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 Routledge Frontiers of Political Economy

FREE CASH, CAPITAL

ACCUMULATION AND
INEQUALITY
Craig Allan Medlen
Free Cash, Capital Accumulation
and Inequality

Investment is the engine of growth. In consequence, the social welfare of the

populace depends on the expectations of uncertain profitability as understood by
the agents of a wealthy few who decide upon levels of investment. As private
wealth is intimately tied to the investment process, the importance of wealth con-
centration goes far beyond considerations of equity. In recent years, private eco-
nomic power has become increasingly concentrated as more of the population has
become dependent upon an elite pursuing private ends. In this context, this book
examines the role of capital accumulation in various historical contexts.
Over seventy years ago, Michal Kalecki derived the mathematical relationship
between government deficits, the external trade account and free cash—defined
as the gross profit over and above that portion ploughed back into new invest-
ment. Since then, the free cash literature has remained largely within an industrial
organizational context where free cash theory has helped to explain mergers. In
contrast, this book revisits Kalecki’s free cash construction at the macro and global
level and explores the various causes and effects of free cash on the economy. As
part of this examination, the author highlights the historical uses of free cash in
imperialist adventures, mergers and speculative endeavors. In addition to devel-
oping a new relative valuation measure of capital accumulation, he also utilizes a
neo-Kaleckian model to help explain the U.S. slowdown in investment since the
late 1960s, the increasing inequality of wealth and income, and the recent specu-
lative episodes associated with the spillage of free cash. Finally, based on these
models, the book argues for heightened taxes on the wealthy and an increased role
for government investment in health care and energy.
Free Cash, Capital Accumulation and Inequality offers an explanation as to
how wealth and income inequalities have fashioned, and been fashioned by, vari-
ous historical episodes right up to the present. It will be of great interest to those
studying and researching in the field of economic analysis.

Craig Allan Medlen is Professor of Economics at Menlo College, in California.

He graduated with a B.A. in Economics from University of California Berkeley in
1966 and received his Ph.D from U.C. Santa Barbara in 1973.
Routledge Frontiers of Political Economy

240 The Political Economy of Lula’s Brazil

Edited by Pedro Chadarevian

241 Resisting Financialization with Deleuze and Guattari

Charles Barthold

242 Class and Property in Marx’s Economic Thought

Exploring the Basis for Capitalism
Jørgen Sandemose

243 Economics, Ethics and Power

From Behavioural Rules to Global Structures
Hasse Ekstedt

244 Supranational Political Economy

The Globalisation of the State-Market Relationship
Guido Montani

245 Free Cash, Capital Accumulation and Inequality

Craig Allan Medlen

246 The Continuing Imperialism of Free Trade

Developments, Trends and the Role of Supranational Agents
Jo Grady and Chris Grocott

247 The Problem of Political Trust

A Conceptual Reformulation
Grant Duncan

For more information about this series, please visit: www.routledge.com/books/

series/SE0345
Free Cash, Capital
Accumulation and Inequality

Craig Allan Medlen

First published 2019
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
and by Routledge
711 Third Avenue, New York, NY 10017
Routledge is an imprint of the Taylor & Francis Group, an informa business
 2019 Craig Allan Medlen
The right of Craig Allan Medlen to be identified as author of this work
has been asserted by him in accordance with sections 77 and 78 of the
Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or
utilised in any form or by any electronic, mechanical, or other means, now
known or hereafter invented, including photocopying and recording, or in
any information storage or retrieval system, without permission in writing
from the publishers.
Trademark notice: Product or corporate names may be trademarks or
registered trademarks, and are used only for identification and explanation
without intent to infringe.
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
Names: Medlen, Craig.
Title: Free cash, capital accumulation and inequality / Craig Medlen.
Description: 1 Edition. | New York : Routledge, 2019. | Series: Routledge
frontiers of political economy | Includes bibliographical references
and index.
Identifiers: LCCN 2018019883 (print) | LCCN 2018028629 (ebook) | ISBN
9781315168289 (Ebook) | ISBN 9781138051447 (hardback : alk. paper)
Subjects: LCSH: Cash flow. | Saving and investment. | Income distribution.
| Equality.
Classification: LCC HF5681.C28 (ebook) | LCC HF5681.C28 M43 2019
(print) | DDC 330.12/2—dc23
LC record available at https://lccn.loc.gov/2018019883

ISBN: 978-1-138-05144-7 (hbk)

ISBN: 978-1-315-16828-9 (ebk)

Typeset in Times New Roman

by Swales & Willis Ltd, Exeter, Devon, UK
Contents

List of figures vi
List of tables vii
Acknowledgments viii

1 Prologue and preview 1

2 Michal Kalecki’s derivation of free cash 13

3 Hobson’s choice: free cash export or domestic redistribution 22

4 Free cash and the stock bubble of the 1920s 38

5 Veblen’s Q-Tobin’s Q and relative valuation 51

Appendix 1 Expansion of cash through new investment 82

6 Stagnation and free cash: a neo-Kaleckian model 83

7 The multinational escape 112

Appendix 2 Multinational deficits and parents’ embeddedness 131

8 Free cash, relative valuation and inequality 133

9 Crossing the boundary line 147

Index 174
Figures

4.1 Wide free cash and mergers 43

5.1 Tobin’s Q 59
5.2 Capital’s share and the Merger/New Investment ratio 63
5.3 Corporate output/corporate fixed investment 66
5.4 Cash/I; Cash/Y 67
5.5 Corporate investment and income growth rates 73
5.6 Investment stagnation and marginal Q proxies 74
6.1 Free cash as a fraction of corporate investment 89
6.2 High income rates 91
6.3 Corporate taxes as a fraction of profit and cash 93
6.4 Government debt and federal debt relative to GDP 95
6.5 Mortgage and consumer debt/income 98
6.6 Rates of return (stocks and bonds) 102
7.1 Multinational sales/exports of goods 116
7.2 Ratios of affiliates/parents 119
7.3 Multinational sales/U.S. exports (goods) to affiliates 122
7.4 Foreign U.S. sales/U.S. imports 122
7.5 The multinational trade deficit 123
7.6 Trade deficit (goods) and the decline in the dollar 124
8.1 Free cash and spillage 136
8.2 Capital spillage 137
8.3 Capital/income (output) ratios 141
8.4 Capital/Y; Cash/Y 143
Tables

4.1 Free cash in the 1920s 42

A2.1 Trade deficit components: correlations on trend 131
A2.2 Multinational parents’ embeddedness: value added,
capital expenditures, R&D 132
Acknowledgments

Acknowledgment of help and advice is an exercise in remembrance, and in this

case, a matter of comradery and some laughter. Acknowledging her own role
in having fun, Diana, my best friend and wife, would quip “Acknowledgment
always comes before the book.” She would often inquire, “Want to talk econom-
ics again?”
Remembrance extends over decades. My exposure to the importance of class
arrangements came by way of Carl Landauer, who, in the 1960s, taught a course
in Marxian economics at U.C. Berkeley and to Paul Sweezy who encouraged
my early inquiries into the young Marx. Exposure to Veblen and other economic
forerunners was brought to me by William F. Kennedy, at U.C. Santa Barbara.
His one-on-one course with me in the history of economic thought drilled home
the notion that economics and history were inexorably bound together in a way
that could not be unraveled. A simple idea, and the starting point of any critical
assessment of mainstream economics which, in violation of this most important
idea, abstracts economics from historical context.
For help in research, I am very much indebted to the library staff at Menlo
College, particularly Anne Linvill who, with patience and good cheer, sought
materials through inter-library loan and web sources. Other professional help-
mates, whose editorial remarks have helped distill ideas in the present work
include Paul Davidson, Christian Wolf, Glen Atkinson, Laurel Busch, Richard
V. Adkisson, Vicki Taggart, Christopher Brown, Jan Kregel, L. Randall Wray
and Richard Sturn. I particularly wish to acknowledge the help of Julio López,
whose correspondence and wonderful book on Michael Kalecki (co-authored by
Michaël Assous) guided me away from a number of what otherwise might be
called “original errors.”
Various parts of the book are built on previous articles that I have written.
Chapter 3 expands upon my article “A Historiographical Exhumation of J.A.
Hobson’s Over-Saving Thesis: General Theory Versus Historiography,” The
European Journal of the History of Economic Thought, October 2012; large
parts of Chapter 4 on the 1920s stock bubble are dependent on “Industrial
Aspects of the Stock Bubble of the 1920s: Free Cash and the Federal Reserve,”
Journal of Business and Economics in Times of Crisis, January 2012; excerpts
in Chapter 5 dealing with Q theory and relative valuation are taken from
 Acknowledgments ix
“The Trouble with Q,” Journal of Post-Keynesian Economics, Summer 2003;
“Veblen’s Q-Tobin’s Q,” Journal of Economic Issues, December 2003; “The
Bubble Machine: Relative Capital Valuation, Distributive Shares and Capital
Gains,” Journal of Economic Issues, March 2007; “Marginal Q: An Institutional
Search for an Unobservable Variable,” Journal of Business and Economics in
Times of Crisis, Spring 2015; the focus on corporate taxes in Chapter 6 takes
its lead from “Free Cash, Corporate Taxes and the Fiscal Deficit,” Journal
of Post-Keynesian Economics, Fall 2015; Chapter 7 builds on “Two Sets of
Twins? An Exploration of Domestic Saving-Investment Imbalances,” Journal
of Economic Issues, September 2005; “The Great Escape: The Multinational
Trade Deficit in Historical Perspective,” Journal of Economic Issues, March
2018. My work on Thomas Piketty in Chapter 8 relies in part on my arti-
cle “Piketty’s Paradox, Capital Spillage and Inequality,” Journal of Post-
Keynesian Economics, Winter 2017.
Finally, my often-brief encounters and correspondence over the years with
Paul Sweezy, John Bellamy Foster, Marvin Lee, Don Harris, James O’Connor,
Phillip Anthony O’Hara and hundreds of students have cemented my convic-
tion that serious economics can be (and should be) combined with friendship and
light-hearted levity. To these persons, I extend my thanks.
1 Prologue and preview

