Finance Capital, Hilferding 1910


The capitalist monopolies and commerce

Capitalist combinations in industry have repercussions upon circulation and its mediation through commerce. I refer here to commerce as a specific economic category, and treat it as distinct from such technical functions as weighing, measuring, and transporting. Commodity production necessarily entails a multilateral change of position of commodities which is accomplished through purchase and sale. If these become independent functions of a unit of capital, then this capital is trading or commercial capital. Clearly, when these activities (which otherwise would have to be carried out by the producers themselves) become autonomous they do not thereby become value-creating operations, and merchants do not become producers. Nevertheless, the autonomy of commerce does effect a concentration of buying and selling, savings on storage and maintenance costs, etc. Commerce, in short, reduces the necessary circulation costs and so eliminates some of the unproductive expenses of production. But in order to engage in trade a sum of money is necessary which must then be converted into commodities. In capitalist society every sum of money takes on the character of capital, and if commercial functions are to become independent the money invested in commerce must become capital, that is, yield a profit. It is clear, however, that this profit does not arise from commerce, from the mere activity of buying in order to sell again, but is only appropriated there. The magnitude of the profit is determined by the amount of capital, for in an advanced capitalist society capitals of equal size bring equal profits. Nevertheless, this profit itself is derived from the profit created in production. The industrialists must hand over a part of the profit which was originally theirs to the merchants, and it must be large enough to attract the necessary capital into commerce.

Commerce, which antedates the generalization of commodity production, and hence the development of capitalism, is - like usury and loan capital - older than industrial capital, and provides the starting point of capitalist development, by bringing together the bulk of the monetary wealth of society. Through credit, which has always been an important means of establishing capitalist relations of dependence - frequently in the form of commodity credit - it made the old handicraft system of production dependent on it and thus launched capitalist domestic industries as well as the first manufacturing industries. The later development of industrial capital put an end to the dependence of industry upon commerce and separated the two activities.

The development of commerce itself is determined by two factors. On one side it is determined by the technical conditions of trade. Commerce assembles products from the various centres of production and eventually sells them to the final consumers. The more dispersed the population is, the more retail sales have to be divided up not only quantitatively, but also seasonally and geographically. The character of retail trade depends upon the income structure and the geographical concentration of the final consumers, and both these factors vary with the social development and social structure of a given country. It is precisely in respect of commercial techniques that the superiority of a large firm over a small one becomes evident. The costs of buying and selling, book-keeping, etc., do not increase by any means proportionately to the turnover. Hence, there is a trend toward concentration. On the other hand, it is the nature of commerce that as it comes closer to the final consumer sales become more fragmented in terms of place and time. The size of a commercial firm is thus limited by its proximity to the final consumer; and these limits, which are always elastic, tend to expand as a country develops, but have an influence, in all cases, upon the'size of businesses. At every stage the trend toward larger firms asserts itself, but it varies in its strength and tempo. The need to decentralize commerce geographically is met by establishing branches of the same large firm. On the other hand, the concentration of population in cities allows retail trade to be concentrated in large department stores. But this is only the beginning of concentration. The technical requirements of trade link department stores themselves with large purchasing houses, which combine large numbers of department stores and come to control them financially to a greater or lesser extent. On the other hand, the enormous financial needs of the large department stores force them into a close relationship with the banks.[1]

Alongside this process of concentration, there is also a trend in retail trade to eliminate the independent trader in so far as the producers in the consumer goods industries themselves take over the sale of their products. This process is most advanced where a trust has completely eliminated the independent retail trade, as the American Tobacco Trust has done.[2]

On the other hand, there are obstacles which tend to retard the process of concentration. It is comparatively easy to open a small retail business - all the easier, the smaller it is - because credit is available (all that is needed being commodity credit) particularly when it is sought from producers, for whom it is a means of competition for markets. In these small retail businesses a low rate of profit prevails and this makes the tradesman into a mere agent of the capitalist, whose products he sells. Consequently, there is no strong economic motive for eliminating him.

Aside from these technical factors which play a role in the case of products destined for the final consumers, that is to say, in retail trade, the repercussions of the relationships within industry are of major importance, where it is a matter of the turnover of commodities among industrial capitalists themselves or between them and the wholesalers. Here concentration in industry reacts upon the development of commerce, which is obliged to adapt to it. The more concentrated industrial enterprises are, and the greater their output, the larger the capital required by the dealers who dispose of this output. Furthermore, as concentration reduces the number of industrial concerns, the more superfluous do dealers become, and the simpler does it appear for the large concentrated industrial concerns to enter directly into contact with each other without any independent merchant as an intermediary. Concentration in industry not only brings about concentration in commerce, but also makes it superfluous. There are fewer turnovers, because each individual turnover is larger, and increasingly the services of an independent merchant capitalist can be dispensed with. In this way, however, a part of the capital available in commerce becomes superfluous and can be withdrawn from circulation.

The capital invested in commerce is equal to the value of the annual social product, divided by the number of turnovers of commercial capital, and multiplied by the number of intermediate stages through which it passes before it reaches the final consumer. But this is only the amount of commercial capital in book-keeping terms. The greater part of commercial capital consists of credit. Commercial capital is used only to circulate commodities, but as we have seen, this circulation can be carried on, for the most part, without the use of actual money. Productive capitalists simply extend credit to each other, and the loans are later cancelled out. The actual merchant capital is very much smaller, and it is only from this capital that the merchant derives a profit. The industrialist's profit depends upon his entire capital, regardless of whether it is his own capital or borrowed capital, because it is productive capital. The merchant's profit depends only upon the capital which is actually used, for this is not productive capital, but functions simply as money or commodity capital. The use of credit in this case does not entail merely a partition of property and hence a division of the profit, but an absolute contraction of the capital and along with it a reduction of the profit which accrues to the commercial class and is paid to it by the industrial capitalists. Here, credit reduces directly the costs of circulation just as paper money does.

