Digitization seems to be on everyone’s lips nowadays, be it at the regulars’ table (or, as Americans might say, “down at the pub”), on late night talk shows, in university lecture halls, or in the the op-ed section of newspapers. For some, the current digital revolution portends the greatest upheaval in the history of mankind. In this camp is German and public intellectual Richard David Precht. In his new book, Jäger, Hirten, Kritiker: Eine Utopie für die digitale Gesellschaft (which loosely translates as Hunters, Shepherds, Critics: A Utopia for the Digital Society), Precht warns of the dramatic consequences of the coming digital dystopia.

Countering Precht is Swiss economic historian Tobias Straumann. Although he agrees that digitization will bring radical changes, he considers the industrial revolution to have been a much deeper turning point in history than the digital one will prove to be. Only with hindsight will we be able to know whether Precht or Straumann are correct, but what can be said with certainty is that the industrial revolution has transformed people’s work, society, and lives in fundamental ways. Just as industrialization was a prelude to the rise of capitalism, digitization may be the overture for what comes next.

However, a proper analysis of intellectual history reveals that the broader social and political consequences of 19th century industrialization were neither unambiguous nor obvious at the time. It was actually the early socialists who laid the theoretical foundation for understanding the implications of industrialization. To a certain extent — and in blatant contradiction to most contemporary socialist ideas — these socialist forerunners referred to mobile credit banks as an indispensable motor for the all-encompassing industrialization of economic and social structures. Only through a network of interlinked mobile credit banks — also called industrial or stock banks elsewhere — would it be possible to achieve a unified whole.

Then, according to the early socialist vision, this conglomerate of economy and industry would be managed and directed by a central hand for the benefit of all. The socialists hoped for a glorious industrial age in which the economic gains flowed to workers rather than to landed elites or factory bosses. In their eyes, the only force holding society from advancing in this way was a lack of general access to credit. This is why early socialists like Henri de Saint-Simon set their initial hopes for change on banking:

“Industrialists are organized by the establishment of the bank which connects all branches in industry and manages the political usage of their capital.”¹

It was the view of the likes of Saint-Simon that if as many people as possible were allowed access to credit, everyone would become an industrialist, society as a whole would advance tremendously, and it would usher in a glorious industrial age of abundance.

Although 19th-century industrialization is typically framed as a capitalistic endeavor, looking at the actual history of the economic transformation one cannot help suspecting that it was the opposite of capitalism. Of course, these attempts to classify what counts as capitalism can quickly devolve into subjective quibbles, but if it is stipulated that industrialization must be a purely capitalist project, then one must at least realize that industrial capitalism had considerable birth defects from the beginning, which would have negative consequences later on.

Switzerland provides an interesting historical case study. Here, too, the prevailing opinion is that the capitalist era in Switzerland began with industrialization. In this narrative, industrialization is inevitably linked to Alfred Escher, the founding father of modern Switzerland who is commonly described as a radical or classical liberal. Escher was born 200 years ago and is not as well-known outside of Switzerland, so it makes sense to look at his career in a little more in detail. The most comprehensive biography of Alfred Escher was written by historian Joseph Jung. He describes Escher as,

‘The most insightful and deserving statesman of Helvetia in recent times’, ‘one of the most brilliant sons,’ ‘most famous ‘men’ and most outstanding personalities’ of Switzerland, and ‘a monument to the history of our fatherland’.²

No other person has shaped modern Switzerland as profoundly Alfred Escher. Another contemporary Swiss historian, Markus Somm, wrote of him:

For a good twenty years, between 1845 and 1869, nothing was done or omitted in Switzerland without Escher having spoken an important, decisive word.³

But how did Escher’s gain such vast influence? Escher, a native of Zurich who studied law at the University of Zurich, was politicized at the very moment when power struggles in the Old Swiss Confederation between the cantons were intensifying. The divides between the cantons—which are roughly comparable to states in the US framework although they are smaller in size—did not fall precisely along either religious or geographical lines, but split apart families and communities and ultimately led to the Sonderbund War. According to the historian Joseph Jung:

