Armitage-Smith on the Profit Deflation of the 1873–1896 Era

From George Armitage-Smith’s book The Free-Trade Movement and its Results (1898), in which he discusses profit deflation in the context of the new calls for protectionism in Britain in the late 19th century:

“The Protectionist reaction has received some countenance from a very different quarter. If agricultural profits have fallen, so also have business profits (both industrial and commercial) declined during the last quarter of a century, and among the classes dependent upon this source of income much discontent has arisen. This finds ready publicity with the capitalist class. Without very profound investigation of the causes of the decline in profits, some of the sufferers fall in with the suggestion offered on behalf of agriculture, that Protection may provide a remedy by stimulating home industry.

Various circumstances have contributed to the decline in profits. If, as has been maintained, the chief cause be an alteration in the standard of value. Protection can provide no remedy. Two other factors, however, enter unmistakably into the explanation of low profits: (i) the great increase in the supply of capital which has kept pace with the prosperity of the country, and which, being more rapid in its growth than the demand, has forced down the rate of interest; and (2) the sharper competition of foreign countries in the markets formerly held by British produce, which has sprung up of late years.

Formerly capital was saved only by the rich landed classes from rents, and by the merchant traders. The industrial revolution brought in new wealthy classes, the manufacturer and dealer, to whom the term capitalist came to be applied. These made fortunes rapidly, and accumulated wealth. Time has wrought great changes in this field also. The joint-stock system, banking, and all the machinery of modern investment stimulated saving among the professional and middle classes, and opened up new sources of income. As education and prosperity extended, capital was augmented from the thrifty shopkeeper and artisan class; the openings for fresh investments were made easily available to all classes by new developments of the loaning and company system, so that the term ‘capitalist’ is no longer capable of restriction to any particular class. The joint-stock system is tending in some industries to drive out the private employer, and capital is brought into the reservoirs of trade from tiny rivulets of saving over the whole field of industry. Two events have followed, which are specially relevant to the present matter. Although the field of loaning has been enlarged so as to cover the whole industrial world, capital has increased so much more rapidly than fresh openings for its investment that the rate of interest has declined; and owing to the facility with which it can be borrowed the competition of employers of capital has been greatly intensified by an accession to the class of controllers of industry, of men who live, not on their own capital, but by the skilful employment of borrowed capital. Both facts have tended to depress profits.

Another not less potent influence in the fall of profits is the increased knowledge and power of the working classes, who now, with better capacity for bargaining and strength gained through their trade-unions, succeed in obtaining a larger share of the product than formerly, while legislation on behalf of labour tends to throw greater expense upon the employer. Meanwhile keener competition among employers hands over, in reduced prices, an increasing portion of the commodity to the consumers of their products, and tends to keep down profits by ‘cutting rates’. On all sides circumstances seem to have been combining to reduce ordinary profits; fortunes are rarely made now with the rapidity of bygone times; men have to remain longer in business, and be content to earn a living instead of making a fortune. While the general standard of comfort has advanced and prosperity has been more widely diffused, capital has suffered a reduction in value. The so-called depression of trade in recent years would seem to be more correctly described as a fall in the value of investments and capital employed in industry; it is a genuine depression as regards capital and profits, but wages on the whole have advanced, and goods have been cheapened. From business men complaints of dulness in trade have been frequent. The real fact is, that trade has been quieter but steadier than formerly; while there have been no periods of violent excitement and huge profits, commercial crises, once frequent and very acute, have been fewer and less disastrous in their effects during the past twenty-five years, and the interference with industry from these causes has been diminished. Profits, however, have steadily declined, and among the numerous causes to which this has been attributed, our free-trading system has, without any reason, been included. If profits were determined by Free-trade, the fall should have commenced from its adoption, but the contrary was the case; profits rose and were maintained for thirty years after 1846. The decline has taken place during the last twenty years, and must therefore be accounted for by causes which have made themselves felt in that period.

The other factor contributing to the fall of profits is the competition of other countries, which has lately become so keen and intense. On this account some persons favour protective proposals as a species of retaliation or defence. Our rivals have gained a firmer footing in neutral markets, and their rivalry has reduced prices. Time was when Great Britain had sole command of many markets, she was in the van of mechanical invention, and early succeeded in spreading the products of her industries over the globe; but she could not hope to retain this monopoly. There is no ‘corner’ in scientific knowledge or industrial skill; other nations are rapidly developing their powers and extending their industries, and their commercial activity is increasing; their competition is inevitable, and has hereafter to be recognized and reckoned with. Its tendency is, however, to lower profits. This fact has naturally excited some concern; it is not the sole, nor yet the chief, cause of the fall; profits, as we have seen, have fallen from causes at home which are independent of foreign competition. But it is the commonest of errors to mistake a part of the cause for the whole; and since in this case self-interest seems opposed to foreign interests, undue emphasis is placed upon this factor. Many persons dependent upon interest on capital have suffered from reduced incomes without understanding the economic grounds for the reduction; such persons are naturally attracted by any proposal which promises a remedy; they cannot demonstrate the effects of that exclusion of foreign goods from which they are told to anticipate a revival of vigorous trade and large profits, but join in the demand for Protection, in the vague hope that it may resuscitate their business profits and restore the prosperity of a past period. There is, however, no basis for any such expectation by the method of trade regulation.” (Armitage-Smith 1898: 196–199).

This was written in 1898, a few years after the deflation ended in 1896, but still gives a fascinating insight into how contemporaries saw the “profit deflation” of 1880s and 1890s.

BIBLIOGRAPHY
Armitage-Smith, G. 1898. The Free-Trade Movement and its Results. Blackie & Son, London.