Capitalism is a growth system. In the face of ongoing technological advance,

and competition by rivals, business firms adapt and expand. The supply of labor,
growing both through productivity advance that expands output per head and
population growth, requires new outlets for labor absorption. In the absence of
planning that would reduce the number of working hours per person and maintain
a level of pay that would allow a reasonable standard of living, labor absorption
requires growth.
The engine of growth is investment. Businesses are going concerns and need
ever-growing markets. New products and modifications of older vintages are
part of a cycle of innovation and obsolescence. Saturation of markets is an ever-
present threat, particularly for large firms in mature markets. Automobiles need
to be replaced. Along with the deterioration of the automobile stock, self-driving
and electric cars will provide for the necessary expansion of markets. In addition
to new space-related research endeavors, existing weapon systems need to undergo
a process of profitable obsolescence to maintain a growing market for defense
contractors. In certain industries, such an energy, quantum computing and aircraft
development, the future path of product development is quite uncertain and a range
of investment options is pursued simultaneously. Often the gestation period for
product development is long, requiring a constantly changing investment mix with
a corresponding sales effort devoted to market enlargement. Market enlargement,
in turn, requires enough new state expenditures and investment across the econ-
omy to generate the income necessary to purchase the expanded level of output.
Apart from profit-maximizing pricing requirements, this necessity for ongoing
growth pushes aside all other factors that might intercede. The term “sustainable
development” is often used to indicate a new ecological awareness. Under present
conditions, sustainable development means—first and foremost—investment in
the service of profitable growth.
On the productivity front, investment carries productivity advances whereby
machines replace labor. Such technological unemployment is quite painful for
those displaced. But growth is facilitated by such displacement, as those dis-
placed are available for employment elsewhere. Absorbing the displaced entails
expanded markets and a corresponding amount of accompanying investment.
Thus, investment enlarges the capital stock and the capacity to produce while
2 Prologue and preview
simultaneously expanding income. Paralleling the mixed blessing of labor
displacement, this expanded capacity requires more income generation so as
not to develop excess capacity. Excess capacity is deadly. If generated in suf-
ficient amounts, excess capacity stifles new investment. Such stifling begets
the onslaught of economic downturn, instigating a degenerative cycle of more
excess capacity, accompanying unemployment and the economy’s inability to
recover. Along with increased state expenditures, investment is a main genera-
tor of expanded income. In consequence, the necessity for investment growth
is imperative. And, in paradoxical fashion, this growth must be in sufficient
amount to avoid the idle capacity that the new investment threatens to enlarge.1
Investment depends on the willingness of the wealthy and their agents to invest
in pursuit of profit. In consequence, the social welfare of the populace depends on
the expectations of uncertain profitability as understood by the corporate agents of
a wealthy few. As will be documented immediately below, investment expendi-
tures are quite concentrated, with a relative handful of major firms carrying forth
the lion’s share. This economic power of the few over the many is oftentimes
expressed negatively as the power of the giants to engage in monopsony, in the
power to leverage financial weight, and in the ability to extract state funds for
bailouts and contracts. But more often the power of the giants is simply taken
for granted as the natural consequence of an existing social order where the sales
of individual firms often exceed the production of nations. These giants are the
gravitational center of a business system with radial arms that expand outwards
in a network of millions of dependent businesses and individuals. In the nature of
the case, this corporate center must remain profitable and growth-driven in order
to feed the outer orbits of business and the larger society. Corporate power is thus
understood as facilitating power and, by reason of its all-encompassing nature,
beyond fundamental change, beyond fundamental challenge.
Upon reflection, this mega-dependency of all upon the giants might appear
obvious. But the enormity of the economy renders invisible any detailed pic-
ture making up the complex whole. Just a few of the innumerable connections
illustrate the point. The non-corporate business sector—comprised in large part
by smaller businesses—invests around 20 percent of total business investment.2
Such businesses employ millions. In 2012, enterprises with a total workforce
of less than five hundred, employed almost half of total business employment;
those with less than one hundred employed over one-third (Caruso, 2015, p. 2).
Those who work for auto repair shops, local road workers, stop-and-shop gas sta-
tions, used car facilities, shopping malls depend directly or indirectly on the great
auto and oil firms that collectively employ over a million workers worldwide. In
the production of all types of pipe, toys, paint, carpeting, asphalt for roofs and
roads, major corporations devoted to the production of oil, rubber, chemical and
plastic are omnipresent. In addition to the firms engaged in designing and manu-
facturing medical equipment, large corporate health facilities and locally owned
hospitals, physicians and health workers depend upon the great pharmaceutical
companies, insurance firms and drug chains. Metal fabricators of all types and
sizes are reliant on firms such as U.S. Steel, Anaconda Copper and International
 Prologue and preview 3
Nickel, who, in their specialty products, require material imports from all over
the globe transported by ships that, in turn, embed the very metals whose imports
are being transported. Interlocking connectedness of major firms and an extended
business network is the rule. A search for exceptions would be futile.
The corporate ecosystem also extends into government expenditures and pro-
curement of revenues. State and local government revenues depend not just on
taxes levied on income, property and sales but on the gas tax and assorted fees
levied by state departments of motor vehicles, whose redeployment expands the
transportation tributaries of roads and highways. Direct investment at the federal
level is comparatively small. But its procurement of high-tech weaponry and other
outputs reach into large-scale contractors and university facilities whose research
and development facilitate and sponsor large amounts of private investment in
industries as wide-ranging as defense, space, telecommunications, nuclear power,
biotechnology and aircraft procurement. The leasing arrangements of public land
areas by timber and mineral companies, together with assorted other subsidies
to large firms, buttress the enlargement of aggregate demand which the federal
government generates through contracts, transfer payment mechanisms and enti-
tlement programs. The employment of military staff in the U.S.’s 700+ military
bases and naval fleets, together with the military and policing aid to various gov-
ernments, protect the shipping lanes and resource-rich areas from which major
U.S. firms profit and to which investment flows. These corporate benefits include
not just the procurement of material resources—oil, copper, tropical foodstuffs
and the like—but also labor resources which, through U.S. multinational affiliates
and others, supply imports into the global distribution channels largely dominated
by major firms.
As private wealth is intimately tied to the investment process, the importance
of wealth concentration goes far beyond considerations of equity. Unlike a not-
too-distant past where a good part of the U.S. population had direct access to the
means of livelihood through the ownership of land and artisan shops, the current
workforce depends overwhelmingly upon wages and salaries. In recent years,
there has developed a new interest in income and wealth disparities. This inter-
est has directed intellectual energy to uncovering the causes of the recent rise in
inequalities and to the functional outcomes associated with the rise. But behind
this discussion lies the larger social question of investment as a primary driver of
social consequence and its use for private ends.
This larger question is not new. Robert Heilbroner describes the over-arching
theme of capital accumulation and the quest for profit as the “great drama” under-
lying the works of major forbearers such as Adam Smith, J.S. Mill, Marx and
Keynes. Heilbroner might also have mentioned more recent theorists, such as
Joseph Schumpeter, Michal Kalecki, Joseph Steindl, Paul Baran and Paul Sweezy.
All recognized that the “vital accumulation process hinges on the ability of a
capitalist class to extract profit from the system.” All understood the importance
of property rights and the division of “functions between the realm of business
and that of the state—a division of functions that takes for granted the priority of
accumulation as a necessary condition for a stable social order.” All understood
4 Prologue and preview
capitalism “as a social formation in which the accumulation of capital becomes
the organizing basis for sociopolitical life” (Heilbroner, 1985, pp. 142–143).
The importance of the “great drama” of capital accumulation and the pri-
vate nature of its appropriation remains doubly true when more and more of the
populace is dependent on a proportionately smaller elite exempt from public
accountability. Investment outlays and wealth ownership are highly concentrated.
From the early 1970s to the present, the top 200 publicly listed non-financial
firms have put into place approximately 65–70 percent of the total corporate
investment of those listed, with the top 50 generating approximately 40 percent
and the top 25 generating one-third (Grullon, Hund and Weston, 2018, p. 5).
These megafirms sit on top of over a million corporations that collectively put
into being about 80 percent of total business investment.3 In 2007, approximately
6 percent of households owned over 80 percent of the outstanding stock, with the
top 1 percent owning over 50 percent (Kennickell, 2009, p. 63). From 1929—the
first year in which the U.S. government records gross saving—until the present,
gross corporate profits in the United States have generated the largest part of gross
saving, with some part of personal saving derivable from such profits.4 As will be
discussed in Chapter 2, these aggregate profits derive primarily from aggregate
investment expenditures.
At the level of wealth taken as a totality, wealth has become increasingly more
concentrated. In 2013, the top 1 percent of family units held between 36 and 42
percent of total wealth,5 with the largest gains over the preceding decades going to
those at the very top of the wealth pyramid. The hierarchical concentration narrows
as if dictated by a mathematical fractal. From 1978 until 2012, the top 1 percent
roughly doubled its share of total wealth. The top one-tenth of 1 percent tripled its
wealth share to claim half of the top 1 percent’s share, with the top one-hundredth
of 1 percent claiming half of that (Saez and Zucman, 2016, pp. 552–553).
Examining the quest for gross profits provides us with a wide window to
inquire into the distribution of income and wealth. The window also invites
inquiry into the historical framework of capital accumulation and alternations in
government policy. The distribution of income and wealth is both cause and effect
of the saving-investment process. In the absence of explicit planning, demand for
product and investment ultimately derives from the class arrangements that deter-
mine income and wealth. In contrast to wealthier families where savings make up
a much larger portion of their income than others, most working-class families
consume the vast portion of their income with some substantial portion consum-
ing more than their income (Medlen, 2008, p. 859). Correspondingly, alternations
in income distribution alter consumption, investment and growth. A tilt in income
distribution towards working-class families, for example, would bolster aggregate
consumption, induce larger amounts of investment and additional employment. It
might also, by reason of expanded production, enlarge aggregate profits.
Despite the fact that the main saving-investment process surrounds the corpo-
rate form of profit-plowback, elementary mainstream economics—as exemplified
in modern textbooks—still retains the tautological but now archaic understanding
that saving is simply the reverse side of consumption. In understanding saving
 Prologue and preview 5
as a “residual,” this portrayal of saving reflects a much earlier period of artisan
and mercantile accumulation where “abstinence” from consumption allowed an
embryonic accumulation of capital. Profit seeking and abstinence were part of the
same artisan framework.6 As tautology, saving-as-residual is true by definition.
But in the modern period of (say) the last 150 years when the very rich could
not possibly consume their income—even if they single-mindedly attempted to
try—and where the bulk of saving is generated through corporate gross profits,
understanding saving as a residual is to substitute tautology for understanding.
Modern government policy operates in the service of expanding investment
and so underpins the quest for private gain. It does so through assorted subsi-
dies and subventions, tax breaks and government contracts, and a monetary
policy designed to facilitate the financing of private investment opportunities
whose availability—apart from significant downturn—is simply assumed. This
availability assumption is largely predicated on faith, which boom times heav-
ily reinforce. This facilitation of investment is unconsciously founded on the
assumption that the pursuit of profit through investment is the only way—or, at
least the only way meriting discussion—in which employment and income can be
dispensed to the underlying population. The social goal of high employment and
income generation is tied inexorably to the private pursuit of profit. The institu-
tional arrangements for profit-seeking investment are simply taken for granted as
a boundary line that is not to be violated.
The boundary line dictating that investment be undertaken by private parties is
tantamount to understanding that direct government production and investment—
as opposed to government expenditure—be shrunk to an irreducible minimum.
The boundary line requires that government should not produce goods and services
that could otherwise be provided through private markets. The widest possible
area for profit-making should be preserved. This understanding is rarely expressed
explicitly. Rather, prevailing discussion concerns government interference with
private markets, as opposed to the possibility of direct government production,
a possibility that only rarely materializes. Economists of conservative persua-
sion are the main carriers of this markets-only ideology. Societal maintenance, a
strong defense budget and sufficient policing to maintain civilized society are to
be supported by government. And that is all. Regarding public policy, this triad
constitutes the limits of conservative imagination. Government services, such as
educational services, might well be modified to allow private initiative through
vouchers; regulations tailored to protect the environment and workers should be
minimized so as to allow maximum growth; any and all measures in support of
self-reliance—particularly the reduction of entitlements that might interfere with
such reliance—are to be encouraged; even government sponsorship of health care
is understood to stifle private initiative.7
Those committed to an active fiscal policy conceive of a larger role for gov-
ernment in managing aggregate demand. But here, again, deference is paid to the
for-profit core of the investment process. Fiscal advocates often critically assess
the outsized U.S. military expenditures which make up the bulk of federal expendi-
tures on consumption and investment. But outside of infrastructure development,
6 Prologue and preview
paying bills for health and education, and expanding transfer payments, fiscal
advocates rarely suggest actual projects that would direct government production.
Demand management is itself the goal, providing incentives for profitable invest-
ment that might result in satisfactory if not full employment.
Those who advocate larger government expenditures often invoke the fiscal
advocacy associated with John Maynard Keynes. This invocation typically calls
for enlarged amounts of government spending to maintain employment, rather
than any prescription for government production. Keynes’s own view was more
nuanced. In Robert Skidelsky’s understanding, Keynes tried to carve out a “middle”
way whereby public enterprises devoted to the general welfare would coexist with
privately owned productive facilities (Skidelsky, 1995, pp. 219–241). Keynes was
a pragmatist whose advocacy for assorted projects and policies largely depended
upon immediate context. For example, in the mid-to-late 1920s, Keynes supported
Lloyd George in his call for state construction and advocated a “big construction
program of capital works—in housing, road building and electrification” (p. 185).
In his General Theory of Employment, Interest and Money (1936), Keynes con-
templated the future possibility of a “somewhat comprehensive socialization of
investment” (p. 378). But for all of this, Keynes’s advocacy of state intervention
remained quite vague. For the direction of state involvement Keynes referred to the
“common will, embodied in the policy of the State” (p. 377). Keynes’s placement
of State policy in the service of the “common will” begged the question of what
the common will consisted of and, most importantly, how the common will related
to the disproportionate state power exercised by the dominant classes carrying out
the investment process.

Free cash
Free cash is the cash (profit after tax plus depreciation) left over after new busi-
ness investment. From a societal perspective, free cash measures how much
remuneration the wealthy receive after carrying out their social role in providing
employment and income through investment. Free cash derives from capitalists’
consumption that partially self-funds through security payouts, with the remainder
available for speculative purposes, mergers, stock repurchases and capital export.
As will be discussed, free cash has been involved in imperialist expansion as well
as being foundational in an assortment of speculative excesses. The last part of
this book shows how free cash has expanded in recent decades and makes an argu-
ment for a larger governmental role in production and investment. It also makes
an argument for higher taxes on the wealthy so as to minimize the speculative
episodes that have periodically imploded in downturns. High taxes on cash would
simultaneously rectify—at least in part—the greatly expanded rise of inequality
of income and wealth that has arisen partly as a result of free cash spillage in the
stock market. High taxes on cash would also allow for much greater monetary
means for governmental investment projects aimed at a variety of human needs
underserved by existing markets.
 Prologue and preview 7
As a term, free cash was first coined by Michal Jensen in understanding the
leveraged buyout movement of the 1980s (Jensen, 1986).8 But as a macro concept
for understanding free cash generation across the entire economy, free cash owes
its mathematical formulation to Michael Kalecki (1899–1970), who, in the 1930s,
understood that government deficits and export surpluses would generate gross
profits (cash) in excess of new investment and capitalists’ consumption. I provide
a skeletal model of Kalecki’s formulation in Chapter 2, and an expanded version
in Chapter 6, where I explore the relationship of both government deficit spend-
ing and non-corporate deficit spending to free cash. Kalecki’s understanding that
government deficits expand the savings pool stands in stark contradiction to the
familiar “Twins Deficit” thesis whereby government deficits are alleged to crowd
out investment through the siphoning-off of saving.
Kalecki’s formulation of free cash and deficits was constructed under the
conditions of the Great Depression. In consequence, he did not spell out the full
ramifications of how free cash could be spilled in domestic markets through merg-
ers, dividends and speculative endeavors. But he did understand that imperialist
adventures were partially caused by the inability of capitalists to dispose of free
cash without capital export. I take up the issue of imperialism in Chapter 3 where I
explore John Atkinson Hobson’s early theory of imperialism. Hobson applied free
cash theory (without the name) to not only European colonial expansion but also to
the neo-colonial expansion of the U.S., exemplified most spectacularly in the terri-
torial grab associated with the Spanish–American War. Hobson also understood the
monopolization process of the late nineteenth century as a generator of free cash and
so linked monopoly to imperialism. In a theme also taken up by Thorstein Veblen—
Hobson’s contemporary—Hobson understood that monopoly generated free cash
by restricting output and investment in the service of higher prices and profits.
Over the next decades of the twentieth and twenty-first centuries, outlets for free
cash turned inwards towards mergers and speculation. For the 1920s, I estimate in
Chapter 4 the free cash that drove the second merger wave that swallowed over
7,000 firms through acquisitions (Thorp, 1931, p. 78); Soule, [1947] 1975, p. 142),
and provided a source of stockbroker loans outside of traditional banking conduits
(Kindleberger, 1973, p. 113). Beyond certain limits, cash could not profitably be
invested in new facilities within the recently formed oligopolistic structures. As
a consequence, free cash drained into acquisitions. In the 1920s, mergers were
particularly prevalent in utilities and manufacturing when the associated forces
for expansion like the automobile and suburbanization drove the larger boom. In
addition to providing stock market cash through loans, free cash contributed to
the stock bubble of the decade through acquisition premiums accorded to targeted
firms. Free cash also contributed to the manic psychology accorded to the prospect
that any stock purchase might soon be a target. Willard L. Thorp noted that for
the 1920s decade a major factor was “undoubtedly the large profits which many
concerns have made during the period of expansion . . . It is not surprising that
the expansiveness of the businessman during periods of prosperity often expresses
itself in the merger movement and large business organizations.”9
8 Prologue and preview
The 1920s was the first boom superimposed on quasi-monopoly foundations,
established earlier in the Great Merger Wave of 1895–1904. Utilizing an analysis
first employed by Thorstein Veblen, I explore in Chapter 5 how this transforma-
tion into monopoly pricing power split apart a new discounted stream valuation
of capital from a more traditional form of capital valuation based on replacement
costs. The replacement valuation of capital descended from earlier competitive
conditions. In Veblen’s analysis, the higher valuations accorded to firms with
monopoly power indicated their ability to restrict production and investment.
These higher valuations also registered the speculative excesses that were to blow
up in 1929.
In the prosperity after World War II, Veblen’s dichotomization of capital
valuation—expressed as the ratio between stock valuation and replacement cost
(Tobin’s Q)—served as the basis of an investment theory. Rather than being a
simple indicator of monopoly power, higher Qs would allegedly drive investment
ahead. Entrepreneurs and existing firms could reap stock gains by producing new
assets and selling them on the stock market. I show that Tobin’s Q theory fails a
basic empirical test in reference to firms’ choice of expansion between mergers
and investment. I formulate a new theory of mergers based on relative valuation
and show that when a higher distribution of income flows towards capital the
value of older capital acquired through mergers rises relative to new investment.
This accords well with a free cash theory of mergers. Extra cash means extra
monetary means for consolidation. This result also suggests a tie-in between stag-
nation of investment, stock market gains and wealth inequality. Monies flowing
towards mergers are monies flowing towards owners of targeted firms, who, in
respect of existing fact, are disproportionately wealthy. And so the great circle:
higher income inequality—when returns to capital expand relative to output—
drives wealth inequality.
In Chapter 6, I discuss the declining growth rate of investment dating from
the late 1960s and relate this stagnation to the post-WWII oligopoly-stagnation
theses of Joseph Steindl, Paul Baran and Paul Sweezy. These theses hark back
to the monopoly-stagnation theses of Hobson and Veblen. Along with oligopoly-
stagnation theorists, I argue that the most recent stagnation is the result of long-term
forces. In turn, I examine the simulative impact of both government and consumer
debt and mathematically derive a neo-Kaleckian model that helps explain the
post-WWII rise of government and consumer deficit spending, free cash and its
speculative effluent. Government deficits are understood as a response to the mas-
sive lowering of taxes on the wealthy and the need for stimulation under stagnant
investment growth. Consumer debt is understood as a predictable response to a
flattening of wages, induced by a very large decline in manufacturing employment,
stagnant investment growth and the globalization of production.
In light of the U.S. multinationals’ expansion of the last half century, I argue in
Chapter 7 that Kalecki’s specification of free cash, deficit spending and the trade
balance needs a major reformulation. For the period prior to World War II and imme-
diately thereafter, U.S. export surpluses created free cash in the way that Kalecki
had formulated. However, unlike this earlier period where trade predominated,
 Prologue and preview 9
multinational production and use of import supply lines are now the dominant ways
in which large firms seek out foreign markets and generate cash. In the absence
of the cash-generating domestic deficits of the U.S. government and private par-
ties, the large and growing trade deficits of the last forty years would have cut into
domestic free cash. But with enlarged and growing cash flows generated through
deficit spending, cutbacks on investment due to multinational production and use
of imports may actually have expanded free cash aggregates over and above the
levels that would have otherwise obtained. I argue that this multinational genera-
tion of free cash is structurally located and has been (and is now) largely immune to
exchange-rate declines in the value of the dollar.
The simultaneous rise of deficit spending in all its forms and the offshoring of
production and investment allows for understanding the recent rise in free cash.
As free cash provides the wherewithal for mergers, such a composite also allows
for an understanding of the increasing concentration of industry and monopoly
power associated with the recent stagnation of corporate growth.
Chapter 8 deals with the recent rise of inequality of income and wealth and
shows how free cash spillage gives additional credence to Thomas Piketty’s
thesis relating inequality to the capital/output ratio and the rate of return on
capital. The neo-Kaleckian model is put to additional use in showing how defi-
cit spending of all types is spilled into the stock market, expanding inequality
while at the same time lowering rates of return on equity, interest rates and
increasing the prices of speculative assets. As these lowered interest rates were
a primary factor in generating the most recent housing bubble, a neo-Kaleckian
understanding allows additional insight into the Great Recession commencing
in the latter part of 2007.
The final chapter argues for a larger governmental role in the investment
process. The chapter illustrates the case with short sketches of how government
investment in health and energy could significantly raise the standard of liv-
ing of people while simultaneously providing for additional employment and
security. Following on John Kenneth Galbraith’s understanding that human
“needs” should be distinguished from “wants,” I advocate government invest-
ment targeting the satisfaction of “needs.” With such targeting, human welfare
would not depend upon the magnitude of growth but rather its direction. The
present ongoing drumbeat for enlarged growth reflects the view that existing
investment patterns are not to be altered; indeed, given the legacy assets of
major corporations, such patterns will not be altered unless the government
redirects the general course. Under existing arrangements, enlarged growth is
the only mechanism that can trickle down to sustain employment and welfare.
I argue that with public investment directed towards human needs, a slowing
down of the rate of growth would not only be compatible with an expansion of
human welfare but would also allow for an ecologically sound economy. I argue
too that such government direction over the investment process would be best
accomplished with high taxes on the wealthy. Such taxes could not only finance
a better national economy but would simultaneously fight inequality and claim
the free cash that drives speculation.
10 Prologue and preview
In reference to health, I propose a parallel government health system comprised
of tuition-subsidized medical schools, government pharmaceutical establishments,
and a partial buyout of existing hospital facilities. Buyouts of hospitals and other
health facilities would minimize political opposition and should be employed
when possible. A parallel government health system need not replace the exist-
ing for-profit system but would induce competition that would lower health costs
across the board. The federal government has the financial wherewithal to carry
this project forward. Most importantly, health, along with food and shelter, are
recognized to be at the base of the needs structure. To ration health in accordance
with income—as is done presently—is as unnecessary as it is debasing.
In reference to energy, I propose a government buyout of vested interests to
facilitate a national grid freed from overlapping jurisdictions and devoted to solar
energy. As the fuel is free, solar energy could totally revamp the growth pro-
cess. Applied to the aging railroad systems of the U.S. and to newly fabricated
mass transit systems, solar energy would cheapen transportation costs and allow
expanded production in areas now characterized as industrial wastelands. In con-
trast to the present situation where the migratory displacement of labor towards
new job hubs devastates existing communities, bringing jobs to people would
allow communities to be rehabilitated and preserved. Needless to say, massive
solar networks would move society towards sustainability and ecological health.
A final comment: apart from a discussion surrounding J.A. Hobson’s early the-
sis of imperialism and the multinational dimension of U.S. production, the book
focuses almost exclusively on the U.S. economy. It should be noted, however,
that the recent slowdown of U.S. growth finds an overseas parallel in the vast bulk
of OECD countries. The U.S. falling tax rates on the wealthy also finds an over-
seas parallel. Whether recent U.S. free cash expansion finds a global counterpart
is a question still to be answered.
In reference to the development of inequality, the present book’s U.S. focus
leaves major gaps. Financial flows across borders—amounting to trillions of
dollars a day—have generated a super-large speculative arena and a new con-
centration of global wealth. Some have begun the trek of understanding this new
globalization of financial gain and the global divergence of income and wealth.10
Others will certainly follow.
In reference to government investment processes related to needs, there is the
further question of agency—the question of how to politically confront the massive
inertia and resistance of propertied interests and others committed to a markets-
only understanding of how a modern economy should work. This is indeed a gap.
I have no ready answers. Proposals directed towards health and energy, however,
do take up those industries that would have the most extensive implications for
enhancing human welfare. Accordingly, the possible engagement of large numbers
of people in advocacy for such change is greater in these critical industries than
in others. Certainly, the argument for government production is most easily made
when the implications for enhancing human betterment is maximal.
The markets for goods and services related to “wants”—particularly the
“higher wants” relating to ostentatious automobiles, luxurious homes, jewelry
 Prologue and preview 11
and the like—would be shrunk if sufficiently high taxes were employed on
exorbitant wealth and high incomes. Such shrinkage would have the adventi-
tious consequence of freeing up resources that could be directed towards basic
human needs.

