d^ MICHIGAN TEXTS IN ECONOMICS READINGS IN CURRENT ECONOMIC PROBLEMS ^?7 ALTON H. HAMILTON THE UNIVERSITY OF MICHIGAN ANN ARBOR 1914 en the ownership and direct operation of industrial concerns by the State are not necessarily excluded by the adoption of the competitive principle. As long as it appears that a given industry, if left in private hands, will be subjected to a control by a trust, whereby true competition is rendered impossible, the assumption by the State of its management will at least not lessen competition ; while, on the other hand, it will secure to the people generally the benefits flowing froin monopoly. In the second place, state operation of an industry may be justi- fied upon the competitive principle, if, by so doing, the industry is managed in such a way that a greater degree of competition will be maintained between the individuals employed than would be the case under private management. From the social standpoint it is FUNDAMENTAL ECONOMIC INSTITUTIONS 53 much more desirable that there should be healthy coinpetition be- tween emplo3^ees than that there should be a contest between industrial concerns. It is one of the chief evils of the present industrial regime that the chief competition should be between work- ing men and women in seeking employment. Positions once se- cured, competition largely ceases. The employees become merged in a large body of workers, and have little direct personal interest in the work which they performi. Even in those private industries in which the wages paid are proportionate to the amount of work done, the individual is not permitted as a rule tO' exhibit his full degree of skill. In many cases it is an unwritten law among such workmen that certain maxima of piece work shall not be exceeded, even by the most able and skillful, for the very satisfactory reason that if such maxima are more than occasionally exceeded the price paid per piece by the employers will inevitably be reduced, with the result, of course, that the most efficient will henceforth receive no more than they would have earned under the old scale, while all the remainder will receive less. If, then, we can have a governmental control in which earnings are graded according- to the amount and character of the work done, and in which a careful inspection is maintained for the purpose of detecting and rewarding merit and demerit proportionally, either by increase or decrease of wages, or by changing the character of work required, then a truer and more beneficial competition will be maintained than the old competition between concerns which the governmental monopoly will destroy. All we wish to point out is that the application of the competitive principle would not neces- sarily exclude governmental ownership and operation. 32. Competition and Selfishness. BY S. J. CHAPMAN. I must reiterate, in order that there may be no mistake, that modern analytical economics neither assumes nor advocates selfish- ness. But without relegating sentiment tO' Saturn, we may hold that the afifections do not directly enter into most business transac- tions. "Oh 'tis love, 'tis love, that makes the world go- round," asserted the duchess in Alice in Wonderland. "Somebody whis- pered," said Alice, "that it's done by everybody minding his own business." However, among the impulses which are the motive power of business activities, the affections may play a large part indirectly. A man may work his best to make as much as possible in the interests of his family or friends, or even for philanthropic 54 READINGS IN ECONOMIC PROBLEMS purposes. Finally it must not be imiagined that, in the absence o£ altruistic motives, a man who works his hardest for success must be sordid. The passion of great business leaders is commonly quite other than that of the miser. Because money provides the counters which measure commercial triumphs, we are apt to go astray in our analysis. They who play cards for cowries are not mastered by a passion for cowries. 33. Competition and Social Service. BY J. A. HOBSON. The consciousness of social service as a stimulus to work is not inconsistent with competition. The artist who' labours to express himself to others can only succeed on condition that he keeps before his mind these others : mere self-expression is not art at all. Though, therefore, the artist may be working for gain, and may be conscious of his competitors, the interest in his work and his capacity to do it involves some regard for the public. The same applies alsO' to the artisan so far as his manipulation of material involves conscious regard for its utility, and therefore consideration of the needs of the consumers. So, too, with the professions ; however keen the rivalry of professional men to iget employment may be, the nature of the work they do' involves the detailed operation of disinterested motives leading them to value their work for its real social utility rather than for the gain it brings them-. This is the well-recog- nised difference between a profession and a trade, which has always underlain the lower esteem in which tradesmen and the trading spirit have been held. It is, indeed, in commerce, and primarily in retail trade, rather than in manufacture or any branch of production, that the ethics of competition appears to do most damage, the rea- son, of course, being that in the dealing processes antagonism of human interests is sharpest, and the conscious energy of dealers is most confined to the pursuit of personal profit. In most manufac- tures, though the employer is not in business "for his health," but primarily to make profits, the skill and intricacy of the practical oper- ations which he conducts absorb much of his attention, and pride in the character of his business and the equality of its products digni- fies his conduct. Just in proportion as he is not forced to concen- trate his thought and feeling upon the art of getting business away from other firms and pushing his clainns against theirs in the market, does his work take conscious shape in his mind as the social func- tion which it really is. Just in proportion as the competitive activi- ties assume prominence is he compelled tO' sink this social feeling. FUNDAMENTAL ECONOMIC INSTITUTIONS 55 to push his goods in conscious rivalry with those of other firms, and to cultivate those arts of sweating, adulteration, and deceit, which seem necessary to enable him to sell goods at a profit. Such considerations indicate that the moral economy of compe- tition is not simple or uniform : where it takes shape in the rivalry of Euripides, Aeschylus and Sophocles to win the favour of an Athenian public for their respective dramas it may act as a direct incentive of the highest form of social wealth ; where it operates among strug-gling grocers in the same street it may mean starved assistants, short weights and doctored goods. 34. State Determination of the Plane of Competitive Action. BY HENRY C. ADAMS. What is meant by saying that unguarded competition tends to lower the moral sense of a business commiunity? Wherever the personal element of a service comes pro^minently into* view, and the character of the agent rather than the quality of goods is forced into prominence, probity has its market value and honesty may be the best policy. But in the commercial world as at present organ- ized, where the producer and the consumer seldom come into per- sonal contact, the moral arrangements followed in the process of production are not permitted a moment's thoiight. All that is con- sidered by the purchaser is the quality and the price of the goods. Those that are cheap he will buy, those that are dear he will reject; and in this manner he encourages those methods of production that lead to cheapness. There are of course exceptions to this rule. But these exceptions do not vitiate the rule laid down. There must be substantial uni- formity in the methods of all producers who continue in competi- tion with each other. Each man in the business must adopt those rules of management which lead toi low prices, or he will be com- pelled tO' quit the business. And if this cheapness, the essential re- quisite of business success, be the result of harsh and inhuman meas- ures, or if it lead to misrepresentation and dishonesty on the part of salesmen or manufacturers, the inevitable result must be that harsh- ness and inhumanity will become the essential condition oi success, and business men will be obliged to live a dual existence. In his excellent work upon "The Philosophy of Wealth," Profes- sor Clark calls attention toi the fact that the "tribal conscience," which was sensitive to the finer qualities of human character, has given way toi the "inter-tribal conscience," which tolerates mercan- tile contention and winks at the tricks of trade. In making: use of 56 READINGS IN ECONOMIC PROBLEMS such expressions he probably has reference to the singular fact that, while society existed in the tribal state, or was controlled by the governments of local trading guilds, competition was inoperative so far as the members of the same tribe or city were concerned ; but in case of trade between members of different tribes, or in the es- tablished market-places where citizens of various towns came to- gether, we find the higgling of the market so characteristic of com- petitive transactions. At the present time, however, these local reg- ulations have given way before the extension of the national idea, and, instead of the old mercantile code of local trade being main- tained for all members of the same nation, even local trade has been brought under the direction of the rule which formerly applied only to inter-tribal commerce. The fact upon which we insist at this point is that an isolated man is powerless tO' stemi the tide of prevalent custom, and that in many lines of business those men whose moral sensibilities are the most blunted exercise an influence in determining prevalent cus- tom altogether out of proportion to their importance as industrial agents. Suppose that of ten manufacturers nine have a keen appre- ciation of the evils that flow from protracted labor on the part of women and children ; and, were it in their power, would gladly pro- duce cottons without destroying family life, and without setting in motion those forces that must ultimately result in race-deterioration. But the tenth mian has no such apprehensions. The claims of family life, the rights of childhood, and the maintenance of social well-be- ing, are but words to him. He measures success wholly by the rate of profit. If now the state stand as an unconcerned spectator, the nine men will be forced to conform to the methods adopted by the one. Their goods come into competition with his goods, and we who purchase do not inquire under what conditions they were man- ufactured. In this manner it is that men of the lowest character have it in their power to give the moral tone to the entire business community. One of the most common complaints of business men is that they are obliged to conform to rules of conduct which they despise. It is a necessary result of a competitive society that the plane of business morals is lower than the moral character of a great majority of men who compose it. But what, it may be asked, can the state do in the premises? The state has done much and can do more. That code of enact- ments known as "facto^ry legislation"' is addressed tO' just this evil of competitive society, and it only remains for us to formulate for this code an economic defense. The general rule laid down for the guidance of state interference in industries was that society should FUNDAMENTAL ECONOMIC INSTITUTIONS 57 be secured in the benefits while secured against the evils of competi- tive action. When the large body of competitors agree respecting some given method of procedure, but are powerless to follow it because a few men engaged in the same line of business refuse to conform to the proposed regulations, it becomes the province of the state to incorporate the wish of the majority in some practical law. In this manner there is established a legal plane of competition higher than that which could be maintained in the absence of legal enactment. This is no curtailment of competitive action, but a de- termination of the manner in which it shall take place. If the law says that no child shall be employed in factories, the plane of com- petition is raised to the- grade of adult labor. If married women are refused employment, the nature of competition is again changed, but competition is not restricted. As the result of such legislation some of the evils of the present system would disappear, while all the benefits of individual action would yet be conserved to society. This, then, is one defense of interference on the part of the state. It lies wathin its proper functions to determine the character of such competitive action as shall take place. There must be con- formity of action between competitors, and the only question is whether the best or the worst men shall set the fashion. One can- not be neutral with regard to this question. No vote at all is a negative vote ; and a vote in the negative is as positive in its results as one in the affirmative. Should the state insist on following the rule of non-interference, society cannot hope to adjust its productive processes to the best possible form of organization. We have all of us, doubtless, heard the claim that the state is a moral agency ; that it is imposed with moral duties. For a number of years after this phrase came to my notice, it presented to my mind no distinct meaning. It seemed to me to cover the philan- thropic purpose of shallow intellects, and to be most frequently used by men who knew not the way of guile nor anything else for certain. But properly understood this phrase contains a deep truth of social philosophy. It does not mean that the law is a schoolmas- ter coercing men to be good, nor that it is the depository of a social ideal to be admired ; but, on the contrary, it means that the law is an agency for the realization of the higher ideals of men by guarding them from that competition which would otherwise force them to a lower plane of action, or else force them out of business. In per- forming such a duty the state performs a moral function, for it reg- ulates competition to the demands of the social conscience. Under the guiding influence of such a thought the immediate interests of 58 READINGS IN ECONOMIC PROBLEMS the individual may be made to coincide, in some degree, with the fundamental interests of society, and thus, by disregarding- the dog- ma of laissez-faire, the fundamental purpose of those formulating the doctrine is in part realized. B. THE LEGAL SYSTEM. 35. The Economic Foundation of Law. BY ARCHELIvE; I.ORIA. Changes in the prevailing economic conditions necessarily in- volve corresponding changes in the law. The history oi the law furnishes us with clear and definite demonstration of that fact. Ger- manic law founded property rights upon the family, while primi- tive Roman law accorded such rights to the individual ; but in the primitive Roman law there are also traces of the earlier family com- munity. That so striking an analogy should exist in the legal systems of two peoples so proioundly different and so widely separated is a highly significant fact and one worthy of serious consideration ; on the one hand because it reverses the theory that the law is an emana- tion of the national conscioiusness, and on the other because it shows that the law necessarily depends upon existing economic conditions. The Romans and the primitive Germans were profoundly different in manners and race, and lived under different climatic conditions. Between these twO' peoples there was nothing in comimon beyond the identity of their economic conditions ; or, to put it more defi- nitely, there was nothing in commion between them except identical territorial conditions which irresistibly impelled them to adopt iden- tical economic constitutions. It is perfectly evident that this profound analogy in the legal systems of these two peoples could not have been the product of conditions wherein they differed, and must, accordingly, come from the one element common to them both, their economic system. 36. Law in Political Economy. BY JOHN R. COMMONS, The place of Law in Political Economy is a subject which has received from English economists no attention at all commensurate with its far reaching importance. The English economists have taken the laws of private property for granted, assuming that they are fixed and immutable in the nature of things and therefore need no investigation. But such laws are changeable — they differ FUNDAMENTAL ECONOMIC INSTITUTIONS 59 for different peoples and places, and they have a profound influence upon the production and distribution of wealth. The miodern economic system depends upon the independent en- terprise of free individuals as contrasted with the public manag^e- ment of business by the government or the community. The private enterprise takes the form either of the independent action of single individuals or the associated activities of individuals in partnerships or corporations. The decisive characteristics of industry under the regime of private enterprise are Division of Labor, Exchange of Products, Credit, Self-interest, and Comipetition. Every one of these characteristics involves the profound dependence of man upon his fello'wmen. Social relations are growing more and more im- portant. In order that industry may be carried on at all under such complex relations, there must be a definite understanding by every individual as tO' wbat he may expect from others and what he must do in turn for others. Nothing can be left to chance, force, or fraud. Consec[uently there must be somewhere a supreme authority with power to define and enforce the rights and duties of individuals. It is not always as important that these rights and duties be based upon ideas of justice as that they be certain. There must be no roonij for the arbitrary rulings of individuals. This indi- cates the necessity for law and ,government. Thus there are in society two lines of ecooo-mic activity, the voluntary activity oi indi- viduals and associations, and the compulsory activity of government. 37. Conflict of Social Welfare and Individual Liberty. BY IvUCIUS POLK MC GEHEE. Many cases involve a conflict of interest, as viewed by the legis- lative mind, between the welfare of the State as a whole and the untrammelled liberty of certain classes in the community. The question O'f the policy of the State in dealing with such conflicts is an exceedingly difficult one and requires the application of broad principles of public policy and economic theory to* practical legisla- tion. These principles are not yet so firmly established that our courts may mark exactly the point at which State interference should in all cases cease and the freedom of the individual have unrestricted sway. The rapid developinient of industry bringing into play new forms of power from wealth and combination, and the increasing complexity of civilization have already rendered necessary restrictive legislation which would have seemed intoler- able tO' a generation nurtured in the legislative theories of Bentham.. Enlightened public opinion, as reflected by our legislatures and 6o READINGS IN ECONOMIC PROBLEMS courts, has reacted from the strict doctrine of laissez faire, and we cannot say that a further abandonment of that position may not be advisable. It is of the utmost importance, then, not to give to the broad and simple phrases of the Constitution in the enumeration of fundamental rights so rigid an interpretation as will hamper the legislature in fashioning remedies for apparent evils and abuses. Or, in the anxiety to preserve individual liberty in theory, the courts may sanction a state of practical oppression. In, discussing the atti- tude of the Supreme Court of the United States toward State legis- lation, the court has said, "While the courts must exercise a judg- ment of their own, it by no means is true that every law is void which may seem to the judges who pass upon it excessive, unsuited to its ostensible ends, or based upon conceptions of morality with which they disagree. Considerable latitude must be allowed for difference of view, as well as for possible conditions which the court can know but imperfectly, if at all. Otherwise, a constitution, in- stead of embodying only relatively fundamental rules of right, as generally understood by all English-speaking communities, would become the partisan of a particular set of ethical or economic opin- ions which by no means are held semper, uhique, et ah omnibtis."'^ 38. Uniformity in Law. BY FRANK J. GOODNOW. The increase of centralization of economic conditions due par- ticularly to improvements in transportation and the consequent en- largement of the area over which commercial transactions extend, and the increase in the mobility of the population, have made the need for uniformity in the law more apparent. While economic central- ization has thus made uniformity in the law more necessary than it once was, influences have been at work which have actually pro- duced diversity in the law rather than increased uniformity. The greater number of courts of last resort which has followed upon the increase in the number of states, together with the decreasing authority of the decisions of the English courts, has been one of these influences. Another has been the great increase of statute law. Legislatures of different states, not being controlled by the necessity of precedent, have, where it seemed necessary tO' change the law, amended it in different ways. The result has been that, although economic conditions have been centralized during the cen- tury and a 'half of our national life, our law has become less uni- form than it was. * Otis vs. Parker, 187 U. S. 608. FUNDAMENTAL ECONOMIC INSTITUTIONS 6i C. PRIVATE PROPERTY. 39. A Definition of Private Property. BY RICHARD T. KLY. Private property is an exclusive right, but never an absolute right. Private property is a growth, changing both with respect to the number of things to- which it extends, and with respect to the privileges which it carries with it. Legal codes will be searched in vain foir an unlimited right of private property. Should a definition of private property be found whicii appears toi be absolute, limita- tions will be found elsewhere in the code. These limitations, when carefully examined, all mean one thing; namely, that private prop- erty has a social side. But this is not all. An examination of the nature and the growth of private property and oi its treatment by civilized nations shows that, in the case oi conflict between the social and the individual side, the social side is dominant and the individual claims must yield. Private property is maintained for so- cial purposes. 40. The Right of Property. BY JOHN AUSTIN. Whoever has a right of property may apply the subject of his right to any purpose or use which does not amount to a violation of any right in another, ot to a breach of any duty lying on himself. And it is only in that negative manner that the extent of the power of user imported by the right can possibly be determined. Property or dominion is applicable^ to any right which gives the entitled party an indefinite power or liberty of using or dealing with the subject. But property, as thus understood, is susceptible of vari- ous modes ; that is to- say, the limitations or restrictions to* that power or liberty, which spring from the rights of others and from duties incumbent upon himself, may vary to infinity. But the possible modes of property are infinite and though the indefinite power of user is thus restricted, more or less, there is in every system of law some one mode of property in which the re- strictions to the power of user are fewer than in others : or, chang- ing the expression, there is some one mode of property in which the power or liberty of indefinite user is more extensive than in others. And to- this mode of property the term dominium, prop- erty or ownership, is preeminently and emphatically applied. It follows from what has preceded, that neither the right of prop- erty, which imports the largest power of user, nor any of the rights 62 READINGS IN BCONOMIC PROBLEMS of property which are modes or miodifications of it can be defined exactly. For property or dominion ex vi termini is jus in rem im- porting an indefinite power of user. This indefiniteness is of the very essence of the right and impHes that the right cannot be deter- mined by exact and positive circumscription. The definition of the right of property Hes throughout the corpus juris, and imports a definition of every right or duty which the corpus juris contains. 41. Property and the Distribution of Wealth. BY JOHN STUART MILL. The distribution of wealth is largely a matter of human institu- tions. The things once there, mankind, either individually or col- lectively, can dO' with them as they like. They can place them at the disposal of whomsoever they please, and on whatsoever terms they please. Further, in the social state, in every state except total solitude, any disposal whatever can take place only by the consent of society, or rather of those who' dispose of its active force. Even what a person has produced by his native toil, unaided by anyone, he cannot keep unless by the permission of society. Not only can society take it from him but individuals could and would take it fromi him if society only remained passive; if it did not interfere en masse or employ and pay people for the purpose of preventing him fromi being disturbed in its possession. The dis- tribution of wealth, therefore, depends on the laws and customs of society. The rules by which it is determined, are what the opinions and the feelings of the ruling portion of the community make them, and are dififerent in the different ages and countries ; and might be still more different, if mankind sO' chose. The institution of property, when limited to its essential ele- ments, consists in the recognition, in each person, of the right tO' the exclusive disposal of what he or she has produced by his own exer- tions or received by gift or fair agreement without force or fraud, from those whoi produced. The foundation of the whole is the right of producers tO' what they themselves have produced. It includes then the freedom of acquiring by contract. The right of each to what he has produced implies a right to what has been produced by others, if obtained by their free consent ; since the producers must either have given it fromi good will, or exchanged it for what they esteemed an equivalent. To prevent them from doing so would be to infringe their right of property in the things that they them- selves have produced. The question arises whether the reasons on which the institution fUNDAMBNTAL ECONOMIC INSTITUTIONS 63 of property rests are applicable to all the things in which a right of exclusive ownership is at present i-ecognized ; and if not upon what grounds the recognition is defensible. The essential prin- ciple of property being to assure to all persons what they have pro- duced by their labor or abstinence, this principle cannot apply to what is not the product of such labor or abstinence, the raw ma- terial of the earth. The land is not the produce of industr}^ ; most of its valuable qualities are. Considerable labor is often required at the commencement to clear the land for cultivation. In many cases, even when cleared, its productiveness is wholly the effect of labor and art. The fruits of this industry cannot be reaped in a short period. The labor and industry are immediate, the benefit is spread out over many years, perhaps all future time. The holder will not incur this labor and outlay when strangers and not himself will be benefited by it. If he undertakes such improvements he must have a sufficient period before himi in which to profit by them ; and there is nO' way so sure of always having a sufficient period as when his tenure is perpetual. These are the reasons in an economical sense which form the justification of property in land. When the sacredness of property is talked about, it should always be remembered that any such sacred- ness does not belong in the same degree to landed property. No man made the land. It is the general inheritance of the whole, spe- cies, its appropriation is wholly a question of general expediency. It is some hardship to be born into the world and tO' find all nature's gifts previously engrossed, and no place left for the newcomer. To reconcile people to this after they have once admitted to their minds the idea that any moral right belongs tO' them as human beings, it will always be necessary to^ convince themi that the exclusive appro^ priation is good for mankind on the whole, themselves included. Landed property is felt even by its most tenacious defenders to* be a dififerent thing from other property ; and men have tried to reconcile it, at least in theory, tO' their sense of justice by endeavoring to attach to it certain duties, and erecting it into^ a sort of magistracy either moral or legal. The claim of the landowners tO' land is al- ways subordinate to the general policy of the state. 42. The Economic Foundation of Property. BY F. W. TAUSSIG. What can be said in justification of the inheritance of property, which acts so powerfully to maintain inequality? The ground on which inheritance is to be defended is frankly utilitarian. In a 64 . READINGS IN ECONOMIC PROBLEMS society organized on the basis of property inheritance is essential to the maintenance of capital. It may be open to question how far inheritance is necessary for the first steps to accumulation. The motives that lead to money making and to the initial stages of saving and investment are vari- ous, including not only the safeguarding of the future for one's self and dependents, but social ambition, the love of distinction, the impulses to activity and to domination. But, for sustained accumu- lation and permanent investment, the main motives are domestic affection and family ambition. The bequest of a competence or a fortune, though often of dubious advantage to descendants, is a mainspring for its upbuilding by the ancestor. If we were to put an end to inheritance, decreeing that all estates should escheat to the public after death, the owner would commonly dissipate his property. One of the motives for its first acquisition would be gone, and certainly the chief motive for its maintenance. Why accumu- late and invest for the benefit of the community in general? Inheritance in other words is an indispensable part of the insti- tution of property. So long as the community relies on the accumu- lation by individuals and on the ownership and management by them for the supply of its material equipment, it must give scope to the motives that lead to the formation and maintenance of capital through the action of these individuals. What now of the ulterior question, the basis of the whole regime of private property? As the institution of inheritance can be sus- tained only on a basis of utilitarianism, so can that of property in general. The utilitarian reasoning may be summarized as follows : Men will not labor steadily and effectively except in their own be- half. Labor is irksome, the sense of common interest weak. Labor will not be exerted continuously and vigorously except for individ- ual benefit. It is strenuous and well directed in proportion to the expected returns. Inequality arises even under the simplest conditions from the unequal endowments of men. This is accentuated in a society char- acterized by the division of labor; for, in such a society, man is led to do what brings indirectly the largest returns. Competition and self mterest thus not only promote the vigor of labor, but the effect- ive organization of society. Inequality becomes more marked as increasing complexity gives play to the very varying abilities. Wide variations thus arise in earnings, possessions, available surplus. The essence of capital is surplus. This is utilized by those who see time-saving ways of directing labor with effect. Sustained accumu- lations and investment on a large scale will not be made unless there PUNDAMBNTAL ECONOMIC INSTITUTIONS 65 is an inducement. The phenomenon of interest occurs. Like inter- est inheritance operates as an indispensable stimulus to the saving of private means and the increase of social capital. Out of this accumulation a leisure class emerges. Although the immediate effect of the idleness of a fraction of the community is obviously to lessen the total available labor force, the prospect of being a member of the leisure class has proved a wonderful spur to effective exertion and permanent investment. The hope of privi- leged position for one's self or one's kin has been the main motive force for the material progress of society. This reasoning would lead to the conclusion that desert on the part of the members of this leisure class is not necessary to^ justify its existence. Its posi- tion of ease and comfort is a bait to stimulate ambition and accumu- lation. Direct service by the survivors and descendants of fortune- builders would seem to be immaterial; but it is obvious that the jus- tification of inequality and all its consequences becomes more effect- ive when the leisure class is of service directly as well as indirectly. Though the mere existence of a capitalistic aristocracy operates to spur ambition and conserve capital, its position is immensely strong- er if the individual members contribute actively tO' the general well- being, through continued industrial leadership, advancement of sci- ence, literature, and art, and high-minded public service. Such is the analysis of the foundations on which the institution of property rests. It applies to the sound core of the system, not to all its excrescenses. The justificatory account just given would be a fairly accurate description o bind not only the present but the future, and, when it is understood that gain in the present is the motive directing these contracts, it is easy tO' see that the best interests of the future may be jeopardized. I cannot suggest even, at this time, the far-reaching consequences of this peculiarity of corporate organization, but must content myself with the remark that the considerations which led reasonable men of half a century ago to approve the philosophy of industrial individualism, did not include the observation that a body of men organized for the purpose of private gain should ever plead the interests of a perpetual existence. Such a plea, it was assumed, pertained to the state alone. Third. Corporations do not recognize the principle of righteous- ness, candor, courtesy, or indeed, any of the personal virtues, except energy and enterprise, which, according to the old English econ- omists, are assumed to be essential to continued business success. I do not say that the common virtues may not be ap'preciated by men entrusted with the management of corporate enterprises, or that they do not practice such virtues in their personal affairs ; but such is the nature of intercorporate competition, especially for industries in which success is measured by the volume of business transacted, that the managers of corporations are obliged to recognize a dual 86 READINGS IN ECONOMIC PROBLEMS code of ethics — one for the business, one for the home. Your at- tention was called to^ the peculiarity of corporate organization for the purpose of presenting yet another reason why the old rules of •business conduct are not pertinent to the latest phase of industrial development. The old theory of society which assumes identity between personal interests and social morality may possibly have been true when industries stood forth in the person of those who conducted them ; but, to claim that this is true as business is at pres- ent organized, is to ignore the influences which corporations have exerted upon the character of business. If it be true that the growth of corporate enterprise is only hmited by the world's de- mands, that its life is only limited by that of the civilization to which it pertains, and that it is deprived of those restraining influ- ences which work so powerfully upon the individual, is it not clear that a new theory of industrial relations becomes a necessity? G. SPECULATION. 55. The Zoology of Stock Speculation. BY CH ARISES DUGUID. To use the time-honored definition, the Bull is one who buys what he does not want, and the Bear is one who^ sells what he has not got. The Bull buys stock that he does not want, in the hope that he will be able tO' sell it at a higher price before it comes into his possession, pocketing the difference. The Bear sells stock that he has not got, in the hope that he will be able to buy it at a lower price before he has to deliver it. The Bull is optimistic, he believes that the price will rise ; the Bear is pessimistic, he believes it will fall. If the advance which the Bull desires has not occurred before the time of settlement arrives, he would be in a quandary but for the organization which exists in the Stock Exchange to meet his case. Having bought what he does not want, he certainly does not desire to pay for it, and he is enabled to continue his bargain. The actual process of arranging this consists in selling out the security and then repurchasing it, both the sale and the repurchase occurring at the "makirig-up" price. Though technical rules on exchanges vary, this price is usually the actual market-price at a defined moment. If the making-up price is lower than that at which the Bull pur- chased, he has, of course, to pay the difference. In the case of the Bear, having sold stock he has not got, he certainly does not desire FUNDAMENTAL ECONOMIC INSTITUTIONS 87 to deliver it at the settlement, and, just like the Bull, he is able to continue his bargain. If, in spite of his desire, the price of the stock has risen, he has to pay the difference between the price at which he bought and the settlement making-up price. Without the Bulls and Bears, life in the Stock Exchange would be a dull affair, for the anxiety that stO'cks and shares should rise and fall within a short period naturally leads to excitement, and un- doubtedly causes the promulgation of many rumors and the exag- geration of actual news. The very existence of a big Bull account, or of a big Bear account, naturally has a most important effect upon the market. Every Bull is of course a potential seller, and every Bear a potential buyer. While the Bulls are buying prices may rise, and while the Bears are selling they may fall ; but the time comes when their operations, however successful, have to be completed, and the movement in the opposite direction sets in. Good news is frequently followed by a sharp relapse in prices, because of the selling by Bulls anxious to take advantage of it. Bad news is fre- quently without effect, ot followed by a rise, because the Bears see their opportunity of buying back the stock they have sold. Thus it comes that the rates at the settlement are eagerly watched, that some information may be obtained as to whether a Bull account or a Bear account exists. The Bulls may have it all their own way, and by concerted ac- tion, called a "Bull campaign," bring about a "rig." This, however, is a condition of the market the artificiality of which becomes very evident when the time for selling sets in. Unless the delicate posi- tion is handled with extreme skill, there will be left after the un- loading a residue of stale Bulls, Bulls who are compelled to close their accounts at a loss. On the other hand the Bears may have it all their own way. By concerted action the^ may "bang the market," indulge in a "Bear raid," and bring prices down to a low level. The talk is all gloom. At the end of the raid, however, the position of the Bear is an exceedingly dangerous one; he may find it im- possible to obtain the stock which, having sold, he has undertaken to deliver. Prices begin to rise again, and the "Bear covering," or buying back, only enhances the upward movement. In time it may become impossible to buy back at any price; there is no stock ob- tainable; the Bears are "cornered." Unless a Bear so situated can make terms with the one to whom' he has sold the stock, he stands in the position of one who cannot meet his engagements, or, tO' use another term of Stock Exchange zoology, he is a Lame Duck. 88 READINGS IN ECONOMIC PROBLEMS 56. Why the Prices of Securities Rise and Fall. BY FRANCIS W. HIRST. In the first place the value of a security depends mainly upon a quality wihich a bale of cotton or a ton of coal does not possess. It is either actually or potentially interest-bearing. This quality is vis- ible in a bond with coupons attached. A bond like that bought by subscribers to a Prussian state loan will have attached to it quarterly or half-yearly coupons, which can be cashed in almost any great cen- tre of finance. If the government promises to redeem the bond at the end of a definite period at par, at its maturity the bond will be worth par. In the meantime it will rise and fall according to the conditions, first of German credit, secondly of the international rate of interest. But these tendencies may be wholly or in part counter- acted by antagonistic movements oi an international character, for instance, a great war which destroys a vast amount of capital and absorbs vast quantities of savings. But the Prussian bond is not likely to fluctuate much, and the limits of its fluctuations will be the more restricted the more nearly it approaches its maturity. Thus the value of a security depends mainly upon ( i ) the rate of interest, (2) the safety of the principal, and (3) the likelihood of the princi- pal or the rate of interest either rising or falling. These are the main causes of a rise or fall in securities. But the business of the Stock Exchange operators is to endeavor to forecast and discount in advance the natural fluctuations oi in- trinsic value. In the old days before the telegraph, fortunes were made by getting early information, or spreading false information of victories and defeats, which would enhance or depress the price of stocks. The first Rothschild laid the foundations of his immense fortune by getting early news of important events. Nowadays the principle is still the same, but the art of anticipation has been made much more doubtful anff complicated. Telegraphs and telephones are open to all. What everybody reads in his morning paper is oi no particular use to^ anybody in a speculative sense. Besides many foreign governments keep large funds in London and Paris for the express purpose of supporting the market. Hence in the market for Government bonds, big movements are rare. When we come to the prices of railroad and industrial stocks the causes of movement are much more difficult toi detect, and the possi- bilities of making large profits by inside knowledge is much greater. The newspapers may be the conscious or unconscious tools of the manipulators. In new countries the banks are likely to be a working part of the speculative machinery. Thus in the United States those FUNDAMENTAL ECONOMIC INSTITUTIONS 89 who use great fortunes in finance frequently have a controlling' in- terest in a bank. What is called a "community of interest" may be established which will control important railroads and huge indus- trial corporations, as well as a number of banks and trust com- panies. The various wa.ys in which such a community may manipu- late a susceptible market like Wall Street might be made the subject of a long and fascinating volume. Suppose that a powerful group wishes to create the appearance of a general trade depression in the United States. To' do so is not at all impossible. The controlled railways may announce and even partially carry out a policy of reduced orders for rails, equipment, and repairs. They may ostentatiously proclaim an addition to the number of idle cars. Well-disciplined combinations of steel and textile mills may declare a curtailment of production. Banks may suddenly become ultra-conservative; the open accounts and credits of small speculative customers may be closed. In this way a general feeling of despondency can be created. Stocks will fall, partly in consequence of the action of the banks, causing a compulsory liqui- d'ation of speculative accounts, partly through the voluntary action of speculators who think that trade, earnings, profits, and dividends are likely to decline. Thus a bear market is created. The syndi- cate can now employ huge funds toi advantage in profitable pur- chases of those stocks and shares which fall most and are most responsive to ups and downs. Such a policy of course represents great difficulties and dangers. It must be carried out very cautious- ly and very secretly, and ver}^ honorably as between the members. And if it is too successful it may create a slump, or a panic, in which the community of interests may itself be seriously involved. For these and other reasons American operators and manipulators do not frequently enter upon a concerted plan for colossal bear opera- tions. Such a scheme is unpopular. It offends public sentiment. A long bicarish movement, accompanied by unemployment, reduced earnings, and economies in expenditure, produce all manner of un- pleasant consequences, economic, social, and political. In fact big men often boast that they never operate upon the short side, never play for a fall. Such a movement as that sketched above is comparatively rare, cautious, and temporary. Wall Street has of course to wait upon circumstances. Sometimes it is caught by the circumstances. But it must always try tO' adjust itself tO' economic and pohtical condi- tions. A political assassination, a war, a movement against the trusts, unfavorable decisions in the courts, an unexpected downfall of the favourite political party, a catastrophe like the San Francisco 90 READINGS IN ECONOMIC PROBLEMS earthquake^ — such events as these may produce an irresistible flood of Hquidation against which the strongest combination of bankers and corporation mien will struggle in vain. In a general scramble produced by some unexpected event there is more likely to be a gen- eral loss than a general profit. For in the history of speculation the unexpected event is usually a calamity. Real prosperity is built up gradually. The Stock Exchange an- ticipates and exaggerates it, until the speculative fabric has been reared so high above the real foundation that a crash is seen to be inevitable. Generally speaking, because of superior knowledge, the insiders are able to unload at high levels, just as they have been able to load at low levels. So, by speculating in stocks of a national size and significance, the outside public loses more than it gains. It begins tO' buy when they are dear, and it begins to sell when they are cheap. For purposes of scientific analysis we may rest the theory of Stock Exchange quotations upon a distinction between prices and values. Prices are temporary ; values are intrinsic ; they move slow- ly. The price represents the momentary market value of a stock or bond. The value is the real worth, a thing undefinable and im- possible to ascertain. If the real value were ascertainable and avail- able to the public then price and value would be identical, and in the case of gilt-edge securities, the two are as nearly as possible identi- cal. But intrinsic values themselves change like everything else in the world. They depend mainly upon (i) the rate of interest, (2) the margin of surplus earning power or revenue. Both stocks and bonds are also afi^ected in their intrinsic value by the money market and the relationship of the supply Oif capital seeking investment to the demand for capital by new flotations. The intrinsic value of common stock depends also upon the actual effi- ciency of the corporation, the condition of its plant, the skill of its management, and the coiitentment, intelligence, and industry of its whole staff. Of course all these changeful elements of intrinsic value enter into prices. But as prices so'metimes fluctuate violently, it is obvious that they must also be afifected by other causes. These may be summed up under two heads : ( i ) False rumors, which have got about either by design or through the carelessness or mistakes oi newsmongers; and (2) Rigs, pools, combinations, and other techni- cal devises, by which the market is either flooded with, or made bare of, a particular stock or group of stocks. FUNDAMENTAL ECONOMIC -INSTITUTIONS 91 57. The Social Value of the Stock Exchange. BY WIIvUAM C. VAN ANTWERP. Everywhere, in all ages, markets are held because people de- mand them in their effort to secure proper prices by competitive bidding and offering. Buyers seek the largest markets they can get in order to obtain the lowest prices; sellers, in order to o'btain the highest prices ; and so it was learned long agO' that economy of time and labor, as well as a theoretically perfect market, could be best secured by an organization under one roof of as many dealers in a commodity as could be found. The result, moreover, is best accom- plished when the organization is so controlled by rigid rules O'f business morality as to insure to every one who does business there an absolutely square deal. In such a market every purchase is made with a most thorough acquaintance with the conditions involved. Each dealer, each broker, each speculator, strives tO' obtain the best knowledge of the supply and demand, and each buyer and seller has an equal and fair opportunity. The larger the body of brokers, the more accurate the standards of value thus created. To illustrate the price-making function of the Exchange, take the case of the Western farmer. The farmer can sell his crop, even though it has not been planted. Whenever he sells, and under what- ever conditions, he enjoys the authoritative establishment of a price, fixed as clearly as matters are fixed in law. Moreover, the price at which he elects to sell is the best price, the fairest price, and the most scientific price that human agencies can arrive at, because it is made by world-wide competitive bidding at the hands of skilled men, all competing by cable and telegraph. Like the Grain Ex- change, the Stock Exchange serves the same price-making function. Machine-production requires the corporate organization of bus- iness. Such an organization, which comhines the small savings of thousands into large sums and gives to the masses an intelligent directing force at the hands of highly trained experts, depends for its existence upon the sale of its securities. But capital cannot be enlisted in industrial activity without market-places or Stock Ex- changes. It has been found that transactions in the securities which represent the people's money should be rendered easy, quick, and safe, and that the very essence of the Exchange's functions consists in protecting the people who are the actual owners of business enter- prises. In all the great centres of the world Stock Exchanges are af work in this important field. In proportion to the confidence which a country feels in such a market, so enterprise goes forward with vigor, and so the national wealth increases. The success of 92 READINGS IN ECONOMIC PROBLEMS one enterprise in its appeal to public credit through the medium of the Stock Exchange invariably leads to another ; thus commerce and industry develop. Securities in America alone aggregate the total of forty-three billion dollars, more than one-third of the nation's wealth. These securities are owned by almost two million people. Having learned the difficult lessons of saving and judicious invest- ment, are not these people entitled to the safeguards of the Stock Exchange? Until the last century property and trade were so in- secure that if a man saved money, he had tO' hide it, or lend it through a money-broker at such usurious rates as would compensate him for bad debts. Today all this is changed by the banks and Stock Exchanges. Small investors, nO' less than large ones, require great conven- ience and promptness for their operations ; living widely apart, they must put full reliance on prices made by the Stock Exchange; they must have the most* accurate: inf oirmation ; they want prices fixed by the most scientific competition and by the largest possible num- ber of competitors ; they require a market in which they can sell and get their money at once; above all things they must know that they are dealing with reputable men. For these reasons the Stock Exchange exists. If it did not exist there Avould be no standard market for a large part of the country's material wealth. The investor on the one hand and the patent or railway on the other have nothing in common. Left to themselves they would never meet. They would be useless because resources and money have to be brought together to create wealth. A primary function of the Stock Exchange is to bring them together, and by standardizing prices, create values. Similarly, the investor, without the Stock Exchange to guide him, would have nowhere tO' turn for a fair price secured by competitive bidding. Worse than that, with- out a Stock Exchange to create standards and define the difference between good and bad investments, very many people would be at the' mercy of an army of dishonest promoters. Another great seiwice rendered by the Stock Exchange is the means it affords for transferring securities readily from hand to hand. To appreciate the importance of this fact, you have but to think of the difficulties and delays that attend the transfer of other forms of property which doi not enjoy Exchange facilities. The necessity for a quick sale of real estate affords an excellent example. The holder of securities is altogether independent. He knows the price of his holdings every hour in the day. He is exposed to no fraud. He has positive assurance that in the case of necessity, at a moment's notice, he can obtain at the prevailing price the value in FUNDAMBNTAL ECONOMIC INSTITUTIONS' 93 cash of every Stock Exchange security in his box. Such a man knows that the price which the ticker shows him represents the epitomised opinion oi the market and that it is a critical expression of the future. 