Class _ru:2_L!lL .5" Goipght'N?^. COFntlGHT DEPOSIT. INTRODUCTION TO ECONOMIC PROBLEMS BY JAMES DYSART MAGEE, Ph.D. ASSOCIATE PROFESSOR OF ECONOMICS NEW YORK UNIVERSXry CHARLES SCRIBNER'S SONS NEW YORK CHICAGO BOSTON CJ^I J 2- ?--^ \^ Copyright, 1922, by CHARLES SCRIBNER'S SONS A PRINTED AT THE SCRIBNER PRESS NEW YORK, U. S. A. MAR I0rd22 0)C!.A659102 PREFACE This book was written to provide a text for the second semester's work in Introductory Economics. This work is designed to follow a study of the elementary principles of Economics, which is usually given during the first semes- ter of a year's course in Economics. It is designed par- ticularly to follow Turner's Introduction to Economics. The need has arisen for a book which treats economic problems from two points of view: (i) to illustrate and en- force the economic principles studied in the first course; (2) to provide up-to-date facts and discussions of the eco- nomic problems concerning which the student should de- velop opinions. The war together with recent legislation have made it necessary to rewrite much of the material on economic problems. After each chapter, exercises are provided. Some of the questions are intended to test the care with which the stu- dents have read the text. Others of the questions are de- signed to be the basis of discussion. Still others of the questions are meant to suggest the wider aspects of the problems. It has been my aim to present the common opinion of economists rather than to strive for originality. My obhgations to others are great. First, I owe much to my teachers: J. L. Laughlin, Thorstein Veblen, H. J. Davenport, R. F. Hoxie, L. C. Marshall, J. A. Field, C. W. Wright, A. C. Whitaker, A. S. Johnson, and John Cum- mings. Second, much is due to those whose text-books I iv Prejojce have used: R. T. Ely, A. S. Johnson, Alfred Marshall, F. W. Taussig, 11. R. Seagcr, W. II. Hamilton, and F. A. Fetter. Third, my colleagues, Willard Fisher, R. L. McClung, A. L. Faubel, and lOugone Greidcr, have helped me with jiarticular chapters. I'^inally, Dean J. R. Turner has given at all stages most heli)ful suggestions concern- ing the general plan and the methods of presentations of the separate problems. CONTENTS CHAPTER I PAGE The Study of Economic Problems i I. What Arc Economic Problems? 2. The Relation of Eco- nomic Problems to Business Prol)lems. 3. Reasons for the Study. 4. The Truth vs. Propaganda. 5. The Difficulties of the Econ- omist. 6. The Joys of the Economist. 7. The War and Eco- nomic Problems. 8. Attitude toward Conclusions. 9. Exer- cises. CHAPTER II Productive Capacity 8 I. The Factors in Productive Capacity. 2. Mining. 3. Agriculture. 4. Lumber. 5. Manufactures. 6. Transporta- tion. 7. Business Management, 8. The ItlTcct of the War on Productive Capacity. 9. Exercises. CHAPTER III Marketing 20 I. The Problem of Marketing. 2. The Functions of the Middleman. 3. Salesmanship and Advertising. 4. Methods of Marketing Farm Products, 5. The Chicago Board of Trade, 6. Speculation and Hedging. 7. The Marketing of Securities. 8. The New York Stock Exchange. 9. Speculation in Stocks. ID. Retail Dealers in Groceries. 11. Other Types of Retailers, 12, Types of Wholesalers. 13. Wholesale Consumption. 14. Organization for Marketing in Foreign Countries. 15. Exer- cises, CHAPTER IV Cycles in Trade and Industry 58 I. The Course of Cycles. 2. The Periodicity in Business. 3. Mitchell's Theory of Business Cycles. 4. Rising Prosperity, 5. Development of Stresses. 6. Crisis and Panic. 7. Depres- sion. 8. Mitigating the Crises. 9. Exercises, vi Contents CHAPTER V PAGE The Operation of the Federal Reserve System . . 72 I. The Weekly Statement. 2. Cash Items — Operation of the Gold Settlement Fund. 3. Bill Holdings — Trade Acceptances. 4. United States Bonds and Certificates. 5. The Banking- House. 6. The Collection System. 7. The Capital Liabilities. 8. Deposits — Services for the Government — Mobilization of Re- serves. 9. Notes of the Banks. 10. Other Liabilities — Earn- ings. II. The Reserve Ratios. 12. The Discount Policy of the Federal Reserve Board. 13. The Aid to Foreign Trade. 14. Summary of Benefits of the System. 15. Exercises. CHAPTER VI Socialism 94 I. The Problems of the Distribution of Wealth. 2. Utopian Socialism. 3. The Theoretical Basis of Socialism. 4. Socialist Criticism of the Present Order. 5. Consideration of the Criti- cism. 6. Socialist Proposals. 7. The Socialist Party. 8. Guild Socialism. 9. Exercises. CHAPTER VII Labor Organizations 107 I. The Wage Bargain. 2. The Aims of Trade-Unions. 3. Types of Unions and Federations. 4. Collective Bargaining. 5. The Strike. 6. The Boycott, the Union Label, and Other Activities. 7. The Open and the Closed Shop. 8. Trade-Union Leadership. 9. Employers' Associations. 10. Arbitration and Conciliation. 11. The Kansas Industrial Relations Court. 12. Organized Labor and the War. 13. Exercises. CHAPTER VIII Legal Regulation of Conditions of Employment . 129 I. The Reasons for Regulation. 2. Sanitation and Safety. 3. Regulation of the Labor of Children. 4. Regulation of the Labor of Women. 5. Minimum Wage for Women and Children. 6. Regulation of the Labor of Men. 7. Exercises. CHAPTER IX Life and Property Insurance 139 I. The Function of Insurance. 2. The Insurable Risk. 3. The Moral Hazard. 4. Fire Insurance. 5. Other Property In- surance. 6. Life Insurance. 7. Exercises. Contents vii CHAPTER X PAGE Social Insurance . . . . ' 152 I. The Need for Social Insurance. 2. Responsibility for Accidents Under the Common Law. 3. Employers' Liabil- ity Laws. 4. Workmen's Compensation Laws. 5. The New York Compensation Law and Other Laws. 6. Health Insur- ance. 7. Old-Age and Invalidity Insurance. 8. Unemploy- ment Insurance. 9. Exercises. CHAPTER XI Transportation 172 I. The Place of Transportation in Economic Organization. 2. Stages of Development of Internal Transportation in the United States. 3. The Development of the Technic of Railroad Transportation. 4. The Development of the Railroad Net in the United States. 5. Railroad Competition. 6. Railroad Rate Theories. 7. Classification of Freight. 8. Railroad Freight Tariffs. 9. Passenger Service and Rates. 10. Present Inland Water Transportation. 11. Early Merchant Marine and the Reasons for Decay. 12. Coastwise Shipping. 13. The War and Shipping. 14. The Panama Canal. 15. Exercises. CHAPTER XII Government Regulation of Railroads 198 I. The Demand for Regulation. 2. The Scope of the Inter- state Commerce Act. 3. The Powers of the Interstate Com- merce Commission. 4. Procedure. 5. The Regulation of Rates. 6. The Long and Short Haul Clause. 7. The Commodi- ties Clause. 8. The Application of the Anti-Trust Law to Rail- roads. 9. Federal and State Regulation of Interstate Com- merce. ID. State Railroad Commissions and Regulations. 11. The Railroads and the War. 12. The Esch-Cummins Law. 13. Railroad Valuation. 14. Exercises. CHAPTER XIII Unfair Competition 230 I. What Is Competition? 2. What Is Unfair Competition? 3. The Federal Trade Commission and Unfair Competition. 4. (a) Deceiving the Consumer. 5. (b) Coercing Middlemen. 6. (c) Injuring Competitors. 7. (d) Misuse of Government Protection and Public Utilities. 8. Exercises. viii Contents CHAPTER XIV PAGE The Trust Problem 238 I. What Is a Trust? 2. Causes for the Growth of Trusts. 3. Minor Causes for the Growth of Trusts. 4. The Common Law About Combinations. 5. Forms of Combination. 6. Pools. 7. The Trust in the Legal Sense. 8. The Holding Company, 9. The Merger or Amalgamation. 10. The American Tobacco Company. 11. Exercises. CHAPTER XV The Control of Trusts 250 I. The First Attitude of the Public. 2. The Evils of the Trusts. 3. State Legislation. 4. The Difficulties of State Regu- lation. 5. The Sherman Anti-Trust Law. 6. Early Effect of the Sherman Law. 7. The Later Decisions Under the Sherman Law. 8. The Seven Sisters Laws of New Jersey. 9. The Fed- eral Trade Commission Act. 10. The Clayton Act. 11. The Federal Trade Commission. 12. Difficulties in Regulating Trusts, 13. Exercises. CHAPTER XVI Foreign Trade and Foreign Exchange 263 I. The International Division of Labor. 2. Trade Based on Natural Differences. 3. Trade Based on Differences in Eco- nomic Development. 4. Trade Based on Specialization. 5. The Meaning of Foreign Exchange. 6. The Demand for and Supply of Foreign Exchange. 7. Mint Pars and Gold Points. 8. The Balance of International Payments. 9. The Correctives of the Exchanges. 10. Arbitrage, il. Exchange Rates with Countries on a Paper Standard. 12. Exchange Rates with Countries with a Silver Standard. 13. The Gold Exchange Standard. 14. The Regulation of Gold Movements. 15. The Effect of the War on the Exchanges. 16. Dollar Exchange. 17. Exercises. CHAPTER XVII Tariffs and Foreign Trade Policies 285 I. What Is a Tariff ? 2. Technical Terms of a Tariff. 3. The Effect of a Tariff on Imports. 4. Revenue Tariffs. 5. Protec- tive Tariffs. 6. Free Trade vs. Protection. 7. The Course of a Tariff Bill in United States. 8. The Political Evils of a Tariff. 9. The History of the Tariff in the United States, Illustrating the Contents ix PAGE Arguments Used. lo. The Tariff Commission, ii. The Present Discussion. 12. The Problem of Dumping. 13. The Tariff and the Debts Owed Us by Europe. 14. Discriminations and Unfair Competition in Foreign Trade. 15. Reciprocity Treaties. 16. Colonial Preference. 17. The Open Door. 18. Exercises. CHAPTER XVIII Public Finance . 306 I. The Scope of Public Finance. 2. The Sources of Public Revenue. 3. Government Borrowing. 4. Justice in Taxation. 5. Rates of Taxation. 6. The Incidence of Taxation. 7. Gov- ernment Expenditures. 8. The Budget. 9. Exercises. CHAPTER XIX Receipts and Expenditures or the Federal Govern- ment 323 I. The Principal Sources of Revenue. 2. Financial Transac- tions of 1920. 3. War Profits-and Excess-Profits Tax. 4. The Federal Income Tax. 5. The Estate Tax. 6. Internal Revenue Duties. 7. Details of Expenditures. 8. The Problem of the Debt. 9. Revision of Taxation. 10. Exercises. CHAPTER XX Receipts and Expenditures of Cities and States . 337 I. The Expenditures of Various Government Bodies. 2. The Finances of New York City. 3. The Receipts of New York City. 4. The Expenditures of New York City. 5. The Receipts and Expenditures of Philadelphia. 6. The Receipts and Expendi- tures of State Governments. 7. The General Property Tax. 8. Corporation Taxes. 9. The Single Tax on Land. 10. State Income Taxes. 11. State Inheritance Taxes. 12, Exercises. Index 357 CHAPTER I THE STUDY OF ECONOMIC PROBLEMS I. What Are Economic Problems? Facts Involved in Economic Problems. 2. The Relation of Economic Problems to Business Prob- lems. 3. Reasons for the Study. 4. The Truth vs. Propaganda. 5. Difficulties of the Economist. 6. The Joys of the Economist. 7. The War and Economic Problems. 8. Attitude toward Conclusions. 9. Exercises. I. What Are Economic Problems? — Economics is the science of wealth, and as such it is concerned with the principles which govern the production, distribution, and consumption of wealth. Economic problems have to do with the difficulties involved in the application of these principles to specific cases. We may recognize three broad divisions. First, some arise because men have to deal with each other. Thus, to a large extent, the labor problem is a matter of adjustment of personal relations in industry. Other problems have to do with the relations of men as competitors. Second, some arise out of man's dependence on natural resources. Thus, productive capacity is, to a great extent, dependent upon the resources of a country. Third, some problems arise in connection with the effort of the government to regulate industry and commerce. Thus, we have the problems of railroad regulation and the control of trusts. Facts Involved in Economic Problems. — There was an old idea that all human knowledge could be accurately divided, as land is divided, and that a certain area could 1 2 IntrodMction to Economic Problems be given to economics and other areas given to political science, ethics, psychology, chemistry, physics, zoology, astronomy, and numerous other subjects. The common expression "fields of knowledge" reflects this old idea. The economist was supposed to keep his hands off any facts not in his particular field. Our present view places no such limitation on the activities of the economist in dealing with economic problems. We start with some question, such as the price of cotton, and we find that we must consider boll- weevils, the chemistry of soils and fer- tilizers, the psychology of tenant-farmers, and many other matters. Anything which affects an economic problem may come within our survey. 2. The Relation of Economic Problems to Business Problems. — The economic problem is a general problem and is studied from the point of view of the public welfare. The business problem is a particular problem and is studied largely from the point of view of private profit. Thus, the economic problem of the railroads deals, among other things, with the effect of transportation on economic development, the means for providing cheap and efficient transportation, and public regulation of railroads to insure equality of treatment to all shippers. To the board of directors of a railroad the business problem is how to develop traffic for their railroad and how, living up to all of the laws and regulations prescribed, to conduct their business in such a way that they will have money to pay interest on their bonds and dividends on their stocks. Or, again, the eco- nomic problem of labor deals with such things as the sup- ply of labor, the conditions under which labor is performed, and the general aspects of the determination of wages. The business man as an employer thinks of the labor prob- The Study of Economic Problems 3 lem in terms of costs; how can he hire and supervise his labor so that he can produce at a cost which will enable him to sell at a profit? 3. Reasons for the Study. — The justification of our study of economic problems is found in the absolutely funda- mental character of economic conditions and in the desire to be good business men and good citizens. All civilization must have a material basis. We must be fed and clothed before we can enjoy any of the so-called "higher things." We have seen, in some of the European countries, the ghastly results which follow the breakdown of the economic organization. We wish to prevent such an occurrence in this country. The good business man must understand the general eco- nomic problem before he can solve his own particular busi- ness problem successfully. In the old days of a simple local economic organization, a business man, by mere ob- servation, might become aware of most of the factors that entered into his problem. But now we have an economic organization which is almost inconceivably complex, and which embraces, in many of its aspects, the whole world. In such a complicated situation the business man who relies on mere observation is sure to leave out many important factors. And even if he does consider most of the factors, he may not be able to interpret them correctly. All may not intend to be business men, but all are citi- zens. The government is assuming an increasing control over economic activity. This control has great possibili- ties for good or for harm. The results will be good if the voters, in deciding on general policies, and the legislators, in drafting specific laws, make their decisions on the basis of an adequate analysis of the economic problems involved. 4 Introduction to Econmnic Problems 4. The Truth vs. Propaganda. — The economist in study- ing economic problems is seeking to find the truth. He gets all of the facts possible and from these facts he draws his conclusions. The propagandist, too often, begins with his conclusions and selects only those facts which help him in his propaganda. We are not condemning all propa- gandists. They are useful in getting things done, if they happen to start propaganda for something which needs to be done. But we must never forget the difference in their point of view and that of the economist; we must be on the lookout for propagandists who masquerade as scientists. 5. Difficulties of the Economist. — The methods recog- nized in science are experiment, observation, and compari- son. The physical sciences, such as chemistry, use experi- ment. In the experiment the scientist controls the con- ditions. If he wishes to know the effect of hydrochloric acid on zinc, he gets pure acid and pure zinc and puts them together. Then he records the result, and that experiment need not be done again. The economist cannot usually experiment, as he cannot control the conditions. Perhaps he would like to try a central bank in the United States. He cannot start the bank privately. He must persuade Congress to do it. Some experiments are too costly either in money or in human life to be tried. Other scientists can quote authorities for the facts they take as the basis of their reasoning. The economist must always be on his guard. Statements found in print may be mere propaganda; they may be based on incorrect rea- soning, or they may have been correct at the time and in the place they were written, but have no application at the present time. Thus, there is no justification for the quotation of Mill's opinion on the eft'ect of the introduction The Study of Economic Problems 5 of machinery, which was based on conditions in England in 1848, as if it had any bearing on conditions in the United States at the present time. Because he cannot experiment, the economist must rely on observation and comparison. In applying these methods the difficulties arise from the intricate complexity of eco- nomic phenomena. Thus, prosperity and depression are the result of numberless interacting causes, and it is almost impossible to assign the exact degree which some one fac- tor contributed to prosperity or depression. Usually we must be content to discover whether the factor helped or hindered prosperity. The historian has an easier time than the economist; the historian can get at documents, which, at the time, the economist may not even have known about. No tanta- lizing delay is experienced in getting the statistics needed for history. 6. The Joys of the Economist. — In spite of these diffi- culties the economist has his joys. He is dealing with real, alive, present-day people. He is helping to lay the basis for all that is good in social development. There is no dull monotony of unchanging conditions. He has variety enough to make his life very spicy. 7. The War and Economic Problems. — The war deranged the economic organization of the world. It altered the relations of the factors of production. It disrupted lines of trade. It destroyed much capital and killed or maimed many laborers. Reconstruction presents grave problems, many of them economic, which must be solved if civiliza- tion is to persist. The war, then, has presented economic problem in urgent form. It has also aided in the general solution of the prob- 6 Introduction to Economic Problems Icms. 'I\) one depending on llie methods of observation and comparison, new conditions and rapid changes are desirable. The war brought many new conditions and changes rapid enough to suit any one. These changes throw thi' prol)lems in striking rehef. In orcHnary times it is hard to gel i)eople lo reah/e the effects of rising i>rices. liut no one couhl be .so stupid as not to have observed the edects of the doubling of prices during war times. Then again, many new things were tried during the war. We had more governmental interference in business than ever before. When we get the facts, no doubt many in- teresting things will be learned from the experience of Russia with communism. During and aftc-r the war, there have been heretofore uni)aralleled expansions of bank credit and paper currency. In taxation, experiments were tried with exce.ss-protils taxes and steej)!)' progressive income taxes. 8. Attitude toward Condusions. Our conclusions cannot be stated so absolutel)' as those in Economic Theory. There, with the premises carefully laid down and the logic rigorously correct, we may announce our conclusions with ct)nridence. In our study of luonomic Problems we must be more modest. Our conclusions are tentative. They are the best that we can reach on the basis of the facts we have at present. We recogni/e that the conclusions may need to be revised if (he underlying conditions change, or if wi- come into i)ossession ol ni>w facts. Q. Exercises, i . Suggest differences in the point of view of the econt)mist and the entomologist in studying the boll-weevil or the greenbug. 2. How much does the business man consider public welfare? The Study of Economic Problems 7 3. Does it pay for the business man to consider public welfare ? 4. Contrast the tariff as an economic problem and as a business problem. 5. Indicate precisely the relation of economic activity to the development of painting and music. 6. Show how the success of the New York banker may require knowledge of conditions all over the world. 7. How does the adoption of the initiative and refer- endum affect the need for the study of economic problems? 8. State the attitude of the propagandist to truth and to facts. 9. Supposing that the economist were all-powerful, out- line a series of experiments to decide the best form of rail- road control in the United States. 10. Why be an economist? 11. Make a list of the ways the war affected the factors of production. 12. How did the war affect private property? 13. What caution is needed in arguing from war-time experiences ? 14. Why cannot we be absolutely sure of the conclusions we reach concerning economic problems? CHAPTER II PRODUCTIVE CAPACITY I. The Factors in Productive Capacity. 2. Mining. 3. Agricul- ture. 4. Lumber. 5. Manufactures. 6. Transportation. 7. Business Management. 8. The Effect of the War on Productive Capacity. 9. E.xercises. I. The Factors in Productive Capacity. — Productive ca- pacity is of vast importance to the welfare of a nation, for upon it the people depend for the goods and the services which make Ufe possible and pleasant. We may state in general terms conditions which make a country productive. First, the natural resources must be varied and abundant : agriculture demands rich land with a varying degree of heat and moisture; mining requires deposits of minerals so situated that they can be easily worked; transportation is facihtated by natural waterways and a topography that permits easy railroad construction. Second, the people must be able and willing to work. They must have bodies endowed with physical strength, minds which apply the strength, and the moral qualities of faithfulness and honesty in work. Third, the people in working with the resources must be aided by machines and equipment and directed so that the best methods will be used and the skill of each worker utilized to the best advantage. A short-time considera- tion of productive capacity might be made on the basis of the assumption that the equipment of society can be taken as fixed. A longer discussion would consider the possi- bilities of exhaustion of resources and changes in the edu- 8 Productive Capacity cation of the people and the number and efficiency of machines which they use in production. 2. Mining. — We shall try to illustrate some of the pos- sible meanings of productive capacity by statistics. For example, we might take productive capacity in the sense of the materials which furnish a potential supply. Thus, in the following table is given what might be called the potential supply of coal. ESTIMATES OF HIGH-GRADE COAL AT MODERATE DEPTH » Amount in Thousands of Millions or Tons World 4,400 United States 1.975 Canada 286 China 995 India 79 Siberia 67 Germany 410 Great Britain 190 Russia 58 Austria-Hungary 45 France 16 Belgium 11 ' Eckel, E. C, Coal, Iron and War, pp. 111-114. It is interesting to contrast with this table the amounts of coal actually produced. COAL PRODUCTION FOR 1916 IN SHORT TONS 2 Amount in Thousands of Millions of Tons World 1,401,000,000 United States. . . . 590,098,175 Canada 14,461,678 China . '. 24,000,000 India 19,324,826 Germany 272,099,000 Great Britain 287,110,153 Russia 28,962,724 Austria-Hungary. . 50,801,602 France 23,670,000 Belgium 16,458,816 • Finlay, J. R., Cost of Mining, p. 84. We notice that the United States heads both lists; that is, it has the greatest potential supply of coal, and actually 10 Introduction to Economic Problems produced in 191 6 more coal than any other one country. But frequently there does not seem to be any particular connection between the rank in potential supplies in coal and the annual production. Thus, China, which ranks second with reference to potential supply, is far down in the list with reference to annual production, and Great Britain, which is second in actual production of coal, ranks rather low with reference to potential supply. Another consideration which must be borne in mind in talking about supplies of things such as coal is that they are wasting assets. Once used, our coal supply is gone. Our present industrial organization is based primarily on coal, but our experience and development of the past would make it dangerous to predict that no new source of power will not in the future take the place of coal. After all, some may object to our analysis so far on the ground that it seems to depend too much on the accident of the location of political boundaries. We may prefer to test productive capacity in the coal-mining industry by the amount of product per man. TONS OF COAL PRODUCED PER ANNUM PER PERSON EMPLOYED! Years United Kingdom United States Australia New Zealand Canada 1 886-1 890 1891-1895 1896-1900. . . . 1901-1905 1906-I9IO. . . . 1908 1909 iqio 312 271 298 281 275 271 266 257 260 244' 400 444 494 543 596 538 617 618 613 660 333 358 426 437 462 500 388 449 485 542 359 388 441 474 470 478 456 478 487 503 341 375 457 495 439 422 400 453 395 472 IQII IQI2 > Barker, J. Ellis, Economic Statesmanship, p. 192. I Year of strike. Productive Capacity 11 Obviously, the greater productivity in the United States is to be attributed mainly to the richness of our natural re- sources and to the excellent equipment with which the miner works. Besides, the miner's union has not been strong enough to limit output. 3. Agriculture. — Next we may consider agriculture. For our first figures we may take the number of people engaged in agriculture. PERSONS ENGAGED IN AGRICULTURE' Year Country Number I9IO. 1895- 1900. 19OI. 1906. 1907. 1901 . 1897. 19OI . United States. . . . Argentina Austria-Hungary . British India France Germany Italy Russia United Kingdom . 12,388,623 385.323 14,121,055 90.893,575 8,777.053 9,723,472 9,566,340 15,782,669 2,262,454 ' Year-Book of the Department of Agriculture, 1919, pp. 747-749. In one sense we might take the total area of the coun- tries as a possible supply of agricultural land, but it is probably better to take the area actually under cultivation. CULTIVATED LAND^ Year Country Number of Acres 191O I909-I9IO. 1910-1911 . I9IO-I9II . 1910 1900 I9II I9II 19II United States. . . . Argentina , Austria-Hungary . British India France Germany Italy Russia United Kingdom. 293,794,000 44,446,000 61,450,000 264,858,000 59,124,000 63,689,000 33,815,000 245,755,000 17,862,000 ' Year-Book of the Department of Agriculture, 1919, pp. 747-749. 12 Introduction to Economic Problems We may take the number of horses in the country as in- dicating one of the factors of agricultural production. We are not justified in concluding that the same proportion of the horses in the country are used in agriculture; but, as the statistics do not distinguish between horses used on the farms and horses used in the cities, we are forced to take the total, HORSES IN THE VARIOUS COUNTRIES i Year Country Number I9IO. 1914. 19IO. 1913- 1917. 1915- 1908. 1914. I918. United States. . . Argentina Austria Hungary France Germany Italy Russia United Kingdom . 23,016,000 8,324,000 1,803,000 2,005,000 2,283,000 3,342,000 956,000 22,529,000 1,916,000 ' Year-Book of the Department of Agriculture, 1919, pp. 644-647. The figures for agricultural machinery are not available in terms of individual machines and the comparison by value would involve numerous difhculties. A significant item is that on December 31, 1918, in the United States there were 314,936 tractors on the farms. ^ It will be almost impossible to take the agricultural produce as a whole. We can, however, get figures for the production of separate crops, particularly wheat, as it is very widely produced. We take the average production over a period of time to eliminate the variations in crops which arise from the fluctuations in the weather. ' Year-Book of the Department of Agriculture, 1919, p. 745. Productive Capacity AVERAGE PRODUCTION OF WHEAT FOR THE YEARS 1909-1913 1 Country Bushels Country Bushels United States Canada 686,691,000 197,119,000 157,347,000 156,523,000 317,254,000 522,794,000 Spain 130,446,000 61,481,000 4,976,000 350,736,000 7,885,000 United Kingdom . . Netherlands India Argentina Hungary France Russia New Zealand ^ Year- Book of Department of Agriculture, 1919, pp. 517-519. We may eliminate the accidents of size by giving the yields per acre. AVERAGE YIELD OF WHEAT PER ACRE, 1901-1910 2 Country Bushels Country Bushels United States United Kingdom. . Netherlands New Zealand Sweden Germany 139 31-9 330 315 27.6 29.1 Manitoba France 18.2 195 17.8 174 II-3 9-5 Hungary Taoan India Russia ' Year-Book of the Department of Agriculture, 1919, p. 24. The statisticians of the Department of Agriculture have constructed an index-number of productivity per acre of the cultivated area of the different countries on the basis of the six most important crops; namely, wheat, oats, rye, barley, corn, and potatoes. The average yield per acre for a number of years for the given crop is expressed as a percentage of the average yield for all countries. These index-numbers for the per-acre yield of the single crops are averaged to get the index-number for the country as a whole by weighting each crop or the index-number for 14 Introduction to Economic Problems each crop by the acreage devoted to that crop. Thus, loo would equal the weighted average of all the countries. INDEX-NUMBER OF PRODUCTIVITY PER ACRE IN AGRICULTURE » Country Index-No. Country Index-No. Belgium Netherlands United Kingdom . . Germany 221 190 177 169 167 137 136 136 France Hungary United States Italy Roumania India 123 113 108 96 94 84 75 72 New Zealand Japan Canada Argentina Russia Sweden > Year-Book of the Department of Agriculture, 1919, p. 733- It is noticed that the United States comes low in the list. However, we need to make the same inquiry as we did in the case of coal-mining. What is the production per man? One authority says that each American farmer produces 2.5 times as much as the individual in Belgium; 2.3 times the individual in England; 3.2 times the individual in France; 2.5 times the individual in Germany; and 6.0 times the individual in Italy.* In Belgium we get a high }ield per acre at a lower level of comfort. In the United States the unit per acre is lower (though not the lowest), but it is combined with a high level of comfort. We cannot indicate statistically the skill of the farmers in the United States; but we may consider the wide spread of agricultural education, the fact that we have more than sixty agricultural experiment stations, and the fact that agricultural machinery is widely used. * Year-Book of Department of Agriculture, 1919, p. 25. Productive Capacity 15 Agriculture, if carried on in a scientific manner, does not exhaust the soil; so we may consider the figures as indicat- ing wliat may happen in agriculture for an indefinite period. 4. Lumber. — The matter of lumber production is mid- way between mining and agriculture. Lumber comes as the result of growth of trees. In the United States the lumbering operations have, in general, been carried on in a way which results in the destruction of the forests. Eu- ropean countries have nearly all practised scientific for- estry, and they get what is called a crop of trees maturing each year. In the United States we have made a start at this sort of forestry. FOREST AREAi Forest Lands Country (Square Miles) United States 860,000 United Kingdom 5,ooo European Russia 761,772 France 36,000 Germany 54,ooo Italy 15,437 Austria 41,100 Norway 26,900 Sweden 90,241 Japan, including Formosa 29,000 5. Manufactures. — We have already given the statistics for coal, which, of course, is an extremely important factor to the development of manufactures. Perhaps the next most important material is pig iron, since it is the basis either of material for manufactures or the basis of the machines used in manufacturing. 1 Smith, J. Russell, Industrial and Commercial Geography, p. 442. 16 Introduction to Economic Problems ESTIMATED PRODUCTION OF PIG IRON IN THE WORLD FOR 1915 » Tons of • Country 2,240 Pounds United States 29,916,213 Great Britain 8,793,659 Germany 1 1,603,874 France 4,000,000 Russia 3,638,000 Austria-Hungary 1,929,000 Belgium 500,000 Canada 825,420 Sweden 755.ooo Spain 421,000 Italy 389,000 All others 500,000 Total 63,271,166 The primary horse-power used in manufactures in the United States in 1914 was 22,547,574 horse-power. 2 Of this total 1,826,443 horse-power was derived from water- wheels. It is interesting to compare this figure for water- wheels with the estimate made by Van Hise that in the United States the water-power resources could provide about 37,000,000 horse-power.' In the textile industries the best method of comparison is perhaps the number of spindles. In 191 2 Great Britain had 55,300,000 spindles; Germany had 10,700,000; the United States had 30,500,000; and British India had 6,ioo,ooo.'* 6. Transportation. — The natural means of transporta- tion which a country enjoys may be divided into the ex- • Metal Statistics, 1919, p. 51. -Abstract of the Census of Manufacturers, 1914, p. 491. ' Conservation of Natural Resources in the United States, pp. 1 19-120. * Smith, J. Russell, Industrial and Commercial Geography, p. 487. Productive Capacity 17 ternal and internal; the external being the relation to the various oceans and seas and the principal harbors, and the internal being lakes and rivers which can be utilized for transportation. The number of steamboats in the vari- ous countries indicates the way in which countries use the external waterways. TONNAGE OF STEAM MERCHANT SHIPS OF 100 TONS AND OVER IN JUNE, 1920 ^ Country Tonnage Country Tonnage United Kingdom . . British Dominions. United States. .... Japan 18,110,653 2,032,227 14.574.375 2,995.878 France Italy Norway 2,963,229 2,118,429 1,979,560 1,773.392 Holland ' Federal Reserve Bulleiin, February, 1921, p. 186. Internal trade in most countries is carried on by the railroads. RAILWAY STATISTICS, 1913^ Country Miles of Locomo- Line tives 244,418 63,378 19,722 3,759 14,217 7,714 2,554 4,288 10,821 1,581 29.304 5,119 606 123 25,314 13,828 38,154 29,520 8,481 5.322 5.473 2,500 40,360 19,984 9,291 2.383 8,806 1. 95 1 23,691 24,718 All Cars Miles of Line per 100 Square Miles Miles of Line per 10,000 Population United States. . . . Argentina Austria Belgium Brazil Canada China (1912) France (1912) . . . . Germany Italy Japan Russia Spain (1912) Sweden (1912) . . . United Kingdom. 2,445 92 167 98 20 203 3 405 757 115 49 476 52 53 ,508 ,382 i573 718 117 443 .285 .824 .194 279 ,158 316 750 154 751 8.52 1.79 12.50 48.16 0.47 0.79 12.22 18.27 9.90 425 0.60 4-97 5.68 19-51 ' Bureau of Railway Economics, Comparative Railway Statistics, United States and For- eign Countries, 1913. 18 Introduction to Economic Problems As a test of adequacy, the number of miles for the group of people is rather better than that for area. 7. Business Management. — It is impossible to get sta- tistics which indicate the variations in management in the various countries. With reference to the United States we may urge that the numerous inventions of machines and new processes indicate good management. The develop- ment of "scientific management" is another indication of excellence in this field. We have developed various forms of combinations, particularly a corporate form. The de- velopment of accounting indicates one of the instruments by which management is made effective. The recent spread of higher commercial education will no doubt re- sult in more effective management of business. 8. The Effect of the War on Productive Capacity.— Professor Bogart^ has estimated that 12,990,571 men lost their lives as the result of the war; that 629,244 were totally disabled as the result of wounds; and that 10,554,726 were partially disabled as the result of wounds. He estimates^ the property loss on land as $29,960,000,000 and the losses of shipping and cargo as $6,800,000,000. Much agricul- tural land was devastated in Belgium, France, Russia, Poland, Roumania, Serbia, Italy, and Austria. Many fac- tories and homes were destroyed. Railroads and bridges were put out of commission. Crops, cattle, agricultural implements, orchards, were destroyed. Coal-mines, iron- mines, oil-wells, were rendered useless. Forests were ruined. The human factor is probably the most serious. Besides the lessened efficiency of the wounded, the exposure of the war and the lowered standard of food consumption of whole ' Direct and Indirect Costs of the War, p. 274. 2 Ibid., pp. 284-288, 299. Productive Capacity 19 populations will lessen the economic efficiency of the work- ers. Another aspect is serious. Many were killed who possessed special skill or who were important parts of busi- ness organizations. A long period may be required to replace them. 9. Exercises. — i. Why are varied natural resources de- sirable ? 2. Contrast the parts played by race and climate in making people industrious or lazy. 3. Which was the more serious result of the war, the loss of equipment or the loss of laborers? 4. How much attention should the business man give to the potential supply of raw materials in locating his business ? 5 . Make a list of the various factors which might account for the differences in the yearly production of coal per person employed. 6. Compute the percentage of the area of the United States which is under cultivation. What is done with the other land ? 7. How do the yields of wheat per acre correspond with what you would expect from the Law of Diminishing Re- turns ? 8. In planning our forestry policy, how much considera- tion should posterity receive? 9. On what broad general factors does the permanence of the manufactures of a country depend? 10. Which is more important for the productive capacity of a country, internal or external transportation facilities ? 1 1 . Explain why Canada has so few railroads in compari- son with area and so many in comparison with population. 12. What sort of statistics would you wish to have, if you desired to test the efficiency of the business men of two countries? 13. How long will it take to restore the productive ca- pacity of Europe to what it was before the war? CHAPTER III MARKETING I. The Problem of Marketing. 2. The Functions of the Middle- man — Assembling — Storage — Assumption of Risk — Financing — Sort- ing, Packing, and Grading — Selling — Transportation. 3. Salesmanship and Advertising. 4. Methods of Marketing Farm Products. 5. The Chicago Board of Trade. 6. Speculation and Hedging. 7. The Mar- keting of Securities. 8. The New York Stock Exchange. 9. Specula- tion in Stocks — The Stock Exchange Clearing Corporation — Market Reports of Stocks, Bonds, and Money. 10. Retail Dealers in Groceries — Chain Stores — Mail-Order Houses— Department Stores — Co-opera- tive Stores — Public Markets — Company Stores — Retail-Wholesale Stores. II. Other Types of Retailers. 12. Types of Wholesalers — General Wholesale Markets — General Wholesalers — Specialty Houses — Catalogue Houses — Commission Houses — Co-operative Marketing — Auctions — Wholesale Branches. 13. Wholesale Consumption — Direct Sale — Organized Speculation — Raw-Material Merchants — Auctions. 14. Organizations for Marketing in Foreign Countries. 15. Exercises, I. The Problem of Marketing. — Our complex division of labor is responsible for the problem of marketing; that is, the problem of getting goods from the producer to the con- sumer. In the earlier, simpler economic organization of society, often the producer and consumer were one. In other cases where they were different persons, they were still near enough to each other to make direct personal bargains. Now the producer and consumer are widely separated. The men who take charge of the process of getting the goods from the producer to the consumer are called middlemen. Marketing links itself with our study of price-making, since it is carried on by a series of purchases and sales made 20 Marketing 21 at prices which are the result of the interaction of the forces of demand and supply. We must first understand the functions performed by the middleman in the process of marketing. Chief among these functions are: assembling, storage, assumption of risk, financing, sorting, packing, grading, selling, and trans- portation. 2. The Functions of the Middleman. — (i) Assembling. — If we think of the problem involved in providing city- dwellers with eggs, we can understand the function of as- sembling. Eggs are produced on widely scattered farms, and must be brought together to be shipped and sold to the consumers. The problem of the wholesaler in the dry- goods trade is to assemble from various factories all of the things which the retailer may wish to buy. The retailer in turn assembles from various producers or other middle- men articles which the customer will wish to purchase. In New York City most of the small newspaper dealers get their papers from News Companies. Thus, the trouble of going around to all of the various publishers is avoided. In the aspect of assembling various different things cus- tomers may want, the mail-order houses with their gigantic catalogues probably stand first, with the department stores a close second. (2) Storage. — Storage is necessary particularly for sea- sonal products. Thus, apples are harvested in the summer and fall, and must be sold for the rest of the year. The storage function has developed particularly in connection with grain where vast elevators are utilized, and in con- nection with certain articles which require cool temperature to keep them in good condition where cold-storage plants have been developed. 22 Introduction to Economic Problems (3) Assumption of Risk. — The middleman's risks are various. The price of the article may change in the in- terval between purchase and sale. The goods may be destroyed by fire. The quality of the goods may deteri- orate. The style may change. All of these are risks which occur in the process of getting the goods from the producer to the consumer, and the middleman ordinarily assumes the risk rather than the producer. The middleman also as- sumes the risk of bad debts. In case of destruction by fire it is possible to shift the risk to insurance companies. But this shifting involves the payment for the service. (4) Financing. — Ordinarily the financing is done by the banks, but it is one of the things which is arranged by the middleman, even if he does not himself actually provide the money. The producer often gets his money immediately after the goods are sold. Frequently the consumer does not pay for the goods until a considerable period after he has purchased them. In the interval, the middleman is either directly or indirectly furnishing the money. (5) Sorting, Packing, and Grading. — The retailer buys goods in large quantities and divides them into smaller quantities to suit the needs of the consumer. City-dwellers especially have no place to store large quantities of flour and sugar, and so the middleman breaks large packages and sells whatever amount is desired. The habit of buy- ing goods in packages has developed, and this enables the consumer to identify the goods as coming from a certain producer; and, on the whole, selling in packages is much more sanitary than the older method of sales in bulk. Grading and sorting is part of the essential function of standardization in marketing. Apart from standardiza- tion in weights, measures, and grading in quahty, trading Marketing 23 would become a game of deceit and chance. Butter may, for example, be of varying degrees of goodness. It is the function of the middleman to sort the butter which he re- ceives into the various grades and to see to it that those who prefer the finest butter get it and those who are con- tent to eat the cheaper grades get those grades. (6) Selling. — In selling we think of the creation of new wants. The middleman is not content to take the demand situation as he finds it. He wishes to increase the demand for the particular article. This increase in demand may be brought about by advertising and by the use of sales- men. The activities of the clerks in the store are directed not only to supplying the things which the customers ask for, but also to suggesting things which they think the cus- tomer may be persuaded to purchase. (7) Transportation. — Transportation over the great dis- tances between producers and consumers is now a special- ized function, and it is taken over by the railroads and other companies. But here again the middleman is one who directs and pays for the transportation. And he directs and often carries on with his own equipment the transporta- tion from the store to the customers. After grading, the transportation problem is to have goods go as far as pos- sible toward the consumers before breaking bulk. We do not mean to imply that these functions will always be performed as they are at present. But somebody must do them. The trend of development seems to be in the direction of turning over more and more of the functions to the middleman. In the early days the consumer per- formed many of them for himself. The permanence of our present arrangements depends on whether we are willing to pay for the services. We may say there are two com- 24 Introduction to Economic Problems modities, groceries delivered and groceries to be carried home. In each case the price is set by the forces of de- mand and supply. If people cease to be willing to carry groceries home, the demand for undelivered groceries will fail and so grocers will supply delivered groceries. 3. Salesmanship and Advertising. — The older idea of salesmanship stressed the feature of skill in bargaining. The skilled salesman could sell anything to anybody (at least once). The newer idea is broader. The skilled sales- man is a specialist in marketing. His ideal is to get the goods at the time, in the place, and of the quality, desired. The sales department helps plan what will be produced and how it shall be marketed, including the advertising. We have seen that the fundamental factor in the demand for a product at all stages of the marketing process is the desire of the consumer. Thus, the clothing manufacturer sells to dealers but directs his advertising campaign toward the consumer. If the consumer desires the clothes, the dealer will be anxious to buy them from the manufacturer. Advertising aims to stimulate the desire for some com- modity. The use of a brand or a trade-mark facilitates the identification of the goods. In some lines the goods can be placed in trade-marked packages. The advertisers have developed methods of appeal by following psychologi- cal laws. They use a variety of mediums — newspapers, bill-boards, window displays, cards in cars, letters, circulars, and many other devices — but all with the purpose of creat- ing desire in the consumers. 4. Methods of Marketing Farm Products.— We take the marketing of wheat as typical of the problems which arise in connection with the marketing of agricultural products. The farmer ordinarily sells his wheat to a grain buyer who Marketing 25 represents a dealer in one of the big primary markets. A farmer may sell his wheat to a corporation formed by a group of farmers to undertake to carry on the process of marketing their own product. When the grain arrives in the market, it is graded, ordinarily, by state authority, some- times by boards of trades or produce exchanges, and some- times by the federal government. The graded wheat is then unloaded at an elevator, and an elevator receipt taken which calls for a certain amount of a definite grade of wheat. We may assume that the wheat is purchased by a miller. What he gets is the warehouse receipt. With this receipt he calls upon the warehouse company to deliver the wheat. He takes the wheat to the mill and grinds it into flour and the various by-products, such as cattle food. The flour may be sold to a jobber or wholesaler who sells it to the retailer to be sold to his customers to be utilized by them in the preparation of food, or it may be sold to a baker who makes bread, crackers, or other form of bakery prod- ucts which he sells directly to the consumer or indirectly through retailers. 5. The Chicago Board of Trade. — ^We may take as typical of the produce exchanges the Chicago Board of Trade. It is the greatest market for wheat in the United States. It is an organization composed of 1,625 members, and deals in grains and provisions. Some of the things are sold for cash and immediate delivery, and in this case there are tables for samples of the commodities. Most of the trad- ing, however, consists in dealing in futures. Here we have the pits for the various grains. The pit has an arrange- ment which rises by steps from the floor, then goes down by steps into a pit. The purpose of this arrangement is to afford the greatest possible number of people a chance 26 Introduction to Economic Problems to see each other. In the wheat-pit arc gathered the men who wish to buy or sell futures in wheat. They have de- veloped a sign-lan{:^uage by which they convey their bids and olTcrs. The wheat-i)it is the focus of the offers to buy and sell wheat from all over the country. The possibility of dealing in futures depends upon the grading of the com- modities. What are called the contract grades are Nos. I and 2 red winter; No. i northern spring; Nos. i and 2 hard winter, and No. i velvet cha.fi. These are perfectly definite kinds of wheat with reference to quality and con- dition. So, any one may buy the wheat, even though he is not himself a judge of wheat. 6. Speculation and Hedging. The speculation in futures usually concerns itself with the months just before the harvest or the time just after the supplies of wheat from the harvest in the southern hemisphere will be available, or the time when the harvest in this country is thoroughly complt'tetl. The effect of sjieculation on the produce ex- change is to make more even the price, and so to promote a more even consumption of the commodity throughout the year. Speculation in grain j)erforms a very useful function in permitting insurance. Suppose we have a miller who wishes to bid on a contract to furnish state institutions a certain quantity of Hour each month, lie might take a chance on the price of wheat at the various times through the year in which it would be needed. It might turn out that he would make more than his manufacturing prolit, but also he might make less. However, he can insure his manufacturing profit and eliminate the speculative risk by finding a speculator who will promise to deliver wheat to liini over the period of the contract at an agreed price. Marketing %1 Hedging. — The following illustration is simplified and the margins taken in even cents for ease in calculation, but it gives the essence of the hedging transaction. We assume that a miller wishes to manufacture flour for which he has no customer. It will be sold in the market a month from the time he buys the wheat. Now the price of flour in all periods, except just preceding a harvest, follows fairly closely the price of wheat. In periods after the harvest, the future price of wheat and the cash price differ roughly by the costs of carrying the grain, such as the storage charge and the interest on the funds used to purchase the grain. We will assume that it costs i^ to carry a bushel of wheat for one month. We will assume that the cost of manufacture including the miller's profit is 2ff a bushel. The miller wishes to manufacture the flour without taking the risk which comes from the fluctuations in the price of wheat and flour, so he uses the speculative markets to hedge or to assume the risk. In December he buys the wheat to grind at, we may say, $1.20 a bushel, and at the same time he sells an equal quantity of wheat at $1.21 to be delivered in January. He grinds the wheat and in January has flour to sell. If market conditions have not changed, he sells his flour at $1.23 for the amount made from a bushel of wheat and buys the wheat to deliver on his future contract at $1.21 ; so he makes merely his milling profit. Suppose, however, the price of wheat in January is $1.26. He sells his flour at $1,28 and so makes $i^ a bushel extra profit, but he loses 5 ^ a bushel on each bushel of wheat he delivers on his speculative contract. Thus, his speculative gains and losses just balance, and he makes his milling profit. Suppose the price of wheat falls and in January is $1.16. In selling flour at $1.18 he loses s^ 28 Introduction to Economic Problems on the amount made from a bushel. But he makes 5^ a bushel on his speculative wheat, receiving $1.21 for wheat he buys for $1.16. Thus again, his speculative gains and losses just balance and the miller makes his milling profit. Any expense in the way of commissions the miller charges up as insurance. The illustration shows the aptness of the use of the term "hedge," for the miller is betting on both sides of the market. The following clipping indicates the variety of things which influence the prices in the speculative markets and the commodities dealt in: ERRATIC MARKET IN GRAINS AT CHICAGO EXPORT ORDERS EXPECTED OVER SUNDAY FAIL TO MA- TERIALIZE AND WHEAT DROPS Special to The New York Times Chicago, June 6. — Action of the wheat market was most erratic. A break of i }4 cents early on rather gen- eral local selling was followed by a bulge of 2 cents on buying by Bartlett Frazier and others in the Snow re- port from Nebraska, which was construed as bullish, but Blum and other local professionals started to sell heavily and, with hedging by the J. Rosenbaum Grain Company against purchases in the Southwest, the mar- ket dropped 4@4}i cents from the high, touching $1.27 >^ for the July and $1.13^ for the September. The greater part of the news was of a bearish char- acter, and apparently some of the New York exporters, who bought futures Saturday, expecting liberal foreign acceptances over Sunday, sold out owing to the slow demand. That 500,000 bushels were reported as hav- ing been sold was responsible for the sharp advance toward the close that carried the July up 2K to $1.30 at the last, while September was up 3 cents to $i.i6>^ and closed 34 cents higher for the day, though July was I yi cents lower. Marketing 29 There was considerable selling of July and buying of September, part of it being an effort to hold up the July in order to make a market to sell on. Had it not been for the break in the foreign exchange, it is be- lieved that a liberal business in export wheat would have been done over Sunday, as American prices for deferred shipment are regarded as the lowest in the world, and cash wheat, f. o. b. The Gulf, for deferred loading, is about Chicago July price, plus the freight difference. At the inside figure today, July was off 14 j^ cents and September 9>^ cents from the high of last week, which many traders regarded as sufficient for the time being; but many of the local operators, who have been very bullish of late, are now over on the bear side, be- lieving that the crop reports are entirely too favorable for bulges to be maintained. The Kansas official re- port showed an increase of 900,000 acres over the pre- liminary returns and the total for the State is 10,000,000 acres, but the crop estimate is unchanged at 1 1 5,000,000 bushels, or the same as shown in May. Recent rains and cool weather in the Southwest have resulted in excellent filling, and harvest started in some sections of Kansas today and will be on in Southern Indiana by the end of next week. Premiums on spot wheat here were easier, with red Winter leading, showing as much as 2 cents under Saturday. Receipts of corn today aggregated 1,001 cars, of which around 750 cars were delivered on to-arrive con- tracts. The lack of pressure of cash grain was a sur- prise to the specidative trade, who sold early on the large receipts and were forced to cover later, making a close Vs, cent higher for the day. The country has ceased to offer corn in volume, due to the press of field work. Local public elevator stocks increased only 210,000 bushels the last week, as large shipments partly offset the amounts taken into store. Export sales of 250,000 bushels of corn were reported at the seaboard, but there were no bids here. Oats finished }i @ j/i cents lower, with trade largely of a local character. In the visible supply there was a reduction of 900,000 30 Introduction to Economic Problems bushels of wheat, making the total 8,334,000 bushels, against 9,234,000 the previous week and 38,259,000 last year. Corn increased 3,745,000 bushels, and is 18,848,000, against 15,103,000 the previous week and 2,679,000 last year. Primary arrivals of wheat for the day of 1,983,000 bushels, compared with 1,158,000 bushels last year; week ago, a holiday. Shipments were 1,042,000 bush- els; last year, 685,000. Corn receipts were 1,748,000 bushels; last year, 1,108,000, and shipments, 1,061,000 bushels; last year, 314,000. Today's Chicago prices for the principal commodi- ties were as follows: WHEAT p^^^ High. Low. Close. Close. July $1.32.^ $i.27X $1.30 $i.3iK Sept 1. 17/^ 1-13/^ I.i6>^ 1.15K ^^'^^ Prev. Last High. Low. Close. Close. Year. July (>s'A MH -65 -64 >4 i.9i>^ Sept 66% .6sH .O5H .65K i.57>^ °^^^ Prev. Last High. I-ow. Close. Close. Year. July 40}i .393^ .391^ .397-^ .96>i Sept 4ipi .41 .41 .4i>^ .78fi ^^'^'^ Prev. Last High. Low. Close. Close. Year. July i.25>^ 1.21^4 1.21^4 i.25y4 2.03>^ Sept i.o6>^ 1.03 1.03 1.05K i-85>< PROVISIONS p^^.^ Last Lard — High. Low. Close. Close. Year. July 9.70 9.65 9.67 9.72 20.65 Sept 10.00 9.97 9.97 10.00 21.50 Ribs- July 9.90 9.85 9.90 9.90 18.07 Sept 10.10 10.07 10.07 10.10 18.85 Pork- July 17.10 17.00 17.00 17.30 38.45 Marketing 31 7. The Marketing of Securities. — Governments and corporations furnish the supply of securities, and investors furnish the demand. The middlemen consist of under- writers, bankers, and brokers. The marketing problem is rather different from that of commodities because of the intermittent character of the supply. A corporation does not exist to create securities (eliminating, of course, the fake oil and gold-mining companies). The sale of securities is an incident to the starting of the business or the increase in the scope of its operations. Another difference is what might be called the durable character of the securities. Most of the sales on the Stock Exchange are resales. "Second-hand" stocks do not suf- fer the same depreciation found in "second-hand" clothes or other commodities. Low-grade securities are those with great risk and prom- ised high return. They are sold to those who wish to take a chance and also to the inexperienced and gullible. The sales talks and advertising hold out wonderful promises, alas ! too rarely fulfilled. The securities are often sold by the promoters of the enterprise. High-grade securities are the result of sounder financing. In the case of large corporations, they are almost always handled by investment bankers. In some cases the cor- poration raises new capital by offering to its shareholders the right to subscribe, at an attractive price, to a certain amount of the new stock. An investment banker, or, in the case of larger issues, a syndicate, buys the issue of securities or agrees to take any not subscribed for by the public. In this way he assumes the risk of the transaction. The investment banker also performs the assembling function. He provides the in- 32 Introduction to Economic Problems vestor with the type of security he wishes with respect to safety, denomination, duration, character of the business, etc. The investor relies on the investigation made by the investment banker to obtain information about the securi- ties. The banker does not guarantee the securities, but his recommendation is given great weight by investors. 8. The New York Stock Exchange.— The New York Stock Exchange is an illustration of an extremely highly organized market. It is an unincorporated association of i,ioo members. Technically the membership is called a seat on the exchange, although there are no seats on the trading floor. The stock exchange deals in stocks and bonds which are listed on the stock exchange. The proc- ess of listing involves a certain minimum amount of pub- licity with reference to the condition of the company and certain precautions as to the form of the certificates and the registration and transfer which are aimed to make it safe to deal in the stocks and bonds of the company. In the stock exchange are brought together from all over the country the bids and offers of the buyers and sellers for these listed stocks and bonds. The members of the stock exchange are ordinarily called brokers, and they take orders from their customers to buy or sell. Some of the members of the stock exchange speculate on their own account. These brokers have offices and branches in various parts of the country, from which they receive orders by telephone or telegraph or cable. On the floor of the exchange are twenty posts. All of the stocks are allocated to these posts. In making the division, the aim is to have the active stocks separated. If a broker has an order to buy certain stock, he will go to that post and there will presumably find a broker who wishes to sell the stock. Marketing 33 9. Speculation in Stocks. — There are no dealings in futures in the stock exchange. In general the two classes of speculators are called the bulls and bears. The' bulls are those who think that the prices of stocks are going to go higher. The bears are those who think that the prices of stocks are going to go lower. We may illustrate the ac- tivities of the speculator from both standpoints. Suppose a person thinks that the prices of stocks are going higher. Obviously then, in order to make a profit it is necessary to buy stocks and sell them later at the higher price. Ordi- narily, a transaction is carried on by the purchaser putting up with the broker a certain sum of money which is called a margin. This margin is usually about 10 per cent to 20 per cent of the price of the stock. The broker adds to this margin some of his funds and borrows from the bank the remainder of the money necessary to make the pur- chase of the stock. If all goes well and the price of the stock goes up, then the customer orders the broker to sell. The broker, from the proceeds of the sale, pays off the loan at the bank, takes out the amount of money which he ad- vanced and the interest on both sums, and returns to the customer the balance. It will be seen that this enables the customer to carry about five to ten times as many shares as he could carry if he were forced to pay the full cost of the stock. Of course, if things do not go as he expected, it means that he loses five to ten times as much as he would if he had bought the stock outright; but most speculators do not contemplate the possibility of loss. If a person thinks that stocks are going down, the proc- ess is a little bit more complicated, for here he must sell stock which he does not possess and buy it back later at the lower price. As far as the customer is concerned, the 34 Introduction to Econornic Problems process is just the same as the other. He puts up the margin with the broker. The broker sells the stock and then borrows stock in order to make the delivery. That is, he finds some other broker who is willing to lend him the stock, sometimes for a certain premium, and with this stock he makes the delivery. If everything goes right or, perhaps we may say, goes wrong, and the price of stock goes lower, the customer orders the broker to buy the stock. With this stock the broker repays the man from whom he had borrowed the stock. Here again the cus- tomer makes the difference between the two prices less the commission. The Stock Exchange Clearing Corporation. — In the stock exchange clearing corporation we have an extension of the idea of the clearing-house, which was explained in Turner's Introduction, the chapter on Banking. During the day the broker may buy and sell a certain stock many times. The principle of the stock clearing is that he shall deliver to the stock exchange clearing corporation a certain num- ber of shares of stock if he has sold more than he bought or receive from the clearing corporation stock if he has bought more than he has sold. The clearing corporation also takes care of the payments for the stock. Thus, the clearing is not quite so simple as the bank clearing which involves only the checks since this clearing involves not only cash and checks but also stocks. The stock exchange clearing corporation also handles the collateral back of loans of stock-brokers. Thus, if the loan is called and a new loan is arranged for, the clearing corporation sees that the new lender gets the collateral when it has been released by the first lender. The stock exchange exists primarily for the purpose of Marketing 35 facilitating the sales of stocks and bonds. Because the stocks are uniform, that is, for example, one share of United States Steel common is just the same as another share, any one may deal on the exchange. This has led to great speculation on the exchange. We recognize two general types, namely, the speculation of outsiders who are rather contemptuously referred to in Wall Street as "lambs " and the speculation of experienced speculators. The "lambs" utilize the stock exchange as a gambling device. They have no information on which to base their purchases. They follow wild tips, and the result would not be different if they were betting on where the ball would stop in a roulette- wheel. The function of the other speculators, those who are speculating with some information, is to help in the ap- portioning of capital among the industries which desire it. Various companies put forth various types of securities aimed to raise capital to be utilized in their business. When an industry is new and the outcome uncertain, conservative investors do not ordinarily care to invest their funds in the securities of that industry. But if speculators think there is a chance that the industry will prove profitable, they may be willing to buy the stock and hold it for the inevi- table rise which will come if the industry proves profitable. Thus, in the early days the telephone company's securities were highly speculative. The telephone company had not yet proved its worth. For a long time the railroad securi- ties were classed as speculative. Later the common stocks, particularly of industrial corporations, belonged to the speculative class. The stock exchange gives a continuous market for the stocks. During the hours when the exchange is open, one can always sell or buy. In times of depression, many com- 36 Introduction to Economic Problems NEW YORK STOCM Day's Sales. 