Self-Regulation Impaired [211]
exchanges stable. A free supply of land, labor, and money continued to
be available; consequently no self-regulating market system was in ex-
istence. As long as these conditions prevailed, neither man, nor na-
ture, nor business organization needed protection of the kind that
only intervention can provide.
As soon as these conditions ceased to exist, social protection set in.
As the lower ranges of labor could not any more be freely replaced
from an inexhaustible reservoir of immigrants, while its higher ranges
were unable to settle freely on the land; as soil and natural resources
became scarce and had to be husbanded; as the gold standard was in-
troduced in order to remove the currency from politics and to link do-
mestic trade with that of the world, the United States caught up with a
century of European development: protection of the soil and its culti-
vators, social security for labor through unionism and legislation, and
central banking—all on the largest scale—made their appearance.
Monetary protectionism came first: the establishment of the Federal
Reserve System was intended to harmonize the needs of the gold stan-
dard with regional requirements; protectionism in respect to labor
and land followed. A decade of prosperity in the twenties sufficed to
bring on a depression so fierce that in its course the New Deal started
to build a moat around labor and land, wider than any ever known in
Europe. Thus America offered striking proof, both positive and nega-
tive, of our thesis that social protection was the accompaniment of a
supposedly self-regulating market.
At the same time protectionism was everywhere producing the
hard shell of the emerging unit of social life. The new entity was cast
in the national mold, but had otherwise only little resemblance to its
predecessors, the easygoing nations of the past. The new crustacean
type of nation expressed its identity through national token curren-
cies safeguarded by a type of sovereignty more jealous and absolute
than anything known before. These currencies were also spotlighted
from outside, since it was of them that the international gold standard
(the chief instrument of world economy) was constructed. If money
now avowedly ruled the world, that money was stamped with a na-
tional die.
Such emphasis on nations and currencies would have been incom-
prehensible to liberals, whose minds habitually missed the true char-
acteristics of the world they were living in. If the nation was deemed
by them an anachronism, national currencies were reckoned not even
[ 212 ] The Great Transformation
worthy of attention. No self-respecting economist of the liberal age
doubted the irrelevance of the fact that different pieces of paper were
called differently on different sides of political frontiers. Nothing was
simpler than to change one denomination for another by the use of
the exchange market, an institution which could not fail to function
since, luckily, it was not under the control of the state or the politician.
Western Europe was passing through a new Enlightenment and high
amongst its bugbears ranked the "tribalistic" concept of the nation,
whose alleged sovereignty was to liberals an outcrop of parochial
thinking. Up to the 1930s the economic Baedeker included the certain
information that money was only an instrument of exchange and thus
inessential by definition. The blind spot of the marketing mind was
equally insensitive to the phenomena of the nation and of money. The
free trader was a nominalist in regard to both.
This connection was highly significant, yet it passed unnoticed at
the time. Off and on, critics of free-trade doctrines as well as critics of
orthodox doctrines on money arose, but there was hardly anyone who
recognized that these two sets of doctrines were stating the same case
in different terms and that if one was false the other was equally so.
William Cunningham or Adolph Wagner showed up cosmopolitan
free-trade fallacies, but did not link them with money; on the other
hand, Macleod or Gesell attacked classical money theories while ad-
hering to a cosmopolitan trading system. The constitutive importance
of the currency in establishing the nation as the decisive economic and
political unit of the time was as thoroughly overlooked by the writers
of liberal Enlightenment as the existence of history had been by their
eighteenth-century predecessors. Such was the position upheld by the
most brilliant economic thinkers from Ricardo to Wieser, from John
Stuart Mill to Marshall and Wicksell, while the common run of the ed-
ucated were brought up to believe that preoccupation with the eco-
nomic problem of the nation or the currency marked a person with
the stigma of inferiority. To combine these fallacies in the monstrous
proposition that national currencies played a vital part in the institu-
tional mechanism of our civilization would have been judged a
pointless paradox, devoid of sense and meaning.
Actually, the new national unit and the new national currency
were inseparable. It was currency which provided national and inter-
national systems with their mechanics and introduced into the pic-
ture those features which resulted in the abruptness of the break. The
Self-Regulation Impaired [ 213 ]
monetary system on which credit was based had become the life line
of both national and international economy.
Protectionism was a three-pronged drive. Land, labor, and money,
each played their part, but while land and labor were linked to definite
even though broad social strata, such as the workers or the peasantry,
monetary protectionism was, to a greater extent, a national factor,
often fusing diverse interests into a collective whole. Though mone-
tary policy, too, could divide as well as unite, objectively the monetary
system was the strongest among the economic forces integrating the
nation.
Labor and land accounted, primarily, for social legislation and
corn duties, respectively. Farmers would protest against burdens that
benefited the laborer and raised wages, while laborers would object to
any increase in food prices. But once corn laws and labor laws were in
force—in Germany since the early 1880s—it would become difficult
to remove the one without removing the other. Between agricultural
and industrial tariffs, the relationship was even closer. Since the idea of
all-round protectionism had been popularized by Bismarck (1879),
the political alliance of landowners and industrialists for the recipro-
cal safeguarding of tariffs had been a feature of German politics; tariff
log-rolling was as common as the setting up of cartels in order to se-
cure private benefits from tariffs.
Internal and external, social and national protectionism tended
to fuse.* The rising cost of living induced by corn laws invited the
manufacturer's demand for protective tariffs, which he rarely failed to
utilize as an implement of cartel policy. Trade unions naturally in-
sisted on higher wages to compensate for an increased cost of living,
and could not well object to such customs tariffs as permitted the em-
ployer to meet an inflated wage bill. But once the accountancy of social
legislation had been based on a wage level conditioned by tariffs, em-
ployers could not in fairness be expected to carry the burden of such
legislation unless they were assured of continued protection. Inciden-
tally, this was the slender factual basis of the charge of collectivist con-
spiracy allegedly responsible for the protectionist movement. But this
mistook effect for cause. The origins of the movement were spontane-
ous and widely dispersed, but once started it could not, of course, fail
* Carr, E. H., The Twenty Years' Crisis, 1919-1939,1940.
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