barbed wire fences. Cattle perish in
their thousands. In the spring the open range seems empty of life.

This is followed by a summer of drought, which proves to be the pattern for the
next ten years. The harvest is a fraction of its usual amount, at a time when the
international price of wheat is falling (by 30% during the 1880s). Interest on
loans cannot be met. With confidence gone, the supply of easy credit dries up. For
the first time convoys of Conestoga wagons head eastwards, bearing slogans such as
'In God We Trusted, In Kansas We Busted'.

Though money has been lost, these faraway events are as yet more painful on the
plains than in the offices of Wall Street (established by now as the nation's main
financial centre). Recognizing a potential crisis, financiers and politicians focus
their concern on whether the nation's currency is sound. This soon develops into a
disagreement about the relative roles of gold and silver in the management of the
economy. But there is a general consensus that the government must hold a minimum
reserve of $100 million in gold.

In April 1893, shortly after President Cleveland enters office for the second time,
the reserve falls below this magic figure. This turns out to be the symbolic moment
which provokes the crash.

Investors rush to turn their assets into gold, and panic feeds on panic. By the end
of 1893 the federal gold reserve is $80 million and the shutters have come down on
600 banks, 74 railway companies and more than 15,000 other commercial enterprises.
The collapse in the economy brings widespread unemployment and hardship. In 1895
the banker J.P. Morgan provides the government with $62 million to bring the still
falling reserves back to $100 million.

The next presidential election, in 1896, is fought on the issue of gold versus
silver. The Republican candidate, William McKinley, is on the side of gold. He
wins, but the tide is probably turning anyway. In the summer of 1896 gold is found
in the Klondike. Confidence slowly recovers.

This History is as yet incomplete.