Commercial profit, however, is part of the total surplus value generated by production. Other things being equal, the larger the share which falls to commercial capital, the smaller will be the share of industrial capital. Thus there exists a conflict of interest between industrial and commercial capital. These conflicting interests lead to a struggle which ends with the victory of one of the parties and the subordination of the other in a relation of dependence. In any such struggle between capitalist interests, the deciding factor is the relative strength of the capitals involved, but this should not be conceived in purely quantitative terms. The whole preceding discussion shows that the form of the capital is also important. Other things being equal, control over money capital assures superiority, because both industrialists and merchants become increasingly dependent upon money capital as the credit system develops. Thus, in a variety of ways, the dependency of both industry and commerce is accomplished.

As long as free competition prevailed, commerce could exploit the competitive struggle among industrialists to its own advantage. This was especially true in those branches of industry in which production was still relatively widely dispersed among many firms, while commerce had reached a more advanced stage of concentration. Credit relations worked in the same direction. As long as credit was largely payment credit which the banks extended mainly to commercial capitalists, the merchants enjoyed a financial superiority, which they used in order to obtain advantageous prices, as well as favourable delivery and payment terms, from the producers. By this means the merchants were able to skim the cream from a period of prosperity, and to impose some of the losses during a depression on the producers. This was a time when there were constant complaints from industrialists about the dictatorship of the merchants. Later on, the behaviour of the merchants served the industrialists as a justification for the establishment of cartels. This situation changed fundamentally, however, with the change in the relations between the banks and industry, and with the rise of capitalist combinations in industry.

Partial industrial combinations reduce the amount of trade. Vertical combinations do this directly by making trading operations entirely superfluous. Horizontal combinations have the same effect as does concentration in general. Monopolistic combinations, on the other hand, tend to eliminate independent trading altogether. We have seen that real control of the market first becomes possible when commodities are sold through a central agency. But in order to regulate production in its branch of industry the central agency must be able constantly to estimate the likely volume of sales. Since consumption always depends on the level of prices, the monopolistic combine must be able to fix prices at every stage up to the final consumer, without any interference by independent elements. But these independent elements are precisely the merchants. If commercial operations, including the determination of prices, were left to the merchants, they would be in a position to exploit the market situation, which is the principal advantage of the cartel. They could hoard stocks for speculative purposes, and particularly during periods of prosperity sell them at higher prices. This would result, on the one hand, in a contraction of production, without any compensating benefits to the cartel in the form of a higher profit, and on the other hand, in the directors of the cartel misjudging the market if they planned their production solely on the basis of this speculative and perhaps misleading demand from the merchants. The monopolistic combination will therefore strive to eliminate all forms of independent commerce, since only then will it be able to bring its full influence to bear upon the level of prices.

As we have seen, however, cartelization itself already involves an intimate connection between industry and bank capital; hence the cartel is usually stronger and can dictate its own terms to commerce. Its aim in doing so will be to deprive commerce of its independence and to remove its power to fix prices. Thus cartelization will eliminate commerce as a sphere of capital investment. It restricts commercial operations, eliminating some of them entirely, and performing the others through its own salaried employees, the sales personnel of the cartel. Some former merchants, indeed, may well become agents for the cartel, which then prescribes exactly what their buying and selling prices should be, the difference between them constituting the commission for these 'merchants'. The level of this commission is no longer determined, however, by the average rate of profit, but is simply a wage fixed by the cartel.

But if the balance of power between the two forms of capital is different, the relationship between commerce and cartels may also be somewhat different. It is possible that conditions could be more favourable to concentration in commerce rather than in industry. In this case a small number of merchants would confront many industrial enterprises with comparatively small capitals who are dependent on the merchants for the sale of their products. The merchants are then able to make use of their greater resources to convert a part of their capital into industrial capital by participating financially in these enterprises. They can then take advantage of the dependent position of industry to compel the enterprises to sell to them at lower prices, and so increase their commercial profit at the expense of industrial profit. In recent years such relations of dependence have been developing quite rapidly in some consumer goods industries which sell their products to large capitalist department stores.

These relations of dependence reproduce, at a higher stage of capitalist development, the process which led to the emergence of capitalist domestic industry, in which the merchant displaced the artisan. But similar relations may also be found in industries which are ripe for cartelization. Here commercial capital, which is perhaps involved in a whole series of enterprises, can play the role which would otherwise be assumed by bank capital.

In these cases merchants participate directly in the cartel, but they do so because, in fact, they were already involved in industrial production through their financial participation.[3] In reality, nothing has changed. For here too commerce is deprived of its power to fix prices, and ceases to serve as a market for the industrialists, who now enter into direct relations with the consumers.

The monopolistic combination thus eliminates independent trade by making some commercial operations entirely unnecessary and by reducing the cost of the others. The reduction of those circulation costs which arise from the attempt to win over consumers to the products of a particular enterprise, at the expense of the sales of other enterprises, has the same effect. What is involved here is the outlay on sales representatives (in so far as their number is determined by the fragmentation of production among individual enterprises) and on advertising. Such outlays are unproductive costs of circulation. They produce profit for the individual entrepreneur to the extent that he succeeds in increasing his turnover. For the branch of production as a whole these outlays constitute a deduction from the profit which would otherwise accrue to it. Cartelization reduces these costs enormously, by limiting advertising to what is necessary for product recognition, and reducing the number of sales representatives to the minimum required for the performance of these diminished, simplified and accelerated trading operations.