58. The Functions of Exchanges. BY CHARLES A. CON ANT. The fundamental function of the exchanges is to give mobility to capital. Without them the stocks and bonds of the share com- pany could not be placed to advantage. No one would know what their value was on a given day, because the transactions in them would be private and unrecorded. The opportunities for fraud wO'Uld be multiplied a hundred fold. The mobility for capital af- forded by the corporation would be meager and inadequate if the holder of its bonds and shares did not know that at any moment he could take them to the exchanges and sell them. The publicity prevailing in stock-exchange quotations gives the hodder of a security not only the direct benefit O'f publicity, but the opinion of the most competent financiers of Europe and America. If they were dealing with him privately, they might withhold the information. But the quoted price stands as a guide to even the most ignorant holder of securities. The second benefit is in affording a test of the utility to the com- munity of the enterprises which solicit the support of investors. The judgment of experts is there expressed, through the medium of price, on the utility of the object dealt in. If an unprofitable rail- road is built in the wilderness of Manitoba, the investor docs not have to hunt up information on the freight and passengers carried : he has only to look at the quotations on the New York Stock Ex- change to know at once the judgment of experts on it as a com- mercial venture. If the investor finds that the stocks of cotton- mills are declining, he makes up his mind that there are nO' further demands for cotton mills. If stocks are exceptionally high, he knows that the public demands more cotton mills, and that an in- vestment in them will prove profitable. All this information is put before the investor in a single table of figures. It would be prac- tically unattainable in any other form,. Thus there is afforded to capital throug'hout the world an almost unfailing index of the course in which new production should be directed. Sup'po'se for a moment that the stock markets of the world were closed, that it was no longer possible to learn what concerns were paying dividends, what their stocks were worth, how industrial es- tablishments were faring. How would the average man determine 94 READINGS IN ECONOMIC PROBLEMS how new capital shouild be invested. He would have no guide ex- cept the most isolated facts gathered here and there at great ex- pense and trouble. A great misdirection of capital and energy- would result. The stock market is the great governor of values, — the guide which points the finger tO' where capital is needed and where it is not needed. The very sensitiveness of the stock market is one of its safe- guards. Again and again it is declared in the market reports that certain events have been discounted. As a consequence when the event actually happens, it results in nO' such great disturbance tO' values as was expected. Is it not better that this discounting of future possibilities should occur? Is it desirable that capital and production should march blindly to the edge of a precipice and then leap off, instead of descending a gradual decline? This discounting of the market enables the man whO' holds a given security to- convert it into money without being ruined. It enables the prudent man to hold on to his securities and even to buy those of the frightened and more excited. The produce exchanges afford a form of insurance. They en- able a man with contracts to execute in the future tO' ascertain today what will be the cost of his raw material in the future, and to know that he will get the raw material at that cost. Prudent dealers in great staples go into the market and buy and sell futures in such a way as to protect themselves, just as the prudent man or family goes to the insurance company and pays a premium in order to get a guarantee that his family will be protected against his death. Another important influence of the stock exchange is that which it exerts upon the money market. The possession by any country of a large mass of salable securities affords a powerful guarantee against the eft"ects of a severe money panic. If in New York there arises a sudden pressure for money, the banks call in loans and begin to husband their cash. If they hold large quantities of securi- ties salable on the London or Paris or Berlin market, a cable order will effect the sale of these in an hour, ai^d the gold proceeds will soon be available. These securities prevent sudden contraction and expansion in the rate of loans. This influence of the stock market has much the effect of a buffer upon the impact of twO' solid bodies. Crises are prevented when they can be prevented, and when they cannot they are anticipated, and their force is broken. Securities are in many cases better than money. If a large shipment of money has to be made fromi New' York to London, it is much more eco- nomical to ship securities of the same amount than to ship kegs of gold. Credit is forwarded by cable and the securities follow by FUNDAMENTAL ECONOMIC INSTITUTIONS 95 mail. All markets are thus brought into touch with each other, and respond to a fluctuation of a fraction of one per cent, but without the confusion and crash which would ensue if every sudden pressure for money was felt upon a market naked of such securities. There is another important consideration in this influence of the stock market upon modern society, which will perhaps gather up and bring into a clearer light some of the other points which have been made. The stock market, by bringing all values to a level in a common and public market, determines the direction of produc- tion in the only way in which it can be safely determined under the modern industrial system of production in anticipa- tion of demand. It does so by offering the highest price for money and for the earnings of money at the point where they are most needed. It is only through the money market and the stock ex- change together that any real clue is afforded of the need for capital, either territorially or in different industries. Capital is attracted to securities that are selling high because the industries they represent are earning well. Consequently there results a closer adjustment oi production to consumption, of the world's work to the world's need, than would be possible under any other system. 59. Speculation and the Preservation of Competition. BY HARRISON H. BRACe:. Competing business houses are by no means of equal strength. No small business house in its competition with a large company should be deprived of any help or agency which exists as a natural part of the world of commerce. The legislator should be especially careful not to destroy any agency which already helps to put the small business house on an equality with its larger competitor. Among such democratic influences of commerce is the custom of in- surance. A man of vast business interests does not need insurance so much as small operators. The small business man, by its aid, may undertake venturesome business enterprises and compete with the larger company on favorable terms. The speculative exchange constitutes a kind of underwriting organization in its broader sense, and renders it possible for men of moderate means to engage in a wide field of business operations. Were this form of insurance crippled, many of them would find no profitable employment for their capital and activities. The specu- lative exchanges deal in commodities or securities of uncertain value, and are so articulated with the commercial system that the business houses which are producing and distributing these com- 98 READINGS IN ECONOMIC PROBLEMS instance, are not traded in for future delivery, and the method by which they are bought shows the same preponderating control of market conditions. Oil also is an example. Where the number of buyers is few, and the commiodity regularly dealt in, the expedient of making some kind of arrangement whereby bidding shall be re- stricted is obvious. For the present the speculative exchanges intro- duce an important competing element intO' the calculations of those who would like to become monopolists. The markets furnished by organized speculation represent the most complete development of the competitive system and of democ- racy in trade, as opposed to monopoly and concentration of wealth and power. Upon the exchanges any one may deal, even though he have no extensive plant or arrangements for carrying commodi- ties. At the same time other business men outside the exchanges may rely upon the option system to protect them against vicissitudes which would otherwise cause them tO' abandon the field. Thus or- ganized speculation represents freedom of action and at the same time cooperation and division of labor and O'f functions. It is the people working with separate wills, and yet organized sO' comjpletely that they can accomplish their purposes by joint action. 60. The Experience of Germany with Stock Exchanges. BY THE HUGHES COMMITTEE. In 1892 a commission was appointed by the German government to investigate the methods of the Berlin Exchange. The regular business of the Exchange embraced both securities and commodi- ties; it was an open board where anybody by paying a small fee could trade. The broker could make such charge as he pleased for his services. Margins were not always required. Under the cir- cumstances many undesirable elements entered the exchange. The commission was composed of governmental officials, mer- chants, bankers, manufacturers, professors of political economy, and journalists. Its report was completed in November, 1893. Al- though there had been a wide-spread popular demand that all short selling be prohibited, the commission reported that such a policy would be harmful to German trade and industry. They were will- ing, however, to prohibit speculation in industrial stocks. The Reichstag, however, rejected the recommendations of the commission, and in 1896 enacted a law much more drastic. The landowners, constituting the powerful agrarian party, contended that short-selling lowered the price of agricultural products, and demanded that contracts on the Exchange for the future delivery of FUNDAMENTAL ECONOMIC INSTITUTIONS 99 wheat and flour be prohibited. The Reichstag assented to this de- mand. It also prohibited trading on the Exchange in industrial and mining shares for future delivery. It enacted that every person de- siring to carry on speculative transactions be required to enter his name in a public register, and that speculative trades by persons not so registering be deemed ganiibling contracts and void. The object was to deter small speculators and to restrict speculation to men of character and capital. The results were quite different from the intention of the legis- lature. Men of character and capital declined to advertise them- selves as speculators. The small fry found no difficulty in evading the law. Foreign brokers flocked to Berlin and established agencies for the purchase and sale of foreign stocks. Seventy such offices were opened in Berlin within one year after the law was passed and did a flourishing business. German capital was thus transferred to foreign markets. The Berlin Exchange became insignificant and the financial standing of Germany as a whole was impaired. There was, however, even a more serious consequence of the new law. While bankers and brokers were required to register, their customers were not compelled to do so. Consequently the latter could speculate through different brokers on both sides of the market, pocketing their profits and welching on their losses as gam- bling contracts. Numerous cases of this kind arose, and in some the plea of wagering was entered by men who had previously borne a good reputation. Another consequence was to turn over to the large banks much of the business previously done by independent houses. Persons who desired to make speculative investments in home securities ap- plied directly to the banks, depositing with them satisfactory security for the purchases. As the German banks were largely promoters of new enterprises, they could sell the securities to their depositors and finance the enterprise with the deposits. This was a profitable and safe business in good times, but attended by danger in periods of stringency, since the claims of depositors were payable on de- mand. Here again the law worked grotesquely, since customers w^hose names were not on the public register could, if the specula- tion turned out badly, reclaim the collateral or cash they had depos- ited as security. The evil consequences of the law brought about its partial repeal in 1908. By a law then passed the government may, in its discre- tion, authorize speculative transactions in industrial and mining securities of companies capitalized at not less than $5,000,000 ; the Stock Exchange Register was abolished; all persons whose names loo READINGS IN ECONOMIC PROBLEMS were in the commercial directory were declared legally bound by contracts made by them on the Exchange. Other persons, while not legally bound by such contracts, could not reclaim deposits of cash or collateral security for speculative contracts, on the plea that the contract was illegal. Germany is now seeking to recover the legitimate business thrown away twelve years ago. It still prohibits short selling of grain and flour, although the effects of the prohibition have been quite different from those which its supporters anticipated. As there are no open markets for these products, and no continuous quotations, both buyers and sellers are at a disadvantage ; prices are more fluctuating than they were before the passage of the law against short-selling. III. THE SOCIAL CONTROL OF INDUSTRIAL ACTIVITY. A. SOCIAL PROGRESS. 6i. The Nature of Social Progress. BY I,. T. HOBHOUSi:. I use the term "evolution" in regard to human society, and also the term "progress." This should imply that there is some differ- ence between them. By evolution, I mean any sort of growth; by social progress, the growth of social life in respect to those qualities to which human beings attach or can rationally attach value. Social progress, then, is only one among many possibilities of social evolu- tion. At least it is not to be assumed that every and any forai of social evolution is also a form or stage in social progress. For- example, the caste system is a product of social evolution, and the more rigid and narrow the caste, the more complex the hierarchy, the more completely has the caste system evolved. But most of us would question very strongly whether it could be considered in any sense a phase of social progress. So again there is at the present day a vigorous evolution of cartels, monopolies, rings and trusts ; there is an evolution of imperialism, of militarismi, of socialism, of a hundred tendencies as to the good or evil of which people differ. The fact that a thing is evolving is no proof that it is good ; the fact that society has evolved is no proof that it has progressed. The point is important because umder the influence O'f biological con^ ceptions the two' ideas are often confused, and the fact that human beings have lived under certain conditions is taken as proof of the value of those conditions, or perhaps as proving the futility of ethi- cal ideas which run. counter to evolutionary processes. Thus in a recent article I find a contemptuous reference to "the childlike desire to make things fair," which is "so clearly contrary to the order of the universe which progresses by natural selection." In this brief remark you will obsen^e two- immense assumptions, and one stark contradiction. The first assumtption is that the universe progresses — not humanity, observe, nor the mass of organic beings, nor even the earth, but the universe. The second is that it pro- gresses by natural selection, a hypothesis which has not yet ade- quately explained the bare fact of the variation of organic forms 102 RBADINGS IN ECONOMIC PROBLEMS on the surface of the earth. The contradiction is that progress is incompatible with fairness, the basic element in all judgments of value, so that we are called upon to recognize as valuable that by which our fundamental notions of value are set at naught. By studying certain sides of organic process people arrive at a particular hypothesis of the nature of the process. They erect this hypothesis into an universal and necessary law, and straightway call upon everyone else to acknowledge the law and conform to it in action. They do not see that they have passed from one sense of law to another, that they have confused a generalization with a command, and a statem,ent of facts with a principle of action. They accordingly miss the starting point fi-om' which a distinct conception of progress and its relation to human effort becomes possible. But for any useful theory of the bearing of evolution on social effort this conception is vital. We can get no^ light upon the subject un- less we begin with the clear perception that the object of social effort is the realization of ends to which human beings can ration- ally attach value, that is to say, the realization of ethical ends ; and this being understood, we may suitably use the term progress of any steps leading towards such realization. Our conclusion so far is that the nature of social progress can- not be determined by barely examining the actual conditions of social evolution. Evolution and progress are not the same thing. They may be opposed. They might even be so fundamentally op- posed that progress would be impossible. Because of the influence of biological notions on social and economic thought, one phase of the Darwinian theory must be noted. The main effect of his work in the world of science was tOi generate the conception of the progress of organic forms by means of a continuous struggle for existence wherein those best fitted by natural endowment to cope with the surroundings would tend to survive. In our field, after Darwin, it began to be held that man, in spite of his philosophy, was still an animal, still subject to the same laws of reproduction and variation, still modifiable in the same manner by the indirect selections of the individuals best fitted to their environment. The biological social philosopher had not to trouble himself about what was best ; nor, like the social investigator, to remain in doubt as to the broadest principles regu- lating the life of society. On both these questions his doubts were already solved by what he had learned in biolo^gy itself. The best was that which survived, and the persistent elimination of the unfit was the one method generally necessary tO' secure the survival of the best. Armed with this generalization he found himiself able to view the world at large with much complacency. SOCIAL CONTROL OF INDUSTRY 103 To him life was constantly and necessarily growing better. In €very species the least fit were alwa_vs being destroyed and the standard of the survivors proportionately raised. No doubt there remained in every society many features which at first sight seemed objectionable. But here again the evolutionist was in the happy position of being able to verify the existence of a soul of goodness in things evil. Was there acute industrial competition? It was the process by which the fittest came to the top. Were the losers in the struggle left to welter in dire poverty? They would the sooner die out. Were housing conditions a disgrace to civilization ? They were the natural environment of an unfit class, and the means whereby such a class prepared the way for its own extinction. Was infant mortality excessive? It weeded out the sickly and the weak- lings. Was there pestilence or famine? So many more of the unfit would perish ? Did tuberculosis claim a heavy toll ? The tuber- cular germs are great selectors skilled at probing the weak spots of living tissue. Were there wars and rumors of wars? War alone would give to the conquering race its due, the inheritence of the earth. In a word the only blot that the evolutionist could see upon the picture was the "maudlin sentiment" which seeks to hold out a hand to those who are down. The one sinner against progress is the man who tries to save the lamb from, the wolf. Could we abolish this unscientific individual, the prospects of the world would be unclouded. Yet, before we apply biological conceptions to social afifairs, we generally suppose that the highest ethics is that which expresses the completest mutual sympathy and the most highly evolved society that in which the efforts of its members are most completely ■coordinated to common ends, in which discord is most fully sub- dued to harmony. Accordingly we are driven to one of twO' alter- natives. Either our valuations are completely false, our notions of higher or lower unmeaning, or progress does not depend upon the naked struggle for existence. The biologist would cheerfully accept the first alternative. As we have already seen, he is dis- posed to tell us that we vainly seek to distort truth by importing our ethical standards. He is quite ready tO' insist that we must subordinate our judgmients of value to the survival test. We must judge good that which succeeds. Unfortunately for him at that stage his whole theory becomes a barren tautology. Progress now in his view results from the survival of the fittest, because pro'gress is the process wherein the fittest survive. Again it is always the fittest who survive, because the fact of their survival proves their iitness. I04 READINGS IN ECONOMIC PROBLEMS B. THE RISE OF LAISSEZ-FAIRE. 62. The Individualistic Spirit of America. BY WAI.TER E. WEYI.. The westward march of the pioneer gave to Americans a psy- chological twist which was tO' hinder the development of a social- ized democracy. The open continent intoxicated the American. It gave him an enlarged view of self. It dwarfed the co^mmon spirit. It made the American mind a little sovereignty of its own, acknow- ledging no allegiances and but few obligations. It created an in- dividualism, self-confident, short-sighted, lawless, doomed in the end tO' defeat itself, as the boundless opportunities which gave it birth became at last circumscribed. The colonists were more self-reliant than even the original, self- reliant British stock, since, broadly speaking, only selected men essayed the ocean journey. With the aid of his family, the colonist plowed his acres, shot his game, caught his fish, made his soap and candles, dressed and cured his leather, spun and wove, did his own carpentering, and sometimes his own smithing. He made what he ate, wore, and lived in, and he made and held his own opinions. His philosophy was that of the lonely self-contained farmhouse. As the continent was transformed by the settlers, so in turn the settlers were transformed by the continent. It was the continent that created the typical individualistic American spirit. The scattering of so small a population over so large an area led to an unpre- cedented exaggeration of the centrifugal forces of society. The individual stood alone. The most representative type of this American individualism was the pioneer. It was he who' typified the expansive force of American civilization in the rarefied American continent. His al- most savage individualism triumphed over forest, swamps, malaria, privation, and solitude. It transformed his rough log cabin into a "castle" and his vague far-reaching land and his roaming swine into his "property." It showed itself in a sense of complete self-cur- tailment and in a churlish though free hospitality. The self-reliant, aggressive individualism of the pioneer was also the spirit of the American factory builder, town boomer, railroad wrecker, promoter, trust manipulator, and a long line of spectacu^ larly successful industrial leaders. In the Western land, however, individualism was a national, not a class, characteristic. The con- tinent was one enormous workshop, and it was new, not like the scarred European continent, which had been the burying ground SOCIAL CONTROL OF INDUSTRY 105 of centuries of fighting, starving populations. It was not that American industrial leaders imitated the pioneer, but that they were subject to conditions similar tO' his. Everywhere in America there was a low external pressure, which resulted in an inflation of indi- vidualities. The pioneer acted for himself because there were no others ; he knew no law because he knew no society. So-, with the others, the vastness of the land compared with the fewness of the people, the richness of the land compared with the labor of the people, induced an instinctive taking, an instinctive wasting, a sense oi magnificence, a toleration of others, and a lawless, traditional exploitation of natural resources according tO' the will and ideas of each. American individualism showed itself in a certain magnificence, which to this day afifects the life of the nation. The American, like a young heir, developed a confused sense of abounding wealth. He did not mind waste, for he throve while wasting with both hands. He derided small gains and petty savings. Small gains were for small men. This ''magnificence" revealed itself in ways ludicrous and grandiose. More than in anything else it showed itself in American bragging. The nation, its resources, excellencies, and virtues, were coiloissal, continental. Even its vices were bound- less, and therefore, admirable. This magnificence invaded the arid intellectual .life of America. It inspired our perfervid oratory. It was the very essence of our humor. Another side of this individualism was an illimitable, supreme:, categorical optimism. As the wasted lands led to new lands, as the ruined man rose richer than before, a feeling spread that all was well with America. Evils there were, but the continent was large, movement easy. Economic crisis gave way to newer prosperity. Invention, scientific discovery, improved transportation, opened the continent ever wider, and the optimism of America clung with invincible credulity to the inevitaibleness of progress. Faith in America, faith in one's self, became a creed. The cautious maxims of poverty-bred generations were belied. In America a rolling stone did gather moss ; in America a penny saved was a dollar lost. The dissenter, the ever-falsified prophet of evil, was derided. Despite political corruption and absurd legislation, despite an extravagance of errors, the rallying continent and the invincible buoyancy of the American spirit triumphed. Confidence, not caution, was the law oif business. A corallary of American optimism was tolerance. This toler- ance, which was half-part indifference, extended to slavery, slums, piratical business, and political corruption. The presence of a com- io6 READINGS IN ECONOMIC PROBLEMS munity of unlike free men, the fluidity of American life, the easy association in business and society O'f diverse elements, the free ex- change of goods and ideas between different sections, and prosperity, all made for tolerance. To' a well-fed, well-housed, suitably-mated man, few beliefs, opinions, or prejudices were intolerable. The continent made us a "practical" people. We judged pol- icies by results; by immediate, visible, realizable results. We did not think things out. We did not generalize. Our political and economic life appeared as a disconnected succession of suddenly arising problems, each of which was tO' be singly met. We did not determine on definite long-time policies. America lived under the domain of the immediate. The Americans were a "practical" people. The crass, unbounded individualism of the practical American found its highest expression in private business and the quest for money. America was called the Land of Dollars. The dollar was omnipotent. Traditions being weak, classes inchoate, and the state inactive, the individual in measuring his success accepted this only available standard. The very fluidity of the nebulous communities, the ease with which one man became successfully laborer, teacher, farmer, lawyer, soldier, legislator, and banker, and the prevalence of the creed that any man could do anything, tended to reduce all the inequalities of life to the one equality of the dollar. It was, moreover, a useful and essential standard ; for it was the dollar, not the title of nobility, or the university degree, that could conquer the land. The possession of money was prima facie evidence of a man's usefulness to society. Each man worshipped in the million- aire the apotheosis of his individual self. American individualism, applied to business, explained all our then economic arrangements and all our business methods and tra- ditions. It led to a veritable "pay streak" theory of business. The American followed the one lead, raised the one crop, worked the one vein, cut the best trees, took everywhere the cream of the cream. The American shipbuilder built ships to sail, not to last. Factories and cities were built for immediate profit, like the cheap shanties O'f a moving gang of Polish railroad laborers. Intensity became the law of business. The night was made "joint laborer with the day." In the North the free workers were lured into intense labor and excessive overtime; in the South, on some of the plantations of Louisiana, it was found profitable to work off a stock of negroes once every seven years and buy a new set with the pro- ceeds of the cane. As for the property, the goose was worth less than the golden e^g. The sequel of such untrammeled individualism was a brutally SOCIAL CONTROL OF INDUSTRY 107 unprincipled code of business ethics. Every man was presumed capable of playing his own game. If a simple-minded man bought a broken-winded horse, a salted gold mine, a city lot in Lake Michi- gan, or the mythical wooden nutmeg, it was his lookout. He could not protest to a community which would have laughed at the fool and his folly. The buyer did what some men do when they receive a counterfeit dollar. He kept silent and passed it on. Upon com- petitors, the individualist turned the same batteries. Competition, the fetish of America, was largely unregulated by public opinion. In the relentless struggle for patronage, bribery, treating, false pretense, the buying of rivals' agents, the damaging of rivals' wares, ingenious chicanery of all sorts, entered into the game. Competition was war, and in war all was fair. The individualism of America led to gambling; competition was gambling. The continent offered a fortune to the lucky specu- lator. There was no foretelling the fancy of the public. Men bought, luckily or unluckily, mines, stocks, great tracts of land ; they appealed to the God of Chance as they appealed to the silent continent. They placed the years of their lives and their precarious fortunes upon the cast of a die. America was one large gambling "joint," where money, success, and prestige were the counters, and the players were old men and young woinen, pioneers and workmen, and little boys, devoutly reading conventionalised biographies of successful men. It was indeed a strange psychological world in which the Amer- ican individualist found himself, when, with the reaching of the frontier, American enterprise turned back upon itself. The little gambler was like the belated boy who dreams of a Far West of In- dian trails, but finds there only railways and automobile roads. The individualistic American was dumfounded when he saw favorable terminal facilities, public service franchises, and other special priv- ileges, given to a competitor, had ended competition ; when he saw the trusts organizing a fictitious competitiori against themselves. The individualist could no longer rely upon his automatic "unalien- able rights" and his fair field and no favor. Individually he was impotent and he was still an individualist. The monopolist was also an individualist, unabashed and unreconstructed. Into his hands fell the usufruct of science and invention. He sat at the gate taking a tribute which grew as millions were added to the population. Like Pippa he sang, "God's in His heaven ; all's right with the world." io8 READINGS IN ECONOMIC PROBLEMS C. HISTORICAL ASPECTS OF THE LAISSEZ-FAIRE CONCEPT. 63. The Fundamental Law of Nature. BY wiLUAM bi,ackstone;. As, therefore, the Creator is a being, not only oi infinite power and wisdom, but also of infinite goodness, he has been pleased so to contrive the constitution and frame of humanity, that we should want no other prompter to enquire after and pursue the rule of right, but only our self love, that universal principle of action. For he has so intimately connected, so inseparably interwoven the laws of external justice with the happiness of each individual that the latter cannot be attained but by observing the former, and if the former be punctually obeyed, it cannot but induce the latter. In consequence of which mutual connection of justice and human felicity, he has not preplexed the law of nature with a multitude of abstracted rules and precepts, referring merely to the fitness or unfitness of things, as some have vainly surmised, but has graciously reduced the rule of obedience to this one paternal precept, "that man should pursue his own true and substantial happiness." This is the foundation of what we call ethics or natural law; for the several articles into which it is branched in our system amount to no more than demonstrating that this or that action tends to man's real happiness, and therefore very justly concluding that the performance of it is a part of the law of nature; or, on the other hand, that this or that action is destructive to man's real happiness, and therefore that the law of nature forbids it. 64. A Diatribe against Human Institutions. BY J. J. ROUSSKAU. All things are good as their Author made them, but everything degenerates in the hands of man. By mian our native soil is forced to nourish plants brought from foreign regions, and one tree is made to bear the fruit of another. Man brings about a general confusion of elements, climates, and seasons ; he mutilates his dogs, his horses, and his slaves ; he seems to delight only in monsters and deformity. He is not content with anything as Nature left it. As things now are, a man left to himself from his birth would, in his association with others, prove the most preposterous creature possible. The prejudices, authority, necessity, example, and, in short, the vicious social institutions in which we find ourselves sub- SOCIAL CONTROL OF INDUSTRY 109 merged, would stifle everything natural in him, and yet give him nothing in return. He would be like a shrub which has sprung up by accident in the middle of the highway, to perish by being thrust this way and that and trampled upon by passers-by. All our wisdom consists in servile prejudices; all our customs are but suggestions, anxiety and constraint. Civilized man is born, lives, dies in a state of slavery. At his birth he is sewed in swadling clothes ; at his death he is nailed in a cofiin; as long as he preserves the human form he is fettered by our institutions. 65. A Plea against Governmental Restraints. BY ADAM SMITH. Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can com'- mand. It is his own advantage, indeed, and not that of the society, which he has in view. But the study of his own advantage, natur- ally, or rather necessarily, leads him to prefer that employment which is most advantageous tO' the societ}^ First, every individual endeavors to employ his capital as near home as he can, and consequently as much as he can in the support of domestic industry, provided always that he can thereby obtain the ordinary, or not a great deal less than the ordinary, profits of stock. Secondly, every individual who employs his capital in the support of domestic industry necessarily endeavors so to direct that industry, that its produce may be O'f the greatest possible value. The produce of industry is what it adds to the subject or materials upon which it is employed. In proportion as the value of this produce is great or small, so will likewise be the profits of the employer. But it is only for the sake of profit that any man em-- ploys a capital in the support of industry ; and he will always, there- fore, endeavor to employ it in the support ot that industry of which the produce is likely to be of the greatest value, or tO' exchange for the greatest quantity either of money or of other goods. But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its in- dustry, or, rather, is precisely the same thing with that exchange- able value. As every individual, therefore, endeavors as much as he can both tO' employ his capital in the support of domestic in- dustry, and so to direct that industry that its produce may be of the greatest value, every individual necessarily labors to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows I lo READINGS IN ECONOMIC PROBLEMS how much he is pro'iiiioting it. By preferring- the support of do- mestic tO' that of foreign industry, he intends only his own security ; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which v/as no^ part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it. What is the species of domestic industry which his capital can employ, and of which the produce is likely tO' be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman who should attempt to direct private people in what manner they ought to- employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only toi no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who- had folly and presumption enough to fancy himself fit tO' exercise it. 66. A General Condemnation of Government. BY WII.UAM GODWIN. Society is an ideal existence, and not on its own account entitled to the smallest regard. The wealth, prosperity, and glo-ry of the whole are unintelligible chimeras. Set noi value on anything, but in proportion as you are convinced of its tendency to make indi- vidual men happy and virtuous. Benefit, by every practical mode, man wherever he exists ; but be not deceived by the specious idea of affording services to a body of men, for which no individual man is the better. Individuals cannot have too frequent or unlimited intercourse with each other; but societies of men have no interests to explain and adjust, except so- far as error and violence may render explanation necessary. This consideration annihilates at once the principal objects of that mysterious and crooked policy which has hitherto occupied the attention of governments. Government can have but two legitimate purposes, the suppres- sion of injustice against individuals within the community, and the common defence against external invasion. SOCIAL CONTROL OF INDUSTRY m Legislation, that is, the authoritative enunciation of abstract or general propositions, is a function of equivocal nature, and will never be exercised in a pure state of society, or a state approaching to purity, but with great caution and unwillingness. It is the most absolute of the functions of government, and government is itself a remedy that invariably brings its own evils along with it. Legis- lation, as it has been usually understood, is not an affair of human competence. Reason is the only legislator, and her decrees are irre- vocable and uniform. The functions of society extend, not to- the making, but the interpreting of law; it cannot decree, it can only declare that which the nature of things has already decreed, and the propriety of which irresistibly flows from the circumstances of the case. The true reason why the miass of mankind has so often been made the dupe of knaves has been the mysterious and complicated nature of the social system. Once annihilate the quackery of government, and the most homebred understanding will be prepared to scorn the shallow artifices of the state juggler that would mis- lead him. With what delight must every well informed friend of mankind look forward to the auspicious period, the dissolution of political government, of that brute engine, which has been the only perennial cause of the vices of mankind, and which has mischiefs of various forms incorporated with substance, and not otherwise to be removed than by its utter annihilation. . 67. The Identity of Individual and Social Good. BY PIERCY R.\VEN STONE). Nature has implanted in every man's breast an instinct which teaches him intuitively to pursue his own happiness ; and, by con- necting the welfare of every part of society with that of the whole, she has wisely ordained that he shall not be able toi realize his own wishes without contributing to the happiness of others Every man may thus safely be intrusted with the care of work- ing out his own prosperity. It is not necessary for governmients, it is therefore no part of their duty, to teach tO' individuals what will most conduce to the success of their pursuits; they are ill-cal- culated for such a superintendence. All care of this sort is on their part wholly impertinent. Their functions are of quite a different nature ; to correct the vicious attachment to their own interests which too frequently induces men to seek their own apparent good by the injury of others, which would disorder the whole scheme of society, to bring about what they mistakenly consider their own happiness. 112 READINGS IN ECONOMIC PROBLEMS To restrain, not to direct, is the true function of the government ; it is the only one it is called on to perfonn,, it is the only one it can safely execute. It never goes out of its province without doing mischief. The mischief is not always apparent, for the constitution of the patient is often sufficiently strong to resist the deleterious effects of the quackery. But it is not safe to try experiments which can do no good, merely because the strength of the patient may pre- vent them from being injurious. The spirit of interference has never manifested itself so strongly as of late years. It constitutes the very essence of modern political economy. Everything is to be done by the state; nothing is to be left to the discretion of individuals. It is proposed tO' transfer men into a species of political nursery-ground, where the quality of plants is to^ be regulated with mathematical exactness, to^ be fitted to the capacity of the soil; where every exuberance in their shoots is to be immediately pruned away, and their branches confined within the bounds of the supporting espalier. 68. A Protest against Useless Restrictions. BY JEREMY BENTHAM. Ashurst. — The law of this country only lays such restraints on the actions of individuals as are necessary for the safety and good order of the comimunity at large. Truth. — I sow corn : partridges eat it, and if I attempt to defend it against the partridges, I am fined or sent to gaol : all this, for fear a great man, who is above sowing corn, should be in want of par- tridges. The trade I was born to is overstocked; hands are wanting in another. If I offer to work at that other, I may be sent to gaol for it. " Why ? Because I have not been working at it as an apprentice for seven years. What's the consequence? That, as there is no work for men in my original trade, I must either come upon the parish or starve. There is no employment for me in my own parish: there is abundance in the next. Yet if I offer to go there, I am driven away. Why? Because I might become unable to work one of these days, and so I must not work while I am aible. I am thrown upon one parish now, for fear I should fall upon another, forty or fifty years hence. At this rate how is work ever to be got done? If a man is not poor, he won't work : and if he is poor, the law won't let him. How then is it that so much is done as is done? As pockets are picked— by stealth, and because the law is so wicked that it is only SOCIAL CONTROL OF INDUSTRY 113 here and there that a man can be found wicked enough to think of executing it. Pray, Mr. Justice, how is the community you speak of the better for any of these restraints? and where is the necessity of them? and how is safety strengthened or good order benefitted by them ? But these are only three out of this thousand. D. THE CHARACTER AND MEANING OF LAISSEZ- FAIRE. . 