595,942 Thursday, 563,650 Wednesda}^ 572,701 A Year Ago. 603,504 FRIDAl Two Years Ago. 918,706 1921. High. Low 48 40 391-^ IH 1 ?4 55 H 93 J^ 39 M 65 J^ 54 65 J^ 32?^ 88 133 114 29 8J4 13H 59 J^ 535^ UH 62 H 93,'^ 10 44? 83 721 31 5i 96 107} 88 108 »-^ 129 J 1273 94 821; 10 43^ 3 35 i^ 87 M 813^ 26 1^ 30 17 Vs 1 34 83 28M 26 M 461.^ 291^ 23H 76 M 115 108 8x8 414 8 42 21 M 7J- 3> 29 ■> 63 M 03 18 r)8 85 37 95 110 80 57 6? 31? 1 24 763^ 75 i^ Sales. 100 100 1,700 100 1,400 1,400 300 700 700 200 100 1,800 100 600 200 200 200 100 100 7,000 400 200 7,800 900 1,000 400 200 800 2,800 500 9,400 3,200 1,100 100 30 5,700 100 1,800 200 100 1,800 200 Stock and Dividend Rates. Adams Express Air Reduction (4) Ajax Rubber Alaska Gold Mines ... .Alaska Juneau Allied Ch. & Dye (4).. Allied C. & D. pf. (7). AUis-Chalm. (4) Am. Ag. Chemical. . . . Am. Bank Note (4). . . Am. Bosch Mag Am. Can Am. Can pf. (7) Am. Car & Fdy. (12). . Am. Car & F. pf. (7).. Am. Chicle Am. Drug Snyd Am. Hide & Leather. . Am. Ice (5) Am. International. . . . Am. La F. F. En. (1). Am. Linseed Am. Locomotive (0). . Am. Safety Razor. . . . Am. Smelt. & Ref Am. Sm. & R. pf. (7). Am. Sm. Sec. pf. A (6) Am. Steel F. (3) Xn\. Sugar Ref Am. Sugar R. pf. (7). . .Am. Sum. Tob. (8). . . Am. Tel. & Tel. (9)... Am. Tobacco (12) Am. Tob., CI. B (12).. .\ni. Tobacco pf. (6) . . Am. Woolen (7) Am. Zinc, L. & S Anaconda Copper .... Assets Realization .... Assoc. Dry Goods (4). Atch., T. & S. F. (0).. Do pf . (5) First. 45 33 243^ y2 1 44 Jg 88 3i 34 35 50 ?i 34 21 M 79 128 108H 9 4^ lOK 56 33 M 9 23 90 H 4 36 H 705-8 66 M 25 62 J^ 89 M 43 107 ^ 124 J-i 124 90 75 37M 1% 31 86 80}^ High, 1 45 89'^ 34 35 J^ 51 34 28 M 79 128 108}^ 9 4 H lOJ^ 56 333^ 9 23 91 4 36 Ja 72 6634 25 62 J^ 893^ 433- 1073; 120 3- 124 J- 90 75% 8 38 IM 31 86 J 803!j Low. 45 33 23 H H 1 44 J^ 893-^ 34 35 50?^ 34 273i 79 12T% 108 9 4% lOJ^ 50 32H 9 23 89 33^ 36?^ 70^8 06 25 61 H 89 40 H 124 J^ 124 J^ 90 74 8 373^ IM 31 85% 803 Last. 45 33 24 1 44% 8834 34 35% 51 34 28 79 128 108 9 4M 10% 56 33 9 23 903^ 3% 36% 72 66 25 62% 89 413-^ 10734 1253^ 124% 90 7534 8% 38 VA 31 86% 80 Net Chge. -2 - % + H + 1% +'l'% + % + y2 + % -1 +1% - % + '% + M + 3^ + 'h + % +'"% + 13^ -2 -134 + % + l?i + 1% + 1% + % + % + 1 + % + H + H Closing. Bid. Ask. 45 36 23 H 1 443^ 89 >4 33 ?4 35 50 3334 27 M 78 ?4 127 107% 9 43^ \0H 66% 33% 22^ 90% 4 36% 71% 06 25 62 8834 41 3-^ 107% 125 123 89 75 8 37% 1% 31% 85 3 801 46% 38% 2434 1% 44% 89% 3434 353^ 51 35% 28 80 128% 108 9% 4?4 11 57 33% 934 23^ 91 4% 36% 72% 67 2534 62% 893^ 41% 107% 126 124% 90% 75% 8% 38% 1% 32 863^ 8138 Marketing 37 [CHANGE TRANSACTIONS PT. 23, 1921. Year to Date. 123,056,513 1920. 160,426,771H -Same Period- 1919. 218,185,540 1918. 95,439,313 1921, High. Low 29 M 56 1^ 1053^ 21J''2 12^ 118 18 58 H 7 21?^ 15H 9314 lOlJ^ 167). 24 15^^ 2>W2 14 73 M 3 23 M 435^ 25 35^ 79M 65 81 108 nV2 74 H 61J^ 39 23^ 21?^ 13M 104 J^ 40^ 35 M 97 J^ 10 7 5i 97 10 35 M 3 12»^ 8 651- 95 84 J. 15 M 10 22 9 63 2M 16 33 >$ 145^ 15 46 26 673/4 100 3H 9 46 641^^ 39 20^ 13J^ 16 32 M 31J^ Sales. Stock and Dividend Rates. 100 Lee Rubber & T. (2). . 4,700 Lehigh Valley (3}4)... 100 Lig. & M. pf. (7) 500 Loew's, Inc 200 Loft, Inc. (1) 300 Louis. & Nash. (7) 200 Mallinson & Co 200 Manhat. Elev. (7) 200 Market St. Ry 200 Mailand Oil & Ref.... 100 Max. Motors CI. B.. . . 700 May Dept. S. (8) 100 May. D. S. pf. (7).... 40,700 Mex. Petrol. (12) 500 Miami Copper (2) 1,800 Mid. S, Oil (1.20) 900 Midvale Steel 1,000 M. & St. L. new 500 M., St. P. & S. S. M. (7) 400 Mo., Kan. & Texas. . . 600 M., K. & T. pf 900 Missouri Pacific 1,000 Missouri Pacific pf. . . . 200 Montgomery Ward . . . 100 Nat. Cloak & Suit 100 Nat. C. & S. pf. (7)... 200 Nat. En. & St. (6).... 100 Nat. Lead (6) 100 Nat. Lead pf. (7) 500 N. Rys. of M. 2d pf... 100 Nevada Con. Copper.. 100 N. O., T. & M. (6). . . 3,600 N. Y. Central (5) 100 N. Y., C. & St. L. (5). 100 N. Y. Dock(2H) 3,300 N. Y., N. H. & H 1,800 N. Y., O. & W 200 Norfolk Southern 1,200 Norfolk &W. (7). 1,700 North Am. ctfs. (3). . . 2,000 Nor. Am. ctfs. pf. (3) . First. 261--^ 53^ 101 M 13J^ QH 109% 18 403^ 4 19 8% 80^-2 101 103 n 21 12 25 M 9Vs 70% 1% 3 20 40 18)-^ 163^ 37 75)^ 102 4% 11 53 73 54 J^ 30 15M 21 39 M 34% High. 26,% 54% 101% 14% QH 110 18 40% 4 19 8% 82 101 104% 21% 12 26 10 71 1% 3 20% 40% 18% 16% 46% 37% 75% 102 4% 11 53 73% 54% 30 15% 21% 8% 973- 39% 35 Ji Low. 26% 53% 101% 13% 9% 109% 18 403-^ 4 18 8% 8034 101 102 21 11% 25 H 9% 70% 1% 2% 20 39% 18% 16% 46% 37 75% 102 4% 11 53 73 54% 30 14% 21 8% 96% 393 34% Last. 26% 53% 101% 14% 9% 110 18 403.^ 4 18 8% 81% 101 103 % 21% 12 25% 9% 71 1% 20% 40% 18% 16% 46% 37% 75% 102 4% 11 53 73% 64% 30 143, 21% 83^ 97 393-2 35 Net Chge. + % + 1 - % + % + % + 1% + 1 + 1 + % -' % + 1% + 3% !<; + % + % + % — 1% + % -1% +'1% + % -1 + % - H + 1 - % + % + H +2 + 34 + M Closing. Bid. Ask. 26 53 H 100 14 9% 1103€ 18% 40 3% 17 8% 80 100 103% 21 11% 25% 9% 70% 13-^ 2% 20% 40 18% 16% 46% 37 74% 101 4% 10% 61 73% 54^ 30 14J- 21 8% 96% 39% 35% 27 54% 101% 14% 9% 110% 18% 41 4% 18% 9 82 103% 21% 12 26 10% 71% 1% 3 203^ 40 3i 18% 20 50 37% 76% 105 5 11 52% 73% 57 30% 15% 21% 9 97% 39% 35% 38 Introduction to Economic Problems modi ties are unsalable. Literally, the owners cannot sell them at any price. They lack an organized market with speculative buyers. In times of depression, stocks listed on the stock exchange can be sold. The speculators are will- ing to take them at a price which promises to give them a profit later on. This continuous market is of the utmost importance in banking. Loans can be made with listed stocks as collateral security, because the bankers know that by requiring a margin of about 20 per cent they can always be sure of getting their money back from the sale of the collateral if the borrower does not repay the loan. The financial pages of the newspapers devote considera- ble space to the transactions of the stock exchange. The record of the sales of stock varies a little in form in the different papers. The table on pages 36 and 37 is from the New York Thnes. It represents about one-fifth of the whole report. The headings are probably self-explanatory except "Net Change." It means the change from the close of the pre- vious day. It will be noted that the quotations are all on the basis of 100 share lots. The bond sales, except the government war loans, are reported in greater detail, each separate transaction being recorded. The unit here is $1,000 par value of the bonds. The yield on the Liberty bonds is figured on the last sale. Another thing of great interest is the record of rates for loans of various durations and variously secured both in New York and London. The amount of exchanges at the clearing-house means the total checks brought by the vari- ous banks to the clearing-house to be presented to the banks upon which they are drawn, as explained in Turner's BONDS ON STOCK EXCHANGE FRIDAY, SEPT. 23, 1921. 1921. 1920. 1919. Day's sales $14,654,400 $16,033,850 $10,701,000 Year to date 2.225. UQ-.m^i 2.656.319.6.50 2.381.080.000 ' ' J 7 7 7 7 7 7 1 UNITED STATES GOVERNMENT WAR LOANS. Net — Closing — Sales. Issue. Open. High, Low. Last. Ch'ge. Bid. Asked. Yield. 555 —Liberty 3 J^s, 1932-'47 88.80 88.98 88.32 88.38 -.40 88.32 88.38 4.17 1 —Liberty 3J^s, reg 88.60 88.60 88.60 88.60 . . —Liberty 1st cv. 4s, 1922-'47 89.50 89.70 4.71 . . —Liberty 2d 4s, 1927-'42 89.48 89.64 4.79 2 —Liberty 2d 4s, reg 89.30 89.30 89.30 89.30 83 —Liberty 1st cv. 4 Jis, 1932-'47.. 89.50 89.74 89.50 89.62 +.12 89.62 89.70 4.96 603 —Liberty 2d cv. 4Ms, 1927-'42.. 89.58 89.68 89.56 89.64 +.16 89.64 89.68 5.05 6 —Liberty 2d cv. 4Ms, reg 89.44 89.44 89.42 89.42 +.10 913K— Liberty 3d cv. 434s, 1928 93.36 93.64 93.36 93.64 +.30 93.60 93.64 5.31 54 —Liberty 3d 41^8, 1928, reg 93.30 93.44 93.30 93.40 +.14 1,382 —Liberty 4th 414s, 1933-'38 89.70 89.88 89.70 89.88 +.22 89.86 89.90 5.14 6 —Liberty 4th 4Ms, reg 89.62 89.66 89.60 89.66 +.14 2,037 —Victory 3 Ms, 1922-'23 99.18 99.30 99.18 99.30 +.08 99.30 99.32 4.17 2,806 —Victory 4 Ms, 1922-'23 99.18 99.30 99.18 99.30 +.06 99.30 99.32 5.18 94 —Victory 4 Ms, reg 99.02 99.10 99.02 99.10 +.04 Following sales are given in lots of $1,000: 14.... 104% 7 94% Ist term 58 ChineseRy5s 1....57% 1.... 66% 2 104% 10 95 1....67% 4.... 463^ 4 57 2.... 65% 12 104% 5 95% 3 67 5.... 473^ 1....57i€ "onv 5s. SerB 5 104 20 95% St P & K C S 3s30f..47 6 57 2 65% . 27 104% 5 95% L Ist 4%B C Bergen 8s, 2 57 ref 4%s ref 4%s 5 95% 6 68% temp ctfs 10.. ..56% 5 58% 2 83 5 95% 1st 4%s 20 lOOM 7.... 56% 4.... 58 M 1.... 81% gen 3%s 2.. ..68% 3 .... 100 2.. ..57 C M & P Sd 4s 6 . . . . 82 1 67% S A & A P 4s City Berne 8s 4s 5 64 2 82% 1 67% 4 64% 1.. ..1013^ 11. ...41% 15.. .. 64% Gulf & S I 58 6 68 1....64% 5. ...101?^ 1 41 4 64 1 72 con 4s, Ser A Sea A L ref 4s 7. ...1013^ C & N W tem H Val Ist 4%8 13 72 1....37M 3.. ..101 Adams Exp 4s 6%s 1 . . . . 74% deb 4s, 1934 con 6s City Bordx 6s 1.. ..62 13 102 H & M 1st & 19 81% 8. ...47% 1.... 84 J^ AmAgCh7%s gen 5s ref 5s, Ser A ref & imp 1....47% City Christ 8s, 2.. ..97 5 94% 5.... 67% 4%8, Ser A 2.... 47% K,L&Co cfs 1....96% 5 94 M 27 68 3 80% 3 47 4.. ..101 1....96M 5 95 4 . . . . 67 % NY, Chi & S L 1....47% CCopen53^s Am Sm & Ref 7s adj inc 5s 1st 4s 3. ...47% 3.... 81^ 1st 5s 1.. ..103% 3.... 45% 2 82 S Stl H s f 8s 1.... 813^2 1....78 3.... 104 6 45% 8 81% Ser A 2 81 M 5s7f..77% 5 103% 15.... 45% NY,NH&H non 4.... 95% 2.... 81% 1.. ..78 Chic Rys 5s 10 45% cv deb 4s, '55 S C en 7%s C Lyons 6s 1....78% 2 64 8.... 45% 1 38% 1....92% 1.... 84% 2.... 78% 7 63 M 26.... 45% conv 6s 3.... 92% 1 84 4. ...78 7 . . . . 64 2.. .. 45% 1 52 4 92% 1.... 84% 2.... 78% C R I ife P gen 1.... 45% 1 52% 3.... 92% 1.... 84% Am T & Tel 4s 26.... 45% NY Rys adj 5s 7. ...92% CityMarsls 68 col 4s 10.. .. 74% 1.... 46 6 8% 4.... 92% 1.... 84% 1....83% ref 4s 111 C 4s, 1952 11 8% 21 92% 1.... 843-i 2.... 84% 15.... 70% 3.... 74% ref 4s 5.... 92% City Paris 6s 2....83M 27 ... . 70 M 4s, 1953 2 22% 24 92% 8.... 99i| col tr 58 5.. .. 70% 10 73% NY Tel S B T & T 1st CityZurich 8s 4.... 88% 2.... 70% ref 43 8 f deb 6s 5s 11. ...101% 1....88% 6.. .. 70% 5 78 2 96% 10.... 85% 6.. ..101 2.... 88% 8.... 70% 1.... 78% 2 96% 1 86 Dan Mun s f 1....88% 1.... 70% 5%s 4%s 8s, B 1 88M 5.. .. 70% 3.... 93 1 85% So Pac col 4s .5.... 103 2.... 73% 39 40 Introduction to Economic Problems Introduction, pages 300-301. The amount is given to be used as an indication of the volume of business. Any in- crease in business will result in more checks being drawn, and so greater clearings. MONEY Friday, Sept. 2,3, 1921. Call loans on the Stock E.xchange ruled unchanged at 5 per cent. Thursday's prevailing rate. Outside the Exchange there were a few loans arranged at 4 per cent. Time money market remains quiet, borrowers bidding 534 per cent, for 60-day funds, with 5>-2 being offered, with a differential of yi of i per cent, applying to maturities running over the year-end. Demand is light, with renewals making up the bulk of business. Acceptances were firm but unchanged, likewise com- mercial paper, where brokers report an increasing vol- ume of paper at lower discount now prevailing. CALL LOANS Thursday's Renewal. High, Low. Last. Last, 5 5 5 5 5 TIME LOANS Mixed collateral, 60 days 5K @5>^ 3, 4, 5 and 6 months 5>2 @5K All industrial collateral, 60 days 5/i@5l4 3, 4, 5 and 6 months 5>^@5^ COMMERCIAL PAPERS Best names, 4 to 6 months 5H® Other names, 4 to 6 months 6 @6^ DISCOUNT RATES FEDERAL RESERVE BANK Commercial paper, 15 days, 5; 16 to 90 days. . . .5 Liberty bonds. Victory notes and Treasury cer- tificates of indebtedness, 15 days, 5; 16 to 90 days 5 OPEN MARKET RATES Call loans against acceptances ^}4 Prime bankers' acceptances eligible for purchase or rediscount by Federal Reserve Banks. Rates quoted are for discount at purchase. Marketing 41 Bid. Asked. 30 days 4>^ 4^ 60 days /\J4, 4^ 90 days 4^-^ 4^ 4 months 5 4^ 6 months 5H 5^ Non-member and private bankers, 60-90 days 5^i 5^ LONDON MARKET Money on the London market was down ^ at 3 per cent.; short bills unchanged at 4 per cent.; three months unchanged at 4}i@ 4^" per cent. Gold bullion on the London market down 2d, at iios gd. Taking the British Mint's standard of 85s per fine ounce as par, the market quotations would represent a price of 130 1-3 for gold at London. On the same basis the highest London price for gold this year was 136^, on Jan. 3; the highest of the period 149^, on Feb. 6, 1920. CLEARING HOUSE EXCHANGES Exchange of checks at the New York Clearing House, $617,600,000; balance $56,200,000; Federal Reserve Bank's credit balance, $50,400,000; clearings this day a year ago, $683,553,641. 10. The Retail Dealers in Groceries. — ^We may take the grocery trade as typical of retail trade. First, we will see the different types of stores from which the consumer may get the groceries. The Grocery-Store. — ^The typical old-fashioned grocery- store was run by an individual with his own capital with no connection with other establishments. The retailer bought his groceries from wholesalers and jobbers and com- mission men, and so he forms the last step in the process of getting the goods to the consumer. The Chain Store. — ^This is a development of large-scale methods applied to retailing; that is, one organization con- ducts numerous stores in some particular city or, in the 42 Introduction to Economic Problems case of some of the larger chain stores, in many of the cities in the whole country. The advantage which comes from this system arises in connection with the possibility of buy- ing on favorable terms (because of the great quantities purchased) and of standardizing methods of store arrange- ment and store policy in such a way that the best methods may be used by all of the different stores. Frequently, the chain store buys direct from the producer and so eliminates one step in the process of distribution. Sometimes also the chain stores carry on manufacturing or at least the putting in packages of the products. Mail-Order Houses. — In addition to the other products, mail-order houses also deal in groceries, and so from these houses customers may provide themselves with certain of the groceries which do not suffer deterioration. Here again the wholesaler or jobber is frequently eliminated from the process, as the mail-order concern may buy direct from the producer. The Department Store. — In some cases department stores sell groceries. Here an advantage arises from the fact that the large number of different departments are under uni- fied control. The department store often carries on a large business and has the advantage of being able to buy in large quantities. Co-operative Stores. — A considerable number of the co- operative stores which have been established in this country deal in groceries. Here the advantage is supposed to be gained in cutting down the expense of conducting the busi- ness. There is no particular advantage in this country in the purchase of the goods. In England, where the co- operative system has achieved a greater development, the co-operative wholesale societies are conducted for the bene- fit of the co-operative stores. Marketing 43 Public Markets. — For the sale of vegetables and fruits, very frequently a system of public markets is in existence. In the smaller towns and cities the producers deal directly with the consumers. In the larger cities, the sale in the public market is frequently conducted not by the producer himself but by the middleman who has bought from pro- ducers. The Company Store. — In many coal-mining towns, the coal company keeps a store and, of course, groceries bulk large in the sales. The credit risk is frequently minimized by deducting the amount due at the store from the wages coming to the miner. Frequently the mines are at a dis- tance from trading centres, and so the company stores are a real convenience. However, sometimes they are used as a means of reducing the wages of the miners. The Retail-Wholesale Store. — This hybrid is usually a transition type. An ambitious retailer starts wholesaling on a small scale ; eventually he may give up retailing and devote all of his time to wholesaling, or he may develop a chain of stores. Retailers in the same city do not care to patronize a wholesaler who competes with them. II. Other Types of Retailers. — Besides the types of re- tailers who handle groceries, we find other varieties. A local store may be the agent of a manufacturer. This is quite common in clothes and shoes. In the larger cities there has been a growth of specialty stores. These stores handle a restricted line of goods, especially women's clothes. Some manufacturers wish to control their product until it gets into the hands of consumers. In this case they open retail branches. In the selling of milk, we may say that there are wagon retailers, for the bulk of the sales are really made from the wagon. Finally, some retailers deal in bulk in such commodities as coal. 44 Introduction to Economic Problems 12. Types of Wholesalers. — llic General Wholesale Mar- kets. Ill dry -goods, for example, we have a market price which holds in New York and vicinity. This case differs from the preceding cases, because there is no one place wliere the traders gather, and there are no such clearly established grades. Yet wo get a price set for the various articles, uniform enough to justify calling it a market price. 'V\\c essential feature is that we have competitive groups of buyers and competitive groups of sellers who keep in close touch with what is going on in the market. Quotations such as the following may be found in the business papers, as the Journal of Commerce, and in the trade papers. In less detail, some of the items appear on the financial pages of t'he newspapers: CANNED FRUITS While no less than three steamers are due in New York any time with goodly quantities of canned riNK.VrrLE, the spot stocks are very short. The demand all arounil is reported good with short deliver- ies of certain classes assured, buyers arc taking good quantities of others. There is some activitv in .APPLKS and good sales of CR.VNBERRY JELLY anil S.\UCM<] are reported. The announiement of loo per tent delivery on TE.VrHES and I'E.ARS has not weakened the market heeause of the short surplus. No. los, std 8 ooa . . Choiee 9 ooa . . Mil., igu) pk, No. 3 pies ;u 30 No. 10, unpoolod vollows 5 7i*a5 80 APRICOTS U'al.) — Std., j'js 2 15a. . Clioiee 2 40a . . I'\»nev a J 75 pi:.\e'iii:s~ W'llow, free- - Std., 2%% .2 15a Choice, a^-js .2 55^1 Fancy, a^s .2 75'» los, std _ 2 75a Yellow, elings- - Std., 2>1,S .2 27a Choiee, 2.Hs .2 8(XJ Fancy, 2}is ■ ,A tx)a No. 10s 7 5oa8 50 Marketing 45 50 PEARS— Calif. Bartlcts — Fancy, 2j^s 3 26a3 Choice 3 00a . . Standard 3 00a . . I OS, clioice II 25a. . los, std 9 ooag Kiefer — Fancy i 90a. . Ex. standard i 60a . , No. 2, fancy i 40a . . No. 2, std I 2isa. . pineapples- No. I grtd ai No. 2 grtd ai 2>^s a2 No. 10 pie 5 ooas Hawaiian — Sliced — Ex., 2s 2 40a. Ex., 2>2S 2 85a. , No. los 10 ooa. . Grtd, 2s, std i 8oai Grtd, 2s, ex i goal Std., 2>^s 2 35a2 CRUSHED— 1 flats I 50a. . 2 tails 2 35a. . 2)4 tails 3 ooa. . los, std 6 75a. . CHERRIES— Cal., 2>2S, std 2 85a2 95 Choice, 2 K^s 3 25a3 50 Fancy, 2^s a3 60 Fancy, 3s a3 75 No. 10 sour, pit- ted ai6 00 APPLES— Me., los 5 85a6 00 Pa., los a. . N. Y., los 5 25a5 55 N. Y., 3s 2 ooa. . RASPBERRIES— Std., 2s 2 6oa. . Xstd., 2s 5 ooa. . No. ID ex I 2ia. . No. ID watr.. . . II ^oaii 75 rhubarb- No. 10 4 25a4 75 STRAWBERRIES— Spe ex No 2 3 ooa3 25 do h'y syr 2 75a3 00 los, std., in water 9 ooa. . BLUEBERRIES— Maine, 2s 2 25a2 50 Maine, los 12 50ai3 00 blackberries- Ex. std., 2S 2 50a. . Fancy, 2s 2 75a . . GOOSEBERRIES— 2S, Std., in water. . i 5031 75 los 8 50a. . GENERAL CLOTH TRADING AND PRICES VERY STEADY Trading in the cloth markets was quite general and very steady with no one division leading in special in- terest. Print cloths were sold on a basis of j }4c for Southern 60x48s and yj^c Eastern; 38>^-inch 64-X60S, Qc; 68x72s, loyic; 72x76s, II Kc; 80x80s, 14c; 27-inch q yards, S'^A'^i second hands and 27-inch 7.60 yards, Sheetings sold in moderate quantities on a basis of IOC for 4-yard 37-inch 48-X48S; 1 1 }ic for 4-yard s6x6os, I nfnxhicliDii to l']<'i)iu)iuic rn)hl(ius :iii(ali()iis :ir(> math*. riic improv'fd tlcmaml toi line iimiln'tl \aiii floods \v;r. idiil iiuu'tl. Some «»l (lie roiivci (( is an- pit kiiif^ up aii\ (Ifsiral)l(' h)( ol nu'dinm or low j^ratlr goods on I lie I lit on Ihal lluv art' i«Mlaiii (t> he wauled when I 111- lull tllti I t)l \iiy IukIi prut'S oh I he liiuT (jualitifs iK-giiis lt> In- Iclt. II is alst) slaird llial llu' dfiuand Itii' liiiislird floods is hroadeuiiif^ and ttJiivcrlcrs aiv proviiliiig I lifiiiselvcs willi tlollis llirv may ln" aMf Iti sell al an allrai li\r |>rit"r lor st)nic time to conir. ( tuil iiuifd iiiipit>\ ciiunl is icpttrlcd in liir lalnii" ilciii.iinl, iiolliin^.', ill I lie \\a\' t)l laigc l)usint'ss liciiig doiit-, hill a d(-liiiili' tlciiiand litini ttint I'l lis thai liaxc lici'ii oiil t)i I he inaiLi'ls Itti iiionllis. OK U 1 s Wit nil 1. vvk ;li( I'litV. Wi.llh w ^^l't. ' I'riiT. .\7 .\ 50 1 1 • J .V .\ 00 1 J .<7 .\ (Ml I .' ' J .\«' -• «.s ij^a x; .\ ').S 10 1 , 1 1 mils ,\ -•.s 1 1 >a \\i tUli ( 't)lllll Wi.l III Colli i( .111.1 and 1 .oil 1 ami 1 weight. prii'O. Wfiijl ii. pritc a.s »".35 56-44 4H' 38 W 6.35 60-48 Ih 37 «)..St> II 11 .s .v'^ ' J .s-.^.s <».| (>o 37 «).oo ;,(. ;,.• ,s ' - .^o •I-7.S OS 7,' loV^ a; 7.(>o (.| (.0 "' 1 .V) 1 --.s 7-70 ^^yi .ak^,. H.JO •11 1" () .\') .piH) So So >4 .^'> (>.(>o M' II SUM ■II I riNt.s (>,.|o .|S .|S 7>'^ \u ,» oo .|S .|S 1 ,' .<«' <• 1 5 41 4«> ()?S \,u .} t>o .|S .s .• lt>' , y; 4.00 4S4S 10^4 .i'' •1 •/«' .(S ;,.. .|0 J.H5 4S-48 IJA4 M' s.oo .,S .(S S ' J •1" ,V(>o 5(> <>o Xi^i .U> .S .s" .|S .n» 7S 1*' 1 -VS ■II 1" ';»■» ,U .S.oo .|S .,s SS SMIiKNS VH 4.00 (>1 St> 1 1 y .|.oo (..| II.' 'J 37 >» S-'> "1 !- 10 .\') .|,.-o (>! io| i.< yi .v.v> ;: i.-t) l(> Marh'iimj 47 TVVII.I-S .V) .|..S<» f>H-7^> •»/'■♦ .\') 5-H) 64-64 9>^ ,V) 4.<«> <)H-76 li),i ,v) ,^i<» «K>-64 17 n.AIN COMIIKl) (l.OlllS .V> II..-^5 KH-Ho 12 40 .S.50 .SH .So i<> 40 <).()() 76-72 14^ jo 7<'<» <)'> loo i^i'j I'AjAMA ( Ilia KS 36>^ 4.70 72-H(> II>a 36;,i 5.75 6,|-(.() 10 KINi:S'l' (IRADKS OI- KRKSII Itiriri'.K SOLD UI'/nilK AND rONK I'1KMI:K lilirriOK. Ucccipis ycs(,onln,y, 5,v-|S iKukagcs. As most of I 111' joblxTS licid olT the I.idcr p.irl of Ijisl week, (licy wen; iieediii)^ f.iir supplies of fresli slock yes(er(l;i,y, ;i,iul business k<"'""''''".V w;is belter. I)e- ni.iiid, liowever, w;is (((iirnied ( losely lo liiu; and fa,ney grades of fresh crejiinery ; lliese advanced about lie willioul pulbiig up [\\{.: other (jualilies t.o any extent,. I'lesli crea,iiu;ry extras sohi at i.r'j a 44c, niori; gener- .'dly I lie lalliir ligure where inspect ed goods were de- manded, and tin; higher scoring lots brought 'W/j a, 4SC. Marks just under extras sold belter and brought. 42>a a 4.^ Firsts 36>^a43 Seconds 34 a36 State Dairy — F'inest 42 a43 Good to pme 37 a4i Com. to fair 30 336 Renovated — Extra a. . . . Firsts a Ladles — Fresh — Extras 32 3.32 }4 Firsts 29>^a30>^ Seconds 28 a28^ Poorer 26 a27 Packing Stock — Fresh — No. I 28 a. . No. 2 27 a. . Poorer 25 a26>^ THE RICE MARKET The rice market is firm with trading nominal. For- eigns are strong due to the rise of exchange, and do- mestics, small in spot stocks, continue at full prices. Domestic — Screenings 3^a. . Second head 3^3.4 Medium h'd aH^S Fancy head G^/iayyi Choice head 53/^a6K Blue Rose — Fancy SH^-SH Choice 5 a. . Japan- Fancy. . . • 5 asX Choice 4^^a4^ Foreign — Siam, usual a4^ Saigon — No. I a4>^ No. 2 a. . Rice Flour a3^ Spot stocks mean amounts actually on hand in this market in distinction from supplies situated in other mar- kets or in producing centres. General Wholesalers. — Some wholesalers, especially of groceries and dry-goods, attempt to supply all of the needs of stores in those lines. They assemble the goods from manufacturers or producers and sell them in the quantities desired by the retailers. Often they finance the retailer. Specialty Houses. — In recent years there has been a growth of houses that specialize in some particular part of a general line, as knit goods. This is an example of division of labor in the marketing field. Perhaps the movement is Marketing 49 due partly to the fact that it takes less capital to start a specialty house than a general wholesale house. Catalogue Houses. — Just as we have mail-order houses in the retail field, we find them among the wholesalers. They aim, in general, to replace the travelling salesmen by the catalogues. It will be interesting to see how the contest between the written and the spoken word comes out. Commission Houses. — The commission house takes charge of the sale of goods, and for its services deducts a commis- sion. These houses are found in central markets. They often handle goods shipped for considerable distances. It is this factor of distance, the intermittent and uncertain character of the supply, and the fact that the goods are perishable, which make it convenient to use the commis- sion house. Thus, fruit growers at a distance could not afford to go to market with each shipment of fruit. It is impossible to foretell the quantity or quality of the crop, so contracts for future sale are difficult to make. If the supply were steady, permanent arrangements could be made. Often the season lasts only for a week or two. If the goods were not perishable, other methods might be used. The demand for such perishable fruits and vegetables is rather inelastic. Thus, if shipments happen to be bunched, the returns may be disappointing. The long distance be- tween the shipper and the commission merchant gives chance for disputes as to the condition of the goods on ar- rival and as to the adequacy of the price which was re- ceived. This condition has often resulted in co-operative marketing. Co-operative Marketing. — There are many forms of co- operative marketing. In one the growers, say of berries. 50 Introduction to Economic Problems in a given region will form an association. This associa- tion will represent the growers in their efforts to obtain good freight rates. It will also have a representative in the big central market for the crop. Sometimes this rep- resentative takes charge of the sale of the goods shipped. Sometimes the goods are still handled through the commis- sion men, but under the watchful eyes of the association's representative. The farmer's co-operative grain-elevator is another im- portant type of co-operative marketing enterprise. The marketing of grain involves making provision for storage. To remedy abuses which grew up when the only available elevators were under semimonopolistic control, the farmers decided to run their own elevators and do their own mar- keting. Perhaps the largest co-operative marketing enterprise is the California Fruit Growers' Exchange. The California fruit is marketed at great distances from the places where it is grown. Most of it must be sent in refrigerator-cars. The Fruit Growers' Exchange takes entire charge of the crop, grading and packing the fruit and seeing that it is properly iced. They have agents in all of the principal cities in the East and Middle West who watch the supplies of California fruit in their localities. The fruit is started from California without any destination being specified. When the cars reach some place, such as Kansas City, they are consigned to the cities which, according to the reports of the agents, offer the most favorable market for the fruit. Brokers. — The term broker is applied to men who per- form various functions. There is the broker who is a mem- ber of some exchange and executes orders to buy or to sell for any one who wishes his services. One common use Marketing 51 of the term refers to the man who brings buyer and seller together. We may say that the lack of knowledge of the two gives the broker a chance to function and, incidentally, the chance to make a profit. Often we think of a broker as one who buys and sells at the same level of marketing; for example, buys from one wholesaler and sells to another wholesaler. In this way he serves to correct maladjust- ments of supply. Auctions. — ^The auction is used as a wholesaling device as well as to sell goods to consumers. The use is common- est in the sale of fruits and carpets. Wholesale Branches. — The meat-packers have a special marketing problem. They are dealing with a very perish- able product. Fresh meat must be sold quickly. A sys- tem of branches selling direct to retailers has been devel- oped. Thus, on one hand, a continuous supply is furnished and, on the other hand, overstocking is avoided. 13. Wholesale Consumption. — In general, materials to be used in production of consumable goods are handled in slightly different fashion from goods to be sold to con- sumers. Different lines are handled in various ways. Direct Sale. — Coal and iron are frequently sold by the producer directly to the user. The following market re- port indicates the type of factors which enter into the price-making: POSITION OF PIG IRON CONTINUES TO IMPROVE ACTIVITY IS NOT MARKED BUT DEMAND STEADILY IN- CREASES — LOCAL SALES LAST WEEK 4,000 TONS IN SCATTERED LOTS OVER 4TH QUARTER Demand for pig iron continues to improve and, while there is no marked activity, the market is stead- 52 Introduction to Economic Problems ily growing stronger and the undertone is decidedly more healthy. During the past week sales of foundry grades in the local district aggregated about 4,000 tons of various descriptions in lots ranging from carloads to 500-ton lots. Most of the business placed was for delivery over the balance of the year, which in itself is an indication of growing confidence that the low price levels have been reached and that the tendency from now on is likely to be upward. Inquiries received by local selling agents cover requirements of some 3,500 tons, also in scattered lots, the largest of which is for goo tons for prompt shipment. As the season ad- vances it is becoming more evident that stocks in con- sumers' hands have dwindled considerably and there is every indication that demand will show a steady improvement from now on. Business for the most part has been confined to Pennsylvania, New Jersey and New York deliveries. Some little demand has come from Boston, but New England requirements as a whole have been relatively light. September returns are expected to show an increased production over August, which in turn had registered an improvement over July. One Susquehanna furnace has been added to the three now in operation. The meltings from all accounts have not increased materially, though on the whole there has been no falling off. The improvement in demand is attributed almost solely to the steady decline in the amount of stock carried by the foundries, and as the current ship- ments are known to be in excess of the furnace output the statistical position of the market is decidedly im- proved, with the result that prices are more firmly held than ever. Eastern Pennsylvania and Buffalo iron is quoted at the basis of $20 to $21 at the furnace. This gives the former the advantage in the delivered price, but at least some Buffalo iron has found its way to the local market. PIG IRON, FUEL AND ALLOYS No. 2 Pittsburgh $22 96a 23 96 No. 2 X Philadelphia 21 34a 22 26 No. 2 Valley, furnace 21 00a 22 00 Marketing 53 No. 2 East Pennsylvania 20 00a 21 00 No. 2 Southern, Birmingham 19 oca 20 00 No. 2 Virginia, New York 28 i6a 29 10 No. 2 Chicago 22 oca Basic Valley, furnace 19 25a 19 75 No. 2 Buffalo 20 ooa 21 00 Bessemer, Pittsburgh 21 96a 22 46 Malleable, Pittsburgh 22 46a 22 96 Malleable, Chicago 22 ooa Malleable, Valley 20 50a 21 00 Malleable, Buffalo 22 ooa Gray forge, Pittsburgh 21 96a .... L. S. Charcoal, Chicago 30 ooa Domestic Ferro-manganese — Prompt delivery, 78% to 82% 60 ooa 63 00 Spiegeleisen, 20%, furnace 25 ooa 26 00 Ferro-silicon, 50%, delivered 60 ooa 65 00 Bessemer ferro-silicon, 12%, blast furnace. 43 loa .... COKE— Connellsville, furnace 3 25a 3 50 Connellsville, foundry 4 25a 4 75 Wise County, furnace 5 25a 5 75 Wise County, foundry 6 ooa 7 00 Pocahontas, furnace 8 ooa 8 50 Pocahontas, foundry 8 50a 9 50 New River, furnace 6 50a 7 50 New River, foundry 8 ooa 8 50 OLD MATERIALS.— The following prices are current in New York: Rerolling rails $l I 50a 12 00 Relaying rails (nominal) ... 37 50a 40 00 Old car wheels 11 ooa 11 50 Steel car axles 11 ooa 1 1 50 Iron car axles 18 ooa 19 00 Heavy melting scrap 7 ooa 7 50 No. I yard, wrought 11 50a 12 00 Iron and steel pipes 8 50a 9 00 Machine shop turnings 3 50a 4 00 Cast borings 5 5oa 6 00 Stove plates 9 50a 10 00 The need for continuity of supply is one of the factors which has led to the integration of industry. Things such as engines and cars are usually sold direct 54 Introduction to Economic Problems from maker to user. There are comparatively few works which make them and comparatively few users. The bar- gaining process is carried on between the sales agent of the maker and the purchasing agent of the user. Organized Speculation. — The bulk of the grain and cot- ton is sold through exchanges. As was explained above, this is made possible by grading the commodities. The presence of a large body of speculators gives a continuous market and steadies the price throughout the year. Raw-Material Merchants. — Because raw wool cannot be graded so satisfactorily, it is usually handled by dealers and sold by sample rather than by grade. Auctions. — Besides the use of auctions mentioned above to get goods into the hands of retailers, they are used in handling raw materials. Thus, much of the tobacco-leaf is sold at auction to the manufacturers of tobacco products. Raw furs are also sold at auction. 14. Organizations for Marketing in Foreign Countries. — For a long time our exports consisted largely of agricul- tural products. We may say that the foreigners took the initiative in buying our cotton, our wheat and flour, our meat. More recently some of the trusts have developed a foreign trade, which has involved more activity on our part. Thus, the Standard Oil Company, the International Harvester Company, the Singer Sewing Machine Company, the United States Steel Company, and others, either di- rectly or through subsidiaries, sell goods in many foreign countries. They are big enough to undertake alone the expense of foreign branches and agents. Smaller manu- facturers could not afford to do this. By the Webb Act, combinations for marketing abroad are permitted. Thus, it is contrary to the anti-trust laws for the manufacturers Marketing 55 to combine to exploit the home market, but it is perfectly- legal for them to combine to exploit the foreign market. 15. Exercises. — i. (a) What caused the separation of producer and consumer? (b) What are the functions of the merchant? Illustrate how these functions arise from the separation of the pro- ducer from the consumer. 2. Why cannot a merchant make the same percentage of profit on the turnover of all the articles he sells? 3. Get a copy of the Bulletin of the United States Bureau of Labor Statistics on Wholesale Prices. Make a list of the markets for the various articles. List the sources of information. 4. What functions of the middleman were performed even in a simple organization of society? Show the logical re- lationship among the following: trade, differentiation in production, territorial division of labor, transportation, middlemen. 5. How can a New York City store afford to deliver goods in Plainfield, New Jersey (about twenty-five miles from New York City) ? 6. (a) Enumerate the activities of middlemen in the dis- tribution of butter. Classify these activities as to whether they are productive or merely acquisitive. (b) Does it justify the continuance of the middleman to explain that he performs functions? 7. Account for the recent tendency of stores to take on other lines, e. g., drug-stores. 8. In how many different kinds of stores is candy sold? 9. Does it ever pay a store to carry goods, say postage- stamps, which it sells at cost? Why? 10. (a) Is the added expense of package goods justified? Defend your answer. (b) How do package goods make possible a simplification of marketing ? 11. Why is grading so important in the marketing of wheat ? 56 Introduction to Economic Problems 12. What would be the effect of a decline in illiteracy on the methods of marketing used and on the desires of con- sumers ? 13. Is it good salesmanship to force a sale on a customer? 14. Does advertising add to the price paid by the con- sumer of, c. g., Ivory Soap? Wrigiey's Gum? Ford auto- mobiles? Heinz 57 Varieties? 15. What difficulties would there be in the use of the parcel-post as a means of direct dealing with farmers to get butter, eggs, potatoes, and apples? 16. Why is the principal wheat market in Chicago, when there are other cities which actually handle more wheat? 17. W^hy do the prices of the different grains move in the same direction? 18. List the factors which influence the price of wheat futures. 19. Why does not the price of flour follow the price of wheat just before a harvest? 20. Is there an analogy between Blue Sky Laws and Pure Food Laws? Why or why not? 21. Is there anything which corresponds to fashion in the demand for securities? 22. What causes the greater fluctuation in the prices of speculative stocks as compared with investment stocks? 2 7,. Why is the New York Stock Exchange so much bigger than any other stock exchange in this country? 24. Why does the public condemn the bears more than the bulls? 25. Make a list of Ave things ranked according to their salability. Which would the bank prefer as collateral for a loan ? 26. Explain the difference in the function of speculation in the case of grain and in the case of stocks. 27. How would 106 street-car fare affect retailing in New York City? 28. (a) What effect does the telephone have on the loca- tion of a store? Marketing 57 (b) Do wholesale and retail houses require the same type of location ? 29. What is the difference between the department store in the city and the general store in the country town ? 30. Compare the efficiency of the co-operative retail store and the chain "cash-and-carry" store. 31. Why does not the department store drive out the single-line store? 32. How can the individual retailer survive the competi- tion of the chain store? 33. Discuss the possibility of developing the mail-order house for local trade. 34. What advantage, if any, has the specialty store over the department store? 35. Suppose a new method were devised which would permit milk to be kept indefinitely; how would it affect the marketing of milk? 36. What are the advantages and disadvantages of auctions ? 37. Is co-operative marketing advantageous or disad- vantageous to the consumer? 38. What was the marketing problem back of the prac- tices in the building-supply combinations exposed by the Lockwood Investigation in New York City ? 39. How does the purchase of a steam-engine differ from the purchase of coal ? 40. How do interlocking directorates connect up with marketing problems ? 41. Why is there considerable room for bargaining in sales for wholesale consumption? CHAPTER IV CYCLES IN TRADE AND INDUSTRY I. The Course of Cycles. 2. The Periodicity in Business. 3. Mithc- ell's Theory of Business Cycles. 4. Rising Prosperity. 5. The De- velopment of Stresses. 6. Crisis and Panic. 7. Depression. 8. Miti- gating the Crises. 9. Exercises. 1. The Course of Cycles. — Our modern complex indus- trial system is characterized by a pronounced variation in activity. At times we have prosperity, every one is work- ing, industries are being expanded and goods are being produced in great quantities. Then we have crises. Pros- perity is checked, pessimism replaces optimism, the indus- trial machine seems to falter and refuses to function. Sometimes these crises degenerate into panics. The mon- etary system, the banking system, and the credit system all fall under suspicion. The confidence which is necessary for their working appears to be lost. After the crisis or panic comes depression. It is often called "hard times." Production is slackened, factories are idle, and men are out of work. After a while prosperity develops again and the cycle repeats itself. 2. The Periodicity in Business. — In the United States we have had crises of greater or lesser severity in 18 14, 1818-1819, 1837, 1857, 1866, 1873, 1884, 1893, 1907, 1914, and 1920. In England, the crises in the same period came in 1810, 1814, 1819, 1825, 1837, 1847, 1^57; 1864-1866, 1882, 1890, 1893, 1907, 1914, and 1920. We notice that there is a rough but not exact correspondence. Sometimes we find a crisis in one country without a corresponding one in the other country. There are also differences in inten- S8 Cycles in Trade and Industry 59 sity in the two countries. Ten years seems to be the commonest interval, but it does not occur in a majority of the cases. By using refined mathematical methods, Pro- fessor H. L. Moore finds a cycle of thirty-three years with a minor cycle of about eight years superimposed. We may turn next to statistics which show the consider- able changes which take place in industry and in various markets. The monthly letter of the Federal Reserve Bank of New York for August, 1921, gives the following table showing a calculation in percentage figures of the production in this country of eleven important commodities in each month of this year up to June. To arrive at a fair estimate of normal production a statistical analysis has been made of all available figures for previous years, and allowances made for normal growth. The percentages are as follows: (Normal Production Equals 100) Jan. Feb. Mar. Apr. May June Anthracite coal mined . . Bituminous coal mined Pig-iron production . . . Steel-ingot production . Tin deliveries Cement production .... Cotton consumption . . . Wool consumption Sugar meltings Wheat flour milled Meat slaughtered IOI.3 73-6 70.0 58.3 30.1 77.8 54-8 55-4 53-6 79.6 88.2 II0.8 64.0 59-1 48.8 30.7 70.3 66.7 67.1 77-9 80.0 92.2 93-4 57-4 44-4 40.0 32.6 88.2 66.1 87.8 120.0 107.9 91.9 98.2 64.0 33-2 30.9 30.8 87.7 63.6 98.4 93-9 II3-7 lOI.I 88.9 67.3 33-7 31-9 23.7 82.8 67.1 105.2 80.3 104.6 96.9 94.1 65-9 30.8 26.5 30.8 83.6 72.5 106.6 79.2 116. 1 102.0 The following table, prepared by Bradstreet's, gives in percentages the decreases (or increases) of various things which indicate activity in business. July, 1 921, is compared 60 hitrodiiction to Economic Problems with July, 1920, and the seven months, January to July, 1921, is compared with the same period of the year 1920. December from Year Ago July 7 Months Price index-number, August i Bank clearings, United States 41.2 25 I 22.5 28.0 t 150.0 t37-3 25.0 t2.0 77-7 29.2 ti7.6 71.8 58.0 29.7 38.7 t32.7 14 5 21.4 8.4 66.8 50.5 t32.4 71.3 56.5 2.7 t228.7 *39-2 23.1 22.1 24.4 t 198.0 ti95-2 24.7 21 .2 46.9 20.9 t39.8 514 60.0 25.2 370 t4.5 ti.o 24.1 t2.5 57.0 41 .6 10.7 51-9 14 t48.o New York City Outside New York Failures (number) Failures (liabilities) Stock sales Bond sales Incorporations New capital issues Municipal-bond sales Pig-iron production Lake Superior iron-ore shipments Commerce Sault Ste. Marie Canal Mail-order business (two houses) Fire losses Anthracite-coal shipments Bituminous-coal production % Anthracite-coal production J Merchandise imports .' . . . Merchandise exports Building (Bradstreet's report) Steel-ingot output .... U. S. Steel Orders, July 31 Railroad earnings, gross § Railroad earnings, net § • Average for eight months, t Increase. t Week and season ending July 30. § May and five months. 3. Mitchell's Theory of Business Cycles. — The old ex- planations of crises proceeded on the assumption that pros- perity was the usual or normal state of affairs and that the crisis was due to some extraordinary event such as a crop failure, some great disaster such as a lire, flood, war. Each crisis thus had a different explanation. The newer expla- nation holds that our economic organization is so put to- Cycles in Trade and Industry 61 gether that we must expect rhythm in business; a more or less regular succession of prosperity and depression; of rising and falling prices. No mathematical exactness is expected in the periodicity. A favorable or unfavorable event may prolong or shorten the period of prosperity or depression. Thus, a good crop may shorten the period of depression. Many men had framed explanations to account for this recurrence. Most of these explanations picked out one factor and said it was responsible. Thus, Professor Irving Fisher blamed the crisis on the lagging adjustment of the rate of interest in times of rising prices. The theory now generally accepted was worked out by Wesley C. Mitchell, the American economist. He made an exhaustive study of the facts concerning cycles in busi- ness and endeavored to combine the good in all of the theories which had preceded his into an explanation which would square with the facts. His theory aims to describe and account for the variations of activity that occur in business. The analysis is from the point of view of the entrepreneur, whose activities are controlled by costs, what he can get for his goods, the vol- ume of sales, the profit margins, and both short and long time credit arrangements. 4. Rising Prosperity. — Mitchell chooses to start with the situation after a period of hard times or depression. Prime and supplementary costs of manufacture have de- clined. Stocks of goods in the hands of both wholesalers and retailers have become depleted. The liquidation of business debts which followed the crisis has been carried out. Interest rates are low, the banks have abundant re- serves, and so are in a position to increase loans. 62 Introduction to Economic Problems The situation with respect to both depleted stocks of goods and the ease of securing money at low-interest rates encourage investors to begin the purchase of corporation securities. Conditions are ripe for a renewal of business activity. Sometimes a propitious event starts the upward movement; but even without such an event, improvement takes place. An increase in the demand for commodities in any one field brings increases in demand in those industries which furnish raw materials and supplies to the industries which handle the increased output, also to the industries which deal in complementary or substitution goods and to those industries which supply the personal needs of the workers in the flourishing industries. Thus, at the outbreak of the war in 1914, there was a demand for food and munitions. The demand for munitions caused a demand for iron, steel, and machine-tools. This caused a demand for iron ore, coal, and limestone. The workers in these industries de- manded more food, clothes, and better houses. The in- creased demand for butter caused oleomargarine to rise in price. Railroads feel any increase in business since it means more transportation of raw materials and finished products. In the matter of distribution of consumable goods, the sales of retailers cannot be increased much without causing buying from jobbers, and then the jobbers must soon buy from manufacturers. Each industry that is stimulated thus stimulates others. The increased railroad transporta- tion causes increased demand for steel from the railroads. After this process has been going on for some time, the spirit of the business man changes from pessimism to optimism. In the early part of the period of stimulated production Cycles in Trade and Industry 63 there are certain factors which tend to keep prices down. As the scale of production increases, the cost per unit less- ens. The buyers are in a strategic position because for a long time orders have been scarce. Depression frequently breaks up combinations in business so that competition is keener. But prices eventually rise when the volume of business gets to that place where additional orders would require overtime work and new equipment. Combina- tions are re-established or new ones are formed, and buyers become anxious to purchase goods. Idle factories renew operations; others extend their plants, and new factories are started to provide for the rapidly increasing volume of sales. The rise in price of an article at any one stage of produc- tion raises the price at all subsequent stages, and the bid- ding of the manufacturers for raw materials passes back the rise to the earlier stages. The rise in prices is not even. Retail prices rise less quickly and to a less extent than the wholesale prices of the same commodities. This is ex- plained because custom is a more important factor in setting retail prices, and also some of the expenses of the retailers do not rise as rapidly as the wholesale prices of the prod- ucts. The wholesale price of finished commodities rises less rapidly than the price of the partially manufactured, and these in turn less rapidly than the price of raw materials. The explanation is similar to the case of retail prices since some of the manufacturing expenses do not rise as rapidly as the raw material. The wholesale price of manufactured goods used by consumers rises more quickly but to a less extent than the wholesale prices of manufactured goods used by producers. The wholesale prices of raw mineral products rise more rapidly than the wholesale prices of raw farm or forest products. This is due to the fact that 64 Introduction to Economic Problems mineral production is more nearly under the control of business men. The other industries are affected by the seasons. Wages rise less rapidly than wholesale prices. This is due in most cases to the fact that the workers are not so well organized as the parties dealing in the other markets. Many of the laborers may be working under contracts which run for a considerable time. Also the full or over time employment gives a greater total wage al- though the wage rates may not be increased. Discount rates do not rise at once, but very soon the in- creased activity along with the higher prices brings an in- creased demand for loans that causes an increase in rates. Profits in general increase, because some of the costs rise less rapidly than the increase in the selling price of the product. With the general increase in the amount of profits, the prices of stocks early rise because dividends are assured and perhaps the rate is increased. The rise in stocks is likely to come early because the stock-brokers dis- count the anticipated rise in earnings. The amount of money invested in business increases because the prospect of profit leads to the extension of old enterprises and the starting up of new ones. With the growth of business con- fidence, investors are no longer so insistent on high-grade bonds and are willing to take more risks in stocks. 5. The Development of Stresses. — This process of in- creasing prosperity involves many difficult problems. Will the demand for goods keep pace with the supply even at advanced prices? Will the cost of materials increase less rapidly than the selling price? Will the money incomes increase as rapidly as the cost of living? Will the bank reserves be ample to supply the increased banking liabili- ties? Prosperity inevitably brings a crisis. Supplemen- Cycles in Trade and Industry 65 tary costs, such as rent, interest, and supervision soon be- gin to increase. Then contracts providing for goods or services at a low cost expire and the oflScials get higher salaries. Then the plant must be enlarged. The prime costs, such as labor and materials, have been increasing right along. Raw materials are more expensive. With respect to labor, there is a double increase in cost. Wage rates are advanced and the average efficiency of labor decreases. This is due partly to the taking on of less skilful men and partly to the lessening of discipline and partly to overtime work. The rates on bank loans grad- ually increase. This is an important item in a great many industries where the considerable part of the extension is carried on with borrowed capital. The business manage- ment becomes less efficient because the manufacturers are overrushed in increasing production. They do not secure the fullest utilization of material and labor. They do not wish to change their processes or methods of organization because the delay would result in decreasing production. The investment market soon develops a shortage of capital. Business men have been putting money back into their own business. Others who have been paying high prices for various products do not have a surplus to invest. Thus industries which manufacture equipment for other indus- tries are often first hit. For a long time they were unable to supply the demands of those who wanted to get new equipment and perhaps to increase their plants. As soon as the demand for commodities falls off the demand for equipment to make them also falls. Tension develops in the short-time money market. Many have extended their business operations on borrowed funds, and when a check comes to business prosperity they 66 Introdiiction to Economic Problems find it necessary to continue their loans or even to increase them in order to protect their operations. The upward movement of prices does not affect all industries equally and cannot continue indefinitely. Certain prices are set by public regulation, such as the fares on street-cars. Some are set by contracts and some set by custom. The increased capacity of the various enterprises results in a larger volume of goods. This larger volume ordinarily cannot be sold at the old price. Whenever the construc- tion and work stop, orders for material and supplies fall off, and this causes a decrease in the prices. 6. Crisis and Panic. — When the prices of a finished product have stopped rising more rapidly than the cost, profits decline and frequently some particular industry will be particularly hard hit and will get into difficulty. Sometimes an unfavorable event, such as crop failure, political disorder, uncertainty about monetary standards, the outbreak of war, prices in foreign countries, give a start to liquidation. Liquidation when once started spreads from one enterprise to another, from one trade to another, from one place to another. The debtor in trying to meet his obligations may attempt to get some one else to lend him, may put pressure on those who owe him money, may offer inducements to settle to those who owe him amounts not yet due, may sacrifice for cash the goods on hand, and may sacrifice securities or other property he holds. Any of these methods make the situation more difficult for others. The demand for loans becomes very great because those who will need money in the future add their demand to those who need money at once, because they wish to make sure that they will have the funds when they need them in the future. Cycles in Trade and Industry 67 In the United States, before the Federal Reserve Act, this condition easily developed into a panic. The failure of business concerns resulted in bank suspensions or fail- ures. The market for loans and investments became de- moralized. Specie payments were suspended. Domestic exchange did not function in its ordinary way. Collec- tions became slow, prices of commodities fell rapidly. The fall in prices reverses the situation which we saw in the rise in prices. In other countries with central banks, and in the United States since we have the Federal Reserve Sys- tem, this short bank phase of panic is replaced by what is called a crisis. 7. Depression. — Industries gradually readjust their prime costs because materials fall in price, wages are reduced, and interest rates are lowered. Supplementary costs for a while increase because the volume of business is less. But in many cases an insolvency brings about a permanent re- duction of fixed charges. In many cases the big values of appliances and equipment may be written down even though the company is not reorganized. New men buy old enterprises at lower cost, old loans are renewed at lower rates, new enterprises are started with low prime costs due to the improvement in the process or in the machinery. The physical volume of business after certain periods shows increase because the accumulated stocks of goods are grad- ually disposed of. Goods used by consumers and producers wear out and must be replaced, population increases, and in the later stages of depression there is a demand for pro- duction. Finally, we get to the point where we started, which may be called the end of liquidation. 8. Mitigating the Crises. — Some people are in favor of scrapping our whole economic system because of depres- G8 Introduction to Economic Problems sions. Most economists would want to be very sure that what was put in its place would be better. They would retain our present economic order but attempt to prevent the great variation between prosperity and depression. One great advance has already been made in this coun- try. Formerly, because of our rigid banking and currency system, the crisis usually became a panic. The panic caused wide-spread ruin, many failed who should have been saved. The derangement of industry was greater than it should have been, and so the period of depression was prolonged. The Federal Reserve System has put an end to this condition. The banks can now meet all of the legitimate demands for credit or currency in time of crises. Possibly, the Federal Reserve Board may attempt to control credit expansion through the control of the rate of discount. There are three problems. In the first place, can the Federal Reserve Board control the rate of discount? At the start they could not because the banks did not need to rediscount at the Federal Reserve Banks. During the war they could control the rate, for nearly all of the banks were rediscounting. Because the Treasury Department wished low rates for government financing, the Federal Reserve Board did not try to raise rates. There is still a question as to how much rediscounting the member banks will do in normal times. The second question is whether the Federal Reserve Board, even if they had the power, would wish to exercise the control. We can imagine the outcry from interested business men if the Federal Reserve Board announced that business, was in danger of overexpansion and that an at- tempt would be made to check the expansion by raising the discount rate. Congress would probably intervene. Cycled in Trade and Industry 69 Most business men are not yet ready to give the control of prosperity into the hands of any board. The third question is still more fundamental. How effective is raising the discount rate in checking expan- sion ? Interest is only one of the costs of doing business and in many cases, a minor one. In the case of dealing in stocks, a high call rate in 1920 did not check speculation. The chances for profit were so great that the men were willing to pay the high call rate. Obviously, the problem is one of checking certain overexpanded industries. There is danger that the increased interest rate will hit the con- servatively run industry. The speculative ones are either able, because of large profits, to pay the higher rate, or at least they are willing to take the chance. In the end, we shall probably be forced to fall back on the judgment of the local banker. He should be able from his knowledge of the borrowers to curb the ones who wish to over- expand. One proposal attacks the problem of unemployment in the period of depression. It is suggested that govern- ment work and public improvements, so far as possible, be done in periods of depression. Often in periods of prosperity the government adds its demand to the other demands and so helps in the expansion. Of course, this plan has its limitations. Much government work and many public improvements cannot well be postponed. Then again, all who are out of work could not be given work at such enterprises. Naturally, the physically strong could do common labor, but that would hardly be satis- factory. In the chapter on Social Insurance is discussed the prob- lem of providing insurance for unemployment. 70 Introduction to Economic Problems Another suggestion is that business men should be edu- cated in the knowledge of the business cycle. Business forecasting should be developed in such a way that the business man, knowing what was about to happen, could be prepared for it. 9. Exercises. — i. {a) Distinguish between a panic and an industrial depression. {b) Were there panics under the manorial system in England ? (c) Trace the connection between our present economic organization and the existence of crises. 2. To what extent could we have crises if we did not have a credit system? 3. Illustrate from the clothing industry the interdepen- dence of modern business. 4. (a) How may a boll-weevil pest in the cotton-crop of Texas affect the production of woolens ? (6) Show how an automobile manufacturer is affected by the fortunes of his customers, his competitors, and those who sell supplies to him. 5. List the reasons why credit instruments are not always met at maturity. 6. Trace the interests, in time of depression, of business men, workers, and consumers with reference to the volume of goods to be produced. Is the course which yields the most profit to the business man the one which best pro- motes the public interest? 7. Trace the effect of price changes on profits. 8. Why do not retail and wholesale prices move to- gether? raw materials and finished products? railroad rates and steel rails? the rate of wages and the cost of living ? 9. {a) Why do not prices during periods of prosperity keep on rising indefinitely? {h) In what way is the movement in the price of a par- Cycles in Trade and hidustry 71 ticular commodity, say cotton cloth, affected by an up- ward move in the general level of prices ? 10. Explain how liquidation spreads. 1 1 . Indicate the problem of the banker in times of pros- perity and in times of depression. CHAPTER V THE OPERATION OF THE FEDERAL RESERVE SYSTEM I. The Weekly Statement. 2. Cash Items^Operation of the Gold Settlement Fund. 3. Bill Holdings — Trade Acceptances. 4. United States Bonds and Certificates. 5. The Banking-House. 6. The Col- lection System. 7. The Capital Liabilities. 8. Deposits — Services for the Government — Mobilization of Reserves. 9. Notes of the Banks. 10. Other Liabilities — Earnings. 11. The Reserve Ratios. 12. The Discount Policy of the Federal Reserve Board. 13. The Aid to Foreign Trade. 14. Summary of Benefits of the System. 15. Exercises. 1. The Weekly Statement. — Perhaps the best way to study the operation of the Federal Reserve System is to consider the statement of resources and liabilities as given out each week. Resources 2. Cash Items — Operation of the Gold Settlement Fund. — Gold Coin and Certificates. — Since the United States is on the gold standard, all obligations of the Federal Re- serve Banks are ultimately payable in gold. Thus, we see that gold coin and certificates make a very important item. The certificates, it will be remembered (Turner's Introduction, page 214), are issued by the United States Treasury on the deposit of gold coin. Gold Settlement Fund, Federal Reserve Board. — In Tur- ner's Introduction, page 300, the workings of the local clearing-houses have been explained. The Gold Settle- ment Fund of the Federal Reserve Board serves the same purpose. It would be impossible for the representatives of the twelve Federal Reserve Banks scattered all over the country to get together in any one place to offset the 72 The Federal Reserve System 73 FEDERAL RESERVE STATEMENT. RESOURCES. Sept. 21, 1921. Sept. 14, 1921. Sept. 24, 1920. Gold and gold certificates $428,036,000 $446,642,000 $183,826,000 Gold settlement fund — Federal Re- serve Board 411,210,000 441,109,000 341,303,000 Gold with foreign agencies 111,455,000 Total gold held by banks $839,246,000 $887,751,000 $636,584,000 Gold with Federal Reserve agents . . 1,777,529,000 1,694,301,000 1,211,619,000 Gold redemption fund 94,353,000 102,449,000 141,632,000 Total gold reserves $2,711,128,000 $2,684,501,000 $1,989,835,000 Legal tender notes, silver, &c 151,968,000 150,001,000 161,759,000 Total reserves $2,863,096,000 $2,834,502,000 $2,151,594,000 Bills discounted: Secured by U. S. Government obligations 495,156,000 503,677,000 1,220,423,000 All other 892,081,000 924,485,000 1,484,041,000 Bills bought in open market 33,514,000 40,712,000 307,624,000 Total bills on hand $1,420,751,000 $1,468,874,000 $3,012,088,000 United States bonds and notes 38,081,000 33,729,000 26,877,000 U. S. certificates of indebtedness: One-year certificates (Pittman act) 184,875,000 187,875,000 259,375,000 All other 8,571,000 19,803,000 11,248,000 Total earning assets $1,652,278,000 $1,710,281,000 $3,309,588,000 Bank premises 29,111,000 28,877,000 15,370,000 5% redemption fund against Federal Reserve Bank notes 8,917,000 8,845,000 11,824,000 Uncollected items 591,811,000 641,279,000 817,843,000 All other resources 16,448,000 16,801,000 6,056,000 Total resources $5,161,661,000 $5,240,585,000 $6,312,275,000 I.IABII.ITIES. Capital paid in $103,017,000 $102,982,000 $97,401,000 Surplus 213,824,000 213,824,000 164,745,000 Reserved for Government franchise tax 50,777,000 50,101,000 Deposits; Government 74,183,000 49,219,000 46,493,000 Member banks— Reserve account. 1,588,209,000 1,631,038,000 1,800,677,000 All other 29,218,000 25,574,000 34,910,000 Total deposits . $1,691,610,000 $1,705,831,000 $1,882,080,000 Federal Reserve notes in actual cir- culation •.•■■.•• 2,474,676,000 2,491,651,000 3,279,996,000 Federal Reserve Bank notes in cir- culation— Net liability 103,590,000 103,078,000 214,180,000 Deferred availability items 503,174,000 553,235,000 595,342,000 All other liabilities 20,993,000 19,883,000 78,531,000 Total liabiUties $5,161,661,000 $5,240,585,000 $6,312,275,000 Ratio of total reserves to deposit and Federal Reserve note liabilities combined 68.7% 67.5% *43.6% Ratio of gold reserves to Federal Re- serve notes in circulation after set- ting aside 35% against deposit liabilities 91.8% 89.8% *74.9% * Calculated on basis of net deposits and Federal Reserve notes in circulation. 