Notes
1 See the discussion in Evsey D. Domar, 1957, especially Chapter 5. In the simplest
model, the capacity to produce depends proportionately on the capital stock, so that
changes in capacity depend proportionately on changes in the capital stock, or lev-
els of investment. In contrast, changes in the ability to buy depend on the Keynesian
multiplier multiplied by changes in investment, or the change in the change of the
capital stock. For changes in the ability to buy to equilibrate with changes in capacity,
investment growth would have to be proportional to the saving/income ratio multi-
plied by the capacity/capital stock ratio. Expansion of the saving/income ratio—in
rough measure the expansion of gross profits to the total economy—and the growth
of more efficient capital—reflected in a rise in the capacity/capital stock ratio require
a faster rate of investment growth to avoid excess capacity. Such a rigid specification
of growth requirements gives at least a partial understanding of why under-utilized
capacity might well be normal and why the economy needs government stabilization
measures designed to expand purchasing power.
2 Total fixed non-residential business investment from the Department of Commerce;
corporate investment from the Federal Reserve, Flow of Funds Accounts. Subtraction
of the latter from the former allows a calculation of non-corporate business investment.
3 See endnote 2; number of corporations specified are “C” corporations. “S” corpora-
tions make up close to 4 million firms.
4 In 2016, undistributed gross profits (retained earnings plus depreciation changes) were
almost twice the gross saving of households and institutions. As saving from dividends
derive from gross corporate profit, this approximate two-fold difference should be con-
sidered a conservative estimate (table 5.1, Department of Commerce).
5 Differing estimates depend on various methodologies. Emmanuel Saez and Gabriel
Zucman (2016) cite the higher figure; Jesse Bricker et. al. (2016) cite the lower.
6 Like other conceptions that misguide inquiry, this understanding is not entirely false.
Wealthy families do have personal savings and can, as individual entities, sell off stock
to others. Today, consumption is the central core of macroeconomic theory, not the
pursuit of profit. In the simplest model, consumption is functionally related to the
level of income. Investment, government spending and net exports are understood as
“exogenous.” More complex models allow investment to be determined by income
and the interest rate. Equilibrium is established when saving and investment equili-
brate. The categories of consumption investment, government and net exports allow a
separate discussion and categorization of each, leading the student of economics to the
taxonomical conclusion that the economy is indeed a complex arrangement of interde-
pendent economic items.
7 A full accounting of alleged government oversteps can be found in Milton and Rose
Friedman’s Free to Choose, 1980.
8 Jensen was interested in various industries and firms, not the macro economy. In
Jensen’s definition, free cash was monies left over after capital expenditures, where
capital expenditures were not necessarily confined to new investment propelling
growth. Free cash, as used in the current book, is calculated only in reference to new
investment.
9 Cited in Reid, 1968, p. 67.
10 See, for example, Galbraith, 2008, 2012; Thompson, 2008; Stiglitz, 2015.
12 Prologue and preview
References
Bricker, Jesse, Alice Henriques, Jacob Krimmel and John Sabelhaus, “Measuring Income
and Wealth at the Top Using Administrative and Survey Data,” Brookings Papers on
Economic Activity, Spring 2016.
Caruso, Anthony, “Statistics of U.S. Businesses: Employment and Payroll Summary
2012,” U.S. Department of Commerce, Economics and Statistics Administration, U.S.
Census Bureau, February 2015.
Domar, Evsey, D. Essays in the Theory of Economic Growth, Oxford University Press,
New York and Oxford, 1957.
Friedman, Milton and Rose Friedman, Free to Choose: A Personal Statement, Harcourt
Brace Jovanovich, New York and London, 1980.
Galbraith, James K. Inequality and Instability: A Study of the World Economy Just Before
the Great Crisis, Oxford University Press, Oxford, 2012.
Galbraith, James K. “Global Inequality and Global Macro Economics,” in Global
Inequality, edited by David Held and Ayse Jata, Polity Press, Cambridge, 2008,
pp. 148–175.
Grullon, Gustavo, John Hund and James P. Weston, “Concentrating on Q and Cash Flow,”
Journal of Financial Intermediation, Vol. 30, Issue C, 2018, pp. 1–15.
Heilbroner, Robert L. The Nature and Logic of Capitalism, W.W. Norton & Co., New
York and London, 1985.
Jensen, Michael, “Agency Costs of Free Cash Flow, Corporate Finance and Takeovers,”
American Economic Review, Papers and Proceedings, 1986, pp. 322–329.
Kennickell, Arthur, “Ponds and Streams: Wealth and Income in the U.S., 1989 to 2007,”
working paper, Board of Governors, January 7, 2009.
Keynes, John Maynard, The General Theory of Employment, Interest and Money, Harcourt,
Brace Jovanovich, New York, [1936] 1964.
Kindleberger, Charles P., The World in Depression, 1929–1939, University of California
Press, Berkeley and Los Angeles, 1973.
Medlen, Craig, “Galbraith Preference Mappings: Needs and Want, Evidence from the 2005
Budget Study, Notes and Communications,” Journal of Economic Issues, Vol. XLII,
No. 3, September 2008, pp. 853–862.
Reid, Samuel Richardson, Mergers, Managers, and the Economy, McGraw-Hill Book
Company, New York, 1968.
Saez, Emmanuel and Gabriel Zucman, “Wealth Inequality in the United States since 1913:
Evidence from Capitalized Income Tax Data,” Quarterly Journal of Economics, Vol.
131, No. 2, 2016, pp. 519–578.
Skidelsky, Robert, John Maynard Keynes, The Economist as Savior, 1920–1937, Penguin
Books, New York, 1995.
Soule, George, The Prosperity Decade: From War to Depression 1917–1929, M.E. Sharpe,
Inc., New York, [1947] 1975.
Stiglitz, Joseph E., The Great Divide: Unequal Societies and What We Can Do About
Them, W.W. Norton & Co., New York and London, 2015.
Thompson, Grahame F. “Global Inequality, the ‘Great Divergence’ and the Supranational
Regionalization,” in Global Inequality, edited by David Held and Ayse Kaya, Polity
Press, Cambridge, 2008, pp. 176–203.
Thorp, Willard L., “The Persistence of the Merger Movement,” pp. 74–89, American
Economic Review, Papers and Proceedings of the Forty-third Annual Meeting, Vol.
XXI, No. 1, March 1931.
2 Michal Kalecki’s derivation
of free cash

Free cash studies have inevitably discussed inherent limits on new capital
expenditures relative to cash generated. Such studies have focused mainly on
mergers and acquisitions in particular historical periods, relating industrial for-
mations to methods of financing.1
At a macro level, however, free cash explanations surrounding specific indus-
trial and historical considerations appear unduly narrow, particularly in light of
the ubiquitous spread of oligopoly formations across the economy and across
time. For as long as growth proceeds upwards, the monopoly power invested
in oligopolistic formations will tend to generate excess cash. Monopoly pricing
power allows high returns. Monopolistic pricing power also involves restriction
of production and investment in support of administered prices and high markups.
At least since the 1920s, oligopoly formations exhibiting monopoly pricing power
have permeated virtually the whole of the economy outside of residential con-
struction, trade in services and the ground floor of agriculture.2 In consequence,
a case-by-case explanation of free cash generation can only fall short in explain-
ing how aggregate totals of free cash expand and how such expansion furthers
merger activity and capital spillage in general.
The key to understanding the macro-generation of aggregate free cash totals
surrounds not just the oligopoly formations of modern industry, but the con-
sumption level of the capitalist class and the deficit spending of both government
and private parties. In grappling with understanding the Great Depression of the
1930s, Michal Kalecki was the first to express this insight in reference to gov-
ernment deficits. He noted that “A budget deficit has an effect similar to that of
an export surplus. It . . . permits profits to increase above the level determined by
private investment and capitalists’ consumption” (Kalecki, [1933] 1971, p. 85).
During the Depression, merger and speculative activity came to a near-halt. So
Kalecki understandably did not foresee the full importance of free cash for under-
standing mergers and speculative activity. In Kalecki’s view, government deficits
provided both remedial sustenance through additional purchasing power and an
expansion of profits that might be directed, under favorable circumstances, towards
additional investment.
14 Michal Kalecki’s derivation of free cash
Reasoning from the simplest possible thought experiment, Kalecki first
assumed a closed economy without government or trade and with the working
class consuming all of the wage bill:
Production (Y) consists of consumption (C), divided between workers’
consumption (Cw) and capitalists consumption (Cπ) and investment (I), which gen-
erates income divided between gross profit (profits (π)+ depreciation (Dep)) and
(wages (W)). Under the assumption that all workers’ wages are consumed (W = Cw):

(1) Y = Cw + Cπ + I = W + (π + Dep) = W + Cπ + I
Or: (1a) π + Dep = Cπ + I

This latter identity does not distinguish between cause and effect. But Kalecki
reasoned that capitalists cannot determine their profit. But they can make deci-
sions on investment and consumption and if current gross profits are inadequate
to finance these decisions, these decisions can still be financed through debt.
Accordingly, “capitalists earn what they spend” (Feiwel, 1977, p. 85).
This last point deserves emphasis. Total output (Y) as in (1) above depicts the
division of income into its components, with the capitalists’ share arising out of
their behavioral (causal) activity. Consequently, Kalecki transforms what would
otherwise be just an identity into a short-term model.
From (1a), it is apparent that a certain amount of capitalists’ consumption will
be mirrored by an exact amount of Free Cash, defined narrowly as (π + Dep – I).
Capitalists’ consumption thus provides aggregate excess cash for firms to dispose
of or to be returned in funding the consumption.
Kalecki extended the concept of gross profit generation by showing that in
addition to investment, government deficit spending and export surpluses (modi-
fied here as a positive Current Account3) allow for both the expansion of aggregate
gross profits and the generation of gross profits in excess of new investment and
capitalists’ consumption.4 To show this, modify (1) above to include government
expenditures financed through taxes (T) and the fiscal deficit (FD) and the Current
Account (CA) and allow W* and (π +Dep)* to be after-tax receipts of workers and
capitalists respectively.

(2) Y = Cw + Cπ + I + T + FD + CA = W* + (π + Dep)* + T

Simplifying and again noting the assumption that workers consume all their
income. (i.e. Cw = W*),

Cw + Cπ + I + FD + CA = W* + (π + Dep)*
(2a) (π + Dep)* = Cπ + I + FD + CA

To summarize: “capitalists earn what they spend” plus the spending associated
with government deficits and the current account. Note that a negative current
account subtracts from profits.
 Michal Kalecki’s derivation of free cash 15
We can rearrange (2a) to arrive at Free Cash, defined in this model as net of
corporate taxes:

(2b) Free Cash = ((π + Dep)*- I) = Cπ + F.D. + CA

An expansion of government deficit spending and/or a positive current account

generates free cash over and above capitalists’ consumption. Investment need not
expand for additional cash to flow into businesses.
It should be noted that the free cash model (2b) is a stripped-down model.
In Chapter 6, I enlarge the model to encompass personal saving, non-business
investment such as residential construction and deficit spending outside of the
government sector. I will show how non-government deficit spending—such as
consumer deficit spending—has an analogous effect to government deficit spend-
ing in enlarging free cash.
The free cash model (2b) is a stripped-down model also in that it neglects the
impact of productivity advance—particularly the advance carried forth by new
investment. In other writings, Kalecki was quite explicit about the impact of tech-
nological change,5 particularly over the longer run. But in his short-term modeling
of income determination—as represented by the model above—he abstracted
from its impact. This neglect is equivalent to understanding a particular vintage
of investment in one period as equivalent to another of the same magnitude in
another period. Productivity advance, however, allows an expanded level of out-
put and an expanded level of income receipts. It also allows for an expansion of
free cash. In particular, an enlarged income accruing to capitalists will expand
their consumption and, in accordance with (2b), will enlarge free cash quite inde-
pendently of any enlargement of deficit spending or the current account.
Although limited to short-term income determination, Kalecki’s model gives
insight into how government deficit spending and a positive current account might
enhance stability. A neoclassical perspective relies on a plow-back of saving into
more productive investment to generate growth. But it assumes that a willingness to
save will in fact be translated into investment. Under conditions of excess capacity,
the Kaleckian perspective disallows any such optimistic assumption as an automatic
response. Under a Kaleckian understanding, deficit spending and current account sur-
pluses encourage investment by enhancing aggregate demand. They also allow for
a measure of free cash that permits investment in future periods to expand beyond
current levels, without requiring firms to take on additional debt to finance such
investment. This is not to deny that savers and investors are often different and that
debt enables the conversion of savings into investment. But at the aggregate level, free
cash constitutes internally generated funds that could be placed into future investment.
Government deficit spending and a positive current account therefore allows
(but does not guarantee) a reduction in private debt and risk in pursuit of capi-
tal expansion. Kalecki never stressed the point but his free cash conception
links inexorably to his “Principle of Increasing Risk.”6 Tracy Mott summarizes
Kalecki’s “Principle” noting that the “size of the [firm’s] own capital” is the limit-
ing factor on the expansion of the firm. This limit arises
16 Michal Kalecki’s derivation of free cash
because the more of one’s own wealth tied up in a particular fixed invest-
ment, the more danger one [is] exposed to in the event of failure and the more
trouble one would be under in case of a sudden need for liquidity.

