Review of Austrian Economics

Articles Eugen Richter and Late German Manchester Liberalism: A Reevaluation

Ralph Raico

For several generations now there has existed an overarching interpretation of modern history conditioning and shaping the views held by nearly all educated people on the issue of socialism and the market economy. This interpretation goes roughly as follows: once there was a “class”—“the” bourgeoisie—that came into being with the colossal economic and social changes of early modern history, and strove for recognition and domination. Liberalism, which admittedly helped to achieve a limited degree of human liberation, was the ideological expression of the bourgeoisie’s self-interested struggle.1 Meanwhile, however, another, much larger class came into being, “the” working class, victims of the triumphant bourgeoisie. This class strove in its turn for recognition and domination, and, accordingly, developed its own ideology, socialism, which aimed, through revolution, at the transition to a higher, broader level of human liberation. The natural and inevitable conflict of interests of these two classes—basically, of the exploiters and the exploited—fills modern history, and has led in the end, in the welfare state of our own time, to a kind of accommodation and compromise. With this historical paradigm I think we are all quite familiar.

Recently, however, a different interpretation has begun to gain ground. The outstanding historian Ernst Nolte, of the Free University of Berlin, has expressed its central point:

The real and modernising revolution is that of liberal capitalism or of economic freedom, which began 200 years ago in England and which was first completed in the USA. This revolution of individualism was challenged at an early date by the so-called revolutionary socialism, whose guideline was the archaic community, with its transparency of social conditions, as the most comprehensive counterrevolution, namely as the tendency for totalitarian collectivism.2

Although capitalism “radically chang[ed] the living conditions of all those affected in a relatively short time and improv[ed] them to an extraordinary degree, at least materially,” “it did not understand how to awaken love.”3 The great capitalist revolution called forth a socialist movement, which “in a certain sense [was] thoroughly reactionary, indeed, radical-reactionary.”4

The Place of Liberalism

This more recent conception suggests a new interpretation of liberalism. Liberalism is, in fact, the ideology of the capitalist revolution that prodigiously raised the living standards of the mass of people; a doctrine gradually elaborated over several centuries, which offered a new concept of social order, encompassing freedom in the only form suited to the modern world. Step by step, in practice and theory, the various sectors of human activity were withdrawn from the jurisdiction of coercive authority and given over to the voluntary action of self-regulating society. The first great victory was freedom in religious matters. The world-historical significance of religious liberty lies precisely in the fact that it demonstrated, in this first, great area of human existence, how society could be left to its own devices.

Practically all the peoples of western and central Europe (as well as the Americans) contributed to the working out of the liberal idea and the liberal movement. Not just the Dutch, French, Scots, English, and Swiss, but, for instance, in Spain, the Late Scholastics of the School of Salamanca and elsewhere,5 and a number of Italians, especially at the beginning of political economy. In this evolution, the Germans also played an often overlooked part.6

Particularly striking for foreigners who have concerned themselves with the problem of German liberalism has been the bitter hostility that it met with in its own time and at the hands of historians, and which is linked to the first, conventional interpretation of modern history described above. Paul Kennedy has quite accurately referred to “the sheer venom and blind hatred behind so many of the assaults in Germany upon Manchestertum [Manchesterism].”7

This hostility was directed especially against the man who was for two generations in Germany the representative of the liberal movement that embraced all civilized nations: Eugen Richter. Malice has now been replaced by neglect. Last year, in July, was the 150th anniversary of Richter’s birth, and if any notice was taken of the occasion in the Federal Republic, aside from my own very modest contribution,8 it has not come to my attention. That should not be surprising, however. Since both the conservatives and the socialists—the two camps that have by and large written the history of Germany—found Richter insufferable, he has usually been treated disparagingly or else disregarded. Thus, he remains virtually unknown to the great majority of even educated people. Given the older historical interpretation, this circumstance makes a certain sense; it by no means corresponds to the newer one. Thus, an attempt to evaluate Richter’s significance for German liberalism and German history is perhaps called for.

Differences of Opinion on Richter

Eugen Richter9 was the brilliant, if occasionally too masterful, leader of the Progressive Party (Fortschrittspartei) and later of the Liberals (Freisinn), the political expressions of German “Left Liberalism,”10 or “determined” (entschieden) liberalism, through 30 years, in the Imperial German Reichstag and in the Prussian House of Representatives; he was, moreover, an untiring journalist and publisher.11 Outside of a narrow group of friends and political associates, the attitudes and opinions on Richter, in his own time and afterwards, have been mostly very negative.12 This is naturally the case on the authoritarian-conservative side: Crown Prince Wilhelm, later Kaiser Wilhelm II, even hatched a plan (never realized) to have Richter “beaten up” by six junior officers,13 and Richter’s old adversary, Prince Bismarck, confided to the old Kaiser, Wilhelm I, that it was among men like Richter that “the material for deputies to the [French Revolutionary] Convention” was to be found.14 Hans Delbrück, whose portrayal of Richter influenced later writers, compared him to the Athenian demagogue Cleon and branded him the leader of a party whose highest passion was reserved for pieces of silver,15 while for the Marxist Franz Mehring, Richter was merely “a servant and helper of Big Capital.”16 Richter’s “rigidity,” “dogmatism,” and “carping doctrinairism” have been repeatedly attacked,17 and a present-day German historian simply reflected the nearly unanimous view of his colleagues when he summarily characterized Richter as “the eternal nay-sayer.”18

Yet even Bismarck was compelled to concede: “Richter was certainly the best speaker we had. Very well-informed and conscientious; with disobliging manners, but a man of character. Even now he does not turn with the wind. . . .”19 Another opponent, this time from the liberal camp, the first President of the Federal Republic, Theodor Heuss, admitted that Richter was “the most influential leader of ‘determined’ liberalism,” and “certainly in detail work [sic] the most knowledgeable deputy in the German parliaments . . .”20 An observer closer in spirit to his subject expressed it more simply: Richter “was the liberal doctrine incarnate.”21

Richter’s Career

Eugen Richter was born on July 30, 1838, in Düsseldorf, the son of a regimental doctor. The atmosphere in the parental home was “oppositional,” e.g., the family read the Kölnische Zeitung “eagerly”—evidentally, rather bold behavior for the time. Richter’s “predominantly critical-rational disposition” developed from his early youth.22 He studied political science with Dahlmann at Bonn and with Robert von Mohl at Heidelberg, where he also studied public finance with Karl Heinrich Rau, then the most celebrated expert in the field. While still a student he went to Berlin, where the proceedings of the Prussian House of Representatives interested him much more than his university lectures. He began attending the meetings of the Kongress deutscher Volkswirte (Congress of German Economists) and, through newspapers and journal articles, avidly took part in the growing movement for economic liberalism in Germany; he was also active in the consumer cooperative movement.

By 1884 Richter headed a united Left Liberal party, the Deutschfreisinnige Partei, that boasted of more than 100 seats in the Reichstag. Liberalism’s hour in Germany seemed to have come: the Kaiser, Wilhelm I, was very old, the Crown Prince, Friedrich, the most liberal of all the Hohenzollerns. It turned out otherwise, however, than might have been desirable for the Germans. Bismarck’s political skill saw to it that the Freisinnige Partei was smashed in the next two elections, and when Friedrich finally ascended the throne, in 1888, he was already mortally ill. These vicissitudes could make no difference in Richter’s political convictions, however. For another two decades he held fast to the same principles, which appeared increasingly obsolete and irrelevant. He was the last authentic liberal leader in the parliament of any great power.