6g. The Economic-Political Philosophy of Individualism. BY ALBERT V. DICEY. IndividuaHsm as regards legislation is popularly connected with the name and the principles of Bentham. The ideas which under- lie the Benthamite or individualistic scheme of reform may con- veniently be summarized under three leading principles and two corollaries. • I. English law, as it existed at the end of the eighteenth cen- tury, had developed almost hap-hazard, as the result of customs or modes of thought which had prevailed at different periods. The laws had for the most part never ben enacted. In order to amend the fabric of the law we must, so Bentham insisted, lay down a plan grounded on fixed principles. Legislation, in short, he proclamied, is a science based on the characteristics of human nature, and the art of law-making, if it is to be successful, must be the application of legislative principles. II. The right aim of legislation is the carrying out of the principle of utility, or, in other words, the proper end* of every law is the promotion of the greatest happiness of the greatest number. This principle is the formula with which popular memory has most closely connected the name o^f Bentham. Whatever objections this principle may be open to, one may with confidence assert that it is far more applicable to law than to morals, for at least two reasons : First, legislation deals with numbers and with whole classes of men ; morality deals with individuals. It is obviously easier to determine what are the things which as a general rule promote the happiness of a large number of persons, than to form even a con- jecture as to what may constitute the happiness of an individual. Let it be noted that the law aims not at positive happiness, but only citizens of a state. It merely favors the existence of the con- ditions under which it is likely that its subjects will prosper. But 114 READINGS IN ECONOMIC PROBLEMS here we come across another distinction. Secondly, law is concerned primarily with external actions, and is only very indirectly concerned with motives. Morality, on the other hand, is primarily concerned with motives and feelings. But it is far easier to maintain that the principle of utility is the proper standard of right action than that it supplies the foundation on which rests the conviction of right or wrong. Ideas of happiness, it has been objected, vary in different ages, countries, and among different classes; a legislator, therefore, gains no real guidance from the dogma that laws should aim at pro- moting the greatest happiness of the greatest number. To this objection there exists at least two answers. The first is that, even if the variability of men's conceptions of happiness be admitted, the concession proves no more than that the application of the principle of utility is conditioned by the ideas of human welfare which prevail at a given time in a given country. There is no reason why utilitarianism should refuse to accept this conclusion. Different laws may promote the happiness of diiferent people. The second reply is that, as regards the conditions of public prosperity, the citizens of civilized states have, in modern times, reached a large amount of agreement. For instance, who* can seriously doubt that a plentiful supply of cheap food, efficient legal protection against violence and fraud, and the freedom of all classes from excessive labor conduce to the public welfare? What man out of Bedlam ever dreamed of a country the happier for pestilence, famine and war? Laws deal with very ordinary matters, and deal with them in a rough and ready manner. The character, therefore, of a law, may well be tested by the rough criterion embodied in the doctrine of utility. There stilt exists, however, an objection that must be examined with care. Bentham' and his disciples have displayed a tendency to underestimate the diversity between human beings. They have too easily accepted the notion of uniformity in ideas of happiness in different countries and different ages. This supposition has facil- itated legislation, but it has led to the feeling that laws which in the ninteenth century promoted the happiness of Englishmen, must at all times promote the happiness of the inhabitants of all countries. The foundation then of legislative utilitarianism is the combi- nation of two convictions. The one is the belief that the end of human existence is the attainment of happiness ; the other is the assurance that legislation is a science and that the aim of laws is the promotion of human happiness. III. Every person is in the main and as a general rule the SOCIAL CONTROL OF INDUSTRY 115 best judge of his own happiness. Hence legislation should aim at the removal of all those restrictions on the free action of an indi- vidual which are not necessary for securing the like freedom on the part of his neighbors. This dogma of laissez faire is not from a logical point of view an essential article of the utilitarian creed. A benevolent despot might enforce upon his people laws which, though they might diminish individual liberty, were likely, nevertheless, to ensure the well-being of his people. Yet laissez-faire was practically the mO'St vital part of Bentham's doctrine. Benthani perceived that under a system of ancient customs modified by hap-hazard legislation, un- numbered restraints were placed on the actions oi individuals, which were in no sense necessary for the safety and good order of the community at large, and he inferred at once that these re- straints were evils. Consequently we have from him the eulogy of laissez-faire. But with him and his disciples it was a totally dif- ferent thing froim easy acquiescence in the existing conditions of life. It was a war-cry. It sounded the attack upon every restric- tion, not justifiable by some definite and assignable reason of utility. From these three guiding principles O'f legislative utilitarianism — the scientific character of sound legislation, the principle of utility, faith in laissez-faire — English individualists have in practice deduced the two corollaries : that the law ought to extend tO' the sphere and enforce the obligation of contracts; and that, as regards the pos- session of political power, every man ought tO' count for one and no man count for more than one. Each of these ideas has been con- stantly entertained by men whoi have never reduced it to a formula or carried it out to its full logical result ; each of these two ideas has profoundly influenced modern legislation. 70. The Authoritative Basis of the Laissez-Faire Concept. BY WALTON H. HAMILTO'N. There is nothing novel in the assertion that deference to author- ity is the most persistent and fundamental of the many aspects of the intellectual attitude, laissez-faire. True it is that the expression carries the idea of an industrial regime going its way, untrammeled by state interference. In fact its most obvious meaning seems to be a policy under which the individual shall be legally free to select his own occupation, choose his own business associates, em- ploy an industrial technique and organization which is to his own liking, and buy his materials and labor and market his wares on ii6 READINGS IN ECONOMIC PROBLEMS terms voluntarily made. Thus it means freedom for the individual in the immediate conduct O'f his business and the sale of his wares. But it does not totally exclude authority. Many advocates of laissez-faire see nothing amiss in governmental grants of public lands, subsidies, patents, or franchises. Many would permit the state to levy customs duties intended to check importations, raise prices, and increase the number of those engaged in protected in- dustries. All would allow the state tO' encourage commerce by im- proving transportation and credit facilities. It is perhaps not an overstatement to say that the advocate of laissez-faire regards as interference, not all political activity affecting industry, but only such as adversely affects business interests. Instances such as the above, however, are only passing phases of the situation. Penetrating and conditioning industrial activity at every point there is a tangled web of legal, political and social institutions. Among the legal in- stitutions are the prohibition of physical violence in industrial ac- tivity, a recognition of private property rights, machinery for com- pelling the discharge of obligations voluntarily assumed, and pre- scribed forms for partnerships and corporations. Among the social institutions are a system of intangible and immjaterial prop- erty rights, the manifestations of public and class opinion, a code of business ethics, and a system of collective action and the recog- nition of collective authority in individual industrial establishments. Upon these the advocate O'f laissez-faire of necessity takes an atti- tude. Since these institutions change slowly and are conceived of as indispensible, they have generally been regarded by the business man as a part of the unchangeable nature of things. There- fore laissez-faire formally says nothing about them. Yet its very silence is the best evidence of its unqualified approval of habitual legal and social institutions and its demand that the individual he j) ^ hedged about with conventional authorit}/. Not only is the province from which authorit}^ is excluded a narrow one, but even in that province laissez-faire is conceived of as a m,ere means for securing some desirable social end. Neither theorist nor layman, in formulating his reasons for supporting this policy, declares himself in favor of a purely acquisitive system, wherein the strong shall wax stronger at the expense of the weak. By the older school, whose aspirations for society were democratic, it was argued that the competitive struggle, under laissez-faire, resulted in the greatest good, not only to the highly successful few, but to every member of the social community. By the newer school the basis of whose theories is biological, and whose ideal is aris- tocratic, its justification is found in the elimination of the unfit, SOCIAL CONTROL OP INDUSTRY ny the perpetuation of the fit, and the tendency of society towards a higher cultural level. By some of the latter charity is strongly condemned, not hecause it strips the fit of some of the earnings which the industrial struggle has brought him, but because the survival of dependants tends to lower the prevailing type of civilization. IntO' the merits oi these theories this is not the place to go. Here it is enough to note that even its most extreme advo- cates do not conceive of laissez-faire as a theory of predation, nor seek to justify it by any benefits, however great, which it may con- fer on the individual. On the contrary, over and above him, a con- scious social end is set up, to the realization of which his activities must tend, and in view of which the policy itself is tO' be approved or condemned. 71. The Unscientific Character of Laissez-Faire. BY J. E. CAIRNES. Political Economy has to do with wealth. But what is the problem concerning wealth which it undertakes to solve? I think the prevailing notion is that it undertakes to show that wealth may be most rapidly increased and most fairly distributed, by the simple process of leaving people tO' follow the promptings of self-interest unrestrained either by the State or by public opinion. That is the doctrine of laissez-faire. I shall endeavor to show that the maxim of laissez-faire has no scientific basis whatever, but is at best a mere handy rule of practice. If the doctrine of laissez-faire is to be taken as a scientific prin- ciple, its implied assertion is this : that, taking human beings as they are, in their intellectual and physical surroundings, and accepting the institution of private property as commonly understood, the promptings of self-interest will lead individuals, in all that range of their conduct which has to do with their material wellbeing, spontaneously to follow that course which is most for their own good and for the good of all. You will at once see that it involves the two following assumptions: first, that the interests of indi- viduals are fundamentally the same, secondly, that individuals know their interests in the sense in which they are coincident with the in- terests of others, and that, in the absence of coercion, they will in this sense follow themi. If these two propositions be made out, the policy of laissez-faire follows with scientific rigour. But can they be made out? For my part I am disposed to accept the first one, that human interests, well understood, are fundamentally at one. But how as to this assumption that people know their interests in 1 18 READINGS IN ECONOMIC PROBLEMS the sense in which they are identical with the interests of others, and that they spontaneously follow them in this sense? The advo- cates of laissez-faire usually argue that human interests are natur- alh^ harmonious ; therefore we have only tO' leave people free, and social harmony will result ; as if it were an obvious thing that people know their interests in the sense in which they coincide with the interests of others, and that knowing them, they must follow them, as if there were no such things in the world as passion, prejudice, custom, esprit de corps, class interest, to draw people aside from the pursuit of their interests in the largest and highest sense ! Here is the fatal flaw on the very threshold of the argument. Nothing is easier than to show that people follow their interest, in the sense in which they understand their interest. But between following their interest in this sense and in the sense in which it is coincident with the interests of other people, a chasm yawns. That chasm in the argument of laissez-faire has never been bridged. To come to the important point, what is it that people under- stand to be their interests? What did landlords, as a class, under- stand to be their interests down to 1846, when they maintained the Corn Laws as indispensable to their rents, and the prop of their political power? What do Irish landlords understand to be their in- terests when they are withheld only by fear of assassination from evicting their tenants to consolidate their estates? What did em- ployers in former days understand tO' be their interests when they enacted statutes of laborers? Or, in more recent times, when a ten hours' act became necessary to- protect women and children against the unscrupulous pursuit of gain? I ask if any one can seriously consider the state of things represented by these examples, and retain absolute confidence in his maxim of laissez-faire? The truly significant circumstance is that the policy expressed by laissez-faire has been steadily progressive for nearly half a century, and yet we have no' sign of mitigation in the harshest features of our social state. Those ugly social features, those violent contrasts of poverty and wealth, that strike so unpleasantly the eye Oif every foreign observer in this country, are still painfully prom- inent. In a word, "the grand final result, the indefinite approxi- mation of all classes towards a level which is always rising," seems as yet scarcely nearer. This seems tO' me to^ abate our confidence! in laissez-faire as the panacea for industrial ills. There is no- evidence to warrant the assumption that lies at the root of this doctrine. Human beings follow their interests according to their delights and dispositions; but not necessarily in that sense in which the interest oi the individual is coincident with that of SOCIAL CONTROL OP INDUSTRY 119 others or of the whole. It follows that there is no' security that the economic phenomena of society will always arrange themselves spontaneously in the way that is most for the common good. In other words laissez-faire falls to the ground as a scientific doctrine. At best it is a practical rule and not a doctrine of science. I^ike most other practical rules, it is open to numierous exceptions. Above all, it must never for a moment be allowed to stand in the way of the candid consideration of any promising proposal of social or industrial reform. 72. How Laissez-Faire has Worked out in Practice. BY L. T. IIO'BHOCJSE. In the main, the teaching of the school tended to a restricted view of the function of government. Government had to maintain order, to restrain men from violence and fraud, to hold them secure in person and property against foreign and domiestic enemies, that they may rely upon reaping where they have sown, and may enjoy the fruits of their industry. The factory system early brought matters to a head at one point by the systematic employment of women and young children under conditions which outraged the public conscience when they became known. In the case of children it was admitted that the principle of free contract could not apply. It left the child toi be exploited by the employer in his own interest. But this principle admitted of great extension. If the child was helpless, was the grown-up person, man or woman, in a much better position ? Here was the owner of a mill employing five hundred hands. Here was an operative possessed oi no- alternative means of subsistence seek- ing employment. Suppose them to- bargain as to terms. If the bargain failed the employer lost one man. At worst he miight have a little difficulty for a day or two in working a single machine. During the same days the operative might have nothing to eat, and might see his children going hungry. Where was the efifective liberty in such an arrangement? In the matter of contract true freedom postulates substantial equality between the parties. In pro- portion as one party is in a position of advantage he is able to dictate the terms. In proportion as the other party is in a weak position, he must accept unfavorable terms. Hence the truth of Walker's dictum that economic injuries tend tO' perpetuate them- selves. For purposes of legislation the state began with the child, where the case was overwhelming. It went on to include the young person and the woman. It drew the line at the adult male, and I20 READINGS IN ECONOMIC PROBLEMS it is only within our own tim:e that legislation has avowedly under- taken the task oi controlling the conditions of industry. To this it has been driven by the manifest teachings of experience that liberty without equality is a name of noble sound and squalid result. In place of the S3^stem of unfettered agreement contemplated, the industrial system) which has actually grown up' and is in pro- cess of further development rests on conditions prescribed- by the state. The law provides for the safety of the worker and sanitary conditions of empdoyment. It prescribes the length of the working day for women and children. In the future it will probably deal freely with the hours for men. It makes employers liable for in- juries sulTered by operatives. Within these limits it allows freedom of contract. The theory of laissez-faire asumed that the state would hold the ring. It would supress force and fraud, keep property safe, and aid men in enforcing contracts. On these conditions men should be absolutely free to compete with each other, so that their best energies should be called forth. But why, on these conditions, just these, and no others? Why should the State insure protection of person and property? The time was when the strong man armed kept his goods, and incidentally his neig^hbor's goods too, if he could get hold of them. Why should the State intervene io do for a man that which his ancestors did for themselves? Why should a man who has been soundly beaten in physical fight gO' tO' a public authority for redress ? How much more manly to fight his own battle. Was it not a kind of pauperization to make men secure in person and property, through nO' efforts of their own, by the agency of a state machinery operating over their heads? Would not a really consistent individualism abolish this machinery? "But," the advo- cate of laissez-faire may reply, "the use of force is criminal, and the state must suppress crime." So men held in the ninteenth cen- tury. But there was an earlier time when they did not take this view, but left it to individuals and their kinsfolk to revenge their own injuries. Was not this a time of more unrestrained indi- vidual liberty. On what principle then is the line drawn, sO' as to specify certain injuries which the State may prohibit and to mark off others w'hich it must leave untouched? Individualism as ordinarily understood, not only takes the police- man and the law court for granted. It also takes the rights of property for granted. But what is meant by the rights of property ? In ordinary use the phrase means just that system tO' which long usage has accustomed us. This is a system by which a man is free to acquire by any method of production or exchange, within the SOCIAL CONTROL OF INDUSTRY 121 limits of the law whatever he can oi land, consumable goods, or capital ; to dispose of it at his own will and pleasure for his own purposes, to destroy it if he likes, to give it away or sell it as it suits him, and at death tO' bequeath it to whomsoever he will. The State can take a part of a man's property by taxation. But in all taxation the State is taking something from a man which is "his," and in so doing is justified only by necessity. In many ways, in the face of actual conditions, the individualist has been driven to a change in property rights in the direction of greater social control. The school of Henry George, individualists though thej^ be, would purge the social system oi the private ownership of land. This alone, say they, will insure genuine freedom to all individuals. Thus individualism, when it grapples with the facts, is driven no small distance towards state regulation. Once again we have found that to maintain individual freedom and equality we have to extend the sphere of social control. We cannot assume any of the rights of property as axiomatic. We must look at their actual workings and consider how they affect the life of society. E. THE LIMITS OF THE PROVINCE OF GOVERNMENT. 73. The Individualistic Conception of the Province of Govern- ment. BY JOHN STUART MII^Iv. We have now reached the question to what objects governmental intervention in the affairs of society may or should extend. The supporters of interference 'have been content with asserting a gen- eral right and duty on the part of government to intervene, where- ever its intervention would be useful ; and when those who have been called the laissez-faire school have attempted any definite lim- itation of the province O'f government, they have usually restricted it to the protection of person and property against force and fraud ; a definition to which neither they nor any one else can delib- erately adhere, since it excludes some of the most indispensable and unanimously recognized of the duties of government. Whatever theory we adopt respecting the foundation of the social union, and under whatever political institutions we live, there is a circle around every individual human being, which no government, be it that of one, or a few, or of the many, ought tO' be permitted to overstep: there is a part of the life of every person who' has come to- years of discretion, within which the individuality oi that person ought to 122 READINGS IN ECONOMIC PROBLEMS reign uncontrolled either by any other individual or by the public collectively. That there is, or ought to be, some space in human existence thus entrenched around, and sacred from authoritative intrusion, no one who professes the smallest regard to human free- dom or dignity will call in question. Even in those portions of conduct which do affect the interest of others, the onus of making out a case always lies on the defend- ers of legal prohibitions. It is not a merely constructive or presump- tive injury to others, which will justify the interference of law with individual freedom. To be prevented from doing what one is in- clined to, or from acting according to one's own judgment of what is desirable, is not only always irksome, but always tends to starve the development of some portion of the bodily oi' mental faculties, either sensitive or active ; and unless the conscience of the individual goes freely with the legal restraint, it partakes, either in a great or in a small degree, of the degradation of slavery. A second general objection to government agency is that every increase of the functions developing on the government is an in- crease of its power, both in the form of authority, and still more, in the indirect form of influence. The public collectively is abundantly ready to impose, not only its generally narrow views of its interests, but its abstract opinions, and even its tastes, as laws binding upon individuals. And the present civilization tends so strongly to make the power of persons acting in masses the only substantial power in society, that there never was more necessity for surrounding indi- vidual independence of thought, speech, and conduct, with the most powerful defences. Hence it is no less important in a democratic than in any other government, that all tendency on the part of publia authorities to stretch their interference should be regarded with un- remitting jealousy. A third general objection to government agency rests on the principle of the division of labour. Every additional function un- dertaken by the government is a fresh occupation imposed upon a body already overcharged with duties. A natural consequence is that most things are ill done; much not done at all, because the government is not able to do it without delays which are fatal to its purpose. I have reserved for the last place one of the strongest of the reasons against the extension of government agency. Even if the government could comprehend within itself, in each department, all the most eminent intellectual capacity and active talent of the nation, it would not be the less desirable that the conduct of a large portion of the affairs of society should be left in the hands of the persons im- SOCIAL CONTROL OF INDUSTRY 123 mediately interested in them,. A people among whom there is no habit of spontaneous action for a collective interest whO' look habit- ually to their government to command or prompt them in all matters of joint concern have their facudties only half developed; their edu- cation is defective in one of its most important branches. There cannot be a combination of circumstances more dangerous to human welfare than that in which intelligence and talent are maintained at a high standard within a governing corporation, but starved and discouraged outside the pale. Few will dispute the more than suffic- iency oi these reasons, to throw, in every instance, the burden of making out a strong case, not on those who- resist, but on those who recommend government interference. Laissez-faire, in short, should be the general practice ; every departure from it, unless required by some great good, is a certain evil. But we must now turn to the second part of our task, and direct our attention to cases, in which some of those general objections are altogether absent, while those which can never be got rid of entirely are overruled by counter-considerations of still greater importance. Can it be affirmed, for instance, that the consumer is the most competent judge of the end? Is the buyer always qualified to judge of the commodity? The proposition can be admitted only with nu- merous abatements and exceptions. This is peculiarly true of those things which are chiefly useful as tending to raise the character of human beings. The uncultivated cannot be coirupetent judges of cultivation. Those who- most need to be made wiser and better usually desire it least, and if they desired it, would be incapable of finding the way to it by their own lights. In the matter of educa- tion, the intervention of government is justifiable, because the case is not one in which the interest and judgment of the consumer are a sufficient security for the goodness of the commodity. Let us now consider other cases, where, for one reason or another, governmental interference is necessary. These may be classed under several heads. First, the individual who is presumed to be the best judge of his own interests may be incapable of judging or acting for him- self ; may be a lunatic, an idiot, an infant ; or, though not wholly incapable, may be of immature years and judgment. In this case the foundation of the laissez-faire principle breaks down entirely. The person most interested is not the best judge of the matter, nor a competent judge at all. To' take an example fronn the peculiar province of political economy; it is right that children, and young persons not yet arrived at maturity, should be protected, so far as the eye and hand of the state can reach, from being over-worked. Freedom of contract, in the case of children, is but another word 1.24 READINGS IN ECONOMIC PROBLEMS for freedom of coercion. Education also is not a thing- which par- ents or relatives' should have it in their power to withhold. But the classing together, for this and other purposes, of women and chil- dren, appears to me both indefensible in principle and mischievous in practice. Children below a certain age cannot judge or act for themselves, but women are as capable as men of appreciating and managing their own concerns, and the only hindrance tO' their doing so arises from the injustice of their present social position. If women had as absolute a control as men have over their own persons and their own patrimony or acquisitions, there would be no plea for limiting their hours of labouring for themselves, in order that they might have time to labour for the husband, in what is called, by the the production of a state of things favorable to the welfare of the advocates of restriction, his home. Women employed in factories are the only women in the labouring rank of life whose position is not that of slaves and drudges. A second exception to the doctrine that individuals are the best judges of their own interest, is when an individual attempts to decide irrevocably now what will be best for his interest at some future and distant time. The practical maxim of leaving contracts free is not applicable without great limitations in case of engagements in per- petuity; and the laW should be extremely jealous of such engage- ments. The third exception which I shall notice has reference to the great class of cases in which the individuals can only manage the concern by delegated agency, and in which the so-called private man- agement is, in point of fact, hardly better entitled to be called man- agement by the persons interested, than administration by a public officer. Whatever, if left to spontaneous agency, can only be done by joint stock associations, will O'ften be as well, and sometimes bet- ter done, as far as the actual work is concerned, by the state. Gov- ernment management is, indeed, proverbially jobbing, careless, and ineffective, but so likewise has generally been joint-stock manage- ment. To a fourth cause of exception I must request particular atten- tion, it being one to which, as it appears to me, the attention of political economists has not yet been sufficiently drawn. There are matters in which the interference of law is required, not to overrule the judgment of individuals respecting their own interest, but to give effect to that judgment; they being unable to give effect to it except by concert, which concert again cannot be effectual unless it receives validity and sanction fromi the law. For illustration I may advert to the question of diminishing the hours of labour. Let SOCIAL CONTROL OP INDUSTRY • 125 us suppose that a general reduction of the hours of factory labour, say from ten to nine, would be for the advantage of the work people ; that they would receive as high wages, or nearly as high, for nine hours' labour as they receive for ten. If this would be the result, and if the operatives generally are convinced that it would, the lim- itation, some may say, will be adopted spontaneously. I answer, that it will not be adopted unless the body of operatives bind them- selves to one another to abide by it. For however beneficial the ob- servance of the regulation might be to the class collectively, the immediate interest of every individual would lie in violating it : and the more numerous those were who adhered to the rule, the more would individuals gain by departing fronn it. Fifthly ; the argument against government interference ground- ed on the maxim that individuals are the best judges of their own interest, cannot apply to the very large class of cases, in which those acts of individuals with which the government claims to in- terfere, are not done by those individuals for their own interest, but for the interest of other people. This includes, among other things, the important and much agitated subject of public charity. Though individuals should, in general, be left to do for themselves whatever it can reasonably be expected that they should be capable of doing, yet when they are at an}^ rate not to be left tO' themselves, but to- be helped by other people, the queston arises whether it is better that they should receive this help exclusively from individuals, and there- fore uncertainly and casually, or by systematic arrangements, in which society acts through its organ, the state. Other cases, falling within the same general principle, are those in which the acts done by individuals, though intended solely for their own benefit, involve consequences extending indefinitely beyond them, to interests of the nation or of posterity, for which society in its collective capacity is alone able, and alone bound, to provide. The same principle extends also to- a variet}^ of cases, in which important public services are to be perform.ed, while yet there is no individual specially interested in performing them, nor would any adequate remuneration naturally or spontaneously attend their per- formance. Take for instance a voyage of geographical or scientific exploration. It may be said, generally, that anything which it is desirable should be done for the general interests of mankind or of future generations, or for the present interests of those members of the community who require external aid, but which is not of a nature to remunerate individuals or associations for undertaking it, is in itself a suitable thing to be undertaken by government. The preceding heads comprise, to the best of my judgment, the 126 READINGS IN ECONOMIC PROBLEMS whole of the exceptions to the practical maxim that the husiness of society can be best performed by private and voluntary agency. It is, however, necessary tO' add, that the intervention of government cannot always practically stop short at the limit which defines the cases intrinsically suitable for it. In the particular circumstances of a given age or nation, there is scarcely any thing, really important to the general interest, which it may not be desirable, or even neces- sary, that the government should take upon itself. Even in the best state which society has yet reached it is lamentable to think how great a proportion of all the efforts and talents in the world are employed in merely neutralizing one another. It is the proper end of government to reduce this wretched waste to^ the smallest possi- ble amount, by taking such measures as shall cause the energies now spent by mankind in injuring one another, or in protecting them- selves against injury, to be turned to the legitimate employment of the human faculties, that of compelling the powers of nature to be more and more subservient to physical and moral good. 74. The Collectivistic Conception of the Province of Govern- ment. BY ALBERT V. DICEY. The fundamental principle accepted by every man who leans towards any form of socialism is faith in the benefit to be derived by the mass of the people from the action or intervention of the State even in matters which might be left to the uncontrolled man- agement of the persons concerned. This doctrine involves two as- sumptions : the one is a denial that laissez faire is in most cases a principle of sound legislation ; the second is a belief in the benefit of governmental guidance, even when it greatly limits the sphere of individual liberty. The importance of the general, even though tacit acceptance of this doctrine, lies in the support which it has given to certain suboirdinate principles which immediately afifect legislation. These may be conveniently considered under four heads : the Extension of the idea of Protection, the Restriction on Freedom of Contract, the Preference for Collective as contrasted with Individual Action, and the Equalisation of Advantages among individuals. I. Let us consider the extension of the idea and the range of protection. The most fanatical of individualists admits the exist- ence of persons, such as infants or madmen, who need the special protection of the State. The most thoroughgoing individualists even insist that for certain purposes all persons need state protec- SOCIAL CONTROL OF INDUSTRY 127 tion, e. g., for the prevention of assaults by robbers. Such protec- tion is in defence of individual liberty, and is therefore an applica- tion of the individualistic creed. Protection, however, may acquire a far wider signification. It is extended in two different ways. In the first place, it is tacitly transformed into "guidance," and is ap- plied to classes who are, in the opinion of the legislature, unlikely to provide as well for their own welfare as can the community. Women's labor and even men's labor are in many cases regulated by law. The State confers protection on many classes. And modern legislation tends to increase the number of protected classes. Pro- tection is also made to include arrangements for safeguarding all citizens against mistakes which often can not be avoided by a man's care and sagacity. Laws against food adulteration rest upon the idea that the State is a better judge than the man himself of bis own interest. II. Collectivism curtails as surely as individualism extends the area of contractual freedom. The reason is obvious. Extension of contractuar capacity enlarges the sphere of individual liberty. Ac- cording as legislators do or do not believe in leaving each man to settle his own affairs, they will try to extend or limit the sphere of contractual freedomi. During the latter part of the nineteenth cen- tury the tendency to curtail such liberty became clearly apparent. The transition from permissive to compulsory legislation bears wit- ness to the same rising influence of collectivism^. Ill; Next is the preference for collective over individual action. This preference rests upon two grounds. The one is the belief that whenever the interest of the wage-earners comes into competition with the interests of capitalists, and especially as to the rate of wages, an individual laborer does not bargain on fair terms ; he seems powerless against a wealthy manufacturer, and still more so against a large company possessed of wealth, which, as compared with his own resources, may be regarded as unlimited. The other ground is the sentiment entertained by every collectivist that an individual probably does not know his own interest, and certainly does not know the interest of the class to which he belongs as well as the trade union, or the State. The belief that associations or communities are organisms, which may be wiser as well as stronger than the persons of whom they are composed, affects a man's whole estimate of the merit O'f combined as compared with individual action, and underlies nuich modern legislation. This tendency is reflected in the legal system in relation to^ the recognition of the right of laborers to combine. 128 READINGS IN ECONOMIC PROBLEMS IV. The extension given by collectivists to the idea of protec- tion makes easy the transition from that idea to the different notion of the equalization of advantages. Of the members of every com- munity tlie greater number cannot obtain the comforts or the en- joyments which fall tO' the lot of their richer neighbors. Against the evil O'f poverty the State ought, it is felt by collectivists, to protect the wage-earning class, and, in order to give this protection, must go a good way towards securing for every citizen something like the same advantages, in the form of education, or of physical well- being, as the rich can obtain by their own efforts. This has not as yet led to that enforced equality known as communism, but, during the latter part of the nineteenth century, it has produced much leg- islation tending towards that equalization of advantages among all classes which means the conferring of benefits upon the wage- earners at the expense of the whole body of tax-payers. This ten- dency is traceable in the law with respect to elemientary education, in employers' liability laws, and in legislation relating to non-em- ployment. The difference between the legislation characteristic of the era of individualism and that of collectivism is essential and fundamen- tal. The dissimilarity rests upon and gives expression to different ways of regarding the relation between man and the State. Lib- erals have looked upon men mainly as separate persons, each of whom must, by his own eiforts, work out his own happiness and well-being; and have held that the prosperity of the community means nothing more than the prosperity of the whole or a majority of its members. They have also assumed, and surely not without reason, that if a man's real interest be Avell understood, the true welfare of each citizen means the true welfare of the State. Hence Liberals have promoted legislation which should increase each citi- zen's liberty, energy, and independence; and which should intensify his sense of individual responsibility for results, whether as regards himself or his neighbors, of his personal conduct. Collectivists, on the other hand, have looked upon men mainly, not so much as isolated individuals, but as beings who by their very nature are citizens and parts of the great organism — the State — whereof they are members. They have felt that the happiness of each citiz;ien depends upon the welfare of the nation, and have held that to insure the welfare of the nation is the only way of promot- ing the happiness of each individual citizen. Hence collectivists have fostered legislation which should increase the force of each man's social and sympathetic feelings, and should intensify his sense SOCIAL CONTROL OF INDUSTRY 129 of the responsibility of society for the welfare or happiness of each individual citizen. The force of collectivism is not spent. The inner logic of events leads tO' the extension and development of legislation Which bears the impress of collectivism. F. ASPECTS OF THE MOVEMENT FOR SOCIAL CONTROL. 75. A Refutation of the Evolutionary Argument against Social Reform. BY W. L-YON BLRASK. The philosophical argument against Social Reform which has most weight is that by helping individuals the State deprives them of the disposition to help themiselves, and they tend to rely more and more upon the social organization and less and less upon themselves. Everything in the way of public assistance is thus regarded with suspicion. To feed school-children is to weaken parental responsi- bility. To raise wages by legislation is as demoralizing as to dis- tribute doles. To' offer a pension of five shillings a week in old age is to discourage thrift in youth. It is therefore better in the end that poverty should be allowed to run its course than that a mis- directed benevolence should demoralize the people. This argument, reproducing the logical individualism of the Utilitarians, has been greatly strengthened by Darwinism. Herbert Spencer has thus applied the theory of evolution to political affairs. "The well-being of existing humanity, and the unfoldng of it into ultimate perfection, are both secured through the same benificent, though severe, disci- pline to which the animate creation at large is subject; a felicity- pursuing law which never swerves for the avoidance of partial and temporary suffering. The poverty of the incapable, the distresses that come upon the imprudent, the starvation of the idle, and those shoulderings aside of the weak by the strong, which leave so many in shallows and in miseries, are the decree of a large, far-seeing benevolence." Yet, if there is one thing that most distinguishes modern from ancient society, and society of any kind from the disorganized exist- ence of primitive man, it is the prevalence of the idea that we are, in some measure, respousible for the condition of our neighbors. If the course of past development is any guide, we may be certain that unless we take steps to alter our condition, we shall certainly continue in the same course in the future. It would be at least sur- I30 READINGS IN ECONOMIC PROBLEMS prising that the salvation of the race should now be found to lie in a deliberate reaction, against the movemient of countless ages, towards the state of undisciplined human egotism. A doctrine so repugnant to what we have been accustomed tO' regard as our better feelings requires little examination to discover its fallacies. The evolutionary argument against Social Reform falls to the ground when it is once admitted that the individuals in contempla- tion are individuals organized in society, and that it is only so long as they are organized that development, as we understand it, can take place. If. mankind were left to< scramble for such good things as it could get without cooperation, the race would no doubt, in course of time, develop such characteristics as that competition would allow to survive. But if we erect higher standards, and re- quire, even from selfish motives, the moral, intellectual, and physical benefits which only organization, culture, and the communication of ideas will produce, the comparison between human beings and the rest of the animate creation is useless for our purpose. Some limit- ation of the struggle for existence is obviously needed, if we are not to fall back to the level where only the brute qualities of strength, swiftness, and cunning are of value. Once we admit the need of a social organization, which involves a very considerable check on mechanical evolution by the survival of the fittest, the only con- troversy is about the extent and character of the limits on competi- tion and not about their existence. But the argument for Social Reform is not based only upon the possibility of altering environment so that individuals who are unfit for it may maintain themselves as long as they live. It is not the incapable who are poor. It is not only the imprudent who are over- come by distress. It is not only the idle who starve. Bad conditions of life destroy not only the inefficient, but the efficient. He is a very dull and stupid observer who supposes that all the slovenly, debauched, and criminal men and women whom he sees around him are what they are because of their innate qualities. A bad environ- ment does not merely destroy the inefficient, it manufactures them ; and it is as reasonable to oppose social reform' because it prevents the elimination of the unfit, as it would be to defend excessive eating and drinking, or sitting in wet clothes. Unhealthy eating would no doubt destroy people with weak stomachs, but for every one who perished in this struggle with environment there would be ten who survived. Bad housing and bad wages produce the same results as bad habits. An ill-fed girl becomes the mother of weakly children. Casual labor kills only after it has given birth to an incalculable SOCIAL CONTROL OF INDUSTRY 131 amount oi laziness, vice, and mental disorder. The elimiination of the unfit is uncertain and capricious. The deterioration of the fit is certain and remorseless. Reform is thus the only possible means for discovering- what individuals are fit in the human sense. It is only when all have a chance of survival that we can distinguish between efficient and inefficient. The reformer need have no' fear that his generous impulses are signs of an anti-social sentimental- ism. He is in fact only Evolution conscious of itself. This elaboration of social control is not inconsistent with such competition as is necessary for the development of character, and for the production of the wealth v/hich is distributed among the members of society. It is not Socialism. It removes only some of the risks of failure, and only those which are beyond individual con- trol. No man is made less thrifty because at the age of seventy he will receive five shillings a week. No man works the better for knowing that, if he is ever ill for a month, he and his family will never be free again, or will work the worse for knowing that his home will be kept together until he is able once more to support it by his own exertions. No woman gets any virtue out of working fifteen hours a day -for seven days a week, with the knowledge that even then she will not earn enough to keep herself in food and cloth- ing without recourse to charity or prostitution, and her character will not be deteriorated when a level is fixed below which her wages cannot fall. The benefit of competition remains. The disasters in- evitably attendant on it are averted. The poorer people no longer wrestle on the brink of an unfenced precipice. We do not want to see impaired the vigor of competition, but we can do much to miti- gate the consequences of failure. We want to^ draw a line below which we will not allow persons tO' live and labor. We want to have free competition upward. We do not want to pull down the struc- tures of science and civilization ; but to spread a net over an abyss. Our aim is not to abolish competition. Competition will always be powerful enough. But to limit the strife — to fix a ring around the prize-fight — to protect the vital parts from the blows of the com- batants. Individual growth can only take place in competition. But it is not necessary that failure in competition should be mortal. The struggle of competition is to go on. But it is not to go on to the death. Economiic society is to be converted into a gigantic Trade Union, based upon the belief that the highest good of the individual can only be secured in cooperation with his fellows, and limiting his freedom only in so far as it is necessary to^ secure freedom to his associates. 1.32 READINGS IN ECONOMIC PROBLEMS 76. The Futility of Utopian Legislation. BY GEORGE CHATTERTON-HILI.. It is essential for the welfare of society that its evolution should keep pace with the rate of changfe in the environing conditions. Should the environment change more rapidly than the society is capable of changing, the extinction of society must follow. The rate of evolution in society must conformi to the possibilities and also to the needs of that society. All legislation must take into consid- eration not merely the traditions of the past, but alsoi the facts of the present. And the balance of power between the various com- ponent elements oi a society, which is an undoubted fact of every ''present," must be the chief consideration of ever}^ legislator. The traditions of the past must only be taken into consideration in so far as they are also- elements of resistence to^ reform in the present, for it is the duty of the social reformer to take into consideration the elements of resistence tO' every project of reform. It is upon the measure of resistence that may be expected to it that the possibility of every reform depends. Generous utopianists would fain see a number of reforms enacted, some of which would certainly be of use to society at large ; but they forget the usefulness of a reform is no guarantee of its popularity, for prejudice and tradition are stronger than any appreciation of the real needs of society. This ignoring at the present time of the elements of resistance is the chief reason of the failure of so many reform^ projects; and it is fatal to social legislation. But the traditions of the past must be neglected, except in so far as they may constitute an element of invincible resistance which con- demns a social reform project a priori. The realities of the present must occupy the first place in the mind of the legislator. Neglect of this condition leads to the making of impossible laws which take no account of the trend of social evolution. The prohibitive duty on corn passed in England in 18 15 by a Parliament representing almost exclusively the country aristocracy is an examiple oi this neglect of actual conditions. Here was England, already with a highly-de- veloped industry in which hundreds O'f thousands of working men were employed, placing a duty on foreign corn which rendered bread wellnigh unpurchasable for the great masses of the people in the interests of a small minority of landowners. This, and innumerable other instances, are examples of what we may call Utopian legislation — that is to say, legislation undertaken without any knowledge of the precise relations existing between the different elements in society, and which is at once futile in the pres- SOCIAL CONTROL OF INDUSTRY 133 ent, and eminently productive of harm' in the future. It is of para- mount necessity to base social legislation on an adequate knowledge and appreciation of the factors within the society. The rapidity of social legislation must necessarily be proportionate tO' the needs of society; and the needs of society must be measured according to those of the great majority of that society. 77. The Necessity of a New Social Basis in Law.