This emphasis on “increasing risk” helps in understanding the priority of internal

cash flow financing as opposed to outside financing. Debt is both dangerous and
liquidity absorbing as interest is paid out. Equity finance, is safer but “dilutes the
value of the investment to the original shareholders (Mott, 2010, pp. 5–6).
Although certainly helpful in understanding the priority of internal financing,
the “Principle of Increasing Risk” certainly needs qualification. Confronted with
the possibility of market saturation, mature firms need to inject additional liquid
capital—often in large amounts—to maintain and expand markets. As going con-
cerns, firms often require new investments geared towards innovation simply to
stay alive. That said, free cash allows for additional firm expansion through the
reduction of risk. Of course, there is no assurance that such expanded investment
will take place, or that debt will be correspondingly reduced with additional cash
flow. Indeed, the latter chapters of the present work show that investment growth
has slowed considerably over the last few decades with expanded amounts of
corporate debt underpinned by the use of free cash as a collateral base. In that
government deficits generate the free cash that supports corporate leverage, there
exists a hierarchy of debt layering whereby sovereign debt allows an increasingly
risky upper layer of corporate obligations. The latter chapters also show that the
larger part of recent free cash generation has been directed towards mergers and
speculative ends.

Investment is self-funding
The Kaleckian analysis above is an extended and class-based version of the
Keynesian propositions that investment is self-funding and that government
deficits help stabilize an unstable economy. Kalecki and Keynes worked inde-
pendently so it should not be thought that Kalecki simply modified Keynes’s
analysis. But in showing that investment creates gross savings (the lion’s share
of saving is either gross profit (profits plus depreciation) or derives from gross
profit through security payouts), both theorists reversed the causal sequence of
the saving-investment process. This reversal of causality qualifies as the most
important advance in comprehending the saving-investment process at the aggre-
gate level under conditions of excess capacity. In contrast to the micro-view of the
firm where investment derives from gross profits (saving) and its future prospects,
Keynes and Kalecki understood that at the macro-level of an underemployed
economy, investment created the saving necessary to fund the investment.
The circumstances of the Great Depression gave birth to this new under-
standing. Saving could only be realized if there was sufficient income to save.
Investment drove the economy and the growth of income. In consequence, high
investment was one with high incomes and thereby high saving. In Keynes’s cri-
tique of the classics, Keynes maintained that the causal presumption of savings
 Michal Kalecki’s derivation of free cash 17
driving investment required an unwarranted assumption that resources of labor
and capital were fully utilized. Such an assumption meant that every “decline in
consumption meant an increase in investment to absorb the labor released. The
rate of investment is then governed by the desire of the community to save.” But
with underutilized resources, “It is the rate of investment which governs the rate
of saving and not vice versa” (Robinson, [1942] 1991, pp. 65–66).
In addition to showing how investment is self-funding, Kalecki’s formula-
tion of free cash also shows how capitalists’ consumption could be self-funding
through payouts in dividends and interest. As shown by the free cash formu-
lations in both (1a) and (2b), a growing level of capitalists’ consumption will
appear on the income statements of businesses as an enlargement of gross profits
in excess of new investment. This excess cash is now available to fund the high
level of capitalists’ consumption from which the free cash derives. This pos-
sibility of consumption funding does not mean that capitalists’ consumption is
necessarily financed through free cash, or that free cash is disgorged towards
dividends and interest in any exact measure. Such finance might well involve
other sources such as debt. In addition to interest and dividends, free cash might
well be spilled in merger activity, or be available for capital export, or, in more
recent decades, spilled in stock repurchases. As businesses can use free cash as
an indicator of economic health and collateral for debt, free cash generation also
permits cash spillage in excess of free cash through debt financing. As will be
shown in Chapter 8, the simultaneous rise of free cash and debt has been particu-
larly prevalent in recent decades.
The self-funding nature of investment and consumption is instructive in terms
of depression economics. It is also instructive in clarifying the relationship of
monopoly power and the associated cash making up the bulk of saving. In con-
trast to the price competition of the mid-nineteenth century, the later trusts and
monopoly structures dating from the latter part of that century aimed to increase
profits (saving) by crimping production and investment. Unlike the microeco-
nomics of the firm whereby investment restriction acts to maintain monopoly
pricing and profit, at the macro level, such crimping of investment stifles growth
and profit. The fallacy of composition obtains. Individual monopolies and oli-
gopolistic structures exhibiting monopoly pricing power can grow profits while
restricting investment if the overall economy grows. But if the aggregate econ-
omy is infused with monopoly power, both investment and profits (saving) would
tend to decline along with the economy. Given Keynes’s reputation as the main
theorist of the Great Depression, it is somewhat ironic that he never inquired into
how the industrial structure might bring on stagnation. Kalecki came closer to the
mark by relating the “degree of monopoly” to the division of income, whereby an
expansion of monopoly led to an expansion of profits and investment slowdown
([1952] 2009, pp. 11–41).7
In relating spending propensities to the class division of income, the Kaleckian
version of the investment-driven savings process constituted a distinct improve-
ment over that of Keynes. By pointing to the high levels of worker consumption
and the discretionary nature of capitalist investment, Kalecki’s analysis pointed
18 Michal Kalecki’s derivation of free cash
to how planned investment could sustain the economy, without the uncertain-
ties associated with private accumulation.8 No longer dependent on the prospects
and risks attendant to obtaining private profit, planned investment could main-
tain economic growth without interruption. Keynes’s analysis pointed in the same
direction, particularly in Chapter 12 of the General Theory where he discusses the
precariousness of assessing future investment prospects under a “State of Long-
Term Expectation.” But Keynes himself could never embrace a socialist outcome
other than to suggest that if taxation and monetary policy and “perhaps other
measures” failed, “a somewhat comprehensive socialization of investment will
prove the only means of securing an approximation to full employment.” This
offhand remark was accompanied by the proviso that a quasi-socialist outcome
would be a last-ditch measure and would not preclude “all manner of compromises
and of devices by which public authority will co-operate with private initiative”
(Keynes, [1936] 1964, p. 378).
Kalecki’s sharp-edged notion that consumption and purchasing power would
expand with a redistribution of income towards wages was also implicated in
Keynes’s analysis. But Keynes never emphasized this aspect of his theory.
Keynes introduced an aggregate “propensity to consume” that would decline with
expanded income across the entire economy. But in contrast to the Kaleckian
version of class-based consumption where wages were assuredly spent, Keynes
provided his famous psychological law rooted in the “community”: “that when
aggregate real income is increased aggregate consumption is increased but not so
much as income” (Keynes, [1936] 1964, p. 27). This diminishing “propensity to
consume” with income certainly suggests the possibility of a class-based analysis,
with the aggregate propensity to consume enlarged with an increased wage bill
relative to gross profits and assorted incomes flowing into the upper classes. But
by framing the “propensity to consume” in light of the whole economy, Keynes’s
analysis bypassed any explicit analysis of the distribution of income and its macro-
implications. This omission is glaring in light of Keynes’s multiplier analysis. As
the power of the multiplier effect depends critically on the propensity to consume,
one might have expected Keynes to recommend an income redistribution towards
wages in the service of expanding the multiplier. But no such recommendations
are to be found in Keynes’s work.
Apart from understanding how government deficits can create free cash, the
Kaleckian identity (2b) is important for understanding how a positive current
account (Kalecki’s “export surplus”) relates to foreign debt. A positive cur-
rent account means that the world owes the “export surplus” country. Such a
surplus thus involves foreign debt. A country’s imports are another’s exports.
So any exclusive trade among the advanced world producing largely substitut-
able products would simply be a “beggar-thy-neighbor” war, with each nation
attempting to expand production and profits at the expense of the other. Net
importers would arrive at debtor status as a derivative of their inability to com-
pete. However, with colonialism or any type of foreign domination of others,
a rich developed country can put debt on the colonial sphere, so as to gener-
ate a positive current account with that colonial sphere. So, in this case, cause
 Michal Kalecki’s derivation of free cash 19
and effect are reversed—instead of positive current accounts causing external
debt, external debt can lead to positive current accounts. Kalecki expressed this
important idea without elaboration, no doubt because he saw that

The connection between “external” profits and imperialism is obvious. The

fight for the division of existing foreign markets and the expansion of colo-
nial empires, which provide new opportunities for export of capital associ-
ated with the export of goods, can be viewed as a drive for export surplus, the
classical source of “external” profits. Armaments and wars, usually financed
by budget deficits, are also a source of this kind of profits.
(Kalecki, [1933] 1971, p. 85)

Kalecki never fully examined the empire-building that resulted in World War I
and which spilled over into the World War II. But his reference to the “classical
source” of “external” profits certainly referred to the territorial expansion by the
European powers and the United States.
To the generation of “external” profits and its relationship to free cash we now
turn to J.A. Hobson’s theory of imperialism. Of necessity, this inquiry will be
quite limited in scope, relating Hobson’s theory of imperialism to the maldistribu-
tion of wealth and income within the advanced capitalist spheres, the monopoloid
structures within modern capitalism, and the tendency to depression arising out
of these monopoloid structures. Hobson’s analysis of a tendency to depression is
particularly important. His analysis was, as Keynes acknowledged in a critique
contained within the General Theory, prefatory to Keynes’s own work.9 As will
be shown, however, Keynes edited out of his own analysis the Hobsonian thesis
of how monopoly related to imperialism. Keynes also understood Hobson’s the-
ory as an “underconsumption” theory as opposed to an “underinvestment theory”
due to monopoly power.

Notes
1 The merger wave of the 1920s involved a great deal of horizontal mergers that were
largely carried out by second-tier firms. Dominant firms left over from the Great Merger
Wave were under the watchful eye of the Justice Department. The thinking at the time
was that consolidation at a secondary level might allow expanded competition with the
giants (Stigler, 1950). A similar anti-trust concern influenced the conglomerate merger
wave of the 1960s. Conglomeration would expand overall concentration, but the octopus
legs of the conglomerates tended to lessen concentration ratios in each industry entered.
Free cash, however, could explain a large part of the 1960s merger wave (Mueller,
1969). In the buyout wave of the 1980s, high amounts of leverage were associated with
large amounts of free cash. Such leverage justified its existence by directing free cash
outward from acquiring corporations that could not use it toward target corporations that
could. With debt finance, interest on bonds substituted for dividends with the advantage
that interest paid reduced corporate taxes. By the late 1980s, debt-financed mergers left
a third of them bankrupt (Holmstrom and Kaplan, 2001, p. 128). Over recent decades,
banking consolidations can be partially explained by the expansion of finance in general
and the proliferation of non-financial firms like General Electric and the great auto firms
into financial services.
20 Michal Kalecki’s derivation of free cash
2 I say “ground floor” because while crops and farms often involve thousands of firms and
parties, the narrows of food distributors, seeds, pesticides and agricultural equipment are
largely dominated by oligopoly structures.
3 The current account deals with exports and imports of goods and services, but also with
income and transfer remittances.
4 The mathematics in this section follows the logic of Kalecki, [1965] 2009, pp. 45–51.
5 See, for example, Kalecki, “A Theorem on Technical Process,” [1941] 1991.
6 Kalecki credits M. Breit for the basic formulation of the “Principle of Increasing Risk”
(Kalecki, [1937] 1990, p. 289).
7 The Keynesian revolution in thought surrounding the Great Depression came at the same
time as theories of imperfect completion and oligopoly were being developed. For stag-
nation theorists like Paul Baran and Paul Sweezy, the key to situating the Keynesian
revolution in history was to understand how the Depression related to the restrictionist
tendencies of monopoly power. For clarifying remarks relating monopoly power to the
Keynesian revolution, see Paul Sweezy ([1963] 1964, pp. 305–314); Baran and Sweezy
(1966, pp. 54–58).
8 Joan Robinson, a friend of Kalecki, once noted that “The planning of investment is
the key to economic control.” Her reference was both to the former Yugoslavia and, in
a somewhat too optimistic assessment, the “capitalist countries” that “now accept the
necessity for planning” (Robinson, 1969, p. 186).
9 In a listing of just Hobson’s ‘most important works,’ G.D.H. Cole (1940) lists forty
books that Hobson wrote, not including the numerous works that Hobson contributed to
various journals. Hobson’s writings treat not just strictly economic themes, but social,
political and psychological issues dealing with whole realms of culture, political accom-
modation and wars. Among a variety of other topics, Hobson wrote on the Boer War, the
Egyptian question relating to the Suez Canal and the cotton imports flowing into Britain,
the relationship of India and the Dominions to the larger Empire, the inter-imperialism
of major powers in relation to China and South Africa, the aftermath of World War I,
the elements making for progressive taxation and the difficult question of how tropical
resources and foodstuffs could be garnered without imperialism. For readers interested
in a recent and detailed overview of Hobson’s development over time as well as the
extensive literature surrounding Hobson’s views to those of others, consult Cain (2002).

References
Baran, Paul and Paul Sweezy, Monopoly Capital, Monthly Review Press, New York, 1966.
Cain, P.J., Hobson and Imperialism: Radicalism, New Liberalism, and Finance 1887–1938,
Oxford University Press, Oxford, New York, 2002.
Cole, G.D.H., “Obituary: J.A. Hobson,” The Economic Journal, Vol. 50, No. 198/199,
June–September 1940, pp. 347–360. Published by Wiley on behalf of the Royal
Economic Society.
Feiwel, George R., The Intellectual Capital of Michal Kalecki, University of Tennessee
Press, Knoxville, 1977.
Holmstrom, Bengt and Steven N. Kaplan, “Corporate Governance and Merger Activity
in the United States: Making sense of the 1980s and 1990s,” Journal of Economic
Perspectives, Vol. 15, No. 2, Spring 2001, pp. 121–141.
Kalecki, Michal, Selected Essays on the Dynamics of the Capitalist Economy 1933–1970,
Cambridge University Press, Cambridge, UK, 1971.
Kalecki, Michal, Collected Works of Michal Kalecki, Vol. 1, Clarendon Press, Oxford,
1990.
Kalecki, Michal, Collected Works of Michal Kalecki, Vol. II, Clarendon Press, Oxford,
1991.
 Michal Kalecki’s derivation of free cash 21
Kalecki, Michal, Theory of Economic Dynamics, An Essay on Cyclical and Long-Run
Changes in Capitalist Economy, Monthly Review Press, New York, [1952] 2009.
Keynes, General Theory of Employment, Interest and Money, Harvest/HBJ Book, Harcourt
Brace Jovanovich, San Diego, CA, New York and London, [1936] 1964.
Mott, Tracy, Kalecki’s Principle of Increasing Risk and Keynesian Economics, Routledge
Studies in the History of Economics, Taylor and Francis, New York and Oxford, 2010.
Mueller, Dennis, “A Theory of Conglomerate Mergers,” Quarterly Journal of Economics,
Vol. LXXXIII, No. 4, November 1969, pp. 643–659.
Robinson, Joan, An Essay on Marxian Economics, Orion Editions arranged with the
Macmillan Press, Ltd., Philadelphia, PA, [1942] 1991.
Robinson, Joan, “Socialist Affluence,” in Socialism, Capitalism & Economic Growth,
edited by C.H. Feinstein, Cambridge University Press, Cambridge, UK, 1969.
Stigler, George J. “Monopoly and Oligopoly by Merger,” The American Economic Review,
Papers and Proceedings, May 1950, Vol. XL, No. 2, pp. 23–34.
Sweezy, Paul, “The First Quarter Century,” in Keynes General Theory: Reports of Three
Decades, edited by Robert Lekachman, St. Martin’s Press, Macmillan & Co. Ltd., New
York and London, [1963] 1964.
3 Hobson’s choice
Free cash export or domestic redistribution