74 Introduction to Economic Problems obligations arising in the course of business. So the proce- dure indicated below is followed. The Federal Reserve Board has a system of private wires connecting all of the Federal Banks and branches. Every business day, each bank and each branch telegraphs in to the Federal Reserve Board in Washington the amount of obligations which are due them from the other banks and branches. Each bank has on deposit in the Treasury at Washington under the con- trol of the Federal Reserve Board a certain minimum amount of gold. The debits and credits of each individual bank are offset by the Federal Reserve Board, and changes in the ownership of this gold are made to settle the bal- ances to be paid or the balances due. Gold with Foreign Agencies. — As an incident to the transactions with our allies during the war, the Federal Reserve Banks held a certain amount of gold with banks abroad. It will be noticed that no amount is given in the statement for this year. Gold with Federal Reserve Agents. — We shall see later that Federal Reserve notes may be issued against the de- posit of gold with the Federal Reserve agent. This gold is also used as part of the reserve held against the notes and so comes under the heading Resources. Gold Redemption Fund. — The Federal Reserve notes are redeemable in gold at the Treasury in Washington, so it is necessary for the Federal Reserve Banks to provide the Treasury with gold to meet the demand for redemption. The law specifies that a fund of at least 5 per cent shall be held in the Treasury. This appears in the statement as the gold redemption fund. Legal Tender Notes, Silver, etc. — Included under this heading are the greenbacks or United States notes, the sil- The Federal Reserve System 75 ver certificates and silver coin. The variations which have taken place have been partly due to the sale and repur- chase of silver under the Pittman Act. The items consid- ered so far make up the total reserves. It will be remem- bered that the bank must hold 40 per cent of the outstand- ing Federal Reserve notes in gold and 35 per cent of the deposits in gold or lawful money. 3. Bill Holdings — Trade Acceptances. — Bills Discounted Secured by Government War Obligations. — ^The theory of the Federal Reserve System is that it is to deal in commercial paper. The law provides that money borrowed from the Federal Reserve Banks cannot be used for the purpose of speculation in stocks and bonds. Therefore, notes secured by stocks and bonds as collateral cannot be rediscounted with the Federal Reserve Banks. An exception is made for notes secured by obligations of the United States Gov- ernment. The idea, of course, is that all the banking facilities of the country should be at the service of the gov- ernment if necessary. The notes secured by government war obligations are of two general types. First, the col- lateral notes of the member banks secured by government war obligations; this means that the borrowing bank gives its own note to the Federal Reserve Bank and offers as security government war obligations. Second, other dis- counted bills secured by war obligations; this means that member banks take the notes of their customers which are secured by government war obligations and rediscount them with the Federal Reserve Banks. Bills Discounted, All Other. — This item includes member banks' collateral notes, secured otherwise than by govern- ment war obligations. The law provides that banks may borrow from the Federal Reserve Bank and offer as col- 76 Introduction to Economic Problems lateral bills and notes which would be eligible for redis- count. It has been a common practice of the banks to borrow on lifteen-day notes and offer as collateral notes of their customers which could be rediscountcd, which run perhaps for thirty to sixty days. Obviously, it is simpler to do this than it would be to rediscount a large number of notes of comparatively small denomination. Another ad- vantage, of course, is that the bank may not have notes on hand which mature in the short period for which they desire to borrow the money. Bills BougJd in the Open Market. — ^The Federal Reserve Act permits the Federal Reserve Banks to engage in what are called "open-market transactions." The primary pur- pose of this permission is to enable the banks to control the movement of gold in foreign exchange. Thus, they are permitted to buy certain types of foreign bills of ex- change, but also they may buy certain types of bills in the domestic market. It has been the hope of many people that we could introduce in this country the settlement of obligations by trade acceptances. The Federal Reserve Board, the National Association of Credit Men, and the American Bankers' Association all have co-operated in a camjiuign to educate the American business men in the use of the trade acceptances. The trade acceptance is in- tended to supplant the method of selling goods on open account; that is, the selling of goods where no record is made of the transaction except on the books of the parties concerned. When the trade acceptance is used, the seller of goods draws a draft on the purchaser. In brief, this draft is addressed to the buyer by the seller and says: "Pay to the order of ourselves so many dollars." On the face of the draft is an indication of the transaction out of The Federal Reserve System 11 which the draft arises. This draft when presented to the purchaser is "accepted" by him if the goods have arrived in satisfactory condition. The purchaser writes "accept- ed," signs his name, and makes the draft payable at a certain bank at a certain time. The acceptance then be- comes his promise to pay. The big dechne in the total of bills on hand shows the effect of declining prices and de- pression on bank borrowing. In foreign trade, the bankers' acceptance is used to greater extent. This is explained in the chapter on Foreign Exchange. 4. United States Bonds and Certificates. — United Stales Government Bonds. — The holdings under this title are the result of the provisions of the Federal Reserve Act which were intended to get rid of the national bank note circula- tion. The national bank notes are secured by the deposit of government bonds. Because of the profit involved in the issue of notes, the government was able to sell bonds to be used to secure notes which bore the low rate of in- terest of 2 per cent. Any plan to retire the national bank notes had to make provision for relieving the banks of these bonds. The amount held in the banks at the time of the passing of the act was about $740,000,000. The law provided that each year the Federal Reserve Banks should buy, if the Federal Reserve Board directed, $25,000,000 worth of these bonds from the national banks. The Fed- eral Reserve Banks might issue Federal Reserve Bank notes against these bonds, or they might have half of them changed into 3 per cent thirty-year bonds and the other half into 3 per cent one-year gold notes of the government which were to be taken on the agreement to purchase at the end of the year an equal amount of one-year gold notes 78 Introduction to Economic Problems and repeat the process for thirty years. Because the war bond issues were at a higher rate than 3 per cent, the Fed- eral Reserve Board has not required the banks to buy bonds from the member banks since the war. United States Certificates of Indebtedness. — This item is composed of two kinds of certificates of indebtedness. First, the certificates of indebtedness issued by the govern- ment for short-term financing. The Federal Reserve Banks have always taken a certain amount of these. The second type of certificate is the one-year certificate. One- year certificates of indebtedness were issued under the terms of the Pittman Act, to be deposited as security for an issue of Federal Reserve Bank notes. These notes took the place of the silver certificates which had been backed up by the silver dollars melted for bullion under that act. As the silver is repurchased, these certificates will be re- tired. We may expect considerable variation in the amount of the other type of certificates of indebtedness. Just be- fore payment of interest on Liberty bonds is due, the government may borrow on short-term certificates from the Federal Reserve Banks. As the investment market improves, presumably the certificates of indebtedness will get more and more into the hands of the investing public. 5. The Banking-House. — Bank Premises. — The banks, of course, must have quarters in which to carry on their business. In most of the cities, the banks have purchased real estate upon which they will later build. Since the earnings have been great, the banks have followed a very conservative course in the matter of writing off the cost of the buildings located on the real estate purchased where they intend to tear down the buildings later. The Federal Reserve System 79 Five Per Cent Redemption Fund against Federal Reserve Bank Notes. — Federal Reserve Bank notes, just as national bank notes, are secured by government obligations and a fund equal to 5 per cent of the notes outstanding is de- posited in the Treasury at Washington for redemption of the notes. The fund need not be gold, it may be lawful money. 6. The Collection System. — Uncollected Items. — This heading covers a large number of items, many of which are small in amount. "Due from foreign banks" is a small item now. National bank notes are not legal tender and so could not be counted above in stating the resources. They are, however, assets of the Federal Reserve Bank which holds them. Bank-notes of other Federal Reserve Banks according to the law cannot be paid out by the Federal Reserve Bank under the penalty of 10 per cent. So these two items could not be used as reserve. Federal Reserve notes of the other Federal Reserve Banks come under the same rules. Unassorted currency is an asset, but until it has been assorted it cannot appear in a state- ment under other holdings. The largest single item in this classification consists of transit items. One of the functions of the Federal Reserve Bank is to act as a clearing-house for the member banks of its district. Previous to the start of the Federal Reserve System, checks received by a bank on banks outside of its own city were collected usually through correspondent banks. Under the National Banking System, banks in all cities except New York, Chicago, and St. Louis were permitted to count as reserves balances in central reserve or reserve city banks. These balances, besides being used as reserves, were the basis of the system of domestic exchange. When a customer of a bank desired to make payment at a distance 80 Introduction to Economic Problems and did not wish to send his own check, he got from his bank a bank draft, that is, the bank's check on its deposit in another city. Usually, of course, the draft was on a New York bank. Banks in reserve and central reserve cities paid a small rate of interest, usually 2 per cent, on these balances. It was to the advantage of the bank to be able to make this small earning on the money which was also functioning as a reserve. The banks ordinarily built up their balances in the reserve city banks by sending checks which they had received which were drawn on banks out- side of their own city. Thus, the depositing of reserves, the drawing of drafts, and the check collection system tended to concentrate funds in New York. One of the purposes of the Federal Reserve Act was to cause a decen- tralization of banking. We will see how the Federal Re- serve System provides for the collection of checks. Each bank may send to the Federal Reserve Bank of its district all the checks on other banks which it has received in the course of business. The Federal Reserve Bank credits the bank at par for these checks, but the credit is not always made the day it is received. The banks of the country are divided into classes accord- ing to the length of time which it takes for the Federal Reserve Bank to send the item to the bank and get the bank's payment for it. These classes are one day, two, three, four, live, six, and eight days. The bank gets credit then, at the end of this period, for the total amount of the checks. The bank to which the check is sent usually pays the check by drawing on its balance at the Federal Reserve Bank. This balance is built up by sending checks on other banks which it has received in the course of business. Thus, the Federal Reserve Bank, in practice, performs the same The Federal Reserve System 81 function as the clearing-house does for banks in a given city, since most of the checks to be collected are sent to the Federal Reserve Bank, and the payment is actually made by offsetting the debits and credits of the various banks. It is the aim of the Federal Reserve Board to have this system of check collection cover the entire country. So, not only member banks, but all banks are urged to utilize this system. The law provides that non -member banks may carry balances with the Federal Reserve Banks for the purpose of meeting payment of checks. The Fed- eral Reserve Board has been successful in getting a very large proportion of the banks of the country to join the system. In almost all of the districts all the banks have agreed to remit for their checks at par. In some of the States in the South and West opposition has been encoun- tered and the system is still incomplete. A member bank may send a check on a bank in another district to the Fed- eral Reserve Bank of that district and get credit in its own Federal Reserve Bank. The settlement between Federal Reserve Banks is made by the Gold Settlement Fund, which was mentioned above. Liabilities 7. The Capital Liabilities. — Capital. — The capital of the twelve Federal Reserve Banks at the end of the respective years has been as follows: Capital of Federal Reserve End of Year Banks in thousands 1914 $18,051 I915 54-913 I916 55,694 I917 70,442 1918 80,767 I919 87,407 1920 '. 99,770 I921 103,186 82 Introduction to Economic Problems This increase in capital is due to three factors. The law provided that each member bank should subscribe for 6 per cent of its capital and surplus in the stock of the Federal Reserve Bank. One-sixth of this subscription was to be paid at the call of the Federal Reserve Board; another one- sixth within three months after that, and another one- sixth within six months after the first call. That is, one- half of the subscribed capital was to be paid in. The other half was to remain as an unpaid subscription. At the end of the year 1914, only one payment had been made, so part of the increase which comes in the year 19 15 was due to the fact that two more instalments were paid. Whenever a member bank increases its capital or surplus, it must subscribe to an extra amount of capital stock in the Federal Reserve Bank. Whenever a new national bank is formed, it also must subscribe the same amount as the national banks which were in existence at the time when the law was passed. A state bank becoming a member makes the same subscription as the national bank. The big increase in the capital due to the membership of state banks comes in the year 1918. In the fall of 1917, the President of the United States issued an appeal to the state banks to join the Federal Reserve System in order to strengthen the financial position of the country in the prosecution of the war. This appeal was largely heeded in both 191 7 and 1918. The increasing volume of business, due to the rising prices and to the activity of war times, caused a great number of banks to increase their capitalization, and this has been re- flected in the growth of the capital of the Federal Reserve Banks. Surplus. — The surplus of the Federal Reserve Banks is closely connected with the earnings of the banks, for it is Thr h'nlnnl Hr.'urvr Hy.^lnii W^ Irom lln* (*x( ("iii ul (ill iiiii)^;s over I lie «livilir:, ol lood .iiid iiiiiiiil ioiiH, WG began tO Sell vai-it (|uaiililic;i ol /.Mioih lo I'liiiopr. 'I'Im- payiiM^iil of thene goodw wa,4 made partly in I In- kIiuii ol Aineiitaii Hecuritles held abroad, but partly in i-old As a result the United States received over $j, 000,000,000 in K"ld from abroad, 'V\\h lar^e sum of gold, along with tlif* lertHtMmd reserve rerjin'rcoK'nlrt enactt^rl by Ihe I'edf^nil Kewerv*" Arl, gave a surplo; ol l<.;iii;d)l< iuiid. in mo, I ol (liebanks. I'oi the first I wUi-J, lo Ihe j-'overnmcnl a;i ;i lr;in< liise tax and may be used hy lli< i^-ov. mhik id lo kIih- ind<|j|jed very 84 Introdiiciio7i to Economic Problems largely. People were urged to buy bonds with borrowed money. The banks rediscounted these notes of the bor- rowers with the Federal Reserve Banks. So, in a sense, we may say that the bonds were purchased by the expan- sion of bank credit in the form either of Federal Reserve notes or of deposits in the Federal Reserve Banks. In order to facilitate the financing, the Federal Reserve Banks kept the rate of rediscount low. Thus, although the volume of rediscounts was very large, the earnings did not increase as much as they did later when the Federal Reserve Board, feeling that the obligation to those who had borrowed to buy bonds had been fulfilled, authorized the Federal Re- serve Banks to raise the rediscount rate. This took place during the post-armistice boom in business, when there was still greater expansion of note issues and deposits. The result of increased rates and higher discount rates meant enormous earnings, so it will be noticed that the surplus of the banks as a whole is over twice as great as the paid-in capital stock. Reserved for Government Franchise Tax. — This item is ex- tremely important, as it enables us to get a rough estimate of the earnings each week. Nine-tenths of the net earn- ings after dividends goes to the government, so ten-ninths of the increase in this item represents, roughly, the earn- ings for the week. 8. Deposits — Services for the Government — Mobiliza- tion of Reserves, — Government Deposits. — The Federal Reserve Banks act as fiscal agents for the government. The law gives the secretary of the treasury the option whether he shall deposit the government funds with the bank or not. Most European governments keep all of their funds in banks. We still have the independent The Federal Reserve System 85 treasury system, started in 1846, when the banks of the country were really not sound and it was wise for the gov- ernment to take care of its own funds. The system was modified after the passage of the National Bank Act by making the national banks depositaries. It is hoped that eventually we will do away entirely with the independent treasury system. The amount of government deposits has been cut down since the close of the war. Already the sub- treasuries have been abolished. The Federal Reserve Banks handle the issue and repayment of certificates of in- debtedness for the Treasury Department in the United States. They pay the interest on the Liberty bonds and take charge of the issuing of the permanent bonds in place of the temporary bonds first issued. The United States Government bears the cost of these fiscal agency services. Due to Members. — Reserve Account. — This item points to one of the great achievements of the Federal Reserve System; namely, the mobilization of reserves. Under the former system part of the reserve was held in the individual bank, and in times of crisis, one bank might have abun- dant reserve while another was greatly in need of reserves, but there was no easy way by which reserves could be transferred from one bank to another. We have seen that in times of emergency, by means of clearing-house loan certificates, a rather crude method of meeting the situation was devised. The part of the reserve which was held in New York was obviously insufficient to meet the demands of all the banks, who feared that they might need the reserve and so called for it whether they really did need it or not. The original act provided for a scheme of reserves in which part was to be held in the bank itself, part in the Federal Reserve Bank, and part in either. An amend- 86 Introduction to Economic Problems ment during the war reduced the reserve requirement and provided that it should all be held in the Federal Reserve Bank. Of course, the bank must still hold some funds in its own vaults, but the law allows each bank to use its own judgment as to the amount which shall be so held. Now, any bank which is in difficulty can utilize the reserve held in the Federal Reserve Bank by means of rediscount- ing paper with the Federal Reserve Bank. In this way it can get Federal Reserve notes if its depositors are demand- ing cash, or it can get a deposit credit at the Federal Re- serve Bank which can be used as reserve for an increase in deposits given to those who wish to borrow money. Other Deposits. — This item includes the credits of foreign governments, which were of considerable importance dur- ing the war but which now are rather small in amount. It also includes the balances held by non-member banks for the purpose of clearing, as was explained above in the account of the check collection system; and also three items — ^cashiers' checks, Federal Reserve exchange drafts, and Federal Reserve transfer drafts. It is seen that these are outstanding liabilities of the bank not yet presented for payment. 9. Notes of the Banks. — Federal Reserve Notes in Actual Circulation. — The figure for notes in actual circulation is obtained by subtracting from the notes outstanding those held by the bank and branches and those forwarded for redemption. It is interesting to see that the amount of Federal Reserve notes in circulation is larger than the amount of any other kind of money. The war decided the question of elasticity on the one side, that is, of expan- sion; and the notes proved adequate to meet every de- mand. We have not yet seen whether they will contract The Federal Reserve System 87 as easily as they expanded. There has been some con- traction. The original act provided that these notes should be backed by loo per cent short-time commercial paper and 40 per cent gold reserve. During the war, this was changed to the requirement that they should be backed by 100 per cent of gold and commercial paper, at least 40 per cent of which must be gold. The accounts of the bank show that they always carry more gold and com- mercial paper than the law requires. We may trace the way in which these notes expand to meet the demands of trade. If a bank has an increased demand for loans, it may rediscount some of its notes at the Federal Reserve Bank in order to provide for the new loans. The Federal Reserve Bank may deposit this paper with the Federal Reserve agent and get in return Federal Reserve notes. Thus, we see that the increasing demands in business which show themselves in the increased amount of commercial paper furnishes the basis for the increase in note issue. On the other hand, if the total volume of loans of the bank is decreasing, it will pay its rediscounts at the Federal Reserve Bank at maturity instead of replac- ing them with other rediscounts. The payment will be made to the Federal Reserve Bank in the form of money or credit instruments redeemable in money. The Federal Reserve Bank in order to get back the collateral must deposit with the Federal Reserve agent Federal Reserve notes or lawful money. It might be that the bank would send in Federal Reserve notes and the Federal Reserve Bank could deposit them directly. If some other form of money is deposited with the Federal Reserve agent, the amount of Federal Reserve notes outstanding may not be decreased immediately, but ultimately the notes will be 88 Introduction to Economic Problems returned for redemption and the other forms of money deposited will be paid out for this purpose. Federal Reserve Bank Notes in Circulatioii, Net Liability. —This amount is obtained by subtracting the bank-notes held by banks and branches from the total outstanding. These Federal Reserve Bank notes are similar to the national bank notes; that is, they are secured by the deposit of government obligations. Those outstanding are due to two operations of the Federal Reserve System. The first resulted from the taking over of bonds by the Federal Reserve Banks as part of the provision for the retirement of the national bank notes. Second, some resulted from the operation of the Pittman Act, which was explained above. The decision to use Federal Reserve Bank notes instead of Federal Reserve notes to replace the silver cer- tificates which were retired when the silver dollars were melted up was based on the fact that 5 per cent instead of 40 per cent gold reserves would need to be kept against them. Deferred Availability Items. — ^This item corresponds to the entry "Uncollected Items" under resources. We have seen that in the check collection system certain items are not available until after a certain period. These items are liabilities which are not yet due. To make this clear, sup- pose a member bank sends in a check on another bank. This check appears once as a deferred liability of the Fed- eral Reserve Bank since it, in two days or so, will owe the bank sending the check in the amount of the check. It appears once as a deferred asset because, at the end of the two days, the Federal Reserve Bank will have a claim on the bank on which the check was drawn. The two deferred items should be approximately the same in amount. The Federal Reserve System 89 10. Other Liabilities^ — Earnings. — All Other Liabilities. — This is an extremely important subdivision, made up of a large number of items. It includes the item which ap- pears in the ordinary bank statements as undivided profits. It includes the earnings which arise from the discount on bills discounted, the discount on bills purchased, the inter- est on United States securities, and the penalties on deficient reserves. This last item calls attention to the fact that if member banks do not keep the reserve required by law they are fined by the Federal Reserve Bank. From these gross earnings are deducted the current expenses, and this gives the current net earnings. From the current net earnings, the dividends paid are deducted. The amount left is avail- able for surplus and the franchise tax. As was indicated above in considering surplus the banks have pursued a liberal policy in setting up reserves and in writing off costs for furniture, fixtures, vault, etc. To the amount of net earnings is added the unearned discount and from this sum the interest accrued on United States securities is subtracted. This gives the total as it appears in the balance-sheet. 11. The Reserve Ratios. — At the foot of the table is given the statements of percentage of reserves. This is given in two forms; the important one is the percentage of total reserves to deposit and Federal Reserve note liabilities. In the earlier statements, uncollected items and other de- ductions from gross deposits were subtracted from the total on which reserve was to be held and the deferred availa- bility items were added. In March, 192 1, this practice was discontinued, and so now the statement is on the basis of deposit liabilities and note liabilities compared with the actual reserve. 90 Introduction to Economic Problems 12. The Discount Policy of the Federal Reserve Board. — The Federal Reserve Banks are operated for public ser- vice, not for profit. So the Federal Reserve Board need not be hampered by consideration of profit in carrying out its policies. The board aims to make the discount rates more equal throughout the country. We need not expect the rates to be exactly uniform. One of the advantages of the system of regional banks over a central bank is the possibility of varying the rates in the different sections of the country. For high rates are not entirely an indication of a lack of capital. They are due partly to the greater risks in the newer sections. If one Federal Reserve Bank needs funds another will rediscount for it. Thus, the supply of funds is equalized throughout the country and the discount rates made more uniform. During the war the discount policy of the Federal Re- serve Banks was shaped to aid in the government financing. The secretary of the treasury wished to float the loans be- low the normal rate of interest. To do this it was neces- sary to keep the rate of discount in the money markets abnormally low. This low rate was obtained by having the Federal Reserve Board set low rates of rediscount. To aid in the sale of bonds on credit, the Federal Reserve Banks gave a still lower rate on loans secured by govern- ment war obligations. The post-armistice boom brought a big expansion of bank credit. The Federal Reserve Board felt bound to allow the rates to remain low for a year, since promises had been made to that effect during the loan campaign. So the efhcacy of high discount rates in checking expansion was not tested. The reserves of the Federal Reserve Banks The Federal Reserve System 91 fell to near the danger-line. So after the year was over, the Federal Reserve Banks raised rates vigorously. Deflation followed, and of course some of those hit blamed it on the policy of the Federal Reserve Board. The better opinion seems to be that the prices could not have been maintained anyway in the face of increased production and the falling off of the war demand. The main object of the Federal Reserve Board, the improving of the percentage of reserves, was accomplished. In the chapter on Cycles in Trade and Industry is dis- cussed the possible policy of the Federal Reserve Board in the control of credit expansion. An allied problem is the protection of the gold supply of the country from with- drawals for shipment to other countries. Just now the question is, rather, how to prevent the accumulation of too much gold in the United States. However, after recon- struction has been achieved, there will no doubt be times when we wish to protect our stock of gold. The Bank of England used to prevent gold from leaving England by raising the discount rate. The efficacy of the measure de- pended upon its attracting loanable funds from other money centres. London was a great bill market, and at that time, a free gold market. So lenders were sure that their funds could be invested to take advantage of the high rate and that when they wanted the funds back again, they could have them in gold. The Federal Reserve Board is aiding in developing a market for bankers' acceptances in New York. This will provide the bill market. We are at present the only large free gold market in the world. Thus, the factors are all favorable for the use of this device if the banks are rediscounting enough at the Federal Reserve Banks to force them to follow the 92 Introduction to Economic Problems Federal Reserve Banks' rate in setting the rate on bankers' acceptances. 13. The Aid to Foreign Trade. — Foreign trade is facili- tated by banks in foreign countries controlled by our own citizens. Often in the past our dealers have complained that the foreign banks through which they dealt aided their competitors. The Federal Reserve Act helps in several ways in providing banking facilities abroad. In the first place, national banks with a capital and surplus of one million or over may establish, under the control of the Federal Reserve Board, branches in foreign countries. In the second place, national banks may subscribe up to 10 per cent of their capital and surplus in the stock of banks doing a foreign banking business. Again the act provides for the chartering of corporations which are authorized to do a foreign banking business under the supervision of the Federal Reserve Board. Action has been taken under these provisions. The depression in foreign trade will pro- vide a severe test for such institutions. 14. Summary of Benefits of the System. — In brief, the Federal Reserve System has unified our banking system, centralized reserves, given an elastic currency, made pro- vision for foreign banking, aided in financing the war, pre- vented crises degenerating into panics, improved the facili- ties for collecting checks, provided facilities for financing foreign trade, helped make bank assets more liquid, and made a start at controlling discount rates and the inter- national movement of gold. 15. Exercises. — i. Why not have a Gold Settlement Fund for international obligations? 2 . Should Federal Reserve Banks be permitted to discount bills or notes secured by government bonds in time of peace ? The Federal Reserve System 93 3. Explain how the Federal Reserve Banks can control gold movements through the holding of foreign bills. 4. Explain the use of the trade acceptance. 5. Suggest a way for eliminating the national bank notes from circulation. 6. In what way is the Federal Reserve Bank less efficient for clearing than the local clearing-house? 7. Why should people want decentralization in bank- ing? 8. Compare the assets of the Federal Reserve Bank of New York with those of the other banks. What per- centage of the total does the New York bank hold? 9. What advantage would universal par check collec- tion be to the business man ? 10. How much capital and surplus does a Federal Re- serve Bank need? 11. Trace roughly the course of earnings of the Federal Reserve Banks and predict whether this year's earnings will be greater or less than last year's earnings. 12. What services do the Federal Reserve Banks per- form for the government? 13. Show that the present reserve holdings are safer than the holdings before the Federal Reserve Act although the percentage of reserves is less. 14. Trace the security back of the Federal Reserve notes until you get to actual concrete wealth. 15. Indicate the process by which Federal Reserve notes expand to meet the demands of business and contract when no longer needed. 16. What item indicates the earnings of the banks? CHAPTER VT SOCIALISM 1 . The Problrins of the Distribution of Wealth. 2. Utopian Socialism — Fourier— Owen. 3. The Theoretical Basis of .Socialism— Marx. 4. Socialist Criticism of the Present Order. 5. Consideration of the Criti- cism. 6. The Socialist Proposals. 7. The Socialist Party— Number of Voters — Platform. 8. (iuild Socialism. 9. Exercises. I. The Problems of the Distribution of Wealth. There are two problems in the distribution of wealth: (a) the de- termination of remuneration for services of the various factors in production, and (b) the determination of the amounts which dilTerent individuals in society get. In the case of many laborers, there is only one source, their wages. Some in(Hviduals receive wages, rent, interest, and l)rolits. Obviously, it is the second type of distribution which starts most of the discussions about the justice of the present order, but very soon the discussion gets back to the legitimacy of the shares of distribution in the first sense. The single-taxers attack the private receipt of land rent. The socialist would rule out all shares except wages. The labor movement has taken on different forms in different coimtries. In (ireat Britain and the United States, the trade union movement is the most important aspect of the effort of hdjorers tt) improve their condi- tions. Tliis movement is discussed in other chapters. On the continent of lOurope, although there are trade-unions, more emphasis has been given to socialism. Speaking broadly, we may say that the trade-unionist accepts the present economic order, and, working within that order, 94 Socialism, 95 endeavors to improve his condition by getting shorter hours and higher wages. The socialist aims to improve his condition by changing the present economic order. There are different aspects of socialism. 2. Utopian Socialism.^ — The early socialist movements were characterized by planning for ideal commonwealths or ideal organizations of society. These in general are called Utopias, from the name of the famous book by Sir Thomas More. The basis of most of these schemes was the idea of the natural rights of man and a total lack of the idea of his- torical continuity. These Utopian sociahsts thought that social institutions could be discarded and new ones created with the same ease with which a man can change his clothes. Each had an analysis of the evils of society and a plan to remedy them. Fourier may be taken as typical; he thought that not enough wealth was produced because many were not employed at "productive" labor. Soldiers, the idle rich, tramps, criminals, police and courts, lawyers, philosophers, tax officials made up about two-thirds of society and lived off the other third which really worked. Those who worked were not set to the task for which they were best fitted. The scale of production was often too small to get the best result. Middlemen exploited both the producer and consumer. Fourier's plan for the organization of society to get rid of the evils was to have a phalanx composed of about 1,500 people. They were to have a considerable area of ground and be practically self-sufficing, devoting most of their time to agriculture with some attention to manufac- ture. They were all to live in one big building with great ' Cf. Skelton, Socialism, chap. IV. 96 Infroduciion fo Economic Problems comforts and luxuries made possible by uniting scattered households. We might call it the prototype of the mod- ern apartment-house if it were not for the fact that the workshops were in the same building. He had a novel scheme to get men to work. The desire for variety was to be catered to. Each man would work at six or eight different occupations each day. The scheme of the distribution of wealth was rather complicated. Every one was to receive a minimum of consumption goods. Each occupation gets a share, greater as it promotes harmony, and varying inversely with the amount of pleasure. The share of each occupation is divided into twelve parts, five going to labor, four to talent, and three to capital. Thus, he kept private prop- erty and capital. Robert Owen planned communities of from 500 to 3,000 members. The whole world was eventually to be covered with these communities which would federate. In Owen's proposed communities, equality was to be the basis of the distribution of wealth. There was to be no private property. The Utopians believed in peaceful propaganda. They were sure that if their plan was tried its success would be such that all would be convinced. America was a favorite ground for experimentation because of the freedom and the cheap land. Hundreds of communities were started; most of them failed quickly. The only ones which were permanently successful were those where there was a re- ligious bond. Quite frequently the members were more interested in talk than in work. 3. The Theoretical Basis of Socialism. — Karl Marx was a radical who took part in the German revolution of 1848 and then went to England. In distinction to the socialism Socialism 97 which preceded, Marx and his followers have called their socialism scientific. In the year 1848, Marx and Engels put forth the Communist Manifesto. The ideas expressed in this document may be taken as typical of what is called orthodox socialism. They claim that the prevailing mode of economic production and exchange determine the social organization of society and explain the political and in- tellectual history of the time. Marx followed the phi- losophy of Hegel, giving it a materialistic interpretation. All history, Marx and Engels say, has been a struggle be- tween classes. At the time when they were writing, the struggle, they said, was between the proletariat and bour- geoisie. Previously, when classes had emancipated them- selves, they proceeded to enslave the class below them. Marx said that with the victory of the proletariat, class struggle would cease since there was no class below it to enslave. The doctrines are developed at greater length in Marx's book Das Capital. In the first place the theory of value is that all value is based, or rather should be based, on the socially necessary labor time involved in production. This theory of value has been treated in Turner's Intro- duction, pages 470-471. The theory of value also contains the following corollary, called the theory of surplus value. In society as it is con- stituted under the capitalist system, Marx says that the laborer produces all the value, but that the capitalist, through his control of capital, is enabled to prevent the laborer from getting all that he produces. He takes the surplus above what is necessary to give the laborer an ex- istence. Here Marx is basing his theory on the iron law of wages in its baldest and crudest form in which no allow- ance was made for raising the standard of living. 98 Introduction to Economic Problems Another theory has to do with what is called the doctrine of increasing misery. Historically, the analysis runs as follows: Under slavery the master was bound to furnish the slave land and equipment to work with as well as food and shelter. With the introduction of serfdom, the condi- tion, the socialists say, is worse because the laborer now has to provide his own food and clothing; the lord provides the land. The final degradation comes in what they call wage slavery, in which the employer is not bound to fur- nish food and clothing, land, nor employment. In its appli- cation to the capitalist system of production, the doctrine of increasing misery insists that as the capitalists use the surplus which goes to them to acquire more capital the laborers are exploited more and more until finally the sys- tem gets so bad that revolution is inevitable. One of the results of the Industrial Revolution was an increase in the size of the business unit. Business became more concentrated. One big factory replaced a number of small hand workshops. Marx observed this concen- tration and insisted that the tendency would continue until all industry was in the hands of a relatively small number of people. Then it would be easy for the state to take over industry. The period of trust formation appeared to some socialists to be a fulfilling of the prophecy of Marx. No one at the present time is quite so sure as Marx that the process will really continue until all industries are com- bined into one. Not all of the trusts have been successful. Concentration in agriculture has gone less far. In most countries, agricultural production is still in the hands of the small landholders. In many countries, the average size of farms is growing smaller rather than larger. Marx thought that the middle class would disappear, Socialism 99 leaving only the workers and the capitalists. Most ob- servers of social conditions in various countries agree that the middle class, is increasing rather than decreasing. In the theory of increasing misery, Marx again was gen- eralizing on the basis of conditions in England and many facts seemed to support his contention. Very few statis- ticians now would be willing to admit that, taking the long- time view of things, misery has been increasing. All of the tests show that considering fairly long periods the laborer at the present time is better off than he was previously. The socialist doctrine of crises is a corollary of the doc- trine of surplus value. As the capitalist invests more and more capital, less and less of the proceeds of industry go to the workers. Thus, the workers are unable to buy the products of industry; and so recurring periods come, in which manufacturers are unable to sell their products. Presumably, the inevitable revolution will come in con- nection with a crisis. 4. Socialist Criticism of the Present Order.^ — All but a few people admit that the present economic and social order is not perfect. Many people are not satisfied with the share of goods which they receive under the present distribution of wealth. To these people the socialist prop- aganda makes its appeal. It blames all of our miseries on the capitalistic system of production. Most of the propa- ganda is devoted to the denunciation of the present order with only a slight attention to anything but the broadest generalities about the order which it is proposed to sub- stitute for it. The socialists claim that the competitive system, moti- vated by the pursuit of profit, is not efficient. It wastes ^ Cf. Skelton, Socialism, chap. II. 100 Introduction to Economic Problems our forests. It leads to overproduction in some lines and the multiplication of middlemen. They contrast the num- ber of milkmen on a street with the single postman. They maintain that competitive advertising is a waste. Under caj)italism they say that production is without plan, the adjustment of supply to demand is never exact, and as a result we have crises at more or less regular intervals. Competition, the socialists claim, results in adulteration; in "cheap and nasty" goods. Financial fraud is also blamed on the capitalist system. A second part of the criticism has to do with the effect of capitalism on human life. They say it condemns most people to misery, a struggle to get enough for a decent existence. The capitalist, they say, controls all chances for work and the workman can never be sure of his means of livelihood. Thus, the workman has no real freedom. His work also, as the result of minute division of labor, is usually monotonous and gives no chance for the play of individual initiative. Hours arc long, accidents frequent, and many conditions inimical to health. The small wages make it impossible to provide good living conditions. On the moral side, socialists claim that the competitive system is responsible for intemperance and vice. 5. Consideration of the Criticism.' — To start with, we must recognize that this criticism is part of the socialist propaganda. They wish a new social order, so they main- tain that the present order is as bad as possible. Many of the socialists are actuated by the highest motives. But they are not scientific in their study. In so far as they point to actually existing evils, they perform a useful ser- vice. Though even here, the exaggeration in which they 1 Cf. Skelton, Socialism, chap. 111. Socialism 101 indulge often causes some people to discount their state- ments too much. We object, then, not so much to the individual state- ments, though many of them can be easily challenged, but to the general impression they attempt to create by stress- ing all the bad features, by suppressing all of the good features, and by implying that certain scattered instances are typical of the whole. The efficiency of the capitalistic system is to be tested, first by the comparison with what preceded it. In spite of admitted defects it has given the material basis for a much higher average standard of comfort for a larger num- ber of people than was ever possible before. In the second place, the comparison must be between the results of the present system and the probable results of the pro- posed system, not merely the enthusiastic promises and prophecies. Our capitalistic system involves co-operation as well as competition and is not entirely selfish in business or in using the gains from business. The state without becom- ing socialistic can regulate and check tendencies which prove harmful. Forests can be conserved. There are obvious wastes in our present system of marketing, but most people prefer it to the governmental control during the war. Our modern crises are much less serious than the famines which preceded them. Adulteration is handled by law as are also the grosser forms of financial fraud. The condition of the workers pictured by the socialist does not seem to be true in this country, at least. Employ- ers are not all heartless. Most of them do have an in- terest in their workers and the state enforces certain mini- mum standards on those who do not. Labor-unions have 102 Introduction to Economic Problems gained great power, and many an employer during the war would have been quite startled if told he was dealing with wage slaves. Granted that the labor is more monotonous, it is less exhausting and, more important, hours of labor have been shortened. Most of the more serious hazards of industry have been minimized by laws regarding sani- tation and safety, and those injured come under work- men's compensation laws. Our public-school system aims to give each child a certain equipment. A part, at least, of the troubles of the poor arise from foolish use of wages as well as from the smallness of the wage. Granted a cer- tain minimum of material means for the satisfying of de- sires, the moral development is largely a matter of the individual. 6. The Socialist Proposals.— In brief, the socialists pro- pose that the means of production shall be owned and operated by society as a whole. Some of the later socialists have not insisted that all the means of production shall be so owned; for example, in many cases they are in favor of permitting the small holders of agricultural lands to con- tinue to hold and operate their farms. They in general, however, wish to do away with the shares in distribution which now go to the landholder and the capitalist. This follows, of course, from their theory of value. If labor is the only productive factor, then obviously the landowner and the capitalist have no right to receive any of the product of industry, and just as surely if the labor theory of value is not accurate then the socialist analysis fails. Many problems arise about details, and there is no uni- formity in answering them. Most socialists say that the state will be democratic. The earlier propaganda talked of expropriating the capitaUst, now many suggest com- Socialism 103 pensation. The direction of industry would probably be in some form of bureaucracy, which will determine what and how much will be produced. Money might be retained. The earlier socialists seemed to favor equality in the dis- tribution of goods, now efhciency is frequently suggested. There is difficulty about the introduction of improvements and indeed about maintaining the efficiency of the workers and the leaders. The control of population would also be a serious problem. 7. The Socialist Party. — In the United States there have been many vicissitudes to socialism as a political party. Our chief interest is not in the political details of the party but in the strength they have shown and the principles they advocate. The following table indicates that we have little to fear from the national action of such a small minority: SOCIALIST VOTE FOR PRESIDENT 1 Year Vote Per Cent of Total Vote Per Cent of Population 1892. 1896. 1900. 1904. 1908. I912. 1916. 1920. 21,164 36,274 127,553 433,532 434,618 913,132 604,759 947,000 .176 .263 •913 3-2 2.9 6.2 3-3 3-6 •03 •05 .168 .526 .489 -983 • 603 .896 ' E. G. Riggs, Forum, vol. 66, p. 144. The socialist party platform, of course, like other plat- forms, has a good deal to say of the mistakes and weak- nesses of the competing parties. Our interest, however, is in the section which defines their policy in so far as it is social and industrial. 104 Inh'()dN(iio)i to Fjconomic Problems "Social. — ^r. All business vitally essential for the existence and welfare of the people, such as railroads, express ser- vice, steamship lines, telegraphs, mines, oil-wells, power plants, elevators, packing-houses, cold-storage plants, and all industries operating on a national scale should be taken over by the nation. " 2. All publicly owned industries should be administered jointly by the government and re])rescntatives of the work- ers, not for revenue or prol'it, but with the sole object of securing just compensation and humane conditions of em- ployment to the workers and efiicient and reasonable ser- vice to the public. "3. All banks should be acquired by the government and incorporated in a unified public banking system. "4. 'J'hc business of insurance should be taken over by the government and should be extended to include insur- ance against accident, sickness, invalidity, old age, and un- employment, without contribution on the part of the worker. "5- Congress should enforce the provisions of the Four- teenth and Fifteenth Amendments, with reference to the negroes, and that effective federal legislation should be enacted to secure to the negroes full cWW, political, indus- trial, and educational rights. ''Industrial. — -i. Congress should enact effective laws to abolish child labor, to fix minimum wages, based on an ascertained cost of a decent standard of life, to protect migratory and unemployed workers from oppression, to abolish detective and strike-breaking agencies, and to estab- lish a shorter work-day in keeping with increased indus- trial productivity. ''Fiscal. — I. That all war debts and other debts of the federal goxernment must be immediatel}' paid off in full, Socialism 105 the funds for such payment to be raised by means of a progressive property tax, whose burden should fall upon the rich and particularly upon great fortunes made during the war. "2. A standing progressive income and a graduated in- heritance tax should be levied to provide for all needs of the government, including the cost of its increasing social and industrial functions. "3. The unearned increment of land should be taxed, all land held out of use should be taxed at full rental value." 8. Guild Socialism.— -A variant called guild socialism has recently come into considerable prominence in Eng- land. The industries are to be owned by the people as a whole but operated by the workers. Thus, industry would be carried on by numerous guilds. The state would keep the peace between the guilds. A start has been made in the building industry. A workers' guild has been taking contracts to build houses for municipalities. 9. Exercises. — i. How do you explain the greater growth of the labor movement in the form of socialism on the continent than in Great Britain and the United States? 2. To what causes do you attribute the failure of the communistic experiments ? 3. In what sense is Marxian socialism scientific? 4. What facts of social development can be satisfactorily explained by an economic interpretation of history? Are there any facts which cannot be so explained ? 5. Are actual class struggles wholly economic? 6. In what stage of economic development is the labor theory of value a fairly satisfactory explanation of values ? 7. How far has concentration proceeded in iron and steel, farming, clothing, cotton manufacture, woollen man- ufacture, groceries, dry-goods, tobacco, railroads, and housing ? lOG Introduction to Economic Problems 8. What is meant by the middle class? From the sta- tistics of the income tax estimate the size of the middle class in the United States. 9. What are the criteria of progress? Apply them to test the doctrine of increasing misery. 10. If we admit that the present order has its faults, must we become socialists? 11. What is the difference between socialism and social reform ? 12. What is the difference between socialism and gov- ernment ownership ? 13. Under socialism: How would goods be exchanged? Who would decide what and how much goods would be produced? How would directors of industry be chosen? How would they be rewarded? How would capital be procured ? How would progress in techmc of industry be obtained? How would overpopulation be prevented? How would the individual's occupation be determined? What means would be employed to keep the individual at work? Would wages be based on equality, need, desire, or efficiency? 14. Why do others besides socialists vote the socialist ticket ? CHAPTER VII LABOR ORGANIZATIONS I. The Wage Bargain — Labor the Long Factor — Labor the Short Factor. 2. The Aims of Trade-Unions — Higher Wages — Shorter Hours — Sanitation and Safety — Security and Continuity of Employ- ment — Share in the Control of Industry. 3. Types of Unions and Federations. 4. Collective Bargaining — Rochester Clothing Agree- ment. 5. Strikes as War. 6. The Boycott, the Union Label, and Other Activities. 7. The Open and Closed Shop Controversy. 8. Trade-Union Leadership. 9. Employers' Associations. 10. Arbitra- tion and Conciliation. 11. The Kansas Industrial Relations Court. 12. Organized Labor and the War — War Labor Board. 13. Exercises. I. The Wage Bargain. — In the discussion of the theory of the distribution of wealth among the factors of produc- tion we talked a great deal about long and short factors of production and the small and large remunerations coming to them.^ The principle was laid down that "wages are the discounted marginal product of labor." Now we are to see how these principles are actually worked out under modern economic conditions. It is evident at once that there is nothing automatic about the process. At each step individual initiative comes into play. Work must be sought, wages must be agreed upon. Let us picture the wage bargain. The Wage Bargain Where Labor Is the Long Factor. — We will take first a case under the factory system. Sup- pose that Bill Jones is one of 5,000 employees at a plant. He is not satisfied with the wages he is getting. He decides to try for a raise. He may deal with the owner, but more probably it will be with a hired manager. As worker and manager get together the contest is seen to be ^Turner's Introduction, chap. XX, 107 108 Introduction to Economic Problems very unequal. What does Bill mean to the manager? Nothing in particular; he knows that if Bill quits he can get another man to fill his place. What does the job mean to Bill? Food, clothes, and house for himself and family. If he loses his job, he may get another one after a while; but it may mean that he must move, and there is always the possibihty that he may not get another job. The powers of expression are vastly unequal. The manager is used to talking. Bill is not. The manager is well dressed, Bill feels that his cheaper clothes put him at a disadvan- tage. The result is usually that Bill makes an ineffective presentation of his demand and is curtly refused. He goes away with some resentment but also some relief that the matter is over with. The Wage Bargain Where Labor Is the Short Factor. — The war gave forceful illustration of a condition in which labor was the short factor. From the standpoint of the employer, labor became insolent in its demands. The former situation was reversed. The job meant little to the worker, for he knew that he could get another without any difficulty. The laborer meant much to the employer, be- cause the latter knew that he would have difficulty in re- placing the worker and that his production would be cut down and the chance for large profit be lost. Organization of laborers aims to strengthen their posi- tion in bargaining for a higher wage. It may increase wages in two ways: First, it sometimes happens that, where for want of free competition the employer may force an unfair bargain, a group of workers fails to receive "the discounted marginal product" of their labor. The union may help them to get that amount. Second, the union may exercise control over the amount of labor and thus Labor Organizations 109 increase wages by making labor more of a short factor. The attempt here is to apply the well-known principles of monopoly price. Fortunately for society, the effort to create a labor monopoly is rarely successful. Craft skill cannot well be monopolized ; machines can usually be made to replace such laborers. 2. The Aims of Trade-Unions. — In sum, the aims of trade-unions look toward the improvement of the condi- tions of workmen. More specifically, the workers want higher wages, shorter hours, better conditions of sanita- tion and safety, security and continuity of employment, as well as a share in the control of industry. These may be considered in turn. Higher Wages. — We saw above that there is a legitimate place for union activity in raising wages. Many of the workers do not understand the limitation on the amount to which wages can be raised. They see no reason why wages cannot go up indefinitely. They do not see that in- creases in wages will finally force an increase in prices, and the increase in prices will cause a decrease in the amount of the product which the public will buy. Shorter Hours. — The problem of hours of labor is one of the most important problems from the standpoint of both the public and the laborer. We recognize labor as a means rather than an end. In a democracy we wish each indi- vidual to live a well-rounded life. Labor provides the material means which make such a life possible. But if labor is too long continued, the laborer has no time or energy left to enjoy life. If labor is not continued long enough, the material means for civilization are lacking, and there is danger of reversion to idleness and low stand- ards of living. 1 1 Introdtidion to Economic Problems Another serious aspect of the problem has to do with the relative hours worked by different classes of laborers. Wicksteed calls it the ''disease of civilization" that one group can benefit itself at the expense of other groups. We recognize that some kinds of work are more disagree- able, or tiring, than other kinds, and that a shortening of hours in certain lines of employment tends to equalize the difference in attractiveness. A decrease beyond this justi- fiable point in the hours might increase the remuneration of the group at the expense of all other workers who pur- chased the products of their labor. The shorter hours and higher wages would mean increased prices of the product of the group. Better Condition of Sanitation and Safety. — ^At the present time questions of sanitation and safety are usually handled through labor legislation, which must wait its turn for discussion. Security and Continuity of Employment. — The laborer's job, as we saw above, means life or death to him. He may lose the job by being fired or by stoppage of work due to depression. Much of the trouble in industry arises from the loss of personal contact which has come with the growth in size of business establishments. Often the hiring and firing are done by foremen, many of whom illustrate the danger of giving one man absolute authority over other men. The foreman may fire a man from petty spite or because he fears that the man is better than he is and may, in time, supplant him. The worker wishes to be free from the feeling that he holds his place subject to the whim of a foreman. Then again, promotions and lay-ofifs may be determined by favoritism. The unions often insist on seni- ority. This is particularly true of the strong railway Labor Organizations 111 brotherhoods. Thus, continuity is secured for the older men, but it is obtained at the expense of the younger men. Promotion by seniority is objectionable because it removes the incentive to become efficient in order to win promo- tion. However, promotion by favoritism leads to syco- phancy rather than efficiency. In the United States army and navy, the seniority system for promotion is ordinarily used to prevent political manipulation and favoritism. A Share in the Control of Industry. — Much is heard now- adays of "democracy in industry." Using the political analogy, workers complain that industry is organized on an autocratic basis. They demand that they shall be con- sulted about wages and hours of labor. Other control sought has ordinarily been in the matter of hiring and dis- charge. Sometimes an attempt is made to control or pre- vent the introduction of new processes or machinery. 3. Types of Unions and Federations. — Unions may be classified in many different ways. On the basis of character of membership we may distinguish (i) the labor-union, (2) the trade or craft union, and (3) the industrial union. The labor-union may be composed of workers of all kinds; for example, a union made up of teamsters and tanners and painters and plumbers. Presumably, the purpose of the labor-union is to promote the welfare of the whole laboring class. The Knights of Labor founded in 1869 in Phila- delphia was a union of this type. The trade or craft union is the commonest type at present. It combines the workers of one craft, such as carpenters, and has the narrower, more selfish object of furthering the interests of that one craft instead of all labor. On the whole, the results have justified this narrowing of purpose. The industrial union, as its name indicates, takes the industry 112 Introduction to Economic Problems instead of the craft as the basis of organization. Tlius, the United Mine Workers wish to have all of the men who work about the mines belong to the one union, instead of having the men belong to a great number of craft unions. The ability to shut down the mines completely gives them great bargaining power. Forms of Organization and Federation. — The typical craft or trade union is usually called an international. There may be locals in Canada, Cuba, or Mexico. In theory, the international gets its power from the locals. But prac- tically, through its control of the funds and its power to grant and revoke charters, the international really controls the locals. Sometimes there are subordinate organizations in each place of work. In the typographical union these are called chapels. The railway brotherhoods have com- binations of all the locals on one railway system. There are various levels of federations of unions; the basis is roughly territorial. At the top we have the American Federation of Labor. As its name implies, it is a federa- tion rather than an organic union. It combines most of the strong craft unions, except the railway brotherhoods, and also has as members some industrial unions. It aims to promote the interests of its members primarily through legislation and propaganda. It helps to organize unions. It keeps the peace between rival unions which claim juris- diction over certain processes. In each state there is a State Federation of Labor which looks after state legisla- tion and the promotion of the common interest of the labor-unions. In a number of cities there are city federa- tions. They assist in strikes and boycotts, see that the union label is used on all public printing, and see that union hours and wages are observed on all public work. Labor Organizations 113 Besides these federations, there are other groupings. Thus, locally there will be an Allied Printing Trades Coun- cil. This combines all of the craft unions in the printing business and enables the workers to present a united front to the employers. In the building trades we find local, state, and national federations of the various craft unions. The methods used by trade-unions include collective bar- gaining, the strike, the boycott, and the union label. 