* BY JUSTICE OUVER W. HOLMES. This case is decided upon an economic theory which a large part of the country does not entertain. If it were a question whether I agreed with the theory I should desire tO' study further and long before making up my mind. But I dp not conceive that to be my duty, because I strongly believe that my agreement or disagreement has nothing to do with the right of the majority tO' embody their opinion in law. It is settled that state constitutions and laws may regulate life in many ways that we as legislators might think inju- dicious, or if you like, as tyrannical as this, and which equally inter- fere with the liberty of contract. This liberty of the citizen to do as he likes so long as he does not interfere with the like liberty of others to do the same, which has been a shibboleth for many well- known writers, is interfered with by school laws,«by the Post Office, by every state and municipal institution which takes his money for purposes thought desirable, whether he likes it or not. The r4th Amendment does not enact Herbert Spencers Social Statics. A con- stitution is not intended to embody a particular economic theory, whether of paternalism and the organic relations of a citizen to the state, or of laissez-faire. It is made for people of fundamentally differing views. General propositions do not solve concrete problems. The decis- ion will depend on a judgment or intuition more subtle than any ar- ticulate major premise. Every opinion tends tO' become law. I think that the word liberty in the 14th amendment is perverted when it is held to prevent the natural outcome of a dominant opinion, un- less it can be said that a rational and fair minded man would neces- sarily admit that the proposed statute would infringe fundamental principles as they have been understood by the traditions and the laws of our people. * This is the famous bake-shop case. In this case a statute passed by the New York legislature, regulating the hours of labor in bake shops, was de- clared unconstitutional. This selection is an except from a dissenting opinion. 134 READINGS IN ECONOMIC PROBLEMS 78. The Logic of Social Reform. BY HI:RBERT CROIvY. Refoimiers have failed for the most part to reach a correct diag- nosis of existing political and economic abuses, because they are almost as much the victims of perverted, confused, and routine hab- its of political thought as the politicians. They have not eschewed the tradition that a patriotic American citizen must not in his politi- cal thinking go beyond the formulas consecrated in the sacred Amer- ican writings. Accordingly, all the leading reformers begin by piously reiterating certain phrases about equal rig^hts for all and spe- cial privileges for none, and of government of the people, by the people, and for the people. Having in this way proved their funda- mental political orthodoxy, they proceed to- interpret the phrases ac- cording to their personal, class, local, and partisan preconceptions and interests. They have never stopped to inquire whether the principle of equal rights in its actual embodiment in American iuh- stitutional and political practice has not been partly responsible for some of the existing abuses, whether it is either a safe or sufficient platform for a reforming movement, and whether its continued pro- clamation as the fundamental political principle of a democracy will help or hinder the higher democratic consummation. All Americans, .whether they are professional politicians or re- formers, "predatory" millionaires or common people, political phil- osophers or schoolboys, accept the principle of "equal rights for all and special privileges for none" as the absolutely sufficient rule for an American democratic political system. The platforms of both parties testify in its behalf. Corporation lawyers and their clients appear frequently to believe in it. Tammany offers tribute to it during every local campaign in New York. A Democratic Senator, in the intervals between his votes for increased duties on the pro- ducts of his state, declares it to be the summary of all political wis- dom. There is no extreme of radicalism or conservatism, of indi- vidualism or socialism, of Republicanism or Democracy, which does not rest its argument on this one consummate principle. Further, reform is both meaningless and powerless until the Jeffersonian principle of non-interference is abandoned. The ex- perience of the last generation plainly shows that the American economic and social system cannot be allowed to take care of itself, and that the automatic harmony of the individual and the public interest, which is the essence of the Jeffersonian creed, has proved to be an illusion. Interference with the natural course of individual SOCIAL CONTROL OF INDUSTRY 135 and popular action must be in the public interest; and such inter- ference must be sufficient tO' accomplish its purposes. The reformers have come partly to realize that the Jeffersonian policy of drift must be abandoned. They no longer expect the American ship of state by virtue of its own righteous framework to sail away to a safe harbor in the Promised Land. They understand that there must be a vigorous and conscious assertion of the public as opposed to private and special interests, and that the American people must to a greater extent than they have in the past subordi- nate the latter to the former. They behave as if the American ship of state will hereafter require careful steering" ; and a turn or two at the wheel has given them sonne idea of the course they must set. But even the best of them have not learned the name of its ultimate destination, the full difficulties of the navigation, or the stern disci- pline which may eventually be imposed upon the ship's crew. They do not realize how thoroughly Jeffersonian individualism must be abandoned for the benefit of a genuine social consummation. And they do not realize how dangerous a craft their cherished prin- ciple of equal rights may have become. In reviving the principle of vigorous national action they have been looking in the direction of a much more trustworthy and serviceable political principle. The as- sumption of such a responsibility implies a rejection of a large part of the Jeffersonian creed, and a renewed attempt to establish in its place the popularity of its Hamiltonian rival. On the other hand it involves no less surely the transformation of Hamiltonianism into a thoroughly democratic political principle. This is hopeful in giv- ing a new meaning to the Hamiltonian system of political ideas and a new power to democracy. 79. A Progiam of Social Reform. BY WOODROW WIUSO'N. We see that in many things our nationa] life is very great. It it incomparably great in its material aspects, in its body of wealth, in the diversity and sweep of its energy, in the industries which have been conceived and built up by the g-enius of individual men and the limitless enterprises of groups of men. It is great, also, very great, in its moral force. Nowhere else in the world have noble men and women exhibited in more striking forms the beauty and the energy of sympathy and helpfulness and counsel in their efforts to rectify wrong, alleviate suffering, and set the weak in the way of strength and hope. We have built up, moreover, a great system of government, 136 READINGS IN ECONOMIC PROBLEMS which has stood through a long age as in many respects a model for those who seek to set liberty upon foundations that will endure against fortuitous change, against storm and accident. Our life contains every great thing, and contains it in rich abundance. But the evil has come with the good, and much of the fine gold has been corroded. With riches has come inexcusable waste. We have squandered a great part of what we might have used, and have not stopped to conserve the exceeding bounty of nature, without which our genius for enterprise would have been worthless and impotent, scorning to be careful as well as admirably efficient. We have been proud of our industrial achievements, but we have not hitherto stopped thoughtfully enough to count the human cost, the cost of lives sniffed out, of energies overtaxed and broken, the fearful physical and spiritual cost to the men and women and chil- dren upon whom the dead weight and burden of it all has fallen piteously the years through. The groans and agony of it all had not yet reached our ears, the solemn, moving undertone of our life, coming up out of the mines and factories and out of every home where the struggle had its inti- mate and familiar seat. With the great government went many deep secret things which we too long delayed to look into and scru- tinize with candid, fearless eyes. The great government we loved has too often been made use of for private and selfish purposes ; and those who used it had for- gotten the people. At last a vision has been vouchsafed us of our life as a whole. We see the bad with the good, the debased and decadent with the sound and vital. With this vision we approach new affairs. Our duty is to cleanse, to restore, to correct the evil without impairing the good, to purify and hiunanize every process of our common life without weakening or sentimentalizing it. There has been something crude and heartless and unfeeling in our haste tO' succeed and be great. Our thought has been, "Let every man look out for himself, let every generation look out for itself," while we reared giant machinery which made it impossible that any but those who stood at the levers of control should have a chance tO' look out for themselves. We had not forgotten our morals. We remembered well enough that we had set up a policy which was meant to serve the humblest as well as the most powerful, with an eye single to the standards of justice and fair play, and remembered it with pride. But we were very heedless and in a hurry to be great. SOCIAL CONTROL OF INDUSTRY 137 We have now come to the soher second thought. The scales of heedlessness have fallen from our eyes. We have made up our minds to square every process of our national life again with the standards we so proudly set up at the beginning and have always carried at our hearts. Our work is a work of restoration. We have itemized with some degree of particularity the things that ought to be altered, and 'here are some of the chief items : A tariff which cuts us off from our proper part in the commerce of the world, violates the just principles of taxation, and makes the government a facile instrument in the hands of private interests ; A banking and currency system based upon the necessity of the government to sell its bonds fifty years ago, and perfectly adapted to concentrating cash and restricting credits ; And industrial system which, take it on all its sides, financial as well as administrative, holds capital in leading strings, restricts the liberties, and limits the opportunities of labor, and exploits without renewing or conserving the natural resources o^f the country. A body of agricultural activities never yet given the efficiency of great business undertakings or served as it should be through the instrumentality of science taken directly to the farm or afforded the facilities of credit best suited to its practical needs. Watercourses undeveloped, waste places unreclaimed, forests un- tended, fast disappearing, without plan or prospect of renewal, un- regarded waste heaps at every mine. We have studied as perhaps no other nation has the most effec- tive means of production, but we have not studied cost or economy as we should either as organizers of industry, as statesmen, or as individuals. Nor have we studied and perfected the means by which govern- ment may be put at the service of humanity, in safeguarding the health of the nation, the health of its men and its women and its children, as well as their rights in the struggle for existence. This is no sentimental duty. The firm basis of government is justice, not pity. These are matters of justice. There can be noi equality of opportunity, the first essential of justice in the body politic, if men and women and children be not shielded in their lives, their very vitality, from the consequences of great industrial and social processes which they cannot alter, con- trol, or singly cope with. Society must see to^ it that it does not itself crush or weaken or damage its own constituent parts. The first duty of law is to keep sound the society it serves. Sanitary laws, pure food laws and laws determining conditions f 38 READIXGS IX ECONOMIC PROBLEMS of labor which individuals are poAverless to detemiine for them- selves are intimate parts of the very business of justice and legal efficiency. These are some of the things we ought to do, and not leave the others undone, — the old-fashioned, never-to-be-neglected, funda- mental safeguarding of property and of individual right. We shall deal with our economic system as it is and as it may be modified, not as it might be if we had a clean sheet of paper to w^ite upon ; and step by step we shall make it what it should be, in the spirit of those who question their own wisdom and seek coun- sel and knowledge, not shallow self-satisfaction or the excitement of excursions whither they cannot tell. Justice, and only justice, shall always be our motto. And yet it will be no cool process of mere science. The nation has been deeply stirred, stirred by a sol- emn passion, stirred by the knowledge of wrong, of ideals lost, of eovernment too often debauched and made an instrument of evil. G. CONSER\\VTR~E FACTORS IX CURRENT SOCIAL DEVELOPMENT. 80. A Defense of an Industrial Aristocracy. EY W. H. MALLOCK. The whole secret of social progress is the domination of the greatest. Progress and the maintenance of civilization in any com- munity depends upon its possessing a number of great men, of which number the greatest shall, by competition with the others, succeed in gaining a control over the beliefs and actions of the majority. The social activities upon which progress depends are reducible to five kinds — intellectual, religious, military, economic, and politi- cal. The first three of these are such that the means by which the great m.an makes his intluence felt hardly requires discussion. The only domains that require minute and careful discussion, and have really a direct bearing on the practical problems of the day, are the domain of economic production and the domain of political govern- ment. These may be said to contain between them the whole of the questions with regard to which parties are divided. This is especially true of the domain of economic production : for it is mainly on account of its connection with the production and distribution of wealth that political government excites so much pop- ular interest. And in every other domain of human activity equally we shall find that the interests of men have an economic process at SOCIAL CONTROL OF INDUSTRY 139 their basis, or economic progress as their object. The processes of production and commerce are the central processes of every nation's life. It is to foster them that governments exist. It is in the domain of economics that all the social problems of the day begin or end. Consequently the question which is really our first concern relates to the means by which great men, whose greatness consists in excep- tional powers in causing the production of wealth, and on whom consequently the wealth of the whole community depends, obtain a control over other men's productive actions. This control can be secured in two ways only. One of these wa3-s is slaver}- ; the other is the capitalistic wage-system. They resemble each other because they are both contrivances by which the superior few may secure the implicit obedience of the many. Slavery- and the capitalistic wage-system differ onty in this : that the one secures the required industrial obedience by operating on men's fears ; the other on their desires and wills. It is because of this method of securing obedience that what is called capitalism is an agent of progress, and has developed itself in progressive communi- ties. The wage-system represents capital, in the form of immediate means of subsistence, as owned or controlled by a small number of persons ; and its efficiency as a productive agent resides in the bar- gain which it enables any great man possessing it to make with or- dinary workers, a barg"ain that they shall do their work in accord- ance with the great man's directions. The essence of the wage- system is in the power it gives to the few to direct the producers. But what are the means by which the most elffcient of the great men get this control into their own hands, and take it out of the hands of the less efficient? Under the regime of private capitalism this process is simple. The fitness or efficiency of each great man is according to the acceptability to the public of the goods or ser\-ices which" he offers them. If the public are not pleased with these goods and services, they do not buy or demand them; and the capital of the man by whom they are offered, not being rewarded by any money received, melts in his hands, and with it his control over other men's labor. Meanwhile, by a converse process, the great man who offers goods or ser\'ices which the public desire and find serviceable, renews and increases from the payments for these goods the capital which has been disbursed by him, and renews and increases his con- trol over other men's labor. The w^ge-system is the sole alternative to slaver}- as a means by which one great man shall compete against another great man. Com- petition here is not a struggle for existence but a struggle for dom- inance. Under capitalism it is a struggle between employers to find I40 READINGS IN ECONOMIC PROBLEMS laborers, not a struggle among the laborers tO' find employment. In the maintenance of this competitive struggle the workers are pro- foundly interested; for, not only does it inflict no injury upon them- selves, but to it that progress in the processes of production is due on which their own hopes depend. So grounded is capitalism in human nature that we might reduce society to ashes, but the present system and capitalistic competition would rise again out of them. For the outer form of capitalism is not what capitalism is, any more than a painter's brush is the power that paints great pictures. Capitalism, in its essence, is merely the realized process of the more effi.cient members of the human race controlling and guiding the less efficient ; capitalistic competition is the means by which, out of these more efficient members, society itself selects those who serve it best ; and no society which intends to remain civilized, and is not prepared to return to the direct coer- cion of slavery, can escape from competition and the wage-system under some form or other. Inequality in productive power is of such a kind as to render the industrial obedience of the larger number oif men to a small minority the primary and permanent condition on which economic progress is possible; that which feather-brained fanatics call "economic free- dom" would be merely another name for economic helplessness. All the democratic formulas which for the last hundred years have represented the employed as the producers of wealth, and the capi- talistic employers as the appropriators of it, are, instead of being expressions O'f a profound truth, only inversions of it. It is the few and not the miany who, in the domain of economic production, are essentially and permanently the chief repositories of power. 8i. Judicial Decisions and Social Reform. BY FRANK J. GOODNOW. It is a difficult matter to derive any general principles from the decisions of the courts as to the constitutionality of governmental regulations, since so much depends upon the reasonableness of the regulation at issue. It may, however, be said that where there is any connection between social legislation and public health or safety, the courts exhibit considerable unwillingness to declare the legislation unconstitutional; but where the connection is not clearly evident, or where the purpose is not so much to protect the public health and safety as to better the economic condition of the laboring classes and to place them in a stronger position in their struggle with their employers, the tendency of the judicial mind is to consider such SOCIAL CONTROL OP INDUSTRY 141 legislation as either class legislation or as infringing upon the rights of property or liberty which are conceived in terms of laissez-faire. The courts do seem in some, though not in all instances willing to apply to modern conditions theories developed in the English law before the acceptance of the ideas of laissez-faire — ^theories through whose application vast powers of regulation over property affected with a public interest, and over attempts at monopoly and in restraint of trade, are recognized as still possessed by the government. It may therefore be hoped, if not expected, that as they come to have a clearer idea of the difference between present and former economic conditions, the courts may, as in the case of property af- fected with a public interest and of monopolies, come to the con- clusion that the state may constitutionally be used to protect the weaker classes in the community from the dangers not merely of disease and unsafe conditions of labor, but as well from those which are attendant upon great economic dependence in an increasingly industrial society. It may be pointed out that in reaching such a conclusion they would not he greatly departing from the old Eng- lish law which offers examples, as in the case of the usury laws, of a desire to protect those members of society who were at economic disadvantage in the struggle for existence. An important consideration in this connection is the question of the theory that underlies current legal conceptions. This is per- haps nowhere miore clearly brought out than in the recent Missouri case of State vs. Switzler* where the court says, "Paternalism, whether state or federal, as the derivation of the term implies, is an assumption by the government of a quasi-fatherly relation to the citizen and his family, involving excessive governmental regulation of the private affairs and business methods and interests of the peo- ple, upon the theory that the people are incapable of managing their own affairs, and is. pernicious in its tendencies. In a word, it min- imizes the citizen and maximizes the state. Our governments are founded upon a principle wholly antagonistic to this. Our fathers believed the people capable of self-government. Such a govern- ment is founded upon a willingness and desire of the people to take care of their own affairs and an indisposition to look to the govern- ment for everything. The citizen is the unit. Under self-govern- ment we have advanced in all the elements of a greater people more rapidly than any nation that has ever existed upon the earth, and there is greater need now than ever before in our history for ad- hering to it." "^ 143 Mo. 287. 142 READINGS IN ECONOMIC PROBLEMS It is to be noted that the historical argument, which is in a large degree the controlling argiiment in this case, when taken together with the insistence upon that political and economic theory known as laissez-faire, to which is accorded an absolute and universal ap- plication at all times and under all circumstances, both makes social reform impossible, so far as concrete measures cannot be justified by our own histo'ry, and regards political and economic conditions as static rather than progressive in character. The result of its uni- versal application will be tO' fix upon the country for all time insti- tutions which, as has been pointed out, were established in the eigh- teenth century to deal with conditions then existing, but which may in this the twentieth century be unsuitable because of the economic, social, and political changes which have taken place in the last one hundred years. 82. The Dominance of the Entrepreneur View-Point in Politics. BY WAI,TON H. HAMII^TON. It requires no great familiarity with the political and economic history of England and the United States in the last hundred years to reveal the dominance of industrial interests in shaping legisla- tion. The men who have ruled the commercial world and created the industrial systems of these two countries have ostensibly been advocates of the policy of non-interference with industry. But in practice they have drawn the line only at legislation' which adverse- ly afifects business. They have never lost an opportunity to miake a most active use of the machinery of government in furthering their own interests. A casual study of the legislation passed in this country during the decade ending in 1907 will show how potent has been the influence of this class. In general the legislation is in keeping with the interests of the producing classes; in particular it seems tO' have been shaped largely from the entrepreneur view-point. So dominant has the latter been as almost tO' preclude a considera- tion of legislation tending to general social betterment. Perhaps un- consciously, rather than consciously, has a view-point which con- siders primarily the interests of only a small part of the people writ- ten itself into our political activity. But, even then, in a democracy, such as the United States, how has the view-point of a class become so powerful as to shape general legislation? The answer to the question must find a beginning in the technical changes which characterized the Industrial Revolution. The most significant of these was the replacement O'f the tool by the machine. A tool is a simple instrument, costing very little, useful for a number SOCIAL CONTROL OF INDUSTRY 143 of different tasks, and depending for its success upon the skill of the laborer using it. A machine, on the contrary, is a complex of many parts, costing much in labor and accumulated wealth, useful for a highly specialized task, and depending for its success upon the nicety of its own mechanism. Where tools were universally used, the time of the productive process was short, productive establish- ments were many, and the laborer was quite independent. The cost of the machine, and the very small contribution which a single unit of product can contribute tO' it, prevent the machine from being used except in the production of a large number of units. But the specialization of the machine requires the use of a large number of machines in the production of a single article. Under machine pro- duction the economiical industr) is likely to be the one which differ- entiates the productive process intO' the largest number of separate acts for each of which a machine is used. The modern industrial unit is likely to be large, making use of much capital, and employing many laborers. Because of the peculiar adaptability of the machine to their needs, manufacturing, mining, transportation and industrial establishments have increased to great size, and have come to occupy a position of the highest impoirtance. This vantage position becomes of all the more importance when we realize the purpose for which the business is being conducted and its relations to other industrial units. In form it is a corporation. There exists no necessary personal relation between the manage- ment of the corporation and the stockholders. This means that the investors are demanding dividends ; that the management must pro- duce dividends. It is, therefore, natural that the • relationship be- tween the corporation's activities and social good is not kept in mind by those interested in the corporation's success. In the complex ar- rangement of modern business a social means has become an indi- vidual end. Relative to other businesses it occupies a strategic position. The productive process is a long one with many steps between the pro- duction of raw materials and the sale of the finished product. Only a few operations are performed by industrial concerns which make an extensive use of machinery. But the smaller concerns must se- cure regular dividends, and are, therefore, dependent upon the favor of the large concern. Unconsciously they come to have the attitude of the mien directing larger businesses. The complexity of modern industry has also resulted in creating a number of subsidiary agents who perfo'rmi general services which are necessities of the produc- tive process. Chief among these are the agencies of credit and in- vestment, banks, stock and produce exchanges, insurance companies, 144 READINGS IN ECONOMIC PROBLEMS loan and mortgage associations. Since generally these institutions make their large profits from the operations oi the entrepreneur class, and in many cases are creatures of mining, manufacturing, and transportation interests, those who control them naturally think in terms of entrepreneur interests. Among other subsidiary inter- ests are those of the legal, advertising, and newspaper professions. Constant association with the entrepreneur class, identity of pecuni- ar}'^ interests, and an unconscious imbibing of managerial habits of thought make the views oi the legal class closely akin to those of the industrial magnates. The growth oi business has caused the news- paper to undergo a peculiar development. In its early history it was primarily a news-sheet, and was dependent for its success upon the faithfulness of its representation of the interests of the subscribers. Advertising was an incidental feature. Now the element of im- personality is distinctly marked in the news-vending business. The newspaper is owned by a corporation, the stockholders demand that dividends be forthcoming, and the management has no^ alternative. For that reason the advertisement as a source of revenue has ap- pealed more and more tO' the business office. Now it is safe to say that a large subscription list is incidental to charging high rates for advertising. So it has come about that, consciously or unconsciously, the business office exercises considerable influence over the editorial and news policy oi the paper. This has resulted in making a large part of the press a ready vehicle for the dissemination of informa- tion and opinions favorable to "big business." The position in which the laborer is placed forces him to- think largely in acquisitive terms. He sees in organization and in political activity a means for individual betterment. But wages for his labor he must receive regularly. In many cases the time-period in terms of which his thought processes run is no longer than a month, in many cases it extends only till Saturday night. So far as his own labor is concerned, especially if he is skilled, the laborer is relatively immobile. It is too much to expect him to vote in favor of a radical change in the industrial organization. His immediate interests are so inseparably bound up with those of his employer that to a large extent the latter's political views are his. Through a very elaborate differentiation of functions and an equally elaborate integration of parts, modern industrialism presents the appearance of a vast, intricate, and extremiely delicate machine. Its financial operations are carried on through the instrumentality of credit. So long as confidence holds out, the system moves along smoothly. But so soon as men lose confidence a train of activities is set in motion which mav result in the destruction at least tempor- SOCIAL CONTROL OF INDUSTRY 145 arily, of the acquisitive powers of many classes. The very deHcacy of this mechanism creates a fear of disturbing the present arrange- ments. The business man feels that his interests are bound up with those of the large industrial and financial concerns, and for that reason he opposes innovation. The necessity for winning imme- diate profits deters him from favoring radical schemes. The stratification of society rests ultimately upon a pecuniary basis. The higher classes enjoy a prestige that causes the lower classes to imitate them in dress, in code of morals, in habit of thought, in political opinion. The position of men in the entrepre- neur class is very high. Their opinions upon all questions, particu- larly political questions, in which they have a peculiar interest, are likely to filter down through the various social strata which make up the state, and become a part of common-sense political philos- ophy. In the political system the legislator can better keep himself in office by favoring the local interests of his district than by work- ing for legislation for the general good. To the continuance of his political life the business man who occupies a strategic position in- dustrially, and who can make a substantial campaign contribution can contribute much. Other social currents, more subtle and harder to detect, also contribute to^ the dominance of the entrepreneur viewpoint. Ma- chinery has awed the human mind with a sense of its power and its strength. As a result to the modern mind the idea of size is almost identical with the idea of importance. To the superficial mind the large industrial establishment which employs many men is thought of as the cause of its laborers being employed. It appears that the factory or mill is an institution of Providence from which flows the blessings which the laborers' families realize through an expendi- ture of the wages paid out by it. We know that the coming of the machine multiplied individual productive powers, increased the size of economic incomes, and raised the general standard of living. Without going to the trouble of making nice distinctions one instinc- tively associates machine industr}^ with progress and regards in- dustries in which machinery is extensively used as really important, and looks upon those in which it is not so extensively used as old- fashioned, and of little social value. Machiner}^ too, favors the concentration of population, while non-mechanical industries favor its dispersion. This concentration brings into play all the sentimental forces which play about place, locality, and the city greatly to the advantage of local landowners. The manufacturing interests which make the city possible thus come to be regarded as necessary means to the realization of civic ends. 146 READINGS IN ECONOMIC PROBLEMS The imiportance of these industries has in public thought been still further increased by what may be called the impersonality of cap- ital. The investment of capital tends to separate itself from the personal business inclinations of its owner. To the extent that industry depends upon capital for success, the state or municipality can not secure the industry simply by an appeal to the personal tastes and local prejudices of the owner. Special privileges have to be offered. Thus the competition of local units results in a state of public opinion favorable to the interests of industries carried on on a large scale. Of course other forces are at work in moulding political opinion. Many other attitudes are mixing themselves into the complex nexus of the attitude of the public towards industry. Into these currents of opinion it is not our purpose to go. It may be that they will be crushed before the powerful blow of entrepreneur views. Or it may be that they will blend themselves with that viewpoint, modify it, and render it less acquisitive and more considerate of social in- terests. Onlv time can tell. H. GOVERNMENTAL MEANS OF SOCIAL REFORM. 83. Taxation as a Means of Social Control. BY ADOLPH WAGNEK. The modern science of economics not only recognizes the mutual dependence of public and private economic activity, and their mutu- ally complementary character; it also renounces the optimistic view of the present organization oif private industry, and recognizes the great evils in the system O'f free competition. It has come to know that the organization of productive industry by private initiative, and the distribution of wealth which takes place upon this basis have a decisive social influence. It knows that through this process the power and relations both o^f individuals and oi classes are determined in modern economic society. At the same time our science recognizes the influence which the state exercises directly and indirectly upon the distribution of wealth and position of social classes, by the fo^rm which its activity takes, by the manner in which it spends its revenues, by the kinds of taxation it adopts, and by the creation of public debts. From the knowledge of our science have developed two demands. In the first place, the state should so order its expenditures, tax system, and loans as to- remove certain economic and social evils SOCIAL CONTROL OF INDUSTRY 147 which have attended them in the past. And in the second place,, the state, by adoptingf appropriate policies, should remedy evils which are not due to its previous action in financial and other mat- ters. From this second demand it follows that, in the domain of public finance, expenditures should increase in order to enable the state to assume new functions ; and that taxation should be em^ ployed for the purpose of bringing about a different distribution of wealth from' that which would result from the action of free competition upon the basis of the present social order. It is the modern social problem which is here beginning to work this trans- formation in the science of finance. One who considers the present system unconditionally just, as the liberal school did, must logically consider the existing" distribu- tion of wealth, which results from this order, as the only righteous and just distribution. This conclusion the keener thinkers of the school have formulated. For a person of this school the existing distribution of wealth is a fact admitting of no further discussion. It follows then that taxation should nbt alter the existing distribu- tion. In this view of the case, therefore, taxation should be cor,- fined to the purpose of raising sufficient revenue ; and the socio- political theoiry of taxation s!hould be rejected. But, if one disputes the premises underlying the teachings of the liberal school, he can insist that the conclusion that the dis- tribution established by competition is not to be disturbed by tax- ation is not universally true. We need beside the purely fiscal theory of taxation, to establish a second, — the socio-political, by which a tax becomes something more than a means of raising revenue, and is considered a means of correcting that distribution of wealth which results from competition. IV. THE TARIFF PROBLEM. A. THE FACTORS IN THE PROBLEM. 84. The Basis of International Trade. BY AI.VIN S. JOHNSON. All permanent exchange originates in differences in character of productive powers. This may have originated in differences in natural aptitude, or in differences in training. From a purely economic point of view trade is either local or interregional, not domestic or international. Differences in natural endowment, in general character of population, in rates of wages and interest, characterize interregional trade. As a rule, however, international trade is interregional, and is subject to the same rules. In some cases the products of the two regions are quite dis- similar. Neither region can produce the commodities which it receives from the other. A modern example is the exchange of iron and steel for teas and spices. Trade having this basis is naturally permanent ; with every reduction in costs of transporta- tion it tends to increase. But, most commonly, one of the trading regions or both can produce both classes of commodities exchanged. Usually one country has the advantage in producing one product and the other country in producing the other. It is therefore natural that an exchange of products between the two countries should take place. Differences in the essential character of the populations of two trading regions are difficult to define, since the characters of nations are always thickly overlaid with custom and habit. Nevertheless such differences exist. Trade based upon such essential differences also tends to increase in importance with improvements in transpor- tation. Trade based upon differences in relative supply of land at- tained extraordinary proportions during the nineteenth centur}'-. The Old World was densely, the New World, sparsely, peopled. It is well. known that the largest output per workman is attained through superficial cultivation. In manufactures on the other hand, density of population, instead of reducing productive efficiency, tends to increase it. Hence an exchange of agricultural products THE TARIFF PROBLEM 149 for manufactures between the New World and the Old was natural and inevitable. While trade upon this basis tends to^ increase with reduction in costs of transportation, there is a counter tendency at work which in time checks it. Immigration flows intoi the regions rich in land. In the end such regions lose their peculiar advantages in the production of raw materials, and gain in power to produce manufactured goods cheaply. Trade of the character under dis- cussion may continue for centuries, but ultimiately it decays. If a nation has an abundant supply of capital which it is un- willing to invest in foreign lands, there are many branches of manu- facture that can be prosecuted with far greater advantage than in other countries ; since in practically every branch of manufacture the interest on capital makes up a large proportion of the total ex- penses. Such a nation, with a low interest rate, has a decided ad- vantage over a nation in which the supply of qapital is relatively scarce, while the latter has an advantag'e in those industries in which less capital is used. Under present-day conditions no country- can long hold a branch of trade merely through cheapness of capital. Like labor, capital tends to migrate tO' the less developed regions of the world ; its migration involves far less personal sacrifice and far less personal cost. Furthermore, capital increases rapidly in newer lands. Trade based upon differences in capital supply may, therefore, be regarded transitory. In a region long devoted to a given branch of industry, something that we may call a tradition of workmanship evolves. The best type of iron worker is not developed in a single day. Costly experiments in settling urban stock upon farms have demonstrated that it takes generations to make a farmer. Still more important is the tradition of workmanship in industries requiring a high degree of taste and skill. W^here is the Occidental whoi can produce an Oriental rug? When times are ripe, the population of a region may develop the tradition of workmanship necessary for the prosecution of any special branch of industry, but no region can be expected to gain a superiority in all lines. Trade, based upon such dift"erences, may, therefore, be treated as permanent in character. 85. The Nature and Classification of Import Duties. BY GEORGE M_ ElSK. Customs duties were originally taxes on trade. They were pay- ments for the use of roads, bridges, ferries, ware-houses, weights, measures, or the protection of merchants and goods on the high- ways. According to Adam Smith they were "called customs as I50 READINGS IN ECONOMIC PROBLEMS denoting customary payments which had been in use from time immemorial." They were collected either at the boundary of the country, or at the gates of a town. Fiscal requirements were almost always the sole reason for the levying of these duties. In course of time there developed a two-fold system of taxation, internal duties, and customs duties. Customs duties in a national sense were first developed in England, .beginning especially at the time of Cromwell. There are three general classes oi customs duties : import duties, export duties, and transit duties. The latter are levied upon mer- chandise passing through one country and destined for another. CustomiS duties may be based upon value and measured in per- centages or upon a unit of weight or measure and measured in payments per pound, ton, etc. The former are called ad valorem and the latter specific duties. We speak of a systematic arrangement of customs duties as a customs tariff, or simply a tariff. Customs duties may either be for the purpose of revenue or for protection. In practice the terms are not used in an absolute sense, since both revenue and protection play more or less of a role in nearly all customs duties. There are two general classes of pro- tective duties, agricultural and industrial or manufacturing. German protection, for example, is more essentially agricultural, while pro- tection in the United States is principally manufacturing. Yet modern international conipetition has developed a community of interests between certain branches of agriculture and industry so that in most countries we find certain agrarian and industrial iur- terests united in favor of protection. The class oi commodities subject to import duties varies not only according to the purpose for which they are levied, but also in accordance with the divergent social, political and economic con- ditions of the country. Import duties are the most important class of customs duties, being employed almost universally by modern states. Growing national expenditures emphasize their import- ance. But international competition tends to discourage the levy- ing of import duties upon the raw materials used in manufacture or on food products. 86. A Definition of Free-Trade. BY W. G. SUMMER. The term "Free Trade," although much discussed, is seldom rightly defined. It does not mean the abolition of custom houses, nor does it mean the sulbstitution of direct for indirect taxation, as a few American disciples of the school have supposed. It means THE TARIFF PROBLEM 151 such an adjustment of taxes on imports as will cause no diversion of capital from any channel into zvhich it luould otherwise flow, into any channel opened or favored by the legislation which enacts the customs. A country may collect its entire revenue by duties on im- ports and yet be an entirely free trade country, so long as it does not lay those duties in such a way as to lead anyone to undertake any em\pioyment, or make any investment he zvoidd avoid in the absence of such duties; thus the custom duties levied by England, with a very few exceptions, are not inconsistent with her profes- sion of being a country which believes in free trade. They either are duties on articles not produced in Egland, or they are exactly equivalent to the excise duties levied on the same articles if made at home. They do not lead anyone to put his money into the home production of an article because they do not discriminate in favor of the home producer. 87. A Definition of Protection. BY GEORGE E. HOAR. Protection, as used in our political and economic discussions, is the imposing of such duties on the importation of foreign products as will prevent a domestic producer of an article from having his business destroyed by the competition of the foreign import, zuhile he establishes it ; or will enable him to maintain the production, without its being destroyed or rendered unprofitable by the com- petition of the foreign article after it is established, when he cotild not otherwise sO' establish or maintain it ; or the enabling him to pay larger wages in such production than he could pay if he were subject to the foreign competition. B. TARIFF HISTORY. 