Today, it is rare to hear a defense of outsized wealth and income inequality. But
when a defense is mounted, it typically runs along lines familiar to persons living
one hundred years ago. Superior merit is sometimes invoked, as tautologically
evidenced by market outcomes or by asserting natural inequalities as to talent,
brains and ambitions. Much less often and with much less credence, such merit
is subliminally understood to be mysteriously transferable from inherited wealth.
Most often, however, the defense runs along functional lines. At the level of the
individual or firm, investment derives from savings. Consequently, there must
be an economic class sufficiently wealthy so as to abstain from the consump-
tion of its total income. Transforming this necessary condition into a larger virtue
proceeds by way of an assessment that investment prospects are large and a con-
viction that in regard to private saving there can be no such thing as too much. The
nineteenth century provides the benchmark. In a famous passage in the Economic
Consequences of the Peace, Keynes wrote that

Europe was so organized socially and economically as to secure the maximum

accumulation of capital . . . Society was so framed as to throw a great part of
the increased income into the control of the class least likely to consume it.
The new rich of the nineteenth century were not brought up to large expendi-
tures, and preferred the power which investment gave them to the pleasures of
immediate consumption. In fact, it was precisely the inequality of the distribu-
tion of wealth which made possible those vast accumulations of great wealth
and capital improvements which distinguished that age from all others.
(Keynes, [1920] 1988, pp. 18–19; original emphasis)

Keynes was outlining not just the facts of inequality but its justification. Growth
depended on a “double bluff or deception.” The mass of the people would, through
deference to authority or otherwise, tolerate a small portion of the “cake,” on the
understanding that the larger part of the cake would accrue to the capitalist class
that would invest. The acquiescence of the masses mirrored an understanding
that all persons could benefit from growth. As Keynes put it, “The duty of ‘sav-
ing’ became nine-tenths of virtue and the growth of the cake the object of true
religion” (p. 20).
 Hobson’s choice 23
Keynes’s description of nineteenth-century capital accumulation depicted
a time when profitable prospects brought in “immense accumulations of fixed
capital” (p. 19). In emphasizing the point, Keynes compared the “railways of the
world” to the pyramids of Egypt, and obliquely referred to ancillary investments
surrounding the conversion of sail to coal power and the development of factories
based on steam (p. 19). Keynes also noted that the export of European capital to
the world allowed the import of cheap food from North America and assorted
materials and resources that sponsored domestic development. Although Keynes
did not explicitly discuss the larger colonial question, he did mention that the
interest receipts of exported capital helped the reinvestment process to allow

as a reserve . . . against the less happy day when the industrial labor of Europe
could no longer purchase on such easy terms the produce of other continents,
and when the due balance would be threatened between its historical civiliza-
tions and the multiplying races of other climates and environments. Thus the
whole of the European races tended to benefit alike from the development
of new resources whether they pursued their culture at home or adventured
it abroad.
(pp. 22–23, emphasis added)

In noting the benefits accruing to industrial labor through the export of capi-
tal, these early writings of Keynes argued that the inequality surrounding the
saving-investment process benefited the whole of society. Keynes’s optimistic
assessment could be challenged on several levels. Keynes’s depiction avoided
any discussion of the territorial captivity of native peoples and the associated
violence that maintained imperial empires. That capital export might benefit
“the whole of the European races” meant that sections of labor could be (and
would be) ideologically absorbed to maintain their place within the capital-
ist orbit. It was in this vein that Lenin comprehended how the “super profits”
acquired through the export of capital permitted the “bribery” of a new labor
aristocracy (Lenin, [1917] 2011). Keynes never discussed the ideological
absorption of the proletariat into the social fabric of capitalism. But given
Keynes’s subsequent revulsion against the Bolshevik experiment and his
belief that the given social order was the only socially acceptable order avail-
able, such ideological absorption was fully in line with his desire for social
maintenance and peace. In an essay written five years after The Economic
Consequences of the Peace, Keynes wrote that “the Class war will find me
on the side of the educated bourgeoisie” (Keynes, [1925] 1963, p. 324; origi-
nal emphasis). For Keynes—ever the pragmatist—historical circumstances
changed policy prescriptions; but for the nineteenth century, Keynes was fully
convinced that capital export served the social order taken as a whole.
Others would register exception. Apart from Marxists, like Lenin, Nikolai
Bukharin and Rosa Luxemburg, there were a variety of reformist critics of capital
export who suggested that territorial expansion and a concomitant development of
finance and commerce in the hinterland was just one way—and a depraved way—of
24 Hobson’s choice
achieving a higher level of material welfare.1 Of these critics, John Atkinson Hobson
was the most noteworthy. In Imperialism ([1902] 1965), Hobson distinguished
between the older colonial structures and the new imperial reach that absorbed
large areas of newly acquired lands that were inhospitable to European culture
and commerce. Hobson argued that if only the mal-distribution of income within
Europe was rectified in favor of the lower classes, domestically expanded mar-
kets could substitute for territorial expansion. Higher wages would feed mass
consumption power and encourage larger amounts of investment. After first
detailing the extensive growth of European domination over new territories in
the latter part of the nineteenth century and minimizing or dismissing explana-
tory hypotheses such as extended commercial advantage and population growth
that would account for such expansion, Hobson came to the conclusion that
the wealthy had much too much wealth and income. Unable to profitably dis-
pose of their excess saving on domestic investment due to the domestic poverty
of the general population, and unable to consume enough themselves to main-
tain demand, the wealthy and their agents looked towards new domains for the
investment of surplus capital. As this capital could not be profitably invested
on the home front, such monies constituted free cash as measured by domestic
investment opportunities.
The natural outgrowth of too much inequality was a tendency to depression.
According to Hobson, the middle classes might well apportion their income in
accordance with the interest rate, but the very rich, who owned the large firms
and landed estates, could not possibly consume any additional income. Indeed,
the rejection of more consumption by the rich constituted “an instinctive rejec-
tion of the injurious effort to incorporate . . . surplus in . . . current expenditures”
(emphasis added). For Hobson, it was “likely that a large and growing proportion
of the total volume of saving in England and in the Western world . . . [was] . . .
of this order” (Hobson, 1914a, p. 100). Hobson’s formulation was rooted firmly
in the class structure and in the industrial matrix to which the class structure was
appended. Without foreign markets or a drastic restructuring of inequality that
would bolster enough consumption power, depression was in the offing.
Hobson thus turned Keynes’s justification of nineteenth-century inequality on
its head. This was the result not of corrected error but a shift forward in time and
a corresponding shift in historical context. As A.K. Cairncross notes:

In the middle of the nineteenth century the building of British railways and
towns took nearly the whole of Britain’s savings. A trickle of capital found
its way abroad, partly to finance railway-building on the Continent, partly in
commercial and banking ventures and partly in speculative loans to foreign
governments, generally in the Near East or in South America. It was not till
after 1870 that the trickle began to assume really formidable proportions and
the growth of capital came to centre on overseas development.
(Cairncross, [1953] 2015, p. 2)
 Hobson’s choice 25
That the domestic absorption of savings prior to 1870, “took nearly the whole
of Britain’s savings,” suggests a petering out of domestic investment opportuni-
ties, leading to foreign outreach. This understanding receives additional support
when consideration is given to the sunk capital in traditional industries that could
only maintain profitability through new territorial expansion. Expanded foreign
investment centered primarily on steam transportation, both in railways and ships;
utilities, such as electric facilities, tramways and telegraph facilities, and other
infrastructure development, such as docks and harbors, mining, and materials of all
kinds (p. 2). Over the time period from 1870 to 1914, “Britain herself had invested
abroad about as much as her entire industrial and commercial capital, excluding
land and that one tenth of her national income came to her as interest on foreign
investments (p. 3).
This one-tenth of the national income meant that while capital exports were
large, the flow of derived income was even larger. In the period 1903–13, capital
export from Britain absorbed some 7 percent of British income (Kenwood and
Lougheed, 2001, p. 28). “Over the longer period between 1870 and 1914, Britain’s
net export of capital totaled 2,400 million [pounds]” (Sweezy, 1969. p. 194). But
in the same years, Sweezy writes, the sum total of “interest, dividends and other
remittances amounted to no less than 4,100 [pounds].”2 This generation of free
cash required larger and larger markets for its absorption. Hobson’s dilemma—
either expanded markets abroad or substantial redistribution of income towards
common people—was not relieved by expanded territorial acquisitions. The
British outreach towards new acquisitions put Britain on a treadmill whereby the
expansion of markets simply generated the need for more.
Hobson’s thesis is open to the critique that, apart from the white settler colo-
nies and dominions of Britain, the new territorial claims of the late nineteenth
century absorbed but a small fraction of the total capital export of Britain and the
advanced nations in general. But, as noted above, any futuristic understanding had
to anticipate places for further growth. Railroad mileage had largely peaked in
Britain around 1870. And although rail expansion had not yet peaked in Canada,
Australia, Argentina, Brazil and Mexico, they had certainly leveled off in the turn
to the twentieth century (Rostow, 1978, pp. 452, 458, 511, 494). As other nations
played industrial catch-up to Britain in the latter part of the nineteenth century,
it became increasingly difficult for Britain to export to more advanced nations
as production became largely substitutable. Consequently, a larger percentage of
British capital exports went to British Dominions, India and Latin America.
The export of British capital to the United States was also considerable, making
up roughly one-fourth to one-fifth of capital export from mid-century to World
War I (pp. 28–30). But even here, as shown most particularly in the substitution of
U.S. rail subscriptions for that of the British (Hobson, [1914b] 2012, pp. 152–153),
there was a displacement of British investment, anticipating the U.S.’s post-war
capital export position. Such displacement put additional pressure to obtain the
monetary receipts necessary for the procurement of U.S. production, particularly
26 Hobson’s choice
agricultural production. As Keynes had noted in reference to ample food imports
into Europe, capital exports allowed a “general reduction in the price of imports”
(Keynes, [1919] 1988, p. 7). Such reductions in wage goods permitted higher prof-
its, as employers could pay a lower wage than otherwise.
In addition, capital exports allowed expanded trade in general which bol-
stered home demand. Balance of trade figures show that apart from the United
States, France and Russia, British exports of goods to the Empire and Latin
America followed the pattern of India whereby exports consistently outpaced
imports (Cairncross, [1953] 2015, p. 189), if only by small amounts. This con-
trasted sharply with the general balance of merchandise trade that consistently
showed negative balances from the mid-1820s onward (Tiberi, 2005, pp. 34–38)
and which Hobson himself had recorded from 1870 to World War I (Hobson,
[1914b] 2012, p. 170). Moreover, in terms of cyclical ups and downs, capital
exports corresponded to Hobson’s understanding that foreign markets alleviated
the tendency to depression: “There is also plenty of evidence that it was foreign
rather than home investment that pulled Britain out of most depressions before
1914” (Cairncross, [1953] 2015, p. 188).
Capital export in general and territorial expansion in particular sustained
European growth. In the course of their duties, colonial administrators would
assume large administrative and military responsibilities that would protect
joint-stock investments in sponsoring rail, shipping and other infrastructure
facilities whose building and assembly would require additional investments
both in the hinterland and in Europe. Interest on colonial debt would be earned
by European imports from resource-rich colonial lands and flow back to finan-
ciers and the wealthy. Saturated rail and steel facilities within Europe would
find extended markets in the larger colonial and neo-colonial world.3 Shipping
facilities could expand to transport both exports of European product to the
protectorates and the imports necessary to pay service costs. The military appa-
ratus necessary to protect shipping and the artificial colonial lines drawn up by
European powers also absorbed savings, while providing military careers for
officers of prominent social standing. Those of ecclesiastical persuasion could
temporarily leave their domestic pulpits and find newly conquered foreign
peoples to convert.
Hobson would understand the parties attached to the new imperialism as
“parasites,” (Hobson, [1902] 1965, Ch. 4). But given the overarching context of
imperialist expansion, it was unclear as to whom would be exempt from Hobson’s
parasitic classification. In addition to the arms dealers and the military itself, and
the financiers and shippers and the great manufacturers geared to export, there
was the large proportion of the labor force devoted to trade. Hobson asserted
that the proportion of labor devoted to trade was only a fifth to one-sixth of the
total labor force including the portion of labor in ancillary trades (Hobson, [1902]
1965, p. 28). Hobson would minimize the importance of this very large ratio by
not only omitting Keynesian multiplier effects—of which he was apparently
unaware—but by suggesting that
 Hobson’s choice 27
There is no necessary limit to the quantity of capital and labour that can be
employed in supplying the home markets, provided the effective demand for
the goods that are produced is so distributed that every increase of production
stimulates a corresponding increase of consumption.
(Hobson, [1902] 1965, p. 29)

Hobson’s parasitic conception of virtually the whole of British society, or at least

a sufficiently large part to implicate the whole economy, was in essence a call for
a new social system and a corresponding redistribution of income towards the
laboring classes.
Lack of internal markets drove imperialist expansion. But that was not the
whole of Hobson’s analysis. Trade, if contained exclusively within the advanced
nations, would, at least in time, mean increasing competition among substitute
products. Britain’s early lead in the industrialization process allowed a rapid catch-
up among nations in the latter part of the nineteenth century. But increasingly as
other nations industrialized—the Scandinavian group, France, Belgium, Germany
and the United States—and became more and more self-sufficient, trade among
advanced nations increasingly approximated a zero-sum game. I say “approxi-
mate.” The comparative advantage of North America, France and Southern Europe
in foodstuffs counterbalanced Britain’s lead in industry. But in the competitive
race among advanced nations, an important marginal advantage would accrue to
those nations that could establish newly formed markets in the hinterland. Hobson
avoided the term “comparative advantage,” as the term suggested developed trad-
ing markets, voluntary labor markets and a whole range of commercial institutions
notably lacking in the newly acquired territories. But Hobson did understand the
pull towards resource-rich territories that could produce tropical foodstuffs, rubber,
tin and other geographically located products. This pull spoke for the possibility of
trade with the underdeveloped regions. But it also spoke to the problems of how to
exploit the non-market areas without imperialism.4
The tariff hikes of the late nineteenth century also pushed for more territorial
grab. Until very late in the nineteenth century, Britain stood out for free trade the
longest, as free trade benefited the strongest. But even Britain came to adopt a
protectionist stance when rivals started to carve into foreign markets. These tariff
hikes were self-defeating, as the limitation of imports for one country limits exports
for the next. So here again, the new advantage would go those nations most aggres-
sively engaged in colonial expansion. Enlarged export markets in the Dominions
and particularly in the new territories required debt both for purchasing exports and
for enforcing debt servicing. Under the colonial whip, debt could be imposed or at
least subsidized and protected through military and policing arrangements.
These subventions of money and military support deserve emphasis. In his
doctoral thesis ([1914b] 2012), Hobson discussed in detail the many defaults on
sovereign state debt and private ventures throughout the world—railroads and
governments in the southern United States, governments, such as Greece, Egypt
and Turkey, where the “administration of their debts [were] partially or wholly
28 Hobson’s choice
taken out of their hands” (p. 127), the municipal defaults in Argentina (p. 128), not
to mention the “rubbish” bonds of other South American states, such as Ecuador,
Paraguay and Peru (p. 147). In contrast, Hobson notes the case of Indian railroads
whereby the Government of India

granted all land required, free of expense for ninety-nine years, to companies
incorporated by Act of Parliament in England, and guaranteed interest, gener-
ally at 5 percent, upon the capital employed. The necessary stimulus to pri-
vate enterprise was thus applied, and by July 1858 seven distinct companies
were engaged in constructing lines under the guarantee system.
(p. 135)