4. Collective Bargaining. — By collective bargaining we mean the setting of wages and the conditions of employ- ment by a process of negotiation between representatives of the employers and representatives of the workers. It equalizes more or less completely the strength of bargain- ing of the two parties. The workers' representative is often skilled in this industrial diplomacy. The employers face not the loss of one man's labor, but complete stop- page of work and consequent loss of profit. The employ- ers still have the advantage in the matter of staying power. Ordinarily they are in no danger of not having enough to eat, even if work should shut down for a long time. Usually the agreement is a matter of compromise. Each side asks for more than it expects to get, and gets about what it expected. The agreement is embodied in a contract which usually runs one or two years. Where both sides are well organized this method has often worked out satisfactorily. Collective bargaining usually proceeds on the basis of an agreement which provides the machinery and lays down the principles which govern the negotiations. The follow- ing is an example of a particularly successful agreement: Labor Agreement, Men's Clothing Industry, Rochester, New York. — I. This agreement made between the members of the Clothiers' Exchange of Rochester, New York, as in- 114 Introduction to Economic Problems dividuals acting through the said exchange as their rep- resentative, and the Amalgamated Clothing Workers of America, shall become effective after ratification by the members of both parties, and the fact of such ratification shall be indicated by an exchange of notes between the president of the exchange and the president of the amal- gamated. The agreement shall continue in force until May 31, 1922. Handling of Grievances. — 2. The right of the workers in the industry to bargain collectively is agreed to, and the Amalgamated Clothing Workers of America is recognized as the organization of the workers, duly authorized to act as the agency for collective dealing with the employers. The employees in every shop shall elect representatives to take up their cases with the management in the first in- stance. If the shop representatives cannot agree with the management, then a union representative shall be called in. The employers shall appoint duly authorized represen- tatives of the management, who shall be responsible for carrying into effect the terms and conditions of this agree- ment in all their shops. Power of Hiring. — 3. The power to hire shall remain with the employer, but in cases where discrimination on account of union membership is charged, the impartial chairman shall have the right of review; and if facts are brought before the impartial chairman that appear to in- dicate that the labor policy of any house is calculated to undermine the union, he shall have the power to review that policy. Power of Discharging. — 4. The power to discharge and suspend employees remains with the employer, but it is agreed that this power will be exercised with justice and Labor Organizatiojis 115 due regard for the rights of the workers; and if any worker feels that he has been unjustly treated in the exercise of this power, he may appeal to the labor adjustment board hereinafter mentioned, which shall have the power of re- view in all such cases. Changes in Shop Management. — 5. The right of the em- ployer to make changes in shop management and methods of manufacturing is recognized, such changes to be made without loss to the employees directly affected. No Strikes or Lockouts. — 6. There shall be no strikes, lockouts, or stoppages of work in any shop covered by this agreement. Equal Division of Work. — 7. The principle of equal divi- sion of work is recognized, and during slack seasons work shall be divided as far as practicable among all the workers in the shop. Labor Adjustment Board. — 8. The administration of this agreement is vested in a labor adjustment board, consist- ing of representatives of the employers and of representa- tives of the workmen, together with an impartial chairman selected by both parties. The representatives of the em- ployers and the representatives of the workmen upon this board shall have an equal vote, regardless of the number of representatives of either side, and in case of a tie vote the impartial chairman shall cast the decisive vote. All disputes or differences over questions arising under this agreement which the parties hereto are unable to adjust between themselves shall be referred to the labor adjust- ment board for adjustment or arbitration. This board shall have full and final jurisdiction over all such questions, and its decisions shall be conclusive, except as may be otherwise provided by agreement of the parties hereto. 116 Introduction to Economic Problems Except where the board itself shall otherwise determine, the chairman of the board shall be authorized to take original jurisdiction of all cases and controversies arising under this agreement and to adjust or decide them in accordance with rules of practice and procedure estab- lished by the board. Decisions of the chairman shall be binding on both parties. It is agreed that William M. Leiserson shall continue to act as chairman of the labor adjustment board. 9. The board shall have authority to make such rules, regulations, and supplementary arrangements not incon- sistent with this agreement as may be necessary to carry into effect the principles of this agreement or to apply these principles to new questions whenever they arise. It may also define, describe, and limit the penalties to be imposed for the violation of any of the provisions of this agreement. ID. The expenses of the labor adjustment board shall be borne equally by both parties to this agreement. Changes in Wage Scales. — 11. Upon the petition of either party the labor adjustment board shall have the power to determine whether important changes have taken place within the clothing industry, or in industrial conditions generally, which warrant changes in general wage levels or in hours of work; and if it is decided that such changes are warranted, negotiations shall begin between the parties hereto. In the event of a disagreement, the question shall be submitted to arbitration. 12. Upon the petition of either party, any adjustment of wages of individuals or sections that may be necessary in order to remove serious and unjust inequalities in pay may be made at any time during the life of this agreement, Labor Organizations 117 provided that no request for such adjustment shall be heard by the impartial chairman until he has been authorized to consider it by the labor adjustment board. A decision by the impartial chairman in such a matter shall take effect and operate during and after the first full work week after the date of the decision unless the parties otherwise agree. Minimum Wage. — 13. A minimum wage for all begin- ners in the industry and a probationary period during which the employer shall be free to discharge such help without question shall be fixed by the labor adjustment board. Regular Working Hours. — 14. The regular hours of work shall be forty-four per week, to be worked eight hours on the five days preceding Saturday and four hours on Satur- day. Payment for Overtime. — 15. For work done in excess of the regular number of hours per day, overtime shall be paid at the rate of time and one-half. Sanitary Control. — ^16. The labor adjustment board is authorized to exercise sanitary control over shops covered by this agreement, and it shall have authority to make regulations designed to protect the health and safety of the workers in the shops. Abolition of Home Work. — -17. It is agreed that home work shall be abolished and the labor adjustment board shall investigate and work out procedure to this end. 5. Strikes as War.- — If collective bargaining is industrial diplomacy, then, in a very real sense, strikes are industrial war. Methods of reason and persuasion are abandoned for the appeal to force. The problem of the leaders of the men is to arouse in them a determination to win the strike which will not be shaken by short rations, lack of fuel, and 118 Introduction to Economic Problems severe hardships. The leaders fill the minds of the men with a grim purpose to achieve certain demands. The de- mands are often much greater than the leaders have any hope of getting and are knowingly made so for the purpose of bargaining. The idea is to get what you want after the inevitable compromise has been made. The men are filled with propaganda to arouse a feeling of hatred and ill will against the employer. When the settlement has been made, there remain as a result of the struggle hostility and lack of confidence between employers and workers. In the strike the workers leave their jobs and resist any efforts of the employers to fill them. The success of the strike depends upon their ability to tie up the industry. The employer, of course, tries to start up with other work- ers. These are called "scabs " or "blacklegs." The worker looks on the scab as a traitor to the working class. For the sake of the high wages offered, the scab betrays his fellow workers and helps the employer force them to work under conditions they do not think fair. Picketing. — The strikers resort to picketing. The line between peaceful picketing, which is allowable, and picket- ing which is not peaceful is difficult to draw. Some judges are inclined to think that no picketing can be peaceful. In most cases persuasion is allowed. The strikers some- times resort to violence. Frequently the strikers say that the employers order the violence or destruction of property in order to alienate public sympathy. Street-car strikes in particular are characterized by violence, because of the necessity of wide distribution of the men. Perhaps an analogy may be drawn between violence in strikes and slug- ging in football. Both are condemned by right-thinking people. But in both cases the activity appears more hei- Labor Organizations 119 nous when done by an opponent. The strike may be won or lost, or it may be settled by arbitration, which will be considered later. 6. The Boycott, the Union Label, and Other Activities. — The boycott is the refusal to patronize and the attempt to keep others from patronizing one with whom the labor or- ganization has a disagreement. The effectiveness depends upon how serious an inroad is made upon the business con- cerned. A boycott would probably be more effective against the New York American than the New York Times because more unionists read the former paper. Secondary boycotts carry the thing one step further. An attempt is made to boycott all who trade with the boycotted person. The courts ordinarily hold this secondary boycott to be unlawful. The Union Label. — The idea here is that by means of the label every one may know that the article has been pro- duced under union conditions. The unions urge that all persons should buy only union-label goods. Thus, pressure is put upon firms to unionize their plants as a condition of being able to sell their product. Other Activities of Unions. — The unions carry on certain social and insurance activities. The unions hold "grand balls," picnics, and other social affairs. The unions collect dues from their members. Part of the dues go to the pay- ment of the officers, the balance goes for various benefits. The principal benefit is the payment received while out on strike. By means of the strike benefit the unions attempt to enable the strikers to hold out as long as is necessary to win the strike. Many of the unions have a small funeral benefit. The Brotherhoods of Locomotive Engineers and Locomotive Firemen have substantial life-insurance bene- 120 Introdnction to Economic Problems fits. Usually the unions have a small out-of-work benefit. Some of the unions have a sickness benefit. A few provide for superannuated members. 7. The Open and Closed Shop Controversy. — The dis- putants do not always use the open and closed shop with the same significance. Perhaps the best contrast is ob- tained if we define the closed shop as one in which all of the men employed belong to the union and union member- ship is required for employment; and the open shop as a non-union shop where union membership is a bar to em- ployment. The argument for the closed shop runs as follows : Labor organizations are needed because of the inequality of the bargaining power of the employers and workers. To make the unions effective they must have control of all of the workers, and they cannot have this control if men not members of the union can get employment. The open-shop argument is composed of two parts. One is a general attack on trade-unions and all of their works; and the second is the assertion of the natural right of the worker to work when and where and under what condi- tions he pleases, and the correlative right of the employer to hire and fire as he pleases. No general judgment is possible. If the union is decent, that is, if it is not monopolistic and does not prevent quali- fied men from joining and does not try to abuse its power, then probably the closed shop is preferable. 8. Trade-Union Leadership. — The problem of leader- ship for trade-unions in the United States has been made more difficult by the opportunities for advancement open to the laborers. Mr. Charles M. Schwab is a born leader, but instead of staying in the laboring class and leading Labor Organizations 121 them he became an entrepreneur. We expect to find all sorts of leaders of trade-unions just as we find all sorts of men in other positions. There is the grafter type. Robert P. Brindell built up a Building Trades Council in New York City and used it as a method of holding up contractors and builders. Unless they paid him bribes, he would call strikes and hamper the building projects. Andrew J. Fureuseth, of the International Seamen's Union, is of a different type. He impresses people as being absolutely sincere and self-sacrificing in his efforts to im- prove the conditions of seamen. He is one of the best- informed men in the country on maritime law. There is danger that the leaders may come to think that the movement exists only for the purpose of provid- ing salaries for themselves. Members may be considered mere dues payers. The officers may become strongly in- trenched in their positions; and, by manipulation, they may be able to resist any attempt to remove them from their posts. Just as it is dangerous to generalize on the basis of political constitutions and laws, so it is not safe to follow union constitutions without checking up the working in actual practice. For example, the walking delegate or business agent, who is supposed to see that the union rules are observed, according to most constitutions has little power; he acts only with the authorization of the union. In practice, however, the walking delegate, in times of difficulty, is frequently given almost autocratic power. 9. Employers' Associations. — Naturally, the organiza- tion of the workers has been met by organization of the employers. They have developed methods for combat- ing the methods used by the workers' organizations. 122 Introduction to Economic Problems The lockout is the analogue of the strike. The employers refuse to give employment to the workers unless they agree to certain conditions. It brings the same test of staying power, and, of course, may catch the workers un- prepared. The hlack list is a reply to the boycott. The black list is illegal, but no difficulty has been experienced in devising methods which are legal though they amount to a black list. Thus, some employers' associations maintain an employment bureau. In this bureau are kept records of all the men who work or have worked in the industry. When a man is discharged from a plant, the reason is indi- cated on the card. A man who has tried to promote a union would probably be reported as a "trouble-maker" or "agitator," and would be refused employment in the establishment of the other members of the association. Types of Employers^ Associations. — The militant type are anti-union: They refuse to deal with the unions and at- tempt to destroy them. The National Metal Trades Association is of this type. Some associations deal col- lectively with their workers. They are the counterparts of the national trade-unions. The Stove Founders' Association is of this type. ID. Arbitration and Conciliation. — The methods of arbi- tration and conciliation are proposed to lessen strife in in- dustry. Conciliation consists in efforts of outsiders to bring the disputants together. Arbitration is the settle- ment of the dispute by reference to one or more persons, all or some of whom are supposedly impartial. Not infre- quently arbitration takes place after a strike has been in progress some time; occasionally it is used to avert the strike. It is frequently the weaker side which proposes arbitration. They wish to gi^'e the public the impression Labor Organizations 123 that they are so confident of the justice of their case that they are wiUing to have impartial persons decide. As a matter of fact, they fear that if the strike goes on they will lose, and they figure that in the inevitable compromise decision of arbitration they will get at least a little. Compulsory Arbitration. — In Australia and New Zealand there have been developed systems of compulsory arbitra- tion, the essential feature of which is the setting of wages by public authority. This was hailed by some as the ultimate solution of the labor problem, and New Zealand was called "a land without strikes." This designation has not proved accurate, for strikes have occurred. And what is more, the penalties for unauthorized striking have not been enforced. Organized labor in the United States is almost a unit in opposing compulsory arbitration. Labor organizations fear that any tribunal would be prejudiced against them, and they assert that compelling workers to labor under undesirable conditions is involuntary servitude. The fundamental difficulty about arbitration is that there is no standard of fair wages which both sides accept as final. II. The Kansas Industrial Relations Court. — Although this is called a court, it might better be termed a commis- sion, since its decisions are not enforced in the ordinary way but are enforced by appealing to the regular courts. The law arose out of the difficulties occasioned by a coal strike in 1919. It represents the idea that consumers have a right to demand that employers and workers shall not cause consumers distress because they cannot agree on wages or conditions of employment. The law provides for ''a court of industrial relations," made up of three "judges" 124 rntrodvciion to Economic Problems appointed by the governor of the state for a three-year term. The court has jurisdiction in those industries which are connected with pubHc interest. It may intervene in any industrial dispute in these industries on its own initia- tive, by the request of cither party to the dispute, a com- plaint of ten citizens, or a complaint of the attorney- general of the state. The procedure of the court requires that the rules of evidence as recognized by the Supreme Court of the state are to be followed in investigation. The law lays down the principle to guide the court that labor is entitled to a "fair" wage and capital to a "fair" return. The difficulty involved in this compulsory deter- mination of wage rates is the enforcing of the decision. 12. Organized Labor and the War. — During the war, organized labor was in a very strategic position. The labor leaders on the whole aided in the plans of the govern- ment for industrial mobilization. At the same time they were anxious to take advantage of their position to advance the interests of organized labor. Many of the strikes which occurred were not authorized by the higher union officials. The great advance obtained was the practical recogni- tion of the unions by the government. They were given representation on the commission which drew up the plan for the War Labor Board. This board was composed of five representatives of the employers, five representatives chosen by the American Federation of Labor, and two chairmen selected by the two groups. The two chairmen took turns in presiding. The aims of the board were to speed production and prevent cessation of work. The first idea was that the status quo with respect to labor organization should be maintained. Later, however, the unions were permitted to make gains. Labor Organizations 125 The following principles were adopted as the basis of the activity of the board: Principles and Policies to Govern Relations Between Workers and Employers in War Industries FOR THE Duration of the War There should be no strikes or lockouts during the war. Right to Organize. — i. The right of workers to organize in trade-unions and to bargain collectively, through chosen representatives, is recognized and affirmed. This right shall not be denied, abridged, or interfered with by the employers in any manner whatsoever. 2. The right of employers to organize in associations or groups and to bargain collectively, through chosen rep- resentatives, is recognized and affirmed. This right shall not be denied, abridged, or interfered with by the workers in any manner whatsoever. 3. Employers should not discharge workers for member- ship in trade-unions, nor for legitimate trade-union ac- tivities. 4. The workers, in the exercise of their right to organize, shall not use coercive measures of any kind to induce per- sons to join their organizations, nor to induce employers to bargain or deal therewith. Existing Conditions. — i. In establishments where the union shop exists the same shall continue and the union standards as to wages, hours of labor, and other conditions of employment shall be maintained. 2. In establishments where union and non-union men and women now work together, and the employer meets only with employees or representatives engaged in said establishments, the continuance of such condition shall not 126 Introduction to Economic Problems be deemed a grievance. This declaration, however, is not intended in any manner to deny the right, or discourage the practice, of the formation of labor-unions, or the join- ing of the same by the workers in said establishments, as guaranteed in the last paragraph, nor to prevent the War Labor Board from urging, or any umpire from granting, under the machinery herein provided, improvement of their situation in the matter of wages, hours of labor, or other conditions, as shall be found desirable from time to time. 3. Established safeguards and regulations for the pro- tection of the health and safety of workers shall not be relaxed. Women in Industry. — If it shall become necessary to employ women on work ordinarily performed by men, they must be allowed equal pay for equal work and must not be allotted tasks disproportionate to their strength. Hours of Labor. — The basic eight-hour day is recognized as applying in all cases in which existing law requires it. In all other cases the question of hours of labor shall be settled with due regard to governmental necessities and the welfare, health, and proper comfort of the workers^ Maximum Production. — The maximum production of all war industries should be maintained and methods of work and operation on the part of employers or workers which operate to delay or limit production, or which have a ten- dency to increase artificially the cost thereof, should be discouraged. Mobilization of Labor. — For the purpose of mobilizing the labor supply with a view to its rapid and effective dis- tribution, a permanent list of the number of skilled and other workers available in different parts of the nation Labor Organizations 127 shall be kept on file by the Department of Labor, the in- formation to be constantly furnished (i) by trade-unions; (2) by state employment bureaus and federal agencies of like character; (3) by the managers and operators of in- dustrial establishments throughout the country. These agencies should be given opportunity to aid in the dis- tribution of labor, as necessity demands. Custom of Localities. — In fixing wages, hours, and condi- tions of labor regard should always be had to the labor standards, wage scales, and other conditions prevailing in the localities affected. The Living Wage. — (i) The right of all workers, includ- ing common laborers, to a living wage is hereby declared. (2) In fixing wages, minimum rates of pay shall be estab- lished which will insure the subsistence of the worker and his family in health and reasonable comfort. 13. Exercises. — i. Why is there more dispute about wages than about the other shares in distribution? 2. List the advantages and disadvantages in bargaining of each of the parties to the wage bargain. 3. What sets the limit to the possibility of increase in wages by union activity? 4. Draw up a list of the grievances of labor. Which can be remedied by union activity? 5. How do unions affect the efficiency of their members? Explain carefully. 6. What are the difficulties in organizing unions among farm laborers? women? casual workers? 7. What is the economic basis for the area covered by the different federations of unions? 8. Why is it difficult for employers and workers to agree on a just basis for the determination of wages ? 9. Should workers be permitted to bargain through out- side agents ? 1^28 IiHrodnction to Economic Problems 10. Outline the strategy you would use to get an increase in wages through collective bargaining. 11. What rights has the public in the case of a strike? 12. Which is the better analogy, the strike as war, or the strike as a game? 13. If you were a labor leader, how would you go about winning a street-car strike? 14. If you were a clothing manufacturer, how would you go about breaking a strike of your employees? 15. What industries have you seen boycotted? How effective was the boycott? 16. In what lines of goods is the union label used on the best qualities? on the cheaper grades? 17. Does the union label add to the price of the goods? 18. Why are there grafters among labor leaders? Who is to blame? 19. What rewards has the honest labor leader? 20. Which are easier to organize, the workers or the employers ? 21. Which would you expect to win in a contest between workers and employers, if: [a] both are unorganized? {b) the laborers are organized and the employers un- organized ? ((■) both are organized locally? (//) the laborers are organized nationally and the em- ployers locally? {e) the laborers are organized locally and the employers nationally ? (/) both are organized nationally? 22. Indicate the methods developed by the employers' associations to meet the methods of the labor-unions. CHAPTER VIII LEGAL REGULATION OF THE CONDITIONS OF EMPLOYMENT I. The Reasons for Regulation. 2. Sanitation. 3. The Regulation of the Labor of Children — Hours — Age. 4. The Regulation of the Employment of Women— Hours — Night-Work — Prohibited Employ- ments. 5. The Minimum Wage for Women and Children. 6. The Regulation of the Conditions of Employment of Men— Hours. 7. Exercises. There are two classes of labor legislation: regulations of the conditions of labor, and social insurance. The first type will be discussed in this chapter, and the social in- surance will be taken up in a later chapter. 1. The Reasons for Regulation. — The basis of this regu- lation is the experience that the individual workers are unable under the present complex organization of industry to enforce demands for improvement of conditions. The workers deal primarily with foremen or bosses, and the re- sult of insistence on improved conditions would ordinarily be the loss of their positions. So, in order to protect the workers and indeed to protect the high-minded employers from the unfair competition indulged in by the less high- minded, the state finds it necessary to step in to set cer- tain levels of competition with reference to the conditions of workshops. 2. Sanitation and Safety. — The ideal here is that the conditions in the workshops shall be such that the workers' health and efficiency shall not be impaired by working in them. Many employers have discovered that money spent in improving the working conditions repays itself in in- 129 130 Introduction to Economic Problems creased output, but some employers have not discovered this and so the law must be used to enforce certain min- imum standards. Proper light and heat and ventilation, of course, are necessary for efficiency. In occupations where the process involves the collection of dust, it is neces- sary to provide for the removal of this dust. Thus, in grinding and polishing metals, provisions can be made for the removal of the dust by suction to prevent the worker from inhaling it. Safety Devices. — Great advances have been made re- cently in the development of safety devices. The hazards of industry have been brought to the attention of the people by the records of the accidents which have been kept as the result of the development of workers' compensation laws, which will be treated later. Many of the accidents were found to be preventable by putting guards on belts and putting coverings around the gears. The great advance in methods of providing for sanita- tion and safety and the lack of technical knowledge on the part of the legislators make it inadvisable to attempt to make minute requirements in the law. The better way involves a law which lays down the general principles and provides for some sort of administrative board to make particular rulings from time to time. Thus, the New York law states the principle and the method of application : "All factories, factory buildings, mercantile establish- ments and other places to which this chapter is applicable, shall be so constructed, equipped, arranged, operated and conducted in all respects as to provide reasonable and ade- quate protection to the lives, health and safety of all per- sons employed therein. The industrial board shall, from Legal Regulation of Employment 131 time to time, make such rules and regulations as will carry into effect the provisions of this section." 3. The Regulation of the Labor of Children. — Regulation of Hours. — In 1920, twenty-six states and the federal law provided that eight hours should be the maximum work for children. Often the laws except domestic service and work in agriculture. Sometimes they exclude canneries and stores. The fight against state legislation has often been cleverly carried on by playing off one state against another. That is, the employers in one state complain that it is not fair to subject them to stricter regulations concerning the use of child labor than those which apply to their competitors in other states. There is no doubt about the question of the constitutionaKty of such laws. About forty states prohibit night-work of children under sixteen. Usually the laws forbid working between the hours of 7 p. M. and 6 a. m. The exclusion of children is on the basis that working might cause injury to life, limb, health, or morals. The question of constitutionality has been raised in connection with the federal law. In 191 6, a law was passed regulating the working of children by excluding from interstate commerce products upon which they had worked in violation of the law. This law was declared unconstitutional on the ground that the control of Congress over interstate commerce did not extend to the manufacturing of products for interstate commerce. In 191 9, a second attempt was made to enforce certain standards, such as: no work under the age of fourteen; in the ages of fourteen to sixteen work should be limited to eight hours a day and forty-eight hours a week with no night- work; no child labor in mines under sixteen. This law was passed under the federal power of taxation. The 132 Introduction to Economic Problems proposers of the law hoped to control child labor by making it unprofitable for manufacturers to use child labor. It provided for a tax of lo per cent on all goods produced in violation of the law. The constitutionality of this law has been questioned. Regulations with Respect to Age of Children. — Most of the state laws provide that no child under fourteen shall be allowed to work in any gainful occupation. Some states provide that no child under sixteen shall work in certain hazardous occupations, and that no child under eighteen shall work in extrahazardous occupations. The child of the poor widow is sometimes exempted from the applica- tion of the law. This exemption seems to be very illogical. The whole purpose of the legislation is to guarantee to every child the chance to develop into a normal useful citizen. The accident of having a poor widow for a mother should not deprive the child of his birthright. The occu- pations which are frequently counted as hazardous are cleaning and oiling machines; working with machine-saws; stamping, grinding, and mixing machines; working with dusts and poisonous acids. The extrahazardous occupa- tions frequently include mines, blast-furnaces, railroads, and explosives. In New York the age for night messengers is set at twenty-one, on the ground that the work is danger- ous to morals. Frequently, there is less legislation about the street trades. Often newsboys start at twelve years of age, and peddling may often be done at fourteen. Those who are interested in the promotion of child-labor legisla- tion wish to raise these standards and to make the limit fourteen years in the case of boys and sixteen for girls, in order to assure better physical development and more education. Some states require a physical examination Legal Regulation of Employvient 133 on the ground that it seems logical to determine that the child is physically able for the work which it wishes to do. The medical records in the schools would help. Not only should there be a physical examination before the child starts to work, but there should be subsequent examina- tions to make sure that the work is not proving injurious. It is obvious that the purpose of child-labor legislation must cause a tying up of the educational requirements with the requirements concerning the age at which the child may go to work. About one-half of the states re- quire by law the completion of at least eight grades, but the enforcement is often lax. It is sometimes difficult to establish with certainty the age of a child, particularly if the child itself and the parents are anxious to violate the law. The birth certificate, baptismal records, school rec- ords, all, may be used. Some of the states which have de- veloped the legislation have a system of work certificates. The work certificate is usually issued by some one con- nected with the school system. It is sent from the school authorities to the employer; and when the child stops work it is to be returned to the school authorities. In New York State, the law provides for work certificates issued by the Department of Health, or health commis- sioner, or some one designated by them. Medical inspec- tors may order a physical examination of children between the ages of fourteen and sixteen who work in factories or mercantile establishments. If the child is found to be physically unfit to be employed, the employment certificate is cancelled. Then the child cannot work until the age of sixteen is reached, or until a new examination shows that the infirmities have been removed. Children are not allowed to work more than eight hours in any one day or 134 Introduction to Economic Problems more than forty-eight in one week. Boys twelve to four- teen years old may sell papers after 6 a. m. and before 8 p. M. if they get a permit at the request of their parent or guardian approved by the principal of the school they attend. This applies to cities of the tirst, second, or third class. 4. The Regulation of the Employment of Women. — Hours of Labor. — In iq2o, all but six states had some limi- tation on the hours of labor of women. In most of the states, tlie number allowed was less than sixty a week. Usually the law excepts work in homes or on farms. In some states the regulation applies merely to cities and towns. In those states where the canning industry exists, it is frequently exempted from the application of the law. This is done on tlie ground that tlie perishable product must be handled when it comes in in order tliat loss may be prevented. Some of the early laws were almost nullitied by allowing overtime. Now some allow overtime for such things as the stoppage of machinery, or at such times as the Christmas holidays. It is well to provide for varia- tions in the number of hours allowed in ditlerent businesses. The approved method of doing this is to have a commission which sets after investigation the number of hours allowed. The laws have been upheld as constitutional on the ground tliat it is necessary to protect the health of women in order to preserve strength and vigor to the race. Xi^ht-Work for Women. — In iq:;o, twelve states pro- hibited night-work for women. The common form of pro- hibition is that no woman shall work between hours of 10 p. M. and 6 a. m. The idea back of this regulation is that if women work at night they do not get proper rest in tlie daytime, the time during the day being often taken up Legal Regulation of Employment 135 with housework. The eye-strain involved in working with artificial light is great, and there are moral dangers often in going and coming from work. The United States Su- preme Court has not yet passed on the constitutionality of such laws. Prohibited Employments. — Some states prohibit the work- ing of women in mines, and in some processes, such as polishing. New York forbids their employment as core- makers in foundries where the cores are baked in the room in which they are made. 5. The Minimum Wage for Women and Children. — The application of the minimum wage has been justified ordi- narily on the ground that it applies to certain groups of workers who, because of their weak bargaining position, may be exploited by the employers. Fifteen states now have laws applying to women, or to women and children. Ordinarily in this country men prefer to have wages set by union activity, and there is doubt about the constitu- tionality of such laws for men. The laws are usually stated in general terms, such as providing that women shall get a wage sufficient to "maintain health and welfare." The best plan for administering the law seems to be the com- mission plan. A state commission, either directly itself, or through subordinate commissions on which represen- tatives of the employers and the workers and the public are included, holds an investigation of the particular in- dustry. The wages have not on the whole been extremely high. The usual plea is that the industry cannot afford to pay high wages. The public is coming to take the posi- tion, however, that no industry should exist which cannot pay its own way. No industry should expect other in- dustries to contribute to the support of its workers. Es- 130 Introduction to Econoinic Problems pedal provision is frequently made for handicapped work- ers and for learners. This provision usually is that some representative of the commission may grant what amounts to a license to work to the person after an investigation, and can set the proportion of the full wage which the per- son is to get. The justification for this provision is the fear that employers if unregulated might get all of their work done at less than the standard rate by the use of the handicapped or by the use of learners. In most of the states, penalties for violation are provided; however, in Massachusetts the enforcement of the law is left to public ojMnion. 6. The Regulation of the Conditions of Employment of Men.' — There has been less of this than regulations for women and children. The men have been considered capa- ble of taking care of themselves. Hours of Labor. — The constitutionality of general laws regulating the hours of labor of men in all industries has been doubtful. There is no question of the power of the government to determine the conditions of employment on all public works. So, the federal government, most states, and most cities have laws prescribing eight hours as a day's work. In other than public work some ground must be found for the limitation of hours. Thus, in railroad trans- portation, to prevent accidents men handling trains are not allowed to work more than sixteen hours continuously. In mining, because of the danger involved, sixteen states have laws limiting the hours of labor to eight. Some states have laws regulating the hours for workers in smelters, and others for workers in tunnels where the time allowed ' Cf. Commons and Andrews, I'rinciplcs of Labor Legislation, pp. 247-271. Legal Regulation of Employment 137 depends upon the air-pressure in which the work is carried on. The Oregon law placing the limit of ten hours a day on all labor has been upheld by the Supreme Court of the United States. 7. Exercises. — i. Why not leave sanitation and safety to the self-interest of the employers? 2. To what extent are workers to blame for accidents? 3. What interest has society as a whole in the prevention of accidents ? 4. What is the best method for legislating about sani- tation and safety ? 5. Why not leave children to the care of their parents? 6. Why is night- work bad for children? 7. Explain the attempts to get federal regulation of child labor. 8. What would you suggest as a better criterion than age for deciding whether or not a child shall be allowed to work? 9. Why are boys allowed to go to work earlier than girls ? 10. What connection should there be between the com- pulsory educational requirement and the regulations about child labor? 11. Why should women in homes be allowed to work longer than those in factories? 12. How can you justify the limitation on the freedom of a woman to work as long as she wishes? 13. What are the objections to night- work for women? 14. In these days of equal rights for women, why should they be prohibited from working in some employments ? 15. If wages are "the discounted marginal product of labor," what will be the effect of setting by law a minimum wage for women? Make various assumptions as to the rates set. 16. Should the minimum wage for women cover more than the physiological minimum of subsistence? 138 Introduction to Economic Problems 17. Should the minimum wage for women be enough to support more than the woman herself? 18. Why are special provisions in minimum wage laws necessary for the handicapped and learners? 19. What is the constitutional difficulty about labor legislation for men? 20. Why do we have agitation for eight-hour-day laws? Why not seven, six, five, four, or three hour day laws ? 21. On what grounds are laws limiting the hours of work of men in particular occupations based ? CHAPTER IX LIFE AND PROPERTY INSURANCE I. The Function of Insurance. 2. The Insurable Risk. 3. The Moral Hazard. 4. Fire Insurance — Schedule Rating. 5. Other Prop- erty Insurance — Marine Insurance — Boiler Insurance — Title Insurance. 6. Life Insurance — Calculation of Premium — Ordinary Life — Limited- Payment Life — Endowment — Dividends — Life Insurance and Invest- ment. 7. Exercises. • I. The Function of Insurance. — Insurance is the co- operative bearing of losses. Sometimes the insurance com- pany is organized on a mutual basis. But, even if the company is organized by individual enterprise and run for private profit, the effect is the same. Individuals take a small, certain loss (the premium paid) in order to protect themselves from the disaster which would follow if the big, uncertain loss should happen to come on them. Thus, we may say that, in effect, those whose houses are insured against fire and who have no fires pay the loss of those who have fires. For a few dollars a year, each householder can be protected against loss of $1,000 by fire. The business man faces many hazards. Some can be insured against; for some of the risks the speculative mar- kets provide a means of hedging which is the equivalent of insurance; for some, however, there is no insurance and the business man must bear the risk. Insurance plays an important part in many financial transactions. Whenever property forms the security for a bank loan or the basis of a bond issue, it must be insured. Obviously no one would wish to loan money on security which might vanish in a few minutes. 139 140 Introduction to Economic Problems To understand insurance we must grasp the meaning of insurable risk and the moral hazard in insurance. 2. The Insurable Risk. — The meaning of this term may be approached from the common idea of the ''law of aver- ages." If we flip a coin a large number of times, we may expect heads and tails to come up an equal number of times. Nothing is more uncertain than whether "Babe" Ruth will get a hit a particular time at bat. But when we take even a short period, we can count on his making a high percentage of hits and a dependable number of home runs. The United Cigar Stores count the people passing given points and locate the store on the basis of the in- vestigation. They know that a certain percentage will become customers. Storekeepers know that a certain per- centage of their customers will want 1$% collars. Now there are certain hazards which we may say follow the law of averages and so give an insurable risk. For example, nothing is more uncertain than the question of whether a particular building will burn, but if we take a large number of widely distributed buildings we can pre- dict with great accuracy the number which will burn in a year. Thus, if one out of a thousand houses burn each year, a mutual company with volunteer officials could insure the houses at the rate of $1 for each $1,000 insur- ance. Again, the duration of life of any one individual is very uncertain, but if we take large groups of men we can pre- dict the average duration of life and so can calculate the amount which must be paid as a premium to accumulate enough to make a payment of $1,000 at the death of each of the insured. We may say, then, that an insurable risk exists if the Life and Property Insurance 141 hazard occurs with predictable regularity. Therefore, the extension of the field of insurance depends on the growth of definite information about hazards. 3. The Moral Hazard. — Even if an insurable risk exists it may not be feasible to meet it by insurance, because of the moral hazard. The moral hazard is that the event will take place not accidentally, but by deliberate intention of the insured. Thus, the moral hazard in fire insurance is that the insured will set fire to his own premises. The moral hazard in life insurance is suicide. If we cannot control the moral hazard it is obviously impossible to pro- vide insurance. Especially with new forms of social in- surance it is difficult to predict to what extent the moral hazard will hamper. Thus, in unemployment insurance there is danger that a man might prefer the insurance pay- ment without working, to full wages and working. 4. Fire Insurance. — In fire insurance we say there is an insurable risk because if we take a large group of houses or buildings we can predict the number of fires which will occur with sufficient accuracy to enable us to find out how much we must charge each individual in order that the loss (or at least part of it) of those whose houses are burned may be paid to them. The premium, as it is called, in fire insurance then involves the payment for the loss and also the amount necessary to compensate the men who carry on the business. The first amount is called the net or mathematical premium, and the sum of the first and the second, the gross premium. The moral hazard in fire in- surance is that the fire occurs, not as an accident, but as the result of the activities of the owner. In other words, we say that the moral hazard in fire insurance is arson. Fire insurance is particularly instructive because of the 142 Introduction to Economic Problems careful and accurate gradation of the premium to the risk. A widely used method of fixing premiums is to follow the Universal Mercantile Schedule.^ This schedule starts with the standard city which comes up to certain specifications with regard to water system, fire-fighting equipment, pav- ing of streets, police, building law, and fire record. In this standard city, the standard building must come up to speci- fied requirements as to number of stories, and methods of construction. There is a basis rate of 25^^ per $100 charged for the standard building in the standard city. The actual rate is found by adding to the rate for all failures to come up to the required standard and subtracting from it for exceptionally good features. Thus, if the city has no fire department, the rate is increased by 32^. A shingle roof adds 15^. Open elevators add 12^. Hot-air-furnace heat adds 3^. If the street is inaccessible and unpaved, it adds 10^. Terra-cotta and cement chimneys add 50^. For exceptional construction and conditions, deductions are allowed. For no cellar, deduct 10 per cent. If the grade floor is fireproof, deduct 10 per cent. If metallic studs and lathing are used, deduct 10 per cent. An automatic fire- alarm causes a deduction of 5 per cent. Automatic sprin- klers cause deductions of from 25 to 40 per cent. Next must be considered the problem of how the building is occupied. Each possible use has an effect on the hazard ; a retail drug- store adds 10 per cent. Deductions are made for nearness to hydrants and special fire-fighting appliances. Thus it is seen that the attempt is made to allow for everything which may have a bearing on the chance of causing damage by fire. The better-managed companies watch carefully the dis- tribution of their risks. They will not take more than a ^Heubner, S. S., Property Insurance, pp. 193 #. Life and Property Insurance 143 certain number of risks in one city. In the case of New York City they divide the city into districts and restrict the amount of insurance they write in each district. They aim, thus, to avoid the conflagration hazard, the danger of a large section of a city burning. 5. Other Property Insurance. — Marine Insurance. — In land transportation, the carrier assumes the risks. In water transportation, the shipper must provide the insur- ance. Thus, in the development of credit instruments in foreign trade the marine-insurance policy is one of the important documents. In the matter of organization marine insurance is notable because of the large amounts which are provided by individual underwriters. However, insurance companies are now obtaining an increasing share of the business. Boiler Insurance. — This type of insurance provides against the hazard of boiler explosion. It is very interest- ing because almost all of the premiums received by the companies are spent in inspection and prevention of acci- dents. The whole theory of the practice is that, with proper care, no explosions need occur. Title Insurance. — In the older sections of the country where the real estate has passed through many hands, there is always a chance that there may be a flaw in the title to the property. For a long time abstracts of titles have been common. Now companies will insure the title. The companies assume that their examination of the title is so thorough that there will be no loss. They agree to pay losses which result from errors in examination or de- fects which were not discovered. Title insurance is of great importance in mortgage loans. It enables a lender to make sure that the property put up as security can be counted on if he wishes to foreclose. 144 Infroducfion to Economic Problems 6. Life Insurance. -This tyi)c of insurance is rather more comph'cated because it is insuring against a hazard whicli is hound to occur. One may carry fire insurance for many years and never have a fire, but ultimately we all must die. Fire insurance is ordinarily carried on the basis of insurance by the year or for a short number of years, bul Ihc life-insurance contract ordinarily runs for life or a lon^ period of lime. A policy may run for seventy years or even longer. Life insurance satisfies the require- ment that there must be an insurable risk. That is, if we take a large enough group of men, we can predict the num- ber of men at different ages who will die each year. In order to make clear the essential nature of life insur- ance, a brief description of a method of computing life- insurance j)reiniums may be given. The method given is not the one used by the actuaries in their computation but is mathematically equivalent. We start with the American Experience Mortality Table, This table aims to show what deaths would take place in a group of 100,000 males aged ten years old. The computa- tion of the premium for age thirty-five will be shown, so the first, the last entries in the table, and a part near thirty- iive will be given. SICI.ECTION IROM TlIK AMKRICAN EXPERIENCE MORTAIJTY TABLE Age Niimhcr Living ill Ihc Hcninning of the Year Numl)cr Dying During the Year 10 100,000 99.251 81,822 8 1 ,090 Ho,353 3 749 746 732 737 742 3 11 -IS 36 37 95 Life and Property Insurance 145 To start with we find the net single premium. It is called "net" because it does not allow for the expense of doing business. It merely gives the amount, which if paid by a group of men aged thirty-five, would, along with in- terest accumulations, furnish funds enough to give the beneficiaries of each poHcyholder $i,ooo when each death occurred. We assume that the premium is paid at the first of the year and the death claims at the end of the year. It is assumed that 3 per cent can be earned on the invested funds. This rate seems low, but the insurance company must play safe. The contract may run for sev- enty years, and many things may happen to the interest rate in that time. We find the present worth of the amounts of money needed to make the payments each year. Seven hundred and thirty-two die the first year. The present worth of $732,000 at 3 per cent true discount is found by dividing by 1.03 or multiplying by .970874. We could make a table for all of the years after thirty-five as follows: Age Amount Needed to Pay Policies Present Worth at 3% Discount Compounded Annually ■^'; $732,000 X .970874 737,000 X .942596 = $710,679.77 = 694,693.25 36 95 Total $34,355,666.83 Thus $34,355,666.83 would provide $i,ooo at the death of each of the 81,822 men who started at age thirty-five. Dividing the amount by 81,822, we find that each would need to pay $419.88 as the net single premium. It is called a single premium because it is paid once for all. 146 Introduction to Economic Problems However, most men do not wish to pay for their insur- ance all at once. They prefer to pay in yearly instalments. In what is called an ordinary life policy, the payment is continued until death. We attack the problem of comput- ing the net annual premium by finding how much the present worth of a payment of $i a year from all of the survivors would be. We assume the payment is made at the first of the year. PRESENT WORTH OF $\ A YEAR FROM SURVIVORS Age Total Payment Present Worth 35 36 37 95 Total $81,822 X I 81,090 X .970874 80,353 X .942596 = $81,822.00 = 78,728.17 = 75,740.42 $1,629,648.77 If $1,629,648.77 is the total from a contribution of $1 a year from each survivor, in order to pay for all the claims we would need 34,355,666.83 divided by 1,629,648.77, or $21.08 as a net annual premium. To get the premium actually charged by the insurance companies, an expense loading is added. The law allows a loading of one-third the net premium. Net prL'inium $21 .08 Loading 7 . 03 Gross premium $28 . 1 1 Limited-Payment Life. — Many men do not wish to keep on making payments as long as they live. They prefer to complete the payments during the time of their maximum earning power. Perhaps the commonest period for pay- Life and Property Insurance 147 ing premiums is twenty years. To calculate the premium necessary, we find the present worth of $i a year from the survivors as before but stop after twenty payments have been made. PRESENT WORTH OF $1 A YEAR FROM SURVIVORS Age Total Payment Present Worth 35 36 37 $81,822 X I 81,090 X .970874 80,353 X .942596 = $81,822.00 = 78,728.17 = 75,740.42 S4 Total Si, 1 50,932. 79 It is interesting to see that the present worth of the twenty payments, $1,150,932.79, is over two-thirds of the amount for the sixty years in the former case. The present worth of the payments of forty years after age fifty-five is small because of the heavy discount involved and because of the lessened number of survivors. Dividing as before the amount necessary to make the $1,000 payments at each death by the present worth of $1 a year from all the survivors, we get the net premiums as follows: $34,355,666.826-^$I, 150,932. 798 =$29.85. The New York law allows a loading equal to that of the ordinary life plus one-sixth of the amount the net premium is greater than the net premium on the ordinary life policy : Net premium $29 . 85 Loading 8 . 49 Gross premium $38 . 34 Twenty-Year Endowment. — This is not a straight insur- ance policy. It involves two provisions. If the holder 148 Introduction to Economic Problems dies within the twenty years, his beneficiary gets the $i,ooo insurance. If the holder is aHve at the end of twenty years, he gets the $i,ooo. So, we must provide insurance for those who die and endowment for those who live. We need a new calculation of the cost of insurance, since the policy now covers only twenty years: AMOUNT NEEDED TO PAY INSURANCE Age Total Payment Present Worth 35 36 54 Total $732,000 X .970874 737,000 X .942596 = $710,679.77 = 694,693.25 $12,553,331.24 The table shows that there will be 64,563 survivors. The present worth of $1,000 to be paid to each of them at the end of twenty years is $35,746,983.59. Dividing each of these totals by $1,150,932.80 (the present worth of $1 a year from each of the survivors), we get the net premiums for the insurance and the endowment. Net annual premium for the insurance $10.91 Net annual premium for the endowment 31 .06 Net annual premium for the loading 9-94 $51-91 The loading is limited by a Wisconsin law to one-third of the net premium for the limited-payment life for the same period ($29.85), so it cannot exceed $9.95. Endow- ment policies are also written for other periods than twenty years. There are many other forms of policies suited to all sorts of needs. The foregoing account illustrates the prin- ciples upon which they are all calculated. Life and Property Insurance 149 Life insurance does not consider the variations in risks as minutely as fire insurance does. Each applicant must pass a medical examination. If he comes up to certain standards, he is insured; otherwise most companies will not insure him. Some companies insure substandard risks by charging an extra premium, based on the character of the impairment. Other companies agree to insure a man of forty with certain impairments if he pays the premium for age fifty. The insuring of the impaired is being done in- creasingly as more definite information about the eflfect of impairments on the length of life becomes available. Dividends to Policyholders. — Many insurance companies nowadays are carried on under the participating plan. That is, the insurance company aims to provide insurance to the policyholder at as low rate as possible. The com- pany takes the policyholder only after a medical examina- tion. This means that the actual mortality experienced will probably be less than that predicted in the mortality table. Then, since the company must play safe with refer- ence to the amount of interest they can earn, usually over long periods of time they earn a higher rate than that on which the premium was calculated. Then often, they also conduct their business at less cost than they allow for in the expense loading. Savings from all of these sources, that is, less mortality than was expected, a higher rate of interest earned than was calculated upon, and less expense than was allowed for, are returned to the policyholders in the form of what are rather incorrectly called dividends. Dividends are really a return of overcharges. Life Insurance and Investment. — The function of insur- ance as co-operation in bearing losses is indispensable. If a man has many pieces of property widely scattered, he 150 Introduction to Economic Problems may carry his own fire insurance. That is, he may take the risk, and it is assumed that the fire losses will not be greater than the premiums he would be obliged to pay to the insurance company, and so he can meet them if he sets that amount aside. But a man cannot insure his own life. There is no way in which he can get the law of averages to work. He may set aside the amount of the life-insurance premium, but if he dies soon that would be of small use to his beneficiary. Unless he has abundant means to provide for his family, he must get the co-operation of others in providing insurance. Insurance as an investment does not have the same indispensability. It has some things in its favor. It is safe, if taken out in any of the big, well-known companies. Many find it a convenient method of saving small sums regularly which would be difficult to invest on account of their smallness. Some people need the com- pulsion which comes from the engagement to pay regularly, and the services of the life-insurance agent to see that the payments do not lapse. The chief objection to insurance as an investment is the rate of return, which, because of the expense of conducting the business, is low, even when the safety is allowed for. 7. Exercises.— I. Explain carefully how insurance is co- operative bearing of losses when it is carried on by stock companies. 2. List the risks to which the business man is exposed. Against which of them can he insure himself? 3. Is there an insurable risk in the ones against which the business man cannot insure himself? 4. Is there an insurable risk in the chance of a student failing in Economics 2 ? If so, how would you determine it ? 5. What would be the moral hazard in the insurance mentioned in question 4? Life and Property Insurance 151 6. How does business depression affect the moral hazard in fire insurance? 7. Is it fair for two men to get the same benefit from life insurance when one pays premiums for two years and the other for fifty years? 8. How much life insurance does a business man need? 9. Discuss life insurance as an investment. 10. What effect on the amount of dividends on life-in- surance policies would you expect from (a) the higher rate of interest now obtainable on investments? {h) the influenza epidemic? (c) the increase in wages and salaries? 11. Why will not people insure their fives without hav- ing a life-insurance agent persuade them? 12. What is the banker's interest in fire insurance? 13. Explain how it is possible for a large corporation to carry its own fire insurance. 14. Can a wealthy man carry his own life insurance? 15. Does fire insurance eliminate the loss due to fires? 16. What are the dangers of local mutual fire-insurance companies ? 17. What are the advantages of country- wide mutual fire-insurance companies? Are there any disadvantages? 18. What is the importance of marine insurance in for- eign trade? 19. Explain the system of conducting title insurance. 20. What is the theory underlying the conduct of boiler insurance ? 21. In what respect is insurance similar to gambling? In what respect dissimilar? 22. "Insurance works toward a greater equality in the distribution of wealth." Is this true? Why or why not? CHAPTER X SOCIAL INSURANCE I. The N('C<1 for Social Insurance. 2. Kcspoiisihility for Acciflent3 Under the ("oninion Law — ^Contril)iitory NcKliKt'i't — The IJurdcn of the ()c:c:u|)ational Kisks — Assunii)ti(jn of Risk — The I'ellow-Servant Doctrine. 3. I^nployers' l,ial)iHly Laws. 4. Workmen's Compen- sation Laws. 5. The New York ("omi)ensation Law and Other Laws — Injuries Compensated — Industries Covered — Persons Compensated — liurdcn of I'aymcnt — Compensation for Death — Compensation for Disal)ility — C'arrier for the Insurance. 6. Health Insurance — Hazards of Industry -Health Insurance in ICurope — Henefits. 7. Old-Age and Invalidity Insurance -Old- A^^e Pensions in Lnj;;land-— The German .System. 8. Unemployment Insurance — The (ihent System — Out-of- Work Henefits of Lahor-lJnions — The British System. 9. Exercises. I. The Need for Social Insurance. — Insurance has been defined as the co-operative bearing of losses. It may be carried on by j)rivate companies. We speak of social in- surance when the state carries on tire insurance, subsidizes it, or makes it compulsory. The reason for the compulsion lies in the faihire, or inability to insure, of those subject to some hazard. Typically, social insurance aj)plies to some hazard to which workmen are expo.sed. Their wages are relatively low, and it is difhcult for them to provide anything to meet the hazard of sickness, unemployment, or death. When such a disaster comes to a family, it often means the break- up of the family, or dependence on public or private charity. Once the dependence on charity is begun, it frequently means permanent dependence. Observation of such con- ditions has led many people to the conclusion that some remedial measures need to be taken. Compulsory insur- 153 Social Insurance 153 ance has many advocates. They do not think that indi- vidual initiative will handle the situation. Workmen's compensation is everywhere the commonest form of social insurance. It provides payments for acci- dents in industry. 