88. A Short Sketch of American Tariff History. BY HARRISON S. SMALEEY. For the first quarter of a century after the establishment of our national government the idea of protection played an almost neg- ligible part in American fiscal policy. The first tariff law, that of 1789, was little else than a revenue measure. The duties on a very few articles were made higher than the average with the idea that their production at home needed encouragement; yet the rates were actually so low that little, if any, stimulus resulted. The general 152 READINGS IN ECONOMIC PROBLEMS sentiment Oif the country was in favor of free trade. In the south the absence of manufacturing and the prevalence of agricuhure based on slave labor created indifference and, later, hostility to pro- tectionist arguments ; while in New England the great interest of the people in shipbuilding and the carrying trade attached them to the policy of freedom in commerce. Moreover the sensitiveness oi the American people with reference to taxation rendered the sug- gestion Oif a national protective system less agreeable tO' the public. Not restrictive legislation, but the Napoleonic wars, first gave an artificial stimulus to American manufactures. Napoleon's Berlin and Milan decrees, and the English orders in Council resulted in the passage of the Embargo Act in December, 1807, and for more than a year thereafter American harbors were closed to foreign commerce. When at last the war with England began, foreign commerce was almost totally prostrated. The result of this interference was that the American people were in large measure thrown on their own resources and co'mpelled to manufacture many things which they had formerly imported. During the years 1808-15 so many manufacturing establishments had been started that, by the time the war was over, a sentiment was growing up in favor of protection. Accordingly in 1816, when a bill was passed raising duties to a general average of about 20 per cent for revenue purposes, the rate on textile fabrics was made 25 per cent for protective purposes. Troublous times followed. Business was in an unsettled con- dition, especially because of the influx of foreign goods which began after the war closed. Added to this were very serious currency troubles. Afifairs reached a climax in the crisis of 1818-19; and al- though, after that, prosperity was restored, there remained a lively public opinion in many quarters in favor of protection. In 1818 some slight extension of the policy was made, and in 1820 a fairly comprehensive high protective tariff bill was passed by the House and defeated in the Senate by only one vote. In 1824 a rather high protective tariff law was passed. Within the next few years the tariff was dragged into politics. A new political aHgnment was tak- ing place and the opposing leaders, headed by Adams and Jackson, were manouvering for position. Hence befo're the parties settled down to definite policies a period of uncertainty prevailed. It was at this time that the law of 1828 was passed, establishing a tariff higher than that of 1824. So many features of this act proved unsatisfactory that it came to be called the "Tariff of Abominations." By 1832 the demand for revision had become so great that in that year a new act was passed removing most of the specially objection- THE TARIFF PROBLFM 153 able features. But this did not satisfy all of the opponents of the protective, policy. The interests of the north and the south in refer- ence to that policy had never been identical, but the line of cleavage became especially clear in the discussion oif the "econoinic mon- strosity" — as the law of 1828 has been called. The south objected strongly to protection, Randolph declaring that the tariff of 1828 was calculated "to rob and plunder one-half of the Union for the benefit of the residue." At this time Calhoun's ideas as to state sovereignty and nullification were taking firm hold in some quarters, and as a result the people of South Carolina assembled in con- vention, "nullified" the tariff, and threatened secession if attempts were made to enforce it within the state. This crisis was met by the Compromise Tariff Act of 1833, which contemplated a gradual abandonment of protection and an ultimate return to a revenue tariff of duties in excess of 20 per cent. One- tenth of the excess was to- be removed in 1834, another tenth in 1836, another in 1838, and another in 1840; on January i, 1842, three- tenths were to come off, and the rest on July i, 1842, thus reducing all duties to a 20 per cent level. Hardly had the 20 per cent level been reached when the Whigs, who had . but recently come into power, passed the high protective tariff of 1842. There was no great public demand for this law. At the next presidential election a political reverse occurred and the Democrats, coming once more into power, passed, in 1846, a law v/hich has sometimes been called a free trade measure. It was in fact a moderate protective measure. While some duties were very high, the most important articles paid but 25 and 30 per cent. The law, which often bears the name of the Secretary of the Treas- ury, Walker, was in force until 1857, when a still lower level of duties was adopted. Most of the important articles were placed on a 24 per cent, basis. This reduction was adopted because the exist- ing law was bringing an excess of revenue into the treasury. The Morrill law of 1861 was passed, raising the level of duties above that of the tariff of 1846. This law was enacted partly be- cause of protectionist ideas and partly for political effect. Hardly had it been passed before the South seceded. Throughout the con- flict which followed modifications of the tariff were constantly being made, and in the end the level of duties was very greatly raised. The primary reason for the advances in tariff rates was the need of revenue, but the idea of protection was also prominent. The government, in its search for revenue, had adopted a most elaborate policy of internal taxation, including taxes on manufactured goods. It was claimed, therefore, that since American producers were 154 READINGS IN nCONOMIC PROBLEMS burdened with heavy taxes, which increased the cost of production and so put them at a disadvantage as compared with foreigners, they should be protected by a proportionally higher tariff duty. Thus many "compensating duties" were added to the already high rates. The level thus reached was in some cases still further ele- vated through the efforts of those congressmen who found it easy to secure increases in duties under the pretense of augmenting the revenues. Under the stress of all these circumstances the average rate of duty on dutiable goods rose toi about 37 per cent in 1862 and to about 47 per cent in 1864. During the war no one imagined that the excessive duties would be permanent. As the years passed the war tariff, without sub- stantial-reduction, continued in force; and even in 191 1 we had a general level of duties practically the same as that which prevailed toward the close oi the Civil War. Soon after the termination of the war Congress began to repeal the special internal revenue taxes for which compensating duties had been established. It should then have taken away the compensating duties. But it did not do so ; and today the American people are still paying many special duties designed to compensate manufacturers for taxes which have not been levied upon them for forty 3^ears or more. Several reasons may be assigned for the failure of Congress to reduce the war tariff after the close of the conflict. Its attention was largely drawn to the problems of reconstruction in comparison with which the tariff was a minor issue. Again, Southern opinion, which alone was favorable to free trade, was not strong. Further- more, the tariff was in a state of great confusion, and its intelligent revision would have required a great deal of time and care. Still another factor of a political character was probably of considerable consequence. The Republican party had been organized as a. pro- test against the spread of slavery. With the successful termination of the Civil War its object was accomplished. Hence it was left without a special reason for its continued existence. If the party was to remain a force in politics it must have a positive platform on which to stand. So- the Republican leaders seized upon protec- tion and made it one oi their leading policies. But most important of all, the protected interests exerted in the congressional lobbies a powerful influence to- prevent a reduction of duties. Indeed, from that time to this the pressure brought by protected producers upon Congress and congressmen has been the most serious obstacle in the way of tariff reform. For these reasons the war tariff level was maintained. Within a few years the popular mind became accus- tomed to high protection and more or less adjusted to it, and the THE TARIFF PROBLEM 155 lobbyists and representatives of protected interests found it relatively- easy to secure what they wanted from Congress. Yet numerous readjustments were made. Thus in 1870 the duties on certain revenue articles and a very few protected articles were lowered and, under cover of these reductions, increases were made in the rates on steel rails, nickel, flax and other goods. At other times the duties on wool, woolens^ copper and other articles were advanced. In 1872 the agents of the manufacturers felt it to be good policy to permit some reduction, because the existing duties were bringing in a surplus revenue and also because the farmers in the west, who were not in a flourishing condition, were restless under a tariff which raised the prices of most of the articles they purchased. The result was a horizontal reduction of 10 per cent in all rates. Coffee and tea were placed on the free list, — an act which showed the determination of the champions of protection to lower the duties on revenue, rather than on protected articles. In 1875 the tariff was restored to its former level. In the early eighties the treasury was again overflowing and agitation for tariff revision was raised. A commission appointed to consider the question reported a scheme which contemplated a moderate reduction. The Senate passed a bill embodying ideas of the commission, but the House failing to concur the bill was sent to conference, and there many rates were raised. As a result there was but little reduction in the general level of duties. The bill as passed in 1883, was an effort to satisfy the popular demand for revision and at the same time save the principle of high protection by making innumerable and confusing readjustments. But despite this. President Cleveland, elected in 1884, came out strongly in favor of tariff reduction, and it became the leading issue in the campaign of 1888. The Republican leaders felt driven in defense of their party to accept the issue and to advocate more strongly than ever the policy of high protection. When, therefore, they succeeded in electing their candidate, Benjamin Harrison, they proceeded to adopt a new tariff which surpassed in altitude all previous achievements. This measure, the McKinley Act, resulted in a substantial increase in the general level of duties. The neces- sity of reducing the revenue was again met without any sacrifice of the protective principle. The duty on raw sugar, averaging 2 cents a pound, was removed, thus eliminating all revenue from imported sugar, but a bounty of 2 cents was granted to all sugar producers in this country, thereby protecting them and relieving the treasury surplus at the same time. 156 READINGS IN ECONOMIC PROBLEMS Hardly had this act been passed when it became evident that it was not altogether popular. The Republican leaders had advanced and extended the policy of protection. This was more than the people were readv to agree to, and at the congressional election of 1890 there was an overwhelming Democratic landslide. Again in 1892, the Democrats were successful, capturing the Presidency and the Senate, as well as the House. They were then in a position to revise the tariff. Before taking up the tariff, however, they found it necessary to consider the currency question. The Repuiblican Congress in 1890 had passed a bill for the limited coinage of silver. The result had been the virtual disappearance of gold and a fear that the country would go on a silver standard. This was the chief cause which was driving the country toward a crisis. Congress, sum- moned by the President, repealed the silver Purchase Act, but too late to avert the crisis. The repeal created bitterness and faction within the party, which made the prospect of harmonious action on the tariff exceedingly dim. The party situation was especially difficult because the margin in the Senate was small, there being but six more Democrats than Republicans. Under these circum- stances tariff revision became a difficult task and the Wilson Act. passed in 1894, was a most unsatisfactory measure. The House proposed substantial reductions, in most of which the Senate would not concur. The bill as passed, while a more moderate measure than the McKinley Act, was not on the whole so low as the tariff of 1883. President Cleveland was so displeased that he would not sign the bill, but allowed it to become a law without his signature. The Wilson Act was obviously not a sincere effort to carry out democratic principles. Moreover the duty on refined sugar was adjusted so as to give protection to the Sugar Trust, and as the Democrats has posed as the antagonists of monopolies, their sur- render to the sugar octopus hurt them seriously. The panic of 1893, caused largely by the silver legislation of the Republicans, had left the country plunged in a most serious business depression. This began before the Wilson bill was introduced. No' tariff legis- lation of any kind could have relieved the situation perceptibly. Surely there was no threat to business interests in the modest reduc- tions of the Wilson Act. Yet in an unreasoning fashion people began to blame the Wilson tariff for the failure of business to re- cover from the panic. The development of interest in the silver question opened a possible way of sidetracking the tariff, and when in the Democratic convention of 1896 Bryan made his celebrated THE TARIFF PROBLEM 157 "cross of gold'' speech, he was hailed as the new leader of the party and the free coinage of silver was declared to be the paramount issue. Nevertheless the tariff was not by any means lost from view. The Republicans, victorious in the election of i8c)6, felt authorized to raise the tariff once more. In consequence they passed the Dingley law of 1897, which was a revision upward, restoring the general level of the McKinley Act. The duty on wool was restored to the rates of 1890. The dut}^ on raw sugar was also restored and the rates on refined sugar so adjusted as to give the sugar trust the samie advantages that had been given it by the much-criticised Wilson Act. In 1900, as to the tariff, the Republicans had an argument, which though unsound, was bound to carry- weight with the people. They could say : "From 1894 to 1897 yO'U had a democratic tariff and you had hard times; from 1897 to 1900, you have had a Republican tariff and prosperity has prevailed." It made no difference that the Democratic tariff was a high protective tariff" ! Nor did it make any difference that the hard times of 1893-1897 had been due to causes other than the Democratic tariff', while the boom times of 1897- 1900 had been due almost wholly to causes other than the Republican tariff ! "Post hoc, propter hoc." Realizing this, the Democrats evaded the tariff, and found a paramount issue in Imperialism. The Republicans were again victorious and the Dingley tariff remained untouched. But before the campaign of IC104 the situation changed. Be- tween 1899 and 1002 a large number of enormous industrial con- solidations were effected under the "favorable" laws of New Jersey. These were regarded as "trusts." The old fear of monopolies was renewed and increased, and anti-trust sentiment was not slow in appearing. Now it has long been evident that in some cases mon- opolies had been able to charge extortionate prices because they were protected from foreign competition by unduly high tariff duties. The Republican leaders felt the pressure of the public conviction that excessive tariffs make possible exorbitant monopoly prices. Accordingly in their platform they stated that the duties should at least equal the difference in cost of production at home and abroad. On their part the Democrats regained their courage and denounced protection, especially condemning the existing law as one which permitted the trusts to oppress the people. But, although the Republicans held out noi definite hope of a revision of the tariff, they were able to win the election on the overshadowing issue of Roosevelt. 158 READINGS IN ECONOMIC PROBLEMS Having won the election the Republicans settled down to- a policy of inaction with reference to the tariff. Before the campaign of 1908,, however, popular sentimient, due both to trusts and to^ the high cost of living, had sO' developed that the Republican leaders admitted the necessity of promising a revision. Accordingly in the platform of 1908 they declared unequivocally that "the true principle oi protection is best maintained by the impO'sition oi such duties as will equal the difference between the cost of production at honiie and abroad, together with a reasonable profit to American industries." They also promised that, if successful in the election, they would at once revise the tariff. The Democrats, meeting soon after, declared that they welcomed "the belated promise of tariff reform now affected by the Republican party as a tardy recognition of the righteousness of the Democratic position" on the question ; but they added that the people could not safely trust revision to a party so deeply obligated to the highly protected interests as was the Republican party. The Republicans v/on. The result of a special session of Congress was the Payne-Aldrich law. Whatever change in the general level of duties has been made by the new law, the difference is not large enough to be of any importance one way or another. The rates in certain schedules were obviously increased, in others diminished, and in others left at substantially the same general level. A just estimate of the merits of the Payne-Aldrich law as a whole cannot be made now, but some statements can be made with confidence. It is a high protective tariff. The readjustment of duties in it was not such as to reduce the cost of living, or, with but one or two exceptions, to interfere with the monopoly powers of any trust. Many jokers and delusive provisions were included in the law. For example, sugar was reduced one-twentieth of a cent a pound. Congress alsO' "dealt a blow at the beef trust" by reducing the duty on fresh mieats one-half a cent a pound. The method of counting threads in cotton goods was so changed as almost tot double the duties on some classes of goods. Certain grades of sugar pay more because of a change in the method of testing sugar, and so on. In short the tariff' revision oi 1909 was quite as much a matter of politics as ever before. THE TARIFF PROBLEM 159 C. ASPECTS OF THE FRAMING OF A TARIFF BILE. 8g. Resolutions of the National Wool Growers Association and National Association of Wool Manufacturers. Resolved, That the mutuality of the interests of the wool pro- ducers and wool manufacturers of the United States is established by the closest of commercial bonds, that of demand and supply; it having been demonstrated that the American grower supplies more than 70 per cent of all the wool consumed by American mills, and, with equal encouragement, would soon supply all which is prop- erly adapted tO' production here ; and further, it is confirmed by the experience of half a century that the periods of prosperity and depression in the two branches of the woolen industry have been identical in time and induced by the same general causes. Resolved, That as the two branches of agricultural and manu- facturing industry represented by the woolen interest involve largely the labor of the country, whose productiveness is the basis of national prosperity, sound policy requires such legislative action as shall place them on an equal footing, and give thenii equal encour- agement and protection in competing with the accumulated capital and low wages of other countries. Resolved, That the benefits of a truly national system, as applied to American industry, will be found in developing manufacturing and agricultural enterprise in all the States, thus furnishing markets at home for the products O'f both interests ; and Resolved, further. That is is the sense of this meeting that in the coming revision of the tariff the present duties both on wool and woolen goods be maintained without reduction. 90. An Argument for High Duties upon Woolen Goods. BY N. T. FOI.WELI<. Unlike the iron and steel industry, where machinery manufac- ture cheapens the cost of production, the manufacturer of worsted and woolen textiles has no advantage over his European competitor in quantity produced ; man for man, loomi for loom, the production is the same. The climate of England, France and Germany is better adapted for spinning than ours, and they can spin finer yarn from the same grade of wool than we can here, and consequently can run their spinning frames at a higher rate of speed, thus getting greater production. The oft-repeated story that an American workman can produce more than his brother abroad is false as far as the worsted and woolen trade is concerned. i6o READINGS IN ECONOMIC PROBLEMS Our mills have been at a high cost of labor and materials and are partially filled with machinery that has paid a duty of from 30 to 60 per cent. All the numerous articles which go tO' equip a mill have cost from 30 tO' 50 per cent more than the amount required abroad. Our wages are double what are paid in England and three times the amount paid in France and Germany. There is nO' reason why the rates of duty should be lowered on worsted and woolen textiles, as conditions which prevail today are no different from those which prevailed at the time the Dingley bill became a law, with one exception, namiely our wages have in- creased. We are importing from two to three million dollars per week, foreign cost, of dry goods, and this fact is conclusive proof that the tariff should be raised rather than lowered. 91. How Duties are Sometimes Secured. BY WM. WHITMAN AND S. N. D. NORTH. Elsmere, April 4, 1897. Dear Mr. Whitman : Now about the tariff. I cannot, after what has been said to me in reference to- my confidential relations with the committee, keep you posted as I would like to do. . . Let me ask you a question. Should tops at a 24-cent line have the same compensatory duty as yarns at a 30-cent line? Should tops at a 24- cent line have a compensation duty of 27^/2 cents? . . I do not want you to intimate tO' any Senator that I have written you on this subject. I am kept at work from 10 A. M. until midnight and I have not sufficient clerical assistance as yet. I am the only person whom the committee allows at its meetings. Truly yours, S. N. D. North. Boston, June 2, 1897. My dear Mr. North: We all depend upon you to watch closely our interests, to see that nothing is overlooked or neglected by our friends on the committee. I have no doubt they will do all they can do, but with so many interests to look after, our special repre- sentative must see to it that our interests receive proper attention. Yours very truly, William Whitman. THE TARIFF PROBLBM i6i 92. The Conflict of Interests. The following typical attitudes on various duties will give some idea of the local and industrial conflict of interests that had to be reconciled in the tariff bill of 1909. These instances are all taken from speeches reported in the Congressional Record. A Republican from New York considered a duty on hides inexcusable. A Repub- lican from Massachusetts appealed for free hides in the interests of the consumer. A Southern Democrat demanded a protective duty on rice. Free coal was pronounced by a Pennsylvania Con- gressman to be contrary to protective principles. Several congress- men, from different sections of the country, insisted that the glass industry should be highly protected. Senators from ihe Rocky Mountain States dwelt upon the importance of protecting the woolen industry. The representatives from California demanded protec- tive duties on lemons. A congressman insisted that a duty on post- cards would even things up with Germany. A Democratic Senator from Texas advocated very strenuously a duty on lumber. A Mich- igan Republican argued quite as strenuously for a high duty on sugar. A Minnesota Democrat urged adequate protection for barley. An Iowa congressman insisted that duties should be framed in such a manner as adequately and equally to protect all industries. An Oklahoma Democrat pleaded for a duty on hides. Senator Knute Nelson of Minnesota, a protectionist and a Republican, said :* "I am tired of being lectured to about these schedules and about the orthodoxy of the Republican party. Let us recognize the fact that with a tariff bill it is just as it is with the River and Harbor bills. There is nO' use disguising it. You tickle me and I tickle you. You give us what we, on the Pacific coast, want for our lead ore and our citrus fruit, and we will tickle yoit people of New England and give you what you want on your cotton goods. When you boil down the patriotism of the speeches just made you come toi the same basis as that of the River and Harbor bill. You vote for mv creeks, you vote for my harbors, you vote for my rivers, and I will vote for yours, and it will be all right." 93. The Play of Special Interests. BY A. S. BOrXES. The history of tariff-making is not particularly honourable in all its details to any party or interest. It has too often partaken of a personal fight by manufacturers against the public and each other. * Congressional Record, May 10, 1909. i62. READINGS IN ECONOMIC PROBLEMS The strugg'le on this occasion (1883) before Congress lasted nearly the whole session. It was earnest and sometimes bitter; some in- terests were satisfied with the final result, others were not. The attempt to modify the tariff brought intoi bold relief the numerous conflicting interests and the difficulty and delicacy of the undertak- ing. As our industries become more heterogeneous, the tariff also grows more complex, and the difficulty of doing justice to^ all is in- creased. For example, the wool manufacturers, to succeed best, must have free w^ool and dye-stuffs ; on the other hand, both these inter- ests desired protection. The manufacturers of the higher forms of iron must have free materials to succeed best ; on the other hand, the ore producers, the pig-iron manufacturers, and every succeeding class desired a tariff on their products. It was not easy for these interests to agree, and som^e of them did not. The iron-ore pro- ducers desired a tariff of eighty-five cents a ton on ore ; the steel- rail makers were opposed to the granting of more than fifty ; the manufacturers of fence-wire were opposed to- an increase of duty on wire-rods used for making wire, and favoured a reduction ; the manufacturers of rods in this country were desirous of getting an increase; the manufacturers of floor oil-cloths desired a reduc-' ton or the abolition of the duty on the articles used by them; the soap manufacturers desired the putting of caustic soda on the free list, which the American manufacturers oi it opposed ; some of the woolen manufacturers were desirous that protection should be granted to- the manufacturers of dye-stuffs, and some were not ; the manufacturers of tanned foreign goat and sheep skins desired the removal of the tariff on such skins ; those who tanned them,, and who were much less numerous, were equally tenacious in main- taining the tariff on the raw skins; and the same conflict arose be- tween other interests. D. THE UNDERWOOD-SIMMONS TARIFF ACT. 94, Theory of a Competitive Tariff. It is a fact that in many lines of business the system of protec- tion has been carried to such a point as to put business into an arti- ficial condition and to induce the upbuiMing of many establishments not needed and so uneconomically conducted as to prelude them from doing business except by virtue of special favor granted them through Government action. If these establishments stood alone today, there would be no reason why the special privileges accorded to them should not be instantly wiped out. If as a result of the THE TARIFF PROBLEM 163 elimination of excessive protection, ill-equipped and badly organ- ized factories should find it necessary to discontinue operations, the countrv' would be the richer on that account, since its capital would be diverted into productive channels, and it would be enabled to devote itself exclusively to healthy enterprises yielding a reason- able return. The business enterprises which have been artificially created at an unwarranted expense do not stand alone, but have staffs of employees who are immediately concerned in their maintenance and to whom the necessity of shifting their occupation would be a hardship. There are complex commercial relationships partially de- veloped under or dependent upon the existing tariff which it would be unfair and unwise suddenly to disturb. This does not mean that there should never be a beginning in the task of eliminating these evils. On the contrary, it shows the necessity of beginning the task promptly. It, however, emphasizes the necessity of carry- ing through the transition to a state where business enterprises will be obliged to rest upon their own bases without Government support, in such a way as to avoid unnecessary jars to trade, and to give every opportunity for reasonable adjustment, so that the shift may be made without unnecessary displacements of labor and capital. The committee has had these facts in mind in the prepar- ation of H. R. 3321, and the attempt has been made — 1. To eliminate protection of profits and to cut off the duties which enable industrial managers to exact a bonus for which no equivalent is rendered. 2. To introduce in every line of industr}^ a competitive tariff basis providing for a substantial amount of importation, to the end that no concern shall be able to feel that it has a monopoly of the home market gained other than through the fact that it is able to furnish better goods at lower prices than others. It is felt that tariff schedules aiming at these two conditions can damage no legitimate industry' and is the least that can be asked by those who desire the consumer to be safeguarded in some meas- ure against exploitation by monopolies that now practically dictate prices in the domestic field. Where the tariff rates balance the difference in cost at home and abroad, including an allowance for the dift'erence in freight rates, the tariff must be competitive, and from that point downward to the lowest tariff that can be levied it will continue to be competi- tive to a greater or less extent. Where competition is not inter- fered with by levying the tax above the highest competitive point, the profits oi the manufacturer are not protected. On the other 1 64 READINGS IN ECONOMIC PROBLEMS hand, when the duties levied at the custom house are high enough to allow the American manufacturer to mal-ce a profit before his com- petitor can enter the field, we have invaded the domain of the protection of profits. In our judgment the protection of any profit must of necessity have a tendency to destroy competition and create monopoly, whether the profit protected is reasonable or unreason- able. We should bear in mind that to establish a business in a foreign country requires a vast outlay, both in time and capital. Should the foreign manufacturer attempt to establish himself in this countrv, he must advertise his goods and establish selling agencies and points of distribution before he can successfully conduct his business. After he has done so, if the home producer is protected by a law that not only equals the difference in cost at home and abroad, but also protects a reasonable or unreasonable profit, it is only neces- sary for him^ to lower his prices slightly below the point that the law has fixed to protect his profits and his competitor must retire from the country, or become a bankrupt, because he would then have to sell his goods at a loss, and not a profit. The foreign manu- facturer having retired, the home producer could raise his prices to any level that competition would allow him, and it is not probable that the foreigner, who had already been driven out of the country, would return, no matter how inviting the field, as long as the law remained on the statute books that would enable his competitor to put him out of business. Thirty or forty years ago, with a large number of small manu- facturers, honest competition, no> attempt tO' restrict trade, and a home market more then able to consume the production of our mills and factories, the danger and the injury to the consumer of the country was neither so great nor so apparent as it is today, when the control of many large industries has been concentrated in the hands of a few. Domestic competition then regulated prices to a reasonable extent even where foreign competition was pro- hibited. When we ceased having competition at home, and the law prohibits competition from abroad by protecting profits, there is no relief from the consumer except to- cry for Government regu- lation. There is no more reason or justice in having the Govern- ment attempt to protect the profits of the manufacturers and pro- ducers of this country than there would be to protect the profits of the merchant or the lawyer, the banker or the farmer, or the wages of the laboring man. Which is the wiser course for our Government to take? The one that demands the protection of profits, the continued policy of THE TARIFF PROBLEM 165 hot-house growth for our industries — the stagnation of development that follows where competition ceases — or, on the other hand, the gradual and insistent reduction of our tariff laws to a basis where the American manufacturer must meet honest competition, where he must develop his business along the best and most economical lines ; where, when he fights at home to control his market, he is forging the way in the development of his business to extend his trade in the markets of the world. In our judgment the future growth of our great industries lies beyond the seas. 95. Excerpts from the Underwood-Simmons Act. Section I. Schedule A. — Chemicals, Oils and Paints. I. Acids: Boracic acid, ^ cent per pond; citric acid, 5 cents per pound; formic acid, i^ cents per pound; gallic acid, 6 cents per pound; lactic acid, i^ cents per pound; oxalic acid, i^ cents per pound ; pyrogallic acid, 12 cents per pound ; salicylic acid, 2^ cents per pound ; tannic acid and tannin, 5 cents per pound ; tartaric acid, 3^ cents per pound; all other acids and acid anhydrides not specially provided for in this section, 15 per centum ad valorem. 5. Alkalies, alkaloids, and all chemical and medicinal com- pounds, preparations, mixtures and salts, and combinations thereof not specially provided for in this section, 15 per centum ad valorem. 19. Chloroform, 2 cents per pound. 48. Perfumery, including cologne and other toilet waters, articles of perfumery, whether in sachets or otherwise, and all preparations used as applications to the hair, mouth, teeth, or skin, such as cosmetics, dentf rices, including tooth soaps, paste, including theatrical grease paints, and pastes, pomades, powders and other toilet preparations, all the foregoing, if containing alcohol, 40 cents per pound and 60 per centum ad valorem ; if not containing alcohol, 60 per centum ad valorem ; floral or flower water containing no alcohol, not specially provided for in this section, 20 per centum ad valorem. Schedule B. — Earth, Earthenware and Glassware. 74. Plaster rock or gypsum, crude, ground or calcined, pearl hardening for paper makers' use; white, non-staining Portland ce- ment, Keene's cement or other cement of which gypsum is the com- 1 66 READINGS IN ECONOMIC PROBLEMS ponent material of chief value, and all other cements not specially provided for in this section, lo per centum ad valorem. 91. Spectacles, eyeglasses and goggles, and frames for the same, or parts thereof, finished or unfinished, 35 per centum ad valorem. 99. Freestone, granite, sandstone, limestone, lava, and all other stone suitable for use as .mionumental or building stone, except marble, breccia, and onyx, not specially provided for in this section, hewn, dressed, or polished, or otherwise manufactured, 25 per centum, ad valorem ; unmanufactured, or not dressed, hewn, or pol- ished, 3 cents per cubic foot. 100. Grindstones, finished or unfinished, $1.50' per ton. Schedule C. — Metals and Manufactures of. 102. — Chrome or chromium metal, ferrochrome or ferrochro- mium, ferromolybdenum, ferrophosphorus, ferrotitanium, ferro- tungsten, ferro vanadium, molybdenum, titanium., tantalumi, tung- sten or wolfram metal, and ferrosilicon, and other alloys used in the manufacture O'f steel, not specially provided for in this section, 15 per centum ad valorem. no. Steel bars, and tapered or beveled bars; mill shafting; pressed, sheared, or stamped shapes, not advanced in value or con- dition by any process or operation subsequent to the process of stamping ; hammer molds or swaged steel ; gun-barrel molds not in bars; all descriptions and shapes of dry sand, loam, or iron molded steel castings, sheets, and plates; all the foregoing, if made by the Bessemer, Siemens-Martin, open-hearth, or similar processes, not containing alloys, such as nickel, cobalt, vanadium, chromium, tungs- ten or wolfram, molybdenum, titanium, iridium,, uranium, tantalum, boron, and similar alloys, 8 per centum ad valorum; steel ingots, cogged ingots, blooms and slabs, die blocks or blanks ; billets and bars and tapered or beveled bars; pressed, sheared, or stamped shapes not advanced in value or condition by any process or opera- tion subsequent to the process of stamping; hammer molds or swaged steel ; gun-barrel molds not in bars ; alloys used as substi- tutes for steel in the manufacture of tools ; all descriptions and shapes of dry sand, loam, or iron molded castings, sheets, and plates ; rolled wire rods in coils or bars not smaller than twenty one-hun- dredths of one inch in diameter, and steel not specially provided for in this section, all the foregoing when made by the crucible, electric, or cementation process, either with or without alloys, and finished by rolling, hammering, or otherwise, and all steels by whatever THU TARIFF PROBLEM 167 process made, containing' alloys such as nickel, cobalt, vanadium, chromium, tungsten, wolfram, molybdenum, titanium, iridium, ura- nium, tantalum, boron, and similar alloys, 15 per centum ad valorem. Schedule E. — Sugar, Molasses, and Manufactures of. 177. S.ugars, tank bottoms, sirups of cane juice, melada, con- centrated melada, concrete and concentrated molasses, testing by the polariscope not above seventy-five degrees, seventy-one one- hundredths of i per cent per pound, and for every additional de- g'ree shown by the polariscopic test, twenty-six ome-thousandths of I cent per pound additional, and fractions of a degree in propor- tioin; molasses testing not above forty degrees, 15 per centum ad valorem ; testing above forty degrees and not above fifty-six de- grees, 2^ cents per gallon; testing above fifty-six degrees, 4^ cents per gallon; sugar drainings and sugar sweepings shall be sub- ject to duty as molasses or sugar, as the case may be, according to polariscopic test : Provided, That the duties imposed in this para- graph shall be efi^ective on and after the first day of March, nine- teen hundred and fourteen, until which date the rates of duty pro- vided by paragraph two hundred and sixteen of the tariff Act ap- proved August fifth, nineteen hundred and nine, shall remain in force : Provided, however. That so much of paragraph two- hundred and sixteen of an Act to- provide revenue, equalize duties, and en- courage the industries oi the United States, and for other purposes, approved August fifth, nineteen hundred and nine, as relates to the color test denominated as Number Sixteen Dutch standard in color, shall be and is hereby repealed : Provided further. That on and after the first day of May, nineteen hundred and sixteen, the articles hereinbefore enumerated in this paragraph shall be admitted free of duty. Schedule G. — ^Agricultural Products and Provisions. 188. Barley, 15 cents per bushel of forty-eight pounds. 193. Rice, cleaned, i cent per pound ; uncleaned rice, or rice free of the outer hull and still having the inner cuticle on, V^ of i cent per pound. 195, Butter and butter subtitutes, 2^ cents per pound. 196. Cheese and substitutes therefor, 20 per centum ad valorem. 205. Hay, $2 per ton. 206. Honey, 10 cents per gallon. 213. Straw, 50 cents per ton. 214. Teazels, 15 per centum ad valorem. 1 68 READINGS IN ECONOMIC PROBLEMS Schedule K. — Wool and Manufactures of. 286. Combed wool or tops and roving or roping made wholly or in part of wool or camel's hair, and on other wool and hair which have been advanced in any manner or by any process of manufacture beyond the washed or scoured condition, not specially provided for in this section, 8 per centum ad valoremi. 288. Cloths, knit fabrics, felts not woven, and all manufactures of every description made, by any process, wholly or in chief value of wool, not specially provided for in this section, 35 per centum ad valorem ; cloths if made in chief value of cattle hair or horse hair, not specially provided for in this section, 25 per centum ad valorem ; plushes, velvets, and all other pile fabrics, cut or uncut, woven or knit, whether or not the pile covers the entire surface, made wholly or in chief value of such plushes, velvets, or pile fabrics, 40 per centum ad valorem ; stockings, hose and half hose, made on knitting machines or frames, composed wholly or in chief value of wool, not specially provided for in this section, 20 per centum ad valorem ; stockings, hose and half hose, selvedged, fashioned, narrowed, or shaped wholly or in part by knitting machines or frames, or knit by hand, including such as are commercially known as seamless stockings, hose and half hose, and clocked stockings, hose and half hose, gloves and mittens, all of the above, composed wholly or in chief value of wool, if valued at not more than $1.20 per dozen pairs, 30 per centum ad valorem; if valued at more than $1.20 per dozen pairs, 40 per centum ad valorem; press cloth composed of camel's hair, not specially provided for in this section, 10 per cent- um ad valorem. Schedule N. — Sundries. 341. Dice, dominoes, draughts, chessmen, chess balls, and bil- liard, pool, bagatelle balls, and poker chips, of ivory, bone, or other materials, 50 per centum ad valorem. 347. Feathers and downs, on the skin or otherwise, crude or not dressed, colored, or otherwise advanced or manufactured in any manner, not specially provided for in this section, 20 per centum ad valorem ; when dressed, colored, or otherwise advanced or manu- factured in any manner, and not suitable for use as millinery orna- ments, including cjuilts of down and manufactures of down, 40 per centum ad valorem ; artificial or ornamental feathers suita!ble for use as millinery ornaments, artificial and ornamental fruits, grain's leaves, flowers, and stems or parts thereof, of whatever material composed, not specially provided for in this section, 60 per centum THB TARIFF PROBLEM . 169 ad valorem ; boas, boutonnieres, wreaths, and all articles not specially provided for in this section, composed wholly or in chief value of any of the feathers, flowers, leaves, or other material herein men- tioned, 60 per centum ad valorem: Provided, That the importation of aigrettes, egret plumes or so-called osprey plumes, and the feath- ers, quills, heads, wings, tails, skins, or parts oi skins, of wild birds either raw or manufactured, and not for scientific or educational purposes, is hereby prohibited; but this provision shall not apply to the feathers or plumes of ostriches, or to^ the feathers or plumes of domestic fowls of any kind. Free List. 387. Acids: Acetic or pyroligneous, arsenic or arsenious, car- bolic, chromiic, fluoric, hydrofluoric, hydrochloric or muriatic, nitric, phosphoric, phthalic, prussic, silicic, sulphuric or oil of vitriol, and valerianic. 389. Acorns, raw, dried or undried, but unground. 391. Agricultural implements: Plows, tooth and disk harrows, headers, harvesters, reapers, agricultural drills and planters, mowers, horserakes, cultivators, thrashing machines, cotton gins, machinery for use in the manufacture of sugar, wagons and carts, and all other agricultural implements of any kind and description, whether spe- cifically mentioned herein or not, whether in whole or in parts, in- cluding repair parts. 407. Ashes, wood and lye of, and beet-root ashes. 457. Cofifee. 512. Ice. 513. India rubber, crude, and milk of, and scrap or refuse india rubber, fit only for remanufacture. 586. Rags, not otherwise specially provided for in this section. 652. Original paintings in oil, mineral, water, or other colors, pastels, original drawings and sketches in pen and ink or pencil and water colors, artists' proof etchings unbound, and engravings and woodcuts unbound, original sculptures or statuary, including not more than two replicas or reproductions of the same. Se^ction IV. I. That all goods, w^ares, articles, and merchandise manufac- tured wholly or in part in any foreign country by convict labor shall not be entitled to entry at any of the ports of the United States. J. Subsection 7. That a discount of 5 per centum on all duties imposed by this Act shall be allowed on such goods, wares, and 1 70 READINGS IN ECONOMIC PROBLEMS merchandise as shall be imported in vessels admitted tO' registration under the laws of the United States : Provided, that nothing- in this sub-section shall be so construed as to abrogate or in any manner impair or affect the provisions of any treaty concluded between the United States and any foreign nation. E. THE CASE FOR PROTECTION. 96. Protection and Industrial Transformation. BY P^RIIJDRICH IvIST. The transition from the savage to the pastoral, and from the pastoral to the agricultural state is very efficiently promoted by free intercourse among nations. The elevation of an agricultural people to the condition of countries at once agricultural, manufacturing, and commercial, can only be accomplished under free trade when the various nations engaged at the time in manufacturing are in the same degree of civilization. But some of them, favored by circumstances, having distanced others in manufactures, commerce, and navigation, have adopted and still persevere in a policy well adapted to give them the monop- oly of manufactures, and to impede the progress of less advanced nations or those in a lower degree of culture. The measures en- forced by such nations are called the protective system. The anterior progress of certain nations and foreign commercial legislation have compelled inferior nations to look for special means of effecting their transition from the agricultural to the manufac- turing stage in industry, and as far as practicable, by a system of duties, to- restrain their trade with more advanced nations aiming at a manufacturing monopoly. The system, of import duties is conse- quently a natural consequence of the tendency of nations to seek for guarantees of their existence and prosperity, and to establish and increase their weight in the scale of national influence. Such a principle is rendered reasonable only so far as it renders easy the economical development of a nation. Such restrictions are of the greatest importance because of the impetus which they give to the division of labor. Individuals would be in vain laborious, economical, ingenious, enterprising, intelligent, and moral, without a division oi labor, and a cooperation of produc- tive power. The principle of the division of labor has been hitherto but imperfectly understood. Industrial production depends to a great extent upon the moral and material association of individuals THE TARIFF PROBLEM 171 for a common end. This principle extends to every kind of industr)^ The division of labor and the combination of productive powers take place in a nation when the intellectual power is applied so as to cooperate freely and efficiently with national production. A merely agricultural people, in free intercourse with manufacturing and trad- ing nations, will lose a considerable part of their productive power and natural resources, which must remain idle and unemployed. It can possess neither an important navigation, nor an extensive trade ; its prosperity, so far as it results from external commerce, may be interrupted, disturbed, or annihilated by foreign legislation or by war. 97. What Protection Has Done.* BY ROBE:rT EIvIvIS THOMPSON. The policy of protection is challenged now to justify itself by its works at the bar of public opinion. We are not afraid of that test. We ask your attention to its broad results. It has raised the average of our national wealth from $514 a head (slaves included) in 1850, to $870 a head in 1880. It has increased the value of our manufactures five hundred per cent, and that of our foreign commerce in the same ratio, while the commerce of England increased but three hundred and fifty per cent. It has secured higher wages to our workmen and better prices to our farmers, without increasing to either the cost of staple manu- factures, as is shown by comparing the prices of textiles and hard- wares before and since i860. It has diversified our industries and raised our people out of that uniformity of occupation which is the mark of a low industrial devel- opment. It has stimulated inventions and improvements to the degree that some of the great staples of necessary use have been permanently cheapened to the whole world. It has drawn the different sections of the country into closer bus- iness relations, and has interlaced the great trunk lines oi railroad to the West with others running Southward. It has brought the foreign artizan across the ocean, and has nat- uralized his craft on our shores, whereas Free Trade would have brought his work only. It has made us as regards the great staples independent of all * Written in 1886. 172 READINGS IN ECONOMIC PROBLEMS other countries in case of war, while it has consolidated the national unity and increased the national strength to a degree that makes the rest of mankind anxious to be at peace with us. It has created a sentiment in favor of this policy so powerful that no political party ventures to- oppose it openly, and such that the friends of Free Trade are hardly heard in our national cam- paigns. 98. Free Trade Destroys the Farm. ANONYMOUS. There is no argument in favor of protection which the advocates of free-trade find it so difficult to assail, with any show of success, as the one against the policy of exporting to foreign countries the fertilizing constituents of the soil in the shape of raw materials. It is a proposition too plain to be disputed, that a bushel of wheat, a bale of cotton, or a tierce of rice, embodies a certain quantity of those earthy elements whose presence on farm or plantation is indis- pensable tO' the growth oi the several productions. Transport the grain, fibre, or kernel far away from the region where it is culti- vated, and forthwith a portion of the fructifying components of the land is forever transferred, permanently diminishing the productivity to that extent. South and West we find innumerable examples of this butchery of the soil, attributable to the lack of that home mar- ket which it is the province of protection to supply, and which it invariably supplies in time, under a wise and stable application of its beneficent principles. Already throughout the cotton belt have an immense number of acres, once yielding the greatest abundance, been turned into open fields, and abandoned to sedge-broomi, fox-glove, and fennel — steril- ity resulting from the very cause we are considering. New planta- tions, carved out of the surrounding forests, have taken the place of these worn-out lands, to undergo, in their turn, a like impoverish- ment and desertion. Whole counties in the long-settled portions of the South have suffered such deterioration of productivity, as to drive the wealthier classes to seek homes in other localities, where a virgin soil was open to occupation, or where dwindling fruitless- ness was yet in its early stages. Similar conditions surround the area devoted to the growth of grain. Ever)^ succeeding twelvemonths there is a diminution in the capacity of the soil to yield the same number of bushels to the acre as during the previous season ; and wdiile there is this continuous falling off in absolute quantity, there is a deterioration in quality, THB TARIFF PROBLEM 173 imperfection naturally resulting from the increasing scarcity of those fructifying elements necessary to the sustenance of the crop. At the rate this impoverishment of land is going on, it cannot be a great many years more before the West must cease to be the granary of the United States. Out of these facts arise some considerations vital to the welfare and prospects of the agricultural classes. He who tills the soil under the disadvantage of diminishing fertility is not only constant- ly depreciating the value of his land, but is making the same invest- ment of labor, skill, experience, and money annually less remuner- ative. The more distant he is from, market, the greater is the tax of transportation to which he is subjected, the smaller to him is the net result of his investment of capital and effort, and the more re- stricted is he in the choice oi the crops he will cultivate. The only practicable way to export to foreign coimtries, or tO' distant marts, these highly valuable and remunerative products of agriculture, is to convert them into iron, steel, hardware, linen, cotton, and woolen fabrics — in other words, to^ have them consumied on the spot by a manufacturing population, and thus made part of the cost of trans- forming other raw materials into compact commodities that can be cheaply transported long distances. Free-trade operates to put distance between the farmer and his markets ; protection operates to diminish the distance between the two. Free-trade practically encourages the impoverishment of the soil, by fostering the policy which exports its fertilizing elements to foreign countries ; protection reinforces the productivity of land, by providing a regular and unfailing means of speedily returning to it, at small expense, the nutritive properties abstracted by the successive crops. Free-trade undertakes to show or, rather, takes for granted that manufacturing industry and tillage are not necessarily con- nected and interdependent ; protection demonstrates by the logic of facts, figures, and experience, that they move hand in hand, in in- dissoluble alliance. Free-trade tends to make a few great com- mercial towns and a thinly-settled, poor interior country ; protec- tion operates for the benefit of those in the interior, in a far greater ratio '. than for those near the coasts and ports. Free-trade as- sumes that we can dispose of enough exports abroad to pay for an unlimited quantity of imports ; protection proves that we can export only certain descriptions of articles, and those only to- coun- tries where the money price is higher than with us, whether we take their sroods or not. 174 READINGS IN ECONOMIC PROBLEMS gg. America's Allegiance to Protection. BY ALBERT J. LKFPINGWEU,. * I intend to state a few propositions, which, as generally accepted facts, appear tO' me to influence very largely the national acquies- cence of America in the protective policy. Perhaps they may be heard with more patience from one who' has never had the slightest connection with the manufacturing interest; who ought apparently to clamor for the cheapest market, but whoi is nevertheless, for the following reasons, a firm adherent to< the protective system : 1. No country of modern times, which is without manufactures, which exports raw products for foreign made goods, and the inhab- itants O'f which are almost wholly engaged in cultivating the soil, has succeeded in obtaining wealth, prosperity, and power as a na- tion. This simple fact is recognized by every civilized government in the world. Free-trade at the present day is either an English or a barbarous practice. Even English colonies perceive that they must build up their home. industries if they are ever tO' gain essential prosperity. Just so far as Free-Trade contributes to the supremacy of British manufactures, it is a means towards the maintenance of national wealth and power. If it shall ever cease to do this, it will be abandoned. 