For Hobson, colonialism, with all of its assorted ramifications, was a net liability.
As a British citizen, he argued that if the new hinterland was to be dominated by
imperialist forces, other nations should do it. Britain could maintain free trade and
by its shipping and commercial advantages, Britain could still maintain access to
the world and the products of others’ protectorates (Hobson, [1902] 1965, Ch. 5).
This reversion into nationalism was, for Hobson, a partial escape from his own
intellectual difficulties. He could never reconcile his belief that all of the world’s
resources should be available to all with the fact that many of these resources were
located in non-market societies not subject to conventional trade. Understandably,
he was quite unable to understand how the “art of self-governance” (European
style) and self-promoted trading relations could be developed by non-Western
cultures in any short period of time. This dilemma—in conjunction with his belief
that the world‘s resources needed to be developed—may explain why, in the
Economic Interpretation of Investment (1911), Hobson eventually came to under-
stand that “imperialism is a necessity, if transitory, stage on the way to democracy
and internationalism” (Cain, [1999] 2013, p. v).
The problem of underdevelopment helps also to explain why Hobson put
finance at the center of imperialist expansion. Newly acquired areas could not
engage in self-sustaining trade. Michal Kalecki’s comment, that the fight for “new
opportunities for [the] export of capital associated with the export of goods, can
be viewed as a drive for export surplus, the classical source of ‘external’ profits”
(Kalecki [1933] 1971, p. 85), puts the export of free cash and trade in a unified
association. But in the imperialist reach into a hostile world, such free cash export,
with state-sponsored military backup, must come first to establish and maintain
future trade. Hobson developed this finance thesis over time. But perhaps his best
sketch was contained in Democracy After the War ([1917] 2013) published during
the height of World War I. Unlike “traders,” who might be denied a certain market
and can turn to the next, financiers have a vested stake, which is a

fixed and lasting one . . . bound up with the general prosperity or failure of
the country. Their economic interest in that foreign country may be as great
as or greater than in their own, and what happens as to good or evil in that
country may be more important to them than anything likely to happen in
 Hobson’s choice 29
their own. If, therefore, any action of their Government, any stroke of foreign
policy, can improve the security of that distant country, it improves their
securities, and even if a threat of war or an act of war is needed to obtain that
object, what matter? The people pay the cost with their lives and their money,
the investor and financier reap the gain.
(p. 83)

Hobson’s historiography of industry

Hobson’s inquiries into imperialism involved not just foreign investment but a
historiography of industry that related stages of industrial development to the
over-saving process and imperialism. This historical account developed along the
timeline of his own intellectual growth. His early thoughts, in The Physiology of
Industry ([1889] 1956), written in conjunction with A.F. Mummery, broke with
the notion that saving was an unquestioned good. According to Hobson and
Mummery, capital investments were rigidly dictated by consumption require-
ments. Correspondingly, there could be too much capital—understood as fixed
installations—relative to consumption power. Implicitly, the work dealt with com-
petitive markets where output and investment could not be controlled and where
even the attempt would prove nugatory, given the plethora of firms competing for
market position. In the view of Hobson and Mummery, depressions were the inevi-
table result of uncoordinated capital investments relative to purchasing power.
Evidence of over-capacity indicated that realized saving exceeded the prof-
itable use of capital. The Physiology of Industry thus implicated inadequate
consumption power relative to the capital stock and therefore clearly pointed
towards the redistribution of income advocated by Hobson in his later works. In
focusing on over-saving, Hobson and Mummery did note that “labourers . . . are
the chief sufferers from the saving habits of the rich” (Hobson and Mummery,
[1889] 1956, p. 182). But this insight did not extend to the advocacy of remedial
measures directed towards altering the distribution of income.
In this early work, Hobson and Mummery understood saving as “realized” sav-
ing in the form of additions to the capital stock. It was this identification of saving
with additional accumulation that formed the basis of Keynes’ famous critique in
the General Theory (1936). Keynes credits Hobson and Mummery as predeces-
sors in understanding over-saving but only to remark that they did not properly
emphasize the distinction between planned saving and planned investment and,
consequently, could not understand the nature of an under-full employment equi-
librium. According to Keynes, the

root of Hobson’s mistake . . . [was] . . . his supposing that it is a case of exces-

sive saving causing the actual accumulation of capital in excess of what is
required, which is, in fact, a secondary evil which only occurs through mistakes
of foresight; whereas the primary evil is a propensity to save in conditions of
full employment more than the equivalent of the capital which is required.
(pp. 367–368)
30 Hobson’s choice
Keynes’s critique, by invoking the “propensity to save” rather than realized sav-
ing and, most importantly, the possibility of “foresight,” suggested at least the
possibility of industrial control—or attempts at industrial control—over saving
and investment. Given the anarchical nature of a modern economy, industrial
control could not be affected at the macro-level of the economy without the con-
trolling hand of government. But the attempt to maximize gross profits (busi-
ness saving) through the control of production and investment at the level of
the industry is certainly one with formations exhibiting monopoly power. In his
General Theory critique, Keynes mentioned that Hobson’s later works “contained
his ‘root’ error” (Keynes, 1936, p. 370),5 but Keynes was remiss in neglecting
Hobson’s later inquiries into the changing nature of the industrial structure, most
particularly the movement into a monopoly phase of capitalism. Concerned as he
was with General Theory rather than history, Keynes omitted any commentary on
Hobson’s understanding of a changing industrial structure.
Hobson was the author of one of the main contemporary texts in economic
history, The Evolution of Modern Capitalism (1894). In this text and in other
works following, most particularly The Problem of the Unemployed (1896),
Imperialism (1902), The Industrial System (1910) and Work and Wealth (1914),
Hobson inquired into the unfolding of the nineteenth century into the twenti-
eth. In Hobson’s view, this temporal transition was equivalent to the unfolding
of competitive capitalism into a new type of capitalism that was infused with
monopoly power (Hobson, 1894, pp. 128–185). According to Hobson, in the
competitive phase of the nineteenth century, new capital vintages introduced by
new firms dictated both a rapid obsolescence of existing capital and overcapacity
in the sense that consumption could not keep pace with the productive power of
industry (p. 149). This over-saving as excess capacity would be manifest either
as idle plant and equipment that would hamper further investment, or as over-
production, which would drive prices below the level at which profits could be
earned (Hobson, 1896, pp. 61–63). This unprofitability would, in itself, prevent
further investment and stifle recovery through the ruinous effects on industry.
Even with excess capacity, new entrants might enter an industry as the newcomers
who at least had a chance of acquiring a profitable portion of the existing market.
But Hobson’s favorite theoretical tool—the fallacy of composition—instructed
him that such new investment would undercut the industry taken as a whole. For
unless markets expanded sufficiently, the new entrants would take markets away
from others (pp. 85–86). Keynes’s critique—quoted above—that ‘the root of
Hobson’s mistake . . . [was] . . . his supposing that it is a case of excessive sav-
ing causing the actual accumulation of capital in excess of what is required’ was,
from an historical standpoint, not a mistake but a condition characteristic of the
nineteenth-century economy and of competitive structures in general.
In Hobson’s succession of works, he explored the development of an organic
industrial system riddled with a vast mixture of business firms, small and big,
competitive and monopolistic. In his Evolution of Modern Capitalism (1894,
pp. 113–116) and later in The Industrial System (1910, pp. 183–196), Hobson
 Hobson’s choice 31
concentrated mainly on the creation of large, monopolistic firms evolving out
of an earlier competitive stage. But he also noted a variety of industries pop-
ulated by numerous small business firms. These included fishing, agriculture,
luxury and fashion trades, retail trade, arts and the professions. He noted also
that even in those industries that tended towards gigantism (milling, manufactur-
ing, wholesale commerce, insurance and finance), the concentration of capital
often proceeded in a milieu, where smaller and medium-size firms persisted.
Nevertheless, he understood that, in these key industrial sectors, the tendency to
monopoly operated as an inexorable force. The evolutionary dynamic of capital-
ism consisted of a weeding-out of inefficient firms, the growth of larger firms
driven by economies of scale in manufacturing and distribution, and the monopo-
listic binding-up of firms through mergers, trusts, pools, cartels and associations
(Hobson, 1894, pp. 172–181).
Keynes’ version of over-saving was conceived at a time when oligopolistic
and monopolistic elements had entered the industrial structure and when large
amounts of savings were made up of or derived from gross profits. Under a
condition where monopolistic practices could restrict output and investment in
the quest for higher profits, there might well by—to repeat Keynes’ words—“a
propensity to save in conditions of full employment more than the equivalent of
the capital which is required.” Unlike Hobson, Keynes did not direct his inquiries
towards the relationship of saving to industry, relegating saving to the residual
left over from consumption. In contrast, Hobson was intrigued by the growth of
saving and its apparent correlation with monopoly power.6 In The Problem of
the Unemployed (1896), Hobson groped towards understanding how competi-
tion gave rise to firms superior “in the arts of competition” and how these firms
would restrict investment and output in the service of increased profitability.
Technological advances, embodied in new investment, would be introduced at
a slower pace to maximize total return, understood as the comparative result
between what the combined capital would lose as a result of obsolescence and
the expanded profitability due to the cost savings obtainable through new capital
installations (Hobson, 1896, pp. 85–86).
In Imperialism (1902), Hobson develops these insights, particularly in Chapter
VI, which he tellingly entitles “The Taproot of Imperialism.” Far from omit-
ting the case where savings tended to outpace investment (as Keynes charged),
Hobson examines in some detail the industrial setting where this phenomenon
takes place. In the modern trust, free cash is generated. A trust “cannot normally
find inside the ‘trusted’ industry employment for that portion of the profits which
the trust-makers desire to save and invest.” To the possible charge that new
inventions would require savings, Hobson wrote: “New inventions and other
economies of production or distribution within the trade may absorb some of the
new capital, but there are rigid limits to this absorption” (Hobson, [1902] 1965,
pp. 75–76). In reference to the payouts accruing to the wealthy stockholders and
managers, Hobson wrote that the captains of industry were the recipients of an
“enormous amount of wealth,” but
32 Hobson’s choice
No luxury of living to which this class could attain kept pace with its rise
of income, and a process of automatic savings set in on an unprecedented
scale. The investment of these savings in other industries helped to bring
these under the same concentrative forces.
(Hobson [1902] 1965, pp. 74–75)

In Imperialism (1902), Hobson’s remarks on trustification pertained to the U.S.

industrial structure. But his analysis would apply equally well to the case of
Germany. The German cartels, formed behind protectionist walls, not only pro-
tected German industry on the domestic front, but allowed for a degree of export
dumping. As fixed costs could be covered by high domestic prices, German indus-
try could lower prices to compete on world markets. Coming from behind even
held a technological advantage as new capital installations could be of the most
efficient vintage.
Hobson maintained that the free cash generated from monopolistic practices
combined with traditional foreign debt to further the export of capital and impe-
rialist conquest. In this connection, it is not surprising that Lenin, in his “popular
outline” Imperialism: The Highest Stage of Capitalism, gives credit to Hobson’s
Imperialism, “with all the care that, in my opinion, that work deserves” (Lenin,
[1917] 2011, p. 7). For some scholars, like John Strachey, the likeness of the
imperialist theories of the two allowed one to link them together as “The Hobson-
Lenin Explanation” of imperialism (Strachey, 1960, Ch. VI). The commonality of
the two in understanding imperialism and its accompanying militaristic buildup
is unmistakable. World War I confirmed that rival empires born of imperialism
could lead inexorably to the most major conflagration imaginable. The War also
confirmed that the territorial expansion that was one with increased industry and
free cash was, in its own way, a zero-sum game. Not even the partial concessions
and compromises made by monopoly groups across boundaries could maintain
the peace. These compromises were extensive: the French–German split over
Morocco; the division of Persia into spheres of influence by Britain and Russia;
the joint financial ventures in China where the Four-Power group of Britain,
Germany, France and the United States morphed into the Six-Power group with
the addition of Russian and Japan; the compromises over the split-up of the
Ottoman Empire, and the mobilization of rival forces in Egypt and the financing
of the Suez Canal, among others.
Militaristic expansion was tied inexorably to the motor force of capital accumu-
lation that required continued expansion without end. In Schumpeterian fashion,
imperialism is often understood as expansion for its own sake, arising out of war
machines whose existences constituted their own ends rather than means. Hobson
conceded that the military apparatus fed upon itself, but it was basically ancillary
to the capital-accumulation mechanism of perpetual motion. Hobson did not deny
that a whole range of motives fed into the military animus. Such motives involved
political prestige, animal propensities towards violence, patriotic allegiance, and
even a “zest for hazard and adventure and . . . passion for physical self-assertion
and personal prowess” (Hobson, [1917] 2013, p. 35). He was also acutely aware
 Hobson’s choice 33
of war habits of thought, stressed repeatedly by Joseph Schumpeter that were
“artificially preserved in the life of the leisured ruling caste and in the popular
pastimes” (p. 35). These sentiments were ingrained over centuries and would rise
to the surface under any wartime pretext. But Hobson distinguished “the volume
and intensity of . . . motives from their management and direction” and put the
guidance and direction of all the militaristic sentiments in the service of capital
accumulation that “fuse . . . and exploit them” (p. 37).
Hobson bemoaned the jingoism, militarism and nationalist fervor that was
part of imperialism and which contributed to World War I. But, in Imperialism
(1902) and in works written prior to the actual outbreak of hostilities, he did not
actually forecast the War. Rather, his prescription for redistributed wealth and
income was primarily a plea for more equality within the advanced nations. His
plea was consistently reformist. In a foreshadowing of Keynes, Hobson advocated
higher taxes on the wealthy and unspecified state-generated employment projects.
Although his reformist prescriptions remained vague, he was fully convinced that
a rational reformist program based on income redistribution would alleviate the
ugly choice of a jingoistic and warlike expansion of capital export or depression
resulting from deficient domestic markets born of inadequate consumption due
to the poverty and deprivation of the underlying population. Such a restructuring
would certainly mean social control over the main industrial and financial forces.
In short, any such control would have to overthrow the ruling groups tied to mod-
ern industry and finance so as to dictate collective investment decisions.
But Hobson could never bring himself to advocate such an overthrow. In
Democracy After the War (1917), in the penultimate chapter entitled “The Conquest
of the State,” Hobson tried to specify the conditions whereby the common peoples’
interests would be advanced in a “democratic” State. Given that parliamentary
representatives and judiciary magistrates were all aligned with or came from the
upper classes, he understood existing democracy as “sham self-government”
(p. 185). But despite the title of the chapter, the “Conquest” remained curiously
apart from the issue of collective ownership of property, even of the infrastructure
variety. After a momentary focus on the class structure of the existing State, and
his assertion that “Industrial and social safety and progress . . . demand the suc-
cessful capture of the State by the people” (p. 183), Hobson did not address the
social control necessary to carry out collective investment. Instead, Hobson called
for more and better education for all. This education would further critical thinking
and transcend the existing education for commoners that tended towards the type
necessary for clerks and those engaged in menial tasks. Such would presumably
prepare the common people for taking up the important administrative tasks within
a new socialized state.
Hobson’s call for a pacifistic reformist state did not escape criticism, even
from those critics, who, like Thorstein Veblen, were otherwise sympathetic. In
commenting on Hobson’s earlier call for reformation, contained in The Problem
of the Unemployed (1896) Veblen categorized Hobson’s remedial elements of a
“Reformed Distribution of Consuming Power,” “taxation of ‘unearned’ incomes,
higher wages [and a] shortened working day,” as “palliatives.” Such a movement
34 Hobson’s choice
could only be “chimerical,” in that “public policy is with growing singleness of
purpose guided by business interests with a naïve view to an increase in profits”
(Veblen, [1904] 1978, p. 257). Politics was firmly in the grip of business and at
least for the foreseeable future, could be assumed to remain so.7

The United States: a partial test of mass purchasing power?