The core of the problem lay in the contrast between conservatives and radical (classical) liberals and ultimately revolved around the question of how the Confederation should be structured in political as well as infrastructural terms: decentralized or centralized. In both camps, there were reformed and Catholic people.⁴

Alfred Escher was drawn into this conflict; because of his ideological stance, he took the side of the “radical-liberals” and finally became one of their most influential figures:

The radical-liberal party, which Escher joined in Zurich, had completed the political turnaround in 1844/45 and had returned to the levers of power. And within this party, Escher had moved up into the innermost leadership circle.)⁵

The term “radical-liberal” has little to do with our current understanding of this term. Today, a “radical” or “classical” liberal is more or less synonymous with calling a person a “libertarian,” someone who advocates for as limited a central State as possible. However, in Escher’s time, the “radical liberals” were libertarian in some sense, but they were also promoting the centralization of the State. Of course, the scope and size of the central State promoted by the “radical liberals” seems small compared to the dimensions of the State today, but radical liberals were the 19^th century Swiss faction that favored big government. As Jung writes,

It was Alfred Escher’s central theme that did not let go of him during his entire political activity: the relationship between the centralized and the decentralized design of Switzerland. For him, it was undisputed that the power of the many cantons would have to be dismantled in favor of a greater unity of the country.⁶

Until the founding of the federal state in 1848, Switzerland was a loose confederation of states. The decentralized spirit of the Old Confederation continued even after the creation of the federal government. Those who remembered the old system were known as Confederates. Their political opponents, the “radical liberals” around Escher, quickly realized that this diversity, which empowered the cantons, would hinder their goal of unifying Switzerland under one federal government to ultimately push the economic development of the country as a whole:

In particular, the structural nature of the Confederation with its various units of measurement, currencies, and coins, and even more so with its cantonal customs units, stood in the way of the development of the railways (large-scale industry and economy).⁷

Of course, Escher’s views did not come out of the blue. There must have been a reason why Alfred Escher and his “radical-liberal” comrades came to the conclusion that they should make the non-centralized confederation of states into a much more centrally organized federal State. It is likely that Escher’s position was shaped during his time traveling in France, which had taken on a pioneering role in the large-scale, central orchestration of industry and commerce by mobile credit banks in Europe:

In the summer of 1843, Alfred Escher returned to Zurich from a six-month stay in France. In Paris, he and Johannes Honegger had set themselves the ambitious task of transforming the Swiss Confederation politically and structurally. In their opinion, the rusty and rotten structure was to become a modern Switzerland. On his return to Zurich, Alfred Escher resolutely set about implementing these plans.⁸

Dazzled by the French system, Escher came to see the Old Confederation of states as a reactionary and outdated entity. For Alfred Escher, Switzerland was at a crossroads: either it would seek connection to the international railway network via national railway efforts, or Switzerland would be left an isolated, backward nation. From Escher’s point of view, without transport connections and government promotion of industry, the Swiss economy would stagnate, and its rate of scientific innovation would fall behind that of other European nations.

In view of the developments throughout Europe at the time, Escher’s logic is coherent and comprehensible. All over the Continent, emerging nation-states pushed for comprehensive industrialization. In order to keep pace, it seemed necessary for Switzerland to follow suit. The situation seems to have been quite like that confronting Switzerland today, although while Switzerland was under economic pressure at the time of Escher, now it is political pressure that Switzerland is facing. Some argue that Switzerland can only have a future if it joins the EU politically. Others oppose this and consider such an approach to be counterproductive in the long term, which is why they insist on maximizing Switzerland’s independence from the European Union.

The upheaval in the 19th century must be viewed against a similar backdrop. By opting for the national and large-scale industrial route — with Escher and the “radical liberals” playing a key role — Switzerland, like the rest of Europe, embarked on the Faustian “experiment” of artificially expanding fiat currency which has brought recessions and other economic crises time and again ever since. But it was exactly because Switzerland was one of the poorest countries at the time that the decision to go down this road was taken. According to the general view, that basic level of poverty made it logical for Switzerland to try and free itself from economic dependency through centralized industrialization.