Social Philosophy and the Two-Front Strategy

Regarding his early journalistic activity, it is noteworthy that, already as a young man, Richter emphasized not only the economic disadvantages of the antiquated mercantilist system, but at the same time the infringement of civil and political freedom bound up with that system. Thus, in an early brochure, On the Freedom of the Tavern Trade, he attacked the concessions-system, which invested the political authorities with wide-ranging licensing and regulatory authority for all trades and professions:

As long as the police administration in our state unites in itself such legislative, judicial, and executive powers, Prussia does not yet deserve the name of a Rechtsstaat.23

The cornerstone of Richter’s social philosophy was the connection between political and economic freedom, a conception that distinguished him, and Left Liberalism in general, from the mass of “National Liberals.” Two decades later, Richter closed his great speech against Bismarck’s protective tariff with the words:

Economic freedom has no security without political freedom, and political freedom can find its security only in economic freedom.24

This tenet determined Richter’s continuing political strategy. All his life, he conducted a “two-front war,” against Bismarckian “pseudo-constitutionalism” and a recrudescent mercantilism on the one hand, and the rising socialist movement on the other.25

Richter and the other entschieden liberals have often been reproached for this policy. Critics maintain that the Left Liberals should have allied with the Social Democrats, in a common resistance to the militarist-authoritarian Second Reich, and Richter’s famous “rigidity” and “dogmatism” are supposed to be largely responsible for the fact that such a united front never came into existence. Some historians even give the impression that liberal opposition to Social Democracy in Imperial Germany is only comprehensible as the product of “fear” of the “lower orders.”26

But it can scarcely be surprising that Richter rejected such an alliance. He saw himself confronted with a socialist party that did not trouble to conceal its ultimate aim, abolition of the system of private property and the market economy, and that viewed “the class-struggle between bourgeoisie and proletariat as the ‘pivot of all revolutionary socialism.’”27 After 1875, the Social Democratic Party of Germany (SPD) was primarily a Marxist party, and, despite later revisionist tendencies, its acknowledged leaders, like Bebel, Liebknecht, and Kautsky, were confirmed orthodox Marxists. Of course, the SPD presented various democratic demands “to start with”; its ultimate goal remained, however, the social elimination of all “non-proletarians.”

The Social Democratic standpoint confronting Richter may be illustrated by the example of Franz Mehring, a major theoretician and the biographer of Marx. In 1903, Mehring wrote, in the Neue Zeit, of the German “bourgeoisie” (and its defenders): “It had to be aware, and basically it was aware, that, without the help of the working-class, it could not defeat absolutism and feudalism. It had further to be aware, and basically it was also aware, that, in the moment of victory, its previous alliance-partner would face it as an adversary,” at which point the bourgeoisie would presumably fall victim to the proletariat in the final, decisive conflict. Nonetheless, Mehring insisted that in this alleged state of affairs the bourgeoisie ought to draw the conclusion “that a pact with the working-class on tolerable [sic] conditions offers it the only possibility it has.”28 But for liberals like Richter, the Marxist scenario was by no means all that “tolerable.” It is understandable, therefore, that Richter held that the “Social Democratic state of the future,” because it was hypothetical, was for the time being less dangerous than the existing “military state,” yet essentially “much worse.”29

Even aside from the fact that “from 1869, meetings of the Progressive Party in Berlin were violently disrupted by the Social Democrats,”30 how would an alliance with the Social Democrats have been at all ideologically conceivable? As liberals, men like Richter viewed socialism as a kind of counter-revolution, and believed that the achievement of the socialist goal would lead both to appalling poverty and to state absolutism. There was nothing in the socialist doctrine of the time that would suggest otherwise. Historians would do well to recognize that at least a part of the blame for the non-occurrence of a common front against militarism in Germany must be borne by the Social Democrats themselves.

Pictures of a Social Democratic Future

For their part, the socialists engaged in a relentlessly scathing critique of the liberal economic order. But, as Richter pointed out:

The Social Democrats are very garrulous in criticizing the present social order, but they are careful not to clarify in detail the goal that is supposed to be achieved through the latter’s destruction.31

This omission Richter attempted to make good in his Pictures of a Social Democratic Future.32 In its time, this little book, with its ironic subtitle, “Freely drawn after Bebel,” was a sensation. It was translated into a dozen languages, with more than a quarter-million copies printed in Germany alone. It must be conceded that in some respects Richter’s narrative is dubious. It leans too heavily on the pathos of family problems under the new socialist regime; but that was to be expected, since it was directed at a wide, popular audience. Sometimes the work even verges on the ridiculous, especially in connection with the relations of social equality that will supposedly obtain under socialism, e.g., the new Reich Chancellor must shine his own boots and clean his own clothes, in Richter’s account.

The explanation for this, however, is that Richter took the egalitarian promises of the socialists too literally, too seriously. He lacked any inkling of Marxism’s tendency to bring to power a new class of higher-echelon state functionaries. Still, Richter was able to anticipate many of the characteristics later displayed by Marxist states. Emigration is prohibited in Marxist Germany, since “persons who owe their education and training to the State cannot be accorded the right to emigrate, so long as they are of an age when they are obliged to work.”33 Bribery and corruption are to be found everywhere,34 and the products of the nationalized economy are unable to meet the standards of competition on the world market.35 But above all, Richter emphasized the connection between economic and political freedom:

what is the use of freedom of the press, if the government is in possession of all the printing presses, what does freedom of assembly avail, if all the meeting places belong to the government? . . . in a society in which there is no more personal and economic freedom, even the freest form of the state cannot make political independence possible.36

When the worst imaginable happens and the socialist state proves incapable of provisioning the German Army as the Fatherland is invaded by France and Russia, a counter-revolution breaks out, restoring a free society.

Marxists and Conservatives: Mutual Aid

Richter often tried to present his two-sided campaign as part of one and the same war, by arguing that it was a question merely of two forms of state paternalism. Interestingly, this interpretation was supported from an unexpected quarter, although without Richter’s normative charge. Accused of political offenses, the founder of German socialism, Ferdinand Lassalle, addressed his judges as follows:

As wide are the differences that divide you and me from one another, Sirs, against this dissolution of all morality [threatening from the liberal camp] we stand shoulder to shoulder! I defend with you, the primeval Vestal flame of all civilization, the State, against those modern barbarians [the laissez-faire liberals].37

Richter reiterated that the right-wing parties—the Conservatives and the Anti-Semites—aided socialism “especially [by] the agitation against mobile capital, against the exploitation it allegedly perpetrates, and, moreover, by the limitless promises handed out to all occupational classes of special state help and provision.”38 In turn, socialism helped the Conservatives and Anti-Semites through its revolutionary threats, intimidating the middle classes and driving them into the arms of a strong State power.39

State Socialism and Sozialpolitik

Richter fought the state-socialist program proposed by Bismarck, including the nationalization of the Prussian railroads and the establishment of state monopolies for tobacco and brandy, and, naturally, Bismarck’s turn towards protectionism, towards rendering dearer the cost of necessities, by which the great Chancellor, landowner, and hater of the “Manchester money-bags” manifested his compassion for the poor. A “passionate opponent of cartels,” Richter considered the planned tariff wall “the ideal nurturing ground for the formation of new cartels.”40 While Richter, together with other liberal leaders, such as Ludwig Bamberger, supported the introduction of the gold standard in the newly formed Empire, unlike them he opposed the centralization of the banking system through the creation of a Reichsbank; such a central bank, he felt, would tend to privilege “big capital and big industry.”41

Perhaps Richter’s most famous attack in this field was directed against Bismarck’s Sozialpolitik, with which the modern welfare state was born. Richter, together with Bamberger, was the chief speaker in opposition to the program, which began with the accident insurance bill of 1881, and over the years he persevered in his point of view when other liberal critics were converted to the new approach. One remark of his was, and is, deemed particularly notorious: “A special social question does not exist for us [the Progressives]. The social question is the sum of all cultural questions”42—by which he probably meant that, in the last analysis, the standard of living of working people can only be raised through higher productivity, a viewpoint perhaps not totally devoid of sense.

It is above all this opposition to Sozialpolitik with which Richter is reproached.43 If one judges from the standpoint of world history as the tribunal of the world, Richter was certainly in the wrong. The welfare state is today in the process of conquering the whole globe; even the grandiose socialist idea is on the point of being reduced to a mere set of comprehensive welfare programs. Still, at least one of the reasons Richter advanced against the beginnings of the welfare state has a certain cogency.