2. If, during the past fifty years, America had permitted a sys- tem O'f unrestricted trade with all the world, she could never have reached the development of her manufactures which has rendered her independent ; but would, today, be little more than a huge agri- cultural colony, exchanging the produce of her fields for the manu- factures and fabrics oi Europe. To' be a nation of farmers, to ex- cell in sheep-raising and in agriculture^ — this is the English ideal of what America ought to content herself with being. If there ex- isted between the United States and England a perfectly free and open trade, a distribution of industr}^ unfettered by tariffs, England would be the manufacturing member, and the United States the agricultural member of the partnership. 3. Under the system of protection America has been able to develop her boundless mineral resources, to encourage the growth of her manufacturing industries, until, today, she is not merely inde- pendent and able to supply her own wants, but she exports to for- eign nations, and has begun to compete with England for the mar- kets of the world. Conclusive evidence of this exists on all sides. The careful observer can not escape it. 4. A protective tariff has been the most important, and, indeed, the essential agent, in the development of the mianufacturing Indus- THE TARIFF PROBLEM 175 tries of the United States. This proposition can hardly be seriously denied at the present time. Through the enhanced prices paid at first by consumers, manufactures have been created and fostered. Perhaps for a while they have been very costly to the nation. But of the result the country can well be proud. It has made them inde- pendent of other nations for their supplies. And, in the end, with growth and improvements, goods have fallen in price, greatly to- the benefit of the American consumer. 5. The working class in the United States, under a system of protection, enjoy a .greater degree of prosperity than the working classes of England under a system of Free-Trade. No' test can be more satisfactory and practical than to compare the position of the laborer in one country with his position in another ; and, however difficult it may seem at first thought to weigh in the balances privi- lege, opportunity, comfort, and general prosperity, certain financial facts and statistics afford us a tolerably safe method for arriving at sound conclusions. That the working man here, if thrifty, has a far better chance for improving his condition, for educating his fam- ily, for acquiring landed property than is the case with his brother in Europe is generally admitted. It could not well be otherwise where one may soi easily exchange the forge or loom for the settler's cabin and the plow. Although an impression prevails that tax bur- dens here are onerous, the American working-man in reality pays less than half the tax to which the British workman is subjected. The whole burden of local taxation falls entirely upon the landed class. The taxes upon houses fall upon the owner of the property. The great mass of the American working people are better housed, better fed, clothed, and in all respects better situated than the work- ing millions of the nations whose ports are open tO' the world. These are some of the reasons which appear to me to largely de- termine the persistent allegiance tO' the doctrine of Protection by the people of the United States. Of the ultimate adoption by nations of the principles of absolute Free-Trade I have as little doubt as the most sanguine disciple of Adam Smith. But it is a dream of the far- distant future. It assuredly cannot be realized while the tramp of armies is louder than the din of the work-shop. By America, how- ever, the day of its adoption may be much nearer our own time. History often repeats itself. Like England, by thorough protection of our growing industries, we have laid the foundations of success in every branch of manufacture. So soon as our preeminence is absolutely assured, there will exist no longer the necessity to pro- tect. Of that future we have apparently every reason to hope. 176 ' READINGS IN ECONOMIC PROBLEMS When the production of American skill and industry is found in shops in Europe cheaper than their home-made wares, it is probable that we shall then take our turn in eulogizing Free-Trade, in open- ing our ports to all nations, and in preaching the blessings of unre- stricted trade to a reluctant and still doubting world. 100. Protection and the Formation of Capital. BY AI^VIN S. JOHNSON. The additions to the capital of a nation miust come from the annual income. That the income of a nation will, at any given time, attain its maximum under freedom of trade is a proposition that admits of only rare exceptions. Does it not then follow that the capacity of a nation to accumulate capital will be greater under free trade than under protection? If all classes in society saved equal proportions of their incomes, it would folloAV of necessity that what- ever tends to reduce the national income must reduce the annual addition to the fund of capital. But, in fact, the disposition to accu- mulate capital varies widely in the different classes that compose a nation ; and it is the essence of protection to alter the proportions in which the social income is distributed. We cannot, therefore, accept without further examination the view that protection and the conse- quent reduction of the social income must necessarily retard the ac- cumulation of capital. Apart from purely individual differences in thrift, the tendency to save is affected by general economic and social conditions that en- able us to divide the members of society into more or less distinct thrift classes. A man is not likely to save, if he knows of no invest- ment attractive to him ; he is not very likely to save if the road to the esteem of his fellows lies through expenditures for consumption. The most attractive form of investment is the acquisition of tangible capital goods to be employed under one's own control. Such an investment gives visible evidences of economic efficiency. Accordingly those who are in a position to make such investments have the strongest incentive to save. These persons are entrepre- neurs who have not yet fully equipped their businesses with capital. Them we may place in our highest thrift class. We may assign to a lower thrift class those who live upon salaries or returns from^ pro- fessional service. They have no ever-present means of investment ; they are under the domination of rigid standards of consumption. They must, however, make provision for disability or superannua- tion. In a yet lower class I should place those who derive their in- comes from rents, interest on mortgages and bonds, dividends on THE TARIFF PROBLEM 177 stocks, — the funded income class. They are in no peculiarly favor- able situation to make new investments; they are subject to rigid standards of consumption; and they are under no compulsion to set aside a portion of their incomes for future needs. In the lowest class of all I place the great mass of workingmen, since they have the least favorable opportunity for investment and are subject to the most tyrannical standards of consumption. When an industry reaches the acme of development, the position of the independent entrepreneur becomes assimilated to that of the recipient of funded income. Accordingly we are justified in draw- ing a distinction between the entrepreneur engaged in an industry which quickly attains its full development and those engaged in an industry of practically unlimited development. Thus we arrive at the conclusion that the richest and most enduring sources of new capital are the interest and profits of the manufacturing entrepre- neur class. A practical tariff system cannot bestow all its benefits upon a higher thrift class and impose all its burdens upon a lower one. Nev- ertheless it can hardly be denied that the chief benefits of modern protectionism have been bestowed upon those engaged in capitalistic enterprise. In the United States protection, down to the present day, has meant little but the diversion of income from all other classes in society tO' the capitalist manufacturer. The farmer and wage- earner have carried a net burden ; the manufacturer alone has se- cured a net gain. Here a rapidly developing agriculture has been taxed for the benefit of rapidly developing manufactures. Although, under these conditions a high thrift class has been taxed, agricul- ture would quickly have attained a state of full development, and thus would have ceased to give large incentive to thrift. The im- petus given to manufactures, which under modern conditions pos- sess almost unlimited power of absorbing capital, must, of itself, have accelerated accumulation. It is worth noting that in the long run protection in a democratic state must favor the higher thrift classes at the expense of the lower. In every state protection is essentially a minority interest. The export industries can gain noth- ing from the policy ; industries that supply a purely local demand also gain nothing. These two groups of industries outweigh the indus- tries which would suffer under competition. The number of persons whose incomes are diminished by protection will greatly exceed the number of persons whose incomes are enlarged by it. If it is true that the general tendency of modern protection. has been to divert income from a lower to a higher thrift class we are justified in saying that protective duties have played a part in equip- 178 READINGS IN ECONOMIC PROBLEMS ing modem society with the A^ast stock of capital goods which \t now possesses. For proof of this we must have recourse to an analy- sis of the effects of protection upon capital fo'rmation in concrete instances. Let us suppose that in a country which formerly im- ported its silk a heavy duty is levied with the object of creating a silk-manufacturing industry at home. Men, intending to invest otherwise, are induced to go into the silk business. At the begin- ning the capital goods with which the new industry is equipped rep- resent no net addition to the productive wealth of the country. But a new industry is naturally speculative in character; and the more conservative entrepreneurs are slow to enter it. In the nature of the case the industry will be undersupplied with capital. This means that capital will be more than ordinarily productive in the industry ; it means further that entrepreneurs will be steadily endeavoring to secure more capital to expand their operations. ' Under these cir- cumstances it is inevitable that a large proportion of the profits cre- ated by the industry will be reinvested in it. Here then we have a net addition to the productive wealth of the country. We arrive at practically the same result if we select a commodity entering chiefly into the consumption of the wage-earners. A large proportion of the wage-earning class saves practically nothing, whether wages are high or low. Standards oi consumption tend to absoirb any surplus income that may appear. A duty borne by the wage-earning class places little check upon accumulation. Thus the main effect of the duty is to divert income from a lower thrift class to a higher one, and hence to give an impetuis to the formation of capital. In answer tO' this line of argument it is alleged that a tariff con- structed in such a way as to equalize costs of production at home and abroad would not permit the surplus profits out of which capital is built. This is true. But one miay safely challenge all the economists in the world to point to one instance of a "scientific" tariff. In the nature of things, there can be no such tariff. What manufacturers' association would conduct political campaigns, roll logs, and other- wise exert itself for the mere privilege of being placed on an equal- ity with the foreigner? What would be the object in establishing a new industry if it were to offer only profits that might be secured from industries already existing? It is true that if the protected industry operates under great nat- ural disadvantages, as in the classical case of producing wine in Scotland, the burden to the consumer will be so much greater than the net gain of the producer that the net effect upon accumulation THE TARIFF PROBLEM 179 will be unfavora'ble. But it is not the practice of entrepreneurs to demand, nor of statesmen to grant, protection for industries that labor under extraordinary disadvantages. Rather the selection of industries for protection tends to be such that a greater part of the tribute exacted from the consumer is bestOiwed upon the producer in the form oi profit instead of being wasted in the insane struggle with refractory natural conditions. What is the test by which it can be determined whether the pro- tective system shall be abandoned? By the academlic protectionists, duties should be abolished when the protected industries are in a po- sition to meet foreign competition. According toi the theory here put forth, they should not be removed until the protected industries cease to develop rapidly. Then the duty should be removed whether the industry can meet foreign competition or not. F. THE CASE AGAINST PROTECTION. loi. Infant Industries and the Tariff. BY P. W. TAUSSIG. Of the arguments waged in favor of protection, probably the one carrying the most weight is the infant industry argument. Its essential point lies in the assumption that the causes which prevent the rise of the industry, and render protection necessary, are not natural and permanent. There are two sets of conditions under w'hich these causes may operate. First, there is the state of things in a new country rapidly growing in population when there is a nat- ural change from exclusive devotion to extractive industries toward greater attention to manufacturing, and when this change may be retarded longer than the time when it might advantageously take place: secondly, when great improvements take place in some of the arts of production, it is possible that the new processes may be re- tained in the country in which they originate, and may fail to be applied in another country, through ignorance, inertia, or restrictive legislation. Both these sets of conditions seem to have been fulfilled in the United States in the beginning of the present century. The country was normally emerging from that state of almost exclusive devotion to agriculture which had characterized the colonies. At the same time enormous changes were taking place in the mechanical arts, and new processes were revoiutionizing the methods of mianufacturing. i8o READINGS IN ECONOMIC PROBLEMS Under these circumstances there seems to have existed room for the legitimate application of protection for young industries. Let us examine the early histo'ry of- the protection afforded to the woolen industry. The first attempt at making woolens in large quantities is said to have been made at Ipswich, Mass., in 1792; but no machinery seems to have been used in this undertaking. In 1794 machinery was for the first time used, introduced by an English workman. He substituted carding-machinery for hand-cards. Card- ing-machines were introduced in a few other places between 1800 and 1808. When the period of restriction began in 1808, the woolen manufacture received a powerful stimulus. The prices of broadcloth rose enormously, as did those O'f flannels, blankets, and other goods, which had previously been obtained almost exclusively by importa- tion. The manufacture of woolen goods began, and was consider- ably extended. In 1810 the carding and spinning oi wool by ma- chinery was begun in some of the cotton mills in Rhode Island. After 181 5 the makers of woolens naturally encountered great difficulties in face of the renewed and heavy importations of English goods. The tariff of 1816 gave them the same duty that was levied on cottons, — 25 per cent. Wool was admitted at a duty of 15 per cent. The scheme of duties, under the tariff of 1816, thus afforded no very rigorous protection. The provisions of the act of 1824 did not materially improve the position of the woolen manufacturers. The duty on woolen goods was in that act raised to 30 per cent in the first instance, and to 33 1/3 per cent after 1825. At the same time the duty on wool was raised to 20 per cent in the first place, to 25 per cent after 1825, and tO' 30 per cent after 1826. Notwithstanding this very moderate encouragement, the woolen manufacture steadily progressed, and in 1828 was securely estab- lished. During 182 1 and 1822 large investments were made in fac- tories for making woolen cloths, especially in New England. The best evidence which we have of the condition of the industry during these years is to be found in the testimony given in 1828 by various woolen manufacturers before the Committee on Manufactures of the House of Representatives.. This shows clearly that the industr}'' was established on such a scale that the difficulties arising from lack of skill and experience, unfa,miliarity with machinery and methods, and such other temporary obstacles, has no longer influence to pre- vent its growth. The evidence shows that the mere cost of manu- facturing was not greater in the United States than in England, and that the woolen manufacture had reached that point at which it might be left to sustain itself. In 1828, when for the first time heavy THB TARIFF PROBLEM l8l protection was given by a complicated system of minimnm duties and the actual rates levied rose, in some cases to over loo per cent, this aid was no longer needed to sustain the woolen mianufacture. The events of the period of restriction, from 1808 to 1815, led to the introduction of the industry, and gave it a strong impulse. These were equivalent to effective, though crude and wasteful pro- tective legislation ; and it may he that their effect, as compared with the absence of growth before 1808, shows that protection in some form was needed to stimulate the early growth of the woolen man- ufacture. But, by 1815, the work of establishing the manufacture had been done. The moderate duties of the period from 18 16 to 1828, partly neutralized by the duties on wool, may have done some- thing to sustain it; but the position gained in 181 5 would hardly have been lost in the absence of these duties. By 1828, when strong protection was first given, a secure position had certainly been reached. Although, therefore, the conditions existed under which it is most likely that protection tO' young industries may be advanta- geously applied, — a young and undeveloped country in a stage of transition from a purely agricultural to a more diversified industrial condition ; this transition, moreover, coinciding in time with great changes in the arts, which made the establishment of new industries peculiarly difficult — little if anything was gained by the costly pro- tection which the United States maintained in the first part of this century. Two causes account for this. On the one hand, the char- acter of the people rendered the transition of productive forces to manufactures comparatively easy ; on the other hand, the sudden shock to economic habits during the restrictive period from 1808 to 181 5 effectually prepared the way for such a transition. The politi- cal institutions, the high average of intelligence, the habitual free- dom of movement from place to- place and from occupation to occu- pation also made the rise of the existing system of manufacturing production at once more easy and less dangerous than the same change in other countries. At the same time it so happened that the embargo, the non-intercourse acts, and the war of 18 12 rudely shook the country out of the grooves in which it was running, and brought about a state of confusion from which the new industrial system could emerge more easily than from a well-settled organization of industry. The intrinsic soundness of the argument for protection to young industries is therefore not touched by the conclusions drawn from the history of its trial in the United States. Suffice it that the history of early protection to the woolen industry — and the argument would hold here if anywhere, — does not warrant giving much weight to the infant industries argument. 1 82 READINGS IN ECONOMIC PROBLEMS 102. The Limited Industrial Effects o£ Protection. BY AI^VIN S. JOHNSON. I. Where tzw centres of production compete freely ziHth each other one may be able to drive the other out of certain lines of in- dustry. One cannot drive the other out of all lines of industry. It is often said that the South can manufacture cotton cheaper than New England, and that, therefore, since both sections must sell their products at practically the same price, cotton manufacture in New England is doomed. As the South extends its production, the price of cotton goods declines. Possibly some New England mills are forced to shut down; others, while continuing in operation, re- duce their output. The expansion of the industry in the South in- creases the demand for labor and tends to raise its price. The con- traction of the industry in New England reduces the dem'and for labor, and tends to lower its price. Forces are therefore at work reducing the difference between the two centres in labor cost. But the wages of cotton operatives depends not only on the for- tunes of the cotton industry, hut on the fortunes of other industries as well. A reduction in the wages of cotton mill hands in New Eng- land causes an efflux of such laibor into other occupations, and this tends to check the reduction in wages. In the South rising wages in the cotton industry is followed by an influx of laborers from other industries, and this tends to check the rise in wages. Yet it is quite possible that the South will get a larger and larger share of the cotton industry, until it has taken over practically the whole busi- ness. Now let us suppose that all the industries of the South are in competition with all of the industries of New England, and that the costs are lower in the former part of the country than in the latter. An attempt on the part of all Southern producers to extend their outputs immediately forces up the prices of all producers' goods — labor, fuel, water power, etc. A tendency on the part of all New England producers to restrict production immediately reduces the price of producers' goods. It is, then, only for a brief time that all costs can be higher in one section than in the other. The higher price of labor might indeed induce the whole New England working population to migrate to the South; but in no other possible way could the volume of New England industry be permanently restrict- ed by Southern competition. The same reasoning applies to international competition. It is folly to talk of the probability that British industry will be driven to the wall by German and American competition. Wages and in- THE TARIFF PROBLEM 183 terest in Great Britain may be reduced by foreign competition, and this may induce men and capital to emigrate. This would reduce the volume of British production, but it is impossible that the British manufacturer would in the long run find prices too low tO' cover costs. The latter adjust themselves to prices, and fall when general prices fall. 2. Protection of all industries is an impossibility. Suppose that the government places prohibitive duties upon all imports. Will this not place all industries in a position where they may enjoy higher prices? And in that case, will it not be as easy for us to pay ten cents a pound for sugar as it now is to pay five? A protective tariff, it is often said, is unjust when it singles out a few industries and grants them special favors. An obvious objection is that if this was possible, if each industry was able to charge prices one hundred per cent higher, and each per- son, accordingly, received twice as large an income as he would otherwise have received, no one would secure any real benefit at all. But a more serious objection, is this: no protective duty can raise the prices oi all commodities? A duty can raise the price only of articles which we are in the habit of importing. Now, if we import anything, we must export something to* pay for it, and the export commodities must ordinaril}'- represent as great a volume of values as the import commodities. Now, the price of a commodity that we export must be lower in this country than in the countries to which it is sent. The prices of wheat and cotton in America must be less than the prices of the same articles in England, since we are constantly exporting them. It is manifestly absurd to- suppose that by placing duties on wheat and cotton imported into the United States we can raise the prices of those commodities. Who would wish to import them intoi the United States? The duty on any export product is utterly ineffective. Re- strictions on imports restrict exports also. They do this by reduc- ing the amount of money that the producer for export receives for his goods. An "all around" system of duties, in spite of itself, im- poses a positive burden on as large a volume of industry as that which enjoys special favors under it. 103. Free-Trade and Depopulation. BY C. P". BASTABLU. Protectionists often claim for their scheme that it causes the im- migration of labor and capital into their territory ; and the same view has been taken by persons who deplore the emigration of Eng- 1 84 READINGS IN ECONOMIC PROBLEMS lish employers, caused", it is said, by the desire to get inside the tariff barriers of other countries. A modification of this behef is found in the assertion that under free-trade population and capital would move towards the most fertile parts of the earth's surface, leaving the poorer countries desolate, an evil which is to be remedied by the aid of a protective system. To deal with this doctrine it is only necessary to consider the causes of emigration. So far as they are non-economic, they may be disregarded, since an avowedly eco- nomic measure will not affect them. The economic motive for mi- gration is the hope of gain, which can only be brought into operation by the existence of higher profits and wages in the duty-levying countries. Duties could, therefore, only draw capital and labor into a country which was superior in its resources to that from which the labor and capital was drawn, and which would, all things apart, have a tendency to attract those agents of production. The only possible way in which a protective duty could have the consequence attributed to it, is either by widening the margin between the rates of profit and wages in the two countries, or by affecting a special industry, whose main production was for export. The chief field in the working of this force would be in the case of a large as against a small country. For instance, Swiss industry has been affected by the tariffs of France and Germany, and, were Ireland politically separate from. England, some of its industries might, by means of protection in England, be transferred to that country. To recognize the possibility of a given case is one thing — to admit the expediency of creating it is quite another. In the present instance the evils of the supposed duties are evident. They lead to an artificial and uneconomic distribution of industrial forces, thus reducing the total amount of wealth ; they inflict loss on the con- sumers of the commodities, whose place of production is to be al- tered, while they fail to allow for the natural effect of economic de- velopment in promoting the establishment of all profitable employ- ments. It cannot be shown that France has profited by the efforts to transplant Swiss industries to its soil, nor that Switzerland has been injured by such attempts. The general objections to a pro- tective system apply in all their strength to this particular applica- tion of it. The idea that freedom of trade may lead to depopulation rests upon a confusion between two different branches of economic action, viz., the unrestricted exchange of commodities, wbich is all that free- trade prescribes, and the mobility of the industrial factors. The latter obviously depends upon entirely different causes, and has little THE TARIFF PROBLFM 185 connection with the particular fiscal policy pursued. Germans emi- grate in large numbers to America, Frenchmen prefer to remain at home, though both countries are protectionist in policy. In fact the probability is that where economic motives are the chief reason for emigration, protection will rather increase than diminish their force. Increased cost of living is not an inducement to the energetic and the prudent to remain in a country, but that is precisely what pro- tection tends tO', and we may therefore assert that the fear of depop- ulation from free-trade is entirely devoid of practical foundation. 104. American Free-Trade and American Prosperity. BY GEORGE: BADEN-PO'WELI,. How far is the prosperity of the United States connected with the policy of protection? This c[uestion leads us at oiice among the circumstances that combine tO' bring prosperity to- the United States : and if we look in vain among these for the influence of protection, it may surprise the thoughtless into attention to facts, but it will in no wise run counter tO' the convictions of those who know. The influence of Protection is lessened by the fact that the Uni- ted States is eminently an underpeopled, undeveloped country. This fact is at once the basis O'f the national prosperity and the more than sufficient antidote to the action of Protection. Evidence oi this is seen in the recent high pressure development of the industry of sup- plying food to Europe. For some years back this tillage of the prairie has produced an enormous surplus of food supplies. These would have been mere valueless commodities, or rather would not have been produced at all, but for the cheap means of transit to European markets. Thus it became wealth ; and was used in great measure to repay other nations for some O'f the capital they had advanced to render such things possible. Of the total annual ex- ports from the United States nearly one-half consists of this food surplus. It is thus evident that this production alone of food from virgin soil, paying- for two-thirds of what the nation buys abroad, is accountable for the major portion of the prosperity enjoyed by the United States. But, if tO' this we add the exports of "raw- materials" — of cotton, minerals, etc. — we shall account for at least eighty per cent of the total annual exports from the United States without trenching in the least on the domain fostered by protectio^^. It is then not difficult to see that the prosperity of the United States depends on industries that have no cause whatever to thank Pro- tection. 1 86 READINGS IN ECONOMIC PROBLEMS These industries, however, are rapidly discovering causes for curses and not thanks. Farmers find that high tariffs raise the prices of agricultural implements ; millers complain of the high cost of machinery; carriers oi the high prices of metal work. Experience is proving that the duties which protect one class necessarily injure all others. The train of cause and effect runs in the well-known circle. It is no long task to show that the prosperity of the United States exists in spite of, and not because oi, Protection. So^ seldonu do we remember that absolute Free Trade has been long and firmly estab- lished throughout the United States, and that it exerts an influence many, many times greater than that exerted by Protection. Free Trade reigns absolute and supreme within the frontiers of the United States. The full import of this fact is seen when we remember that the rapidly increasing population imports from abroad only one- quarter of the value of the goods that the British Isles import. And the vast and important home market of so very large and so very self-dependent a population is regulated entirely on principles of absolute Free Trade. The importance of this fact is all the more evident if we remem- ber that the United States is about as large as Europe, but with only one-seventh of the population. We have indeed a territory equalling Europe in extent and in variety of soil, climate, and product. -But properly to picture the case we must sweep out of Europe all the English, Dutch, Danes, Swedes, Germans, Russians, Austrians, Ital- ians, Swiss, Spaniards, Portugese, and Turks, and then distribute and settle over the whole area of Europe the population of France and Belgium only. Then if we add to such distribution of population perfect freedom of interchange of products all over this Europe, we will have a picture of the condition of the United States at the pres- ent day. It ha.s been the dream of Cobden's disciples tO' extend Free Trade over Europe. America has long ago and definitely es- tablished Free Trade over an area equalling that of Europe. It is evident that the prosperity in the United State is due to this freedom of exchange and the comparative paucity of the peo- ple engaged in the highly profitable task of developing vast virgin resources. Of a truth the United States is a glaring instance of the high economic value of Free Trade. Protection, influencing only by means of a comparatively insignificant import trade, is but a weakly drag on this prosperity. It occupies an altogether subordi- nate position as the direct factor for or against this prosperity. THB TARIFF PROBLEM 187 105. An Economic and Moral Indictment of Protection. BY WILLIAM SMART. Relative to the protective tariff, four conclusions seem to sug- gest themselves. I. That it is beyond the wit of man to draw up a tariff which will protect whole ranges of industries without causing all sorts of anomalies and inequalities. Under Free-Trade, self-interest, urged by competition, directs capital into the industries which pay, and buys its material and tools wherever it gets them cheapest and best. But Protection, having for its object the restriction of competition, taxes goods differently according to the circumstances and needs of particular home trades. Thus one industry may get in its material at a low rate, because the home producers of that material do not need much protection; an- other industry which competes with it may have to pay a high rate for its material because the home producers are at a natural disad- vantage. Every industry, again, under this artificial system, knows its own weakness or strength against foreign competition ; but out- siders do not know, and every man keeps his own trade secrets. Granted, then, that there are in each business experts who know just how much Protection is necessary tO' "protect," no legislature has the knowledge or the means of getting at the knowledge. If the legislature simply asks each industry how much Protection it needs, what kind of an answer will it get? Or suppose that a tariff is based on the cost of thoroughly efficient homie producers, how will this suit the average or the inefficient ? Will it not tend to^ throw industry in the hands of great combinations, and end in monopoly? II. That Protection tends to political immorality. Under Free Trade the statesman is the voice of the nation. With him the interests of the wider co^mmunity are always paramount. At the very worst, he stands for no selfish or sordid interest. But what becomes of the purity of political life when every elector looks to his representative to give him a tariff high enough to let him earn a profit? Nay, what becomes to- the party to which he belongs when the whip calls one way and the vested interests another? How, in these circumstances, can the state remain "the armed con- science of the community" ? III. That Protection tends to^ commercial immorality. Law ought not to lead men into temptation. And nations should have some regard to the temptation which their laws put in the way of other nations. There are very few Englishmen who will not do a little smuggling when they cross the channel — the tariffs of other 1 88 READINGS IN ECONOMIC PROBLEMS countries, they argue, are "so irrational." And when it is found fur- ther that the administration of tariffs is modifiahle by influence or bribery, the temptation to regard the entrance duty as a fair mark for ingenuity is all but irresistible. The annals of Protection are full of tales of evasion, of connivance, of bribery, — to say nothing of smuggling. IV. That Protection raises costs and. checks exports. Protection raises the price of everything imported, and, as a con- sequence, the price of everything made at home. Consequently it increases costs and handicaps exports. Only great natural resources, great superiority of skill, or production on a very large scale, can outweigh this handicap. G. THE INFLUENCE OF THE TARIFF ON WAGES. 1 06. The Early Uses of the Wages Argument. BY FRANK W. TAUSSIG. About 1840, for the first time, it was argued in behalf of the protective tariff, that it protected American labor from the competi- tion of cheap foreign labor. In the period preceding the difference between the rate of wages in the United States and in Europe had furnished an argument for the free-traders. The latter were accus- tomed to point to the higher wages O'f labor in the United States as an insuperable obstacle to the successful establishment of manufac- tures. They asserted that so long as wages were so much lower in Europe, manufacturers would not be able to maintain themselves without aid from the government. The protectionists, on the other hand, felt called upon to explain away the diff'erence in wages ; they endeavored to show that this difference was not as great as was commonly supposed, and that, as far as it existed, it afforded no good reason against adopting protection. About 1840 the positions of the contending parties began to change. The protectionists began to take the offensive on the labor question; the free-traders were forced to the defensive on this point. The protectionists asserted that the high duties were necessary to shut out the competition of the ill-paid laborers of Europe. Obviously the change in the line of argument implies a change in the industrial situation. Such an argu- mient in favor of protection could not have arisen at a time when protective duties existed in but small degree, and when wages never- theless were high. Its use implies the existence of industries de- THE TARIFF PROBLEM 189 pendent on high duties. When the system had been in operation for some time, and a body of industries had sprung up which were thought to be able to pay current wages only if aided b}^ high duties, the wages argument naturally suggested itself. 107. Protection's Benefits Go to Labor. BY THEODORE JUSTICE. Another one of the features of the substance of the Dingley tariff act is the revelation to us of the elevation of the standard of living. It must be admitted by all that the effect of the protective tariff has been to elevate the standard of living. The laboring classes in the United States enjoy a degree of comfort that is not within the reach of the so-called middle classes of Europe. This means a great deal, for it proves, what all now admit, that nearly the whole of the benefits of protection go to labor. The evidence of this is shown in this higher standard of living, which makes the home market take 93 per cent of our products. It is' claimed by would-be tariff revisers that the cost of living under a protective tariff absorbs all the advantages under a higher wage scale, but this is not true. This is shown by a comparison of the deposits in the savings banks, which represent the accumulations of labor. In 1897 the deposits were $1,983,000,000, and by July, 1907, they had increased to $3,495,000,000, an increase of 76 per cent. 108. What Fixes the Rate of Wages? BY SIMON N. PATTEN. The commercial relations of a nation are a determining factor in fixing the rate of wages. If two nations freely exchange com- modities with each other, the poorest opportunity for labor utilized in either of the nations will fix the rate of wages. To make this clear contrast two isolated nations, in one of which there is an active policy of endeavoring to increase the opportunities for labor as rapidly as the increase in population, and in the other a passive pol- icy which compels the increase in population to resort to poorer op- portunities. In the one country there will be a constant increase in the rate of wages, because every increase in the productive power would be fairly distributed among all the laborers through the opening up of new occupations. In the other nation there will be a constant diminution of wages as a result of the increase in rent which must follow every resort to poorer natural resources. By bringfing the two nations thus far isolated into commercial relations IQO READINGS IN ECONOMIC PROBLEMS the rate of wages in the progressive natioii will be reduced, and ac- companying this there will be a corresponding rise in rent. There cannot be two prices for commodities upon the same market, and the higher price for food and of all raw materials in the less progres- sive nation will cause a similar price to be paid for them in the other nation, and while this high price is paid the rate of wages will be fixed by the poorest opportunity for labor in the less progressive country. A nation cannot therefore adopt a system of free trade without having its rate of wages determined by the least progressive country with which it comies in contact. A nation cannot come into free cornmercial relations with a country having cheap labor without forcing upon itself the same unequal distribution oi wealth from which the other nation suffers. log. The Effect of Industrial Changes on Wages. BY AI^VIN S. JOHNSON. A policy that drazw labor from the fields that are of greater nat- ural productiveness to fields of lozver natural productiveness tends to reduce wages. In any country wages are determined by the marginal productiv- ity of labor. We will represent the various opportunities of employ- ment that a country like the United States affords by the symbols, A, B, C, and D. A may stand for a group of industries in which we have exceptional advantages over foreign countries. B stands for a group of industries in which our advantages are less, C one in which they are still less, and D the group of industries in which they are least of all. When our population is so small that all our labor can be engaged in the group represented by A, wages will be at their maximum. When our population increases so that some of the labor will have tO' be set to work in group B, the wages of all labor must decline to^ the level of the productivity in that group. We will supp'ose that population has increased up to a point where the opportunities represented by A and B are fairly well manned, and wages are determined by the productivity of labor in B. With wages thus determined, it is clear that no employer, with- out governmental aid, can afford to hire labor to exploit the oppor- tunities represented by C and D. This would necessitate paying labor in C and D as miuch as it produces in B, and that by hypothe- sis is more than it produces in C and D. Now let us suppose that a political party is in power which holds the belief that we should produce everything that we consume, that THE TARIFF PROBLEM 191 is, that the opportunities represented by C and D should be exploited as well as those represented by A and B. Labor may be drawn away from A and B. This involves the necessity of compensating' entrepreneurs in somie way for the disadvantages under which they will operate in C and D. Either wages must be reduced in A and B, ot some form of subsidy must be granted to C and D. The commodities that the industries composing C and D will produce have been hitherto, we assume, obtained from abroad through exchange for commodities produced by A and B. The gov- ernment now renders this difficult by placing high duties upon the former class of commodities. This means that producers in the groups A and B — both employers and workmen — must pay higher prices for what they buy. They do not receive higher prices for what they sell; in fact, they receive lower prices, as this, we have seen, is the effect of protective duties upon export industries. It ap- pears, then, that part of the disadvantage of producers in C and D is removed by reducing wages in A and B. After the duty has gone intoi effect and the prices of commodi- ties that can be produced by C and D have risen sufficiently, en- terprisers will be able to^ hire labor at the wage? prevailing in A and B, and establish industries in C and D. So' far as the remain- ing laborers in A and B buy the products of C and D, the differ- ence between the price which they pay for those products and the price that they woiild pay if they were permitted tO' import those products duty-free is a tax paid not to- the govermnent, but to the producers in C and D, to enable the latter tO' remain in business. It is an uncompensated deduction from the natural earnings of the laborers in A and B. Their wages have been reduced. Nor are the workers in C and D paid as much, estimated in purchasing power, as they would have received if they had been allowed to remain in A and B under the earlier conditions. The net effect of the imposition of the duty has been to saddle the self-supporting industries, A and B, with the support of the pauper industries, C and D. Yet the inventors of this policy have the effrontery to tell laborers in A and B that this policy is the bulwark of their high rate of wages ! The principles involved in the illustration may be stated in the following general terms: Wages in any country will be at the high- est point when all the labor of that country is concentrated in the industries in which its relative advantages over other countries are greatest. If there are nO' protective duties whatsoever, em- ployers will, as a rule, seek out the industries in which their country 192 RB A DINGS IN ECONOMIC PROBLEMS has the greatest relative advantages. Protective duties enable other industries to exist, but only through taxing the more pro- ductive industries for their support. Protection as a permanent policy means a slight reduction O'f money wages, and a greater reduction in wages estimated in purchasing power. H. CURRENT ARGUMENTS FOR FREER TRADE. no. Free-Trade and International Peace. BY RT. HON. WINSTON S. CHURCHILU And, after all, when we come to ask, "What is the bearing of Free Trade upon international relations?" I say that question is very easily answered. It is answered in one word. The bearing of Free Trade upon international relations is "Peace." The funda- mental idea of Protection is exclusion and isolation. The funda- mental idea of Free Trade is unity and interdependence. The arrangement of Europe or of the Great Powers of the world, which our Protectionist friends appear to contemplate, is that there should be a numlber of ver}' powerful self-contained States, producing with- in the circle of their frontiers everything which is necessary for peaceful industry or warlike preparation, independent of their neigh- bours, requiring from their neighbours no services, or scarcely any services, rendering them but few in return, and able to break off all relations, whether commercial or diplomatic, at any momient with the minimum of inconvenience. The European arrangement to which the Free Trader looks forward is a co-operative commonwealth, a great banding together of all the peoples of Europe, of Christendom, and ultimately of the world, so that their affairs and interests may become inextricably interwoven, so that they cannot tear them apart even if they would, so that every one of them is dependent upon every other member of the vast confederation. Which of those twO' ideas is winning at the present time? Is it the isolation of nations, or is it their union and their inter- course? Why, with every year that passes over the globe, with every improvement in communication, with every decision of a Hague Tribunal, with every meeting of a Peace Conference or an International Congress of any sort or of any kind, the unity of the civilized world, and the interrelation and interdependence of all civilized modern communities, is being steadily and irresistibly advanced. Yes, in spite of the folly of armaments and tariffs, in spite of the unwisdom of so many of our political and journalistic THB TARIFF PROBLEM 193 hot-heads, the unity and solidarity of the civiHzed world grows stronger from year to year, and almost from month to month. "All the men," as Diderot said, "in all the lands have become neces- sary to one another." And this process of consolidation and amal- gamation which is going irresistibly forward, which is in the center of the whole movement of the modern world, is taking place, let it be observed, without the slightest loss of national traditions, of love of national characteristics, of the culture and development of each community in itself and for itself. On the contrary, as mankind has becoame more united and more civilized, you find that study of the past, that introspective examination by each race of its own past, of its own history, of its own innate characteristics, which everywhere is producing a great and innocent growth, a harmless growth, of peaceful nationalism within the larger inter- nationalism of the world. What is it that preserves the peace of Europe at the present time ? Ministers can do something. Kings and Presidents can do much. But, in spite of all the efforts which are being made, and which are growing from year to year, of individuals and of sections of society in this country and in that, I should not feel the assurance which I do of the peaceful developmient of European politics in the next twenty years, were it not for the blessed intercourse of trade and commerce, in combining the nations together against their wills, in spite of their wills very often, unconsciously, irre- sistibly, and unceasingly weaving them together in one solid in- terdependent mass. During nearl}' forty years no two great, highly organized commercial Powers have drawn the sword upon one an- other. Crises there have been, and quarrels and disputes of all sorts and kinds, grave headlines in the newspapers, long faces pulled by wiseacres, gnashing of teeth by fierce military and journal- istic men, but something always happens at the critical moment to smooth away the difficulty before it breaks into actual rupture. And what is that something? It is the prosaic bond of commerce in which all civilized and commercial States are becoming involved. And sure I am of this, that the certain impoverishment of everyone, the crash of exchanges all over the world, the wide-spread ruin which would go through neutral lands, the arrest of industry^ and trade, the collapse of credit upon which modern communities de- pend — all these tremendous facts, placed as they are before the eyes of everyone from his own daily experience, do impose an effective caution and restraint, even upon the most reckless and the most intemperate of statesmen. And we find that the great force of capital, the great subtle, 194 READINGS IN ECONOMIC PROBLEMS omnipresent inflnence of capital, is engaged and interested through every channel, during every crisis, in averting the opening of hos- tilities. Well, if capital is enlisted on the side of internationalism,, what of labor? Is there not a similar miovement towards unity on the part of the workers all over the world? Is there not a great assertion on their part that the toilers of the world are all members of one great family, are all the bearers of one heavy burden, and that they will not alloAV the sensational combinations of individuals interested in projects of government or diplomacy to precipitate great masses of human beings at each other's throats in fratricidal strife? III. A Socialist's Plea for Free-Trade, BY EDWARD BERNSTEIN. A network of industrial, commercial, scientific, artistic, literary and other social ties and associations, covers the civilized world. Means of communication, which lead the nations to a closer inter- course, are continually being improved. People are proud of this, and in glowing terms praise each new achievement of the kind. But at the same time we see civilized nations build up tariff walls in face of all this, and from time to time these are increased one after the other in order to counteract as much as possible the con- stantly increasing facilities of international commimication. No' doubt, as long as society is divided into . monopolizing cap- italistic and working classes respectively, who have to compete for their livelihood, no technical progress of any kind will be an unmixed blessing, and free exchange will have its drawbacks for many mem- bers or sections of the comimunity. But the remedy lies not in the return to the erection of tariff walls and toll gates. These will only impede progress and deflect the eyes Oif people fro^m measures of real progressive reformi. They tend tO' enrich some sections of the community at the expense of others. They represent a move- ment which knows nO' limits, each Protectionist nation trying to outrival the others in higher and more elaborate tariffs. And last, but not least, they are one of the main factors of rivalry and en- mity between the nations. Based on the idea that the industrial progress of one nation is detrimental to the welfare of the other, or at any rate fostering this notion, they create international dis- trust, and are greatly responsible for the formidable increase of armaments which we witness in these days of much vaunted civil- ization, and more particularly in the case of those nations who pride themselves on their civilization. Most of the cjuestions which THE TARIFF PROBLEM 195 separate these nations and make a continvioiis increase of arma- ments appear an inevitable necessity are directly or indirectly con- nected with the question of commercial policy. This uninter- rupted increase of armaments, which presses with growing severity upon the wealth of the nations, everywhere draining the revenues and depriving us of the means for thoroughgoing reforms, is a blot on humanity, and makes it the slave instead of the master of its destinies. But this will never be stopped or effectually reduced unless the nations return from the polic}^ of tariff walls to^ that of free intercourse. Tariff walls make colonial questions and the questions of our relations to semi-barbarous countries and subject peoples much more complicated than they would be of their own nature. The}^ hamper and even prevent peaceful solutions and in- crease the incitement to^ wars and Avarlike dispositions. A small minority only is really benefitted by this state of affairs. The great majority of people are damaged by it. If at a former period it was a debatable question whether the wage-earning classes are vitally interested in free international exchange, in my opinion this time has ceased to exist. Under present conditions free inter- national exchange is, I hold, before all, a working-class question ; and all impediments to this exchange artificially create new inter- ests against thoroughgoing industrial reforms. 