It was in the U.S. that mass markets formed in the most extended way. Curiously,
Hobson did not discuss the development of these mass markets, perhaps deferring
to his case that the free cash of U.S. firms could only find sufficient outlets through
imperialism. But I believe that the U.S. case offers a partial test of Hobson’s thesis
that relative equality generates purchasing power and development.
Unlike the tenant farmers and the urban proletariat of Europe who had to pay
some large part of their earnings to estate owners and landlords, a large part of
the U.S. population obtained their food and home from their own land and labor.
Having basic needs met, farm income could be devoted to the purchase of manu-
factured products. This enormous homeland advantage of mass markets elicited
commentary as early as Adam Smith. Despite England being a far richer country,
he noted that “The wages of labor . . . are much higher in North America than in
any part of England” (Smith, [1776] 1981, p. 87). The land constituted an escape
valve whereby the alternative to manufacturing labor was the farm. In conse-
quence, wages rose. Such high wages also “enhanced the incentive to substitute
capital for labor, machines for men” (Landes, 1998). This allowed the rapid catch-
up of U.S. manufacturing. By the turn into the twentieth century, U.S. production
exceeded all other nations, including Britain (Beaud, [1981] 2001, p. 143).8
U.S. exceptionalism in terms of home-grown mass markets cements Hobson’s
understanding that higher income among the lower echelons of the population
drives growth. U.S. exceptionalism also provides a contrast to Europe in terms
of capital export. Given the European class structure and its inability to cre-
ate mass markets, capital export was necessary for European growth. Not so
America. In sharp contrast to Europe, the great advantage of the United States
was that expansion filled out the borders of the continent, involving a kind of
people’s imperialism whereby settlers established themselves on the lands
of Native Americans, and the lands of Mexico. High remuneration and the self-
help surrounding the provision of needs provided the consuming power that
allowed mass purchases of sewing machines, pot-bellied stoves, rifles and farm
implements. This advent of mass markets and the production of standardized
products even acquired a new name: the “American system.”
Large-scale U.S. capital imports during the nineteenth century facilitated U.S.
capital accumulation, particularly in railroads. These railroads made U.S. land into
real estate. Over a quarter of a million miles of track were laid by the time of World
War I (Nelson, 1959, p. 81) These extensive lines allowed farmers access to urban
and world markets, drove numerous ancillary markets in steel, steam, coal, hydrau-
lics and dimensioned lumber, and facilitated a new retail trade that allowed Sears
and other catalogue merchandisers access to the farm belt. In the last two decades
 Hobson’s choice 35
of the nineteenth century, railroad construction made up nearly half of U.S. private
investment (Baran and Sweezy, 1966, p. 226). In this enormous market-enlarging
field, the U.S. followed Britain in a timeline sequence that eventually ended in
saturation.9 Corresponding to the vastly enlarged lands of the United States, the
building of railroads tapered off later than Britain. Growth slowed down in the
1890s and after a momentary rebirth around the turn of the century fell consider-
ably after the Panic of 1907 (Baran and Sweezy, 1966, pp. 226–227).
The export of food and other staples to Europe allowed U.S. debts to be easily
serviced. But as industrialization proceeded and as rail building slowed down,
one could detect at least the prospects of future U.S. capital export. This pros-
pect became increasingly evident as trustification and consolidation of numerous
industries took hold from around 1870 to the turn into the twentieth century. A
variety of commentators, such as Thorstein Veblen, noted that industrial trusti-
fication was one with a tendency to “chronic depression’ (Veblen, [1904] 1978,
pp. 250–251). That the crash of 1907 followed a merger wave that encompassed
some half of the U.S. capital stock was a stark reminder that monopoly can trigger
depression and retard growth in recovery.
This descent into stagnation was interrupted by war orders coming in from
Europe. Subsequent to the War, the automobilization and suburbanization of
the 1920s provided vast new markets and propelled the economy out of the
severe downturn of 1921. The “American system” moved into the next cen-
tury. A survey commissioned by the Ford Motor Company found that in 1929,
Americans had 19 automobiles for every 100 inhabitants “compared to 2 for
every 100 persons in France and Britain.” This same survey found that “out of
100 working families, 98 owned an electric iron, 76 a sewing machine, 51 a
washing machine, 49 a phonograph . . . 36 a radio and 21 a vacuum cleaner”
(Beaud, [1981] 2001, p. 182).

Notes
1 Bernard Porter (2008) provides an extensive summary treatment of various reformers
and a comparative treatment of their views to those of Hobson.
2 Sweezy calculated the total from figures tallied from A.K. Cairncross ([1953] 2015,
p. 180).
3 Hobson didn’t use the term “neo-colonial” and concentrated the bulk of his inquires on
formal territorial annexation. But nineteenth-century British penetration within Latin
America gave his formal theory additional credence.
4 These concerns took up a good deal of Hobson’s inquiries. He was convinced that the
resources of the world should be available to the whole world and developed by those
best able to develop them. But the lack of markets—or, more exactly, markets utilizing
money—in the vast bulk of the world begged the entire question of their development.
The view that imperialism was absolutely necessary for the development of non-market
societies was commonly espoused by the powerful. (See quotes of Cecil Rhodes and
Joseph Chamberlin, in Dutt, 1949, p. 22).
5 Keynes did not refer specifically to any of Hobson’s later works in the critique. The
Physiology of Industry was the only one of Hobson’s work in Keynes’s library at his death.
6 Hobson was on his deathbed when Keynes and he were engaged in their last correspon-
dence. Hobson was quite pleased that Keynes’s General Theory was now being read by
36 Hobson’s choice
a new generation. But even in this last correspondence, Hobson did not refer to his inqui-
ries into the industrial structure and how they might have enhanced Keynes’s theoretical
understanding of over-saving (Medlen, 2012, pp. 791–793).
7 In his later The Engineers and the Price System ([1921] 1990), Veblen ruminated on the
possibility of engineers directing production, “on the initiative and under the direction
of the country’s technicians, taking action in common and on a concerted plan.” The
“Vested Interests” would move over, not by “forcible dispossession” but “involuntarily
after the industrial situation gets quite beyond their control” (Veblen, [1921] 1990,
p. 132). This new order would put industry in the service of human welfare, not busi-
ness. Veblen, however, was never so optimistic to see this new order as other than a
low-probability outcome.
8 This turn to manufacturing predominance, however, did not extend to the export market.
Hobson himself noted that U.S. agricultural exports were over double that of manufac-
turing from 1890 to 1900 (Hobson, [1902] 1965, p. 79).
9 In 1875, fixed capital in British manufacturing was less than railway capital, but by this
time “most of the main-line railways were already in being, and from then on railway-
building normally absorbed smaller amounts of capital and, what was more important, a
smaller proportion of new capital” (Cairncross, [1953] 2015, p. 8).

References
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Economic and Social Order, Monthly Review Press, New York, 1966.
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[1981] 2001.
Cain, Peter, “Introduction” (written in 1999) to J.A. Hobson’s, Democracy After the War,
Routledge/Thoemmes Press, London, 2013 edition.
Cairncross, A. K., Home and Foreign Investment 1870–1913: Studies in Capital
Accumulation, Cambridge University Press, Cambridge, UK, [1953] 2015.
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Hobson, J.A., The Problem of the Unemployed, Methuen & Co., London, 1896.
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4 Free cash and the stock bubble
of the 1920s

The 1920s stock boom is most often associated with the profitable activity tied
to the 5–6 percent growth during the decade.1 A large part of this growth was
linked to the coming of the internal combustion engine and mass production. The
1920s brought in a new automobile age, with its accompanying suburbs, electrical
and gas systems, and municipal, state and federal outlays for roads and highways,
as well as a boom in various industries linked to modern communications, enter-
tainment and household appliances. The internal combustion engine also drove
major advances in agricultural productivity such as the tractor and other agricul-
tural instruments that moved people off the farms, cheapened food, and provided
a larger industrial workforce that migrated to industrial cities. Cheapened food
allowed for an enlargement of mass markets that expanded profits and stock prices.
The enormous jump in World War I’s positive trade balance receded to more nor-
mal levels in the 1920s, and became more and more tilted to industry as industrial
production rose relative to that of agriculture. This tilt to industry also furthered
manufacturing, which in turn expanded profits and stock values in the export trade.
In contrast to the pre-War capital imports that helped develop the expansion of
U.S. rail systems and other industrial undertakings, U.S. banks and multinational
firms now exported capital, both to a war-devastated Europe and Latin America.
Along with a description of the manic behavior associated with stock psychol-
ogy, economic historians generally use an expanded version of the above to explain
the stock bubble of the late 1920s. In this chapter, I stress another aspect, related to
the new oligopolistic character of the industrial structure. The boom of the 1920s
was the first major boom superimposed upon monopoly-oligopoly foundations. I
maintain that these monopoly foundations were a key component to understanding
the speculative overindulgence of the decade that led up to the stock market crash
of the 1930s. Monopoly pricing allowed a restriction of output driving abnormally
high gross profits that spilled into the stock market. Given the large expansion of
markets, this “restriction” has to be understood in a relative sense. Expanded mar-
kets drove increased production, and released some large part of the braking power
that monopoly power entailed. But given the general reduction in per unit costs
resulting from the assembly lines, scientific management and the new technological
advances of the 1920s, one might have expected significant price reductions across
the board. Apart from specific instances like autos, no general price reductions
 Free cash and the stock bubble of the 1920s 39
accompanied the rapid technological advances of the 1920s. Administered prices,
attained through oligopoly pricing, restricted demand and output even in the face
of significant underutilized capacity in the latter part of the decade. Restriction of
output meant a relative restriction of investment, which, in the context of expanded
profits, allowed the generation of free cash.
Free cash was dispensed to stockholders in the form of dividends and merger
receipts. Such an outpouring of cash directed to stockholders not only funneled
new monies into the hands of the rich but encouraged stock buying directly.
Merger acquisition premiums expanded stock values at the same time dividends
provided the wherewithal for additional purchases. Just as important, the self-
financing of corporations drove banks into speculative loans. As George Soule
once noted, “big business was financing itself to such an extent that the need for
commercial credit was reduced. This policy left bank resources free to extend a
large volume of collateral loans, which helped to finance speculation” (Soule,
[1947] 1975, p. 279).
As a partial resultant of monopoly power, the stock bubble of the late 1920s
should be understood as a crescendo point of the preceding decades when
monopoly pricing power became general. Front-seat observers, like Thorstein
Veblen, noticed the slowdown of investment that accompanied the first trustifi-
cation of industry, beginning roughly in the mid-1870s. This trustification was
a direct result of the price competition ushered in with the coming of national
markets. By 1914, the installation of railtrack mileage was equivalent to almost
ten times around the globe. This new national market put into competition
previously insulated firms. Firms had to scale up quickly to enjoy this enor-
mous expansion of markets. The main problem of the nineteenth-century firm
was generating sufficient financial wherewithal to take advantage. The steady
decline in prices from after the Civil War to the turn of the twentieth century
reflected not just the new industrialization of cost cutting but the price cutting
that reflected the transition from an era of intense price competition to that
of monopoly. Initially, trusts, pools and syndications were notoriously unsuc-
cessful as the prospects of price cheating were inherent in the separation of
ownership claims. But this was soon to change.
By cutting into profits, price competition not only undercut internal finance,
but put banks at undue risk when sponsoring individual firms that might well
fail. Price competition thus undermined both internal and external financing.
Understanding this dilemma is key to understanding the Giant Merger Wave of
1895–1904 and why the great investment banks were also its main promoters.
Consolidations put numerous firms under one pricing umbrella that eliminated the
very possibility of firms cheating on one another in regard to price. The wave was
thus at once a counter-reaction to the ruinous competition of the late nineteenth
century and a movement towards an industrial structure populated by dominant
firms (Stigler, 1950). Trusts, pools and other monopolistically oriented efforts
became transformed into unified entities, leaving second-tier firms at the pric-
ing discretion of larger firms. Cutting any giant’s price by a secondary outsider
subjected the outsider to discretionary retaliation that advantaged the larger firm.
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Legation
Legitim
Legitimacy and Legitimation
Lesion
Letters Patent
Libel and Slander
Liberty
Licence
Lien
Limitation, Statutes of
Liquidation
Liquor Laws
Local Government
Local Government Board
Lodger and Lodgings
Lord Advocate
Lord Chamberlain
Lord Chief Justice
Lord Great Chamberlain
Lord High Chancellor
Lord High Constable
Lord High Steward
Lord High Treasurer
Lord Justice Clerk
Lord Justice-General
Lord Keeper of the Great Seal
Lord President of the Council
Lords Justices of Appeal
Lords of Appeal
Lord Steward
Lost Property
Lotteries
Lynch Law
Magistrate
Mahommedan Law
Maiden
Maiming
Maintenance
Majority
Mandamus, Writ of
Mandarin
Mandate
Manifest
Manor
Mansion
Manslaughter
Man-traps
Mare Clausum and Mare Liberum
Maritime Territory
Marriage
Marshalsea
Martial Law
Master and Servant
Master of the Horse
Master of the Rolls
Maxims, Legal
Mayhem
Mayor
Mediation
Medical Jurisprudence
Meeting
Memorandum of Association
Merger
Mesne
Messuage
Military Law
Ministry
Miscarriage
Misdemeanour
Misprision
Mistake
Monarchy
Monition
Mortgage
Mortmain
Motion
Multiplepoinding
Municipality
Muniment
Murder
Mutiny
Nationality
Naturalization
Navigation Laws
Negligence
Negotiable Instrument
Neutrality
Next Friend
Nisi Prius
Noise
Nolle Prosequi
Nonconformity, Law relating to
Nonfeasance, Misfeasance, Malfeasance
Nonsuit
North Sea Fisheries Convention
Notary or Notary Public
Notice
Novation
Nuisance
Nullification
Oath
Obiter Dictum
Obligation
Obscenity
Office
Oligarchy
Ordeal
Order in Council
Ordinance
Ordinary
Original Package
Ouster
Outlawry
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Oyer and Terminer
Pacific Blockade
Pandects
Paraphernalia
Pardon
Parish
Parlement
Parliament
Parricide
Parson
Partition
Partnership
Party Wall
Passport
Patents
Patents of Precedence
Patron and Client
Paymaster-General
Payment
Payment of Members
Peace
Peace, Breach of
Peace Conferences
Peine forte et dure
Peerage
Penalty
Penology
Pension
Perjury
Perpetuity
Person, Offences against the
Personal Property
Personation
Petition
Picketing
Pillory
Pirate and Piracy
Plaintiff
Pleading
Plebiscite
Pledge
Plurality
Plutocracy
Police
Police Courts
Posse Comitatus
Possession
Post & Postal Service
Potwalloper
Power of Attorney
Praemunire
Preamble
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Prerogative Courts
Prescription
Press Laws
Prime Minister
Primogeniture
Principal and Agent
Prison
Privateer
Privilege
Privy Council
Privy Purse
Privy Seal
Prize or Prize of War
Probate
Probation
Procedure
Process
Procès-verbal
Proclamation
Proctor
Procuration
Procurator
Profanity
Prohibition
Promoter
Property
Prorogation
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Prospectus
Protectorate
Provisional Order
Provost
Proxy
Public House
Puisne
Purchase
Quantum Meruit
Quarantine
Quare Impedit
Quarter Sessions
Queen Anne’s Bounty
Quorum
Quo Warranto
Rack
Ragman Rolls
Raid
Rape
Rate
Real Property
Rebellion
Receipt
Receiver
Recess
Recidivism
Recognizance
Record
Recorder
Reeve
Referee
Referendum and Initiative
Refresher
Regent
Register
Registration
Release
Remainder, Reversion
Remand
Remembrancer
Rent
Repairs
Repeal
Replevin
Representation
Reprieve
Reprisals
Request, Letters of
Requests, Court of
Rescue
Reservation
Residence
Resident
Residue
Respite
Respondent
Restraint
Retainer
Reward
Ridings
Riot
Robbery
Roman Law
Rundale
Sacrilege
Salary
Sale of Goods
Salic Law and other Frankish Laws
Salvage
Sanction
Satisfaction
Scandal
Scavenger’s Daughter
Schedule
Scire Facias
Scot and Lot
Scrip
Scrutiny
Sea Laws
Seamen, Laws relating to
Search or Visit and Search
Secession
Secret
Secretary of State
Security
Sederunt, Act of
Sedition
Seduction
Seignory or Seigniory
Seisin
Senate
Sentence
Sequestration
Sergeant-at-Law
Serjeanty
Servitude
Session
Set-off
Settlement
Sexton
Share
Shelley’s Case, Rule in
Sheppard, John (Jack)
Sheriff
Shire
Sign Manual, Royal
Simony
Slander
Socage
Soke
Solicitor
Solicitor-General
Sovereignty
Speaker
Specification
Specific Performance
Spheres of Influence
Spring-gun
Spy
State
State, Great Officers of
State Rights
State Trials
Statute
Stipend
Stocks
Stocks and Shares
Stolen Goods
Subinfeudation
Succession
Succession Duty
Suffrage
Summary Jurisdiction
Summons
Sunday
Superannuation
Supercargo
Supply
Supreme Court of Judicature
Surety
Surrender
Surrogate
Suzerainty
Swearing
Syndic
Syndicate
Taille
Tally
Tanistry
Tenant
Tenant-right
Tenement
Tenure
Term
Theatre
Theft
Thegn
Threat
Tichborne Claimant
Ticket-of-leave
Time
Tipstaff
Tithes
Tithing
Toleration
Toll
Tort
Torture
Town
Trade, Board of
Transfer
Tread-mill
Treason
Treasure Trove
Treasury
Treaties
Trespass
Trial
Tribute
Trover
Truck
Trust and Trustees
Turpin, Richard
Twelve Tables
Udal
Ukaz or Ukase
Ultimatum
Underwriter
University Courts
Uses
Valuation and Valuers
Venue
Verdict
Vestry
Veto
Vicar
Vice-Chancellor
Viceroy
Vidocq, F. E.
Vigilance Committee
Vizier
Vote and Voting
Voucher
Wager
Wainewright, T. G.
War, Laws of
Warden
Warrant
Warrant of Attorney
Warranty
Warren
Waste
Water Rights
Waters, Territorial
Welsh Laws
Wergild
Westminster Statutes
Wheel, Breaking on the
Whig and Tory
Whip
Whipping or Flogging
Wild, Jonathan
Will or Testament
Witness
Woolsack
Works and Public Buildings, Board of
Wreck
Writ
Writers to the Signet
 CHAPTER XXVII
FOR BANKERS AND FINANCIERS