Austria has experienced a unique development. For historical reasons a genuine capitalist wholesale trade has not developed fully here. In the mass consumer goods industries, particularly where speculation plays a role, as in the sugar trade, the bank has assumed the functions of the wholesale dealer. Bank capital could do this all the more easily since it involved tying up only very small amounts of capital. As a result bank capital acquires an interest in cartelization both as a dealer and as a supplier of credit. Austria, therefore, provides the clearest example of the direct and deliberate influence of bank capital upon cartelization. The bank then retains its function as a sales agent for the cartel and receives a fixed commission for these services. A similar trend has emerged recently in Germany. Thus, for example, the Schaaffhausen Bank has established its own commodities department for the sale of cartelized products.[4]

The outcome of the whole process is a reduction of the amount of commercial capital. But if the capital is reduced, so also is the amount of profit accruing to it, which derives, as we know, from industrial profit. This reduction of commercial capital is also a diminution of unproductive costs. What effect does this have on prices? The price of a product is determined by its cost price plus the gross profit. The division of this profit between entrepreneurial profit, interest, commercial profit, and rent, has no effect on the price. The fact that a cartel has taken the place of the merchant, and that some trading operations have been eliminated, means only that the industrialist no longer has to surrender any part of his profit to the merchant. So far as the consumer is concerned the price of the product remains unchanged.[5] The costs of circulation constitute a deduction from profit, and the diminution of these costs means that industrial profit, entrepreneurial gain, increases by the same amount. It is only the superstition that profit arises from trade, the belief that the merchant makes a profit simply by adding a mark-up to his cost price, which leads some writers to entertain the hope that a reduction of commercial costs could somehow bring down the price of products for the consumer.[6]

The diminution of commercial operations also has the effect of releasing capital previously employed in commerce, which now seeks new investment opportunities. In certain circumstances this may increase the pressure to export capital.

It is in the interest of the cartels to retain the external forms of commerce. On this point Kirdorf, the overlord of the coal syndicate, observes :

To reach the ultimate source of consumption, the individual consumer, requires an enormous apparatus, and the increased administrative cost would definitely exceed the advantages derived from higher prices for direct delivery. The business would become intolerably costly and the bureaucracy would become too large to supervise and control. Hence, within certain limits, a strong middleman's trade remains an absolute necessity which can never be entirely eliminated.[7]

In fact, of course, it is no longer a question of dealers and merchants, but of agents of the syndicates whose independence is as fictitious as that of the artisan in domestic industry who passes for a master craftsman. The only difference is that while technical changes in production make domestic industry unprofitable beyond a certain point, this is less so in commerce. There is no real economic difference between a commercial representative on a fixed salary and an 'independent' merchant who, in reality, receives a commission; for by determining the extent of sales areas, and fixing prices for the various areas, the syndicate moderates divergences to the point where, in effect, the income of the employee and the income of the merchant are about the same. The fiction of independence created by a different type of remuneration - and in this case it is a matter of a wage, the income of the `merchant' consisting of the profit on his capital plus the wage which the syndicate would have to pay to an agent - saves the costs of supervision and control, just as piecework wages do as against time rate wages. Furthermore, the system greatly reduces the amount of capital required : the merchant's own capital can be very small since the stability of cartel prices and the territorial monopoly diminish the risks. Hence, most of his turnover can be carried on by means of credit, and he can usually obtain a loan for any payments he has to make, paying only interest on this part of his capital. The syndicate is only concerned with reducing the number of dealers, since its own marketing is thereby simplified, and with lowering the rate of commission for dealers' services (which are regarded as highly skilled) to the level of workers' wages. How far this fiction of independence is maintained is a matter of indifference from an economic point of view. Kirdorf himself says that the extent to which trading by middlemen has been eliminated at the present time is not something definitive, but 'has to be seen in relation to the historical development of the coal industry', and he also emphasizes that it is evident that 'the coal trade carried on by large numbers of dealers, as it developed when the mining industry was fragmented among many independent producers, is no longer necessary today'.[8]

Even the large coal dealers, in spite of their obvious reticence, have given a similar account of the situation. A few quotations will suffice here. Vowinkel (Düsseldorf) declares:

When I say that we are no longer real merchants, I base this view upon the following considerations. The coal syndicate prescribes for us the types of coal we are to buy, the prices at which to buy, where to sell the coal, and the sale price. Obviously, very little remains of commercial freedom. But I do not believe the coal syndicate can do anything else under the circumstances. In future, we wholesale dealers must be clear that things cannot proceed differently, and that our numbers will diminish. This is so obvious that today it is impossible to start a wholesale business of any size because the necessary supplies are not available. Even an existing business is restricted in the sense that it cannot possibly expand.[9]

These 'merchants' are deprived of every vestige of independence. For as the coal dealer Bellwinkel (Dortmund) says : 'the syndicate has a representative with voting rights on the board of directors of every marketing association', and 'is moreover authorized to examine the books at any time'. He concludes quite rightly:, 'In the final analysis our freedom of action has been taken away, and we have become more like sales representatives.'

The outlook for the future is even worse. Mr Vowinkel describes it thus :

The syndicate has created a marvellous organization, from which, I am led to think, the wholesale trade, excepting an unimportant part, will be eliminated. What justification is there then for any wholesale trade? All that will remain for the wholesaler in the end will be to supply the small consumers and those who need credit, and to accumulate large stocks of coal during periods when sales are sluggish, in order to moderate fluctuations. These are the only activities which will justify his existence in the future, and in all probability the coal trade, which has already declined by 45 per cent, as we heard this morning, will fall by at least another 20 per cent.[10]

This is an accurate description of how the specific function of commerce, the circulation process C-M-C, is becoming superfluous. All that remains is the task of distributing, conserving and storing the product, which is necessary to meet the needs of consumption in any social system based upon mass production. Mercantile trade as such has ceased, and as Mr Vowinkel laments, has become a completely automatic process.[11]