But how “poor” was Switzerland really? The argument above leaves a poor aftertaste after reading what  Swiss social scientist Beat Kappeler wrote about early modern Switzerland. He states, for example, that Switzerland was by no means as poor as it is often portrayed in history books today:

Although the representatives of the three original cantons Uri, Schwyz, and Unterwalden swore their allegiance to the Confederation at the beginning of 1291, they were not peasants, but big bourgeois and aristocrats from the countryside. Already in 1332, the city of Lucerne joined, 1351 Zurich, 1352 Zug, 1353 Bern — all of them were already cities! Until 1513 the cities of Fribourg, Solothurn, Basel, Schaffhausen and the small countries of Glarus and Appenzell followed. This was not a farmers’ federation, as the farmers’ turmoil of the 1930s led us to believe. […] And what were the three original cantons and other so-called rural areas doing? […] They made cash with lines, transports, ships, taverns, horse changes. They bought the missing grain from abroad. European trade flows crossed Switzerland. From the Black Sea goods from the transit trade sailed to Ulm on the Danube, were reloaded on carts to Schaffhausen (Switzerland), there again on the Rhine to Rotterdam. Schaffhausen had been on this 3000-kilometer long trade route since the late Stone Age, earning money with reloading, transports, and fees. […] And Angus Maddison proves in an OECD study that since 1500 Switzerland has been earning a higher per capita income than the French or the Germans. A poor farming country? Secret upon secret!⁹

Kappeler contradicts the conventional wisdom about Swiss economic backwardness. Of course, Kappeler is just one source and the early modern economy of Switzerland is a complicated story, but suffice it to say that depictions of 19th century Switzerland as impoverished and backwards were exaggerations. Thus, the proposition that large-scale industrialization of Switzerland through national mobile credit banks rests on a questionable set of historical assumptions. With the benefit of hindsight, Alfred Escher’s view seems reasonable as Switzerland did follow Europe in going through mobile credit-fueled industrialization, but it would be a mistake to say that just because it happened that way, that it must have happened that way. Switzerland could have abandoned Escher’s strategy and may still have developed successfully  even  without the mobile credit banks. Warren Blackman hints at this in his book Swiss Banking in an International Context¹⁰:

The Saint Simon ‘engines of credit’, or industrial banks, were not accepted within Switzerland by the Swiss to the same degree as in France, for the very good reason that banks were already providing all the credit which was required by the Swiss economy at the time. When James Fazy founded the Banque Generale Suisse de Crédit Foncier and Mobilier in 1853 (a Saint Simon type bank modelled after the French Crédit Mobilier), conservative banking opinion reacted negatively. In fact, the Balser Nachrichten, the important newspaper of the day, noted that not only were credit requirements being met by existing banks but that the function of the banking system was only to act as mediator between savers and investors – the ‘intermediation function’ – not as a credit expansion device.

These remarks are not intended to romanticize the period before industrialization and the arrival of mobile credit banks. The quotes merely give a better understanding of the current expansion of credit money and its far-reaching consequences due to the market distorting effects. What were the causes and sources of this expansion in credit that continued through the 19th century? And here we circle back to Alfred Escher. It is particularly astonishing is that a “radical liberal” – which would today might be classified as a statist par excellence – made it possible for a Saint-Simonistic view (which was, again, a variant of early socialism) to break through in Switzerland although the changes are generally presented as a capitalist achievement:

Finally, Crédit Mobilier, whose roots lie in France, provided the most important model for the establishment of large banks in Switzerland.¹¹

Alfred Escher favored the model of the Crédit Mobilier. He recognized its unbelievable potential to promote industry on a large scale through centralized control. He may also have noticed that the intellectual inspiration for this “financing tool” came from a socialist pen. As a pragmatic politician, however, he would not have been overly worried about the source of the ideas. It is even quite possible that Alfred Escher saw no contradiction between his “radical-liberal” convictions and Saint Simon’s early socialist ideas. In the final calculus, the development of Switzerland as a modern nation simply meant more than adhering to any particular set of political doctrines, whether socialist or something else:

Crédit Mobilier prevailed as a model, and within a good decade, six important banks were formed in Switzerland — some with German participation — along the lines of Crédit Mobilier

While the phrase “Credit Mobilier” may be unfamiliar to modern ears, it was one of the most important financial institutions of the world during the mid-19th century. In today’s perspective it is very similar to an investment bank. The brain child of early socialists, the “Credit Mobilier” was regarded as a vital part in developing and industry – even if this industry was built on credit money expansion.