By hindering or restricting the development of independent funds, one pressed along the road of state-help and here awoke growing claims on the State that, in the long run, no political system can satisfy.44

Richter’s words give pause, when one considers the complex of problems gathered under the heading, “The Over-Straining of the Weimar Social State” (the “most progressive social state in the world” in its day), the collapse of the Weimar Republic, and the accompanying seizure of power of the National Socialists.45 One might also reflect on a circumstance that today appears entirely possible: that, after so many fatal “contradictions” of capitalism have failed to materialize, in the end a genuine contradiction has emerged, one that may well destroy the system, namely the incompatibility of capitalism and the limitless state welfarism yielded by the functioning of a democratic order.

Civil Liberties and Rechtsstaat

While the majority of the Progressives supported the Kulturkampf—it was the celebrated liberal and friend of Richter’s, Rudolf Virchow, who gave the crusade against the German Catholic Church the label, “struggle of cultures”—Richter generally opposed this fateful conflict, which contributed so much to hardening the Catholic Church’s hostility to liberalism.46 Although he did not challenge his own close political collaborators as much as he might have—he claimed the Kulturkampf “did not particularly excite” him47—his own position was basically that of authentic liberalism, of, for instance, the French Catholic liberals and the Jeffersonians: absolute separation of State and Church, including complete freedom for private education and a principled rejection of any state subsidizing of any religion.48

Particularly interesting in this connection is that, for Richter, “the private school was the last possible refuge.”49 In contrast to the majority of German (and of French and other) liberals of his time, Richter was not inclined to place obstacles in the way of the private school system in order to promote his own secular Weltanschauung. As he expressed it:

Even if it were true that by using the free private system of instruction schools would come into being less agreeable to my point of view than the public schools, I would still not let myself be led astray, or desist, out of a fear of Catholics or a fear of socialists.50

Similarly, Richter took to the field against the emerging anti-Semitic movement,51 with which Bismarck coquetted in another of his efforts to subvert the liberals. Richter branded the anti-Semites “unnational,” referring to them as “this movement damaging to our national honor.” In turn, the anti-Semites labelled the Left Liberals around Richter “Jew guard-troops,”52 and attempted, as had the Social Democrats, to disrupt liberal meetings in Berlin through violence.53 Until the end of Richter’s career, the German-Jewish middle classes formed an important part of the liberal following, largely on account of the liberal principle of separation of Church and State.54

In general, Richter had learned very well from the great theoreticians of the Rechtsstaat, Dahlmann and Mohl. He fought a bill to criminalize the slander and mockery of state institutions, marriage, and private property.55 In the case of the Social Democrats themselves, he opposed the notorious and futile Socialist Laws, with which Bismarck attempted to suppress the SPD.56 (In this matter, however, Richter appears for once to have played, in the midst of Reichstag machinations, the politician rather than the principled liberal.57) Similarly in the case of measures for the suppression of the Poles in Germany’s eastern territories. Ideas and competing cultural values, in Richter’s view, were not to be combatted by force.58

Richter’s familiarity with the financial affairs of Prussia and of Germany was unequaled.59 From the beginning of his parliamentary service, his attention was focused most particularly on the military budget, and this old question, which had produced the great constitutional conflict of the 1860s and split German liberalism on several occasions, accompanied him throughout his whole political life. A proponent of low taxes, especially for the poorer classes,60 Richter was concerned with moderating the enormous financial demands of the military; in this effort he did not shy away even from arguments with the venerable Count von Moltke. Above all, he was concerned that the authority of the people’s representatives, the Reichstag, should prevail over the Army, that the citizen should not be submerged in the soldier. Thus, his insistence on the two-year, rather than three-year, military service, which led to a further split in the liberal party, in 1893.61 His tireless probing into every single expenditure once caused Bismarck to cry out that in this fashion one would never come to the end of a budget.62 Regarding his interrogation of a minister on a financial matter, Richter wrote, with proud underscoring: “But I didn’t let go.”63 In the field of the spending of public money, that could have been his motto. Max Weber, a National rather than a Left Liberal, nevertheless declared:

Despite Eugen Richter’s pronounced unpopularity within his own party, he enjoyed an unshakable power position, which rested on his unequalled knowledge of the budget. He was surely the last representative who could check over every penny spent, to the very last canteen, with the War Minister; at least, this is what, despite any annoyance they felt, has often been admitted to me by gentlemen of this department.64

In this continuing feature of Richter’s activity it is possible to see the most significant example in the whole history of parliamentary liberalism of the standpoint expressed by Frédéric Bastiat, when he wrote of peace and freedom and their connection with the “icy numbers” of a “vulgar state budget”:

The connection is as close as possible. A war, a threat of war, a negotiation that could lead to war—none of these is capable of coming to pass except by virtue of a small clause inscribed in this great volume [the budget], the terror of taxpayers. . . . Let us seek first of all frugality in government—peace and freedom we will have as a bonus.65

War, Peace, and Imperialism

As for his position on war and peace, Richter by and large shared the views of the radical-liberals, or “Manchester men,” of the nineteenth century, who were hostile to war and highly skeptical of the arguments for large military establishments and colonial adventures.66 In Britain this was the position, for instance, of Richard Cobden and John Bright, and later of Herbert Spencer; in France, of Benjamin Constant, Jean-Baptiste Say, Frédéric Bastiat, and many others. The German liberals, too, placed a high value on peace (although their attitude was somewhat skewed by the problem of national unification). John Prince Smith and his followers were spokesmen for the ideal of “peace through free trade.”67

Richter criticized increases in the strength of German military forces, “which [have] substantially contributed to a subsequent reciprocal increase in relation to France and Russia.”68 Admiral von Tirpitz’s Naval Bills, from 1898 on, which, by setting Germany on a collision course with England, proved to be so fateful, were rejected and denounced by Richter.69 For Wilhelm II’s “Weltpolitik,” he simply had no understanding. To the question, “What is ‘Weltpolitik’?” Richter replied: “Wanting to be present wherever something is going wrong.”70 Under his leadership, the Freisinnige Volkspartei continued to spurn it. The growing hostility between England and Germany nearly drove him to despair.71

Richter experienced the Age of Imperialism, which began for Germany with Bismarck’s initiatives in 1884–85 regarding Africa and the South Seas. Although Richter repudiated these early initiatives, his attitude eventually was somewhat ambivalent, and requires an examination.

Richter’s initial position, which he expressed in June, 1884, was that “colonial policy is extraordinarily expensive,” and

the responsibility for the material development of the colony, as well as for its formation, [is] to be left to the activity and entrepreneurial spirit of our seafaring and trading fellow citizens; the procedure followed should be less of the form of annexation of overseas provinces to the German Reich, than of the form of the granting of charters, on the model of the English royal charters . . . at the same time, to the parties interested in the colony should essentially be left its governing, and they should be accorded only the possibility of European jurisdiction and its protection that we could furnish without having standing garrisons there. For the rest, we hope that the tree will generally thrive through the activity of the gardeners who planted it, and if it does not, then the plant is an abortive one, and the damages affect less the Reich, since the costs we require are not significant, than the entrepreneurs, who were mistaken in their undertakings.72

Not “Dogmatism,” but Pragmatism was Richter’s Failing

A critic of Richter’s, the afterwards-influential Weimar radical-democratic historian Eckart Kehr, maintained that Richter rejected the Naval Bills and Weltpolitik merely from “capitalist motives”—simply because they were not profitable.73 The truth is that, as always, Richter supported his position with statistics and “pragmatic” reasons of all kinds. But even Kehr had to concede that, for Richter, there were also certain principles involved. As Kehr put it, Richter’s standpoint was

that the State should leave exports to the exporters, to industry, and to the merchants, and should not identify itself with the interests of the exporting class. . . . If industry . . . values the protection afforded by warships, let them go and shell out a part of the surplus profit they have captured in this way and build the cruisers for themselves.74

In other words, in this question Richter defended the same principle as on the questions of Sozialpolitik and the protective tariff: the State exists for the common good, and it ought not to be debased to an instrument of special interests. As naive as this attitude may be, it demonstrates that Richter manifested traits of what can be called the civic humanism or classical republicanism of the Stein-Hardenberg variety.75