Vowinkel also shows in detail how the wholesale merchant is gradually replaced by the agent of the syndicate, and quite rightly characterizes his participation in a marketing association as a 'sinecure' which is held only at the pleasure of the syndicate. On the death of the current participant his share reverts to the syndicate, which 'becomes the participant. It is then perfectly obvious that this sub-syndicate [meaning the dealers' association] will eventually be taken over by the main syndicate.'[12]

The monopoly of the large dealers, or of the marketing associations, gives them the power to bring the smaller merchants into a condition of dependence, and to dictate their selling prices; in short, to turn them into their agents. Thus, for instance, the wholesale coal dealer Heidmann (Hamburg) says : 'When I discovered from my books that the debts of these people [the small dealers who obtained their coal from him] were steadily mounting, I told them: you will receive coal only when you agree to charge such and such a price.'[13]

City Councillor (Stadtrat) Dr Rive says of the wholesale merchants of Upper Silesia:

The wholesalers with whom we are concerned here, that is, the first-class dealers (the firms of Cesar Wollheim and Friedlander) have, of course, a whole series of second rank wholesalers in tow who, to be perfectly frank, are completely dependent upon them; and the wholesalers of the second rank are backed up by dealers of the first, second and nth rank. They are all interdependent, and the front rank wholesalers act voluntarily in accord with the agreement [meaning the Upper Silesian coal agreement] even if they are not bound by a contract.

It should be noted briefly here that the independent position of these two coal firms in Upper Silesia is due to the fact that they had gained control of the coal trade long before the conclusion of the agreement. The mines were mostly privately owned, and both firms had some degree of financial interest in them. Not only did they control the marketing organization, but they also had a share in the mine property, either directly or as creditors.

In Rhineland-Westphalia the joint-stock system has made the mines quite independent of commerce. In the west trade was also less concentrated, perhaps because the available market was larger there, and as a result competition was less intense; and even more important may have been the fact that the western mines are more recent than the old privately owned mines of Upper Silesia. That is why, in Upper Silesia, the two most powerful merchant firms have at least managed to maintain their position, even if commerce as such was not able to hold its own. They have become in effect the trading organization of the cartel (in reality, that is, not in a formal manner, because the cartel does not concern itself formally with trade, but leaves marketing to the mines themselves). They hold this position, not as `merchants', but because of their capital resources; whereas the western merchants, who are less important because commerce is less concentrated, are losing ground and even the wholesale merchant is becoming 'more or less an agent', as a principal mine inspector, Dr Wachler, tells us.[14]

The subordination of commerce to the syndicate also makes it easier for the -latter to check foreign competition, which is more dependent on the services of commerce than is domestic manufacture. Thus, the merchant Klöckner (Duisburg) says : 'the commercial firms which sell cast iron have to subscribe to the conditions of the pig-iron syndicate which forbid them to deal in foreign iron or to import it into Germany.[15]

The dependence of small manufacturers in industries which are not ready for cartelization upon large capitalist dealers provides a sharp contrast to the overweening power of cartelized industry. Such dependence becomes particularly onerous when it is reinforced by the provision of credit:

Many small manufacturers are, from a business point of view, completely at the mercy of the dealers. In our industry, which produces finished goods, there are unfortunately very many manufacturers who have insufficient capital and cannot really stand on their own feet, so that in order to stay in business they are obliged to sell their goods at any price they can obtain. The goods are taken by a dealer, or they may be turned over to him as collateral for a loan, and he then has the small manufacturer in the palm of his hand for the foreseeable future; he can dictate to him the conduct of his whole business.[16]

Mr Gerstein, Secretary of the Hagen Chamber of Commerce, is referring here to the small-scale iron industry, and he sees the resistance of the dealers as an important obstacle to the formation of cartels.

On the other hand, cartelization cannot by itself give the finished goods industries any significant advantage with respect to prices:

If the manufacturers of finished goods combine and fix prices which would give them a modest return, we have unfortunately often had the experience that large-scale industry throws a spanner in the works by finishing the articles which it needs itself in its own plants, incurring of course quite different costs from those of the manufacturers, who have to buy their raw materials at prices determined by the cartels of large-scale industry. As we have already heard, this manufacture of required articles in one's own plant is already widely developed. Director Fuchs told me only yesterday that large concerns such as Bochum, Dortmunder Verein, Königshütte and Laurahütte are now entering into competition with factories which only produce railway waggons - which cannot, of course, be classified as products of the small-scale iron and steel working industries, but are nevertheless finished products. In reply, I told him that this will hurt not only the waggon manufacturers, but also small iron and steel working concerns which manufacture the fittings for waggons; for the large steel firms do not only produce for themselves the finished cars, but all the related fittings - buffers, crossings, couplings - in short, every item. The Königshütte and Laurahütte make everything they need for their waggons, from the wheels to the very last part, with the possible exception of springs, screws and rivets. The Dortmunder Union also turns out almost all the parts for its waggons, as well as other small iron and steel products, such as bolts for rail couplings.[17]

But if commerce, through its influence upon the smaller capitalists, impedes the formation of cartels, it nevertheless tries to strengthen this influence by forming rings of its own. Gerstein also provides some examples of this practice. The large ironmongery dealers of Berlin, for instance, have formed an association which exerts a strong influence on the level of prices. The dealers in Danzig bought a firm collectively, and then formed an ironmongers' association as a limited liability company. The Federation of German Ironmongers, with its headquarters in Mainz, has drawn up regulations concerning the purchase of its goods. Members of the Federation are required to obtain a written guarantee from their suppliers that 'they will not sell their products at fairs'. Members of the Federation also undertake not to buy from manufacturers who sell directly to consumers, and in some places this has gone so far that the big state railways were regarded as consumers and the attempt was made to prevent manufacturers from supplying various articles directly to the state railways.[18]

The following is a good example of how easily larger capital resources create relations of dependency, sometimes in the form of a wholesale merchant increasing his commercial profit at the expense of the industrialist and passing on the very risks which his own speculation has created.