Social History Of all classes of business men, bankers

and financiers study most closely the
general tendencies of public opinion and the general course of
industrial and commercial development. Each day’s financial news
reports a position which has been reached in the path of a movement
of which the origin and earlier course—and therefore the direction—
must be sought in the record of past months and years, and
sometimes in the record of a past century. But the banker who turns
to the standard histories in his library with the desire to trace the
course of any gradual and long-continued development is generally
disappointed. It is only of late that historical investigation has been
directed to social and commercial activities rather than to politics
and wars. Yet the history of civilization may be said to lie in the
course of finance and commerce much more than in party strife and
in civil and international wars. For the latter always arrest for the
moment, even if they ultimately further, the progress of civilization.
International The new Britannica has been called
Finance “the most comprehensive of all surveys
of past and present civilization,” and
its treatment of finance and commerce possesses a breadth and
sweep directly due to the international character of the book. The
American financier knows that under existing conditions he must
take into account the laws and usages of foreign countries in regard
to banking, currency, taxation, stock exchange transactions,
corporations and all the other methods and appliances used in
dealing with money and credit. The Britannica could not have
covered this broad field authoritatively if its articles had all been
written by Americans instead of being contributed, as they are, by
specialists of twenty countries. And the very first step, in examining
any question of American finance, may be to consider what has been
done abroad. For example, there has been adopted in Louisiana a
system of rural credit such as was strongly urged, for more general
use, during President Taft’s administration. That would seem to be
purely a matter of internal policy. But for a description of the actual
working of such a system, the sources of information are in the
Britannica article Raiffeisen (Vol. 22, p. 817), the German banker
who perfected the system of agrarian credits, in the article Schulze-
Delitzsch (Vol. 24, p. 383), the Saxon economist who founded the
German central bureau of co-operative societies, and in the article
Co-Operation (Vol. 7, p. 82), where the Danish system of financing
farmers is described and compared with the German and French
methods.
Systematic reading in the Britannica on financial subjects should
begin with the article Finance (Vol. 10, p. 347, equivalent to 20
pages of this Guide), by C. F. Bastable, professor of political economy
in the University of Dublin, whose books on economics have been
largely read in the United States. This article deals with state revenue
and expenditure, or public finance, after pointing out the prevailing
looseness in the use of the word finance. It is interesting to know that
“in the later middle ages, especially in Germany, the word finance
acquired the sense of usurious or oppressive dealing with money and
capital.” So long ago did an unpopular meaning attach to a term
connected with “big business.” The same is true of the word usury,
which originally meant use, or interest; and the Britannica in an
article on Usury (Vol. 27, p. 811) says “usury, if used in the old sense
of the term could embrace a multitude of modes of receiving interest
upon capital to which not the slightest moral taint is attached.” In
each case there may have been some reason besides chance for the
development of the unpleasant meaning, and it has always been the
custom of the spendthrift and the gambler to make the wrong use of
words as well as of business methods. But what we call public finance
was a century ago called political economy, “political” being used
strictly to apply to the state, and “economy” in its original sense of
housekeeping or house-rule. The word “economy” has thus become
broader, as the word “usury” has become narrower, in significance.
Early Economics It is curious to see how one page
after another of the historical section
of this article describes theories of finance which are to-day
propounded by popular agitators as if they were absolutely new and
not only describes them but shows how they were tried and how they
failed. The eastern empires taxed land produce, usually to the extent
of one fourth or one fifth (two tithes). In Athens, under a more
elaborate system, the state owned and administered agricultural land
and silver mines, and yet this state ownership, instead of making for
democratic equality, resulted in too rigid a separation of classes; and
the Athenian attempt to surtax the rich citizens in order to defray the
cost of public games and theatrical performances and to equip ships
(in this case a close parallel to certain recent German legislation) led,
as class taxation always does, to ingenious evasions and, in the end,
increased the power it sought to restrict.
In Rome, home taxes were suspended as soon as conquests
brought tribute from Spain and Africa. But taxes were always the
curse of the provinces, and the vexatious method of the tax “may be
regarded as an additional tax.” “The defects of the financial
organization were a serious influence in the complex of causes that
brought about the fall of the Republic.” The early Empire took its
revenues from public lands, from monopolies, from the land tax,
from customs, and from taxes on inheritances (5%), sales (10%) and
the purchase of slaves (40%). There was no just distribution of
taxation among the territorial divisions, and the burden fell too
much upon the actual workers and their employers. In the kingdoms
which succeeded the Empire after its fall, Roman customs survived
in finance, as in all departments of government; and there was a
want of coherent policy until the time of Charlemagne, when
centralization produced a better system. But scientific taxation did
not really exist until, in the 15th century, under Charles VII, the first
French standing army was created, and its needs led to a new and
more intelligent system. In England, the co-ordination and control of
public revenue and expenditure was similarly due to the growth of
the navy. Since then the tendency has been to include taxes in
general categories; the need for national credit has developed a
system of national debts; and expenditures and receipts are now
governed by legislative sanction. Local finance has been
revolutionized by modern business methods, too slowly adopted it is
true, and by the gradual change from private to public control of
water supply, lighting and transportation.
Taxation and The articles Taxation, National
Tariff Debt and Tariff should be read after
this article on public finance. Taxation
(Vol. 26, p. 458; equivalent to 25 pages of this Guide), by Sir Robert
Giffen, formerly Controller-General of the British Board of Trade,
classifies taxes, points out that direct and indirect taxes are not
intrinsically different and that such a classification is merely a matter
of convenience, and the article proceeds to describe the principal
taxes. It should be supplemented by reading the sections on finance
in the articles on various countries and especially by the article
English Finance (Vol. 9, p. 458; equivalent to 25 pages in this
Guide), the section on Finance in the article United States (Vol. 27,
p. 660) and similar sections in the articles on each of the states of the
Union. These articles give definite information about public debts,
national or state, but the student should read carefully the main
treatment in the article National Debt (Vol. 19, p. 266). The articles
Tariff (Vol. 26, p. 422), by Prof. F. W. Taussig of Harvard, author of
The Tariff History of the United States; Protection (Vol. 22, p.
464), by Edmund Janes James, president of the University of Illinois
and author of the well-known History of American Tariff
Legislation; and Free Trade (Vol. 11, p. 88), by William
Cunningham, author of Growth of English Industry and Commerce,
will be of great interest. The student should read besides the sketches
in the Britannica of Henry Clay (Vol. 6, p. 470), by Carl Schurz, of
William McKinley (Vol. 17, p. 256), Roger Q. Mills (Vol. 18, p.
475), and of other American tariff-leaders, and, for the tariff reform
movement in England, the articles on Joseph Chamberlain (Vol. 5,
p. 813) and Arthur J. Balfour (Vol. 3, p. 250). Before turning from
public to private finance the reader should study the articles
Exchequer (Vol. 10, p. 54) and Treasury (Vol. 27, p. 228).
Private Finance For what may be called private
finance, the student should turn first to
the article Banks and Banking (Vol. 3, p. 334; equivalent to nearly
60 pages in this Guide), by Sir R. H. I. Palgrave, director of Barclay &
Co., Ltd., Bankers; Charles A. Conant, author of The Principles of
Money and Banking; and Sir J. R. Paget, author of the Law of
Banking. Further information on the early history of banking in the
United States will be found in the historical section of the article
United States (Vol. 27, especially p. 697), and in the article Andrew
Jackson (Vol. 15, p. 107) by Prof. W. G. Sumner of Yale.
Currency Next in his course of reading, he
should study the article Money (Vol.
18, p. 694; equivalent to 45 pages in this Guide), by C. F. Bastable.
This deals with: the functions and varieties of money, including
coined money and all else that can take its place in facilitating
exchange, in estimating comparative values, as a standard of value
or of deferred payments, as a store of value; the determining causes
of the value of money and of the quantity of money required by a
country, the credit theory, early forms of currency—greenstones,
ochre, shells, furs, oxen, grain; metals as money; coinage and state
control; representative money, and credit as money; economic
aspects of the production and consumption of precious metals;
review of the history of some important currencies—Greek, Roman,
medieval, English and French coinages are treated in the article
Numismatics (Vol. 19, pp. 869–911, equivalent to 135 pages of this
Guide, with 6 plates and 11 other text illustrations); which discusses
such questions as the constitution of money; typical currency
systems; statistics of production of gold and silver since the
discovery of America, and coinage systems. Other relevant articles
are Bimetallism, and Monetary Conferences for the relation of the
metals; and the articles Gold, Silver, Seigniorage,
Demonetization, Gresham’s Law, Token Money and Greenbacks.
In the article on the George Junior Republic (Vol. 11, p. 749), the
“children’s state” at Freeville, N. Y., the student will find an
interesting proof of the relation of “token” to “real” money. “The
government issued its own currency in tin and later in aluminium
and ‘American’ money could not be passed within the 48 acres of the
Republic until 1906, when depreciation forced the Republic’s coinage
out of use and ‘American’ coin was made legal tender.”
Banking For information as to the methods of
financial business the reader should study the
articles Savings Banks (Vol. 24, p. 243) by Sir G. C. T. Bartley, founder of the
National Penny Bank, and Bradford Rhodes, founder of the 34th St. National
Bank, N. Y. Friendly Societies (Vol. 11, p. 217); Trust Company (Vol. 27, p.
329), by Charles A. Conant, author of The Principles of Money and Banking;
Clearing House (Vol. 6, p. 476); Letter of Credit (Vol. 16, p. 501); Stock
Exchange (Vol. 25, p. 930); Bill of Exchange (Vol. 3, p. 940); Exchange (Vol.
10, p. 50); Futures (Vol. 11, p. 375); Time Bargains (Vol. 26, p. 988); Market
 (Vol. 17, p. 731), by Wynnard Hooper, financial editor of The Times, London,
with sections on Movements of Prices, Cycles, Tendency to Equilibrium,
Disturbance of Equilibrium, Future Delivery, Corners, Money Market, The Great
Banks, Foreign Loans, and Discount Houses; Consols (Vol. 6, p. 979); Coupon
(Vol. 7, p. 318); Dividend (Vol. 8, p. 331); and Premium (Vol. 22, p. 279).
Information on distinctive banking and business laws in the
separate states will be found in the section on finance of the article
on each state. For instance in the article Oklahoma (Vol. 20, p. 60)
there is a summary of the bank deposit guaranty fund.
For insurance see the chapter in this Guide For Insurance Men.
Lives of In financial biography, as in history,
Financiers theory and practice, the Britannica is
valuable because of its full, clear and
authoritative treatment. The student will find articles on great
financiers, such as the Astors, the Vanderbilts, the Barings, the
Rothschilds, James Law, George Peabody, James Fisk, Jay Gould, E.
H. Harriman, James J. Hill, J. P. Morgan; and on great authors on
the subjects of economics and finance,—for instance, Malthus, Adam
Smith, Walter Bagehot, Ricardo, Roscher, Boehm von Bawerk,
Thorold Rogers, H. C. Carey, E. R. A. Seligman, F. A. Walker, J. W.
Jenks, F. W. Taussig, Richmond Mayo-Smith and A. T. Hadley.

ALPHABETICAL LIST OF ARTICLES IN THE

ENCYCLOPAEDIA BRITANNICA OF INTEREST TO
BANKERS

Account
Accountants
Achenwall, Gottfried
Adams, Henry Carter
Agio
Aguado, A. M.
Alcavala
Aldrich, N. W.
Allport, Sir J. J.
Alstromer, Jonas
Amortization
Angel
Anna
Annuity
Arbitrage
Armour, P. L.
Ashley, W. J.
Assignats
Astor, John Jacob (and family)
Atkinson, Edward
Attwood, Thomas
Audit and Auditor
Backwardation
Bagehot, Walter
Balance of Trade
Bank Notes
Bank Rate
Banks and Banking
Barbon, Nicholas
Baring (family)
Barter
Bastiat, Frédéric
Bates, Joshua
Baudrillart, H. J. L.
Bawbee
Baxter, Robert Dudley
Bemis, E. W.
Bezant
Biddle, Nicholas
Bill of Exchange
Bimetallism
Blanqui, J. A.
Bliss, C. N.
Block, Maurice
Bodin, Jean
Bodle
Boehm von Bawerk
Boisguilbert, Sieur de
Book-keeping
Bourse
Breaking Bulk
Brentano, L. J.
Broker
Bucketshop
Budget
Bullion
Buying in
Cairnes, John Elliott
Call
Capital
Carey, Henry Charles
Carli-Rubbi
Carrying-over
Cash
Chase, S. P.
Cheque, or Check
Chevalier, Michel
Child, Sir Josiah
Circular Note
Claflin, H. B.
Clark, John Bates
Clearing House
Cohn, Gustav
Coin
Coeur, Jacques
Colston, Edward
Combination
Commerce
Commercial Treaties
Consols
Contango
Cooke, Jay
Co-operation
Cooper, Peter
Cossa, Luigi
Coulisse
Coupon
Courcelle-Seneuil, J. G.
Cournot, A.
Coutts, Thomas
Cover
Credit
Crédit Foncier
Crockford, William
Crore
Crown (coin)
Cunningham, William
Custom Duties
Custom House
Davenant, Charles
Decker, Sir Matthew
Decimal Coinage
Delessert, J. P. B.
Delfico, Melchiorre
Demonetization
Dewey, Davis Rich
Dime
Discount
Distribution
Dividend
Dock Warrant
Dollar
Drawback
Drexel, A. J.
Ducat
Ely, Richard Theodore
Engel, Ernst
English Finance
Exchange
Exchequer
Excise
Farr, William
Farrer, Baron
Farthing
Florin
Field, Cyrus West
Fisk, James
Fix, Theodore
Fouquet, Nicolas
Franc
Free Trade
Friendly Societies
Futures
Gabelle
Gallatin, Albert
Ganilh, Charles
Garnier, C. J.
Garnier, Marquis
Genovesi, Antonio
George, Henry
Giffen, Sir Robert
Gilds
Gilbart, James William
Gioja, Melchiorre
Girard, Stephen
Goldsmid (family)
Gould, Jay (and family)
Grain Trade
Greenbacks
Gresham, Sir Thomas
Gresham’s Law
Groat
Guinea
Gurney (family)
Hadley, A. T.
Hamilton, Alexander
Hamilton, Robert
Hanna, M. A.
Harriman, Edward H.
Haxthausen, L. von
Hermann, F. B. W. von
Hill, James J.
Horner, Francis
Horton, Samuel Dana
Hudson, George
Hufeland, Gottlieb
Income Tax
Ingram, J. K.
Insurance
Invoice
Jakob, L. H. von
Jenks, J. W.
Jesup, M. K.
Jevons, William S.
Jones, Richard
Kay, Joseph
Laing, Samuel
Lakh
Laveleye, E. L. V. de
Law, John
Lawrence, Amos
Le Play, P. G. Frédéric
Leroy-Beaulieu, P. P.
Leslie, Thomas E. C.
Letter of Credit
Levasseur, Pierre Emile
Levi, Leone
Lingen, Baron
Lipton, Sir T. J.
Lira
List, Friedrich
Lloyd’s
M’Culloch, John R.
Mackay, John William
Macleod, Henry Dunning
Making-up Price
Malthus, Thomas Robert
Mark
Market
Marshall, Alfred
Marx, Heinrich Karl
Mayo-Smith, Richmond
Mint
Mohur
Moidore
Monopoly
Monetary Conferences (International)
Money
Money-lending
Moon, Sir Richard
Moratorium
Morgan, John Pierpont
Morris, Robert
Morton, L. P.
Mun, Thomas
National Debt
Newmarch, William
North, Sir Dudley
Octroi
Overstone, 1st baron
Par
Paterson, William
Pauperism
Pawnbroking