The genuine failing in Richter’s approach to imperialism is that he never systematically posed the question: “Profitable for whom?” It is true that Richter opposed Bismarck’s colonial plans in the conviction that their core was “the burdening of the relatively unpropertied to the advantage of the relatively propertied.”76 Yet, in the next decade, when Germany occupied Kiaochow and undertook the construction of a railroad in Shantung, Richter showed himself much more amenable than before.77 He declared:

we [the Freisinn] view the acquisition of [Kiaochow] Bay otherwise and more favorably than all the previous flag-raisings in Africa and Australia [i.e., New Guinea]. The difference for us is that . . . China is an old civilized country . . . and that transformations that have been introduced into China, especially by the last Sino-Japanese War, could cause it to appear desirable to possess a base there for safeguarding our interests.78

Yet, Richter’s last parliamentary speeches, in 1904, both in the Reichstag and in the Prussian House of Representatives, dealt with colonial questions in a sharply negative manner; again, he put himself forward as, above all, “the representative of the whole community, the representative of the taxpayers,” and complained of “the neglect of urgent needs in domestic policy on account of the demands of a misconceived colonial policy.”79

In explaining Richter’s inconsistency in this area, the comment of Lothar Albertin is pertinent: Richter “remained, in regard to imperialism, without a theory [theorielos].”80 He was never able to advance to the interpretation of imperialism of a Richard Cobden, according to which economic expansion supported by means of the state always redounds to the advantage of certain interests and to the disadvantage of the taxpayers and the majority. Thus, on this issue Richter belonged, in Wolfgang Mommsen’s suggestive typology, to the “pragmatic” entschieden liberals, rather than to the “principled” radical-liberals.81

The Liberal Surrender

The final capitulation of German liberalism was inaugurated by the famous Friedrich Naumann,82 today viewed in what pass for liberal circles in the Federal Republic as a kind of secular saint. Ambitious and endowed with enormous drive, Naumann was politically insightful as well. He recognized how the rules of the political game had changed:

What fundamentally destroyed liberalism was the entry of the class-movement into modern politics, the entry of the agrarian and industrial-proletarian movement[s] . . . The old liberalism was no representative of a class-movement, but a world-view that balanced all differences among classes and social orders . . .83

In many respects, Naumann anticipated what is often considered the central insight of the School of Public Choice, when he described the development of modern democracy:

The economic classes contemplated to what end they might make use of the new means of parliamentarianism . . . gradually, they learned that politics is fundamentally a great business, a struggling and a haggling [Markten] for advantages, over whose lap collects the most rewards cast by the legislation-machine.84

Richter, too, understood this.85 The difference, however, was that Naumann endorsed the new rules of the game and wished to see a revived liberal movement adopt them wholeheartedly.86 Together with his close friend, Max Weber, Naumann tried to fashion a liberalism more “adapted” to the circumstances of the twentieth century, and to win liberal leaders like Theodor Barth to his strategy. In contrast to the hopelessly prosaic Richter, Naumann knew how to shape a political vision and offer it to a new generation alienated from classical liberal ideas.87 In his conception, liberalism had to make its peace with Social Democracy, by taking up the cause of Sozialpolitik and other “claims” of labor. At the same time, it had to snatch the national cause from the conservatives, by becoming the most zealous advocate of Weltpolitik and imperialism, and learning to appreciate the German drive to authority and prestige in the world (Weltgeltung). It must both “absorb state-socialist elements,”88 and develop “an understanding for the power-struggle among the nations.”89 In short, liberalism must become “national-social.” Naturally, Naumann was quite wild about the naval build-up. Already in 1900, he was convinced that war with England was a “certainty.”90

For the sake of liberalism’s future in Germany, Eugen Richter had to be “definitely fought.”91 Towards Richter, now the grand old man of Left Liberalism, Naumann had a kind of good-natured contempt. To one of his National Social audiences, he declared:

Eugen Richter is unchangeable, and that is his greatness [Laughter]. But under this man, with his unique tenacity in work and will—which must be admired even by those who consider him a peculiar fossil—there are a whole series of people who say, in assemblies and in private: Of course we are for the fleet, but as long as Richter is alive—the man surely has his greatness [Laughter] . . .92

Evolution or Dissolution of Liberalism?

Even from the ranks of the younger leaders of Richter’s own party there was growing criticism of his position on the colonies and the naval build-up. In 1902, on the floor of the Reichstag one of Richter’s own protégés, Richard Eickhoff, thanked the War Minister on behalf of his constituents for a new armaments contract, taking the opportunity to request still more contracts, and joking that, l’appetit vient en mangeant.93 With Richter’s death in 1906, the old liberal negativity and carping criticism in military matters—and the history of German Manchesterism—came to an end. German Left Liberalism had no further objections to the Imperial military budget. Eight years later would come that summer of 1914 and the fateful machinations of the German General Staff, in the meanwhile grown omnipotent.

A few years after Richter’s death, the then well-known nationalist historian, Erich Marcks, spoke of the “supersession of the older liberalism.” This liberalism had, to be sure, saturated and impregnated the whole life of the modern nations; its effects continued to be felt everywhere. It was indestructible. But, added the biographer and adulator of Bismarck:

With its own most distinctive political principle it has now been eclipsed. The idea of increased state force, the idea of power, has displaced it. And it is this idea that everywhere fills the leading men mightily and decisively dominates them: we have met with this same drive, quite apart from Russia, where it never disappeared, in [Theodore] Roosevelt and [Joseph] Chamberlain, and recognize it in Bismarck and Kaiser Wilhelm II.94

German Liberalism as “English Trader-Spirit”

Ultimately, the hostility between England and Germany, which Richter had so bitterly fought, contributed greatly to the outbreak of the World War I—the hostility, it should be noted, not the economic competition, since England and America were also in that sense competitors (and, of course, also customers), a circumstance that did not result in contention. German hatred of England95 found its apotheosis, and its reductio ad absurdum, in a work by the scholar who was then perhaps the most famous economic historian in the world: Werner Sombart, a leader of the interventionist Verein für Sozialpolitik. If one wishes to understand what the German anti-liberalism of the earlier twentieth century meant, one must consult this book. It is titled, Traders and Heroes,96 and appeared in the war-year 1915. The underlying thesis is that there exist two spirits whose eternal strife comprises world history, the trader-spirit and the hero-spirit, and two peoples who today incarnate one or the other of these. Naturally, the English are the traders, the Germans the heroes. Sombart’s work, to the extent that it is not a hymn of praise to war and death, is often amusing, e.g., when the author asserts: “The foundation of everything English is certainly the unfathomable spiritual limitedness of this people”97; or when he devotes a chapter to English science without mentioning Isaac Newton98; or when he maintains that the English since the time of Shakespeare have produced no cultural value.99

Much more serious and characteristic for the time is Sombart’s seconding of Ferdinand Lassalle in dismissing the liberal ideal as merely that of “the nightwatchman state.”100 Many in the next two generations would echo Sombart’s judgment on German liberalism, when he described its golden age and decline:

But then there came another bleak time for Germany, when in the 1860s and 1870s the representatives of the so-called Manchester School quite shamelessly hawked imported English goods on the streets of Germany as German products. . . . And it is well-known how today this “Manchester theory” has been contemptuously shoved aside by theoreticians and practitioners in Germany as totally mistaken and useless.