2. Responsibility for Accidents Under the Common Law. — Under the common law, the employer usually es- caped paying for losses due to accident because he could use certain defenses: contributory negligence, occupational risk, assumption of risk, and fellpw-servant doctrine. These may be taken up in turn. Contributory Negligence. — In most accidents, it can be shown that if the injured had done something or had not done something, the accident would not have occurred. So it is easy to say that the worker is partly to blame; and it was the law that the employer could not be held respon- sible, even though he had been negligent. The modern attitude is a frank recognition of the failure of the human body and human attention to function perfectly in the average individual. The laws now provide for compensa- tion unless there has been gross negligence on the part of the injured man, and sometimes even when there has been such negligence. The Burden of the Occupational Risks. — Some occupations have a greater hazard than others. The common law pre- sumed that the man entering the employment understood its hazards and assumed them, possibly because of some increase in pay. This may have been a fair assumption in the earlier, simpler economic organization which was characteristic of the period in which the common law took form, but it is certainly not true to-day. Wages are not always higher in dangerous trades, and even when 154 Introduction to Economic Problems they are higher, they do not compensate for the added risk. Assumption of Risk. — According to the common law, the employer was held responsible for providing safe working conditions. But there grew up a doctrine that if a worker continued to work with a machine that was not safe, he assumed the risk for any accidents which might arise from the defective machine. If a worker had complained about a machine which caused an accident, that fact was urged in the trial as proof that he knew of the defect and so had assumed the risk of working with the machine. The Fellow-Servant Doctrine. — The common law relieved the employer of liability in case the accident was due in any measure to a fault of a fellow servant. This seems fair enough in a simple organization of society where a man could know personally his fellow servants and could watch out for the careless or refuse to work with them. But how can we say that an engineer running from New York to Philadelphia is responsible for knowing the frailties of all of the switchmen who might make mistakes while he is guiding a train between the two cities? 3. Employers' Liability Laws. — A first step in advance was taken in some jurisdictions by passing laws which made the employers liable for accidents. However, this brought but little relief, for employers insured their liabiUty in casualty companies. An injured employee was forced to sue for damages. The worker rarely had the courage to antagonize the employer. If he did sue, the case would be long drawn, and if the worker won it would be appealed. The practical result was that only a very small part of the money the employers paid as premiums ever reached the workers as compensation. Even if the worker won, much Social Insurance 155 of the damages usually went to his lawyer. His financial condition often made it necessary for him to hire his lawyer on the contingent-fee basis. 4. Workmen's Compensation Laws. — For social insur- ance against accidents in industry, the laws are ordinarily called Workingmen's Compensation laws to distinguish them from the earlier Employers' Liability laws. The laws came relatively late in the United States. But once the movement started it quickly spread. Forty- two states enacted compensation laws in the years 1911-1919. There can be no question about the existence of an in- surable risk. Accidents occur in industry with predictable regularity. The yearly toll in the mines, on the railroads, and in other industries would make a gruesome list. The moral hazard in accident insurance is the possibility that the worker will deliberately allow himself to be maimed in order to collect the insurance. Opponents of the system predicted that many such cases would occur. On the whole, experience has shown the fear to be groundless. The laws usually do not cover accidents due to gross negli- gence of the worker. In our study of compensation laws we will follow the provisions of the New York law, pointing out the different practices of other states on various provisions. 5. The New York Compensation Law and Other Laws.^ — In the first place, the New York law is a compulsory law. With regard to the employer this means that he must make the payments specified in the law. With regard to the employee this means that the injured workman cannot sue the employer; he must be content with the compensa- tion provided by the law. Fourteen other states have com- ^ Cf. Bulletin of U. S. Bur. of Labor Statistics No. 2^2, p. 49. 156 Introduction to Economic Problems pulsory laws and thirty-one states elective laws. Under the elective law, if an employer wishes he may refuse to accept the law. If he so refuses, then he, in most cases, cannot use the ordinary common-law defenses if an acci- dent occurs. Without these defenses the employer has not much chance of winning the suits brought against him. Laws elective for the employee grant him the right to sue the employer instead of taking the compensation provided by the law, but allow the employer to use the old defenses, so that a good defense usually can be made. Injuries Compensated. — Accidental injuries out of and in course of employment, and disease or infection naturally and unavoidably resulting therefrom, causing disability for more than two weeks, or death, unless caused by the wilful intention of the injured employee to bring about the injury or death of himself or another, or by his intoxication while on duty, are covered. An amendment to the New York Workmen's Compen- sation law in 1920, §49-a, enumerates certain diseases which are to be compensated as such and regardless of any accidental origin. They are: anthrax, poisoning by lead, mercury, phosphorus, arsenic, wood alcohol, nitro and amido derivatives of benzine, carbon bisulphide, nitrous fumes, nickel-carbonyl, dope, gonioma kamassi; chrome ulcerations, epitheliomatous cancer or ulceration of skin or corneal surface of the eye due to tar, pitch, etc. ; glanders, compressed-air illness, six diseases due to mining, and cataract in glass-workers. The New York law is broader than the laws of most other states in its inclusion of diseases arising out of em- ployment, or "industrial diseases," as they are called. Most of the other states insist on a narrow interpretation Social Insurance 157 of accident, which excludes anything which does not hap- pen suddenly. The New York law and the laws of several other states also require payments for disfigurement, even though the accident caused no direct loss of earning power. Generally the states restrict compensation to cases which impair earning power. Industries Covered. — The industries covered are hazard- ous employments, including extensive classified lists cover- ing forty-five groups; also all other employments not so enumerated, in which four or more workmen or operatives are regularly employed, domestic and farm labor excepted. The exclusion of farm and domestic labor is found in nearly all states. It probably is the result of the political strength of the farmers, for certainly farming is an industry with much hazard, especially in harvesting and threshing. Much confusion arises over the question of which indus- tries are hazardous. One might think that the fact of accident would indicate that the industry was hazardous. However, in New York the question is of little importance, since the provision about four or more workmen is very inclusive. Casual labor is frequently excluded. No doubt this makes for administrative convenience, but surely the re- sults of accidents are no easier to bear when they are the result of casual labor. Many states follow New York in not including domestic labor. Perhaps, because of the difficulty of administering the law in such cases and the feeling that the occupations are not hazardous. In some states the act does not ap- ply to establishments having less than some specified num- ber of employees, from ten down to two. This makes for ease of administration, but does not protect the workers, 158 Introduction to Economic Problems and in truth is but an indirect way of excluding farm and domestic labor. If a New York employee of a New York company is in- jured on a piece of work which takes him to another state, he still can claim compensation. Much confusion has arisen in attempting to protect the workers on the railways, for Congress controls the part that is interstate commerce, and the states the part that is intrastate commerce. It is obviously difficult to determine whether the man is in- jured in interstate or intrastate commerce. Aliens are covered as well as citizens, although, in their case, there is some limitation about the number of de- pendents. Persons Compensated. — In private employment, all the employees in industries covered are compensated. Those in public employment are also included. Burden of Payment. — In New York, as in the states gen- erally, the entire cost is on the employer. The money for the compensation is paid by him. To a considerable ex- tent, this cost merely takes the place of payments for Ha- bility insurance, costs of lawsuits, and donations to the injured which he was forced to make under the old system. If the payments are greater than formerly, it is expected that he will recoup himself by increasing the price of his product. The feeling is that consumers have no right to expect that workers or their families should bear the burden of accidents incident to the production of commodities. Some laws specifically provide that the payments shall not be deducted from the wages of the workers. In the long run it is impossible to determine whether or not the pay- ments by employers cause wages to rise less rapidly than they otherwise would. Social Insurance 159 Compensation for Death. — In New York in case of death $100 is allowed for funeral expenses. Then there is paid to a widow or dependent widower alone 30 per cent of the wages of the deceased, with 10 per cent additional for each child under 18. Dependent orphans under 18 receive 15 per cent each, as also do dependent parents, brothers, or sisters. The aggregate payments in no case can exceed 66^ per cent of the wages of the deceased. Payments to widow or widower cease on death or remarriage or when dependence of widower ceases, with two years' compensa- tion on remarriage. Payments to children, brothers, and sisters cease at 18 and to parents when dependence ceases. A serious limitation to the benefits arises from the provision that no wages in excess of $100 a month are considered in the computation. In other states, there are wide divergencies in the com- pensation. A common form bases the compensation on the weekly wage, giving various percentages according to the number and relationship of the dependents. In Iowa, 50 per cent of the wages is given to persons wholly dependent; however, not more than $10 or less than $5 a week. The payments run for 300 weeks. In other states the period varies; as 270, 350, and 500 weeks, and the percentages vary from 25 per cent to 66^ per cent. Some states make the payment a multiple of the yearly wage. Kansas gives three years' wages to persons wholly dependent, and sets the maximum at $3,800 and the minimum at $1,400. Oregon gives the widow $30 a month and $6 a month for each child, with a maximum payment of $50. Most states have an allowance for funeral expenses; $100 is the commonest limit. Compensation for Disability. — The New York law pro- vides medical and surgical treatment and hospital service IGO Introduction to Economic Problems for 60 days, or longer where the conditions require; the costs are to be approved by the commission. In some other states, unlimited care is given. During the continuance of permanent total disability, 66^ per cent of the wages are paid. Loss of both hands, arms, feet, legs, or eyes are con- sidered permanent total disability. In temporary total dis- ability the worker gets 66^ per cent of his wages, but not over $3,500 in all. In the case of permanent partial disabil- ity, 66^ per cent of the weekly wages is paid for specified periods: thus, for loss of thumb for 60 weeks; for loss of hand, 244 weeks; for loss of foot, 205 weeks; for loss of an eye, 128 weeks. The payments are not to be more than $15 a week except in case of the loss of a hand, arm, foot, leg, or eye, where they may be $20 a week. The minimum is $5 a week, or the employee's wages if they are less than $5 a week. The law specifies with great minuteness the various par- tial disabilities, distinguishing between the different fingers and joints of the fingers. Payments begin on the fifteenth day, but if the disability continues for more than forty-nine days compensation is allowed from the beginning. Most of the states provide for medical and surgical aid, but often the amount is inadequate; one state sets the maximum at $25. For total disability, the compensation is usually a fraction of the wages, ordinarily lying between one-half and two-thirds. Often limits are set, such as a minimum of $3 to $6 and a maximum of $8 to $16 a week. Very few of the states provide that the payments shall last until death. Some make limitations as to the number of weeks, such as 312, 400, or 500 weeks. Others set a total limit, such as $4,000 or $5,000. Carrier for the Insurance. — In New York, the employer must give proof of financial ability to make the payments Social Insurance 161 (deposit of securities may be required), or must insure in the New York State Fund or a mutual or stock company. The great problems in this connection are the cost and the method of making sure that the worker gets his com- pensation. Some states merely provide that the employer must pay the compensation. In such a case the employer frequently insures in a casualty company. Some of the casualty companies have made it a practice to fight most of the claims. Some states have voluntary or compulsory and exclusive state funds. Here the problem is to fix the premium rates for the various industries so that each in- dustry will pay for its own accidents. Sometimes mutual companies are formed in given industries. These have the advantage of making it profitable to prevent accidents. On the whole, the compulsory state fund appears to give the greatest security to the worker at the lowest cost to the employer. In some states insurance is not required. This situation may nullify the law, for if the employer goes bankrupt there may be no compensation. Also there are difficulties in enforcing the liability. 6. Health Insurance. — There is no question about the existence of an insurable risk with reference to sickness if wide areas and long times are considered. There are varia- tions in the rate of sickness in different localities due to various climatic factors and conditions of living. If we took the state as our unit, probably we would get statistical regularity. The influenza epidemic illustrates the need for considering long periods of time. The moral hazard in health insurance is malingering. Will some people pretend to be ill in order to get the insur- ance, or magnify small ailments? Obviously it is not so 162 Introduction to Economic Prohlems easy to determine when a man is ill as to see that he has had an accident. In the United States there is no social health insurance. The insurance is voluntary and private. Often local so- cieties are formed which, of course, do not get wide dis- tribution of risk. The largest amount of health insurance probably comes from lodges and social orders. The visits to sick members and the fraternal feehng eliminate most of the moral hazard. Some industries, notably railroads, have developed insurance funds. The usual plan is to deduct a certain amount from the wages of each employee. In return, the employee gets medical and surgical attention and a payment for the time absent from work. Private insurance companies will write health insurance, but this part of their business has not had a great growth. Hazards of Industry. — Besides the ordinary problems of health, there are special hazards in industry. Certain broad classifications may be recognized.^ First, dust. Dust may be mechanically or chemically irritating, or it may be infectious dust. Carbon and stone working, grinding, polishing, sorting of rags, file and comb making are processes which expose the worker to harmful dust. This exposure may result in an enervated condition of the eye, ear, nose, and throat, and in tuberculosis. Second, variations in temperature. Work in iron and steel mills, glass factories, sugar-refining, bakeries, ice manufac- turing, kilns for pottery, tempering and handling metals, canning and preserving, and stoking furnaces all involve either high heat or changes in temperature. These varia- tions in temperature cause anaemia, general debility, rheu- matism, premature old age, cataracts, and stiff joints. ^ Monthly Labor Review, vol, XII, pp. 645-648. Social Insurance 163 Third, humidity. Some of the industries which expose the workers to dampness are pulp and paper mills, tanneries, some textile processes, canneries, sugar-refining, steam vul- canizing, dyeing, and cleaning. This humidity gives rise to diseases of the respiratory passages, neuralgia, and rheumatism. Fourth, poisons. Many substances used in industry are poisonous. The danger of lead-poisoning affects those in the mining and smelting of the metal, those who make lead articles, and those who make colors for painting. The lead attacks the fingers and the eyes. Amyl acetate is used in lacquering, enamelling, and gilding. It causes palpitation of the heart. Wood alcohol is used in the preparation of varnish and lacquer, perfumes, celluloid-making, and the manufacture of patent leather. It causes inflammation of the throat and attacks the optic nerve. Phosphorus is handled by those who make bone-black, bone-ash, tar colors, some fireworks and matches. It causes ulceration of the gums, the loosening and falling out of the teeth, and the destruction of the jaw-bones. Besides these, other in- dustrial poisons are ammonia, aniline oil, aniline dyestuffs, arsenic compounds, benzol, brass, carbon disulphide, car- bon monoxide, chlorine, chlorine derivatives, hydrochloric acid, mercury compounds, nitrous gases, phenol, picric acid, sulphur dioxide, sulphuretted hydrogen, sulphuric acid, trinitrotoluol, and turpentine. Health Insurance in Europe.^ — In Europe, social insur- ance of health has had wide development. Much diversity of practice and many problems have arisen which will need to be solved in the United States if we adopt health insur- ance. ' Cf. Commons and Andrews, Principles of Labor Legislation, pp. 417-422. 1()4 Introduction to Economic Problems Workers Included. In luigland, all manual laborers be- tween the ages of sixteen and seventy, and all others whose earnings are less than $1,250 a year, are forced to insure. In Germany, insurance is compulsory for all work people and for people with incomes less than 2,500 marks who are works oCiUials, foremen, workers in stores, theatrical and musical ])eii"()rmers, teachers and tutors. In France, the health insurance is voluntary for all except miners, seamen, and railroad workers. Cost of Insurance. — Cost of insurance is usually divided between the employer and employee roughly in the pro- ])()rtion of two-thirds for the employer and one-third for the eni})loyee; sometimes the state makes a contribution, e.g., in the case of England. MelJiod of AdniinistrulioH. In almost all of the coun- tries the administration is based upon previously existing local, industrial, or fraternal societies, but is subject to pul)lic control. The problem of providing doctors is some- what dithcult. Confidence in the tloctor is an important part of successful treatment. In luigland, agreements are made bi^ween the doctors as a group and the local insur- ance committees, and then the ])atient is allowed to choose from the list the doctor he j)refers. Benefits.— Tha benefits include medical care and cash payments. Where the premiums vary with the amount of wages, the benelit is some proportion of the wages. In England, where the contributions are uniform, the benefit is a flat sum. Under the English National Health Insurance there are provided: (i) A medical benefit, consisting of free medical atten- dance and medicine. Social Insurance 165 (2) A weekly sickness benefit of 15 s. for men and 12 s. for women. The full amount is not given until the person has been a member for two years. The payment is made for 26 weeks if necessary. (3) A maternity benefit of 40 s. in a lump sum. (4) A disablement benefit of 7 s. 6 d. a week after the 26 weeks of sickness benefit has been exhausted. The Leipzig local fund under the German system shows wide activities. It is run democratically by representatives elected, two-thirds by the workers and one-third by the employers. In some of the items, the Leipzig fund offers more benefits than the law requires. The benefits include: (i) Free medical treatment including medicine, spec- tacles, trusses, and other appliances. (2) If disabled, 55 per cent of the wages is given as a weekly payment for 34 weeks. (3) Or, in place of the above, treatment is given in a hospital, clinic, or convalescent home, with payments to the relatives of a fraction of the sickness pay. (4) A maternity benefit. (5) A funeral benefit. (6) Medical treatment and medicine for 13 weeks to un- insured members of the family and a funeral benefit for them. The workers are grouped into ten wage classes, and 4 per cent of the average wages is collected from each of the classes. The workers pay two-thirds and the employers one-third of this amount. The fund controls convalescent homes, forest retreats, and rural resorts. 166 Introduction to Economic Problems 7. Old-Age and Invalidity Insurance.^ — This is a double hazard, (i) Will the person live to old age and will he need support, either because he is incapacitated or because he has not accumulated enough funds to live on ? (2) Will the person become incapacitated irrespective of his age? Probably the number who are invalided would be found to be fairly uniform. The amount of accumulation seems to be less susceptible to prediction. In agricultural sections the problem of old age is less se- rious. The providing of food and house room have not been difl&cult problems in the country, and often the old person can still perform some services. In the cities among the poorer people the care of the aged is a more serious matter. The moral hazard, if it exists at all, is the danger that provision for old age will discourage thrift. Pension systems have developed in some industries and some governmental employments. Often there are com- pulsory payments required of firemen, policemen, and school-teachers. Private saving is the method used by better-paid workers to meet old age, but this obviously has its limitations when applied to the lower-paid groups. Charity is called upon to meet many of the cases. Old-Age Pensions in England. — Old-age pensions in Eng- land may be taken as typical of one method of meeting the problem. Here the state bears the whole burden from funds raised by taxation. The person must be over seventy years old, a British subject for twenty years who has re- sided in the United Kingdom for twelve out of the last twenty years. The person's income must not exceed £49 17 s. 6 d. The amount paid varies from 10 s. a week to ^ Commons and Andrews, Principles of Labor Legislation, pp. 429- 438. Social Insurance 167 those whose incomes are not over £26 5 s. to i s. for those whose incomes are between £47 5 s. o d. and £49 17 s. 6 d. On March 31, 1920, there were 957,915 persons receiv- ing pensions. The German System. — The German system is a contrib- utory system; the worker and the employer each make contributions during the active period of the worker's Hfe. These must be invested until the time for payments arise, then the state adds a yearly contribution. The benefit is paid when the employee reaches the age of sixty-five, or when he is incapacitated for work. The greater part of the payments are to the incapacitated. 8. Unemployinent Insurance.^ — The question of insura- ble risk is bound up with the problem of business cycles. Certainly there is no insurable risk unless we consider long enough times to cover periods both of prosperity and of depression. Certain occupations are seasonal, such as the building trades, canning, and some types of farming. In industries like these, should we compensate for the regular periods of idleness or merely for idleness which is greater than the normal? The moral hazard is voluntary idleness. To some men, half or two-thirds pay for idleness would appear more de- sirable than full pay for work. The system must provide some means for determining whether or not work is really lacking. The Ghent System. — The Ghent system is of limited ap- plication. The city of Ghent, Belgium, in 1901 agreed to supplement the out-of-work benefits paid by the trade- unions. The city felt that if the trade-unions were paying 1 Cf. Commons and Andrews, Principles of Labor Legislation, pp. 442-448. 168 Infroducfioti to Economic Problems « benefits, probably there was no doubt about the inability to find work. The limitations are obvious. The system applies only to members of trade-unions, and it is non- contributory and really a form of charity. The system, however, has been rather widely accepted in other cities in Belgium, Great Britain, Germany, France, Switzerland, Italy, Holland, Denmark, Norway, and Finland. The city of St. Gall, Switzerland, in 1894, tried the ex- periment of compulsory unemployment insurance. Many administrative difftculties were encountered; so, after two years, the plan was dropped. The system dealt directly with the workers, and it was found difficult to collect the weekly payments from them. There was no adequate means for determining the fact of unemployment. The system had been started without knowledge of unemploy- ment, and so the rates charged were inadequate. Out-of-Work Benefits of Labor-Unions. — Such benefits are common in Europe, but are not much used in the United States. The Cigar Makers' Union is the only member of the American Federation of Labor which has a national system. Other unions, however, have systems of narrower scope. The British System. — The St. Gall policy of direct com- pulsion has had its latest and broadest application in the British Unemployment Law, which went into operation in 191 2. It is compulsory, but is applied at first only to certain industries where records have been kept and thus where the extent of unemployment is known. Contribu-. tions are made by the worker, the employer, and the gov- ernment. The benefit started at 7 s. a week; during the war it was raised to 15 s. a week. An amended act came into operation November 8, 1920. Social Insurance 169 It added about 8,000,000 people to the scheme, bringing the total up to 12,000,000. Those in agriculture and domestic service are not included. Non-manual workers who get less than £250 are included. The insurance is paid from contributions by the workers, the employer, and the state. Thus, in the case of men, each week the employee pays 4 d., the employer 4 d., and the state 2 d. The unemployment benefit may be received for only fifteen weeks in any one year. Elaborate provisions are made to make sure that the man is really unable to find work. But the man is not re- quired to become a scab, or accept employment at less than the ordinary rate of wages, or where conditions of work are less favorable than he has been accustomed to. On the other hand, he cannot get the payment if his unemployment is due to a strike. Thus, the state attempts to take a neutral at- titude in strikes. It will not pay unemployment benefits to the strikers, nor will it force the unemployed to take the places left vacant by the strikers. Of course, a man who loses his job because of misconduct, or leaves his job vol- untarily without any just cause, cannot collect the unem- ployment benefit. The amount of benefit was increased to 20 s. for men, starting March 3, 1921; but the amount of unemployment was so great that on July i, 1921, it was cut to 15 s. The fund was in debt at that time. 9. Exercises. — i. Why not have the government, out of funds raised by taxation, compensate for all of the hazards covered by social insurance? 2. What were the common-law defenses used by the employer ? 3. From the standpoint of maximum production of wealth, who should bear the losses due to accidents in in- dustry ? 170 Introduction to Economic Problems 4. Is there any better method of apportioning the cost of accidents than the attempt to find some one person who was to blame for the accident and make him pay for it ? 5. What defects appeared in practice in the employers' HabiHty laws ? 6. Why is the moral hazard slight in accident insurance? 7. Should working men's compensation laws be com- pulsory or elective? 8. Should diseases arising out of employment be classed as accidents ? 9. Should disfigurement without loss of earning power be compensated ? 10. Why are establishments employing only a few labor- ers often excluded from the provisions of working men's compensation laws ? 11. Who ultimately pays the cost of working men's com- pensation ? 12. Why is the compensation always less than the wages ? 13. Discuss the advantages and disadvantages of having the compensation provided: (a) by the employer himself; (&) by insurance in private insurance companies; (c) by insurance in compulsory state funds; {(i) by insurance in voluntary state funds. 14. How many men per thousand employed should an industry be allowed to kill each year? 15. How can we balance cheapening of the process with shortening of the life of the workers? 16. Can industry be made perfectly safe? 17. Why not insure every one against accidents whether they take place in industry or not? 18. How do epidemics affect the insurable risk in health insurance ? 19. How would allowance be made for the differences in the healthfulness of localities? 20. Should allowance be made for differences in the health of the insured at the time the insurance was taken out? Social Insurance 171 21. Should we have compulsory health insurance for the whole population? for the poorer part of the population? If so, where would you draw the line? 22. Why should the employer or the state pay any part of the cost of health insurance? 23. What difhculty arises in connection with the choice of the doctor under health insurance? 24. Can we predict the percentage of people who will be invalids in old age? 25. Can we predict the percentage of people who will not be self-supporting in old age? 26. How does a state old-age pension differ from charity ? 27. Which system for providing for old age is better, the English or the German? Why? 28. Which would be better, unemployment insurance or regularization of industry? 29. Could there be a period of depression in industry, if all of the workers out of employment were getting unem- ployment benefits ? 30. Who ultimately pays the cost of unemployment in- surance ? 3 1 . Explain the Ghent system of unemployment benefits. 32. What are the limitations of out-of-work benefits of trade-unions ? 33. Why not pay out-of-work benefits to strikers? 34. Discuss the proposal to have governments carry on public works in time of depression in order to give work to the unemployed. CHAPTER XI TRANSPORTATION I. The Place of Transportation in Economic Organization. 2. Stages of Development of Internal Transportation in the United States — Waterways— Roads — Canals^Railroads. 3. The Development of the Technic of Railroad Transportation — Locomotive — Rail — Cars — Safety Devices. 4. The Development of the Railroad Net in the United States— The Romance of the Railroad — The Darker Side — The New York Central — The Pennsylvania — The Baltimore and Ohio — The Union Pacific — Central Pacific. 5. Railroad Competition. 6. Railroad Rate Theories — Cost of Service — Distance — Value of Service — What the Traffic Will Bear. 7. Classification of Freight. 8. Rail- road Freight Tariffs — The Bill of Lading. 9. Passenger Service and Rates. 10. Present Inland Water Transportation. 11. Early Mer- chant Marine and the Reasons for Its Decay. 12. Coastwise Shipping. 13. The War and Shipping. 14. The Panama Canal. 15. Exercises. I. The Place of Transportation in Economic Organiza- tion. — Transportation fits into the scheme of economic organization as the device by which the desirabilities of goods are increased by changing the place where the goods are located. Cheap transportation makes possible geo- graphical division of labor, illustrated in the United States by the production of cotton in the South, grain in the Middle West, manufactures in the East, and fruit on the Pacific coast. The importance of transportation is shown by a comparison of the conditions in the Ohio Valley be- fore and after the development of communication with the Atlantic coast. Before easy communication was estab- lished, the people in the Ohio V^alley had plenty to eat but all other phases of their existence were extremely crude. There was no use to produce more than could be consumed locally, for there was no market for the product. When 172 Transportation 173 easy communication was established, the Ohio Valley grew rapidly in wealth and comfort. The products of the fertile lands could be exchanged for manufactures and other things desired. Again, the importance of transportation is shown by the complaint of the farmers of the Middle West in 192 1, that it was possible for a farmer in Argentina to put his grain in New York at a lower cost for the water haul than the farmer would have to pay on the railroads. Strikes and threatened strikes of railroad workers have impressed on the people who live in cities how utterly de- pendent they are, particularly for their food, on the smooth working of the transportation system. Even within a city, great discomfort may be caused if a heavy snow-storm hampers the operation of the ordinary means of trans- portation. The carrying of persons and mail is absolutely essential to the conduct of modern large-scale business. Also, people travel for pleasure. In the latter case, the railroad is sup- plying a direct want. 2. Stages of Development of Internal Transportation in United States. — So far as internal transportation is con- cerned, we may recognize certain stages: (i) Natural water- ways and trails. (2) Roads and turnpikes. (3) Canals. (4) Railroads. Natural Waterways and Trails. — The Indians had de- veloped a technic of transportation which implied the use of such light canoes as could be carried around obstructions in the rivers and over the spaces between rivers or lakes. The Indians also had trails which led over mountains by the lowest passes and in general connected the water transportation system. The colonists followed and devel- 174 Introduction to Economic Problems oped these trails. On the trails, goods were carried on pack-horses and the travellers rode horseback. Roads and Turnpikes. — The development of roads made possible the use of carts and wagons for the transporta- tion of goods and stage-coaches for the transportation of passengers. The difficulties of road-building were increased by the wooded nature of a large part of the country. Be- cause of the poverty of the governmental bodies, many of the improvements were made by private companies, who built turnpikes, as they were called, and reimbursed them- selves by charging toll. A fairly comprehensive system of stage-coaches developed. It was possible by this means to go from Boston to New Orleans. In general, the roads grew poorer as one went West or South. Canals and Canalized Rivers. — From the standpoint of power used, the canal in level country is an extremely efficient means for hauling freight. A team of mules can haul much more on a canal than they can on the best road. The speed is not great. There are, however, certain diffi- culties in the construction and operation of canals. To go up or down hill, locks are used. A lock has gates at both ends. If a boat is to be raised to a higher level, it goes into the lock, the lower gates are closed, and water is allowed to come in and raise the boat to the higher level. If a boat is to be lowered, it goes into the lock; at the high level the gates are closed behind it and the water is dis- charged until the boat reaches the lower level. The proc- ess is slow and expensive, so it is not feasible to build canals where there is much elevation to be overcome. Another difficulty has to do with the supply of water. There must be ample supply of water at the summit level. In many cases this difficulty is insurmountable. Perhaps the most Transportation 175 serious objection to canals in our country is that in the North they freeze in winter and so must remain idle for a considerable part of the year. 3. The Development of the Technic of Railroad Trans- portation. — A brief sketch of some of the main points in this development will help us understand better the eco- nomic problems of transportation. The Early Development of the Locomotive. — Many men worked on the problem of the application of steam to loco- motion. One of the difficulties was how to generate steam rapidly enough. An early French engine with a boiler built on the teakettle principle would run for a few min- utes and then be forced to stop to get up steam. This difficulty was overcome by using the multitubular boiler, which gives an extremely large heating surface. The use of the exhaust to furnish a forced draft helped in the use of the multitubular boiler. We may take 1829 as the date when the locomotive was perfected. In this year Stephen- son's Rocket made a little over 29 miles an hour. The Contrast between Europe and the United States. — In Europe the railroads were usually built between places where there was already in existence the traffic to be car- ried. In the United States, most of the roads were built ahead of the traffic. In Europe, the lines were usually care- fully planned to eliminate curves and grades. The assured traffic made it profitable to build permanently. In the United States, the roads were often built with many curves and grades because the aim was to put the road through as cheaply as possible. Development of the Rail.— One of the discoveries which seems most obvious to us now was that a smooth-wheeled engine could pull a train on a smooth track. Many of the 176 Introduction to Economic Problems early experiments depended for traction upon cog-wheels or the like, such as some railroads which go up mountains now use. Iron and steel were expensive. So, some of the early roads ran on wooden beams with thin strips of iron nailed on the top for a wearing surface. The constant passage of trains would cause the strips to turn up at the ends. When a strip got high enough for the wheel to get under it, then it would come up through the floor of the car and make what the passengers called a "snake head." Some rails were cast in short sections and set in iron sockets. With the development in England of the puddling process and the rolling process, the iron rail became the most gen- erally used rail, first in the shape of an inverted U and finally the present form of an inverted T. The next big advance came with the introduction of the Bessemer proc- ess of making steel. This process made steel cheap enough to be used for rails. Still later, the open-hearth process made a better grade of steel for rails. As the equipment increased in weight there has been a corresponding increase in weight of the rail; so, on the roads of heaviest traffic the rails weigh 130 pounds to the yard. The Engine. — The engine has grown steadily in weight, speed, and carrying capacity. For a long time the passen- ger-engine had an arrangement of wheels ooOO. The large wheels were drivers. Increased speed was obtained by increasing the diameter of the drivers. Increased steaming capacity has been provided by bigger fire-boxes, longer boiler-tubes, higher pressure, superheaters, and fire- brick arches. With the use of steel coaches, which make a much heavier train, the typical passenger locomotive has this arrangement of wheels ooOOOo. The freight-loco- motives have increased still more in size. The largest ones Transportation 177 are the Mallet articulated compounds. The engines are extremely long, and there are joints which permit the en- gine to go around curves. They are called compound be- cause they use the steam twice, once in high-pressure cylin- ders, and then in low-pressure cylinders. Many of the first locomotives used wood for fuel. For many years coal, mostly bituminous, has been the chief fuel. In the West, oil is used to some extent. The electric locomotive is used in two classes of situa- tions. First., in city terminals, especially where tunnels are used. Here safety and the absence of smoke are the prin- cipal reasons for using them. And second, in the moun- tains of the West where coal is scarce and water-power is abundant. Thus, a considerable section of the Chicago, Milwaukee and St. Paul has been electrified. In going down the mountains the motors act as dynamos and gen- erate current to pull other trains up the mountains. Passenger-Cars. — ^The first cars were patterned after the stage-coaches. Soon, the long car with the aisle in the middle developed. Numerous improvements have been made in the springs, the seats, the use of steel in place of wood. The oil-lamps have been replaced by compressed gas, and finally by electric light; the cars are heated by exhaust steam from the engine instead of by stoves. Ves- tibules make passage from car to car easy. Of the special cars developed, the sleeping-car is most important. It has made night travel feasible if not entirely comfortable. The chair-car, the parlor-car, the dining-car, the club-car, the observation-car have all done their part in making travel more luxurious. Freight-Cars. — The early freight-cars were patterned after wagons. Soon the double-truck car was developed. 178 Introduction to Economic Problems Then came the steady increase in size. The cars have be- come specialized. There are open-top cars for handling coal, iron ore, and other coarse, bulky products. These are usually arranged with hoppers so that the load can be dumped by gravity. Box cars are used for hauling grain and general merchandise. There are special cars for haul- ing stock. The development of the refrigerator-car has had great effect on industry. It has made possible the concentration of the packing industry and the develop- ment of fruit-raising regions far from the consuming regions. Tank-cars are used for various liquids, principally oil. Flat cars are used for machinery and lumber. Steel has been used more and more, so that now practically all cars have steel underframes and many cars are made entirely of steel. In this country, we have developed the practice of han- dling, as far as possible, goods in bulk. This saves carrying the weight of a container. Also methods have been de- vised for quick loading and unloading. Cars of coal are dumped by machinery, just as a person might pour the water out of a cup. Safety Devices. — Besides the increased safety which comes from more substantial tracks and stronger equipment, the principal inventions have been in the perfection of brakes and signal systems. The air-brake makes it possible for the engineer to control from the cab the brakes on all of the cars of a long train. The latest improvement utilizes electric control of the air. The automatic block system aims to prevent two trains from trying to occupy the same strip of track at the same time. The telegraph and later the telephone have been used in despatching trains. These safety devices are important also because they make pos- Transportation 179 sible greater speed and a fuller utilization of the facilities of the road. 4. Development of the Railroad Net in the United States. — Perhaps the best way to get a general view is to take the number of miles of railroad at the various decades. MILES OF LINE IN THE UNITED STATES Year Miles 1830 23 1840 2,818 1850 9,021 i860 30,626 1870 52,922 1880 93,267 1890 167,191 1900 198,964 1910 249,992 1918 253,529 Then, some significant dates may be given. The railroad reached Buffalo from New York in 1851; connection be- tween Philadelphia and Pittsburgh was made in 1852; Buffalo and Chicago were connected in 1853. The road from Pittsburgh reached Chicago in 1856. The connection with the Pacific coast was made in 1869. The railroad has been since about 1850 the dominant type of inland transportation in the United States. Before that time we had depended on natural waterways, roads, and canals. Indirectly, the Erie Canal is responsible for the private ownership of the railroads in the United States. The Erie Canal was wonderfully successful. It developed a series of cities along its banks. It stimulated the growth of New York City. Now this success was due to the physical features: (i) the Mohawk Valley gave access to the West 180 Introduction to Economic Problems with the h)west summit level; and (2) the Great Lakes provided a means for collecting traffic to be sent by the canal . Other states, seeing the fortunate outcome of New York's experiment, wrongly concluded that all internal improve- ments, especially canals and railroads, which a state might undertake, would be profitable. So they entered into a vast programme of state development of transportation, at first canals, and later railroads. The money provided by the states was usually raised by selling bonds. In their optimism, the people supposed that the return from the enterprises would pay the interest on the bonds and repay the principal when it came due. Almost without exception, the enterprises were not successful. The financial burden upon the states caused by the failures resulted in many states putting in their constitution clauses saying that the state or any subdivision of the state should not invest in any industry. Long afterward, some of these clauses have kept cities from taking over the street-car systems. The federal government, according to the strict construc- tion of the United States Constitution then prevalent, had no power to engage in the development of transj)ortation. We may summarize by saying that at the time the rail- roads were coming in the federal government could not and the state governments (as a result of the disastrous ending of the projects induced by the success of the Erie Canal) would not provide the funds and take over the manage- ment of the railroads. Thus, private enterprises assumed the task. And so we may hold the Erie Canal responsible, to a considerable degree, for the outcome. The Romance of the Railroads. — There has always been something of romance and adventure about the develop- Transportation 181 ment of railroads in the United States. To be a railroad man has been like running away to sea. Think of the mag- nificent faith involved in putting a railroad through un- settled country and picturing the farms and industries and cities that will spring up. What is more thrilling than the building of a railroad across the plains to California with Indians to fight and buffaloes to hunt? The bridging of streams, the tunnelling of mountains, and the like have given chance for adventurous achievement. The Darker Side.—^\it the building of our railroads in- volved more than romance. The charters and public aid were often obtained by bribery more or less direct. Many innocent investors lost their money through sharp financial practices. Some roads were utilized for speculative pur- poses rather than for the development of transportation. The building of the roads was often made the basis of fraudulent deals with insiders at the expense of the stock- holders. No one can be proud of that part of our railroad history which deals with the early development of the Erie Railroad and the scandals of the Credit Mobilier, the con- struction company used in building the Union Pacific. In connection with the Credit Mobilier a congressional com- mittee once made a wonderful report which amounted to saying that the men interested in that company had been guilty of bribing congressmen, but that no congressman had been bribed. The New York Central.— The New York Central is a type of railroad built up by consolidation. The Erie Canal had caused a growth of population in central New York. Many short lines were built between cities, starting in 183 1 with a line between Albany and Schenectady. By 1845 it was possible to go from Albany to Bufi"alo using 18*2 Introduction to Economic Prohleyns cijfht (lilTcrcnt railroads not |)liysi(ally connected. In 1849 the (ra(ks were connected. Jn 185^^ twelve lines l)etween Albany and lUiffalo were consolidated as the New York Central Railroad. Vanderhilt }j;()t hold of the Harlem Rail- road and the Hudson River Railroad, and in 1869 formed the New York Central and Hudson River Railroad. This gave the connection with New York City. West of Buf- falo, the railroad was interested in various lines giving con- nections with Chicago, St. Louis, Louisville, Cincinnati, and other cities. In 1914 a consolidation took place with the Lake Shore and Michigan Southern under the name the New York Central Railroad. The Pennsylvania Railroad. This road grew out of the Pennsylvania State System. The success of the Erie Canal brought j)rosperity to New York City. Philadelphia wished to get a share in the i)rohtable Western tratle. The mountains to be crossed made the project more dillicult than the building of the I'^rie Canal. The state of Penn- sylvania built a railroad from IMiiladelphia to Columbia. A canal was built from Columbia to llollidaysburg along the Susquehanna and Juniata Rivers. 'Phen came the most interesting feature. The mountains were crossed by a combination of railroads on the level stretches and in- clined planes on the slopes. By this means Johns- town was reached. From there to Pittsburgh a canal was used. The Pennsylvania Railroad built a railroad over the mountain. Later it bought the Pennsylvania State Sys- tem and utilized part of it. The Baltimore and Ohio. — This road was Baltunore's bid for the Western trade. Construction started in 1828. It reached Wheeling in 1853 •^-^^ Chicago in 1874. Transportation 183 The Union Pacific-Central Pacific. — California had grown in population and importance as the result of the discov- ery of gold in 1848. Connection with the East was made by the long journey by water around Cape Horn or by way of Panama or by the long journey overland across the plains. The Civil War emphasized the isolation of California and prompted the building of the railroad. The government gave land grants and financial aid. 5. Railroad Competition. — We may recognize three types of railroad competition, (i) Competition of routes. (2) Competition of facilities. (3) Competition of markets. Competition of routes is illustrated whenever there is more than one railroad between two given points. Thus, be- tween Chicago and New York it is possible to go by one of several railroads, and the different railroads compete with each other for the traffic. In the days before the regula- tion of railroad rates this competition was a source of much discrimination. Low rates were given in order to get the traffic away from competing railroads. Under the present rate system, the rates are usually the same irrespective of the route taken. So competition is now more frequently the form of com- petition of facilities. Ordinarily, students are probably more familiar with competition of facilities as it applies to passenger service. This may take the form of faster trains, finer equipment, or better meals. Then, the com- petition of markets is extremely interesting. Take, for example, the case of oranges in the United States; the two sources of supply are California and Florida. We may then say that the competition which the Pacific railroads meet in the freight rate on oranges comes from the fact that the oranges from California, in order to be marketed, must 184 Introduction to Economic Problems be put into certain cities in the East and Middle West at a price which will enable them to compete with oranges which arc brought from Florida. 6. Railroad Rate Theories. — Cost of Service. — The cost of the service seems at first sight to be a reasonable basis for railroad rates. The chief difficulty in applying it arises from the fact that most costs on the railroad are joint costs. The same tracks are used for passengers and freight. The same engine and crew may be carrying a thousand different shipments. It is possible to figure certain direct costs if a train-load is shipped; c. ^., train crew, coal, something for the use of the engine and cars. However, it is nearly im- possible to figure the cost of the track, the terminals, and the general ofiicers. If we are dealing with a single package in a car, the problem is still more complicated. This much may be conceded, that the added cost of carrying a ship- ment sets the lower limit for the rate. Distance Theories. — At bottom, these theories are based on the idea of cost. There are three forms: (a) The straight distance theory, that the rate should vary directly with the distance. This neglects the heavy terminal expense, (b) The tapering distance theory, in which the rate increases with the distance but less rapidly. A uniform terminal charge and a proportionate mileage charge give this effect. (c) The zone system, in which the rates are the same over considerable areas. This equalizes competitive conditions within the zone. 77/e Value of the Service. — This may be measured by the difference in the value of the commodity at the two places. This is too one-sided to do for a full basis of rates, but it sets the upper limit to what the railroad can charge. Transportation 185 What the Traffic Will Bear. — This phrase is often used to characterize the price pohcy of the monopolist. But in the case of the railroad, it is used primarily as a justification for low rates. The idea is to develop traffic. Each ship- ment must cover the added outlay it causes and contribute something to general expenses. If the commodity is cheap and bulky, it cannot be expected to contribute much per ton, but in the aggregate the amount contributed may be considerable. This is the theory actually followed by most railroad men in the United States. Most regulating commissions attempt to apply a cost of service or a distance theory. 7. Classification of Freight. — When we consider the numerous articles which may be shipped by freight and the great number of places which may be the origin or destination of the shipment, we see how impossible it would be to have documents which quote the rates on each separate article from each separate place to every other place. In order to simplify the matter, the railroad com- panies have grouped articles shipped into classes. In or- der to find the rate charged on any article then, one first consults the classification. Some of the factors which enter into the determination of the classification of an article are given in a decision of the Interstate Commerce Commission, quoted by Ripley.^ "Whether commodities were crude, rough, or finished; liquid or dry; knocked down or set up; loose or in bulk; nested or in boxes, or otherwise packed; if vegetables, whether green or dry, desiccated or evaporated; the mar- ket value and shippers' representations as to their char- acter; the cost of service, length and direction of haul; the 1 Railway Rates and Regulation, pp. 314-315. 186 Introduction to Economic Problems season and manner of shipment; the space occupied and weight; whether in car-load or less-than-car-load lots; the volume of annual shipments to be calculated on; the sort of car required, whether flat, gondola, box, tank, or spe- cial; whether ice or heat must be furnished; the speed of trains necessary for perishable or otherwise rush goods; the risk of handling, either to the goods themselves or other property; the weights, actual and estimated; the carrier's risk or owner's release from damage or loss." On page 187 is given a section of a classification. The section is from Official Classification No. 42, effec- tive July I, 1914. L, C. L. means less than car-loads. C. L. means car-loads. The Official Classification holds for the territory north of the Ohio and Potomac Rivers and east of the Mississippi River. The Southern Classification holds for the territory south of the Ohio and Potomac Rivers and east of the Mississippi River. West of the Mississippi River, the Western Classification is used. This division of territory is only approximate. The question suggests it- self: Why have more than one classification? The neces- sity arises from the fact that the different sections of the country have specialized in production. In a producing section rates will be low because the article moves in com- paratively large quantities and the railroads wish to pro- mote production by low rates. In other sections of the country where the article is used in smaller quantities and in the form of a finished product, the railroads can and will charge higher rates. In the classifications, the lower numbers represent the higher rates. So, in the producing section, the article will be put in the higher-numbered class, and, in the consuming section, it will be put in the lower- numbered class. Much has been done toward making the M IMica: Sheet, in barrels or boxes Scrap, see Note: In bags In barrels or boxes In packages or in bulk, C. L., min. wt 30,000 lbs ., Note. — Ratings on Scrap Mica apply on Mica which has value for grinding or pulverizing only. Ground or Pulverized: In bags In barrels or boxes In packages named, C. L., min. wt. 30,000 lbs 2Middlings : In sacks or bbls Min. wt. 35,000 lbs 3IVIILK: 4 Milk, Condensed or Evaporated (liquid) : In milk shipping cans, subject to rates and regulations of individual carriers. In glass or earthenware, packed in barrels or boxes In metal cans completely jacketed in metal or wooden jackets In metal cans in crates In metal cans in barrels or boxes In bulk in barrels In glass or earthenware, packed in barrels or boxes, in metal cans completely jack- eted in metal or wooden jackets, in metal cans in barrels, boxes or crates, or in buUc in barrels, C. L., min. wt. 36,000 lbs. 5 Milk Food, other than Malted Milk: In glass or earthenware, packed in barrels or boxes In fibre or metal cans in boxes In packages named, C. L., min. wt. 30,000 lbs 6 Milk, Malted: In glass or earthenware, packed in barrels or boxes In fibre or metal cans in boxes In bulk in barrels In packages named, C. L., min. wt. 30,000 lbs Subject to Uniform Bill of Lading Conditions L. C. L. C. L. 187 188 Infroductio7i fo Economic Problems rules uniform, and the three classifications are now avail- able in one book. But in such a large country with such diverse interests, entire uniformity is not to be expected. It will be noted that the classification varies with the way in which the articles are packed and the volume of the shipments. The minimum weight which will be taken at the car-load rate is subject to many disputes. The rail- roads wish it to be as high as possible to promote heavier loading of cars; the shippers want it as low as possible to enable them to get the low car-load classification on small shipments. We will suppose that we wish to ship two sacks of mid- dlings, each weighing loo pounds, from Cumberland, Mary- land, to Columbia, Pennsylvania. The middlings in that form will go fifth class. 8. Railroad Freight Tariffs. — When one has found the classification of the article he desires to ship, the next thing is to find the rate charge for that class from the point of shipment to the destination. The book which has this information in it is called a freight tarifif. In general, there are two kinds of freight rates: those called commodity rates and those called class rates. The commodity rates are quoted on articles which move in large quantities, usually by car-load lots, and so ordinarily apply only to car- loads. The class rates include all of the articles shipped. That is, if an article which ordinarily has a commodity rate is shipped in less-than-car-load lots, the class rates would apply. The fundamental idea of a railroad is to charge a cer- tain rate, usually the highest rate which will enable the article to move in profitable volume. It is obvious that this rate may be afifected by the classification or the tariff. Tranfiportation 189 Local rales arc rates for traffic which does not go Ix'yond a single railroad. Through rates are rates which are charged when the traffic moves over more than one railroad. A certain amount of grouping of rates is found, usually in- duced by competition of various jobbing or manufacturing centres. Thus, the rates to the South from the Middle West are made by charging a certain amount to any one of a number of Ohio River crossings and adding a local from the Ohio River crossing to a point in the South. To return to our problem, a section of a local tariff on the Pennsylvania Railroad before the war is given l)elow: TO STATIONS Nob. 1410 1416 NAMES Mouiitvillf!. .I'cnim. Coll FROM STATIONS NUMBERS f 1981 to 1989 inc. 2001 to 2005 " 2015 2035 i<> 2037 inc. 2053 2057 u. 2076 iiKi, 2082 I 2145 lo 2192 inc. 1981 1983 I 2001 f 2015 2035 lo 2037 'ik 2053 lo 2062 " 2072 lo 2082 " 2145 to 2192 " 1989 inc. 2005 " RATES IN CENTS PER 100 POUNDS CLASSES 2 3 4 6 :<] 2-1 IR ITi ■sz 25 )S If) .•i2 2(1 IH If. :{.{ 2H 1!» 1(1 •.ir> 21) 21 IK ;<7 :j() 21 IK ;ts ■M) 21 IK 32 27 18 ir. :«) 2:i 17 M :n 24 IK 15 .-{2 2r, IH If) .•J2 2(( IK ir, :i;{ 2(1 I'.l 10 :i5 2',» 21 IK .•(7 .'to 21 IH ;i2 27 IH 15 Freight tariffs vary greatly in form and arrangenient. However, they all give information about the rates charged on certain classes or commodities between different places. In this particular one, we look uj) Cumberland, Maryland, in the index of origins and find that its number is 2192. Then we fint T^rtlnt— AJop*i d bj rarrlora In Omolal Cliu-sifTirDllon territory cfCectlvo January 1, l91fl." THE LONG ISLAND RAILROAD COMPANY Shippers No.- Agents N6 ORDER BILL OF LADING-ORIGINAL. BECEIT£D, subject to the olussiacutlons uud urlUs ia elect on the into ot Issue ol this Orlglual BUI ot Liidlub'. at 19 from- -the property described below, In npp^reDt pood order, except as ), markeu, coQslgDed and deBtined aa lodicated beluw, which said n, lieicla coQtaiued Uncluding conditiooa on back horeol) and which Railroad routtj to Bald doetin'ution. It is mutually agreed, as to each to dputi nation, and as to each party at any time Interosted !□ Btall bo auhjoct to all the oontlltioDS, whether printed or wrli are agreed to by tho ohippcr and accepted for nliDscK and hia fissiyua. The surrender of this Orlglnat ORDER Bill of Ladlnic properly Indorsed shall be required before the delivery of the property Inspection of property covered by this bill ot lading will not be permitted unless provided by law or unless permission Is Indorsed oi this original bill of lading or given in writing by the shipper. The' Rate of Freight Irom- to ORDER OF- Destination , — DESCRIPTION Cr ARTICLES AND SPECIE '"to bo Prepaid." to apply In propnyment Obarges Advanced ; 191 192 hitrodtiction to Economic Problems pecially for travel to California, there are two kinds of Pullman cars, standard and tourist. Passenger rates are usually on a mileage basis. The rate charged between two cities, served by more than one road, is set by the short line. If this were not so and a longer road attempted to charge a higher rate, it would not get any of the traffic. Excursion rates and commutation tickets illustrate cheap rates which result from carrying a large number of people at the same time. 10. Present Inland Water Transportation. — Water trans- portation within the United States has declined in impor- tance with the development of the railroad. The biggest water-borne traffic is on the Great Lakes. Iron ore is shipped in large quantities from Minnesota, Wisconsin, and Michigan to the iron and steel producing regions of Illinois, Indiana, Ohio, and Pennsylvania. Coal from Ohio, West Virginia, and Pennsylvania is shipped to the northern lake ports. Considerable grain still moves from the West to the East by way of the lakes. In addition, there is a certain amount of miscellaneous freight carried. The Erie Canal has been rebuilt by the State of New York, but the volume of traffic carried is not great. The traffic on the rivers is of more importance. Considerable coal is carried on the Ohio River. The Hudson River is used particularly for building material. The lower Missis- sippi is used for general freight, especially cotton. 11. Early Merchant Marine and the Reasons for Its Decay. — In the days of sailing-vessels, we possessed great advantages for ship-building. Good woods for hulls and masts and spars were found close to the coast. Our de- signers developed good types, especially the clipper. Our sailors were skilled and daring. As a result of this com- Transportation 193 bination of advantages, we ranked high as a shipping nation. The decline in our merchant marine came after the Civil War. To some extent, it was due to the development of the iron and steel steamship. England had an advantage in building these. Our iron and steel industry had not then surpassed England's. The Confederate privateers during the war destroyed some of the shipping and more was transferred to foreign registry. The table below gives some of the figures showing the decline and the recovery during and after the war: PERCENTAGES OF IMPORTS AND EXPORTS BY WATER CARRIED IN AMERICAN VESSELS i 1877. 1901 . 1914. 1915- 1916. 26.9 1917 8.2 1918 9-7 1919 14-3 1920 16.3 .18.6 .21 .9 ■36.4 •430 12. Coastwise Shipping. — Since 181 7, coastwise shipping has been reserved as a monopoly for American built and operated ships. The tonnage operated has been large; so, we have compared favorably with other nations in total tonnage owned even in the times when we had few ships engaged in foreign trade. General package freight has been carried from port to port. New England gets much of its coal by water carriers. Fruit and vegetables are brought from the South to the North on the coastwise vessels. 13. The War and Shipping. — The great war probably marks the beginning of a new epoch on our merchant ma- rine. To meet Germany's submarine campaign, our gov- ^ Statistical Abstract of U. S., 1920, p. 382. 194 Introduction to Economic Problems ernment entered into a great programme of ship-building and ship operation. The ships were built as rapidly as possible, regardless of cost. The building campaign was successful. It did its part in convincing Germany of the uselessness of continuing the struggle. The sudden termination of the war left the government with many ships contracted for which were not completed. After a short period of prosperity, depression came and the demand for shipping fell off. The government organi- zation for operating the ships was not very efhcient. The following table indicates the changes caused by the war, the enormous increase in the shipping engaged in foreign trade, and the slight decline in the coastwise ton- nage : TOTAL TONNAGE OF SHIPS ENGAGED IN TRADE OF THE UNITED STATES' Foreign Trade Total Steam Tunc "^o. IQI4. 