112. Freer Trade and Industrial Efficiency. BY WILUAM C. REDFIELP. In the Republican platform of 1908 appeared the following words: "In all tariff legislation the true principle of protection is best maintained by the imposition of such duties as will equal the difference between the cost of production at home and abroad, to- gether with a reasonable profit to American industries." It is a great pity that those words were printed only in the English language. It is a pity that they were not translated into Japanese, that they might adorn the cabs of the 720 American loco- motives in Japan ; and into Chinese, that those in Manchuria who wear American cottons might know how self-sacrificing the makers were in selling them to them. It is a pity that they were not trans- lated into Hindu, that the stokers of the Calcutta electric-light works might know how generous was the American firm that sold them their apparatus. But since the difference in the cost of production is said to be such that we need protection against the manufacturers abroad, let us look more closely at those words. Speaking from a manufac- 196 READINGS IN ECONOMIC PROBLEMS turer's standpoint, I venture to think it can be shown that this statement of the Republican platform has these definite character- istics, i) It involves certain contradictions, well known to manu- facturers, which destroy its force. 2) It assumes the existence oi facts which dO' not exist. 3) It may involve such discrimi- nation against some American manufacturers and in favor of some foreign manufacturers as is certainly unjust. 4) It ignores the nature of cost and the nature of competition, and, taken on its face, calls for the removal of the duties on many American manufac- tures. 5) It has worked grave injustice to- our poor people and disaster to many American manufacturers. These things I believe at the end of twenty-five years' manu- facturing experience. I have found it possible, and we all know hundreds of American manufacturers have found it possible to compete in the markets of the world. How does it happen that in a quotation recently made for machinery to a mine in Japan the American price was $215 less than the English price. Last year I was in the city of Tokyo, and a friend who was with me took a large contract from the Japanese Imiperial State Railways, in open competition with Germany and England for several million dollars' worth of locomotives. That gentleman, at the locomotive shops of the Imperial Railways, was told, "We can make locomotives much cheaper than you can in America." "Can you?" inquired my friend, "If so, let us get at the facts. What makes you think your loco- motives cost less than ours?" "Why," the Japanese replied, "be- cause we pay only one-fifth the wages to^ our men that you pay to yours." So they got the cost books, and discovered that "the labor cost for locomotives on the same specifications was three and one- half times greater in the Japanese than in the American shop. That is a perfectly normal fact. Another illustration may be interesting. My agent in the city of Calcutta one day called my attention to the shoes he was wear- ing. He said, "I paid $3.85 for those shoes." "Why," I said, "that is an American shoe." "Yes," he said, "I bought it here. It is the regular American $5 shoe." I treasure as a souvenir a small, ordinary pencil. It has upon it the name of the American Lead Pencil Co. I bought it out of stock in the small town of Bandoeng, in central Java. I have in my home some men's toilet articles — shaving soap, etc., made in New Jersey. I bought them in Hongkong. Yet we are told that though foreign manufacturers are handi- capped by distance, time, and freight, we can not compete with them at home because we pay high wages. To end these illustra- THE TARIFF PROBLEM 197 tions, let me give a list taken at ranidom from one export journal of American goods offered abroad for sale in open competition with Germany and Great Britain: "Ironmongery, fine tools, bicycles, sporting goods, lamps, razors, firearms, carriage makers' supplies, sanitary goods, lighting systems, dry goods, men's furnishings, boots and shoes, corsets, hats and caps, textiles, clothing, women's furnishings, office furniture, office devices, stationery, typewriters, filing cabinets, printers' supplies, paper, machine tools, boilers, lubricants, electrical material, valves, wood- working machinery, belting, shafting, pulleys, packing, furniture, kitchenware, and agri- cultural implemients." There are manufacturing houses in America that sell almost no^ goods in the United States. They pay as high wages as an3^one. It is often assumed that American manufacturers cannot com- pete in the world's market on even terms without protection, and can not even hold their own at home. The only wa}^ suggested of meeting competition is by reducing wages, the crudest, the coarsest, and the most brutal of all methods. To get at the heart of the question, let us look at the cost of production from the manufacturer's stanpoint. There are four grO'Ups that enter into every factor}^ cost: i) the co^st of labor; 2) the cost of material; 3) overhead charges; and 4) selling cost. The aggregate of these four fixes the point per unit where profits begin. Let us discuss them separately : First, labor cost. In a modern industry this is often not the largest element in cost per unit of product. It is a matter of testi- mony that in an American locomotive the percentage of direct labor cost is eighteen and that of material and overhead charges eighty- two. The important factor in labor cost is not the rate of wage, but the rate of output. It is not what you pay but what you get from what you pay that counts. Once in Paris I employed a lot of French carpenters and paid them each $1.90 a day, and at the end of four days I was well-nigh crazy. Accidentally I found a man who looked like an American carpenter. "Are you a Yankee?'' I said. "I want to. employ you at once." He said, "Boss, I charge $4.50 a day." I said, "Come right along." Two days later I discharged four Frenchmen, for my one American carpenter did more than four Frenchmen. There are sound reasons for this. A French workman goes to work having eaten almost nothing. For breakfast he has a biit of bread and coffee. At eleven o'clock he eats a little bread and drinks a little sour wine. At three he does the same. At night he has what he 198 READINGS IN ECONOMIC PROBLEMS calls a dinner. Such a man cannot work: at any labor requiring steady physical exertion in competition with a man who eats three square meals a day. Cost is everywhere and always variable — at every tim^e and in every place. Output varies with the character of the workman, the equipment, the arrangement, with the nature of the superintendence, with the discipiline. It is absurd to assume that work done by a man paid $4 daily costs more per unit than work done by a man paid $2. It may be more or less costly. , Therefore, because cer- tain goods are produced at a certain labor cost per unit when the wage rate is $3 per day in a certain place, it can never be argued that the same wage rate on similar goods results in like labor cost per unit in another place. It inay vary ten to fifty per cent. To discuss the wage-rate as the controlling factor in labor cost per unit is both inadequate and misleading. To say that a man gets $3 per day means nothing at all as to the cost of his product. It may be either high or low. Apart from the wage rate, labor cost per unit is very largely under the control of the manufacturer and miay be radically altered without changing the wage rate at all. I know a factory in which the product was doubled in two years without adding a man or without adding a machine. This is how it came about. The men had been paid on day work. The head oi the concern changed to a piece work plan, guaranteeing the day wage as a minimum, and further guaranteeing that the piece work rate should not be cut. The first result was largely to increase the product. Then three other things happened. The manufacturer went to a man and said, "Pat, yon are earning pretty good wages. The more you earn the better for us both. But there is" one thing you cannot afford, and that is to have your machine shut down for repairs. It hurts me and hurts you every hour that machine is idle." The result was that the fifteen minutes which the employees were induced tO' spend in overhauling the machine each day saved many thousands a year for the factory. In the next place more scientific firing saved one- eighth of the operating time of that part of the plant, besides an immense saving in fuel. In the third place several thousands a year was saved on preventing the output of bad goods. In these ways the output of the factory was doubled in two years and the same thing is possible everywhere. Labor cost per unit varies with time and place, and in the same shop is constantly changing. It is affected by sanitary and climatic conditions. It is enormously modified by the progress of inven- THE TARIFF PROBLEM 199 tions. The labor cost in July mia}^ be entirely altered in December. It varies with the arrangement of the machinery within the shop, is affected by the space available. It varies with the sufficiency and regularity of the supply of material and its suitability to the work. It is affected by the lighting and the power equipment of a shop and will change with a change in superintendents. It is af- fected by the methods of paying. And I write froim an experience in figuring labor costs to hundredths of a cent per unit. Labor cost is, therefore, a variable element. It can not be measured by any fixed standard. To offer a fixed rate of duty to cover the differ- ences in labor cost is to state an absurdity, for the one is variable and the other is fixed. In like manner it can be shown that costs of material, overhead charges, a.nd selling charges are variable. In fact, given the scientific spirit in management, constant and careful study of operations and details of costs, modern buildings and equipment, proper arrangement of plant and proper material, ample power, space and light, a high wage rate means inevitably a low labor cost per unit of product and a minimum of labor cost. A steadily decreasing labor cost per unit is not inconsistent with, but is normal to, a coincident advance in the rate of pay when accom- panied by careful study of methods and equipment. Conversely low-priced labor nearly always is costly per unit produced, and usually is inconsistent with good tools, equipment and large and fine product. From the above it is affirmed, without fear of suc- cessful contradiction, that American production today is often as cheap or cheaper in the labor cost per unit than foreign, and, so far from needing protection, it needs to be set free, that we may conquer the world. I believe that protection is an injury to American manufac- turers by limiting their scope and by narrowing their horizon. I believe it costs them enormously in the loss in foreign business, and that is one reason why manufacturers in this country are sO' rapidly ceasing to be protectionists. Another reason for their change of faith is that their plants have become so large that only in rare years has the demand in this country become enough to take their total product, and they have had to sell abroad. And so long as they must pay the high price for materials they find it somewhat difficult toi sell abroad, although they succeed at it. An overstocked domestic market is often no theory but a real condition. Take away the shackles that bind the manufacturer and he will be free to sell in the world's markets, without touching his pay roll. Protection, however, causes a manufacturer almost inevitably to depend on the Government for help, instead of carefully and 200 READINGS IN ECONOMIC PROBLEMS minutely studying the details of his own business. Protection, more- over, has enabled many American manufacturers to prosper by sell- ing to their fello'W countrymen at prices so high that they have not thought it necessary to study their own businesses closely, be- cause they depend upon Government backing. I. SCIENTIFIC REVISION OE THE TARIFF. 113. Economic Investigation the Basis for Tariff Legislation. BY HENRY C. EMERY. It is easy to point out the difficulties in determining the cost of production, the great variations in the cost of production at differ- ent times and in different places in the same country, and the absurdity of applying this principle with absolutely rigid logic. But any principle of actual commercial legislation must be somewhat rough and ready and is never intended by practical men to= be carried to absolutely logical conclusions. It can, of course, be pointed out that in strict logic such a principle as that just mentioned would require the enactment of a different tariff on goods imiported from different countries, according to the variations in cost of produc- tion in those countries. This, however, can be easily met by the application O'f a little common sense and the recognition that the real question is to .adjust rates in such a way as tO' meet the co-mpetition of the chief com- peting country. If there are several countries whose products com- pete actively, the true protectionists wo^uld demand that rates should be adjusted to meet the competition of that country in which the cost of production was the lowest. It can, of course, be pointed out, furthermore, that the logical application of this principle would require enormous duties on articles, like coffee and rubber, which are not produced in this country at all. But here, again, it is not a question of strict logic, but of practical common sense. Not even the most extreme pro^ tectionist ever dreamed of applying the principle to articles of this kind. I am convinced, however, that it is possible in the case of most staple articles of manufacture, to^ determine the ratio of the costs between two different counitries with sufficient accuracy for prac- tical legislation. There is, of course, no single cost of production of any article for a given country, but there is a fairly definite dif- ference in the money costs of a given specified article between two THE TARIFF PROBLEM 201 different countries ; and this ratio can in many cases be sufficiently well determined to make such information of great value. As to the question of g'etting this informiation, the prohlem has proved easier, so far as domestic manufactures are concerned, than was expected, and has not proved insuperable in the case of foreign manufactures. Although in most eases it is impossible tO' get for- eign information as complete and detailed as that which can be se- cured for the industry in this country, we are convinced that enough information can be secured for an adequate basis of judgment. In any case, even if foreign costs could not be secured, the determina- tion of the cost of production at home would still be an important part oif a tariff inquiry. The real question is not so much what is the actual mill cost in a competing country, but at what prices and under what conditions could goods be laid down in the Amer- ican market to compete with the hoime product in the absence of any customs duty. These facts can be detenuined with sufficient accuracy for legislative purposes. Of course, many of you will say that all the foregoing implies the maintenance of the protective principle, and that since you do not believe in the protective principle you can see no utility in investigations of this kind. There are two answers to this. In the first place, it seems to mie absurd tO' protest against a better method of accomplishing a given result, simply because you do not believe in the result itself. If the free trader can get his policy adopted and put into actual practice by the people, well and good. But if, as a matter of actual politics, the people prefer a protective tariff, even the free trader ought to welcome an effort to^ have such a tariff, of which he disapproves in principle, levied as honestly and fairly as possible. To- do otherwise, would be to put one's self in the position of a man whO' could oppose regulations protecting the safety of passengers in ocean travel, or the welfare of seamen engaged in such occupation, on the ground that he did not believe in people going abroad, and therefore did not believe in making travel as safe as possible. The second answer is that a tariff with nO' protection features has never been seriously considered by any political party in this country. One great party does, on the whole, believe in a revenue tariff and is working toward that end, meaning by this only that duties shall be levied primarily for revenue purposes rather than for protective purposes. However, this program involves the placing of import duties on a large variety of articles which are produced at home and which consequently bear incidental pro- tection. 202 READINGS IN ECONOMIC PROBLEMS Therefore, a study of relative industrial conditions becomes as important for the person wlw believes in a revenue tariff as it does for the protectionist. If the first place, it may be assumed that a Congress wishing tO' adjust duties in this way, while aiming solely to secure revenue, would prefer to get the needed revenue with the least disturbance possible to business. Furthermore, they wish to raise the largest amount of revenue with the least burden pos- sible on the consumer. This, again, can be determined only after a very careful study of relative industrial conditions. Even more important, however, from the point of view of the revenue principle, is the fact that, where it is intended to raise revenue by imposing duties on a large number of articles rather than on a few non-competing articles, it is impossible to make any ac- curate estimate of what the revenues will be, until a study has been made of relative prices and costs as a basis for determining how far imports would be increased or decreased by changes in duties. 114. The Impossibility of Ascertaining Costs. BY H. PARKi:;R WILLIS. The case against the cost-of-production theor}^ as a regulator of tarifl" duties may be summed up in a series of propositions some- what as follows : 1. In practice the ascertainment of costs is impossible. No board of commission has the power to demand cost statements from manufacturers, or producers; and if it had, it could not se- cure truthful statements. Moreover, there is no way of obtaining statements of any kind from foreigners. 2. Even if all manufacturers both here and abroad were willing to throw open their books in an absolutely honest and impartial way to an all-powerful commission, it would be of little service. This is because cost accounting is not generally practiced by pro- ducers and because, where it is practiced, there is no general agree- ment as to the treatment of different elements of cost. 3. If there were a perfect system of cost accounting installed upon a uniformi basis in every plant manufacturing a given article throughout the world, knowledge of comparative costs would still be of little service, since costs in every country would have to be known before any conclusions could be arrived at as to what tariff rate was needed to protect a given country against the competition of others. 4. If all these facts were known for every country, the diffi- culty would be about as great as it was previously if the data were THE TARIFF PROBLEM ■ 203 to be used for the establishment of tariff rates. This is because costs of productioni vary as widely within a given country as they do between different countries. Unless it were known whether a duty were to be imposed for the purpose of equalizing costs as between the best, the poorest, or the average establishments in the several countries, the information about costs would be useless as a basis of tariff duties. 5. Even with knowledge on all of the points already enumer- ated, and with a clear-cut intention on the point indicated above, the cost analysis would still be inadequate because of the fact that many commodities are produced in groups, or as by-products O'f one another, so that to utilize the general cost analysis as a basis for tariff rates, it would be necessary to know the manufac- turer's intention with reference to the fixing of prices. It would further be necessary to know that the manufacturer had no dis- position to establish "export prices'' at rates lower than those that would be dictated by his costs of production. 6. If all of the foregoing factors were known, including posi- tive data regarding the intention of the manufacturer in regard to the establishment of prices, there would still remain the ques- tion whether this information about costs, which is necessarily stated in terms of money, would have any real significance of a permanent economic character. Money costs do not correspond in all cases to real costs as measured by sacrifice oi labor and capital. It may be true that a given country can produce much more cheaply than another, yet it does not follow that it will so produce, since its cost advantage in some other line may be so much greater as to dictate its devoting its attention almost exclusively to that line. For all these reasons, the conclusion must be reached that cost of production is both practically impossible and theoretically un- sound as a basis for the establishment of tariff duties. V. THE CURRENCY PROBLEM. A. THE MONEY TRUST. 115. Is there a Money Trust? BY GEORGE W. DOWRIE. During the recent presidential campaign the following utter- ance of Mr. Wilson attracted wide attention : "The greatest mon- opoly in the country is the money monopoly. So long as it exists our old variety of freedom and individual energy of development are out of the question. The industrial nation is controlled by its system of credit. This is the greatest question of all, and to this statesmen must address themselves with an earnest determination to serve the long future and the true liberties of men." It is the purpose of this article to present the most important facts bearing upon the question of the existence of such a "money monopoly," as Mr. Wilson has in mind, and, if such a monopoly is found to exist, tO' seek to determine the causes which are respons- ible for it and its relation tO' our national well-being. At the outset it must be clearly understood that by a "money monopol}^" or "money trust" is meant the concentration in the hands of a small group not only a large part of the three billions of actual money in the country but, as a natural consequence, the control of the many bil- lions in instruments of credit issued upon this relatively small amount of cash as a basis. This is an age of "big business" and it is but natural that banking, which is the business of businesses, should be carried on in a cor- respondingly large way. When a concern like the United States Steel Corporation with its billion dollars of capitalization and a daily cash balance of seventy-five millions comes into existence, not only investment banking must be carried on upon a hitherto- unheard of scale, but the accomplishment of the ordinary banking operations will demand greatly augmented facilities. The result has been that new banking institutions of gigantic size have been organized, or that some of the more powerful of the older banks have absorbed a number of their weaker competitors. In refutation of the contention that the banking facilities of the country have become concentrated, critics point to the fact that the THB CURRENCY PROBLBM 205 number of banks in the United States has doubled within the short space of thirteen years, making a total of more than 25,000 insti- tutions with resources of twenty-five billions. But they neglect to state that four billions of this amount is now under the direct control of but 46 of the 25,000 banks. In our large cities there has been a steady decrease in the number of banks, New York alone having lost 103 of its banks within the past ten years, mostly be- cause of their being absorbed by other banks. Paradoxical as it may seem, this large decrease in the number of banks has brought with it a more than correspondingly large increase in the domination of New York in money matters until at present this one city with less than one per cent of the country's banking establishments has under its control one-fourth of our banking resources. We have not as yet, however, penetrated beneath the surface of our problem. A few years ago a bank with deposits of twenty- five millions was looked upon as a wonder of the age. Today there are six banks with deposits in excess of one hundred millions. These six banks alone have in their vaults one-tenth of the money in the United States and, what is of more importance, exercise an influence in finance far out of proportion toi their actual resources. But we have not yet reached the heart of the matter. A com- parison of the lists of directors of the leading banks and trust companies of New York, Chicago, and other large cities, reveals the fact that there is a perfect network of interlocking directorates, not only between the institutions of the same city, but between those of different cities. The leading banking firms of New York: J. P. Morgan & Co., The National City Bank, The First National Bank, and The Guaranty and Bankers' trust companies, both of which are controlled by the "big three" banks, not only have representatives on the boards of directors of numerous other banks, but each of the big three has representatives on the boards of the other two. We have still another step to go before we g'rasp the problem in its entirety. Investment banking was formerly one of the most unpretentious branches of the profession. The investment bankers bought bonds and stocks and sold them, toi private purchasers for a modest commission. With the formation of gigantic corporations with their security issues reckoned in termis of hundreds of millions investment banking suddenly assumed a prodigious importance. Instead of waiting for a concern to^ be organized, and its securities placed upon the market, the investment banker undertook its organ- ization, formed a syndicate to purchase all its securities, and placed himself or his representatives upon the board of directors. But this was not enough. Realizing that life insurance companies, banks, 2o6 READINGS IN ECONOMIC PROBLEMS and trust companies are the heaviest purchasers of bonds and stocks, they began to obtain control of these institutions in order to have a sure and eas)^ sale for their securities. In this way they controlled not onl}^ the purchase of their wares but the sale as well. So profitable did .this branch oi banking become that the great commercial banks entered the field, but not to compete. As the Pujo committee report puts it, "The possibility of competition be- tween these banl not represent the senti- ments of the creditor, the salaried man, or the laborer, most of whom are silent, but long suffering, paying higher prices, but not get- ting proportionally higher incomes. But this expansion cannot proceed forever. A check' upon its continued operation lies in making loans harder tO' get. As soon as this occurs the whole situation is changed. The banks are forced in self-defense to refuse loans because they cannot stand so ab- normal an expansion of loans relative to reserves. The borrower can no longer hope to make great profits, and loans cease to expand. Now an enterprise, as it is started by borrowing, is expected to continue by renewed borrowing. But with loans hard to get, the persons who have counted on renewing their loans on the former terms and for the former amounts are unable to do so. It follows that those who cannot contract new debts cannot pay old ones, and are destined to become insolvent and fail. The failure, O'r prospect of failure of firms that have borrowed heavily from^ banks induces fear on the part of many depositors that the banks will not be able to realize on the loans. Hence the banks themselves fall under suspicion and, for this reason, the depositors demand cash. Then 2 20' READINGS IN ECONOMIC PROBLEMS occur "runs on the banks," which deplete the bank reserves at the very moment they are most needed tO' pay the demands of the de- positors. Beingf short of reserves, the banks have tO' curtail their loans. Renewed borrowing becomes difficult or impossible. The entrepreneurs whoi are caught must have currency tO' liquidate their obligations or else become insolvent. Somie of them are destined to become bankrupt and, with their failure, the demand for loans is correspondingly reduced. The culmination of an upward price movement is what is called a crisis, a condition characterised by fail- ures which are due to a lack of cash when it is most needed. 126. The Capitalization Theory of Crises. BY FRANK A. FETTKR. Capitalization runs through all industry. The value of every- thing that lasts for more than a moment is built in part upon in- come which is not actual, but expectative, whose amount, there- fore, is a matter of guesswork, or speculation. Many unknown factors enter into- the estimate of future incomes. The universal tendency to rhythm in motion manifests itself in an overestimate or underestimate of income. Most men follow a leader in investment as in other things. The spirit of speculation grows until it becomes almost a frenzy and people rush toward this or that investment, throwing capitalization in some industries far out of equilibrium with that in others. The use of credit enhances the rhythm of price. A large part of business is done on margins. If the value of a thing fully paid for falls in the hands of the owner, he alone loses ; but, if the value of a thing only partially paid for falls so much that the owner is forced to default in his payment, the loss may be transmitted along the line of credit to^ every one in the series Oif transactions. A credit system, highly developed, is a house of cards at a time of financial stress. There is an element of credit in almost all busi- ness. Entrepreneurs enter into strenuous rivalry to secure the profits of a rise, ever hoping to get out whole before the crisis comes. The fundamental cause of crises thus is seen to be psychological ; it is the rhythmic miscalculation of incomes and of capital value, occurring to some degree throughout industry. This is given full opportunity for action only when certain favoring objective con- ditions are present. Most noteworthy of these is the dynamic con- dition of industry. The past century has opened up new fields of investment on an unexampled scale. New machinery and processes THB CURRENCY PROBLEM 221 have givdn undreamed of opportunity for enterprise. Such factors disturb the equiHbrium of prices both in time and space, give a powerful stimukis towards higher values, and stimulate the hopes of all investors. When the balance between the capitalization of various industries and between the income of various periods proves to be false, the inevitable readjustment causes suffering and loss to many, but particularly in the inflated industries. But, because of the mutual relations of men in business, few even of those who have kept freest frora speculation can quite escape the evils. . F. CRISES AND INDUSTRIAL CLASSES. 127. The Order of Events in a Crisis. BY ARTHUR T. HADLEY. The order of events in a crisis is generally this : 1. A shock tO' public confidence in a period of liberal, not to say inflated, credit, creates a demand for ready money. No' one is sure that his neighbor will remain solvent. Each man is therefore anxious to* secure himself against future loss. Every borrower seeks means of paying his obligations and increases the demand for money; almost every capitalist tries to enlarge his cash reserves and thus lessens the available supply. 2. This increase of demand and diminution of supply at first puts up the interest rate on short-time loans. Money is needed to tide over the immediate exigency, and every one is willing to pay large prices in order to obtain it. But this is only a temporary measure. Under the stress of need for securing money, people who have engagements to meet sell their goods at a sacrifice in order to obtain it. An unusually large supply of products and securities is thrown upon the market just at the time when many property owners feel themselves least able to invest, and when some con- sumers are restricting their purchases instead of expanding them. The temporary increase in the interest rate gives place to a more lasting fall in prices. 3. Such a fall in prices lowers profits. A large number of people have made engagements with their creditors and with their employees based on the supposition that prices will continue at the old level. A fall in price renders it impossible to pay interest out of current earnings. Readjustments and foreclosures follow one another in rapid succession. In cases where the lenders of money have obtained proper security the contracts are maintained at the 222 READINGS IN ECONOMIC PROBLEMS expense of the principal of the borrowers. If a railroad bond is really secured by stock behind it, the loss falls on the stockholders, and the bondholders, ultimately at any rate, receive all that the in- terest contract calls for. But if, as frequently happens, the security has been a delusive one, the lenders are compelled to assent to a reduction of the interest which they believe to be safely guaranteed. 4. When the interest contracts have been in large measure re- adjusted, the chief effect on wages begins to make itself felt. It might be supposed, on general grounds, that a fall in price would affect the laborer sooner than the investor. But in the early stages of a commercial crisis the capitalist is not in a position to dictate terms to his laborers. He must make goods and sell goods at any price, in order to keep his head above water. As long as it lasts, the cut-throat competition which lowers profits prevents the demand for labor from being very rapidly lessened. It is when readjust- ments of interest have been made that the laborers' condition be- comes worst. After foreclosure sales have been completed and capital is reorganized on a new basis, no capitalist is necessarily compelled to work at a loss, and some probably go out of work alto- gether. Under these circumstances the demand for labor becomes appreciably less than it was, and the price offered falls rapidly. The first moderate changes are as a rule accepted by the laborers as inevitable, but as reductions become more sweeping they are re- sisted, particularly because house rents and consumers' prices, owing to the inertia of retail tradC; do not fall nearly as fast as producers' prices. The workman sees his wages reduced because his employer cannot sell goods at the old figure, while the price that he pays for his supplies remains nearly the same. • He thinks that something is wrong and strikes. This usually indicates the beginning of the end of a co^mmercial crisis. It has become a proverb in the financial world that railroad strikes give no help to those who are trying to depress the price of securities. On the contrary, in spite of the losses attending such conflicts, it has been found in 1877, 1885, and 1894 that the price of securities in general began to go^ up at the very time when matters seemed to be at their worst. There are two reasons for this. First, strikes cut down production in any given line to such an extent as to enable competing producers to dispose of their products or services more readily. Second, strikes indicate that wage contracts, as well as in- terest contracts, have been readjusted to the price conditions which prevail, and that matters have therefore' reached a point where speculators can make arrangements for the future with the assur- THE CURRENCY PROBLEM 223 ance that the marginal price charged by labor and capital for their services does not exceed the market price which the consumers are likely to pay for the results of such service. 128. How Crises Affect Various Classes. BY J. I.AWRENCK LAUGHUN. The suspension of specie payments has occurred at nearly every period of crisis or panic in the history of the United States. The effect has been to tie up funds for an indefinite period often lasting several weeks. The hardship inflicted has fallen with exceptional severity upon the laboring class in the community, because that class is more lim- ited in its resources and its menibers are not usually able to get the extensions of credit from tradesmen that are accorded to others of larger means. The average laborer conducts his affairs largely on a cash basis, and is dependent upon cash at all times. The laborer who has no deposit at the bank and is absolutely dependent upon money wages from week to week has usually found his immediate earning capacity annihilated, owing to the inability of the banks to supply contractors and factory superintendents with the sums needed for the payment of wages. Thus it has occasionally been necessary to suspend industrial operations at a time when conditions were otherwise fairly prosperous because of a suspension of bank pay- ments. A merchant is invariably a depositor at his bank as well as a borrower. What he borrows he takes, not in actual money, but in the form of book credit. Checks and actual money received by him from his customers he deposits at the bank. His deposits at the bank are frequently less than what he owes the bank. It is there- fore vital to his success that he should continue to do business with the institution without interruption. A panic which compels the bank to call in its loans wipes out his deposit with the bank or com- pels him to get funds from other sources, perhaps at a very serious sacrifice. On the other hand a check to- business means that his customers cannot freely liquidate their obligations tO' him. In that event he may have to- ask for extensions of credit, or his deposits at the bank may be cut down below the figure which the bank con- siders necessary. At any rate he cannot go^ to the bank and with assurance demand liquidation of its obligations to- him. Thus the local merchant shares with his community the penalties of an in- adequate banking system. He is a victim of a rigid reserve system. The method in which a panic affects the agricultural section may 224 READINGS IN ECONOMIC PROBLEMS be shown hy what happened in the fall of 1907. Farmers, crop- tayers, and bankers were drawing on the large reserve centres for currency. Suddenly there came runs on certain New York banks that compelled caution on the part oi the other banks. The local situation and the agricultural demand made it impossible for the New York banks to satisfy all demands. They were comipelled to refuse currency shipments to many points. The banks at these points could not assist other interior banks dependent upon them. In a day the entire country was alarmed. Everybody wanted his deposits in cash, and there was not enough to go around and no possibility of getting more. The local banks had the notes of mer- chants and farmers — all good commercial paper — but they had no cash to pay out. The situation could not be relieved by the use of reserves in gold, for this th.e law does not allow. Depositors, there- fore, were compelled to wait. Loans became, if obtainable, very ex- pensive tO' the farmers. Te effects of such a crisis are far from falling evenly upon all classes in the commtmity. To the large retail merchant or manu- facturer, the depression may not mean more than a restriction or abolition of his opportunities for profit. If obliged to curtail his personal enjoyments or expenses, such curtailment will not be of a kind that entails much hardship. He may be somewhat less prodigal, and may endeavor to* cut off some unnecessary outlays of large amount. The serious eft'ects are felt by employees in far greater m.easure. To the extent that the employee has been dependent upon his regular earnings, he will be affected by the reduction of employ- ment. If he has accumulated no savings, he immediately becomes dependent upon credit or charity for his support. If he has accumu- lated savings, he is obliged to fall back on these. Thus the weight of the shortage necessarily falls upon the employee either as wage- earner or as savings-depositor or as both. G. THE PANIC OF 1893. 