So if the predecessor to modern investment banks was concocted by early socialist thinkers, doesn’t this draw the standard narrative of “investment banks as the epitome of capitalism” into question? After all, it might not be utterly far-fetched to see Alfred Escher, generally regarded as the father of Swiss financial and industrial capitalism, as playing an important role in advancing socialist ideas. This isn’t an attempt to put Escher in a definitive political and ideological camp, rather it emphasizes the ways his policies and convictions overlapped with the ideological project of early socialists. Whether or not he privately possessed socialist beliefs is beyond the point; what mattered for the development of Switzerland is that he ultimately promoted socialist ideas — knowingly or unknowingly. The great friend of Karl Marx, Friedrich Engels, very aptly described this tendency among radical liberals of the time with a degree of satisfaction:

The gentlemen (liberals) really believe that they work for themselves. They are limited enough to believe that their victory will give the world its definitive shape. And yet nothing is more obvious than that they are paving the way for us, the Democrats and communists […], just keep on bravely fighting the fight, you gracious masters of capital. We need you for the time being. You have to get rid of the remains of the Middle Ages and the absolute monarchy, you have to destroy patriarchalism, you have to centralize, you have to transform all more or less dispossessed classes into real proletarians, into recruits for us, you have to supply us with your factories and trade connections, the basis of the material means, which the proletariat needs for its liberation. But do not forget that the executioner is at the door.¹²

At the same time, this apparent discrepancy between Escher’s ideological label, if you will, and his work shows how hollow these discussions of identity can be. Ideologies are only superficially important to many people. In their actions, people are ultimately guided less by ideological principles than by practical opportunity. This does not mean that ideas do not shape people’s thinking and form an important part of the world — they most certainly do. As Swiss psychiatrist Carl Gustav Jung is believed to have said: “We as humans are not the ones having ideas, it’s the ideas that have us humans.”

But what shapes the world around us is human action motivated by a jumble of different ideological influences. The same is true of today’s financial and economic world, which contains elements of both capitalism and socialism. Whether capitalist, socialist, or both at the same time, ideological classification is ultimately a less useful endeavor than identifying the effects of those ideas on the world. In this case, that means analyzing the expansion of credit money soberly and without strict adherence to ideological norms.

It is worth mentioning that in Escher’s day, the mobile credit banks of the Crédit Mobilier type relied on the issue of banknotes and financial instruments then known as “bankers’ acceptances.” Today, the latter is hardly known, but they played a considerable role in the expansion of credit money in the 19th century. The German economist Heinrich Rittershausen confirms this:

The circulation of bank acceptances (bills), “says the excellent bank director and practitioner Käferlein,” had taken on enormous proportions with us. As far as large, prosperous companies were involved, such loans were often the precursors of issues. ¹³

In Switzerland, too, the bank acceptance blossoming just at this moment in time, as Sigmund Levi wrote in his dissertation on major Swiss stock banks ¹⁴:

Of even greater importance to the Swiss industry than exchange transactions was the big banks’ bank acceptance business. […] Similar to the bill portfolio, the strong increase in bank acceptances during the years 1863 to 1876 is noticeable. During this period, bank acceptances gained great importance in overseas traffic.

The bank acceptance was a kind of bank bill issued by the bank to the company that was to be financed. This company could then use the bank acceptance as a bill of exchange to pay suppliers and customers. In a sense, it was an imitation of a real bill, but only a poor one. A bank does not produce consumer goods and is, therefore, excluded from issuing commercial bills. A real bill was only considered reasonable when there was a producer standing ready to deliver goods to clear the bill.