On the other hand, speculation in newsprint interferes with the effort of the syndicate to stabilize prices and to adjust supply to demand. Paper generally, and newsprint in particular, is not an article of speculation, and according to the accounts of what happens in almost all German paper mills it is always those wholesalers who sell short when paper prices are falling, without regard to costs of production, who put pressure on the paper manufacturers with regard to prices, in the most reprehensible manner, when they make purchases from the latter when they are in need of orders. This has gone so far that such dealers spread false rumours to impel the paper manufacturers, located in the mountains and remote from the paper market, to sell far below the market price.

Conversely, when prices are rising on the paper market the same wholesalers use all their wiles and arts of persuasion to press the paper manufacturers into large contracts with them, or to sell them large quantities of paper, even though they themselves have not yet made any sales to their own customers. The principal victims in this case are the printers, who are obliged to pay through the nose for the dealer's speculative coup, but the paper manufacturers regularly form a second group of victims, since in periods of ephemeral prosperity the dealer concerned will put pressure on the price as soon as market prices begin to fall, or if he cannot take the paper himself will leave the manufacturer sitting on his goods. Only in rare instances does a manufacturer decide to bring any kind of legal action against the dealer, because he is afraid of losing the dealer's custom in the future.[19]

The formation of a syndicate immediately changes the situation. The individual dealers now confront a unified industry, and-the power of capital is on the side of the industrialists. But this is not all. The dealer now appears as he really is, as a mere auxiliary, by contrast with the indispensable process of production. The natural necessity of production now asserts its predominance over the capitalist necessity of distribution by means of commerce. The syndicate restricts commerce within its 'legitimate bounds'. `Commerce is regarded as legitimate when the dealer resells the paper on the basis of a stable purchase price plus an adequate profit, and observes the conditions which the paper manufacturers consider acceptable and which are traditional in the paper trade.' Thus the paper dealer becomes an agent of the syndicate working on a fixed commission. Deprived of his freedom, he complains vociferously about his shabby treatment and recalls nostalgically the good old days of le doux commerce. Of all the conditions now imposed on him, he finds most onerous the fact that he is now compelled to buy exclusively from the syndicate. He is prevented from taking advantage of competition among producers, and he himself becomes an instrument for consolidating the syndicate and perpetuating the monopoly which holds him in its grip. He must abandon all hope, for above the door of the syndicate's sales office are inscribed words which inspire in him a fear as great as that of the sinner beholding the words above the portal of Dante's Inferno : 'Buy only from the syndicate and sell only at the prices fixed by the syndicate.' This is indeed the nemesis of the capitalist merchant.[20]

One means of eliminating speculation from commerce is the conclusion of long-term contracts. The coal syndicate, for example, fixes its prices for a term of one year, during which time they may not be changed. No conceivable circumstances would persuade it to depart from this 'fundamental rule'.[21]

Tempora mutantur! At the time of the stock exchange inquiry of 1893 speculation was the alpha and omega of capitalism. Everything is speculation: manufacturing, commerce, hedging operations. Every capitalist is a speculator, and even the proletarian who considers where he can best sell his labour power is a speculator. But in the cartel inquiry, the sanctity of speculation is forgotten. It is now the unmitigated evil from which crises, overproduction, and, in short, all the defects of capitalist society flow. Eliminate speculation is now the slogan. In place of the ideal of speculation we now have speculation about an ideal condition of 'stable prices' and of the demise of speculation. The stock exchange and commerce are now speculative, reprehensible activities, which must be cast aside in favour of industrial monopoly. Industrial profit incorporates commercial profit, is itself capitalized as promoter's profit, and becomes the booty of the trinity which has attained the highest form of capital as finance capital. For industrial capital is God the Father, who sent forth commercial and bank capital as God the Son, and money capital is the Holy Ghost. They are three persons united in one, in finance capital.

The contrast between the certainty of cartel profit and the uncertainty of speculative gains is reflected in the psychological differences between those who engage in the two activities, and in the degree of confidence with which they appear before the public. The cartel magnate regards himself as the master of production; his function is evident. He attributes his success to the effective organization of production and the elimination of unproductive costs. He regards himself as the representative of social necessity as against individualist anarchy, and considers his profit a well deserved remuneration for his activity as an organizer. His capitalist way of thinking takes it for granted that he is entitled to the fruits of an organization even if he is not its sole creator. He is the representative of a new age. 'The day of the individual', Havemeyer hectors the defenders of the old order, 'has passed; if the mass of the people profit at the expense of the individual, the individual should and must go.'[22] The meaning of what he says is socialism, but drunk with victory he does not notice that one fine day he and his like may well be among those who will have to go. The cartel magnate has no scruples, and while Havemeyer declares, with delightful candour, that he doesn't care two cents for other people's ethics,[23] Kirdorf insists no less proudly upon the right of the master in his own house.