The two sentences that conclude this passage, however, end in question marks:

So that perhaps we may say that in the conception of the state, it is the German spirit that in Germany itself has achieved sole sway? Or does the English trader-spirit still haunt some heads?101

As regards Richter, it would be pointless to deny that a certain air of “trader-spirit,” or, rather, of a middle-class mentality, always surrounded him. There is certainly some truth in Theodor Heuss’s accusation of a “monumental petty-bourgeois quality.”102 Richter knew no foreign languages, and the few times he travelled abroad it was to vacation in Switzerland. He seems to have had little interest in the affairs of other countries, even in the fortunes of the liberal movement there. Theodor Barth, spokesman for a Left Liberalism associated with the big banks and exporting merchant houses, jokingly replied to the question, what distinguished his own party from Richter’s: if a man can tell Mosel from Rhine wine, he was a member of Barth’s party, if not, then of Richter’s.103 But Richter’s “petty-bourgeois quality” was something that his followers in the German middle-classes, in the liberal professions and small business, particularly in the great cities and above all in Berlin, felt, understood, and responded to.104 A dwindling remnant as the years went by, they represented by and large a German version of William Graham Sumner’s “Forgotten Man.”105 Six years after Sumner’s classic description was published in the United States, the journalist Alexander Meyer wrote in Richter’s Freisinnige Zeitung that the liberals were

the party of the small man, who depends on himself and his own powers, who demands no gifts from the state, but only wants not to be hindered in improving his position to the best of his abilities and to strive to leave his children a better lot in life than came to him.106

A rare glimpse of such a German “forgotten man” is given in the moving portrayal by Bruno Walter of his father, a Berlin Jew,

accountant in a larger silk firm, for which he worked, in gradually rising positions and with a growing income, for over fifty years. He was a quiet man, with a strict sense of duty and total dependability, and outside of his profession he knew only his family . . . he voted liberal and venerated Rudolf von Virchow and Eugen Richter.107

Undeniably “petty-bourgeois” through and through, such men had no great love for Weltpolitik and invigorating wars, or for the overthrow of all existing social conditions in the name of a Marxist dream; and they stood by Richter to the end.108

“What Richter Can Still Mean for Us”

In 1931, the 25th anniversary of Richter’s death, the social-liberal historian Erich Eyck posed the question whether Eugen Richter could “still mean something for us.”109 After all that the Germans have gone through since Richter’s time, it is easier to ascertain where his significance lies. He was, as regards Germany, the great advocate of the liberal world-revolution that constitutes the meaning of modern history. Through four decades he fought, as politician and publicist, for what Werner Sombart spurned as the “English trader-spirit”: for peace; a decent life for all classes through the market economy and free trade; pluralism and the peaceable, rather than violent, clash of world-views and cultural values; citizenly self-respect, instead of servility; and the independence of the individual. As against all conservative reproaches, he was always a proud patriot, and could never understand why it was the Germans, of all people, who should not enjoy individual rights.

Florin Afthalion has remarked, in the case of Frédéric Bastiat:

How are we to explain that a man who fought for free trade a century before the majority of the industrialized nations made it their official doctrine, who condemned colonialism also a century before decolonization . . . who, above all, proclaimed an era of economic progress and the enrichment of all classes of society, should be forgotten, while the majority of his intellectual adversaries, prophets of stagnation and of pauperization, who were wrong, still have freedom of the city?110

The case of Eugen Richter is similar, and perhaps even more egregious. Certainly, in his own time Richter “failed.” But if this is proposed as the grounds for neglecting the most important of the political leaders of authentic liberalism in Germany, then the ready reply would be: which politician in modern German history before Adenauer and Erhard did not sooner or later fail? When all is said and done, Eugen Richter was a harbinger of the rule of law, free trade and the market economy, pluralism and peace, tendencies that, after the catastrophes promoted by the opposition camps, have brought in a rich harvest—that is to say, he was a harbinger of modernity. For what he was and what he represented—if one may say so: from the mere fact that this German “never trusted any government”111—the old Rhineland liberal deserves to be better treated by the historians and, by the Germans, not to be completely forgotten.

Ralph Raico is professor of history at the State University College at Buffalo, New York.

This paper is based on a lecture given at Professor Christian Watrin’s Wirtschaftspolitisches Seminar at the University of Cologne, June, 1988. A German version appeared in the Zeitschrift für Wirtschaftspolitik 38, no. 1 (1989).