Banks would create an asset for anticipated coverage, issuing shares in the respective pre-financed company. But, as is obvious, anticipation of coverage is not coverage in the true sense of the word. Given that the future is unknown and the coverage on settlement day uncertain, it is a tightrope act that may or may not work out. Nevertheless, banks managed to get bank acceptances into circulation. (After all, they stimulate economic expansion!) But this “growth” was provided for by assets that were not entirely covered by already produced and saved goods; it was credit money expansion at its finest. Through these bank acceptances, banks were able to expand their balance sheet without possessing equivalent value.

So even back then, because of instruments such as bank acceptances, money was more and more a form of credit money while less and less based on real savings. Like fiat currency, bank acceptances relied on the full faith and credit of the institution, albeit in this case that of the banks rather than that of the government.

As a result of credit money expansion tools such as bank acceptances systematic inequalities were intensified already back then. Because of something called the “Cantillon Effect,” people in proximity to the source of credit money expansion are better of than people farther away. Money is not neutral, but every change in the money supply also changes the structure of an economy. Newly created money is distributed neither evenly nor simultaneously among the population. This means that some investors and consumers benefit from early access to newly created credit money while others suffer. It’s hardly surprising that various forms of socialism emerged as a counter-reaction within Germany and broader Europe.

Today, our society is feeling the burn from excessive expansion in credit money, same as happened to the industrial banks established by entrepreneurs like Escher in the 19^th century. Because of credit money expansion, billions or even trillions in unbacked debt securities are floating around the global financial system. These are issued in the form of securities, which creates an incentive to keep as large an amount as possible permanently outstanding. Paying down debt in today’s system means shrinking balance sheets, which means falling asset prices. Similar to bank acceptances, something is issued as a security, the coverage of which is not guaranteed by goods already created or capital already saved. Rather, securities are put into circulation in anticipation of goods to be produced and capital to be accumulated. Financial institutions can thus extend their balance sheets without having to provide real value in return. Thus, there is always more “money” available than there are real assets. This inevitably leads to distortion after distortion. The magnitude of this was about to be revealed when the financial crisis of 2008 hit, but because central banks around the world intervened, the fiasco didn’t fully manifest. But the question remains: Did central banks really sooth the pain by providing more of the same drug that caused the problems in the first place?

Today, these far-reaching distortions of credit expansion, which not only affect the economy but also the environment and society, are generally ignored. Because of that oversight, the political debates over the flaws in the global financial economy go round and round in circles without addressing the underlying flaws in the system. Meanwhile, public frustration with the inability of the political class to fix the economy grows. That said, deriving a normative judgment of these kinds of monetary phenomena is not as trivial as one might think. The expansion of credit money is, of course, incredibly stimulating for the economy and has created enormous prosperity — or, at least, the perception or even the illusion of prosperity on paper.

Yet the world in which we live is deeply paradoxical and saturated with dilemmas that cannot be perfectly resolved. The very fact that the structures of the world today are shaped by this debt-financed expansion of credit money is due to a paradoxical event. In Europe, decentralism and tax competition, which are generally regarded as instruments restricting public financing, have helped the latter to achieve a breakthrough. The pressures of decentralization and tax competition have driven states to optimize returns. The result: the innovation of credit money expansion in European public finance. One can argue that it has been this competition that has driven European countries into adopting the “fine art” of credit money expansion. On the other hand, it may be a Faustian bargain, paradox heaped upon paradox.

In conclusion, the expansion of credit money, with all its manifold distortions and encumbering consequences for society at large, may be the most terrible as well as the most fruitful catastrophe of the modern financial era. As the poet and polymath Johann Wolfgang von Goethe recognized in his Maximen und Reflexionen¹⁵:

As little as the steam engines can now be stifled, as little is it possible when it comes to morality: the liveliness of trade, the noise of paper money, the swelling of debts to pay off debts, all these are the tremendous elements on which a young man is currently founded. (Johann Wolfgang von Goethe)