In their own ethical code the most heinous crime is a breach of solidarity, free competition, secession from the brotherhood of monopoly profit; for which social ostracism and economic destruction are the appropriate punishment.[24] Lists were distributed in which the names of those distillers who would not join the syndicate were printed in bold type.[25]

The public image of the speculator is quite different. He makes his appearance in an unassuming, guilty fashion. His own gain is simply others' loss. Even if he is necessary, the need for him is simply an indication of the imperfections of capitalist society. The source of his gain remains obscure, for he is clearly not a producer who creates values. If his gains are exceptionally large, admiration of his achievement is mingled with suspicion. He is never quite at ease in face of public opinion, and is for ever fearful of new stock exchange legislation. He is apologetic and implores people not to judge him too harshly. 'This is the fate of all human institutions, which are without exception imperfect and liable to err.'[26]

He is content when he finds trusting individuals such as Professor van der Borght, who consoles him by saying : 'It is in the nature of human beings to be seized with a gambling fever from time to time', and can then deflect the criticisms of his detractors by assuring them that 'all these adverse effects are due, in the final analysis, to the ineradicable weaknesses and passions of human nature'.[27]

But of course we must not be too hard on any capitalist. One of them had just admitted that 'Money has a demoralizing power, and a person's character changes very rapidly with an increase of income',[28] and then he became furious. He had been concerned throughout by Professor Cohn's lack of understanding, quite inconsistent with his religious faith, of his sensitive soul. He had endured very patiently the worthy professor's exhaustive, if not particularly enlightening, account of the working of the stock exchange, and had listened with placid good humour to his interesting observations on the functions of the Prussian universities. But things should not be carried to extremes. He certainly had no objection to the professor's pronouncement that the purpose of the university is to be a mediator between the stock exchange and Social Democracy, defending and justifying the stock exchange from an ethical standpoint. But when the learned gentleman goes on to say that 'if the universities were not there these contradictions would explode', he finds these delusions of grandeur simply laughable. He cannot take the professor seriously in this respect, and so he would reply: 'I agree that the stock exchanges pursue ethical aims [be it noted that he remains a speculator], but that is not why they were founded; it was for reasons of self-interest. Is the merchant to found stock exchanges in order to turn them into charitable institutions ?'[29]

The ethical school of political economy has no answer to this question, and Professor Cohn resembles in this instance a poodle with its tail between its legs, but one in which no Mephistopheles lies concealed.


[1]The following information appeared in various newspapers at the beginning of July 1908: It has recently become known that the Swiss department store chain of Braun in Zurich has been turned into a limited liability company with the participation of a German consortium. It is not longer unusual for department stores to be 'promoted' as public companies today, but there are special reasons why the promotion of this Swiss firm merits general attention. The management of the German consortium is in the hands of the firm of Hecht, Pfeiffer & Co. in Berlin which is considered to be one of the most important German export firms. It has developed into a purchasing agent for many department stores in various countries. The agreement with the Braun department store of Switzerland provides that the firm of Hecht, Pfeiffer & Co. will in future take care of all its purchases and will also pay for these purchases. The firm maintains a far-flung purchasing organization, and early last year it formed a consortium with M. I. Emden & Sons of Hamburg which is so close knit that Hecht, Pfeiffer & Co. now also makes all the domestic purchases for 200 businesses which are members of the M.I. Emden group. Furthermore, the firm also maintains contacts with a New York department store for which, according to a statement in the Konfektionär, it makes purchases in Germany of some 60 million marks annually. The economic advantages of the large department store, not the least important of which is that they can purchase in bulk, has led to the establishment of central purchasing agencies which have made most of the business houses they serve financially dependent on them.

[2]2 See the interesting summary account provided by Algernon Lee, 'Die Vertrustung des Kleinhandels in den Vereinigten Staaten', Die Neue Zeit, 27 (2), pp. 654 et seq. To safeguard their independence, cigar merchants had organized a trade association called the Independent Cigar Stores Co. As a counter move, the Tobacco Trust founded the United Cigar Stores Co. with a capital of $2,000,000. 'This company bought up many of the existing retail establishments and, in addition, opened many new ones which offered better goods, a wider choice and more attractive store displays, than their competitors. Prices were reduced and finally a system of rebates was introduced which assured the corporation a permanent body of customers. The struggle did not last long. Within a year the Independent Cigar Stores Co. was obliged to sell out to the United Cigar Stores Co., on terms dictated by the latter. By resisting, the small merchants had only hastened their doom . . . . There is not the slightest doubt that the trust will continue in this way, probably even more rapidly, until it has conquered everything worth conquering in the retail trade of this branch of industry.'

Lee then goes on to describe the concentration in the retail trade in coffee, tea, milk, ice, fuel, groceries, etc., and incisively sums up the trend toward concentration as follows: 'Concentration proceeds, and the class of small independent traders loses ground, in the following diverse ways, which all lead to the same result:

1 Some of the industrial trusts, after having attained supremacy in production, extend their operations to retail trade, entirely eliminating the small tradesmen, and selling their products directly to consumers.

2 Some large industrial corporations do indeed still sell their commodities to the consumer through the small trader, but treat him as their agent rather than an independent tradesman.

3 In large cities, department stores have already taken a considerable part of the retail trade away from the small tradesman, and this process is accelerating. Many of these stores have a capital of hundreds of thousands, or even millions, of dollars, in many cases several of them belong to a single company, and a beginning has already been made in applying the principle of concentration on a still larger scale in this field. In this way the department stores are brought into still closer contact with groups involved in high finance, with the wholesale trade, and with the industrial trusts.

4 Those large business houses which concentrate almost exclusively on the mail order business injure the small tradesmen in rural areas just as the chain stores do in the cities. The rapid development of the telephone and tramways in the cities, and the expansion of free postal delivery in the rural districts, have greatly increased the scope of this kind of business, and in many cases these mail order concerns belong to the same company as operates chain stores in the city.

5 Competition among the small tradesmen themselves only strengthens the trend toward concentration, just as it did in the industrial field at the beginning of the capitalist era. Many a tradesman finds a way of getting some advantage over his competitors, and is then able to expand his business, thus gaining new advantages and restricting still further the scope of his competitors' business.'

See also Werner Sombart, Der moderne Kapitalismus, vol. II, chapter 22.