The Review of Austrian Economics, Vol. 4, 1990, pp. 3–25

ISSN: 0889–3047

• 1Historical Statistics of the United States, part 1 (Washington, D.C.: 1975), series D-86 for unemployment rates and series F-32 for gross national product. Throughout this article, the standard data series for unemployment rates are used, with recognition that there has been a challenge to the validity of those data during the Great Depression years. See Michael R. Darby, “Three-and-a-Half Million U.S. Employees Have been Mislaid: Or An Explanation of Unemployment, 1934–1941,” Journal of Political Economy 84, 1976.
• 2A.C. Pigou, Industrial Fluctuations, 1st ed. (London: Macmillan, 1927), p. 176.
• 3A.C. Pigou, Theory of Unemployment (London: Macmillan, 1933), p. 252. Pigou makes his arguments in a variety of other places. For example, see his “Real and Money Wage Rates in Relation to Unemployment,” Economic Journal 47, 1937, and “Money Wages in Relation to Unemployment,” Economic Journal 48, 1938.
• 4It is perhaps something of an exaggeration to ascribe this position entirely to Pigou. A number of other economists espoused similar views. Recognizing that the list is incomplete, we cite a few, beginning with Jacob Viner, Balanced Deflation, Inflation, or more Depression (Minneapolis, Minn.: University of Minnesota Press, 1933), especially pp. 12–13. See also W.H. Beveridge, Causes and Cures of Unemployment (London: Longmans, Green and Co., 1931), p. 25, and Unemployment, A Problem of Industry (London: Longmans, Green and Co., 1930), chapter 16; Wilford I. King, The Causes of Economic Fluctuations (New York: Ronald Press Co., 1938), chapter 8; and Lionel Robbins, The Great Depression (New York: Macmillan, 1934).
• 5John A. Hobson, The Economics of Unemployment (New York: Macmillan, 1923), p. 84.
• 6W.T. Foster and W. Catchings, Profits (Boston: Houghton Mifflin, 1925) and Business Without a Buyer (Boston: Houghton Mifflin, 1927); and C.H. Douglas, Credit-Power and Democracy (London: C. Palmer, 1920) and Warning Democracy (London: C.M. Grieve, 1931). A more recent interpretation of the Great Depression with underconsumptionist overtones in John Kenneth Galbraith, The Great Crash, 1929 (Boston: Houghton Mifflin, 1976).
• 7Murray N. Rothbard, America’s Great Depression (Princeton, N.J.: Van Nostrand, 1963), p. 45.
• 8Henry Ford, The New York Times, November 22, 1929, p. 2.
• 9The New York Times, November 22, 1929, p. 1. It is interesting to note that Hoover’s inclinations toward underconsumptionism were recognized and, of course, approved, by trade unionists. Witness a statement by the AFL’s John P. Frey in 1929 relating to a public works scheme of Hoover’s. In effect, Frey argued that the president was in agreement with the AFL’s position that depressions were the result of underconsumption and low wages. See Joseph Dorfman, The Economic Mind in American Civilization (New York: Viking Press, 1959), vol. 4, pp. 349–50. See also Ronald Radosh, “The Development of the Corporate Ideology of American Labor Leaders, 1914–1933” (doctoral dissertation in history, University of Wisconsin, 1967).
• 10Rothbard, America’s Great Depression, chapter 8. Not to be ignored is the fact that ideas such as those that enamored Hoover were not as unorthodox among professional economists as sometimes claimed. See J. Ronnie Davis, The New Economists and the Old Economists (Ames, Iowa: Iowa State University Press, 1971). Davis presents an interesting array of statements by economists and other academics relating to the issue of the impact of wage reductions on the economy (pp. 94–99).
• 11John M. Keynes, The General Theory of Employment, Interest and Money (London: Macmillan, 1936).
• 12Abba P. Lerner, “Mr. Keynes’ ‘General Theory of Employment, Interest and Money,’” International Labor Review 34, 1936. See also W.B. Reddaway, “The General Theory of Employment, Interest and Money,” Economic Record 12, 1936. A systematic description of the thought of this time is contained in Lawrence R. Klein, The Keynesian Revolution (New York: Macmillan, 1947). For a taxonomic description of the various views of the aggregate demand schedule for labor, see Sidney Weintraub, “A Macroeconomic Approach to the Theory of Wages,” American Economic Review 46, 1956.
• 13Paul M. Sweezy, personal letter to John B. Shelley, dated February 11, 1977, cited in Dana C. Hewins and John B. Shelley, “Sweezy’s Kink: Macro Foundations of a Micro Theory,” Economic Inquiry 17, 1979.
• 14For a description of the various dimensions of the Keynesian critique of classical economics, see Alvin H. Hansen, A Guide to Keynes (New York: McGraw-Hill, 1953). More recent appraisals and restatements of the total thrust of Keynesianism are Abba P. Lerner, “From ‘The Treatise on Money’ to ‘The General Theory,’” Journal of Economic Literature 12, 1974; and Hyman P. Minsky, John Maynard Keynes (New York: Columbia University Press, 1975).
• 15Peter Temin, Did Monetary Forces Cause the Great Depression? (New York: Norton, 1976), p. 140. Temin also attempts to demonstrate that the Great Depression was brought on by an autonomous shift in the consumption function. That view has been challenged (successfully, we think) by Thomas Mayer, “Consumption in the Great Depression,” Journal of Political Economy 86, 1978.
• 16Keynes, The General Theory. In chapter 2, Keynes is very explicit. In reference to the principle that real wages and employment are systematically related, he says, “I am not disputing this vital fact which the classical economists have (rightly) asserted as indefeasible.”
• 17Ludwig von Mises, The Theory of Money and Credit (New Haven, Conn.: Yale University Press, 1953). Permission granted by Mrs. Margit von Mises. Quotes from 1981 Liberty Classics, Indianapolis, edition.
• 18Milton Friedman, “The Role of Monetary Policy,” American Economic Review 58, 1968.
• 19In particular, see Jerome Stein, Monetarist, Keynesian, and New Classical Economics (Cambridge, United Kingdom: B. Blackwell, 1982).
• 20The key assumptions are constant returns to scale and neutral disembodied technical progress.
• 21The underlying statistical models are moderately complex. They are described briefly in the statistical appendix. The logic and structure of the models are more fully developed in Lowell Gallaway and Richard Vedder, The “Natural” Rate of Unemployment, staff study, Subcommittee on Monetary and Fiscal Policy, Joint Economic Committee, Congress of the United States (Washington, D.C.: 1982).
• 22Federal Reserve Bulletin, various issues.
• 23Historical Statistics, series D-86.
• 24The productivity-adjusted real wage rate on a quarterly basis is calculated by dividing the manufacturing wage bill by the product of Federal Reserve Board (not the wage bill) and the index of average labor productivity (not total output) should be used. However, converting the wage bill and the index of industrial production to wage rate and productivity measures involves dividing both of them by the same quantity of labor (L). Since L appears in both the numerator and denominator of the expression for the adjusted real wage rate, it cancels out and can be ignored.
• 25As calculated from Historical Statistics, series D-688.
• 26Ibid,, series D-683 and D-688.
• 27Ibid., series D-724 and Paul A. David and Peter Solar, “A Bicentenary Contribution to the History of the Cost of Living in America” in Paul Uselding, ed., Research in Economic History, vol. 2 (Greenwich, Conn.: JAI Press, 1977), pp. 59–60.
• 28Broadus Mitchell, Depression Decade, vol. 9, The Economic History of the United States (New York: Rinehart, 1947), p. 84; and Arthur Schlesinger, Jr., The Age of Roosevelt: The Crisis of the Old Order, 1919–1933 (Boston: Houghton Mifflin, 1957), p. 249. Interestingly, though, some observers of the period disagree with this assessment. For example, Leo Wolman, Wages in Relation to Economic Recovery (Chicago: 1931) notes, “[I]t is indeed impossible to recall any past depression of similar intensity and duration in which the wages of prosperity were maintained as long as they have been during the depression of 1930–1931.” Similarly, Don Lescohier, “Working Conditions,” vol. 3, History of Labor in the United States, 1896–1932, John R. Commons and Associates, eds. (New York: Macmillan, 1935) states:
• 29Historic Statistics, series D-802, D-813, D-818, and D-824, respectively.
• 30Robbins, The Great Depression, p. 224.
• 31Geoffrey H. Moore, ed., Business Cycle Indicators, vol. 2, Basic Data on Cyclical Indicators (Princeton: Princeton University Press, 1961), p. 129.
• 32Benjamin M. Anderson, Economics and the Public Welfare (New York: Van Nostrand, 1949), p. 72.
• 33Historical Statistics, series D-839.
• 34Anderson, Economics, p. 220.
• 35Without the productivity adjustment, real wages in manufacturing (in 1923 prices) rose from 58.9 cents an hour in December 1929 to 62.5 cents an hour in December 1930. After that, they continued to rise to 66.3 cents an hour in January 1932. Wilford I. King, Causes of Fluctuations, pp. 182–83. See also Sol Shaviro, “Wages and Payroll in the Depression, 1929–1933” (unpublished M.A. essay, Columbia University, 1947).
• 36Milton Friedman and Anna J. Schwartz, A Monetary History of the United States, 1867–1960 (Princeton, N.J.: Princeton University Press, 1963).
• 37U.S. Bureau of the Census, National Income and Product Accounts of the United States, 1929–1976 (Washington, D.C., Department of Commerce, Bureau of Economic Analysis, 1981), p. 308.
• 38Moore, Business Cycle Indicators, p. 106.
• 39Harold Barger, Outlay and Income in the United States, 1921–1938 (New York: National Bureau of Economic Research, 1942), appendix B, table 28. A smaller profit decline is reported in a less comprehensive survey conducted by the Federal Reserve Bank of New York. See Irving Fisher, Booms and Depressions: Some First Principles (New York: Adelphi, 1932), p. 98.
• 40Robbins, The Great Depression, p. 205. The data were originally published in Commercial and Financial Chronicle.
• 41This is based on the Standard and Poor’s index, which fell 32.9 percent from September to November 1929. The second decline actually began in April 1930. A similar pattern is observed using the Dow-Jones index, which fell 39.7 percent from April to December 1930, compared to 37.0 percent from September to November 1929. The recovery in stock prices after November 1929 was robust; the April 1930 Dow-Jones index was the eleventh highest recorded in history, exceeded only in the first ten months of 1929. See Moore, Cyclical Indicators, pp. 108–9.