1,066,288 9,924,694 720,609 9.023,724 June 30, 1920 Coastwise June ^0, 1914 6,818,363 6,357.706 4,688,240 4.425.997 June "^0, 1920 « Statistical Abstract of U. S. 1930, p. 368. As the result of the war, we have displaced Germany as the second shipping nation of the world. We are not very far behind the United Kingdom. The following table shows how the war affected the tonnage of various countries: Transportation 195 STEAM TONNAGE (MERCHANT SHIPS OF 100 TONS AND OVER) OWNED BY THE PRINCIPAL MARITIME COUN- TRIES IN JUNE, 1920, AS COMPARED WITH JUNE, 1914» Country Gross Tonnage Rank Gross Tonnage Rank United Kingdom United States (including Great Lakes) Japan France Italy Norway Holland Sweden Spain Denmark Russia Greece Brazil Germany 18,110,653 14.574,375 2,995,878 2,963,229 2,118,429 1,979,560 1,773,392 996,423 937,280 719,444 509,564 496,996 475,224 419,438 2 3 4 5 6 7 8 9 10 II 12 13 14 18,892,089 4,330,078 1,708,386 1,922,286 1,430,475 1,957,353 1,471,710 1,015,364 883,926 770,430 851,949 820,861 307,607 5,134,720 3 6 5 8 4 7 10 II 14 12 13 16 2 Total for World 53,904,688 45,403,877 •Federal Reserve Bulletin, Feb., 1921, pp. 184, 186. 14. The Panama Canal. — The World War came about the time the Canal was finished, so there has been no op- portunity to see what effect the Canal will have on the trade TRAFFIC THROUGH THE PANAMA CANAL^ Year Ending June 30 1915 1916 1917 1918 1919 1920 Vessels Tons of Cargo 1,072 4,926,145 760 3,063,371 1,806 7,083,045 2,068 7,535,795 2,028 6,923,423 2,478 9,374,499 10,212 38,906,278 ' Statistical Abstract of U. S., 1920, p. 377. 196 Introduction to Economic Problems routes of the world. It will make possible trade by water between the east and west coasts of the United States. It will shorten materially the distance from ports on the east coast of the United States to the west coast of South America. 15. Exercises. — i. Indicate in as many ways as possible the importance of transportation to New York City. 2. Discuss the influence of transportation on the loca- tion of factories and jobbing houses. 3. Describe the contributions of the American Indians to the development of transportation. 4. What is the objection to toll roads? 5. Give the advantages and disadvantages of canals. 6. Who benefits by the improvement of the Erie Canal? 7. Show how the conditions in the United States influ- enced the type of railroad-building. 8. Trace the development of the rail, the engine, and the cars. 9. Give some account of special freight equipment and the methods of handling freight at terminals. 10. Explain the block system for operating trains. 11. What is the importance of the air-brake? 12. Give several illustrations of competition of routes, facilities, and markets. 13. Why is railroad competition severe? 14. Explain historically wh}'^ we have private ownership of railroads in the United States. 15. Why is freight classification necessary? 16. What determines the class in which a commodity will be placed? 17. Why is it difficult to get uniformity of classification in the dift'erent parts of the country ? 18. What are commodity rates ? Why are they granted ? 19. What is the importance of the bill of lading from the standpoint of the banker? 20. What information is given in a freight tariff? TranspoHatioii 197 21. State the various rate theories, test each from the standpoint of the interest of the railroads and the interest of the general business public. 2 2. Outline the accounting problem in basing rates on cost. How would variations in volume of traflic affect cost ? 23. Discuss railroad competition as it applies to passen- ger service. 24. How will the automobile, the motor-truck, the trolley- car, the auto-bus, and the aeroplane affect the earnings of the railroads? 25. Explain the basis for making commutation and ex- cursion rates. 26. Why are not waterways developed by private enter- prise ? 27. What canals are at present much used? 28. When all costs, public and private, are considered, what sorts of water-carriage are efhcient? 29. Why should coastwise shipping be reserved for American ships ? 30. Compare the advantages and disadvantages for making and operating ships in the United States from 1 790-1850 with those of the present day. 3 1 . Why did the American merchant marine decline ? 32. What is the advantage of having goods carried in American ships ? 33. Recount briefly our experience with government operation of shipping during and after the war. 34. Is the Panama Canal a paying proposition? 35. What advantages to the trade of the United States will the Panama Canal bring? CHAPTKR XII GOVERNMENT RICGULATION OF RAILROADS I. The DtMiiand for RcKnI.Uioii OwiKMship versus Regulation — The Alleged Advantages — ICvils of (iovernnient Ownership. 2. The Scope of the Interstate* Commerce Act. 3. Powers of the Interstate Com- merce Commission. 4. Procedure. 5. The Regulation of Rates. 6. The I-ong and Short llaiii Clause. 7. The Commodities Clause. 8. Tlie Ajjplication of the Sherman Anti-Trust I-aw to Railroads. 9. Fed- eral and State Regulation of Interstate Commerce. 10. State Railroad Couunissions and Regulation. 11. The Railroads and the War. 12. The lOsch-Cunnnins Law The New Provisions About Rates. 13. Railroad Valuation ICarnings Original C'ost — Original Cost with De- [)reciation — C'ost of Rei)ro(Iiiction, New — Cost of Reproduction, Less l)ei)reciation — Capitalization —Market Value of Stocks and Bonds — The Problem of Railroad Land. 14. Kxercises. I. The Demand for Regulation. A study, in con.sider- ablc detail, of tlic course of government regulation of rail- roads is worth while, because we have in it the longest ex- perience of government regulation of any industry. The ])r()l)lemsand diHiruIlies which have arisen in the regulation of railroads will probably attend any effort of the govern- ment (o extend regulation to other industries. But first we must consider the alternative to regulation. Owncrshij) versus Rcgulalion} — All but a few people ad- mit that transportation cannot be left entirely to private initiative. We have seen that our whole economic organiza- tion is dependent on ellicient transjiortation. Competition between carriers needs to be controlled both for the sake of the carriers and the public. The carriers need protec- tion because competition between railroads may be over- • CJ. fohnson and Van Metre, Principles of Railroad Transportation, chap. XXXII. 198 Government Regulation of Railroads 199 severe. Since the railroads have such a large investment in fixed capital, slight variations in the volume of traffic may make a great difference in the net earnings. The fixed expenses go on, to a considerable extent, irrespective of traffic. From one point of view, the return from the added traffic would be mostly clear gain ; so it would be worth fight- ing for. The interest of the public is that the transporta- tion service shall be adequate at all times and that rates shall be reasonable and non-discriminatory. Two methods may be employed to remedy the evils of unrestrained competition. The government may own and operate the railroads, or it may regulate them. The selec- tion of the method should be on the basis of efficiency. The experience of other countries has only limited application to the United States. The area of the United States is so much greater and the mileage of railways so great (nearly one-half of the total in the world) that no country which has government ownership is really comparable. Again, matters of fundamental importance are the attitude of the people toward government enterprises and the degree of administrative efficiency by the government. These differ greatly from country to country. The Alleged Advantages. — The more enthusiastic advo- cates argue that government ownership will enable us to keep all the advantages of our present system and eliminate all of its evils. (i) They argue that the capital charge will be lessened, as watered stock will be eliminated and bonds on the credit of the government could be marketed at a much lower rate of interest. The assumption frequently was made that enough bonds could be sold at 2 to 3 per cent to buy all of the railroads. The experience of our government in 200 / iilnxliiclion lo Fjconomic rrohlciiis sclliiij^ bonds diiriii/jj tiic war showed Ihc error in Uiis as- suniplion. 'Jlie amount of the war issues was only slightly more than the amount necessary to buy the railroads, yet the last issue, sold on a patriotic rather than a market basis, needed an interest rate of 4):( per cent. Some saving un- doubtedly could be made, but it would be much less than sometimes claimed. P^specially, if the government should now allempt lo add this great amount to its indebtedness. (2) The advocates of government ownership claim that all discrimination would be eliminated. Certainly, the dis- criminations which arise from conipetition would be elimi- nated. Those which are personal would, of course, still jiersisl. Another tyi)e of discriminalion might be fostered; an "agricultural bloc" might force through Congress laws directing the government-owned raih^oad to charge ex- tremely low rales on agricultural products. (0 Lower rates are held out as an inducement to have the government own the railroads. Here, it is necessary to make sure that the lower rates are not the result of shift- ing ])art of the costs to the public in the form of tax'cs or of failure to ])rovi(le adequate depreciation. Lower rates which do not result from increased efficiency are not de- sired. The question of elliciency is the whole point at issue. Evils of Government Owners hi p. -{i) Political action in location of railroads might lead to much needless expendi- ture. Our experience with rivers and harbors and public buildings is a national scandal. A railroad improvement bill of the same sort would mean uneconomic and wasteful building. (2) Man)' fear that government ownershi]) would deaden the incHMilixe for im])ro\('meiits. 'Hiey think that the mar- Government Regulation of Railroads 201 vellous technical advances which we have made are the re- sult of the individual initiative which has been fostered by private ownership. They ask what incentive there would be for the manager to be efficient or to introduce improve- ments. (3) The labor problem would be serious. If we argue from the experience of the postal employees, we would say that the labor would not be overpaid. But one important element has been left out of that argument. The postal employees have never had strong unions. The better an- alogy is with what happened during the war. Some allow- ance must be made for the war emergency, but certainly the labor-unions were very successful in getting what they wanted in the way of increased wages and, what was really more important, national agreements about working rules and conditions. The discipline was weakened. The men felt that their advancement depended on union action rather than on the way they performed their work. With this brief survey of the leading arguments regard- ing government ownership, we turn to the development of regulation in the United States. The two reports to Con- gress of investigations concerning transportation condi- tions .shortly before the Act of 1887 are the Windom Re- port of 1874 and the CuUom Report, 1886. In the Win- dom Report, the burden of complaint was that rates were too high. The committee suggested competition to bring down rates. The government was to assist in the devel- opment of various waterways and to build a low-grade freight railroad from the Mississippi River to the Atlantic coast. By the time of the Cullom Report, the complaint had changed. The protest was against discriminations between places and persons. ''ZiH / nlroductum In Fjcononiir f^rofdr/rns 2. Tlie Scope of llio InterKtate Commcrco Act. Coii- gr(;SS huH Slcidily widclicti llir :,((t|)C (»l llir A(l. 'I'lic A( I of 1.SH7 provided lli.il railio.ids iiK hide l)ridj.';cs ;iii(l ferries .itid llial lraiis|)orl:ilioii iixliide all iiistniineiilalil ies of ;;lii|)iiieii( or hlrtns I lie |nil)li< Iow.ikI rcl).'il('S mIiows liovv our hiiniiicss sland- ;it(l;; (|rvrl(>|>. 'I Ik- I'ch.ilc is :i kIuikI <>I p.irl of I lie .iiMolilil. p.'iid loi h.'iiispoi l.'ilioii, Of llic I i.'in .|)or l;il ion iii;iy he |>.-ii<| lor in lite lirst inHlancc .il .1 low*! i.ilc llciii oilier:; .ire |)<'iy- in);. 'l\\c rcl)jilcM were ol I wo kinds. I'irsl, lliosc wliicli wcic llic rcsiill ol" |)('rson;d f.ivorilisni. Very so<»n, ic:.cnl nirni .irosc over lliis ly|>c ol rclcilc. 'I'licrc vv.is .1 hclin)', lli.il I Ik- i.'iilro.'td, lliou)',li privately owned, should (real all shippers in (he s.anie maimer. A second lyj"' <'l rehale was one jdveii lo Ihe shipper who shippecl in laij^e (|iiaiili lies. I'or a loii)', lime nio.l people approved of Iliis typt; of rejtale. 'I'liev ai)',iied llial il was exinlly aiial()j,;()iiH lo Ihe piimiple Ihal wh()l<'sale prices are lower Ihan relaii. rile shin ol Ihe piiltlii lo Ihe view Ihal sik Ii reliales should iiol he allowed usin(\ss, Ihal Ihe liiiii Ihal paid lower rale:; ( oiild drive oiil il:; < oiiipel ilors. Now Ihe law in «'lfe( I says Ihal any one who (an :;liip a car load shall have as low a. rale as any one else. ()|liei form:; of )mmissie)n. In the e;arly rale; e;as(;s, wli(;n the; lnl(r:;late; Commere:e; ('e)mmissie)n found a rate unreasonable^, the;y specilieel the; maximum rale; whieh would Ix; reasonable. This ])ractie;e went unchange;el fe)r a time. I'inally, in iHc^y, in the Maximum Freight Ka,te ele;e;isie)n (167 U. S., /\']()), the suprerme court ele;e;iele;e| that the; Inle;rslate (lommerce; Conuuission could not enforce Ihe maxinnun rales on the ^()»S I nlrodact Ion to Economic Problems railroads. This was a great l)low for freight regulation. I'"()r (■xain])le, if the rate charged was $r.20 ])er loo pounds, ;iiid llu; Interstate ("oniniercc; Coniniission said tliat $1.00 was the maximum reasonable rate, all it could do after this decision would be to say that the $1.20 was unreasonable. So, it might lake a great number of cases to bring down a rate to a r(!ally reasonable level. The Act of i(;oO laid lUiwn more detailed regulations about tiling, j)osting, and observing schedules, and re(|uired thirty days' notice for either an increase or a decreast; of rates. The Act of 1910 aIlowc;d more ])eo])le to gc't ])asses, and ])rovi(l('(l that classi- lications as well as rates must be reasonable. 'J'he burden of ])roof for the reasonableness of advances was put on the railroads. This ])rovisi()n was extremely important. The Tnterstale Commerce Commission had been acting success- fully in removing discriminations which existed in rales, but had not been able to handle the matter of the general rate level so satisfactorily. When the burden of i)ro()f had been on the shippers, they found it almost impossible to convince lh(! Interstate Commerce Commission that the general level of rates was too high. Now the shoe is on the other fool and the railroads lind it almost impossible to convince the Interstate Commerce Commission that the general level of rates is too low. 6. The Long and Short Haul Clause. One particular kind of discrimination between i)la(:es which caused a great amount of complaint was the charge of more for a short than for a long haul. The Act of uSSy provided that rail- roads were forbidden to make a greater charge for a short than for a long haul on the same line under sub- stantially similar circumstances and conditions. If, after investigation, the Interstate Commerce Commission found Government Regulation of Ra'droada !^()J) that the discrnnination was justiriable, it might give per- mission to the railroad to violate this clause. The lirst case which came before the Interstate Commerce Commission was the L. & N. case (i I. C. C. R., 31). In this decision the Interstate ('ominerce C'ommission decided that the dissimilar circumstances wiiich might justify the violation of the long and short haul clause were: firsl, water com- petition; second, competition of carriers not subject to the Act; and ihird, rare and peculiar cases. Of cour.se, this last clause acted as an invitation for the railroads to appeal every case on the ground that it was a rare and peculiar case. In 1892, in a lower court, a case was decided (52 I^'ed. Rej)., 912), which held that the joint line formed by two roads is wholly independent of the; two lines represented by the several roads taken separately and apart. This de- cision was overruled by the supreme court in 1896 in the Social Circle case (162 U. S., 184). The supreme court held that when a continuous line for through traffic is formed by several roads, the roads constituting the line and making use of it are merely parts of one through route and are not separate lines. In 1897, in the case I. C. C. V. Ala. Midland Railway (168 U. S., 144), the supreme court decided that railroad and trade competition created dis- similar circumstances and conditions. 1'his practically nullified the clause, since the discrimination arises ordinarily because of railroad and trade competition and the clause was intended to protect the cities from this particular working out of competition. In the Act of 1910, Congress attempted to strengthen the clause by eliminating the phrase "under substantially similar circumstances and con- ditions." The law ][)r<)vide(l that there sliould be no higher through rate than the sum of the local charges, and that a 210 Introduction to Economic Problems rate lowered to meet water competition cannot be raised merely because the water competition has ceased. In 19 14, in the case of U. S. et al. v. A. T. & S. F. Ry. (234 U. S. 476), the supreme court held that the new section was constitu- tional, since Congress laid down in other parts of the Act the principles to govern its application; and, furthermore, it was held that the Interstate Commerce Commission might prescribe a percentage system in allowing deviations from the strict long and short haul clause. 7. The Commodities Clause. — The Act of 1906 pro- hibits carriers from transporting commodities (except tim- ber) produced by them, or in which they have an interest direct or indirect. This was aimed primarily at the rail- roads which were interested in mining anthracite coal. Operators of independent mines claimed that rates were put so high that they could not make a profit. It was a matter of indifference to the railroad whether the profit was made on the mining or the carrying of the coal. In 1909, in the case United States v. Delaware and Hudson Railroad (213 U. S., 257), the supreme court held that the clause was constitutional, but that a railroad owning the share capital of a coal company did not possess an interest direct or indirect in the coal mined. A railroad which is the legal owner of the coal at the mine might escape the interdiction of the law by selling the coal before the trans- portation began. This seemed to destroy the effectiveness of the clause; but, in 191 1, in the Lehigh Valley case (200 U. S., 257), the supreme court held that it was illegal to use stock ownership for the purpose of destroying the en- tity of the producing corporation while its affairs and those of the railroad were administered in such a way as to make the two corporations virtually the same. Government Regulation of Railroads 211 8. The Application of the Sherman Anti-Trust Law to Railroads. — The intense competition between railroads often resulted in rates which made traffic unprofitable. In order to control this competition, the railroads combined into pools. There were two types of pools, the traffic pool and the money pool. The traffic pool may be illustrated by the agreement, made in the seventies, between three railroads running between Chicago and Omaha. These railroads were of approximately equal strength, and the agreement was that each should get one-third of the traffic. In order to run a pool of this sort, some provision must be made for diverting traffic from one road to another in order to even the amount carried. In this case, the eveners were the shippers of live stock. A money pool means that earnings shall be divided in a certain percentage. In practice, the method was to allow the railroad to retain a certain percentage of the receipts to cover the bare cost of hauling the traffic. The amount in excess of this was turned into the common fund and divided among the railroads according to the agreed upon percentages. In some of the cases, these pools had been successful in maintaining peace between the competing rail- roads. The Act of 1887 prohibited railroads from pooHng or in any way dividing net earnings. After the pools were given up, the railroads attempted to get virtually the same result through rate agreements. Various freight associations were formed which practically set the freight rates in a given region. In 1897, a case was decided by the supreme court, U. S. v. Trans. Missouri Freight Assn. (166 U. S., 290), which held that the Sherman law applies to railroads whether the combination is reason- able or unreasonable and even in the absence of the intent 212 Introduction to Economic Problems to restrain commerce. It is rather interesting that the Sherman law, which was supposed to regulate industrial combinations, should have been first used effectively against railroads which were supposed to have been regu- lated by the Interstate Commerce law. In 1898, in the case of the U. S. v. Joint Traffic Assn. (171 U. S., 505), the court again held that the activities of the traffic association violated the Sherman law and that it was no defense to say that the railroad rates established were reasonable. The fact of combination was sufficient to make the association illegal. In 1904, the Sherman Anti- Trust law was again called upon to suppress the practice which had grown up as a result of prohibition against pool- ing and traffic associations; namely, the practice of com- bining railroads. The case was the Northern Securities case (193 U. S., 197). The supreme court held that the Sherman law embraces all direct restriction of trade and every device for restraining commerce. The Northern Securities Company was a holding company with a state charter. The supreme court held that the state privilege of a holding company did not shelter it against congressional action. The court held that Congress has a right to pre- scribe the rule of free competition in interstate commerce, and to declare anything illegal which hinders it. In 191 2, the law was again utilized to break up the combination be- tween the Union Pacific and the Southern Pacific Railroads (226 U. S., 61). The supreme court decided that there was a combination of competing railroads and that such was against the law. 9. Federal and State Regulation of Interstate Commerce. —One serious problem with respect to regulation in the United States arises from our form of government. The Govermnent Regulation of Railroads 213 federal government has only such powers as are directly delegated to it by the Constitution, or as are implied in the delegation of other powers. The states have all of the powers not so given. The United States Constitution says, Section VIII: "The Congress shall have power to regulate commerce with foreign nations and among the several states and with the Indian tribes." Many disputes have arisen as to the precise spheres of regulation of the two governing bodies and the exact de- termination of what is interstate commerce. Some of the more important cases will be considered. Cases in Point. — A case in 1872 (Reading R. R. Co. v. Pa., 15 Wallace, 232) held that in the absence of federal regulation, state regulation might extend to such matters as bridges, dams, health, etc., but that the transportation of passengers or traffic between states is subject only to the federal government. Two cases 'n 1876 favored state regulation. Some Western States had passed laws regulating the rail- roads, some prescribing rates and some providing commis- sions with power to set rates. This legislation is called "Granger" legislation from the farmers' "Granges," local bodies of a society which grew up to promote the interests of the farmers. The railroads fought the legislation. It is interesting that the railroads were aligned against state control and denied the right of the states to regulate. One case (Munn v. Illinois, 94 U. S., 113) held that where the federal government had not regulated rates the states might do so; that states could control warehouse charges, though they were part of the instruments of interstate commerce; and that the state has the right to prescribe 'Z\l / iiltnth(rh(>n In I'lroiinnnr /'rohlriNJt r/ilc!'. wImic IIic Ihi ■.iiic:,;; i:. Imiipjil willi |)iil»li( iiilcrt'!'.!. A ItiiitK li oi llic lsii)j;li".li ('oiiiiiioii Law liiid ,) whi< h In Id lh:il (hwern/mr/nt Ilcf/iihdio'n of liiv'droad.H ^If* I Ik; federal tourls (;<)ul(l review sl.ile iiiiule rules lo S(;c wlielh(^r lliey were so low lli.'if. Iliey amounled to takin)^ properly willioul ed by the state commission of Minnesota. 'IIk- ;,M|)r(iMe (oml h(;1d tii;i,l C'on;';res:; conlrols inlerstale connnercc, even tliouf^h by so doin;'; it incirding to special loc;d re(|uirernenls, lire slates may act williin I heir respective jinisdictions until Congress sees lit lo .k I. I'.nt when (Congress acts, its aulhorily overrich^s .'dl <:onlli< ling slate legislation. There is no litnitalion on tlie slate con trol of intrastate rates because of a dormant power of Congress. Congress must really .'u.l. The po:,;,il)le <.on flicl might arise in two w.'iys: l''irsl, if a stale (;nfor(,ed exhcinejy low inlrjistale r;il(;s, the railro;i,d;, would he lor( ed lo ( h;i,rg<; higlicr rates on the iid,(;rst.'i,te hauls ;uid so the st.'dc would Ix; coidrolling the interstate rales. 'J'iie second conllicl is illustrated by tlie two cities at the head of the Gnsat I..'ikes, huluth, Minne- sota, jind Suj)erior, Wisconsin. Obvion.ly I he rates from these two pl.'i.ces to Minne.'ipf)lis nnist he tin; s;mie or all of the business would yo lo I he one whi( h h;i,d I he lower ral(r. II MiMMe;,ol;i, pre;,( rilxd .1. low r.ile lo hiiliilh, which is an intrastate haid, it virlti.iiiy would he ;,etlin|', the ral(; 210 Introduction to Economic Problems to Superior, whidi is an interstate haul. lUit the court said in this case that Congress had not acted. The Shreveport cases (Houston E. & W. Texas Ry. Co. V. U. S., and Texas and Pacific Ry. v. U. S., 234 U. S., 342), in 1914, disclosed a case where Congress had acted. The Interstate (\)ninuMce y\ct ])rescril)e(l that rates should not discriminate between places. I'he supreme court held that if a state-made rate causes discrimination against an outsitle point, the power of Congress is supreme and Con- gress has acted so the intrastate rate must be changed. Many state railroad commissions had acted on the assump- tion that it was their function to get all the advantages l)ossible for the shipi)ers within the state. Thus, the pur- pose of the rates set by the Texas commission out of which this case grew was to promote the jobbing centres of Texas and hinder the development of jobbing centres outside of the state. The Interstate Commerce Commission, fol- lowing this decision of the supreme court, set rates from Shreveport, Louisiana, to Texas which indirectly set the state rates, since they were not allowed to discriminate against Shrevei)ort (41 I. C. C. R., 83). 10. State Railroad Commissions and Regulation. In the preceding section, we have indicated the respective s])heres of state and federal regulation. There are two types of state railroad commissions, the strong and the weak. Massachusetts in 1869 had a commission. Its powers were merely advisory. After in\estigation it could make known its conclus'ons. It depended on public opin- ion to get its suggestions carrieci out. In 19 13, Massa- chusetts linally decided to have a commission of the other type. The Middle Western States were the iirst to have commissions of the strong type. The most important Government Regulation of Railroads 217 power of these commissions was the power to fix rates. However, they have many other powers. They often re- quire trains to stop at certain stations; they can prescribe sanitary regulations. Some states either by direct legis- lation or through their commissions have attempted to prescribe classifications and rules about the size of car- load minimums. Before the war, many of the states had laws setting 2^5 a mile as the maximum rate for pas- sengers. The present tendency is for states to have public utility commissions. These are practically the old state railroad commissions, having the added task of looking after public utilities. In New York State there is a division of the field. The Public Service Commission for New York City consists of one member; the commission for the remainder of the state of five members. All are appointed by the governor with the advice and consent of the Senate. The term of office is five years. The commission can compel the attendance of witnesses and the giving of testimony. They have super- vision of railroads, street-railroads,- gas companies, electric- light companies, telephones, and telegraphs. These com- panies are required to make annual reports to the commis- sions in a prescribed form. The provision about railroad rates is that they must not be "unjust, unreasonable, unjustly discriminatory or un- duly preferential," nor "insufticient to yield reasonable compensation for the services rendered." The commis- sion is given the power to set rates and to see that "regula- tions, practices, equipment, appliances, or services" are "just, reasonable, safe, adequate, and proper." Specifically this means, for example, that they can order new tracks. 218 Introduction to Economic Problems new tcTniin.ils, more trains, and set the times of starting trains. The ajjproval of the commissions is necessary for the issue of stocks and bonds. II. The Railroads and the War.— We have seen that during the war all the ener}i;ies of the i)eo])le were concen- trated on (he one task of winning the war. Of course, transi)()rtati()n was one of the most imj)ortant factors in the slruggle. In addition to the increased tralhc due to the manufacture and transportation of munitions of war, the railroads were called upon to move great bodies of men to trainingcamps and later to seaports to take ships for luMoix'. The first step was to try to unify the service and bring about co-operation between the roads. Here a strange situation was encountered. 'I'he ])olicy of regula- tion adopted by the United States had aimed to force the carriers to compete with each other. The railroads in their efforts to co-ordinate their activities were hampered by laws against agreements and combinations. After the declaration of war, the i)residents of the railroads met in Washington and perfected an organization called the Rail- roads' War Hoard. This board did much to ])romote the effective use of the railroads. Complete co-ordination was not possible. Another didiculty in the way of successful co-operation lay in the comj^etitive organization of the railroads. They were organized for profit. Complete unification of facili- ties would bring many difiicult problems. Frequently, one road had advantageously placed terminals. Should it allow other roads to use them? If so, on what terms? Perhaps the general interest would have been served by having one road carry nothing but low-grade freight. But Government Regulation of Railroads 219 would the managers have been justified in accepting this task if by so doing the return to the stockholders would have been cut down ? An act passed August 26, 1916, gave the President power to take over the transportation system. Exercising this power, the President issued a proclamation December 26, 191 7, taking over all of the systems of transportation in the country on December 28, 191 7. The secretary of the treasury, Mr. McAdoo, was made director-general of rail- roads. Mr. McAdoo turned back to their owners many small roads, called "short lines." He did not wish to make up deficits in their operation. The Federal Control Act was signed by the President on March 21, 1918. It pro- vided for the operation of the railroads for the war and a period not exceeding twenty-one months after the proclama- tion of the ratification of the treaty of peace. The roads were to get as compensation the average net operating in- come for the three-year period ending June 30, 191 7. The government agreed to return the roads and equip- ment in as good condition as they were when taken over. Mr. McAdoo at once raised freight rates 25 per cent and passenger fares to 3^ a mile, and state-made rates which conflicted were set aside. The war brought a truce in the conflict between the federal and state regulation. Since the government itself was setting rates, the state commissions refrained from in- terposing objections to any of the acts of the administra- tion. The wages of all classes of employees were raised, and the salaries of some of the higher officials cut. Wages were standardized over the whole country. At first, the operat- ing staffs of the railroads were not changed; later federal 220 Introduction to Economic Problems managers were appointed. A regional plan of operation was adopted. At first there were three regions; finally, nine regions and districts. The government operated the railroads at a loss. The authorities did not think that it was wise to raise rates very high. Probably they were afraid that the addition to the cost of living would be unpopular. After the armistice, there arose a demand for a continua- tion of the governmental operation of the railroads. Vari- ous reasons were urged in support of this policy. Those who believed in government ownership thought that it might be a step in the direction of that policy. It was urged that it would ease the transition involved in recon- struction. On December 24, 1919, the President announced that the roads would be returned to their owners on March i, 1920. Congress had presented to it many plans for rail- road control. The Railroad Administration proposed that federal control be continued until January i, 1924, and that combinations be made which would result in a com- paratively small number of strong companies. The Inter- state Commerce Commission suggested closer financial control, the permitting of united actions, and stricter regu- lation of service and equipment. The railroad executives advocated federal incorporation of railroads and a new member of the cabinet, to be called the secretary of trans- portation, who would see that the railroads got adequate rates. Railroad labor brought forward the Plumb plan. Under this plan the government would own all the railway prop- erties and turn them over to a single corporation to oper- ate, under a management representing the employees, the Government Regulation of Railroads 221 operating officers, and the public. The profits were to be divided equally between the employees and the govern- ment. The security owners wished the roads to be returned; they advocated that regional commissions be set up in ad- dition to the Interstate Commerce Commission, and that legislation requiring rates adequate to yield a certain re- turn to the railroads be passed. The state railroad com- missions thought that they should have their former power and also new functions in connection with the Interstate Commerce Commission. The outcome of the situation was the passage of the comprehensive law now to be re- viewed. 12. The Esch-Cummins Law. — The new bill, which be- came a law February 28, 1920, called the Esch-Cummins bill, contains many important provisions. {a) The roads were to be turned back to their owners March i, 1920. (6) Indebtedness of the roads to the government for betterments might be funded into 6 per cent bonds run- ning for ten years. (c) Rates could not be reduced before September i, 1920, without the approval of the Interstate Commerce Com- mission. {d) A railroad might agree to accept from the govern- ment a guarantee of earnings for six months equal to that guaranteed under federal control. Any excess would be- long to the government. (e) Loans might be made by the governm'ent to carriers at 6 per cent to run not over five years. (/ ) For labor disputes, two provisions are made. One is for voluntary adjustment boards, and the other for the Railroad Labor Board. This latter has three members rep- 222 Iritrodmi'wn to Vlconmnic Prohlrm.s rcHcnliii)', llic cmiiloyccs, llircc i(|n('S(iiliiij', llic carriers, .•i.iier cent on llicir properly. (/) The Inlcrslalc ('ommcrcc Coinniission is to report, on a. |»l.'iu loi iiici;',iii|^ llic i.iilio.Mls into a liniiled luinibcr of systems. II (an permit mergers and division of Irallic. or earnings if snc li are considered wise. (7) The eonunission can r(;(juire the joint use of termi- nals. (h) After ninety days the commission must a|)|)rove any extension or ab.indonmcnt of railroads. (/) After one hundred and IwcnIy days the (ommissioii must ;ippi(>\'e .ill secinity issues except notes maturing in nol over lvv(» ye.irs and to ai» ainonnl not j^reater than 5 per (ciil of the securities oulsta.nclin|f. ini) The commission is j',i\'cn control ovc-r ciir service. (//) The" commission is increased to eleven members and their salaries made $i.»,ooo a year. 77/c /Vcvr Provision About Rates. The problem of set- tin)', a i^iicial lc\(l of rates has always been a pu/,/liiig one. In a given rcj>,ion we lincl strong, well cc)nstru( ted, favor- ably located railroads, and weak and poorly constructed and unl.i\oiablv located ones. A rale lc\'cl which would l)ermil the latter to make expenses would biing big earn- ings to I he former. A r;ile aclc(|uate lo give the strong road iihuY return nught b;i.iikiupl the weak load. The new law (Uwernrrifmt Regulation of Railroads 228 proviVlcs an ingctiious solution. The com mission may es- tablish groui)S and set a value on the railroad property. Each group as a whole shall have rates that will give a yearly return for two years of $}4 per cent (or 6 per cent if the commission so decides) on the value of the group as a whole. After two years the rate of return is left to the commission. If a carric-r mak(;s more than 6 per cent, one- half of the excess goes to a surplus fund unlil it is 5 per cent of the value of the pro|)erty, and one-half to the com- mission as a general contingent fund. After a niilroad has the 5 per cent surplus, it can do as it pleases with its share of the excess earnings. Some (|uestion tlu; constitutional- ity of this taking of earnings for the hen(;lit of other roaQ5 ment of manufactures than ^thers. Historically, England had her Industrial revolution long before the other coun- tries. In the case of the United States, for a long time we were an agricultural people. When a country is first opened up for settlement, agriculture is usually the most profit- able pursuit for the people. Land is the long factor and labor the short factor. Later, with the growth of popula- tion, the time may come when it will pay to manufacture; but for a considerable time manufactured goods can be ob- tained with less effort by raising agricultural products and trading them with some nation which has developed manu- factures. England became a country which specialized in manufactures, trading them for food and raw materials with countries industrially less developed. This type of trade is less permanent than that based on natural differences. Thus, the United States has become a great manufacturing nation and no longer exports any great proportion of the food raised. 4. Trade Based on Specialization. — Trade may exist between two countries with about the same natural re- sources and about the same stage of industrial development. It is profitable to specialize to get the advantages of large- scale production and to develop special skill. Frequently, no particular reason can be given to explain why one line of industry was developed rather than another. It is this type of trade which causes the seeming anomaly of Great Britain exporting woollens to Germany and also importing woollens from Germany. Each has specialized in some type of woollen manufacture. 5. The Meaning of Foreign Exchange. — The trade be- tween countries which arises from any of the reasons given above brings certain problems in connection with the pay- 266 Introduction to Economic Prohlcms ment. Frequently, the monetary systems of tJie countries are ditTorcnt. The payments must be made at a distance. Many of the transactions are credit transactions; that is, tliey involve a period of waiting before the payments are made. In the study of foreign excliange we deal with the mechanism by which payments are mixdc in international trade. Most people are familiar with the idea of domestic ex- change. When payments are to be made at a distance within the country, drafts on New York City are frequently used instead of using the ordinary bank check. In like manner, when payments are to be made between countries, drafts on banks or merchants are used in making the pay- ments. These drafts, of course, are orders to pay money. They ditTer from the domestic drafts because tliere are two monetary systems involved. Thus, a merchant in the United States who wishes to make a pa>inent in London may buy a draft in pounds sterling and pay for it in dolUirs. We may begin our study of foreign exchange by seeing what the financial page of the newspapers gives about it. FRIDAY, MARCH 4, 1921 RANGE OF R.\TES, SIGHT EXCHANGE Thurs. High. Low. Final. Final. LONDON $3,-9oU $iSg}i $3.89,>i $389^ PARIS 7-24K 71^^ 7 I*) 7 19 ROME 3.68 3. 68 3.68 3.66 AMSTERDAM... 34. 35 34 :vS 34 .>5 34-23 BERLIN l.63>i 1.60 i.6.\i; 1.61K MADRID 13.94 13-94 I3 94 ^3 96 CLOSING RATES Parity of exchange is given as reported by the U. S. Mint, except in countries with a silver standard, where parity fluctuates with the price of silver. Foreign Trade and Foreign Exchange 267 EUROPE Week Friday. Ago. STERLING— Par $^.%6H per sovereign. Demand 389;^ 3.86>^ Cables 3-9oX ?)-^7/i Com., 60 days 3.84X 3.82>^ Com., 90 days 3.82 3.80K FRANCE — Par 19.3 cents per franc. Demand 7.19 7. 18 Cables 7.20 7-i8K ITALY — Par 19.3 cents per lira. Demand 3 . 68 3 . 64 >^ Cables 3.69 3-65>^ BELGIUM — Par 19.3 cents per franc. Demand 7.52 7- 51 Cables 7.53 7.52 GERMANY — Par 23.8 cents per mark. Demand i.62>^ i .6o>^ Cables 1.63 i .6i>^ AUSTRIA — Par 20.3 cents per crown. Demand 22 .23 Cables 22 >^ .23^ CZECHOSLOVAKIA— Par 20.3 cents per crown Demand i . 32 1.25 Cables 1.33 i .27 DENMARK— Par 26.8 cents per krone. Demand 1 7 ■ 30 1 8 . 05 Cables 17-35 18. 10 FINLAND— Par 19.3 cents per finmark. Remand 2 . 85 310 Cables 2.90 3.15 GREECE — Par 19.3 cents per drachma. Demand 7 . 48 7 . 45 Cables 7 . 53 7 . 50 HOLLAND — Par 40.2 cents per florin. Demand 34-35 34-13 Cables 34-40 34- 18 HUNGARY — Par 20.3 cents per crown. Demand 26 . 20>^ Cables 26^2 21 JUGOSLAVIA — Par 20.3 cents per crown. Demand 72 .70 Cables 73 .71 Year Ago. 65 65 >< 60 58 29 30 60 61 60 61 05 07 42 44 14 19 10 25 55 60 05 10 375 50 268 Introduction to Economic Problems Week Year Friday. Ago. Ago. NORWAY— Par 26 . 8 cents per krone. Demand 16.35 17-25 1785 Cables 16.40 17.30 18.00 POLAND — Par 23.8 cents per mark. Demand 13 -^i^A 64 Cables I3>^ 133^ 67 RUMANIA — Par 19.3 cents per leu. Demand 1.40 i-36 152 Cables 1.41 i-38 157 SERBIA, Belgrade — Par 19.3 cents per franc. Demand 2.80 2.78 3.30 Cables 2.85 2.80 3.35 SPAIN — Par 19.3 cents per peseta. Demand 13-94 13 QO i7-90 Cables 1396 13-92 18.00 SWEDEN— Par 26.8 cents per krone. Demand 22.35 22.32 19.45 Cables 22.40 22.38 19.50 SWITZERLAND— Par 19.3 cents per franc. Demand 16.70 16.56 17.09 Cables 16.75 16.58 17.16 FAR EAST CHINA — Cents per silver dollar for Hongkong; per tael for Shanghai and Peking. Hongkong, demand 45 • 5o Hongkong, cables 45-6o Peking, demand 65.00 Shanghai, demand 59 • 50 Shanghai, cables 60.00 INDIA — Calcutta, cents per rupee, stabilized at one-tenth of a pound sterling. Demand 27.25 27.00 4650 Cables 27.50 27.50 47.00 PHILIPPINE ISLANDS— Manila: par 50 cents per silver peso. Demand 47-75 47-75 49-125 Cables 48.00 48.00 49-375 JAVA — Par 40.2 cents per florin. Demand 35 -5" 34 -50 JAPAN — Par 49.8 cents per yen. Demand 48-375 4850 -47-125 Cables 48.50 48-75 47-375 48-50 101 00 48.60 lOI 10 70.50 164 00 65.00 152 00 65-50 52 50 Foreign Trade and Foreign Exchange 269 SOUTH AMERICA Week Year Friday, Ago. Ago. ARGENTINA — Par 42.44 cents per Argentine paper dollar. Demand 34.75 35.06 43.65 Cables 35.00 35.18 43.75 BRAZIL— Par 32.45 cents per paper milreis. Demand 15875 15.625 26.125 Cables 16.00 15-75 26.25 CANADA MONTREAL— Par 100 cents per Canadian dollar. Demand 87.7 87.7 87.5 RUSSIAN CURRENCY Prices for pre-revolution Russian ruble notes were as follows, par 51.40 cents per ruble: Bid. Asked. 100 ruble notes, per ruble 45 .50 500 ruble notes, per ruble 42 >^ .44 The first thing we notice is that we have prices quoted. We are interested, of course, in knowing why those prices are what they are. 6. The Demand for and Supply of Foreign Exchange. — If we take the case of sterling exchange, we say its price depends on the demand for drafts on London and the sup- ply of drafts on London. The demand for drafts on Lon- don comes from those people who have obligations to meet in London. These obligations may arise in several ways. First, of course, come importers in the United States who have purchased goods in London. Then, payments by the United States Government for the expenses of its embassies, consulates, and other foreign representatives necessitate the purchase of sterling exchange. Before the war, most of our foreign shipping was carried in British ships and was insured in British insurance companies. These transac- tions gave rise to a considerable demand for sterling ex- 270 Introduction to Economic Problems change. Whenever an American tourist goes to Europe, he must provide himself with funds which will be available in Europe, Perhaps the commonest way of doing that is to buy sterling exchange, which can be turned into English currency or the currency of any other country. Another important group of transactions which gives rise to a de- mand for foreign exchange may be called investment trans- actions. If American investors make loans to the gov- ernments or the businesses of foreign countries, there is a demand for foreign exchange. The supply of foreign exchange comes from those people who have credits abroad. As in the case of the demand for exchange, the merchandise transactions are of first im- portance. Here, of course, it is the exporter who has the supply of exchange abroad. If we develop our merchant marine and the business of marine insurance to such an extent that we carry goods for other countries, then we will have a supply of foreign exchange from that source. The indebtedness of the foreign countries to the United States furnishes a potential supply of foreign exchange. It is not actual so long as the foreign governments are not paying the interest on the indebtedness and are not making repayments of the principal. Financial transactions also affect the supply of foreign exchange. If we take the situation of the United States in early times when we were a debtor nation and European countries were lending vast sums to develop our railroads and other industries, we see that the first effect was to furnish a supply of foreign ex- change. That is, if the Pennsylvania Railroad borrowed money in London, it had a credit in London against which it could draw bills of exchange and sell them in the New York market. Of course, as soon as the Pennsylvania Foreign Trade and Foreign Exchange 271 Railroad had to meet interest on its obligations, it appears as a demander for foreign exchange, and when it must pay the obligations at maturity it must buy foreign exchange covering the amount of the indebtedness. This relation- ship is probably now reversed. We are lending to Europe, and thus a demand for foreign exchange is created; and when repayments are made, a supply of foreign exchange will be created. It will be noticed that various types of exchange are quoted. Demand exchange means a bill on a bank in a foreign country payable on demand. That is, payable as soon as it reaches the foreign country. Cables represent transactions carried on by cable, and so, of course, they are available immediately. The slight difference in price between demand and cables is explained by the fact that the demand exchange is available only after the voyage across the Atlantic, which may take about a week; while the cables are available at once. In the case of England, commercial bills are also quoted. Commercial bills are bills drawn, not on banks, but on business houses. They ordinarily are lower in price than the bankers' bills because the credit of the business man is not quite so high as that of the bank. Commercial bills also frequently are time bills. That is, payable at the end of sixty or ninety days. In this case, the price is lower than demand bills because of the sixty or ninety days which must elapse before pay- ment can be obtained. 7. Mint Pars and Gold Points. — In each case, above the quotation is given a figure for the par. The mint par of exchange is a comparison of the pure-gold contents of the monetary units of the two countries. Thus, the mint par between the United States and Great Britain which appears 272 Iniroduciion to Economic Problems as sterling exchange in the table, is given as $4,865-^ per sovereign. This is obtained by comparing the pure-gold content of an English sovereign, which is slightly more than 113 grains, with the pure-gold content of the United States dollar, which is 2^.22 grains; 113 divided by 23.22 equals 4.86f^. The mint par witJi silver countries is the value in terms of our monetary unit of the pure silver in the coin. So long as the monetary units in gold-standard countries remain the same, the mint pars between the countries will be the same. The mint pars between gold-standard and silver-standard countries change with every change in the price of silver. Obviously, there can be no mint par be- tween a gold-standard country and a country on a paper basis. Frequently, however, the law of the country sets a value on the paper in terms of gold. From this value is computed the par of exchange. Argentina is a case of this sort. The ordinary statement about the price of exchange is that it varies about tlie mint par of exchange within the limits which are distant from the mint par an amount which covers the cost of shipping the unit value of gold. These limits are called the gold points, or the specie points. The explanation given of this limitation is that no buyer of exchange would pay more for exchange than the amount which it would cost him to ship gold, and no seller of ex- change would take less for his bill tlian the cost of getting the gold from the foreign country. This cost used to be stated as about 2C^ a pound sterling in the case of sterling exchange. One of the disruptions of the ordinary procedure in financial transactions caused b>- the war was the stoppage of the free movement of gold between countries. In all Foreign Trade and Foreign Exchange 273 of the European countries at the present time there are hindrances to the movement of gold. This does not mean that there are no gold movements permitted, but simply that the government through their treasuries insists on controlling the movement. A casual glance at the table shows that this limitation of gold movements makes the old statement about gold points a matter of historical rather than present interest. 8. The Balance of International Payments. — In a previous section, we enumerated some of the various transactions which give rise to the supply of or the demand for exchange. Various attempts are made to express the items for a coun- try for a given period in the form of a balance-sheet. We give two such attempts, one before the war and one after the war. BALANCE OF INTERNATIONAL PAYMENTS, 1908-19091 Items causing a supply of exchange : Merchandise exports $1,663,000,000 Excess of gold exports over imports 48,000,000 Excess of silver exports over imports 12,000,000 Foreign investments in United States 184,000,000 $1,907,000,000 Items causing a demand for exchange : Merchandise imports $1,312,000,000 Interest paid to foreigners 250,000,000 Tourist expenditures 170,000,000 Remittance to friends abroad 150,000,000 Freight paid to foreigners 25,000,000 $1,907,000,000 1 Adapted from George Paish, Trade Balance of U. S. (National Mon. Comm.), p. 179. 274 Introduction to Economic Problems BALANCE OF INTERNATIONAL PAYMENTS JANUARY 1, 1919, TO NOVEMBER 1, 1920> (In millions of dollars) Items causing a supply of exchange : Exports of merchandise and silver $l5i098 Exports of gold 653 Foreign loans matured and paid ofif 1,086 Freights due to United States and proceeds from sale of ships 1,011 Interest payments from allied governments 1 77 Interest payments on private American capital abroad 311 $18,336 Items causing a demand for exchange : Imports of merchandise and silver $8,765 Imports of gold 393 New issues of foreign government loans 771 Foreign corporate bond issues 126 American securities returned 200 American purchases of European internal securities 155 Other foreign private investment 500 Government cash advances to foreign governments 2,131 United States Government purchases of European currencies to cover expenditures in Europe 559 Relief 84 Interest payments on foreign capital in the United States. ... 100 Freight payments to foreigners 890 Credits granted by United States Grain Corporation 60 Immigrants' remittances 600 Tourists' expenditures 150 Floating indebtedness due to United States 2,852 $18,336 The rates on a country will be high or low according to whether the balance of international payments as a whole shows an excess of exports or an excess of imports. Thus, ^ J. W. Williams, The Foreign Trade Balance of the U. S. since the Armistice, Amer. Econ. Rev. Suppl., March, 1921, p. 30. Foreign Trade and Foreign Exchange 275 the rates on the United States in all other countries are high, partly because of the high excess of exports (the de- preciation of the foreign currencies also enters in). This is the same thing as saying that in the United States the exchange on the other countries is low in price. 9. The Correctives of the Exchanges. — We have seen that in times when gold is permitted to move freely be- tween nations, the price of exchange varies within the limits of the gold points. Gold moves if the balance of interna- tional payments is against one country. We shall now see why a country cannot continue to lose gold and another country gain gold indefinitely. The movement of gold sets in motion certain forces which tend to counteract the flow. The gold shipped out ordinarily comes from the bank re- serves of the country; from the central bank if the country has one. The loss of reserves tends to stiffen money rates in the country which lost the gold and to ease the money rates in the country which received the gold. (To simplify the explanation, we assume that only two countries are in- volved.) The changes in the relative interest rates may cause international bankers to shift their balances to the country with the high discount rates. This increases the demand for exchange on the country which lost the gold and may be enough to stop the flow. The stiffness of money rates would have a tendency to check speculation and to cause a decline in the prices of stocks and speculative commodities, such as wheat and cotton. The easy money rates in the other country would have the opposite effect. Thus, foreigners would buy stocks and commodities in the country that lost the gold. This buying would cause a demand for exchange which would raise its price and per- haps stop the flow of gold. 276 Introduction to Economic Problems The high exchange rates in the country which lost the gold on other countries would have some effect on the ex- port and import of merchandise. Exports would be some- what facilitated, for the exchange on the other countries received for the goods would bring more of the home coun- try's currency than before. Imports would be somewhat checked because the exchange on the other countries which must be purchased to pay for the goods would cost more of the home country's currency than before. This again would tend to stop the flow of gold. Finally, if long con- tinued, the loss of gold would tend to lower the general price level in the one country, and the gain of gold would tend to raise the general price level in the other country. This change in relative prices would tend to increase the exports of the country with the lower-price level and de- crease the exports of the country with the higher-price level. This change in the movement of trade would tend to shift the balance of international payments and check the outflow of gold. Of course, the operation of the correctives of the ex- changes is interfered with by the regulations which prevent the free movement of gold. 10. Arbitrage. — ^In ordinary times, when the movement of funds is free, the exchange rates are kept in harmony with each other by the activities of a group of dealers in exchange called arbitragers. The manner in which they carry on their dealings is very technical, but a simple illustration in general terms will show how they make their profit and the effect of their operations. Suppose that the United States in its total trade has a favorable balance, that France has an unfavorable balance, but that in the particular trade with France the United States has an unfavorable balance. Foreign Trade and Foreign Exchange 277. That would tend to make, in the United States, exchange low on all of the countries except France, whose exchange would be high. Or to put it the other way, exchange on the United States would be low in France but high in all of the other countries. The exchange dealers would say that the rates were out of line, and so there would be a chance to make a profit by arbitraging. The operation might consist in buying dollars (New York exchange) in Paris with francs (Paris exchange) purchased in London with sterling (London exchange) and selling the dollars in New York for sterling with which to cover the sterling used in the purchase of the francs. This would yield a profit at first. But soon it would raise the price of dollars in Paris and lower the price of francs in New York. When the rates were in line, no profit could be made. II. Exchange Rates with Countries on a Paper Standard. — In Turner's Introduction, in the chapter on Money, we have seen that irredeemable government paper money usually depreciates in value. One of the ways in which this depreciation is measured is the depreciation of the ex- changes. That is, instead of being worth $4.86^, the English pound sterling in New York on the day quoted was worth only $3,893^. Part of the variation from normal, of course, might be due to variations in demand for supply of exchange, but most of it is due to the fact that England is really on a paper basis. Exchange rates with countries on a paper basis are sub- ject to wide fluctuations. Anything which affects the amount of depreciation of the paper money will affect the price of exchange. In Germany, repeated issues of paper marks have lowered the value of the mark. This shows itself in a low price of German exchange in other countries, ^78 Jntroduction to Economic Problems and a hifj;h price of exchange on other countries in Germany. If !'■ ranee should balance her budget, the value of the franc would rise and with it the i)rice of exchange on Paris in New York. 12. Exchange Rates with Countries with a Silver Stand- ard. — Silver is the commonest money in the Orient. The range of prices is so low that gold could not be used in or- dinary transactions. As was explained a])ove, there is no stable mint par. The price of exchange varies with changes in the demand for and supply of exchange and with the changes in the gold price of silver. During and since the war silver has varied greatly in price, from 52^ to $1.37 an ounce. Such ra])id variation introduces great uncertainty into dealings with such countries. 13. The Gold-Exchange Standard. —The exchange on the rhilipi)ine Islands is an illustration of the situation which arises under what is called the gold-exchange standard. The theory of this standard is that the circulation within the country shall be made up of overvalued silver coins; and that these coins shall be kept at a certain par with the money of the gold-using country by an arrangement whereby at any time (he silver may be used to purchase exchange on the gold-standard country at a certain fixed price; and also, that at any time exchange on the gold- standard country may be turned into silver coins at the ])rescribed ratio. The quotation as given above for the riiilipi)ine Islands re])resents a breakdown of this system. Adequate funds were not carried, and so there came a time when exchange could nol be purchased at the fixed ratio. The fact that the quotation is below par in New York means that in the Philippines it is above par. That is, it takes more silver pesos (Philippine money) to get a Foreign Trade and Foreign Exchange 279 dollar than was contemplated when the system was started. 14. The Regulation of Gold Movements. — ^We have seen above in considering the correctives of the exchanges, that there is a more or less automatic regulation of the movement of gold which occurs over long periods as the result of changes in interest rates and price levels. In this section, we wish to consider the more artificial short-time regula- tions used to prevent an outflow of gold. These measures are ordinarily undertaken by the central banks of the vari- ous countries. We are now referring to the time before the war. Since gold is the basis of the banking and credit systems of the leading commercial nations, a sudden withdrawal of a considerable quantity of gold might force rapid contrac- tion and possibly bring on a panic. The Bank of England used to save out the sovereigns, which were light weight but not too light to be current. If they wished to dis- courage the export of gold they would pay out these to the would-be exporter of gold. Since the gold is taken by weight in international shipments, the shortness in weight might be enough to cause it to be unprofitable to export the gold. However, the chief method used by the Bank of England to prevent the export of gold was to raise the discount rate. This attracted funds to London for investment and so changed the balance of international payments. The Bank of France under the law might redeem its notes in silver as well as gold. If it wished to prevent the export of gold it would pay out silver, or charge a premium for gold. Another method used on the Continent was to hold in 280 Introduction to Economic Problems the portfolio of the bank a considerable quantity of bills on London, renewing them as they came due. If the ex- changes became adverse, they could often be corrected by throwing these bills on the market. 15. The Effect of the War on the Exchanges. — The war caused profound changes in the course of trade and brought intergovernmental credit transactions of unprecedented magnitude. The governments interfered more than ever before with economic and financial matters. One of the early steps taken in most countries was to take control of the gold within the country. No gold could ordinarily be exported except on government account. Most of the countries stopped the redemption of their paper money and entered on a policy of inflation. The result is seen in the variation from par of the exchanges of the various countries. 16. Dollar Exchange. — Before the war, sterling exchange was the chief instrument used in settling international obligations. Its primacy depended upon several circum- stances. British trade was world-wide. That meant that people all over the world who bought British goods had obligations to meet in London. This furnished such a de- mand for sterling exchange that those who sold goods to the British were willing to take sterling exchange in pay- ment. A second consideration was that Great Britain early adopted the gold standard and managed its monetary and banking affairs with such prudence that sterling ex- change was always the equivalent of gold. Again, Great Britain was a wealthy nation with capital seeking invest- ment abroad, so London bankers financed much of the com- merce of the world. That meant that the London discount market would absorb the sterling bills drawn against the Foreign Trade and Foreign Exchange 281 shipment of commodities, also that foreign loans could be floated in London. We see then the conditions under which dollar exchange might supplant sterling exchange and New Yo^k take from London the financial leadership of the world. New York is a free gold market and London is not. The United States is the wealthiest country of the world. We are making some foreign investments, but our people are not used to foreign securities and will not buy them freely. Neither have we developed such a wide-spread world trade as Great Britain has. Dollar exchange will probably keep the supremacy so long as we are the only free gold market, and after that it will be a question of how rapidly our trade develops and how extensively we are willing to engage in foreign financing. Besides the sentimental reason for wishing to have our monetary unit used in world trade, there are other advan- tages. The use of dollar exchange throws on the foreigner the risk of exchange. Suppose an American sells cotton to some one in Liverpool on three months' time. If the transaction is carried on in terms of sterling, the amount the American receives depends on the price which he can get for his sterling in three months (of course, he may dis- count his bill, but that merely shifts the risk to some one else). On the other hand, if the transaction is carried on in dollars, the American knows exactly what he will receive but the man in Liverpool will not know how many pounds sterling it will take to meet his bill until the time of pay- ment. Obviously, it would be to our advantage to get rid of the risk of exchange. The second advantage of the extended use of dollar ex- change would be that our bankers, instead of the London ^^84 I iilnxlKclion io lu'onoinir Prohlnns hanlvfis, would in;iki> a piolil on llu' mmu'rous linaucial (ransailioiis. Bankers' ArcrfyhiNccs. Tlu'sc arise under commercial letters of credit. Let us suppose that a New York I'lrm wishes to buy olive-oil from a fum in Italy to which it is not known. It would ^'^c{ Irom a. well-known New York hank a letter of credit which would authorize the Italian dealer to draw, sa>', a ninet\' da>' draft on the New \\)rk hank upon the shipment of the oiK'e oil and wi)ul(l agree ti)accei)t the draft. With this assuranii-, the Italian (l(>alcr would ship (he oil and I'^cl a hill of ladiu}^. lie would draw his draft on Ihe New \'ork hank and attach the hill of hulinjj; and other docuincnis to it. IIi' would sell the draft to his hank and thus ,i;e( tlu' moiu-y for his oil. VUc Italian hank would send the draft to its New \'ork corrc^spondent to |i;e( the ari'epl.ance of the New \'ork hank. 