[3]It is a characteristic of the organization of the Bohemian lignite trade that the sales agent is both a mine owner and a shareholder in the companies he represents. Both coal commission firms, J. Petschek and E. J. Weinmann, have established organizations in Aussig 'which take care of the sale of lignite for the large Bohemian companies .. . both coal companies were originally only middlemen. Early in the 1890s a change came about in this situation, starting with the strong development of the Brüx Mining Company. The Weinmann firm had for a long time engaged in selling for this company. The Brüx concern acquired very cheaply the flooded Osseg seams, and by that means rose to be the leading enterprise in the Bohemian lignite industry. Meanwhile there was a change in the ownership of the Brüx shares; a majority of the shares were transferred to a syndicate led by the Petschek concern, and as an expression of the changed power relations the coal retailing was transferred to this firm. A new relationship was thus established; the coal commissioner was also a large shareholder in the enterprise, who concluded sales agreements with himself, as it were, and had the controlling voice in the conduct of the business and in production. The competing firm had to follow suit, and it too was able to acquire, through the ownership of shares, a dominant influence and a permanent interest in the enterprises which it represented.' Neue Freie Presse, 25 February 1906.

[4]The Neue Freie Presse of 18 June 1905 describes the take-over of one of the large sugar firms of Prague by the Kreditanstalt as symptomatic, and continues : 'The sugar trade has fallen victim almost completely to these tendencies. As far back as the early 1890s, the marketing of most of the Bohemian sugar refineries was already in the hands of the wealthy sugar merchants of Prague, who drew a substantial profit from the sale of sugar for the producers, carrying on the business to suit themselves. Their large-scale transactions and their connections with foreign markets constituted a distinct phenomenon in Prague. The sugar operations of the banks were limited to commission sales for their own refineries, and to the provision of credit in the normal course of banking activity. During the last decade many of these private sugar refineries went out of business entirely, or were taken over by the banks, while others were forced to curtail their business, and of all the sugar magnates of Prague, only one large trading house has survived, which even now represents thirteen sugar refineries and still sells many hundred thousand metric hundredweights of sugar annually. The very largest private sugar refineries, which supply both halves of the Empire, dispense entirely with the services of middlemen in their marketing and take care of their own wholesaling. The medium size and smaller firms have entered into a more or less close relationship with the banks, which supply them with the credit they need, and sell their goods both for export as well as for the retail trade at home, but also frequently assume the full risk involved in the sale of sugar. Thus the once large and prosperous middlemen's trade in sugar has been completely dislodged from its position, and two-thirds of the sales of the Bohemian sugar refineries pass through the sugar departments of the Prague banks (most of which are in any case branches of Viennese banks).

`The starting point for this reorganization of the sugar trade was the provision of credit and the establishment of new sugar refineries. In the 1880s and 1890s numerous new refineries were established in Bohemia and Moravia, sponsored by the large export houses of the Elbe region. Most of them were built with foreign capital, and the banks which supplied the necessary funds stipulated that they retain the commission sales of the output of the new refineries. The small and medium unrefined sugar factories which sprang up like mushrooms after the formation of the cartel were frequently established with insufficient capital and were therefore entirely dependent on their sources of credit. Even the existing establishments required considerable funds to modernize and expand their plants, and entered into a closer relationship with those who could supply the funds, so that ultimately all sales were transferred to the creditors. Thus the Prague branches of the Viennese banks, as well as some of the local banks, gained a firm foothold in the sugar business and transferred the bulk of their activities to that field. The Länderbank represents fifteen refineries . . . . The Anglo-Bank takes cares of the commission sales of eleven unrefined sugar factories. Five large enterprises have their business affairs concentrated in the Kreditanstalt. The Zivnostenska Bank is the selling agent for numerous rural sugar refineries. The banks buy the output of the unrefined sugar producers and transfer it to the refineries, after which they take the white sugar from the refineries and place it on sale in domestic and foreign markets. When in the course of time exports assumed an even greater importance for Austrian factories, the nature of the activities of the banks also changed. Exports required a continuous operation in the various foreign markets, and the modest fees from the commissions become less important as compared with the large profits earned from arbitrage and speculative transactions . . . . But trade on one's own account was closely connected with international business, and very few domestic producers were in a position to undertake such operations, which are often necessarily extended over a long period of time. Thus the last link in the chain of the sugar trade was forged when the banks gained complete control. The factories sold their output to the banks with which they were connected, and they in turn tried to make the maximum profit from it by exploiting any advantage on domestic and foreign markets. Trade on their own account is certainly not yet the general rule, and a few cautious banks refrain from it as a matter of principle, but compared with the commission business it already enjoys considerable importance and it cannot be denied that business development is moving in this direction.

`An even larger commodity business is done by those banks which have close connections with cartels and handle the marketing for the industries which they control. Thus, for instance, the Länderbank controls the sales of the cartels in matches, syrup, enamelware, wrapping paper, and starch, and the output of some chemical industries. The Bankverein is similarly placed with regard to pasteboard mills, and the Kreditanstalt controls sales of the combined brass enterprises. All these are only commission operations, which do not involve any trade in the strict sense of the word, but the middlemen after all, have been ousted from these positions by cartelization and the concentration of sales in central selling agencies. Thanks to competition among the banks, the benefits of the commission business in corn--modifies have decreased and now amount to only a modest proportion of the former substantial commission fees. The decline in the gains from ordinary banking business has given some banks which have commodity branches the idea of developing trading operations on their own account, and there are many indications of new attempts to expand business in this direction.'