• 42Ben Bernanke, “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression,” American Economic Review, June 1983, p. 261.
• 43Ibid., p. 262.
• 44Federal debt declined about $700 million in both 1929 and 1930, but rose more than $600 million in 1931. See Historical Statistics, series Y-493.
• 45If one uses the consumer price index to measure price changes, real interest rates on bank loans in 1929 averaged about 6 percent, rising to about 7.7 percent in 1930, and to about 13 percent in 1931. This is based solely on current year price changes. A real interest rate model using weighted averages of past price changes would show a smaller rise. Interest rate data are based on Federal Reserve System reports. See Moore, Cyclical Indicators, p. 154.
• 46Historical Statistics, series F-54.
• 47Friedman and Schwartz, A Monetary History, table A-1, pp. 712–13.
• 48Ibid., table B-3, p. 803.
• 49Ibid. The deposit/currency ratio fell from 11.57 in October 1929, to 4.44 in March 1933, a decline of 7.13 points, with 3.87 points (54 percent) of that decline occurring between October 1930 and October 1931.
• 50Ibid., pp. 308–13.
• 51The price would fall to $750 only for a consol, a bond with no maturity. Short-term bonds would sell at a small discount from face value because the owner of the bond would receive the face value at maturity.
• 52Historic Statistics, series X-581.
• 53Capital accounts were $10,372 million. Ibid., series X-587.
• 54Most nominal interest rate series show little change in the early years of the Great Depression, and, indeed, many show some decline. This masks two phenomena, however. First, declining commodity prices during the period led to rising real interest rates over time. Second, most interest rate series report actual transactions, probably ignoring a growing number of customers who were crowded out because of sharply rising risk premiums. It is possible that interest rates demanded of some average potential borrower rose, even though actual interest rates reflected in transactions did not rise.
• 55Data from U.S. Bureau of Economic Analysis, Fixed Residential Business Capital in the United States, 1929–1973 (Washington, D.C.: Department of Commerce, 1974), reported in Historical Statistics. The exact data series employed is F-484 for producers’ equipment valued at 1958 prices. This series falls from a 1929 level of $74.1 billion to $59.2 billion in 1933. Simon Kuznets, Capital in the American Economy (Princeton, N.J.: Princeton University Press, 1961), table R-5, p. 492, concludes that net capital formation was almost zero in 1931, and decidedly negative in the years 1932–34.
• 56Use of the consumer price index yields lower-bound measures of the extent of wage disequilibrium. This index fell substantially less than did the wholesale price index during the Great Depression. Consumer prices (Historical Statistics, series E-135) fell 24.3 percent, while wholesale prices (Ibid., series E-23) declined by 30.8 percent.
• 57The codes in question were the blanket codes introduced pending the development of the specific industry codes. See David A. Shannon, Between the Wars: America, 1919–1941 (Boston: Houghton Mifflin, 1965), pp. 154–55. See also Michael M. Weinstein, “Some Macroeconomic Impacts of the National Industrial Recovery Act, 1933–1935,” chapter 14, pp. 262–81, in Karl Brunner, ed., The Great Depression Revisited (Boston: Kluwer/Nijhoff, 1981) and Recovery and Redistribution under the NIRA (Amsterdam: North-Holland Publication Company, 1980).
• 58Historical Statistics, series D-802.
• 59Section 7(a) of the National Industrial Recovery Act was added to allay the fears of labor leaders that industry would act cooperatively against labor. It required that every industry code developed under the act include provisions guaranteeing the right of employees to organize and bargain collectively and that employees could not be required as a condition of employment to either join a company union or refrain from joining a union of their choice.
• 60After the National Industrial Recovery Act was declared unconstitutional by the Supreme Court, the provisions of section 7(a) were reenacted in a more detailed fashion, including the establishment of an administrative machinery to police the law, in the National Labor Relations Act of 1935.
• 61Probably the best known study of this question is H. Gregg Lewis, Unionism and Relative Wages in the United States (Chicago: University of Chicago Press, 1963). Also worth noting are John Maher, “Union, Non-Union Wage Differentials,” American Economic Review 46, 1956; and Adrian W. Throop, “The Union-Non-Union Wage Differential and Cost-Push Inflation,” American Economic Review 58, 1968.
• 62The basic data employed in these calculations are taken from Lowell E. Gallaway, “Trade Unionism, Inflation, and Unemployment” in George Horwich, ed., Monetary Process and Policy: A Symposium (Homewood, Ill.: R.D. Irwin, 1967), pp. 60–66. At first blush, the indication of a significant change in what we call the union/nonunion wage differential appears to conflict with Lewis’s findings in Unionism and Relative Wages, which suggest a stable union/nonunion differential over time. However, we have defined our differential in terms of traditionally organized industries compared to traditionally unorganized ones. Actually, there are substantial numbers of nonunion members in the work force of what we have called the unionized industries. For example, in 1920, when trade union membership peaked at over five million, only about one-fourth of the work force in our unionized industries were union members. See Leo Wolman, Ebb and Flow in Trade Unionism (New York: National Bureau of Economic Research, 1936). They made up about 90 percent of union membership, though. By contrast, on the eve of World War II, when union membership had recovered to over ten million (compared to its 1933 low of less than three million), union workers were approaching accounting for one-half the work force in our unionized industries. In fact, what our wage differential measure attempts to capture is the impact of the changing volume of unionism on the interindustry wage structure and, ultimately, on the average wage rate. Actually, we feel that we may have underestimated the union impact by employing a relative wage differential measure rather than focusing on the absolute differential (in real terms) between the unionized and nonunionized areas. For a theoretical discussion of why the relative wage criterion may not be appropriate, see Gallaway, “Trade Unionism.” If we had used the absolute differential for purposes of this evaluation, the effect of increases in union membership on the interindustry wage structure would have been even more dramatic.
• 63The detailed statistical analysis is described in the statistical appendix to this article.
• 64This is done by estimating the impact of growth in union membership on wage levels and then translating the unionization-induced wage shifts into changes in unemployment.
• 65Total supplements are from Historical Statistics, series D-893. Average annual earnings from ibid., series D-722. See also Albert Rees, New Measures of Wage-Earner Compensation in Manufacturing, 1914–1957, occasional paper 75 (Princeton, N.J.: National Bureau of Economic Research, 1960).
• 66Detailed supplement data are from Historical Statistics, series D-907 and D-908. The percent increase in the total wage bill attributable to the increase in a particular supplement is calculated and the impact of such an increase on unemployment is estimated using the statistical relationships reported in the statistical appendix to this article.
• 67The strongest proponents of a monetary explanation for the recession of 1937–38 are Friedman and Schwartz, A Monetary History.
• 68There is an abundance of literature that suggests a fiscal policy explanation for the downturn in 1938. See E. Cary Brown, “Fiscal Policy in the ‘Thirties’: A Reappraisal,” American Economic Review 46, 1956; Alvin H. Hansen, Fiscal Policy and Business Cycles (New York: W.W. Norton, 1941); Arthur Smithies, “The American Economy in the Thirties,” American Economic Review 36, 1946; and Kenneth D. Roose, “The Role of Net Government Contribution to Income in the Recession and Revival of 1937–1938 ” Journal of Finance, 6, 1951. Roose’s views are also stated in his Economics of Recession and Revival (New Haven, Conn.: Yale University Press, 1954).
• 69Interestingly, Roose, Economics of Recession, also expresses views that are consistent with our findings. He comments, “Most important of all, however, was the reduced profitability of investment, beginning in the first quarter or 1937. This resulted from increases in costs, in which labor played a prominent part.” (pp. 238–39).
• 70This estimate is based on calculations made using the statistical model of unemployment cited earlier.
• 71It is interesting to note that the statistical model of unemployment that we present systematically underpredicts the level of unemployment during the period in which the growth in wage supplements is most pronounced, namely 1936–38. Since the supplements are not included in the wage measure used to predict unemployment, this may account for the underpredictions in these years.
• 72King, Causes of Fluctuations, pp. 80–81, noted this phenomenon rather early, remarking that, “all through the depression, those who were fortunate enough to have jobs were, on the average, earning more money per hour than they were in 1929.”
• 73The total dismissal of the importance of the money wage rate adjustment mechanism became complete during World War II. In Britain, for example, Sir William Beveridge, cited earlier as supporting the classical view of the world, swung full circle and embraced the aggregate demand notions, especially the idea that government spending could produce full employment. In his “The Government’s Employment Policy,” Economic Journal, June-September 1944, pp. 161–62 (a commentary on the government’s White Paper of May 26, 1944), he refers to a statement from Winston Churchill’s 1929 budget speech as chancellor of the exchequer, to wit: “It is the orthodox Treasury dogma steadfastly held that, whatever might be the political and social advantages, very little additional employment and no permanent additional employment can, in fact, and as a general rule, be created by State borrowing and State expenditure,” by commenting, “By the renewed experience of full employment the dogma has been consumed by the fires of war, and the White Paper may be regarded as a ceremonial scattering of its ashes.”