'Vhcu the draft mij^ht he held to malurity or discounted in order to get the proceeds at oiu c When tlu'draft is accepted, the accepting hank gets llu- hill of lading. It may allow the importer Io get Ihe goods under a (rust receipt or some otluM- li'gal device. When the drafi comes due, the money to pay it is i)rovided, of ct)ur.se, hy the importer, not the accepting hank. Hefore the war, most of llu' letters of credit were drawn on London hanks. The ,\nierican im])orter was forced to get his hank to arrange with its London correspondent for the lei liM- of credit. Of t()urst\ the Lt)ndon hankers charged for tlu-ir ser\'ici>s. Now we hope that .Vnieriian hankers will issue the com- mercial leltiMs of cnulil hoth for our own traders and those of other countries. Hankers' acci^plani'cs may also hi> usi'd \o liname exi>orls. Foreign Trade and Foreign Exchange 2Hf} 17. Exercises. — i. What are the advantages of interna- tional division of labor? 2. How may our desire to develoj) ])roductive capacity influence our attitude toward international division of labor ? 3. Give other illustrations of the three kinds of trade. 4. How does foreign trade differ from domestic trade? 5. How much permanence may wc expect from each of the three kinds of trade? 6. How does foreign exchange differ from domestic ex- change ? 7. List the various items in the demand for and sui)])ly of foreign exchange. 8. How would the price of sterling exchange in New York be affected by: (a) An increase in the exports of Great Britain? (b) An increase in the imports of Great Britain? (c) The fall of the Bolshevist government in Russia? {(l) The retirement of the ICnglish treasury notes? (e) The prompt payment of the German indemnity? (/■) A long-continued coal strike in (ireat Britain? (g) A capital levy in Great Britain? (h) General crop failures in Europe ? (i) Rapid recovery of industry in Europe? 9. Explain how the mint pars are computed. ID. Why does there not seem to be much significance to the gold points at the present time? 11. What bad effects on trade does the rapid fluctuation of exchange rates bring? 12. Which is more important, to have stability of ex- change rates or to bring the rates back to par? Can both things be done at the same time ? 13. What is meant by purchasing-power parities? 14. Explain the effect of depreciated exchanges on the trade of a country. 284 Introduction to Economic Problems 15. Trace the effect of the payment of an indemnity by Germany on German exchange rates, trade balances, and productive capacity. 16. What is the profit in arbitrage? 17. What good effect does arbitrage have on exchange rates ? 18. List the correctives of the exchanges in the order in which they operate. 19. List the added factors which enter into the deter- mination of the exchange rates of a country on a paper basis. 20. Give some account of the silver exchanges during the war and the reasons for the broad movements. 21. How does the gold-exchange standard seek to sta- bilize the exchange rates on silver-using countries? 22. What caused the breakdown of the gold-exchange standard in the Philippine Islands? 23. Explain how central banks aim to control gold move- ments. 24. How permanent can the effect of such measures be ? 25. What difficulties will the Federal Reserve Board face in attempting to control gold movements ? What ad- vantages will it have? 26. What has caused the growth in the use of dollar exchange ? 27. What advantage would it be to traders in the United States if dollar exchange became widely used ? 28. What interest has New York City in the spread of the use of dollar exchange ? 29. Will dollar exchange supplant sterling exchange in the world's trade ? CHAPTER XVII TARIFFS AND FOREIGN TRADE POLICIES I. What Is a Tariff ? 2. Technical Terms of a Tariff. 3. The Effect of a Tariff on Imports. 4. Revenue Tariffs. 5. Protective Tariffs. 6. Free Trade vs. Protection. 7. The Course of a Tariff Bill in the United States. 8. The Political Evils of a Tariff. 9. The History of the Tariff in the United States, Illustrating the Arguments Used — Infant Industry in the General Form — War — Home Market — Export Tax — Unconstitutionality — Wages — Infant Industry in Particular Form — High Cost of Living. 10. The Tariff Commission. 11. The Present Discussion. 12. The Problem of Dumping. 13. The Tariff and the Debts Owed Us by Europe. 14. Discriminations and Unfair Competition in Foreign Trade. 15. Reciprocity Treaties. 16. Co- lonial Preference. 17. The Open Door. 18. Exercises. 1. What Is a Tariff? — Tariffs or duties are taxes levied on goods which move in international trade. They may be levied on the import or the export of the commodities. Usually a country with little industrial development but with valuable natural resources will levy export duties. Thus, Mexico and Chile have raised revenue with this type of duty. Most of the duties, however, are levied on the import of the goods into the country. Indeed, the United States Constitution prohibits the levying of export duties. 2. Technical Terms of a Tariff. — A specific duty is one levied as so much per physical unit; as so much per dozen, per pound, per yard, or per quart. An ad valorem duty is levied as so much of the value, as 25 per cent of the value. A tariff schedule is a grouping of rates on related articles. In recent tariff bills in the United States, Schedule A has been Chemicals; Schedule K, Wool and Woollens. 285 286 Introduction to Economic Problems A mixed duty combines specific and the ad valorem duties on one article. A compensating duty is that added to the duty on a manu- factured article to make up for the duty levied on the raw material used in the manufactures. A revenue duty is one levied primarily for the purpose of raising revenue. A protective duty is one levied primarily for the purpose of shielding the domestic producer from the competition of foreign producers. 3. Effect of the Tariff on Imports, — The effect of a tariff duty on the price of the article depends on a variety of circumstances: such as, whether the article is produced within the country or not; if it is produced, whether the production is great enough to supply the domestic demand; whether the country is the chief market of the foreign pro- ducer or not; and whether the demand of the consumers is elastic or inelastic. Some of the cases are quite simple. Suppose we con- sider a duty on tea. There is practically no tea produced in the United States. A duty of 10^ a pound would prob- ably raise the price in the United States by 10^. The de- mand for tea is relatively inelastic; that is, an increase of 10^ a pound in price would cause little falling off of the amount used. While we use a considerable amount of tea, we are by no means the sole or principal market for tea; so, if we refused to take as much as usual, the tea would go to other countries. The opposite extreme is the case of an article which we produce in such quantities that we not only supply the home market but also have a surplus for export. What would be the effect of a duty of 25 ji a bushel on wheat ? In Tariffs and Foreign Trade Policies 287 general, it would have no effect on the price of wheat. It might upset some of the trade along the Canadian border. Canadian wheat is often milled in the United States and often shipped to Europe by way of this country. The duty might hamper this trade, as shipping in bond involves cer- tain formalities. But it would have no effect on the price of wheat, for it does not alter the relation of the supply of wheat to the demand for wheat. The intermediate case presents the greatest difficulty. If high duties are levied on an article which is produced within the country, the for- eign price plus the duty sets a maximum above which the domestic price cannot go, for foreign goods can be sold at that rate. If we assume that the product is produced by competing producers, the domestic price may be very much less than the foreign price plus the duty. 4. Revenue Tariffs. — The tariff as it existed in Great Britain before the war is a good illustration of a revenue tariff. It was levied on comparatively few articles, and, in case they were produced within the country, an internal duty equivalent to the tariff was levied on the home pro- duction. Thus, there was no element of protection. The choice of articles of revenue tariffs is comparatively simple. Those articles will be chosen which are widely used and for which the customers have a rather inelastic demand. Sugar, coffee, and tea are good articles to tax from this standpoint. The rate charged will depend partly on what is found to be the rate which will yield the largest revenue and partly on the taxation policy. The tariff on the articles which are widely used would throw the burden of taxation largely on the poorer classes. For this reason, a rate lower than the one which would yield the highest revenue might be put in force. 288 Introduction to Economic Problems 5. Protective Tariffs. — Here the aim is not revenue, but the hindering of imports. We have seen that the import duty ordinarily raises the price of the article on which it is levied. This increase in price of the foreign article enables the home producer to compete on more advantageous terms with the foreign producer. If the duty is put extremely high, it may be that the foreign article will be entirely kept out. The protective tariff aims to cause some readjust- ment in the distribution of the labor and capital among the industries of the country. 6. Free Trade vs. Protection. — The argument for free trade is based on the idea that international division of labor is desirable because it promotes the maximum pro- duction of goods. There is also the further idea that business men if left to themselves will pick out the most profitable employment for their labor and capital. The free-traders object to any interference with individual en- terprise. It is the doctrine of laissez-faire applied to for- eign trade. In political discussions, the free-traders com- plain that the tariff raises prices and thus increases the cost of living, favors one industry at the expense of others, and promotes trusts. We will take up the protectionist argument more in de- tail in connection with the history of the tariff in the United States; but in general the protectionists admit that prices of protected articles are raised, but insist that compensat- ing advantages are gained in the increase in productive capacity, in the development of a new industry, or in the safeguarding of an industry which is wanted in time of war. 7. The Course of a Tariff Bill in the United States. — According to the United States Constitution, the tariff bill Tariffs and Foreign Trade Policies 289 must originate in the House of Representatives. The party in power has a majority of the members on the various committees. The majority members of the Committee on Ways and Means usually frame the tariff bill. Usually, hearings are held by the committee. Most of the testimony is offered by the representatives of industries which want protection. There is very little representation of the in- terests of the consumers. The importers usually try to get lower rates. The bill is introduced by the chairman of the Committee of Ways and Means, and of course re- ferred to his committee. It is reported back from the committee with a majority report recommending its adop- tion and a minority report pointing out the bad features of the bill as seen by the political party out of power. Members of both parties make long speeches for and against the bill, frequently with the idea that the speeches will be useful in the next campaign. The bill may be taken up schedule by schedule. Amendments may be offered, but usually they stand little chance of being adopted unless approved by the committee. The rules of the House of Representatives permit limitation of debate, and so fre- quently the bill is brought to a vote with reasonable quick- ness. After the bill has passed the House of Representatives, it goes to the Senate. Here it is referred to the Finance Committee. The committee may hold hearings. It works over the bill, frequently making many changes. It reports out the bill with a majority report in favor and a minority report against its passage. In the Senate, because of the lack of effective means for checking debate, the progress of the bill is slower. Amendments from the floor have more chance of adoption. Finally, it passes the Senate. 290 Introduction to Economic Problems Then it is sent back to the House. The House usually re- fuses to concur with the Senate amendments, so the bill is sent to a conference committee made up of members of both the House and the Senate. This committee arranges some compromise and reports it back to the House and the Senate. Ordinarily the bill as changed by the con- ference committee is passed by both houses. It then goes to the President for his signature. 8. The Political Evils of the Tariff.— The tariff has pro- moted sectionalism. The various sections have voted, not on the basis of what would be best for the country as a whole, but on the basis of the effect the bill would have on their particular sections. There has probably been little direct corruption. But the protected industries through campaign contributions have had great influence on legislation. In general, it is well to avoid as much as possible legislation which is of direct pecuniary advantage to individuals. The Senate has been a fertile field for "log-rolling." Here the smaller states have the same representation as the larger. A group may be formed, large enough to con- trol the vote, each member of the group agreeing to sup- port the other in the demand for certain duties for his constituents as the price of his support of the bill. 9. History of the Tariff in the United States, Illustrating the Arguments Used. — In our treatment of the arguments for and against protection, it will be helpful to follow briefly the development of manufactures in the United States and to attempt to indicate the conditions which gave rise to the arguments. In the colonial policy of England, the mother country was to manufacture and the colonies were to provide the Tariffs and Foreign Trade Policies 291 raw materials. The Revolutionary War forced the colonies to manufacture, but at the conclusion of peace the goods from England once more gained the market. The failure to gain satisfactory trading agreements with England brought a very definite trend toward manufacturing. Ex- periments were made with the new power machinery in the textile industry. This was the situation when the first tariff act was passed. In 1789, shortly after the new government under the Constitution replaced the government under the Articles of Confederation, the tariff was enacted. The new gov- ernment needed funds. The people of the country did not relish any sort of direct taxation, so the tariff appealed to them because it was indirect taxation. The rates in the bill ranged from 5 per cent to 15 per cent. Although the bill was primarily for revenue, there was some clearly ex- pressed protective sentiment. The best formulation may be found in the Report on Manufactures presented to Con- gress by Alexander Hamilton in 179 1. He presents among others the Infant Industry Argument for Protection in the General Form. He discusses the problem of an agricul- tural country which wishes to develop manufactures at a time when other countries have already developed them on a large scale. It will be remembered that the indus- trial revolution occurred in England following 1750 and that there the factory system was first firmly established. The United States had been an agricultural country which had produced some raw materials for manufactures; but now the problem was, how could it, in competition with the well-established industries of Great Britain, start on a career of manufacturing ? Hamilton recognized that those who wished to start manufactures in the United States 292 Introduction to Economic Problems would be under certain severe disabilities. They would be under the necessity of training a labor force. They were unfamiliar with the machinery used in the industry. Eng- land was attempting to keep as a monopoly the new proc- esses. To compensate for all of these disabilities, the home manufactures might be given a bounty, or a tariff be levied which would enable him to charge a higher price for his product than that for which the article could be imported. Hamilton thought that a protective tariff was the most satisfactory method to promote the development of manu- factures. We call this the general form of the Infant Industry argu- ment because all of the industries need the protection. The tariff is to assist the country in making the transition from a purely agricultural economic organization to one in which manufactures would play a part, though not neces- sarily the most important part. The advantage gained is an increase in productive capacity. The resources of the country and the capabilities of the population are better utilized. Assuming that the country is fitted for manu- factures, it is wise to pay more for manufactured goods for a time in order that the country may develop its productive capacity. Not much came of the movement to develop manufac- tures at this time because of the shift in the international situation. The French Revolution and the wars which followed it gave the United States a chance to engage in the very profitable business of raising food to sell to the belligerents and to develop the carrying trade. The su- perior attractions of agriculture and shipping caused manu- factures to be neglected. From 1790 to 1808, there were ten bills passed, raising particular rates and adding new Tariffs and Foreign Trade Policies 293 articles. The changes are explained usually by the need of the government for additional revenue. The interference with our trade by France, in the Berlin and Milan decrees, and the British Orders in Council ham- pered the war business. Then the United States Embargo Act of 1807 and the Non-Intercourse Act of 1809 turned the attention of our people again to manufacturing. After the War of 181 2 was declared, all tariff duties were doubled. The revenue received was only about one-half of what it had been. The war stimulated home industries, and when it was over the owners of the industries de- manded protection against the flood of European goods. In the discussion, what may be called the War Argument for Protection was prominent. This argument may be briefly put as follows: No country should be dependent on other countries for the means of defense or for those commodities which satisfy the primary wants of individuals. The argu- ment was applied to the development of the iron and tex- tile industries. In some other countries it has been used with reference to food. In 18 16 a protective act was passed. The next phase of the discussion brings forward the Home Market Argument. Henry Clay as part of his "American System" included protection for manufactures. He argued that the War of 181 2 had shown the unreliability of the foreign market for our agricultural produce. What we needed to do was to develop manufactures as a market for our produce. He hoped to attract foreigners to work in the factories and so increase the population of the United States. He maintained that a home market was steadier and more secure. Ultimately, the quantity of manufac- tures produced would be increased and the prices lowered. This argument was addressed primarily to the Middle 294 Introduction to Economic Problems States and the West. The Act of 1824 was a protective one raising rates. The tariff Act of 1828 was called the "Tariff of Abomina- tions." It raised some rates and included provisions dis- tasteful to the protectionist states, yet they voted for it as being on the whole desirable. In 1830, a few of the abomi- nations were corrected. The remainder were corrected in 1832. In the South, about this time, active opposition to protection was aroused. The grounds of complaint are summed up in the Export Tax Argument against Protection. McDuffie, in his speech in 1830, reasoned that imports are paid for by exports, and so any tax levied on imports acts just the same as a tax on exports. The South with its cotton and rice provided about two- thirds of the exports. Therefore, McDuflie argued that the South was paying about two-thirds of the expenses of the government. We would not agree with his analysis that it was the owners of the exporting industries who really paid the tax. The con- sumers of the articles imported were the ones who paid the tax. The bill of 1832 was the one which South Carolina at- tempted to nullify. The result was the compromise tariff of 1833, which reduced all of the rates to 20 per cent by a series of changes covering nine years. Most of the reduc- tion came in 1842. For a short time in 1842 we had the novel tariff with a uniform 20 per cent rate. However, the same year a protective bill was passed. In the discussion preceding the bill of 1846, much was made of the argument of the Unconstitutionality of the Protective Tarif. This is set forth in its most elaborate form by Walker, who was secretary of the treasury at the time. It was a time when strict construction of the Con- Tariffs and Foreign Trade Policies 295 stitution was popular. Walker said that Congress has the right to levy duties to raise revenue. If the rate of duty is higher than the rate which would give the maximum revenue, obviously, the purpose of the duty is not to raise revenue but to accomplish something else, and so the duty would be unconstitutional. With the passing of the strict construction of the Constitution, this argument is seldom heard. Another argument used at this time was the Wages Argu- ment for Protection. Hamilton had said that the high rate of wages in this country was one of the obstacles the manu- facturers had to contend with in starting new industries. After the protected industries had grown, it was evident that, at least in some of them, the ability to pay high wages depended on the existence of the protective tariff. It was a simple, though illogical, step to conclude that protection was responsible for the high general level of wages in the United States. We have seen in Turner's Introduction, page 456, that high wages arise from high productivity. We explain the high wages in the United States as being the result of our vast natural resources, the intelligence and industry of our population, the skill of our entre- preneurs, and the great amount of capital which we use in production. If we take an industry in which we have no natural advantage, but which, on the basis of the war argument, we have decided to protect, then we may say that the wages paid in that particular industry do depend on protection. The Act of 1846 lowered duties, though the duties were still moderately protective. A surplus of revenue led, in 1857, to a reduction of about 20 per cent in all of the rates. Then came the Civil War. The Morrill Act of 1861 was 296 Introduction to Economic Problems not really a war tariff, though it was passed after the war had started. It was a protective act. During the war, the tariff rates were greatly raised. When internal revenue duties were levied, especially in 1862 and 1864, the tariff duties were increased to compensate the manufacturers. Also many new protective rates were added. After the war, the high rates were maintained. When the revenue increased, rates were lowered in 1870 on articles which were taxed for revenue, such as tea, coffee, sugar, and spices. In 1872, tea and coffee were made free and all other rates reduced 10 per cent. In 1875, this reduction was re- pealed. In 1883, the tariff had a revision by its friends. Not many rates were reduced and some were raised. In 1890, the McKinley bill was passed. The agricultural re- gions had become somewhat restive under the tariff, so great show was made of protecting them. At that time we were heavy exporters of agricultural production, so the duties accomplished nothing for the farmers. Our industries were developing to the place where a foreign market was desired for them. To assist them in getting a foreign market, pro- vision was made for what was called ''tropical reciprocity." Sugar and hides were admitted free unless the country of origin did not treat us fairly, in which case duties were levied. One provision of the bill illustrates the Infant In- dustry Argument in the Particular Form. By this time our manufactures were pretty well developed, but we did not have a tin-plate industry. Here was an industry, it was argued, which needed protection to get it started. The duty was unusual in that it required the industry to show a certain growth or the protection would be withdrawn. The Act of 1894 is an interesting bill. In many political Tariffs and Foreign Trade Policies 297 discussions it is blamed with causing the panic of 1893, which happened the year before it was passed. The Demo- cratic party were pledged to lower the tariff, but the Senate made the bill more protective. The campaign of 1896 was fought on the free-silver issue, but when the Republicans came in power they passed the Dingley Act in 1897. The Act was decidedly protective. Some rates were lowered, but others, such as silk, linen, and sugar, were raised. Elaborate provisions were made for reciprocity, but they were not effective because the Senate did not ratify the treaties which were negotiated under the provisions of the Act. The Dingley Act lasted longer than any other tariff act in our history. In 1909, another revision of the tariff was made by its friends, with the result that some rates were raised, some lowered, but the general level of rates remained about the same. The rates in the Act were minimums. If any country discriminated against us unduly, an extra duty of 25 per cent of the value of the article was levied on all goods from that country. In the hearings preceding the passage of this bill, a new attitude on the part of some manu- facturers was evident. They wished to develop their ex- port trade and they found that they were hampered by high cost of materials which they had to obtain from pro- tected industries. In 1913, we have the first thoroughgoing revision of the tariff since the Civil War. The Underwood bill lowered many rates, such as woollens, cottons, iron, and steel; and put hides, leather, shoes, wheat, flour, cattle, meat, wool, coal, and lumber on the free list. In spite of all these re- ductions, there was considerable protection in the bill. The principal argument in the campaign used by the Demo- 298 Introduction to Economic Problems crats against protection was that the Tariff Caused the High Cost of Living. This proved to be a very telling campaign argument. The war gave the Democrats an explanation for the failure of the cost of living to drop. Most econ- omists agree that the tariff had little to do with the cost of living. In so far as they were talking of the general level of prices, most economists would explain the rise pri- marily as a result of monetary changes, such as the in- creased production of gold and the extension of banking. In so far as high cost of living referred to food costs, the explanation runs in terms of the disappearance of our free fertile land and the working out of the Law of Diminishing Returns in the historical sense. In 1920, the Republicans came into power. A special session of Congress was called. An emergency tariff bill was passed to protect the farmers. In the deflation of prices following the post-armistice period, the prices of farm products fell sharply, causing great distress in the agricul- tural regions. Some of the duties levied were: wheat, 35^ a bushel; wheat flour, 20 per cent; corn, 15^ a bushel; po- tatoes, 25^ a bushel; wool, 15^^ to 45^ a pound; and sugar, i.i6ji per pound for sugar of 75 degrees and .o4|!f for each additional degree. Besides the agricultural provisions, a section provided an antidumping duty equal to the difference between the offering price and the foreign-market value. Another sec- tion provided control of the import of dyestuffs, which practically amounts to prohibition. The bill as enacted was to remain in force for six months. The expectation was that before the expiration of six months a permanent tariff bill would be passed. However, no permanent bill was agreed upon at the special session, Tariffs and Foreign Trade Policies 299 and so the life of the emergency bill was extended until a permanent tariff bill should be passed. 10. The Tariff Commission. — Many people have argued that we ought to have a scientific tariff with rates adjusted to changing conditions by a commission of experts. It is idle to expect that Congress would be willing to give up its power of legislating on the tariff, and the change would require an amendment to our Constitution. There is, how- ever, a function which a tariff board or commission can perform. It can gather information and present it to Congress. The Tariff Board during President Taft's ad- ministration made comprehensive reports on the woollen and cotton industries. The present Tariff Commission dates from 19 13. It has made a glossary of all of the terms used in connection with the tariff and made many special reports, such as, on the aniline-dye and other industries started during the war, and on free ports. 11. The Present Discussion. — ^At the present time, we have the Infant Industry argument applied to the aniline- dye industry. The United States is a great manufacturing nation. The argument in its general form would no longer apply, but in the case of this one industry which we desire to develop we apply the argument in the particular form. We say that the American manufacturers of aniline dyes are under certain disadvantages in the period after the war until they have developed the methods of manufac- turing; and, furthermore, that until they will have been able to get together a skilled labor force, they will need protection. To-day the war argument is most used in this country with reference to the aniline-dye and certain other so-called "key" industries. The connection of the aniline-dye in- 300 Introduction to Economic Problems dustry with the war was a double one. In the first place, as a result of the isolation of Germany we were put at considerable inconvenience to find dyes for textile and other industries. We wished to provide against the re- currence of this situation. The second phase is more directly connected with the prosecution of a war. The first steps in making some types of explosives and in making aniline dyes are the same. Thus, we can quickly turn the aniline-dye factories into factories for the manufacture of high explosives should it be necessary. A third appeal for protection is the Bargaining argument. We are urged to enact protective legislation in order that we will have what the small boy would call "trading" stock when we come to bargain for tariff concessions from other countries; that is, people argue that if we do not have a tariff, if we permit other countries to send without hindrance their products to this country, then we have no way of making them give us concessions, but if we put a protec- tive tariff on various products, then we can get concessions by removing this tariff. 12. The Problem of Dumping. — At the present time, dumping is a serious problem. We must distinguish a num- ber of things which may be called dumping. The first is the sporadic selling of surpluses abroad at lower prices than they are sold at home, with the idea of keeping the price in the home market somewhere near normal. The second is a continuous dumping which occurs ordi- narily when the home market is protected and when the industry at home is under the control of a monopoly. In the case of many German industries, there was control by a cartel. This cartel kept the price at home at a cer- tain profitable figure and sold surpluses abroad at low Tariffs and Foreign Trade Policies 301 prices. This differs, of course, from the first case in being a permanent policy. This is of particular advantage when it is used to prevent the development of the industries in other countries. The cartel which controlled the aniline dyes would be able to sell in the United States at a rate which would prevent the development of the dye industry in the United States. 13. The Tariff and the Debts Owed Us by Europe. — During the war, we loaned our allies about $9,600,000,000. In 1921, the interest due brought the sum up to over $10,- 000,000,000. What we really loaned, of course, was food, munitions, and ships. The repayment would need to be in goods. So, it is argued that if we really wish to receive repayment, it will not do to have a tariff which will pre- vent, or greatly hamper, imports from Europe. Some have argued that it would be better to cancel the debts, for the goods sent in repayment of them would drive our producers out of business. In the transition period, there might be some trouble, but the final result would be that we would get some things by importation and our manufactures would be in the lines in which we possessed the greatest advantages. 14. Discriminations and Unfair Competition in Foreign Trade. — This is analogous to the practices noticed within the country in the discussion of trusts and monopolies. One country may be favored over another. In the early days^ much of the tariff policy had a political aspect; thus, England wished to injure France in every way and so dis- criminated against her. Dumping and stealing of trade- marks have been very common. Sometimes sanitary regu- lations have been used to keep out the products of a given country. Germany from 1883 to 1891 kept out our pork 302 Introduction to Economic Problems products on alleged sanitary grounds. Germany gave preference to Swiss cattle and discriminated against other countries by using the description "large dappled moun- tain cattle or brown cattle, reared at a spot at least 300 metres above sea-level, and which have at least one month's grazing each year at a spot at least 800 metres above sea- level." Discriminations of a more open character will now be considered. 15. Reciprocity Treaties.— From the standpoint of the contracting parties, these treaties seem to be the exten- sion of good- will in international relationships. From the standpoint of the outsiders, the treaty looks like discrimi- nation. In return for reductions of duties on certain articles in one country, the second country gets reductions on another group of articles when sent to the first country. We have an agreement with Cuba: we give Cuban sugar reduced rates when it comes into the United States and Cuba gives reduced rates on certain of our products when they are sent to Cuba. To the producer in Java this ar- rangement seems to be a discrimination. Many countries have treaties with other nations pro- viding for "most-favored-nation" treatment. In Europe, these treaties are interpreted to mean that any reduction granted to a country is automatically extended to all coun- tries with which "most-favored- nation" treaties have been negotiated. The United States has interpreted the treaties to mean that a similar reduction would be made for the other countries if they gave something in return. 16. Colonial Preference. — The development of colonial possessions by the various powers has given rise to a prob- lem with reference to the trade of the colonies. Of course. Tariffs and Foreign Trade Policies 303 in the early colonial days, the seventeenth and eighteenth centuries, the colonies frankly were treated as possessions of the mother country to be used or exploited in any way which was profitable to the mother country. We have advanced from this idea to the point where we insist that the interests of the colonies must be considered in the de- velopment of colonial policies. The question now is, shall the interests of other countries be considered in the de- velopment of the colonies? Has the mother country the right to the exclusive trade of the colonies, or if not the exclusive trade, has the mother country the right to de- mand that its trade be granted preferences over the trade of other countries? Great Britain has a great colonial empire. Many of the colonies give to goods from the mother country a lower rate than is charged when the goods come from other countries. A proposal for tariff reform in England suggested that protective tariffs be levied and the colonies be given preferential rates on food products. To some people, colonial preference seems to be a discrimination against outsiders. Thus, they would say that the Philippines should charge no higher rate on goods from Europe than on those from the United States. 17. The "Open Door."— The phrase ''open door" im- plies equality of treatment to all nations, not only in tariff rates, but also in investment opportunities. It is applied to colonies. But, at present, the most important applica- tions are to China and to the regions held under mandates from the League of Nations. It does not mean that no duties will be charged, but that any duties levied shall apply to all equally. Many fear that, despite the provi- sions in the peace treaty about the "open door" in the mandated regions, ways will be found to hamper the trade 304 Introduction to Economic Problems of other countries and to reserve the natural resources for exploitation by the country which holds the mandate. i8. Exercises. — i. Why are most tariffs levied on im- ports ? 2. How are the tariffs in the United States arranged? 3. Explain the different kinds of duties. 4. Indicate under what conditions the foreigner can be forced to pay the tariff and under what conditions the consumer pays it. 5. State the general ground of disagreement between free-traders and protectionists. 6. Show concretely how a tariff may change the direc- tion of the application of the labor and capital of a country. 7. Argue that a tariff can or cannot increase the labor and capital in a country. 8. If left to individual enterprise, will the labor and cap- ital of a country always go into the industries which will most benefit the public? 9. What is meant by an increase in the wealth of a nation? How does foreign trade help? 10. If it pays a lawyer who is a good stenographer to spend all of his time at law and hire a stenographer, what, by analogy, would it pay a country to do which may pro- duce various things? 11. Show how conditions in the United States led to the use of the various arguments for and against protection. 12. Trace in broad outline the course of tariff rates in the United States. 13. Show the fallacy of the wages argument for pro- tection. 14. Follow the course of a tariff bill through the United States Congress. 15. Illustrate what is meant by log-rolling. 16. What are the political evils of the tariff? 17. Under our present political system, what are the imitations on the activities of a tariff commission? 18. What would be a scientific tariff? Tariffs and Foreign Trade Policies 305 19. Outline as far as possible the present attitude toward the tariff of the following: the farmers, the consumers, manufacturers who wish to export, other manufacturers, bankers, the South, New England, the Middle Atlantic States, the Middle West, and the Far West. 20. What is the effect of a tariff on wheat or raw cotton ? 21. What is the objection to the practice of dumping on the part of consumers in the country which does the dump- ing? 22. Illustrate unfair competition in foreign trade. 23. What is a reciprocity treaty? 24. Distinguish the European and American interpreta- tion of most-favored-nation treaties. 25. Give examples of colonial preferences; to what ex- tent are they justifiable? 26. What is meant by the "open door"? 27. How, in practice, may the "open door" be nullified? 28. What problems arise in connection with the control of raw materials? CHAPTER XVIII PUBLIC FINANCE I. The Scope of Public Finance. 2. The Sources of Public Revenue — Taxes — Fees — Public Prices. 3. Government Borrowing — War Debts. 4. Justice in Taxation — Benefit Theory — Ability Theory — Cynical Theory. 5. Rates of Taxation. 6. Incidence of Taxation. 7. Government Expenditures. 8. The Budget — Advantages — New York City — New York State — Federal Government. 9. Exercises. 1. The Scope of Public Finance. — The use of the term political economy by the early writers indicates the large place which public affairs held in their thought. It will be remembered that the mercantilists devoted themselves to questions of public policy, such as duties and regulations of foreign trade; and that in Germany a class of writers, called cameralists, studied the problem of public adminis- tration, especially the methods of raising revenue. Two aspects of the question demand our attention: First, where do the governing bodies get the money they spend? Second, for what purposes do they spend it? 2. The Sources of Public Revenue. — At the present time, the receipts of governing bodies come mostly from taxes, loans, fees, and returns from government-operated utilities. Taxes are forced contributions to the expenses of the state. We shall see later that they are levied in numerous ways, but always there is the idea that the tax is a general contribution, not a payment for any specific service. Fees, on the other hand, are levied in connection with certain particular activities; such as recording deeds and 306 Public Finance 307 other papers, and getting licenses. Here there is a cer- tain element of compulsion. Usually, mortgages must be recorded. The primary purpose is perhaps the public benefit; yet the person who pays the recording fee gets some direct benefit, and payment is made only when one needs the service. Public prices are defined as amounts paid by consumers for service rendered. For example, many municipalities own the water-supply system. The payment for the water is a part of the revenues of the city. It is obvious that there is no element of compulsion. One does not need to buy unless he wishes. Roughly, the price is set as other prices are, modified by the consideration that there is or- dinarily a monopoly and that frequently for public policy the price is kept down. 3. Government Borrowing. — Government loans are short time or long time. The short-time loans are to cover deficits, and sometimes are issued in anticipation of tax collections. Nations frequently borrow from the central banks of the countries. Thus, the Bank of England loans the government on exchequer bills. In this country the Federal Reserve Banks loan the government on treasury certificates of indebtedness. The longer government loans arise from wars and from expenditures for improvements or the acquisition of in- dustries. The form of these loans is ordinarily the unse- cured bond. The buyers have confidence in the promise to pay of the issuing government. Bonds issued by back- ward countries are sometimes secured by a lien on the cus- toms or some other source of revenue. The Anglo-French 5's, issued shortly before we entered the war, were unusual in being secured by collateral. The large part played by 308 Introduction to Economic Problems war in the creation of indebtedness is all too plain to those who live to-day. The world is staggering under a burden of debt. DEBTS BEFORE AND AFTER THE WARi (In million dollars) Before War After War 1, 208 26,597 3,458 37,657 336 1,584 93 1,619 446 734 6.598 30,494 3.031 15,009 1,261 1,284 5,092 54,402 722 1,889 188 521 1,165 40,007 2,631 17,071 1,602 8,909 667 2,002 171 1,158 United States. Great Britain. Canada Australia New Zealand . France Italy Japan Russia Belgium Greece Germany. . . . Austria Hungary Turkey Bulgaria Total. 28,669 HO,937 ' L. R. Gottlieb, Debts, etc., of Principal Belligerents, Quarterly Jaurnal of Economics, vol. 34, November, 1919, pp. 164-165. In the United States, the Panama Canal was built largely by funds obtained from the sale of bonds. Abroad, when countries have acquired railroads or telephone lines, the payment has ordinarily been made by issuing bonds. In this country where states made improvements which are supposed to be long lived, the cost is paid by the sale of bonds. Thus, New York State sold bonds to modernize the Erie Canal. Many states are going in debt to build good roads. In the local governments we find bonds issued to build public buildings, to pave streets, to put in sewer Public Finance 309 systems, to buy parks, and for other purposes. Sound finance in such cases demands that the bonds be paid off during the life of the improvement. Many cities are still paying interest, and have yet to pay the principal of bonds issued to finance improvements long since worn out. Where cities are fairly large, it is much better to follow, as did New York City for a while, the "pay as you go policy." 4. Justice in Taxation. — The problem of justice in taxa- tion relates to the question of the apportionment of the tax burden. How much ought each to contribute ? There are two recognized theories and one which is implicit in much of the practice. Benefit. — One group urges that benefit should measure the contribution. The government provides certain ser- vices which should be paid for by the users. This theory is workable for certain services, say fire protection. The cost might be assessed on property-holders according to the value of their property with perhaps some scale of rating which took into account the variation in fire hazard. But how can we rate some of the services the goivernment per- forms ? What value is the system of justice to an individual who never in his whole life goes to court ? Is the talk about the inestimable advantages of our free institutions mere Fourth-of-July oratory? Again, many of the services of the government are for the benefit of those who cannot pay. The insane, the paupers, the sick who are cared for in public institutions, cannot pay for the benefits received. So the benefit theory does not seem to be workable. We would all agree that no money should be raised by taxation the spending of which does not benefit the public; but the amount of individual benefit cannot be used as the basis for levying the taxes. 310 Introduction to Economic Problems Ability. — The second group urges that taxes should be levied according to ability to pay. Most people accept this theory; of course, all the time magnifying the ability to pay of all but themselves. Take the problem of a class in college raising funds, the problem of class taxation. For ordinary small things, the assessments are equal. The amount is so small that ability may be assumed equal. But suppose it is the question of raising funds for class gift to the school or a big donation toward endowment. Then the common feeling is that the more wealthy should con- tribute more than the poorer members of the class. Cynical. — The third theory finds few to defend it, but many to follow it in practice. It might be stated as fol- lows: the raising of taxes is a matter of practical politics. No one likes to be taxed. Our business is to provide the revenues to spend in the way which will cause the least outcry from politically powerful groups, without becoming sentimental about questions of justice. Thus, if indirect taxes raise revenue without the people realizing it, they are good taxes, even though they may be paid mostly by those least able to pay. Another point with reference to justice in taxation has to do with the problem of getting changes in the distri- bution of wealth through taxation. Taxation could be so used, if the people as a whole desired it, but on the whole the problem of inequahty had better be attacked more directly. Heavy taxation under the ability theory will doubtless make the distribution of wealth more uniform. 5. Rates of Taxation. — Taxation may be levied on vari- ous bases. We may tax on wealth, income, consumption. In any case, we have the problem. Shall the rates be pro- portional, progressive, or regressive ? Suppose we are tax- Public Finance 311 ing on income. Shall we say that all shall pay the same proportion of their income ? This we call proportional taxa- tion. Or shall we say that as a man's income increases he shall pay a larger proportion in taxes ? This is progressive taxation and the method actually used in the federal in- come tax. Or shall we say that the smaller the income the larger proportion shall be taken? This is regressive taxation. It probably would be defended by no one but is the result which follows the levying of a tax equal in amount on all taxpayers. Taxes on necessities of life also work out in practice as regressive taxes. Of course, we must consider the taxation system as a whole. It is the com- bined effect of all of the taxes which determines the justice, not the effect of one tax. 6. The Incidence of Taxation. — Not all taxes are really paid by the persons on whom they are levied. We say they shift. The incidence of the tax is upon the persons who finally pay the tax. The problem of shifting is always a value problem to be solved in terms of demand and sup- ply. There is nothing automatic about the process. The shifting must come about through changes in prices. The problem is one of the most complex in economic analysis, and we can take only a few elementary cases, {a) A tax on land will not shift. The renter will not pay more for land merely because the owner is more heavily taxed. What he pays is the market price of the productive services of the land, and the tax has no effect on the demand for or sup- ply of land. (&) A tax on buildings will shift to the renter. The shifting may not take place at once. There may be a lease running for some time. The shifting takes place more or less rapidly, depending on whether the city is growing rapidly or not. The reason for the shifting lies S12 Introduction to Economic Problems in the necessity of getting investors to put up new build- ings to replace those wearing out, or to provide for the growth in population. This they will not do unless they get a certain net return. Thus, we see that by the limitation of supply the shifting takes place, (c) Taxes on articles produced under competitive conditions in the long run will be shifted to the consumer. The reasoning is similar to the case of buildings. The variation in time required to make the shift is a question as to the amount of capital in the business which cannot be utilized for some other pur- pose. But ultimately the plant will not be renewed, and so the supply will not be forthcoming unless the price covers the tax as well as the other costs, (d) A tax on the net profits of a monopoly will not shift. We have seen that the alert monopolist sets the price at the point which will yield him the greatest net profits. The levying of the tax reduces his profit, but raising the price would cause a loss. (e) A tax on a commodity produced by a monopoly may be shifted. We cannot be sure that it will be shifted until we know the conditions under which the article is produced and the shape of the demand curve for the article. But since the tax is levied on each unit produced, it may well be that the greatest net profit will be gained by selling an amount smaller than before, at a higher price. 7. Government Expenditures. — The second problem of public finance is the problem of expenditures. In later chapters we shall see the various purposes for which the public money is spent. Here our interest is in the general principles which should underlie expenditures. Ordinarily, all the government spends it must get from the citizens. The problem then is just how much shall be done at pubhc expense for the good of all. The answer will depend on Public Finance 313 the nature of the various services and the efficiency of the government. Historically, the trend has been toward gov- ernment taking over more and more functions. Adam Smith^ said duties of the government were: (i) to protect from violence and invasion without; (2) to protect individ- uals from injustice and oppression; (3) to erect and main- tain certain public works and institutions which individual enterprise will not undertake because it would not be profitable. Now we take a broader view. In the early days many roads and bridges were privately owned and a toll was charged for the use of them. There has been a steady increase in the amount of education furnished by the public; at first only primary schools, then high schools, and finally colleges and universities. The modern city does many things for the citizens which the village would not think necessary; such as garbage removal, the provision for recreation, public concerts, libraries, art museums, and hospitals. In many of these things we may say that doing them publicly gains the advantages of large-scale produc- tion. But we have, on the other hand, to contend with the inefficiency which comes from regarding offices as the spoils of politics instead of a public trust. Another problem has to do with the extent to which it is fair to tax one group to raise funds to expend for the benefit of another group. Thus, should New York City be taxed for expenditures which benefit primarily the remainder of the state ? 8. The Budget.— In homely language, when a govern- ment has a budget system it attempts to act in managing its receipts and expenditures as a prudent man does. In the United States one of the fundamental principles of our governmental organization has been the "separation of 1 Wealth of Nations, book IV, chap. IX. 314 Introduction to Economic Problems powers." We have had executive, legislative, and judicial departments all independent. Even in the legislative de- partment, often different committees have looked after revenues and expenditures with very little consultation. Thus, we have ordinarily had little attempt to adjust ex- penditures to revenues. In general, we have been grow- ing rapidly in wealth and usually have had a surplus of revenue. Of course, this condition has led to extravagance; to pork-barrel legislation based on the plan of doing some- thing in the way of public buildings, or river and harbor improvements for each congressman and senator. Every one who desired something done, tried to get the federal government to do it. Thus, recently we have had federal aid for road-building and for vocational education. As the result of the great war, our federal expenditures have increased tremendously, and we must consider more carefully than ever before what we can afford to spend and how we shall raise the revenue. In the countries which have cabinet government, there is closer co-operation between the executive and legislative branches. The cabinet holds office so long as it commands the support of the legislative body, and it is chosen in the first place from the legislative body. The cabinet must present the budget which shows the proposed expenditures and the methods for meeting them. The opposition party then has its chance to criticise both the record of the gov- ernment and the new proposals. Advantages Claimed for the Budget} — (a) It is an instru- ment of democracy. It enables the people to understand what has been going on, and to control the government. 1 W. F. Willoughby, The Movement for Budgetary Reform in the States, pp. 1-4. Public Finance 315 (6) It correlates legislative and executive action. The budget gives larger responsibility to the executive in making and carrying out plans, but also gives the legislature better methods of holding the executive responsible for the results. (c) It secures administrative efficiency and economy. In a way, it is the application of modern business methods of accounting in governmental affairs. Each department is checked up. Its chance to get appropriations depends upon its record in the past. In the United States, considerable progress has been made in budget procedure in cities and states. Thus, in New York City the procedure is as follows: New York City} — The Department of Finance sends forms to all the bodies which get support from the city. On these forms are to be recorded actual expenditures in the past and estimates for the next year. These are sent out in the summer and returned in September to the De- partment of Finance. Examiners from this department work over the material presented and recommend appro- priations to the Board of Estimate and Apportionment (composed of the mayor, the comptroller, the president of the Board of Aldermen, and the five borough presidents). Hearings are held, at which department heads may defend their estimates and the examiners defend their suggestions. What is decided on is called the "tentative budget." Next public hearings are held, and any taxpayer may suggest changes. As a result of the hearings, the budget may be revised. It must be passed before November ist. Next, it goes to the Board of Aldermen, which can reduce but not increase items. They have twenty days to deal with ^ Munro, Principles and Methods of Municipal Administration, pp. 447-449. 316 Introduction to Economic Problems it. When passed by them, the budget goes to the mayor, who may veto their amendments. Unless the aldermen by a three-fourths vote override the mayor, his veto means that the original item replaces the amended item. Finally, after adoption, the budget is certified by the mayor, comp- troller, and the city clerk and the amounts indicated are appropriated. This budget illustrates the type which attempts to con- trol administration by requiring minute specification of the purposes for which amounts are asked. The Budget in New York State. — New York has not adopted the budget in the full sense. Its budget may be called a legislative budget. The governor within a week of the start of the session sends to the legislature a state- ment of appropriations desired by each state body or in- stitution which gets money from the state. The governor may suggest additions or reductions. He may also give estimates of probable revenues for the year. The Finance Committee of the Senate and the Ways and Means Com- mittee of the Assembly prepare and submit a budget con- taining complete and detailed statement of all appropria- tions. They also make an itemized and detailed estimate of probable revenues and the amount of direct tax neces- sary. The law provides for the presentation of the budget in the form of an appropriation bill and specifies the proce- dure to be followed in its passage. The meetings at which the appropriation bills are considered are open to the public. On the third reading, reductions may be made, but no in- creases are permitted except by unanimous consent. The Federal Budget.— Ahav many years of eflfort, the Con- gress has finally passed a plan for a budget. The law was effective July i, 1921. It is an executive budget prepared Public Finance 317 for the President by a bureau in the Treasury Depart- ment. The new procedure for the federal government is laid down in the Budget and Accounting Act, 1921, which was signed by the President on June 10, 1921. The President is made responsible for reporting the budget to Congress. He sends Congress at the beginning of the regular session a budget which shows : {a) The condition of the Treasury at the end of the last fiscal year, and the estimated condition for the year in progress and for the following year if the proposals of the budget are carried out. {h) The revenues and expenditures of the federal govern- ment for the last fiscal year and the estimated revenues and expenditures for the current year. {c) The President's suggestions for revenues and ex- penditures for the ensuing year. {d) Any information which will help Congress in decid- ing on the administrative and financial policies of the government. In effect, this budget will combine a report of how the government has been conducted and proposals for con- ducting the government in the future. The start in making the budget will be the requests of the various departments for appropriations. The Presi- dent, however, must use his judgment in submitting these requests in the budget, since he assumes responsibility for asking for the money when it is included in the budget. It will be the President's duty to suggest that funds be given to the various departments in such a way as to in- sure economy and efficiency. Of course, the President cannot do this in person, so the Bureau of the Budget is 318 Introduction to Economic Problems provided to assist him in formulating the budget. This bureau is presided over by a director, who is in a sense the President's personal representative. The director is not limited to passing on the requests of the various depart- ments and bureaus. He may make suggestions about changes in organization or activities to promote efficiency. This Bureau of the Budget is nominally a bureau of the Treasury Department, but the secretary of the treasury has no control over it. The director is responsible directly to the President. The budget when it comes to the House will, by amendment of the rules of the House, be handled as a single programme. This is a great advance over the previous system in which many committees worked inde- pendent of each other and made a general financial pro- gramme almost impossible. Just as the individual must decide between certain competing avenues of expenditure, so Congress refuses many things, not because they are not good in themselves, but because the limited amount of money available for appropriations makes it necessary to choose those things which are more important. The part of the Act referring to accounting makes pro- vision for an independent examination and audit of all government expenditures. The Act provides for a comp- troller-general of the United States to head an independent accounting office which will take over the duties performed by the comptroller of the treasury and the six auditors of the Treasury Department. The comptroller-general is given permanent tenure of office. He may be removed only on impeachment or by joint resolution of Congress when it decides that he "has become permanently inca- pacitated or has been guilty of neglect of duty, or of mal- feasance in office, or of any felony or conduct involving Public Finance 319 moral turpitude." The one idea back of the change is to replace the audit which previously was interested merely in whether the technical requirements of law had been ful- filled with one which aims to promote the efficiency of the administration of the government's financial affairs. If the comptroller-general performs his functions properly, it will not be necessary for Congress to hold periodic examina- tions as it does now into the activities of the various de- partments which receive funds from Congress. Too often, of course, these investigations have been for partisan pur- poses. This legislation makes possible, if Congress and the ad- ministration are willing to co-operate, a more efficient and businesslike conduct of our federal government. The following tables were sent to Congress on Decem- ber 5, 1921: 9. Exercises. — i. Distinguish public and private finance. 2. What sets the absolute limit on the amount that can be spent by an individual ? by a corporation ? by a govern- ment? 3. What interest has the business man in public finance? 4. What are the sources of government revenue? 5. Distinguish taxes, fees, and public prices. How is the amount of each determined? 6. Explain the methods used by the United States Gov- ernment to get short- time loans (less than one year). 7. Contrast the principles which underlie prudent bor- rowing by an individual; by a corporation; by a govern- ment. 8. Contrast the security back of corporation bonds and United States Government bonds. 9. Why do not governments sell stock? What is meant by the stock of New York City? 320 Introduction to Economic Problems BUDGET SUMMARY [Exclusive of postal revenues and postal expenditures paid from postal revenues) Total receipts Total expenditures, including reduction in principal of public debt , Excess of expenditures , Excess of receipts . . . . $3,338,182,750 3.505,754,727 $167,571,977 1921, Actual $3-943.453.663 $5,624,932,960.91 3,967,922,3661 5,538,040,689.30 $24,468,703 ESTIMATED EXPENDITURES FOR 1922 AND 1923 Legislative Executive office State Department Treasury Department War Department Panama Canal Navy Department Interior Department Indian Service Pensions Post Office Department Deficiencies in postal revenues Department of Aijriculture Expenditures for j^ood roads Department of Commerce Department of Labor' Department of Justice and Judicial Shippiui^ Board and Fleet Corporation United States Veterans' Bureau Kailroatl Administration and Transportation Act . . Federal Board for Vocational Education Other independent offices, including^ War Finance ai Grain Corporations District of Columbia Increase of compensation Purchase of oblij,'ations of foreign Governments . . Purchase of farm loan bonds Deduct unclassified repayments, &c Ordinary expenditures Reduction in principal of the public debt: Sinking fund Purchase of Liberty bonds from foreign repayments Redemption of bonds and notes from estate taxes Redemption of securities from Federal Reserve Bank franchise tax receipts Total net reduction in principal of public debt . Investments of trust funds: Government life insurance fund Civil service retirement fund and District of Colu bia teachers* retirement fund Trust fund investments Interest on the public debt Total expenditures Estimated Budget Expenditures, 1923 $16,265,215 227,045 10,432.624 168.997,160 369.902.107 7.358.839 431.754.000 41.799. 