[5]In specific cases, as a result of the different relations between industrial and commercial capital in particular branches of industry, price changes may occur. Let us assume that in one branch, for example the machine tool industry, productive capital equals 1000 and commercial capital 200. Given an average rate of profit of 20 per cent the commercial profit will be 40. The total price to consumers would be 1,000 + 200 (the price at which the industrialists supply their product to the merchant) plus 240 (which reproduces the merchant's capital plus profit), that is, a total of 1,440. But suppose that in the textile industry commercial capital of 400 must be added to the productive capital of 1,000. The price of the product would then be 1,680. Now assume that a cartel succeeded in a eliminating commercial capital and reducing commercial expenses by half in both cases. The machine tool manufacturers would then obtain a profit of 340 on a capital of 1,100, while the textile manufacturers would make a profit of 480 on their capital of 1,200. The inequality of rates of profit could lead to equalization processes which would then be reflected in price changes. But what textile consumers gained the buyers of machine tools would lose. In fact, such equalization would be a very difficult and incomplete process because cartelization would interfere with it.

The case is different if independent merchants are replaced by consumer co-operatives, wholesale purchasing societies, agricultural co-operatives, etc.; for this means that organized consumers take over the activities of the merchant capitalists and also receive the commercial profit. Equally, the increased concentration would mean a saving of circulation costs.

[6]The wholesale merchant, Engel, says quite correctly: 'The efforts of the syndicate are intended to create a monopoly for itself and to eliminate the wholesale trade entirely. Naturally prices will not be any lower for the retailer. If the motives were not to obtain for the factory and the, syndicate the same benefits which accrue to the wholesale merchant, the whole movement would be without purpose.' Kontradiktorische Verhandlungen über den Verband deutscher Druckpapierfabriken, part IV, p. 114.

The same is true of the coal syndicate. It 'uses its monopoly of the haulage and wholesaling business to levy a tribute on the small consumers, without any overt increase in coal prices, by raising transportation rates, while ensuring that the higher prices which consumers are obliged to pay benefit the producers rather than as hitherto the merchants', R. Liefmann, Kartelle and Truste, p. 98.

[7]Kontradiktorische Verhandlungen, vol. I, p. 236.

[8]ibid., p. 235.

[9]ibid., pp. 228 et seq.

[10]ibid., p. 230.

[11]ibid., p. 229.

[12]ibid., p. 230.

[13]ibid., part II, p. 455.

[14]ibid., part II, p. 380.

[15]The hypocritical language of the worthy syndicate agent is truly delightful: 

`As commercial firms we considered this legitimate, because our main concern is to promote and protect domestic business.' Plundering the domestic market, interfering with the finishing industries by the creation of artificial shortages of coal, coke and iron, maintaining high domestic prices by dumping abroad - this is the patriotism of the profit motive!

[16]Kontradiktorische Verhandlungen, 6th session, p. 444.

[17]ibid., p. 445.

[18]ibid., p. 447. On the other hand, the same Gerstein also shows (ibid., p. 556) how strictly the large firms deal with their smaller suppliers: 'A large steel plant which owns mines has printed conditions for the procurement of material for tools, in which it requires tenders from suppliers, and continues: "Quantity: Our requirements for the calendar year 1904 without obligation on our part to take any specific quantity. Delivery at our request."'

[19]Kontradiktorische Verhandlungenfiber den Verband deutscher Druckpapierfabriken, IV. Testimony of Reuther, pp. 110 et seq.

[20]20 'The syndicate therefore undertook to eliminate the existing wholesale trade in newsprint. After it had succeeded in eliminating a great many agents, who sold other types of paper besides newsprint, there still remained a large number of dealers who handled only newsprint, and the syndicate then decided to refuse to sell its paper to firms which engaged in speculation, and also to prevent the entry of new dealers into the field. It therefore refused in many cases to sell newsprint, even to paper merchants who were already planning to extend their trade to newsprint at the time when the syndicate was being organized' (ibid., p. 111).

[21]Kontradiktorische Verhandlungen, vol. I, pp. 94 et seq. In the autumn of 1899 the German Coke Syndicate obliged its customers to place their orders for the two years 1900-1901; and it should be noted that the syndicate used its power to raise the price, which had been fixed at 14 marks in February 1899, to 17 marks for these two years. The steel mills had to accept these terms, under the threat that otherwise they would not receive their supplies of coke.

This case is also interesting because it shows how little influence syndicates have upon crises. The agreements were concluded in 1899, about 27 months before the crisis. Business began to decline about mid 1900, and 1901 was a depression year, but the high prices for coke were maintained. As a result the crisis was exceptionally severe for the processing industries. Kontradiktorische Verhandlungen, 3rd Session, pp. 638, 655, 664.

[22]Industrial Commission, Preliminary Report on Trusts and Industrial Combinations, 56th Congress, Senate Document 476, part I, 1901, p. 223.

[23]ibid., p. 63. 'I do not care 2 cents' worth for your ethics'. He adds that it is a proper business principle to reduce prices to the point where they destroy competition. For as he puts it later, 'trusts are not in business for their health' (p. 223).

[24]Consider the penalties threatened by the Deutsche Agrarkorrespondenz (No. 8, 1899) which is close to the Bund der Landwirte (the Farmers' Union): 'The German distiller who refuses to join the association foregoes any claim to professional recognition. These people should be shunned, and if such a fine gentleman were later to be hit in his pocketbook, no better or more merited punishment could be imagined.'

[25]Kontradiktorische Verhandlungen. Testimony of General Secretary Köpke.

[26]Deutsche Börsenenquete, vol. I, p. 464. The statement was made by Russel, the lawyer of the Diskontogesellschaft.

[27]Handwörterbuch der Staatswissenschaften, pp. 181 et seq.

[28]Deutsche Börsenenquete, vol. II, p. 2151. Testimony of von Gülpen. But not only in this case: Mr V. Guaita assures us that 'If they make life miserable for him (the provincial banker) he is obliged to deal in fraudulent paper more than he did previously' (ibid., p. 959).

[29]Deutsche Börsenenquete, vol. II, p. 2169.