• 74The rate was 9.7 percent in 1927, while the median annual rate for the years 1921–29 was 11.05 percent. On unemployment statistics, see Department of Employment and Productivity, British Labour Statistics: Historical Abstract 1886–1968 (London: H.M. Stationery Off., 1971).
• 75Real output rose 2.75 percent a year from 1921 to 1929, and even 1.66 percent annually from the boom year of 1920 to relatively depressed 1930; by contrast, real growth per annum from 1900 to 1913 was only 1.65 percent. These calculations are derived from C.H. Feinstein, National Income, Expenditure and Output of the United Kingdom, 1855–1965 (Cambridge, U.K.: Cambridge, University Press, 1972).
• 76Daniel K. Benjamin and Levis A. Kolchin, “Searching for an Explanation of Unemployment in Interwar Britain,” Journal of Political Economy, June 1979.
• 77See Edwin Cannan, “The Problem of Unemployment,” Economic Journal, March 1930; Robbins, The Great Depression; Jacques Rueff, “Ces variations du chomage en Angleterre,” Revue politique et parliamentaire, December 10, 1925; William Beveridge, The Causes and Cures and Unemployment, A Problem. This list is by no means exhaustive. These persons and others recognized that not only did unemployment insurance payments raise the opportunity cost of working, but they inspired union militancy and, accordingly, produced higher money wage rates. Among the other writers, see, especially, A.C. Pigou, “Wage Policy and Unemployment,” Economic Journal, September 1927, and John R. Hicks, The Theory of Wages (London: Macmillan, 1932). A prominent politician who believed unemployment compensation raised unemployment was Winston Churchill. See his article, “The Dole,” Saturday Evening Post, March 29, 1930.
• 78Anderson, Economics. Like the authors in the previous footnote, Anderson argued that unemployment insurance payments raised wages.
• 79On consumption spending, see Feinstein, National Income; Richard Stone, et al., The Measurement of Consumers’ Expenditures and Behaviour in the United Kingdom, 1920-1938, two volumes (Cambridge, U.K.: Cambridge University Press, 1954). For statistics dealing with a variety of economic variables in this period, including consumption, see B.R. Mitchell, Abstract of British Historical Statistics (Cambridge, U.K.: Cambridge University Press, 1976).
• 80That is actually an understatement. Output in 1939 was more than 21 percent higher than in 1929, with the per annum growth rate of 1.94 percent being high by historical standards. Real gross national product fell only 6 percent from 1929 to the trough in 1932. See Feinstein, National Income.
• 81The 1937 British unemployment rate of 10.8 percent was actually slightly below the median rate of the 1920s. See Department of Employment and Productivity, British Labour Statistics. The U.S. unemployment rate of 14.3 percent in 1937 compares with a median rate for the 1920’s of 3.75 percent. See Historical Statistics, series D-86.
• 82A.W. Phillips, “The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861–1957,” Economica, N.S., vol. 25, 1958; Richard G. Lipsey, “The Relation between Unemployment and the Rate of Change in Money Wage Rates in the United Kingdom, 1862–1957: A Further Analysis,” Economica, N.S. vol. 27, 1960; and Paul A. Samuelson and Robert M. Solow, “Analytical Aspects of Anti-inflationary Policy,” American Economic Review 50, 1960.
• 83The corporate profit share of national income rose from 11.33 percent in 1961 to 13.98 percent in 1965. Historical Statistics, series F-163 and F-179.
• 84The choice of a one-year lag produces the best explanation for unemployment variations in the post-World War II period. The logic of some type of lag is appealing. Employers may well respond to increasing productivity-adjusted real wage rates by searching for alternatives other than the laying off of a labor force that is experienced in its tasks. Also, once it becomes obvious that labor force reductions are necessary, it is tempting to accomplish them through a process of attrition, by simply not replacing workers who quit, die, or retire. The concept of a lag is certainly consistent with the arguments presented in Walter Oi, “Labor as a Quasi-Fixed Factor,” Journal of Political Economy 70, 1962.
• 85Fortunately for the defenders of the neo-Keynesian paradigm, the inflation of the period could be explained away as a phenomenon associated with the movements of specific commodity prices, especially oil. However, these are movements in relative prices and not in the overall price level.
• 86Estimates reported in Gallaway and Vedder, “Natural” Rate, indicate that the equilibrium rate of unemployment was about 4.4 percent in the 1960s and 5.7 percent in the early 1970s, standing at 6.6 percent by the end of that decade.
• 87Some of the representative studies of this subject are the early work of Gene Chapin, “Unemployment Insurance, Job Search, and the Demand for Leisure,” Western Economic Journal 9, 1971; and, later, Martin Feldstein, “Unemployment Compensation: Adverse Incentives and Distributional Anomalies,” National Tax Journal 27, 1974.
• 88C.T. Brehm and T.R. Saving, “The Demand for General Assistance Payments,” American Economic Review, December 1964, pp. 1002–18; and Hirschel Kasper, “Welfare Payments and Work Incentives: Some Determinants of the Rates of General Assistance Payments,” Journal of Human Resources, 1968. See also Robert E. Hall, “Effects of the Experimental Negative Income Tax on Labor Supply” in Joseph A. Pechman and Michael Timpane, eds., Work Incentives and Income Guarantees: The New Jersey Negative Income Tax Experiment (Washington, D.C.: 1975); and Lowell E. Gallaway, “Negative Income Tax Rates and the Elimination of Poverty,” National Tax Journal, September 1966, pp. 298–307, for further evidence dealing with the question of work incentives.
• 89Benjamin and Kolchin, “Unemployment in Interwar Britain.”
• 90U.S. Employment and Training Administration.
• 91U.S. Social Security Administration.
• 92Total social welfare expenditure data are from the Social Security Administration. Personal income data are from the Department of Commerce.
• 93Joint Economic Committee of the Congress of the United States, Economic Indicators (Washington, D.C.: March 1983), p. 16.
• 94Ibid., p. 12.
• 95Alfred Marshall, Principles of Economics (London: Macmillan, 1920); Irving Fisher, Booms and Depressions; A.C. Pigou, Theory of Unemployment; Lionel Robbins, The Great Depression; Jacob Viner, Balanced Deflation; A.H. Hansen, Business Cycle Theories (Boston: 1927); and W.H. Beveridge, Unemployment, A Problem. For a thorough discussion of the thinking about business cycles prior to, during, and immediately after the Great Depression, see Gottfried von Haberler, Prosperity and Depression (Cambridge, Mass.: Harvard University Press, 1958).
• 96Not everyone has ignored these notions. In addition to von Mises, it should be noted that Friedrich Hayek, Unemployment and Monetary Policy (San Francisco: Cato Institute, 1979) and W.H. Hutt, The Keynesian Episode: A Reassessment (Indianapolis: Liberty Press, 1979) have continued to propound what we have called the von Misesian-classical view of macroeconomics. We especially call attention to Hutt’s views on the general subject of the underconsumptionist position, which are well summarized in his “Illustration of Keynesianism” taken from his Politically Impossible (London: Institute of Economic Affairs, 1971). His specific view on Hoover and wage reductions was related to the authors in private dinner conversation.
• 97John R. Hicks, “A Sceptical Follower,” The Economist, June 18, 1983, p. 19.
• 98The growth rates are calculated from the real gross national product statistics reported by the U.S. Department of Commerce, Bureau of Economic Analysis.
• 99The magnitude employed is the adjusted monetary base which consists of (1) reserve accounts of financial institutions at Federal Reserve Banks, (2) currency in circulation (currency held by the public and in the vaults of all depository institutions), and (3) an adjustment for reserve requirement rate changes. A detailed description of the simulation can be found in Gallaway and Vedder, “Natural” Rate.
• 100Economic Indicators, p. 16.
• 101The data sources are Historical Statistics, series D-683, D-688, and D-724, and David and Solar, ibid.
• 102The data source for the trade union membership variable is Historical Statistics, series D-948.
• 103Konstanze Wegner, Theodor Barth und die Freisinnige Vereinigung. Studien zur Geschichte des Linksliberalismus im wilhelminischen Deutschland (1893–1910), p. 100.
• 104Ibid., pp. 99–101.
• 105William Graham Sumner, “On the Case of a Certain Man Who is Never Thought Of” and “The Case of the Forgotten Man Further Considered” (1884), in idem., War and Other Essays, Albert Galloway Keller, ed. (New Haven, Conn.: Yale University Press, 1911), p. 247–68.
• 106Quoted in Müller-Plantenberg, Der Freisinn nach Bismarcks Sturz, p. 146.
• 107Bruno Walter, Thema und Variationen: Erinnerungen und Gedanken (Stockholm: Bermann-Fischer, 1947), pp. 16 and 21.
• 108Cf. Franz Mehring’s view, admittedly sardonic, “that [Richter] did not create the Freisinnige Partei in his own image, but that they chose him as their leader, because they saw in him their most fitting image.” Gesammelte Schriften, Thomas Höhle, Hans Kock, and Josef Schleifstein, eds., vol. 15, Politische Publizistik 1905 bis 1918 ([East] Berlin: Dietz, 1966), p. 165.
• 109Erich Eyck, “Eugen Richter,” in Auf Deutschlands Politischem Forum (Erlenbach-Zurich: Rentsch, 1963), p. 47.
• 110Florin Afthalion, “Introduction,” in Frédéric Bastiat, Oeuvres économiques (Paris: Presses Universitaires de France, 1983), p. 8.
• 111Müller-Plantenberg, Der Freisinn nach Bismarcks Sturz, p. 200.