31,883,000 252,350,000 3,357,092 21,509,666 47.497.530 I 125,700,000 19.939.970 6,301,835 18,415,681 50.495.735 455.232.702 5.529,244 17,034,583 25,070,877 $2,127,053,927 $283,838,800 30,500, 25,000,000 30,000,000 $369,338,800 $26,162,000 Estimated Expenditures, 1922 $15,984,446 227.045 11.406,032 169,871,163 389,091,406 7,219,849 478,850.000 35,005,829 33,135,000 258,400,000 3,276,454 48,172,270 48,637.100 1 105,000,000 20,131,800 4,796,916 16,825,568 73,911,081 438,122,400 337,679.235 4.756.344 16,983,165 22,275,063 35,000,000 $2,574,758,166 $272,442,200 30.500,000 25,000,000 60,000,000 $387,942,200 $22,022,000 8,200.000 $34,362,000 $975,000,000 $3,505,754,727 $30,222,000 $975,000.0 $3,967,922,366 Actual Expenditures, 1921 $18,994,565.17 197,341.68 8,780,796.84 476,352,192.21 1,101,615,013.32 16.461,409.47 650,373.835-58 39,687,094.86 41,470,807.60 260,611,416.13 5.230.650.15 130.128,458.02 62.385,702.93 57.452,056.48 30,828,761.55 8,502,509.55 17,206,418.03 130,733,268.26 730,711,669.98 104,671,772.62 83.596.418.52 22,558,264.16 73,896,697.44 16,781,320.79 922,593.14 $4,088,295,848.20 $261,100,250.00 73.939.300.00 26,348,950.00 $422,113,000.00 $20,325,152.88 8,161.956.87 $28,487,109.75 $999.144. 73'-35 ^$5,538,040.689. 30 Excess of estimated expenditures over ordinary receipts, fiscal year 1923. ...-,... $167,571,977.00 Excess of estimated expenditures over ordinar)' receipts, fiscal year 1922 24,468,703.00 Excess of ordinary receipts over expenditures payable therefrom, fiscal year 1921. . . . 86,892,271.61 ■The above table includes estimates of additional expenditures during 1923 and 1922 for good roads, authorized by the Act of November 9, 1921. Public Finance 321 10. Should bonds be sold by a city to pay current expenses? to buy parks? to pave streets? to erect a city hall ? 11. How do weak governments add security to their bonds ? 12. Is the matter of permanence of the investment the decisive factor in the question of whether bonds should be issued or whether the payment should be made from cur- rent revenue ? 13. Should state and municipal bonds be exempt from taxation in the jurisdiction that issues them? 14. Contrast the serial method of paying bonds with the sinking-fund method. 15. What is the purpose of state laws limiting the bor- rowing power of cities ? 16. State the cases where the benefit theory appeals to you as being fair. 17. What difficulties arise in applying the ability theory of taxation? 18. What is the theory of justice in taxation followed by most legislators ? 19. Argue for and against using taxation as a method of changing the present distribution of wealth. 20. Distinguish regressive, proportional, and progressive rates. To illustrate, give rates on incomes of $1,000, $8,000, and $10,000. 21. Which rates would the benefit theory lead to? the ability theory? 22. If we take equal ability to mean equal sacrifice, what would the Law of Diminishing Desirability indicate about the rate which should be used? 23. Is the shifting of taxes undesirable? 24. What is the fundamental difference between land and buildings which causes the difference in the incidence of taxes laid on them ? 25. Is the tax on movies shifted? 322 Introduction to Economic Problems 26. Should a government adjust its expenditures to its revenues or adjust its revenues to its expenditures ? 27. Why have government expenditures increased in the last century ? 28. How much should a government provide in the way of education? recreation? music? 29. What is the fundamental idea of the budget? 30. What features of our form of government make the working of a budget difficult? 31. What advantages are claimed for the budget? 32. Outline the procedure in New York State. 33. Describe the federal budget. 34. Why did Liberty bonds depreciate ? 35. Assuming competitive conditions, trace by means of diagrams the effect caused by the levy of a tax on a commodity produced under conditions of (a) constant cost; {h) increasing cost; and (c) decreasing cost. 36. What is the effect on the distribution of wealth of public borrowing? CHAPTER XIX RECEIPTS AND EXPENDITURES OF THE FEDERAL GOVERNMENT I. The Principal Sources of Revenue. 2. Financial Transactions of 1920, 3, War-Profits and Excess-Profits Tax. 4. The Federal In- come Tax. 5. The Estate Tax. 6. Internal Revenue Duties. 7. Details of Expenditures. 8. The Problem of the Debt. 9. Revision of Taxation. 10. Exercises. I. The Principal Sources of Revenue. — The tariff has been the steadiest contributor to the revenues of the fed- eral government. Before the passage of the Homestead Act in 1862, the sales of public lands, at times, brought in considerable revenue. This was particularly true in the years before the panic of 1837. The largest amount from public lands since the passage of the Homestead Act was $11,202,017.23, which was received in 1888. Internal revenue duties were resorted to during the Civil War, and large sums were raised. As soon as possible after the war, most of them were repealed. The ones on liquor and to- bacco and a few others were retained. In 1909 there was levied a tax on the net earnings of corporations, and the proceeds were included as internal revenue. The maximum amount from internal revenue after the Civil War taxes were repealed and before the levying of the tax on the incomes of corporations was $307,180,663.77 in the year 1901. Of course, the coming of the Great War brought another resort to internal revenues. The maximum amount which has been received from customs tariff was $333,- 683,445.03 in the year 1910. 323 324 Introduction to Economic Problems 2. The Financial Transactions of 1920. — The following figures give a summary view of the financial transactions of the United States Government for the fiscal year end- ing June 30, 1920: FINANCIAL TRANSACTIONS OF THE UNITED STATES FOR THE FISCAL YEAR 1920' Net balance in general fund June 30, 1919 $1,251,664,827.54 Receipts exclusive of the principal of the public debt. . 6,694,565,388.88 Public-debt receipts 15,852,855,030.64 $23,799,085,247.06 Disbursements exclusive of principal of public debt. . $6,403,343,841.21 Public-debt disbursements 17,038,039,723.62 $23,441,383,564.83 Net balance in general fund June 30, 1920 $357,701,682.23 The large amount of the transactions in the public debt which appear as both receipts and disbursements is due to the use of short-time certificates of indebtedness. Some of the certificates, which mature at the time when big pay- ments are received from the income and excess-profits taxes, are paid off; but in general the maturing series is paid off by selling a new series. The receipts of the United States Government for the fiscal year ending June 30, 1920, will now be presented in greater detail, and some of the sources of revenue will be discussed. At once we are struck by the large proportion of the receipts which come from incomes and excess profits. 3. War-Profits and Excess-Profits Tax. — This tax had a double purpose. In the first place it was thought that any ' Report of Secretary of Treasury, 1920, p. 411. Receipts of the Government 325 RECEIPTS OF UNITED STATES GOVERNMENT FOR FISCAL YEAR 1920 ^ Income and profits $3,956,036,003.60 Estates of decedents 103,635,563.24 Distilled spirits and alcoholic beverages 139,871,149.80 Under provisions of prohibition Act 641,029.34 Tobacco and manufactures 295,809,355.44 Oleomargarine, renovated butter, mixed flour 3,811,872.65 Bonds and stocks, future sales of produce 84,347,827.49 Transportation 289,348,087.35 Insurance 18,421,754.01 Excise taxes on manufactures, producers and importers 216,146,750.07 Excise taxes on consumers and dealers 109,199,188.42 Corporations on capital stock . 93,020,420.50 Brokers, amusements 9,913,280.85 Admission to places of amusements, club dues 81,918,556.74 Narcotics i,5i3.9i9-50 Sales of condemned government property 3,045,492.81 Total internal revenue $5,407,580,251.81 Customs 322,902,650.39 Miscellaneous revenue 960,966,422.38 Panama Canal tolls 5,664,741.45 Total ordinary revenue $6,694,565,388.88 industries which profited as the result of war activities should be forced to contribute part of the profit to the ex- pense of carrying on the war; and in the second place, it was thought that those industries which were extremely profitable should contribute a large part of that profit to the government. The rates for the income of the year 1918 were imposed as follows: First Bracket: 30 per centum of the amount of the net income in excess of the excess- profits credit and not in excess of 20 per centum of the invested capital. Second Bracket: 65 per centum of the amount of net income in excess of 20 per centum of the invested capital. Third Bracket: the sum, if any, by ^Report of Secretary of Treasury, 1920, pp. 410, 601. 326 Introduction to Economic Problems which 80 per centum of the amount of the net income in excess of the war-profits credit exceeds the amount of the tax computed under the first and second brackets. Per- haps an illustration may make the case clearer: EXAMPLE OF WAR-PROFIT AND EXCESS-PROFIT TAX ON INCOME OF A CORPORATION FOR 1918 Average pre-war invested capital $2,000,000 Average pre-war net income 500,000 Invested capital for 1918 2,500,000 Gross income, including taxable interest on Lib- erty bonds 5,500,000 Deductions 4,800,000 Net income 700,000 WAR-PROFITS AND EXCESS-PROFITS TAX First Bracket: Income not over 20% of invested capital $500,000 Deduct excess-profits credit : Specific exemption $3,ooo 8% of invested capital 200,000 ^„, ^^^ ^ 203,000 Remainder $297,000 Tax at 30% $89,100 Second Bracket: Income over 20% of invested capital 200,000 Tax at 65% 130,000 Total tax under first two brackets $219,100 Third Bracket: Income $700,000 Deduct war-profits credit: Specific exemption $3,000 Average pre-war income 500,000 10% of increase in invested c^P't^l 50.Q»» 553,000 Remainder $147,000 80% of $147,000 117,600 Tax under first two brackets 219,100 Tax under third bracket 000 $219,100 Receipts of the Government 327 The excess-profits tax has been probably the most se- verely criticised tax of all of the war expedients. It was productive during the war and during the boom in business which followed the closing of the war. It is an unsatis- factory tax in times of depression. There are many chances for injustice and inequality inherent in any tax which at- tempts to base the amount to be paid on calculations in- volving capital invested in the business and on net profits without control of the accounting of the businesses involved. According to the tax law a conservatively capitalized com- pany was penalized and a recklessly capitalized company was rewarded. Again, by paying large salaries some of the tax could be escaped. It was currently reported that many firms entered into extended and expensive advertising cam- paigns, hoping to escape some of the tax and perhaps build up an asset of good-will. The grave danger of a heavy profits tax is that it will discourage business enterprise. All business involves risks of loss. These risks will not be undertaken unless there is a chance for gain. If the excess- profit tax leaves but little above what could be obtained by investing his capital in securities, the business man may conclude that the game is not worth the candle. 4. The Federal Income Tax. — Income is the ideal basis for taxation. However, there are many practical difficul- ties in the way of administering an income tax with rates as high as those in the federal income tax. The federal tax divides the net income up into various parts and taxes them at highly progressive rates. The table on next page gives the rates at their highest. Gross income includes all salaries, wages, returns from businesses, and all gains or profits. Among other things, it does not include proceeds of life-insurance policies paid 328 Introduction to Economic Problems INCOME-TAX RATES FOR YEAR 1918 ON NET INCOME Income between Rate $ - $2,000 0% 2,000- 5,000 6% 5,000- 6,000 7% 6,000- 8,000 14% 8,000- 10,000 15% 10,000- 12,000 16% 12,000- 14,000 17% 14,000- 16,000 18% 16,000- i8,ooo 19% i8,ooa- 20,000 20% 20,000- 22,000 21% 22,000- 24,000 22% 24,000- 26,000 23% 26,000- 28,000 24% 28,000- 30,000 25% 30,000- 32,000 26% 32,000- 34,000 27% 34,000- 36,000 28% 36,000- 38,000 29% 38,000- 40,000 30% 40,000- 42,000 31% 42,000- 44,000 32% 44,000- 46,000 33% 46,000- 48,000 34% 48,000- 50,000 35% 50,000- 52,000 36% 52,000- 54,000 37% 54,000- 56,000 38% Income between Rate $56,000- $58,000 39% 58,000- 60,000 40% 60,000- 62,000 41% 62,000- 64,000 42% 64,000- 66,000 43% 66,000- 68,000 44% 68,000- 70,000 45% 70,000- 72,000 46% 72,000- 74,000 47% 74,000- 76,000 48% 76,000- 78,000 49% 78,000- 80,000 50% 80,000- 82,000 51% 82,000- 84,000 52% 84,000- 86,000 53% 86,000- 88,000 54% 88,000- 90,000 55% 90,000- 92,000 56% 92,000- 94,000 57% 94,000- 96,000 58% 96,000- 98,000 59% 98,000- 100,000 60% 100,000- 150,000 64% 150,000- 200,000 68% 200,000- 300,000 72% 300,000- 500,000 75% 500,000- 1,000,000 76% Over 1,000,000 77% to beneficiaries; gifts and bequests; interest on state, mu- nicipal, and some United States Government bonds; and compensation insurance. To get net income, deductions are made from gross income to cover business expenses, interest, most taxes, losses, worthless debts, depreciation Receipts of the Government 329 on business property, and charitable contributions up to a limited amount. From net income, certain credits are allowed; namely, dividends from corporations which have paid the income tax, interest on certain obligations of the United States, $i,ooo for a single person, $2,000 for the head of a family, and $200 for each dependent under eighteen years of age. These exemptions were increased by the Revenue Act of 192 1, described in section 9 of this chapter. One injustice is in the favor of the farmers. The farmer gets a large part of his living from the farm and does not pay any income tax on it. The system of self-assessment gives a chance for dis- honest people to pay less than their fair share of the tax. As time goes on, there will probably develop an adequate use of information at the source for large items, but there will always be a chance to conceal numerous small items. The chief difficulty arises from the existence of tax-free securities, by the purchase of which the investor may escape the tax. One class of these securities is issued by the federal government itself. Bonds of the first Liberty loan are free of all tax. Bonds of the Federal Farm Loan Banks are also free of tax. The second great class of exempt se- curities consists of state and municipal bonds. The courts have consistently held that the federal government cannot tax such bonds. The tremendously high supertaxes make even a low return on a tax-exemptbondprofitable to the man whose income is large. Men who have large investments in business may not be able at once to convert them into tax- free investments, but the pressure is very great to do so. 5. The Estate Tax. — This tax is usually called the inheri- tance tax. In one respect it is a good tax, as the recipients of the bequests probably think more of what they are get- 330 Introduction to Economic Problems ting than what they are giving up. At first thought it would seem to be an easy tax to escape by gifts before death. However, the law taxes gifts within two years of death as bequests. And most men do not believe that they are going to die soon and do not like to give up the control of their fortunes. The present federal tax is on the net estate. Estate Tax of 1919 Net estate of a resident is obtained by subtracting from the gross estate: (i) Expenses of funeral and administration claims and losses; support of dependents while estate is being settled. (2) Property on which federal estate tax has been paid within five years. (3) Bequest for public, charitable, and educational pur- poses. (4) An exemption of $50,000. RATES OF TAX ON NET ESTATE $I,500,00O-$2,O00,0O0 12% 2,000,000- 3,000,000 14% 3,000,000- 4,000,000 16% 4,000,000- 5,000,000 18% 5,000,000- 8,000,000 20% 8,000,000-10,000,000 22% Over 10,000,000 25% Thus if the net estate were $1,000,000 the tax would be $51,500, made up as follows: I % on $50,000 $500 2% on 100,000 2,000 3% on 100,000 3,000 4% on 200,000 8,000 6% on 300,000 18,000 8% on 250,000 20,000 $51,500 Up to $50,000 . . . . ... 1% $50,000- 150,000. . . . , . . . 2% 150,000- 250,000. . . . ... 3% 250,000- 450,000 . . . , .... 4% 450,000- 750,000. . . . ... 6% 750,000-1 ,000,000. . . . ... 8% 1,000,000-1 ,500,000 . . . . ...10% Receipts of the Government 331 6. Internal Revenue Duties. — Taxes on Commodities and Transactions. — Most internal revenue taxes on commod- ities and documents are collected by means of stamps. For ease of supervision, the stamping is usually required to be done at the point in manufacture or trade where the goods are most concentrated. Before the war this system worked well with liquor and tobacco. Any one could tell whether the tax had been paid. As to documents, the pro- vision that they shall not be legal unless stamped has usually been effective in insuring the use of the stamps. The so-called luxury taxes and the tax on refreshments are less good from the administrative standpoint. The big stores undoubtedly keep accurate records and pay the tax. It is doubtful whether all of the small stores return all that they collect. There is no adequate check on the receipts or even on the number of stores that are supposed to make returns. The same is true of the tax on the admission to amuse- ments. In ordinary theatres and in league baseball, the financial arrangements require accurate accounts and probably the government gets what is collected. But it would be easy in the case of the small moving-picture house or in the case of the occasional entertainment to neglect to return all or part of the tax collected. 7. Details of Expenditures. — ^We turn now to the details of the expenditures of the federal government. Of course, we recognize the unusual character of the year in question. Before the war the expenditures of the federal government amounted to about $1,000,000,000 a year; now the inter- est on the public debt is over $1,000,000,000 a year. The big items are for war and navy. Perhaps these will be reduced by disarmament agreements. The item federal 332 Introduction to Economic Problems control of transportation will not be so large again, but will be present until all of the claims of the railroads, particu- larly for deferred maintenance, have been settled. DISBURSEMENTS OF THE FEDERAL GOVERNMENT FOR THE YEAR ENDING JUNE 30, 1920i Legislative establishment $19,327,708.72 Executive proper 6,675,517.58 State Department 13,586,024.42 Treasury Department 322,315,627.43 War Department 1,610,587,380.86 Department of Justice 17,814,398.18 Post-Office Department 50,049,295.07 Navy Department 736,021,456.43 Interior Department 279,244,660.87 Department of Agriculture 65,546,293.14 Department of Commerce 30,010,737.75 Department of Labor 5,415,358.40 United States Shipping Board 530,565,649.61 Federal Control of Transportation 1,036,672,157.53 War Finance Corporation 134,628,433.27 Grain Corporation 350,328,494.70 Other independent offices and commissions 59,469,305.17 District of Columbia 19,987,898.41 Interest on public debt 1,020,251,622.28 Total 16,308,498,019.80 Deduct unclassified repayments 4,399,847.00 $6,304,098,172.82 Panama Canal 11,365,714.01 Purchase of obligations of foreign governments 421,337,028.09 Purchase of Federal farm loan bonds 29,643,546.17 $6,766,444,461.09 Special deposit of War Finance Corporation 363,100,619.88 Net ordinary $6,403,343,841.21 * Report of Secretary of Treasury, 1920, pp. 410-41 1. Receipts of the Government 333 8. The Problem of the Debt. — ^The problem confronting the secretary of the treasury is how to meet the floating indebtedness and the Victory notes, which it will be re- membered were made to run for only five years. The obligations were put in short-time form with the hope that the funds would be available to pay them off as they came due. The depression of 1920 will hamper the raising of sufficient revenue to retire them. The repaying of the Liberty bonds illustrates the evils of a fluctuating standard of value. The money was spent when prices were high. It will be repaid when prices are lower. The bondholder will gain and the government lose, in the sense that it will be harder to raise the taxes to pay the debt. In one sense, an internal debt is no bur- den to the country as a whole, since it merely means a redistribution of funds. What one group loses another group gains. The system of taxation followed will de- termine what classes within the country bear the burden. It is not inconceivable that future elections will be fought on the question of the taxation policy. The country which borrowed abroad must in the future pay back the loan. This means that the people of that country will have less to consume and the country which holds the bonds will have more to consume. After the Civil War there was agitation against the bondholders. The wide distribution of the Liberty loans would be a bar to the recurrence of such agitation. Un- fortunately, the Liberty bonds did not stay so widely dis- tributed. We may have trouble with those who paid par for their bonds and later sold them at a sacrifice. 9. Revision of Taxation. — During war times the public will submit to heavy taxation. After the war, there al- 334 Introduction to Economic Problems ways arises a demand for release from the burdens of the war taxation. The conflict in Congress was over the class which should bear most of the taxation. The agricultural bloc prevented much reduction in the surtaxes in the in- come-tax rates. They thought that they were preventing the shifting of the burden to the masses. In the income tax, no changes were made in the sur- taxes for the tax payable in 1922 on the income for 1921. The surtaxes for the income for 1922 and after were cut somewhat. The exemption for married persons was in- creased from $2,000 to $2,500 for those with incomes below $5,000, and the exemption for dependents was increased from $200 to $400 each. These changes apply to the in- come tax for 192 1, payable in 1922. The following table, which is for a married man claiming personal exemption but not exemption for dependents, shows the normal rates, surtax, and amount of tax on in- comes up to $1,000,000 for 192 1 and 1922 under the new law. The excess-profits tax was repealed to take effect Janu- ary I, 1922, so the tax will be collected on the profits for the year 192 1. In a sense it was replaced by increasing the rate which corporations are required to pay on their net income from 10 per cent to i2jE^ per cent, to take effect on the income of 1922. The tax of 8 per cent on passenger transportation and of 3 per cent on freight transportation was eliminated after January i, 1922. Numerous small taxes, called nuisance taxes, were taken off. ID. Exercises. — i. Why has the United States derived so little revenue from its public lands ? 2. Why were not internal revenue taxes used earlier in this country? Receipts of the Government 335 ' Net Income Per Cent of Nor- Per Cent of Surtax, Per Cent of Surtax, 1922 and Thereafter Total Tax, Total Tax, 1922, and mal Tax 1921 1921 Thereafter •3,000 4 $20 $20 4,000 4 60 60 S.ooo 4 100 100 6,000 4 I 170 160 8,000 8 2 I 370 340 10,000 8 3 I S90 S20 12,000 8 4 2 830 720 14,000 8 S 3 1,090 940 16,000 8 6 4 1,370 1,180 1 8,000 8 7 S 1,670 1,440 30,000 8 8 6 1,990 1,720 22,000 8 9 8 2,330 2,040 24,000 8 10 9 2,6go 2,380 26,000 8 II 10 3,070 2,740 28,000 8 12 II 3,470 3,120 30,000 8 13 12 3,890 3.520 32.000 8 14 13 4,330 3.940 34,000 8 IS IS 4,790 4.400 36,000 8 16 IS 5,270 4,860 38,000 8 17 16 5,770 S.34O 40,000 8 18 17 6,290 5. 840 42,000 8 19 18 6,830 6,360 44,000 8 20 19 7,390 6,900 46,000 8 21 20 7,970 7.460 48,000 8 22 21 8,S7o 8,040 50,000 8 23 23 9,190 8,640 52,000 8 24 23 9,830 9,260 S4,ooo 8 2S 24 10,490 9,900 56,000 8 26 2S 11,170 10,560 58,000 8 27 26 11,870 11,240 60,000 8 28 27 I2,S90 11,940 63,000 8 29 28 13,330 12,660 64,000 8 30 29 14,090 13.400 66,000 8 31 30 14,870 14,160 68,000 8 32 31 15,670 14,940 70,000 8 33 32 16,490 IS. 740 72,000 8 34 33 17.330 16,560 74,000 8 3S 34 18,190 17,400 76,000 8 36 35 19,070 18,260 78,000 8 37 36 19,970 19,140 80,000 8 38 37 20,890 20,040 82,000 8 39 38 21,830 20,960 84,000 8 40 39 22,790 21,900 86,000 8 41 40 23,770 22,860 88,000 8 42 41 24,770 23,840 90,000 8 43 42 25,790 24,840 92,000 8 44 43 26,830 25,860 94,000 8 45 44 27,890 26,900 q6,ooo 8 46 45 28,970 27,960 98,000 8 47 46 30,070 29,040 100,000 8 48 47 31,190 30,140 130,000 8 52 48 61,190 58.140 300,000 8 S6 49 93,190 86,640 300,000 8 60 SO 161,190 144,640 500,000 8 63 SO 303,190 260,640 1,000,000 8 64 SO 663,190 550,640 ' In computing the tax, personal exemption of $2,500 is allowed on incomes not in excess of $5,000, and $2,000 is allowed on incomes of $6,000 or over ,_ both under the new law. No allowance is made for credit for dividends or interest on United States obligations, if any, included in net income. Neither is there any allowance of any exemption for dependents. For incomes over $1,000,000 the rate of the normal tax is 8 per cent, the surtax for 1931 is 65 per cent, and the surtax for 1922 and thereafter is 50 per cent. 336 Introduction to Economic Problems 3. Why do not people donate money to the government? 4. From the report of the secretary of the treasury, or from the statistical abstract of the United States, draw diagrams showing the yearly receipts from customs and from internal revenue. 5. What was the idea back of the excess-profits tax? 6. What was the chief difficulty in assessing the excess- profits tax ? 7. What was the incidence of the excess-profits tax? 8. What is the purpose of the exemptions in the income tax? 9. Figure the income tax paid on a net income for the year 1918 of $205,000, $340,000, $1,625,000, and $1,000,- 000,000. 10. How do people escape paying the federal income tax ? 11. If the tax rate is progressive, which is fairer, to tax the estate as a whole or the separate bequests? Which is more productive ? 12. Under the federal estate tax, upon whom would the burden really fall ? 13. What were the principal internal revenue duties be- fore the war ? 14. What are the difficulties in collecting the luxury and amusement taxes? 15. Why do government expenditures never get back to pre-war figures? 16. Should the war debt be paid quickly? at all? 17. Should any payment on the principal of the debt be made in time of depression? 18. Which of the war taxes should be repealed first? 19. Are stock dividends income? CHAPTER XX RECEIPTS AND EXPENDITURES OF CITIES AND STATES I. The Expenditures of Various Government Bodies. 2. The Fi- nances of New York City. 3. The Receipts of New York City. 4. The Expenditures of New York City. 5. The Receipts and Expendi- tures of Philadelphia. 6. The Receipts and Expenditures of State Governments. 7. The General Property Tax. 8. Corporation Taxes. 9. The Single Tax on Land — Modifications. 10. State Income Taxes — The New York Tax. 11. State Inheritance Taxes — The New York Tax. 12. Exercises. I. The Expenditures of Various Government Bodies. — In this chapter we shall study in some detail the finances of New York City as the largest city in the United States, and in less detail Philadelphia, as more typical of other cities in the country. We shall treat the states all to- gether, indicating the percentages of revenue received from various sources and the percentages which went for the various expenditures. First, we may compare the pre-war expenditures of the various governmental bodies. NET GOVERNMENTAL COST PAYMENTS, 1913 1 Amount Per Capita National government $1,048,225,180 505,399,448 1,043,594,297 $10.36 505 32.34 State governments Governments of cities with over 30,000 population > Financial Statistics of States, 1917, p. 32. The striking thing is the large expenditure of the cities and the relatively small expenditures of the states. 2. Finances of New York City.— We may start with the controller's statement of receipts and expenditures. 337 Q i4 Pi O O 05 1—1 > ^- H CO U Oi CQ U (Jh u O w Q C/3 H Q Z W U3 Q S Z > U < a. oi < Q u •^ >^ < u C/3 u b o « a u g^ "o "o S o u S 0) o tn (A C C O O ? o O t,^ ^ *n re rO O 00 o\ ■^ VO* Tp 00 On vO in 00 Tf tri •* M q •-; t^ M oo" u vO lO o^ lO vO_ tr> ■<*• r^ 00 ■<^ ■5^ o_ 00__ tn vrT (T) m. Cn ►1 o o U U X X rt nj oi »; o 4) "b ^ ■-• >, u D c c 3 C/3 Pi OS c c o 00 3 4J ^ *!3 ^ o « "K a SsO a. "^ o < H O Si u 6 .S j3 05 4> r* a 3 C O 3 .2 *j 8S8 v6 00 o f*5 o VO O l-H »H ID VO vO rj- o" 5 o - - a ^ u ■ o 2 ■*-■ r- o o o" d o o o ^ - CQ CQ CA) +J S 01 o) J- (O O 4) < Cl, CLi U s ii X W O O en en 13 -a 0) 4) V (U O U O O Ui u PL, a. C \0 w 03 Pi g Dh !z; PL, s u <^ 2 Si. w On M "^ .S ^ ^1 = S 01 3 +j c o o o o 0\ Ot « S n! rt O O hT U (75 (U 0) m pQ U U PQ U O ^8 O vO t-i w O >0 ►H_ C^ lO ^ P-1 00 'f ci t^ t^ CO T+ ID w 1-1 O O •* 01 v£) ^ O q vd 00 (jv t^ d d o\ m looo o o vO_ \0 uo CO o_ vo_ 00* CO vd" 00~ Q >- iO\0 ID >o o o i-«^ lo vo q_ CO •-To; w ID cOVO r^ CO •-_ qj «D CO «D Ov N 1-1 in CO C C o o a a a a << p P CO 0^ CO (?v CO O ■* O 0_\0_vO •* d" •* CO d" CO Tf I^ 1-1 00 M_ O •^vd" d" CO >-i § & CO O O § C "fS ':3 **• t, eg __ 0) in u D U -!-> acA) 0) H V- c •-i ^ J2 1- 0) PiU 0000 O. Q. Q. O. O. E E E E E 1^ 4>

Ui a> 0) (U QQ ■^ in J2 E >»^ «j -u c Uai "(3 pa c c JC to rt c c U J2 J2 ^^ cQ "rt "rt 4-1 P9 m c° 340 Receipts of Cities and States 341 The special accounts include numerous items, such as im- provement funds and revenues from city colleges. The largest single item is money received from the state for education. The second largest is receipts from sale of water. Corporate stock includes stock for water, rapid transit, docks, and assessments for street and park openings. Trust accounts cover pension funds, gifts, fines, and pen- alties held in trust, and uncalled-for wages. The next table gives more in detail the receipts, exclud- ing borrowing and special accounts. RECEIPTS OF NEW YORK CITY FOR YEAR ENDING DECEMBER 31, 1920 Taxes on land and buildings $194,956,77344 Special franchise taxes 6,284,748.37 Taxes on real estate of corporations 5,057,149.10 Personal property tax 31623,980.45 Arrears of old taxes 5,936.81 Total taxes $209,927,588.17 Total fees $1,561,257.74 Total interest 83,831.01 Total licenses 362,053.50 Total permits 287,538.25 Total privileges 295,090.18 Total rentals 38,545.88 Special bank tax 5,724,160.30 Mortgage tax 7,608,209.17 Share of state income tax 12,469,255.74 The licenses cover auctions, peddlers, amusements; and include marriage licenses. The permits issued were for golf, sewers, and drains. The privileges sold were conces- sions on bridges and in parks. The special bank tax is a tax on the shares of all banks. The special franchise taxes 849 Introduction to Eeonomio Problems arise from the New York law which permits the taxation of franchises as real estate. The great disproportion be- tween the tax on land and buildings and personal property reflects somewhat the ease with which personal property can be concealed. We may next consider the appropriations in more detail. The total is less than is given in the controller's summary, because it does not include about nine millions appropriated for the county governments within New York City and about the same amount of tax paid to the state. APPROPRIATIONS FOR YEAR 1920 FOR NEW YORK CITY Board of Aldermen and City Clerk $302,840 Board of Estimate and Apportionment 368,999 Commission of Sinking Fund 3i890 The Mayoralty 71.247 Department of Finance 1,547,248 City Chamberlain 69,995 Law Department 1,030,493 Department of Taxes and Assessment 640,281 Board of Elections 2,129,915 Municipal Civil Service 211,772 Commissioner of Accounts 252,520 Bureau of Weights and Measures 67,169 Department of Licenses 195.703 Department of Public Markets 209,785 Board of Assessors 38,333 Art Commission 7.526 Examining Board of Plumbers 7.210 Presidents of the Boroughs 14,843,881 Department of Education 49,408,681 City Colleges 1,460,986 Teachers' Retirement 2,621,433 Public Libraries 1,849,439 Parks and Museums 4,727,622 Receipts of Ciites and States S4S Police Department $24.591. 187 Fire Department 13.186,753 Armory Board 392.026 Board of Standards and Appeals 38,810 U. S. Volunteer Life Saving Corps 6,887 Department of Health 4.729.832 Department of Public Charities 7,497,561 Board of Child^Welfare 2,084,492 Hospitals 2,835,624 Department of Water Supply, Gas, and Electricity 7.513.^50 Department of Street Cleaning 13,163,524 Charitable Institutions 8,149,388 Department of Correction 2,331,214 Department of Plants and Structures 3,432,416 Department of Docks and Ferries 1,123,274 City Courts 3,110,497 Board of City Record 1,093,730 Debt Service 74,8ii,539 Miscellaneous 4,282,568 Total $256,441,440 The figures for the debt are of interest. Net Funded Debt held by public $1,034,544,694 Temporary debt 103,125,083 $1,137,669,777 This debt is approximately as large as the debt of the federal government before the war. The figures for Philadelphia, Pennsylvania, probably rep- resent more nearly the situation of other cities than does New York City. 5. Receipts and Expenditures of Philadelphia.^^ RECEIPTS OF PHILADELPHIA, PENNSYLVANIA, 1917 General property tax $27,856,283 Poll tax 75.038 ^U. S. Census, Financial Statistics of Cities, pp. 140-141. 344 Introduction to Economic Problems Business tax $2,152,182 Non-business license 125,872 Special assessments 697,821 Fines, forfeits, and escheats 74i7i7 Subventions and grants 1,211,393 Donations and gifts 8,466 Pension assessments 243,670 General departmental earnings 1,711,374 Highway privileges 630,744 Rents 4,774,996 Interest 1,872,691 Earnings of public-service enterprises 5.233,339 $46,668,586 Two of these items may need a little explanation. Sub- ventions consist mostly of state aid for education. General department earnings are for licenses and permits. The expenditures are given in the following table: OUTLAYS OF PHILADELPHIA, PENNSYLVANIA, 1917 1 Legislative — Council and Board of Aldermen $106,334 Mayor's Office 44.159 Financial Department 1,223,494 City Solicitor's Office 249,388 Other executive departments 337,575 Judicial branch 1,541,527 Elections 933,242 Care and rent of buildings 502,706 Police Department 4,566,325 Fire Department i ,447,069 Militia 48,500 Register of Deeds and Mortgages 281,825 Inspection service 242,728 Other protection to persons and property 246,241 Conservation of health 689,569 Sanitation 2,460,808 'U.S. Census, Financial Statistics of Cities, 1917, pp. 141,200- 207, 233-238. Receipts of Cities and States 345 Highways $3,739,332 Charities, Hospitals, and Corrections 3.737.554 Education 8,461,718 Recreation 1,451,500 Miscellaneous 532,455 General expenses 812,565 Public-service enterprises 2,401,076 Interest on indebtedness 5,206,451 Outlays 18,031,387 $59,345,528 The meaning of most of these items is clear. The Finan- cial Department includes the treasurer, the auditor, and the force which has to do with the assessment and collec- tion of revenue. Other executive departments include the City Clerk, the City Engineer, the Board of Public Works, the Civil Service Department, the Department of Public Safety, and the Department of Public Buildings and Grounds. The judicial branch includes the courts, the coroner, the marshal, and the sheriff. Inspection service covers buildings, weights and measures, and boilers. Other protection to person and property means the fire-alarm system and pounds for dogs. Under sanitation comes sewers and the collection and disposal of refuse. High- ways include roadways and bridges, sprinkling streets and lighting them. Under the head of charities we find out- door poor relief, poor-houses, the care of children, general hospitals, the care of the insane, and the probation officers. General expenses cover pensions for the policemen, the firemen, the teachers, and the employees of the Health Department; also judgments and losses. The public-ser- vice enterprises are water-works, markets, and docks. The outlays cover any permanent additions to the property of the city. 346 Introduction to Economic Problems 6. Receipts and Expenditures of the State Govern- ments. — In our study of the state receipts and expendi- tures, we will take the percentage distribution rather than the actual figures, since the percentage figures are easier to grasp. The figures are for all of the states of the United States. PERCENTAGE DISTRIBUTION BY PRINCIPAL CLASSES OF REVENUE RECEIPTS OF ALL STATES FOR 1917 ' Per Cent Property taxes 53 . i Special property taxes 2.6 Poll taxes 0.4 Business and non-business licenses 22 . 3 Special assessments and special charges for outlays 0.6 Fines, forfeits, and escheats 0.4 Subventions, grants, donations, and pension assessments 2.1 Earnings of general departments 12.0 Highway privileges, rents, and interest 6.0 Earnings of public-service enterprises 0.5 We may indicate what is included in the various classes before considering the merits of the separate taxes. Prop- erty tax means the general property tax. The special property taxes include taxes on inheritances, corporations, savings-banks, mortgages, secured debts, telegraph and telephone companies, etc. Business taxes include licenses on the liquor trafiic, taxes on insurance companies, taxes on corporations, taxes on incomes of individuals. The most important non-business licenses are on motor vehicles and permits for hunting and fishing. Special assessments are usually in connection with parks or highways. Fines come as the result of activities of courts; forfeits come in connec- ^Financial Statistics of States, 1917, p. 71. Receipts of Cities and States 347 tion with bonds given to guarantee the performance of contracts. Escheats are funds received from the sale of property whose owners cannot be located. Subventions are principally the payments received from the federal gov- ernment for education, highways, and experiment stations. Donations are usually for schools or hospitals. Earnings of general departments are mostly fees for services ren- dered, such as issuing and filing of legal papers, boiler in- spection, moving-picture censorship, and regulation of various trades. Highway privileges are enjoyed and paid for by some public-utility companies. The public services include docks, wharfs, ferries, canals, and irrigation. HOW THE STATES SPENT THEIR MONEY IN PERCENTAGES OF THE TOTAL EXPENDITURES OF 1917» Per Cent General officers, executive, legislative and judicial , 10.7 Protection to person and property 6.1 Development and conservation of natural resources 4.5 Conservation of health and sanitation 2.6 Highways 7.9 Charities, hospitals, and corrections 24.3 Schools 37.5 Libraries 0.3 Recreation 0.3 General 4.9 7. The General Property Tax. — ^This tax may be called the backbone of the revenue systems of the states and cities. It is also the chief problem of public finance. All taxes are supposed to be paid from income. The amount of property held is taken as an indication of income. It is a good indication of income in a primitive state of society 1 Financial Statistics of States, 1917, p. 96. 348 Introduction to Economic Problems with no credit instruments and no salaried people. In such a society the property is tangible, and the assessors do not have much difficulty in finding the property. In our modern situation, with its mortgages, corporate stocks and bonds, and government bonds, it is practically impos- sible to find the property if the owner wishes to conceal it. So, in many cases, the tax degenerates into a tax on tangi- ble personal property and the intangible personal property of the very conscientious. Because most people do not report all of their personal property, the tax rate must be very high. Thus, we have the essentially immoral situa- tion of a tax system that penalizes honesty and rewards dishonesty. Besides this fault in administration, there is the fundamental objection that in our present organization with its many people working for salaries, the amount of property held is no test of income. Especially is this true in New York City, where a small proportion of people own their own homes, and many a family on a salary spends it all and has little property except furniture and clothes. It is better to separate the real estate from the personal property and tax each at a different rate. Iowa found that more revenue was received from personal property when a tax oi }4 oi i per cent was levied on it directly than when the attempt was made to collect a tax of around 2 per cent on it under the general property tax. 8. Corporation Taxes. — Many corporation taxes are the result of anti-corporation sentiment. People fail to dis- tinguish between charters which permit persons to become a corporation and those grants which give special and ex- clusive privileges. When the corporation is singled out for tjixes not applied to all individuals, the tax is usually in the form of a license Receipts of Cities and States 349 or payment for the permission to do business within the state. In this form it is possible to reach corporations chartered in other states. Many puzzling problems, arise in connection with the taxation of corporations, such as railroads which have property and do business in several states. How shall the earnings be apportioned among the states for taxation? Indeed, there is frequently also a problem of apportioning the total taxes collected among the counties and cities within the state. Sometimes the corporations are taxed on their capital stock. This disregards the question of the profitableness of the business and the question of over and under capital- ization. If earnings are taxed, fairness demands that the tax be on net earnings, but expedience and ease of admin- istration often results in taxing gross earnings. This is an unfair burden on the businesses with small profit and rapid turnover. 9. The Single Tax on Land.^ — Henry George was a printer in California at the time of great speculation in land. He was greatly impressed by the growth in the value of land. He held that this growth was due to social causes, and yet under our present system individuals got the benefit of the increase in value. This increase is what is meant by the unearned increment. As the result of his observations and study he published a book called Prog- ress and Poverty. The book is written in a charming style and is actuated by a real desire to help humanity. We may find a great deal of fault with Henry George's analysis, but none at all with his spirit. The problem as he sees it is why poverty persists in spite of progress. He believed that all of the ills of society are due to our system of landholding. So the solution is simple. If we take by 350 Introduction to Economic Problems taxation all of the economic rent of all land, society will lose all of its ills. No other taxes were to be levied. This universal-panacea idea has been a great help in propaganda, but rather a hindrance to those people who doubt whether only one thing is wrong with society. Our first objection to the single tax is that it involves confiscation. If you take away the economic rent of a piece of land as a tax, you have really taken the owner- ship. Confiscation of any sort is bad, because it takes away the feeling of security, which is one of the essential conditions for economic enterprise. Second, Henry George had a simple belief that in some miraculous way the amount of economic rent would always be sufficient to carry on the government. Most econo- mists would agree that ordinarily as population increases the amount of rent also increases, but they would be slow to believe that the increase would be just what was needed for the government. Rents fell in England in the nine- teenth century as the result of the opening up of our Mid- dle West, Canada, and Argentina. At the same time pop- ulation was increasing in England. The British Govern- ment would have been in great difficulties if it had been depending on the single tax. Third, our idea of justice in taxation requires that each should contribute according to his ability. Yet the single tax would reach only the landowners. Fourth, all lands do not increase in value. The subways in New York City increased the value of down-town prop- erty and the property in the sections made available for residence, but they decreased the value of certain sections in between. The development of the Middle West caused m ny New England and New York farms to be abandoned. Receipts of Cities and States 351 If the state takes the unearned increment, should it not compensate for the unearned decrement? Modifications of the Single Tax. — ^At the present time, many so-called single taxers are simply people who believe that an increasing burden should be put on land in taxa- tion. Some experiments have been tried in taxing the in- crement in the value of land. A considerable number of German cities starting about 1905 tried such a tax. The Imperial German Government adopted a tax of this kind in 191 1. It is retroactive, since the increment is figured from the last sale, or from January i, 1885, whichever is the later. A yearly percentage is added, which is sup- posed to compensate for the rise in the general level of prices. No provision is made to protect the government in the case of falling prices. The tax takes from 10 per cent to 30 per cent of the increment, depending on the per- centage of increase in value. The rates are subject to a deduction of i per cent for each year of ownership. The famous Lloyd George Budget, which resulted in modifying the powers of the House of Lords in England, included an increment land tax. It avoids the charge of confiscation by taxing only the increment after April 30, 1909, the time the tax was proposed. It is levied on the increase in value of the site. Agricultural land is not included. The tax is 20 per cent of the increment above 10 per cent. To administer the law required that all lands subject to the tax be valued as of April 30, 1909. This work was so expensive and the returns from the tax so small that the collection of the tax was suspended dur- ing the war. It is probable that in the United States, with our general property tax, we have succeeded in getting more of the 352 Introduction to Economic Problems unearned increment of land than either Germany or Great Britain. lo. State Income Taxes. — For many years it was thought that states could not utilize the general income tax suc- cessfully. Many experiments with the tax had been tried and failed. 'J'he administnilion was usually local, and when the taxpayers did not report their incomes, the local assessors did not enforce the penalties. Again, the failure to assess intangible personal property under the general property tax was supi)osed to show the impracticability of the income tax. Recently, some states have introduced the income tax with considerable success. Much of this success is due to the development of state tax administration to control and unify the local administration. Wisconsin in 191 1 intro- duced the first of the newer state income taxes. The state attempts to tax the incomes of individuals and corpora- tions which are earned or are derived from sources within the state. I'rojx'rty whose income has paid income tax is exempted from the property tax. For single persons the exemption is $800; for married $1,200, with $200 for each dependent child. The first $1,000 of taxable income of individuals is taxed i per cent. The rate rises to 6 per cent on the amount over $1 2,000. C'()rj)()rations pay 2 per cent on the first $r,ooo and 6 per cent on the income over $6,000. The New York Income Tax. — ^This tax took efl"ect in 1920 on the income of 1919. It follows the federal income tax, with variations due primarily to differences in law about exemptions. Thus, the New York State law docs not ex- emj)t from taxation dividends on stock as the federal law does. The personal exemptions are $1,000 for single. Receipts of Cities and States 353 $2,000 for married, plus $200 each for dependents. The amount above the exemptions and the deductions is taxed I per cent on the first $10,000, 2 per cent on the next $40,000, and 3 per cent on the amount over $50,000. An interesting feature of the law is the effort to tax the earnings of non-residents. Many people who work in New York City live in New Jersey and Connecticut. The New York law requires non-residents to pay on the income from property in New York, or business conducted in New York, or from services rendered in New York, and gives them the same exemptions as residents of New York. II. State Inheritance Taxes.— The inheritance tax is particularly well adapted to the states because the admin- istration of the estate of the deceased is in the hands of the state courts. No transfer of the property can be made without the consent of the court; so none of the estate can escape taxation. The theory is that the tax is on the transfer and that the state could, if it wished, take all of the property. One great evil has arisen in connection with state in- heritance taxes. The states, in their greed, try to tax any estate on any pretext. Thus, the state in which the de- ceased lived will wish to tax the whole amount of the be- quests. Then the state in which any property is situated will insist on getting a tax on that property. The state in which the evidence of property (such as stocks and bonds) is located, often in a safe-deposit vault, may demand a tax. Thus, because of lack of comity among the states, one estate may be subject to unjust multiple taxation. The New York Inheritance Tax. — 'This is a tax on the various bequests as distinguished from the federal tax, which is on the estate as a whole. Bequests for religious 554 Introduction to Economic Problems and charitable purposes are not taxed. The rates are pro- gressive in two senses; they increase with the size of the inheritance, and with the remoteness of the relationship. Bequests to father, mother, husband, wife, or child are exempt to $5,000; i per cent is charged on the first $25,000 above the exemption; 2 per cent on the next $75,000; 3 per cent on the next $100,000; and 4 per cent on all over that amount. An exempted amount of $500 is allowed in bequests to brothers, sisters, wife, or widow of son, husband of daugh- ter, or one treated as a child. The rates on bequests above the exemption are 2 per cent on the first $25,000, 3 per cent on the next $75,000, 4 per cent on the next $100,000, and 5 per cent on the balance. An exemption of $500 is allowed in bequests to non- relatives. The rates above the exemption are much higher than in the other cases. They start with 5 per cent on the first $25,000; then 6 per cent on the next $75,000; 7 per cent on the next $100,000; and 8 per cent on the balance. The New York law applied to non-residents in so far as they bequeath real property situated within the state and shares in New York corporations. 12. Exercises. — i. Why do states spend so much less than the cities and the federal government? 2. What is the chief source of revenue of New York City? of Philadelphia? 3. What are the five greatest groups of expenditure for New York City? for Philadelphia? 4. What classes of taxes yield the most revenue for the states? 5. What are the chief expenditures of the states? 6. What is the objection to the use of property as a measure of ability to pay taxes ? Receipts of Cities and States S55 7. What happens to personal property under the general property tax? 8. Which is the fairer basis fo taxing corporations, gross or net earnings? Which is the more easily admin- istered ? 9. Which is the fairer basis for taxing corporations, capi- tal, or earnings? 10. Should a corporation be allowed to deduct its bonded indebtedness from its valuation? 11. Discuss the market value of stocks and bonds as a basis for taxing corporations. 12. What is the fairest way to tax corportions with property in more than one state ? 13. What is the objection to any single tax? 14. Does the single tax follow the benefit or the ability theory of justice in taxation? 15. What is the objection to taking the past unearned increment in the value of land ? 16. What provision does the single tax make for the unearned decrement ? 17. Supposing that prices rise as the result of monetary inflation, is there any real unearned increment ? 18. Indicate the chances for double taxation in state in- heritance taxes. 19. From the standpoint of ease in administration, which state should tax inheritances? 20. Why does New York state tax the earnings of resi- dents of New Jersey who work in New York ? INDEX acceptances, 282 Addyston Pipe case, 255 advertising, 24 agricultural productivity of vari- ous countries, 14 agriculture, 11; persons engaged in, II amalgamations, 244 American Federation of Labor, 112 American Tobacco Company, 244- 48; anti-trust case, 256; disso- lution of, 257 anti-trust laws, Kansas, 251; New York, 252; Sherman, 253 appropriations of New York City, 342-43 arbitrage, 276 arbitration, 122-23 assembling, 21 assumption of risk, 154 attitude toward conclusions, 6 auctions, 51, 54 balance of international payments, 273; tables of items for the United States, 273-74 bankers' acceptances, 282 Barker, J. Ellis, 10 benefits of the Federal Reserve System, 92 bill of lading, 190-91 Board of Trade, Chicago, 25 Bogart, E. L., 18 boiler insurance, 143 bonds on the stock exchange, 39 boycott, the, 119 Bradstreet's, 59 Brimson case, 204 Brindell, Robert P., 121 British system of unemployment insurance, 168-69 brokers, 50-51 Brown v. Walker, 204 budget, the, 313-14; advantages, 314-15; the federal, 316-17; estimates for 1922 and 1923, 320; New York City, 315; New York State, 316 business management, 18 business problems, 2 butter market reports, 47-48 California Fruit Growers' Ex- change, 50 canals and canalized rivers, 174 canned fruit market reports, 44-45 capital of Federal Reserve Banks, 81-82 cars, railroad, passenger, 177; freight, 177-78 catalogue houses, 49 Central Pacific Railroad, 183 certificates of indebtedness. United States, 78 chain stores, 41-42 check collection system, 79-81 Chicago Board of Trade, 25 child labor regulation, 131; age, 132; hours, 131-32 classification of freight, 185-86 Clay, Henry, 293 Clayton Act, 231, 258 closed and open shop, 120 cloth market reports, 45-47 357 358 Index coal production, by countries, 9; per person, 10 coal supplies, 9 coastwise shipping, 193 coercing middlemen, 234 colonial preference, 302-03 collection system, check, 79-81 collective bargaining, 113 combinations, common law con- cerning, 240-41; forms of, 241 Commerce Court, 205 commission houses, 49 commodities clause, 210 common law concerning combina- tions, 240-41; defenses, 153-54 Commons and Andrews, 136, 163, 165, 167 company stores, 43 competition, definition, 230; rail- road, 183 compulsory arbitration, 123 conciliation, 122-23 conclusions, attitude toward, 6 contributory negligence, 153 Control of Trusts, Chap. XV co-operative marketing, 49-50 stores, 42 corporation taxes, 348 correctives of the exchanges, 275- 76 Counselman v. Hitchcock, 204 crises, mitigating, 67-70 crisis, 66-67 cycles, course of, 58; Mitchell's theory of, 60-67 Cycles in Trade and Industry, Chap. IV debt, problem of the federal, 333 debts, government, before and after the war, 308 deceiving consumers, 232 democracy in industry, 1 1 1 department stores, 42 depression, 67 development of stresses, 64-65 discount policy of the Federal Re- serve Board, 90-91 discriminations in foreign trade, 301 distribution of wealth, 94 dividends, life insurance, 149 division of labor, international, 263-64 dollar exchange, 280 dumping, 300 Eckel, E. C, 9 economic problems, defined, I; and business problems, 2; and the war, 5; the study of, i economist, the, difficulties of, 4; joys of, 5 Engels, Frederick, 97 engine, the railroad, 176-77 employers' associations, 121-22 employer's liability laws, 154 Erie Canal, 179 Esch-Cummins Law, 221 estate tax, federal, 329; rates, 330 excess-profits tax, 324-27 exchange rates with countries on a paper standard, 277; on a silver standard, 278 exchanges, the, effect of the war on, 280 ex parte Young Case, 214 expenditures, government, 312; of the federal government, 331-32; of Philadelphia, 344; of state governments, 346; of various governmental bodies, 337 export tax argument against pro- tection, 294 facts in economic problems, i farm products, marketing, 24 federal and state regulation of commerce, 212-16 Federal Reserve bank notes, 88 Federal Reserve Banks, capital, 81-82; check collection system, Index 359 79-81; reserve ratios, 89; ser- vices for the government, 84; surplus, 82-83 Federal Reserve Board, discount policy, 90-91 Federal Reserve notes, 86-87 Federal Reserve System, benefits of, 92; operations of. Chap. V; weekly statement, 72-73 Federal Railroad Control Act, 219 Federal Trade Commission, 259; Act, 258; and unfair competi- tion, 231-32 federations, labor unions, 1 12-13 fees, 306 fellow-servant doctrine, 154 financial transactions of 1920, 324 financing, 22 Finlay, J. R., 9 fire insurance, 141-43 foreign exchange, demand for and supply of, 269; meaning of, 265- 66; quotations, 266-69 Foreign Trade and Foreign Ex- change, Chap, XVI forest area of various countries, 1 5 Fourier, F. M. C, 95-96 free trade vs. protection, 288 freight cars, 177-78 freight classification, 185-86; tar- iffs, 188-90 Fureuseth, Andrew J., 121 general property tax, 347 Ghent system of unemployment insurance, 167 gold exchange standard, 278 gold movements, regulation of, 279 gold points, 271-73 gold settlement fund, 72 Gottlieb, L. R., 308 government borrowing, 307-09 government ownership of rail- roads, 198-201; advantages, 199; evils, 200 Government Regulation of Rail- roads, Chap. XII government, services for, Federal Reserve Banks, 84 grading, 22 grain market, Chicago, 28 groceries, retail dealers in, 41-43 Hamilton, Alexander, 291 Haney, L. G., 250 hazards of industry, 162-63 health insurance, 161-65; in Eng- land, 164; in Europe, 163-65 hedging, 26, 27 Heubner, S. S., 142 holding company, 243-44 home market argument for pro- tection, 293 horses in various countries, 12 hours of labor, 109-10; for women, 134; regulation of men's, 136 Illinois Central case, 205 income tax, federal, 327; rates for 1918, 328; rates for 1921 and following, 335; of New York State, 352 Industrial Relations Court, Kan- sas, 123-24 infant industry argument for pro- tection in the general form, 291 ; in the particular form, 296 inheritance tax of New York State, 353-54 inheritance taxes, state, 353 injuring competitors, 234-36 inland water transportation, 192 insurable risk, the, 140-41 insurance, boiler, 143; fire, 141- 43; functions of, 139; health, 161-65; invalidity, 166; life, 144-50; marine, 143; old age, 166; social, need for, 152-53; title, 143; unemployment, 167- 69 360 Index interest rates, 40-41 internal revenue duties, 331 internal transportation, develop- ment in the United States, 173- 75 Interstate Commerce Act, pro- cedure, 203-05; scope, 202 Interstate Commerce Commission, powers, 202-03 I. C. C. V. Ala. Midland Railway, 209 invalidity insurance, 166 investment, life insurance and, 149-50 iron market reports, 51-53; pro- duction of pig, 16 Jenks, J. W., 241 Kansas anti-trust law, 251 Kansas Industrial Relations Court, 123-24 Kentucky and Indiana Bridge Case, 203 Knight Case, 254 labor and the war, 124-27 Labor Organizations, Chap. VII land in cultivation, 11 law of public callings, 214 Legal Regulation of the Condi- tions of Employment, Chap. VIII Lehigh Valley Case, 210 Life and Property Insurance, Chap. IX life insurance, 144-50; and in- vestment, 149-50; dividends, 149; calculation of premium, 144-50 locomotive, early development, 175 long and short haul clause, 208-10 L. and N. Case, 209 lumber, 15 mail-order houses, 42 manufactures, 15; power in, 16 marine insurance, 143 market reports, butter, 47-48; canned fruit, 44-45; cloth, 45- 47; iron, 51-53; rice, 48 Marketing, Chap. Ill; co-opera- tive, 49-50; farm products, 24; in foreign countries, 54-55; problem of, 20; securities, 31 markets, public, 43 Marx, Karl, 96 Maximum Freight Rate decision, 207 McDufifie, George, 294 men's labor regulation, 136; hours, 136-37 merchant marine, 192-93 mergers, 244 Michigan Salt Association, 241 middleman, the functions of the, 21 mining, 9 Minnesota Rate Case, 215 mint pars of exchange, 271 misuse of government protection and public utilities, 236 Mitchell, Wesley C, 61 money rates, 40-41 Moody, John, 254 Moore, H. L., 59 moral hazard, the, 141 mortality table, American Experi- ence, 144 Munn V. Illinois, 213 Munro, W. B., 315 New Jersey, Seven Sisters Laws, 257 New York anti-trust law, 252 New York Central Railroad, i8t- 82 New York Stock Exchange, 32 night work for women, 134-35 Northern Securities Case, 212 Index 361 North River Sugar Refining Com- pany Case, 243 occupational risks, 153 Official freight classification. 186- 87 old-age insurance, 166 old-age pensions in England, 166 open and closed shop, 120 "open door," 303 open market transactions, 76 organized speculation, 54 Owen, Robert, 96 ownership vs. regulation of rail- roads, 198-201 packing, 22 Paish, George, 273 Panama Canal, 195-96; traffic, 195 panic, 66-67 passenger-cars, 177; rates, 192; service, 190 payments of New York City, 340 Peick, v. C. & N. W. Ry., 214 Pennsylvania Railroad, 182 periodicity in business, 58-59 picketing, 1 18-19 Pittman Act, 78 pools, 241-42; railroad, 211 power in manufactures, 16 Productive Capacity, Chap. II; effect of war on, 18; factors in, 8 prohibited employments for wo- men, 135 propaganda, 4 prosperity, 61-64 protective tariffs, 288; argued unconstitutional, 294 Public Finance, Chap. XVIII; scope, 306 public markets, 43 public prices, 307 public service commission in New York, 217-18 rail, development of railroad, 175- 76 railroad competition, 183; freight tariffs, 188-90; mileage in the United States, 179; pools, 211; rate theories, 184-85; rate regu- lation, 205-08; valuation, 224- 25 railroads and the war, 2 1 8-2 1 ; passenger service and rates, 190; the darker side, 181; the ro- mance of, the, 180-81 railways, statistics in various countries, 17 rate theories, railroad, 184-85 raw material merchants, 54 Reading R. R. Co v. Pa., 213 rebates railroad, 206 Receipts and Expenditures of Cities and States, Chap. XX Receipts and Expenditures of the Federal Government, Chap. XIX receipts of New York City, 338- 39, 341; of Philadelphia, 343; of state governments, 346 reciprocity treaties, 302 regulation of conditions of em- ployment, reasons for, 129; of railroads, demand for, 198; of railroad rates, 205-08 reserve ratios. Federal Reserve Banks, 89 responsibility for accidents under the common law, 153-55 retail dealers in groceries, 41-43 retailers, 43 retail-wholesale stores, 43 revenue, federal, sources of, 323; sources of public, 306 revenue tariffs, 287 rice market reports, 48 Riggs, E. G., 103 Ripley, W. Z., 185, 241 risk, assumption of, 22 roads and turnpikes, 1 74 362 Index Rochester Labor Agreement, Men's Clothing Industry, 113- 17 safety, 129-30 safety devices on railroads, 1 78 salesmanship, 24 sanitation, 129-30 Schwab, Charles M., 120 securities, marketing, 31 security and continuity of employ- ment, IIO-II selling, 23 Seven Sisters Laws of New Jersey, 257 Sherman Anti-Trust Law, 253; applied to railroads, 211-12; early effects, 254-55; later de- cisions, 255-57 ships, tonnage of merchant, 17 Shreveport Rate Cases, 216 single tax on land, 349 Skelton, O. D., 95, 99, 100 Smith, J. Russell, 15, 16 Social Circle Case, 209, 214 Social Insurance, Chap. X; need for, 152-53 Socialism, Chap. VI; theoretical basis of, 96-99; Utopian, 95-96 socialist criticism of the present order, 99-100; party, 103-05; party platform, 103-05; pro- posals, 102-03; vote for presi- dent, 103 sorting, 22 specialty houses, 48-49 speculation, 26; in stocks, 33; organized, 54 Standard Oil Company Case, 255; dissolution of, 256 state and federal regulation of commerce, 212-16 statement, weekly, of the Federal Reserve System, 72-73 state railroad commissions, 216- 18; railroad regulation, 216-18; regulation of trusts, difficulties, 253 Stevens, W. S., 251 Stock Exchange, Clearing Corpor- ation, 34-35; New York, 32; transactions, 36-37 stock speculation, 33 storage, 21 strikes, 1 17-18 Study of Economic Problems, Chap. I ; reasons for, 3 surplus. Federal Reserve Banks, 82-83 tariff, arguments used, 290-98; and debts owed us by Europe, 301; Commission, 299; bill, course of, 288-89; definition, 285; effect on imports, 286; history in the United States, 290-98; political evils of, 290; present discussion, 299; pro- tective, 288; revenue, 287; tech- nical terms of, 285-86 Tariffs and Foreign Trade Poli- cies, Chap. XVII tax, the general property, 347; the single, on land, 349 taxation, federal revision of 192 1, 333-34; incidence, 311; justice in. 309; rates, 310 taxes, 306; corporation, 348; state income, 352; state inheritance, 353 technic of railroad transportation, 175-79 title insurance, 143 tonnage, steam of various coun- tries, 195 trade acceptances, 75-77 trade based on differences of eco- nomic development, 264; based on natural differences, 264; based on specialization, 265 Index 363 trade, foreign, aid by banks, 92 trade union leadership, 120-21 trade unions, aims of, 109-11 trafjfic through the Panama Canal, 195 Transportation, Chap. XI, 16, 23; and economic organization, 172- 73; development of internal, in the United States, 173-75 trust in the legal sense, 242-43 Trust Problem, Chap. XIV trusts, attitude of public toward, 250; causes for growth of, 238- 39; difficulties in regulating, 260; evils of, 250-51; minor causes for growth of, 239-40; state legislation against, 251-53 truth vs. propaganda, 4 Turner, J. R., 72, 97, 107, 238, 277. 295 unemployment insurance, 167-69 Unfair Competition, Chap. XIII; description, 231; in foreign trade, 301 union label, the, 119 Union Pacific and Southern Pa- cific Case, 212 Union Pacific Railroad, 183 unions, types of, 111-12 U. S. et al. v. A. T. & S. F. Ry., 210 United States Steel Corporation Case, 257 United States v, Deleware and Hudson Railroad, 210 U. S. v. Joint Traffic Assn., 212 U. S. v. Trans Missouri Freight Assn., 211 Utopian socialism, 95~96 Van Hise, C. R., 16 Wabash etc. R. R. Cos, v. Illinois, 214 Wage bargain, 107; labor the long factor, 107-08; labor the short factor, 108-09 wages argument for protection, 295 Walker, R. J., 294 war argument for protection, 293 war, effect on the exchanges, 280 War Labor Board, 124 war profits tax, 324-27 war, the, effect on productive capacity, 18 war and economic problems, 5 war and organized labor, 124-27 war and shipping, 193-95 war and the railroads, 218-21 water transportation, inland, 192 waterways and trails, 173 Webb Act, 54-55 wheat production, 13 wholesale branches, 51; consump- tion, 51; markets, 44-48 wholesalers general, 48; types of, 44 Williams, J. W., 274 Willoughby, W. F., 314 women's labor regulation, 134-35; hours, 134; night work, 134-35; prohibited employments, 135 workmen's compensation laws, 155; New York state, 155-61