129. The Causes of the Panic. BY W, Je;TT LAUCK. But what was the local and the true cause of the crisis of 1893 in this country ? It cannot be said to have been due to a scarcity of money in the United States at that time. During the entire period 1878-93 the amount of money in circulation more than doubled. Consequently the money supply was ample. On the other hand, it cannot be maintained that the crisis of 1893 was caused by an ex- THE CURRENCY PROBLEM 225 tension of the mercantile credits such as brought about the dis- astrous collapse of 1873, for business houses and industrial estab- lishments during the period 1891-93, instead of extending, were curtailing their operations, and were arranging their plans in the expectation oi a breakdown in the financial machinery of the coun- try. They could not have engaged in any extended or hazardous activities if they had been inclined to do so, for the reason, as al- ready seen, that very little, if any, foreign capital was obtainable for investment in the United States after 1891, and American cap- ital likewise refused to enter into doubtful financial or industrial undertakings. So far as the withdrawal of foreign and domestic funds, however, brought about industrial and business disaster, it was not a direct cause of the crisis, but only the result which flowed out of the operation of the primiary and fundamental cause. This cause to which the crisis of 1893 is directly and wholly attributable co'usisted of a widespread fear, both at home and abroad, that the United States would not be able to maintain a gold standard of payments. The very nature of the crisis itself bears out this conclusion. It was essentially a monetary crisis, and its typical feature consisted in the numerous failures of banks and financial institutions. Moreover, the precipitation of and the recov- ery from the crisis furnishes additional evidence to bear out the fore- going claim. The beginning of the crisis was marked by the decline of the Treasury gold reserve, on April 22, below the $100^000,000 limit ; the ending of the resultant industrial and financial chaos dated from the repeal, on August 28, of the Silver Law of 1890. The apprehension in 1893 as to- the fixity of the gold standard of payments arose indirectly out oi the silver agitation and legis- lation during the period 1878-90, and was directly traceable to the operation of the Sherman Silver Purchase Law of 1890. For sev- enteen years, 1878-90, the gold standard of payments was constantly threatened, and the crisis of 1893 was practically the culmination of this long period of uncertainty. Under the operation of the Silver Act of 1878, the country received a serious shock to its confidence in the fixity of the gold standard. During the two years, 1884-86, when the silver issues of the country became redundant, the dis- trust in the ability of the Treasury to^ maintain gold payments became so great that gold was withheld in the payments of customs duties, and silver certificates were worked off on the Treasur}^ Additions to the Treasury's supply of gold were thus cut off, and the gold re- serve declined to $115,000,000. As a consequence, apprehension as to the maintenance O'f gold payments became widespread, and a panic was narrowly averted. As it was, the stream of silver was 2 26 READINGS IN BCONOMIC PROBLEMS only prevented from overflowing the Treasury by the action of the Treasury officials in employing" artificial devices to create a vacuum in the circulation. The advocates of the free coinage of silver, however, held the balance of political power during the first session oi the Fifty-first Congress, and as a result of their agitation the Sherman Taw was passed, which almost doubled the amount of silver obligations an- nually issued by the Government. The currency of the country soon became redundant, and silver certificates and Treasury notes were used in the payments of public dues, while gold was hoarded. Consequently the Treasury gold reserve rapidly declined, and fear for the maintenance of the standard again arose. Foreign investors and exporters saw the danger in the situation even before the people of this country, and began tO' withdraw the funds which they had invested in this country during the period 1886-90. Moreover, they called for the payment of trade balances in gold. Gold was, there- fore, demanded for export. But the banks in the United States were hoarding gold, and gold for export could practically be ob- tained only by the presentation of legal-tender notes at the Treasury for redemption. This operation caused a further inroad upon the Treasury gold reserve. Larger amounts of funds were drawn from the country, and increasing amounts of gold flowed out of the Treas- ury in the redemption of legal-tenders. The limit was finally reached on April 22, 1895, when the gold resen^e fell below the danger-line. At that time the fears of the public over the question of the standard of payments reached a climax. As soon as it became known that the gold reserve of the Treas- ury had declined below the danger-point of $100,000,000 the appre- hension relative to the fixity of the standard developed into a panic. There was an immediate rush to realize on all descriptions of prop- erty before the gold standard was abandoned. The public were afraid of the adoption, as the standard of payments, of a silver dollar which v/as worth only fifty cents in gold. At the same time over- whelming demands were made upon the banks to pay their accounts in gold or specie, and the cash thus obtained by depositors was hoarded and the existing money supply contracted. Under these conditions gold seemed scarce. In reality gold was only relatively scarce in comparison with the abnormial ofifering of property for sale on account of the fear of the silver standard. In the face of the universal demand, however, to convert property into cash or some other liquid form of exchange, those having obligations to meet found it impossible to secure funds, and the result was soon seen in widespread industrial and financial disaster. THE CURRENCY PROBLEM 227 130. The Course of the Panic. BY AI.EXANDER D. NOYJ^S. The pubHc mind was on the verge of panic. During a year or more, it had been continuously disturbed by the undermining of the Treasury, a process visible to all observers. The financial situation in itself was vulnerable. In all probability, the crash of 1893 would have come twelve months before, had it not been for the accident of 1891's great harvest, in the face of European famine. The panic of 1893, in its outbreak and in its culmination, followed the several successive steps familiar to all such episodes. One or two powerful corporations, which had been leading in the general plunge into debt, gave the first signals of distress. On February 20th, the Philadelphia and Reading Railway Company, with a capital of forty millions and a debt of more than $125,000,000, went into bankruptcy ; on the 5th of May, the National Cordage Company, with twenty millions capital and ten millions liabilities followed suit. The management of both these enterprises had been marked by the rashest sort of speculation; both had been favorites on the specu- lative markets. The Cordage Company in particular had kept in the race for debt up to the moment of its ruin. In the very month of the company's insolvency, its directors declared a heavy cash divi- dend ; paid, as may be supposed, out of capital. In January, National Cordage stock had advanced twelve per cent on the New York market, selling at 147. Sixteen weeks later, it fell below ten dollars per share, and with it, during the opening week of May, the whole stock market collapsed. The bubble of inflated credit being punc- tured, a general movement of liquidation started. This movement immediately developed very serious symptoms. Panic is in its nature unreasoning; therefore, although the finan- cial fright of 1893 arose from fear of depreciation of the legal tenders, the first act of frightened bank depositors was to withdraw these very legal tenders from their banks. Experience has taught depositors that in a general collapse of credit the banks would prob- ably be the first marks of disaster. Instinct led them to get their money out of the banks and intO' their own possession with the least possible delay, therefore when the depositors of interior banks de- manded cash, and such banks had in immediate reserve a cash fund amounting to only six per cent of their deposits, it followed that the Eastern "reserve agents" were drawn upon in enormous sums. On the Newi York banks the strain was particularly violent. During the month of June the cash reserves of banks in that city decreased nearly twenty millions ; during July, they fell ofl^ twenty- 228 RBADINGS IN ECONOMIC PROBLEMS one millions more. The deposits entrusted to- them by interior institutions had been loaned, acording to the banking practice, in the Eastern market ; their sudden recall in quantity forced the East- ern banks to contract their loans immediately. But in a market already struggling to sustain itself from wreck, such wholesale im- pairment of resources was a disastrous blow. In the closing days of June, the New York money rate on call advanced to seventy-four per cent, time loans being wholly unobtainable. The early with- drawals by depositors in the country banks were only a slight indi- cation of what was to' follow. In July, this Western panic had reached a stage which seemed to foreshadow general bankruptcy. Two classes of interior institutions went down immediately — the weaker savings banks, and private baulks, distributed in various pro- vincial towns, which had fostered speculation through the use oi their combined deposits by the men who controlled them all. In not a few instances, country banks were forced to suspend at a moment when their own cash reserves were on their way to them from depository centers. Out of the total of one hundred and fifty- eight national bank failures of the year, one hundred and fifty-three were in the West and South. How wide-spread the destruction was among other interior banking institutions may be judg'ed from the fact that the season's record oi suspension comprised 172 State banks, 177 private banks, 47 savings-banks, 13 loan and trust com- panies, and 16 mortgage companies. During the month of July, in the face of their own distress, the New York banks v/ere shipping every week as much as $11,000,000 cash to these Western institutions. Ordinarily, such an enormous drain would have found compensation in import of foreign gold, and, in fact, sterling exchange declined far below the normal gold import point. But the blockade of credit was so complete that oper- ations in exchange, even for the import of foreign specie, were im- practicable. Banks with impaired reserves would not lend even on the collateral of drafts on London. So large a part, indeed, of the Clearing-House debit balances were now discharged in loan certificates that a number of banks adopted the extreme measure of refusing tO' pay cash for the checks of their own depositors. Long continued, a situation of this kind must reduce a portion of the community almost to a state of barter ; and in fact a number oi large employers of labor actually made plans in 1893 tO' issue a currency of their own, redeemable when the banks had resumed cash payments. On the 25th of July, the Erie Railroad failed, the powerful Milwaukee Bank suspended, and the situation appeared well-nigh hopeless. THB CURRUNCY PROBLEM 229 Relief came in two distinct and remarkable ways. Large as the volume of outstanding loan certificates already was, three New York banks combined to take out three to four millions more, and this credit fund was wholly used to facilitate gold imports. At almost the same time, the number of city banks refusing to cash depositors' checks had grown so' considerable that well-known money-brokers advertised in the daily papers that they would pay in certified bank checks a premium for currency. This singular operation virtually meant the sale of bank checks for cash at a discount. Through the money-brokers, therefore, depositors paid in checks the face value of such currency as was ofl^ered, plus an additional percentage. This premium rose from one and a half to- four per cent, and at the higher figures attracted -a mass of hoarded currency intO' the brokers' hands. This expedient was applied on an unusually large scale, and it had the good result of helping to keep the wheels of industry moving. Its bad result was that it caused suspension of cash payments in the majority of city banks; for, of course, when a premium of four per cent was offered in Wall Street, for any kind of currency, it was out of the question for the banks to respond un- hesitatingly to demands for cash by speculative depositors. Most of the banks cashed freely the checks of depositors where it was shown that the cash was needed for personal or business uses. The panic, in short, had ended, but not until the movement of liquidation had run its course. The record of business failures for the year gives some conception of the ruin involved in this fo^rced liquidation. Commercial failures alone in 1893 were three times as numerous as those of 1873, and the aggregate liabilities involved were fully fifty per cent greater. It was computed that nine com- mercial houses out of every thousand doing business in the United States failed in 1873 ; in 1893, the similar reckoning showed thirteen failures in every thousand. 131. A Week of the Panic. Our markets have been more disturbed and excited this week than at any time this year. The situation looked unpromising when the week opened, and became daily more imsettled until Thursday, when there was a decided improvement; but yesterday the situation was again somewhat less favorable. Monday and Tuesday an un- usual number of failures among our banks and private firms were reported in various parts of the country, but especially in the West, some of themi being concerns of long standing and held in high repute. On those days, too, rumors became hourly more distinct 230 READINGS IN ECONOMIC PROBLEMS respecting the difficulties Erie's floating debt was causing the man- agement and the probabiHty of its becoming needful to put the road into the hands of receivers. Tuesday afternoon the announcement was made that receivers for the company, had been appointed. On Wednesday the failures referred to, the Erie receivership, and the state of the money market caused an unsettled and feverish opening, which conditions were used, and used mo'St efl:ectually, by those seek- ing to break prices, values of all the leading stocks gradually melt- ing away. This decline was favored by the fact that the outside public having money to- invest either looked upon the Erie receiver- ship as a more disturbing affair than the step warranted, or else were discouraged by the frequent flurries and declines in prices which have occurred of late, and so- for the time being kept off the market. The next day, Thursday, the outlook, as already stated, was much brighter, and so it was yesterday, though there was some reaction from the previous day, a further large break in General Electric stock being a disturbing feature. Money on call representing bankers' balances was not stringent until Wednesday. The loans early in the week were from 6 to 2 per cent, the latter figure being recorded on Monday after the inquiry for the day had been satisfied and there seemed to be an abundance offered. The demand for currency for shipment to the West, stim- ulated by the failure of the "Mitchell" bank at Milwaukee, and of banks at Louisville and Indianapolis, was urgent on Tuesday, and on the following day a calling in of loans by some of the banks and trust companies in this city and in Brooklyn created a disturbance in the money market, while the fall in stock values induced discrim- ination against collateral, and the rate was advanced tO' three-six- teenths of I per cent and interest, equal to- about 74 per cent per annum, and large amounts were loaned at one-eighth of i per cent and interest, equal to 51 per cent per annum. On Thursday there was an early demand for money which caused 51 per cent tO' be again recorded, but in the afternoon the rate fell to 6 per cent. Yesterday the course was much the same, the range being 51 and 2 per cent, with the close at the lowest figure. The average for the week was probably about 10 per cent. Renewals were at from 6 to 8, and while banks and trust companies quoted 6, very little was loaned over the counter at this figure, and the institutions that had money to loan offered it in the stock exchange. Time contracts continue in urgent demand and good rates are bid, but the supply is small and chiefly confined to private sources. Neither banks nor trust companies are making loans on time, but it is probable that a few of the insurance companies and other corporations have yielded to THE CURRENCY PROBLEM 231 the importunities of brokers. The basis of the business is 6 per cent; in addition i per cent commission is paid for thirty days, i}^. per cent for sixt}^ days, and 2 per cent for four months. Scarcely anything is done in commercial paper, and the few transactions made are at such rates as can be agreed upon. Many of the jobbing com- mission houses are advising the mills with which they do business tO' shut down, as it is impossible at present tO' make advances, and many of the mills at the East are consequently closing. 132. The Premium on Currency. Other than the President's message and the meeting of Congress, which we have remarked upon in a subsequent column, the premium on gold and currency that has prevailed has been the important topic. This feature in the situation we referred tO' last week when it had developed only very moderate proportions. From that beginning, however, the demand for currency gradually grew more urgent, the premium rising as high even as 5 per cent, disclosing a marked scarc- ity of currency, not alone in this city but very noticeable at Phila- delphia and Boston in the East and Chicago and other centers in the West. All kinds of currency were in request including even stand- ard silver dollars. Foreign bankers also report that i^ per cent was paid for gold to arrive. Of course the gold import movement had been affected by these operations, which in turn have raised foreign exchange rates materially, since the premium paid raises the power of exchange and consequently the point at which gold can be imported at a profit. Thursday, however, there were decided indications that the transactions in currency had culminated. On that day the supply was increased by large offerings and the demand slackened. Yesterday the same conditions continued to prevail, and the premium on currency dropped to i^A and 2 per cent. 133. The Hoarding of Currency. BY J. De; WITT WARNER. Then developed the feature that will forever characterize the stringency of 1893 — instructive to those who have not already learn- ed how immaterial is any ordinary supply of legal currency when compared with credit in its various forms — the real currency of the country. Almost between morning and night the scramble for cur- rency had begun and culminated all over the country, and the pre- posterous bulk of our circulating medium had been swallowed up 232 READINGS IN ECONOMIC PROBLEMS as effectually as, in a scarcely less brief period, gold and silver had disappeared before the premium, on specie a generation before. Cur- rency was hoarded until it became so^ scarce that it had to be bought as merchandise at a premium of i to 3 per cent in checks payable through the clearing-house; and to enable their families tO' meet petty bills at the summer resorts the merchant and professional men of the cities were forced to purchase and send express packages of bills or coin ; while savings banks hawked their government bond investments about the money centers in a vain effort to secure cur- rency. 134. The Effect on Trade. The month of August will long remain memorable as one of the most remarkable in our industrial history. Never before has there been such a sudden and striking cessation of industrial activity. Nor was any section of the country exempt from- the paralysis; mills, factories, furnaces, mines nearly everywhere shut down in large numbers, and commerce and enterprise were arrested in an extra- ordinary and unprecedented degree. The complete unsettlement of confidence and the derangement oi our financial machinery, which made it almost impossible to obtain loans or sell domestic exchange, and which put money to a premium over checks, had the effect of stopping the wheels of industry and of contracting production and consimiption within the narrowest limits, so that our internal trade was reduced to very small proportions — in fact, was brought almost to a standstill — and hundreds of thousands of men thrown out of employment. 135. Various Aspects of the Panic. While special telegrams from many points South and West re- port a more hopeful feeling in financial and commercial circles, due to the increased currency issue by New York national banks, the gold afloat for the United States, and in the expectation that Con-, gress will promptly repeal the compulsory purchase of silver clause of the Sherman Act, the week has, on the whole, brought more un- favorable features in the apparent hoarding and scarcity of currency East and West, the near approach of the demand for funds to "move the crops," the increase in the shut-down movement by manufactur- ers in New England, Middle and Central Western States, and the clog to trade shown by prohibitive rates for New York exchange at centers East, West, and Northwest. Chicago packers and grain shippers selling to interior eastern points, having been unable to sell their New York exchange, are ordering the currency to pay for THB CURRENCY PROBLEM 233 stuff shipped direct by express, thus doing away with banks. At New York credit of both banks and commiercial interests is unim- paired, but actual money is scarce and commands a premium. The arrival of gold in transit is expected to clear the atmosphere and relieve pressure. Demands for actual currency from all quarters on New York are pressing. The scarcity of small notes and silver dol- lars is a feature. Banks are generally refusing or complying only partially with requests for large sums. The irrational but widespread hoarding of currency has com- pelled jobbers and manufacturers in many instances to do business more nearly than ever on a cash basis, which has resulted in a further restriction of trade throughout the country. This is accompanied by such signs of aggravation as increased difficulty in disposing of commercial paper, a still greater scarcity of currency at larger cen- ters, and a shut-down movement among industrial establishments; the latter, together with curtailment of forces in that and in com- mercial lines, points to the enforced idleness of nearly 1,000,000 wage-earners within the past two months, as compared with not more than 400,000 at the close of 1884, the previous year of greatest business depression. The week's bank clearings total is the smallest of recent years — $802,000,00^0 — 17 per cent less than last week and 20 per cent less than in the week of 1892. A hand to^ mouth demand for staples is reported from Boston ; many leading industries have shut down, currency is scarcer, com- mercial paper is ignored, and general business rather more clogged than last week, all of which applies as well to^ New York, Philadel- phia, Baltimore, and Pittsburg. Increased demands from country banks make currency scarcer at Cleveland and Cincinnati, where previous dullness is intensified. Business at Louisville is almost at a standstill, banks declining to receive country checks even for collection, and preferring not to handle New York exchange. General trade is almost on a cash basis at Indianapolis, and reduced in volume, which is also true at Milwaukee. Chicago bankers are hopeful, owing to the heavy gold importations, but orders left with jobbers are held awaiting crop advices, some of the latter being doubtful. St. Paul, Minneapolis, and Duluth jobbers are doing a hand to mouth business, awaiting a change in the situation. St. Louis reports a shrinkage in the vol- ume of sales of dry goods and hardware, while at Omaha banking accommodations and the volume of trade continue in reduced vol- ume. Live stock receipts are smaller, with higher prices, and the corn crop is damaged in western Nebraska. . 234 READINGS IN ECONOMIC PROBLEMS H. THE PANIC OF 1907. 136. Is a Panic Imminent?* BY HEJNRY HALL. It is useless to^ deny that many, perhaps a majority, of the factors which, on previous occasions, have foreshadowed a financial panic and reaction in trade in the United States, are present at this moment in national affairs. A most remarkable and unprecedented feature, however, is the fact that the coming panic, if one is actually imminent, has been so extensively advertised. Hitherto, panics have generally found the financial world unprepared ; and the trouble has always come with the suddenness and fury of the descent of a meteorite from the heavens above, a terrific explosion oi gunpowder, or a West Indian tornado'. Warnings have been uttered galore. As far back as October 11, 1905, Frank A. Vanderlip preached conservatism at a meeting of bankers and avowed the fear that the strain on our currency system might bring disaster. On October 27, 1905, E. H. Harriman cast serious doubt on the future by asserting that the country was about to run into an era of competitive railroad building. On January 4, 1906, Jacob H. Schiff told the Chamber of Com- merce of New York City, then in session tO' discuss the scarcity of the cash supply : "Mark what I say : If this condition of affairs is not changed, and changed soon, we will get a panic in this country, compared with which the three which have preceded it would be only child's play." Not to lag behind as a pessimistic oracle, J. J. Hill called atten- tion, January 29, 1906, to the extravagance of the American people in their expenses for luxuries and pleasure. The dangers may be summarized, in order tO' have them clearly before the mind : 1. The appalling issue of over $1,640,000,000 of new securities in 1906, and the recent call of the Pennsylvania Railroad on its stock- holders for $200,000,000 more. Nothing like this has ever been known in this land of mighty things, not even in the "indigestible security" period of 1902. 2. The enormous expansion in business, which extends tO' every county and hamlet in the country, and is in fact world wide. In * This article was published in February, 1907. THE CURRENCY PROBLEM 235 spite of the great increase in American bank note currency and gold production, business has at last overtaken and nearly overwhelmed the resouirces of the banks. Take a single instance : From a total of $1,539,000,000 in 1895, our foreign trade has risen to $2,970,000,- 000 in 1906. No country, no man, can expand his business in any such wa}^, without the use of more money to carry it on with. This expansion is repeated in every vocation in the United States ; and the total vokune of transactions has grown more swiftly than the cash supply. 3. The high prices of all commodities, again requiring more money for the transaction of business. 4. Increase of wages in all principal callings, which has added an expense of about $200,000,000 annually to the railroads and in- dustries of the country and promises a diminution o^f net earnings. 5. The furore for new buildings in cities and the speculation in farm lands and other unimproved property. 6. Personal extravagance of the people, which is evident on every side, and which, so far as motor cars are concerned, is leading many people to mortgage their realty. 7. Heavy loss of capital by the San Francisco earthquake, $175,000,000 of which fell on the insurance companies and $125,- 000,000 on the people of the city. This must be coupled with the loss from wars and various calamities in other parts of the world. 8. Rottenness in financial methods, as exposed in the past few years in notable public investigations, with more coming to light every day. 9. Retirement from active circulation in New York state in 1906 of $50,000,000 oi good and lawful money, now locked up under the new law as trust company reserves. This loss of active cash, com- ing at a most inconvenient juncture, is equivalent to the destruction of an equal amount of money. 10. The fact that loans at the banks are more extended, com- pared with reserves, than ever before in our history. Last Decem-- ber, deposits in the banks of this city were $62,500,000 less than loans, an unparalleled event. In the worst times of 1893 and 1903, deposits were never more than $40,000,000 less than loans. It is unnecessary to dwell on the dangers of such a situation. 11. And finally, the excessively high rates of interest, which have prevailed for a year or' more, and which recur with every additional call for funds. 236 READINGS IN BCONOMIC PROBLEMS 137. The Irrepressible Crisis.* BY W. H. LOUGH, JR. We may make a list of 12 factors to be considered in sizing up the present situation. They are arranged approximately in inverse order to their immediate influence. 1. The state of the public mind. 2. Production and volume of credit in extractive industries. 3. Production and volume of credit in manufacturing industries. 4. Production and volume of credit in transportation industries. 5. Output of mortgages and bonds. 6. Output of credit currency. 7. Output of loans and discounts. 8. Output of book credits. 9. Trend of general prices. 10. Treasury and bank reserves of cash. 11. Output of gold. 12. Tendency of foreign exchange. If we could get complete and accurate information about each one of these 12 factors we could come to some definite and practically certain conclusion as to the business future. Suppose we try to sum up briefly the data available at present about each of the factors named. 1. It is obvious that neither over-confidence nor speculative mania is or has been especially strong. On the contrary, intelligent opinion is notably conservative. Retrenchment, not headlong ex- pansion, is the order of the day. Land booms have been reported f romi various parts O'f the country, but apparently they have not been attended with the excitement that has existed in such cases at other times. 2. The extractive industries, agriculture and mining, have made new records in volume of production in the year just passed with- out interfering with prices to any marked extent. The yields of corn and winter wheat were greater than ever before. Other crops were, on the whole, extraordinary, and 1906 came as the climax of several previous years of large agricultural output. The prospects for 1907 are favorable. 3. Manufacturing industries, as is well known, have made great * This article was outlined in February, 1907, and barely missed getting into the March number of Moody's in which editorial mention of it was made. Its statements as to financial weakness were, at least in part, verified by the extreme declines in security values during the month of iMarch. THB CURRENCY PROBLEM 237 strides in the last three years. To^ take two examples which happen to be at hand, we find new buildings contracted for in 1906 worth $750,000,000 and we find an output of 25,000,000 tons of pig iron in 1906, against 23,000,000 tons in 1905, the best previous year. The pig iron was used largely for structural steel and railroad equip- ment. A falling ofif in the demand for these two products would undoubtedly affect a great amount of outstanding securities, and short time credit. In the opinion of excellent judges, a decline in the demand is already at hand, and will in all probability become more evident as the year progresses. As to other lines O'f manufac- turing we may say, in general, that production is large and increas- ing, but apparently not yet excessive. 4. New railroad trackage built in 1906 reached a total of over 6,000 miles ; but this new mileage is nothing compared tO' that con- templated for the next few years. The Northwestern railroads are especially active, and in that region the "era of competitive railroad building," predicted by E. H. Harriman, is at hand. What the effects will be on the large volume of new railroad stocks remains to be seen. Within the last twO' months railroad managers have begun to move a little more slowly in extending and improving their lines. Nevertheless railroad rebuilding and enlargement is still progressing on a great scale, for transportation facilities are plainly inadequate. 5. In considering long time debts, we should note first the strik- ing unpopularity of bonds with the investing public. The reluc- tance of investors to put their money intO' mortgages and bonds, is, of course, a natural result of high prices and big semi-speculative profits, which make bond returns look small. 6. In the amount of credit currency issued by the government we find, of course, no important change in the last few years. The volume of bank notes outstanding, however, has steadily increased from $172,000,000, in 1894, to about $585,000,000, now. The fact that the increase has been brought about by more liberal laws and by the lowered price of government bonds, rather than by business demands, naturally leads us to suspect its stability. 7. The present status of bank loans and discounts is best indi- cated by the following totals oi this item for all national banks : 1896, $1,873,000,000; 1900, $2,710,000,000; 1906, $4,300,000,000. These are most surprising figures in view of the comparatively slight increase in population and real capital during the same period. They grow more astonishing still when we think of the great increase in other banking business during the last ten years. The rate of in- crease would be almost beyond belief if the figures were not thor- oughly trustworthy. 238 READINGS IN ECONOMIC PROBLEMS 8. Under the term "book credits" I mean to include all the great body of accommodation extended by merchants to individual customers and by wholesalers to retail firms. Of course it is im- possible to compute its amount. All we can say is that, beyond ques- tion, it must exceed in volume anything that this country has ever previously known. If a wave of credit restriction should set in, a great many individuals and firms would be compelled to shorten sail in a hurry. 9. The trend of general prices in the last few years is too well known to call for much discussion. Dun's index numbers for a few years past are as follows: 1897, 75.5; 1898, 79.9; 1899, 80.4; 1900, 95.3; 1901, 95.7; 1902, 101.6; 1903, 100.4; 1904, loo.i; 1905, 100.3 ; 1906, 105.2. These prices are the inevitable result of the out- put of gold and of credit during this period. 10. The total gold coin and certificates in circulation in the United States was, in 1896, $497,000,000; in 1900, $811,000,000; in 1906, $1,263,000,000. The total national bank reserves of lawful money, in September, 1896, was $343,000,000; in 1900, $520,000,000; in 1906, $626,000,000'. The ratio of cash on hand to deposits at corresponding periods of the last few years has been: 1896, 19.1% ; 1900, 15.9%; 1901, 14.7%; 1902, 13.2%; 1903, 14.3%; 1904, 15%; 1905, 14%; 1906, 12.7%. Looking over the banking field, we see a general downward tendency in the proportion of cash reserves to the credit piled up on the reserves. Unless the downward ten- dency be reversed, according to all experience, the result will be disastrous. It is in order, then, to see what the prospect is of reliev- ing the situation by large additions of cash. 11. The annual gold production of the world has increased from $202,000,000, in 1896, to over $400,000,000, in 1906, and the outlook is for a still greater production next year. But, sooner or later, the rising tide of prices is certain to cut ofif the less profitable production and lead to a restriction of output. 12. We turn, as a last source of temporary relief, to the other commercial nations in the hope that from them the United States may draw additional supplies of gold. The principal foreign banks of the world are estimated to hold about $4,000,000,000 specie, in- cluding both gold and silver. The whole commercial world seems deluged with prosperity. No nation and no' bank has too much gold. On the contran,'-, every one is reaching eagerly for more on which to base an enlarged issue of credit. American banks will seek in vain in foreign markets for sufficient additions tO' their cash reserves. The experience of the last hundred years indicates that the forces now at Avork are driving us straight toward a crisis, — and I mean THE CURRENCY PROBLEM 239 by crisis not a Wall Street flurry, snch as we have lately seen, which may come at any time from purely local influences, but a general, temporary break-down of industry. With credit everywhere ex- panded to the danger point, we are in a position from which only two means of escape are possible. One is a large and rapid increase in our gold reserves, which is out of the question. The other is a progressive restriction of credit, necessarily gathering momentum as it proceeds, which is another name for crisis. Just when or how the wave of credit withdrawals will start nO' one can tell. A big failure or a rash bit of legislation, or any one of a hundred inci- dents, which under normal conditions would do little harm, might set it going. So long as the decisive incident does not occur, — and, of course, it may not come very soon, possibly not for two or three years, — prices keep on rising and credit keeps piling up. For that reason the longer it is delayed the harder jolt it is likely to give. 138. Conditions Leading up to the Panic* It did not take a prophet to foretell that, following the three months' decline in the price of stocks which culminated in the severe declines in March, a business depression would follow. The lessons of history make it certain that industrial contraction begins soon after a great decline in stock prices occurs. A few long-headed men last fall saw plenty of trouble ahead and began to prepare for it by unloading stock at high prices. Not, however, until the middle of March were there plenty of bears in evidence. Although financial experts worked overtime in March to convince us that the decline was temporary, due to mischievous legislation, close observers no- ticed within a few weeks after the collapse that the demand for luxuries, like diamonds, automobiles, and pianos, began to decline. Soon the railroads began to: curtail improvements ; then manufac- turers of electric supplies began to lay men off; then we read that the department stores of New York had discharged 2,000 employees, and expected to discharge 4,000 more; next we heard that manu- facturers in various lines were curtailing output, and that many big wholesale merchants had instructed their buyers in Europe to curtail purchases. A little later there appeared statistics of many kinds that indicate a shrinkage in business. Bank clearings, railroad earn- ings, smaller volume of business, and unsuccessful strikes are some of the evidences of the depression already upon us. Because of the destruction of old capital and of speculation and * This was published in July, 1907. 240 READINGS IN ECONOMIC PROBLEMS new issues of securities calling* for more and more new capital as well as the unparalleled construction of building's and permanent im- provements, turning circulating intO' fixed capital, the banking situa- tion is now about the worst ever known. Never were liabilities so great and cash reserves lower in proportion to liabilities. Gradually conditions appear tO' be growing worse instead oi better. The forced liquidation in bonds and stocks had not this year been suffi- cient to improve the credit situation. The depreciation in shares is due to the rise in the price of cap- ital. The development of industrial enterprise has recently been too rapid for available capital. The one great cause is the lack of cap- ital to carry on the world's business on the scale now planned. The industrial and financial world has overreached itself. Although new capital is being created faster than ever before, the supply is not equal tO' the demand, and the business of the world must slacken for awhile. That the cash reserves oi the world are low, as compared with banking liabilities, is beyond question. In this country the surplus reserve, as shown by the New York bank statement of July 6, was $856,250. This is the first time since 1893 that the surplus reserve has fallen below $5,000,000, for the first week in July. Even more significant is the fact that loans have been increasing steadily in proportion to deposits, and that they now exceed deposits by 3.4%. In 1905 deposits exceeded loans by about 4%. These figures indi- cate an unstable equilibrium! in the business world. If these statistics are a fair index, the business world is today insolvent, under panic conditions. It owes more than it can pay, except by further borrowing from the banks. All that is necessary to precipitate a panic under such conditions is for the solvent por- tion of the depositors to become frightened and to withdraw their bank deposits. The banks will then be compelled tO' call loans and to demand payment fro'm the insolvent portion. Since only 5.6% of the resources of the banks are in cash, it is probable that many national banks are in a weak condition. Possibly the brakes will yet be applied in time to prevent serious trouble and to enable us to pass through the coming financial ordeal with a very slight reaction. 139. Business Conditions in August. The banking and credit situation in this and other countries has not improved in the last month. Although the New York bank statements have been fairly good since July i, it is generally believed that they have been manipulated. Even as they stand they show THE CURRENCY PROBLEM 241 the smallest surplus reserve in ten years. Notwithstanding the fact that the crops are poor and late, it is probable that, because of high prices and speculation, more money will be required to move them, and that the demand for it will come sooner than usual. The extreme tightness of money is shown by the market for coniimercial paper. The very best paper in the country is moving off slowly at 6%, while choice notes are selling at 6j^%, and a "raft" of good name paper is selling as high as 6)4%. Signs of depression are multiptying on all sides. It is now gen- erally admitted that the railroads are curtailing expenses wherever possible. Before making improvements railroad presidents are watching and waiting anxiously for a depression that will not only make labor plentiful, but make it efficient. Manufacturing and mercantile industries are also curtailing. This is especially true of the building, electrical goods, lumber, woolen, boot and shoe, and leather industries. The prices of copper and iron are declining rapidly. The prices of lumber and bituminous coal are also- weak- ening. These things indicate, that industry is slowing up. We shall probably know more about it by October. 140. The Course of the Panic. BY HORACE; WHITE. Early in October, 1907, there were signs of trouble in the New York Stock Exchange. Prices of securities fell with great violence. On the 1 6th there was a crash in the market, started by the failure of certain speculators in copper-mining stocks. Public attention was thus directed to a group of banks in the manageniient oi which these persons were influential. These banks fell under suspicion and the rumors extended to other speculators and banking institutions sup- posed to be affiliated with them. On the 21st the National Bank of Commerce announced at the clearing house that it would no- longer be responsible for checks drawn on the Knickerbocker Trust Com- pany, one of the largest, and perhaps the most conspicuous, of the financial institutions of the city. On the following day there was a run on it by depositors, and it closed its doors after paying- $8,000,- 000 over its counter. With the failure of the Knickerbocker Trust Company the panic became general. Prominent bankers held a meeting at midnight to take measures to stop it, and the Secretary of the Treasury, Mr. Cortelyou, came from Washington and promised to assist. On the 23rd a run on the Trust Company of America began, but the bankers gave it assistance sO' that it was able tO' pay out $13,000,- 242 READINGS IN BCONOMIC PROBLEMS ooo in cash in one day without closing its doors. On the same day a run was started on the Lincohi Trust Company, but was success- fully met. There was a renewed and heavy break on the stock ex- change, and the rate for call money rose to 90 per cent ; time loans could not be had on any terms. October 24th the panic reached its height; call money was not obtainable. A bankers' pool was organized to deal with the situa- tion. By offering $25,000,000 at 10 per cent they broke the dead- lock. Secretary Cortelyou deposited $19,000,000 in the banks. The run continued on the two trust companies, but all demands were met. During this time there had been a heavy drain on the New York bank reserves from banks in other parts of the country. On the 26th the clearing house decided tO' issue loan certificates. This was virtually a general bank suspension, but while most of the banks used their discretion either to pay checks presented at their counters in cash, or to stamp them "good through the clearing house," several of them paid all checks presented without any discrimination what- ever. The example of New York was followed almost instanta- neously by all the clearing houses of the countr\'. A premium on currency made its appearance on November 2nd, and various devices for paying wages and carrying on retail trade by means of small certificates and pieces of stamped cardboard, were used everywhere. The premium on currency increased gradually to 4 per cent, as quoted in the newspapers, but in fact it reached 5 and 6 per cent in some instances where large sums were imperatively required. The exchanges of the country were thrown into confusion. On October 29th Chicago drafts on New York were quoted at $2.50 per $1,000 discount. In other places the usual country balances in New York had been so far drawn down that the banks in the interior, although having plenty of cash in hand, could not sell drafts on New York at all. It happened that we had been blessed with an abundant wheat harvest, while there had been a shortage in all European countries except France. The price of w^heat was accordingly the highest that had been known for several years, and the export of this staple gave our bankers an abundance of commodity bills with which to command gold abroad. Sterling exchange fell to $4.82 on October 26, and to $4.80 on October 28, on which day $18,750,000 in gold was engaged in London for importation. This movement continued until December 23rd, during which time $107,000,000 in gold was imported, all of which was paid for with exported grain and cotton. During a part of this movement the quotations for demand sterling THE CURREXCY PROBLEM 243 were above par (S4.866), and even went as high as S4.91, so that some people said we were buying gold at a premiiim. But the quotation S4.91 was not a quotation of cash, but of bank checks that were selling in Wall Street at about 96 cents on the dollar. The premium on currency continued until the last of December. On November 17th announcement was made at Washington that the Treasury would come to the relief of the business community by issuing S5o,ooo,ocx5 of Panama canal bonds, and Sioo.ooo.ooo of one-year 3 per cent certificates of indebtedness. As both of these operations contemplated the borrowing of money from a market already staggering with the demands upon it, the promised relief was never experienced. The design of the President and Secretary was to issue a security which, by the offer of 3 per cent interest, would draw^ hoarded money out of its hiding place, and also to increase the amount of 2 per cent bonds in the market which could be used as security for national bank notes. There was a brief spurt on the stock exchange when this plan was promulgated, but on the next da}' the depression was as great as before, and on the three following days it became still greater. Critics said that the proposed issue of certificates was not authorized by law, and that the proposed issue of bonds, if lawful and successful, would be a fresh drain on the cash reser\-es of the banks which could not be recouped in months. Banking opinion was nearly unanimous that the government's inters-ention had not been helpful but the con- trar}'. Perhaps the most striking phenomenon of the panic was the rush of the countr\- banks to draw their money out of the central reser^'e cities, where the bulk of it was held. This proves that there is much human nature in bankers, but it proves even more con- clusively that our banking system is behind the age and needs better- ment. 141. Shipment of Currency to the Interior. The clearing-house committee knew by experience that the dis- sipation of the Xew York banking reserve, upon which practicallv the credit volimie of the nation rests, would alarm the nation, in- tensify the panic, and greatly prolong the period of recuperation. Xew York bankers have been severely criticised because they did not more fullv respond to the demands of country- correspondents bv shipping currency against balances. To have fully honored the demands that were pouring in from all sections of the countr\' would have dissipated our banking reserve in a fortnight. How 244 READINGS' IN ECONOMIC PROBLEMS could it be replenished? Were the interior bankers sending cur- rency to New York? What would have been the effect upon the country if the New York banking reserve had been entirely de- pleted ? It would have so intensified the panicky feeling that wide- spread commercial disaster would have resulted. The $53,000,000 deficit in our banking reserve occurred in less than ten days after the failure of the Knickerbocker Trust Company, and was caused by the shipment to interior institutions of the larger portion of that amount in that short time. We kept the door of our treasure house wide open until for the good of the whole country it became neces- sary to ever}'where close it. It never was fully closed; currency shipments continued in a restricted way throughout the panic, and a larger number of our banks kept up their counter payments as usual. 142. Resolutions of the Atlanta Clearing House.* In view of the action taken by the New York Clearing House, and subsequently adopted by Chicago, St. Louis, Philadelphia, Cin- cinnti, New Orleans, Nashville, Birmingham, Baltimore, Louisville, Memphis, Montgomery, Mobile, and many other principal cities throughout the country, restricting the shipment of currency, and the restriction of other business to its proper channel, the Clearing House ; therefore, be it Resolved by the Atlanta Clearing House Association — 1. That until further notice collections and bank balances be settled in exchange for clearing-house certificates. 2. That checks drawn on the members of this association be paid through the Atlanta Clearing House, and correspondents be requested to so stamp their checks. 3. That payments against all accounts, including certificates of deposit, be limited to $50 in one day, or $100 in one week. 4. That exception shall be made to the above in case of pay rolls, which shall be paid as follows : All denominations of $5 and over in clearing-house certificates, and all denominations of under $5 to be paid in cash as desired. Resolved further, That the manager of the Atlanta Clearing House Association be instructed to give notice to the correspondents of the Atlanta Clearing-House banks that the above resolution is in effect on and after this date and until further notice. * October 30, 1907. THE CURRENCY PROBLEM 245 143. Estimate of Money Hoarded. The national banks held $40,839,000 less cash on December 3 than on August 22. And yet, during this period, the government increased its deposits in the national banks by $80,000,000, and there was imported about $70,000,000 in gold. Considering this increase of about $150,000,000, and the loss of $40,839,000, more than $190,000,000 of cash was taken out of the national banks in this period. It is cjuite certain that neither the savings banks nor the trust companies increased their cash holdings by any such amount. In fact, they had to close their doors to prevent the withdrawal of cash. It is probable that the trust companies of the country lost considerable cash, and that the savings banks gained none during this period. In ordinary years the national banks lose but little cash by crop movements — say $25,000,000. This is, perhaps, considerably less than the shrinkage this year in the cash holdings of the. trust companies. It would appear, then, that fully $200,000,000 of cash this year disappeared from our banks between August 22 and De- cember 3. 144. The Panic and the Depreciation of Gold. The panic in the United States was, of course, due to* peculiar conditions : a bad currency and an unsound banking systemi ; lack of confidence in banking and industrial institutions ; great specula- tion due partly to excessive optimism; attacks on corporations, etc. Now, these causes are helf causes, but they are not fundamental. The fundamental cause of the present panic is the depreciation of gold. When gold is being produced in larger and larger quantities, we know that as compared with other products, its cost of produc- tion is declining more rapidly. This means that its value in exchange is falling. But gold, being the measure of all values, its price does not decline; the prices oi other things rise. When the prices oi other things are rising, there are great opportunities for specu- lation. Hence farseeing men will buy and hold non-perishable property. When a large proportion of the people try to live in this way there is trouble ahead. Speculation, if carried far enough, results in crises. Besides, depreciating gold and rising prices necessitate high rates for money and bring about decline in the prices of securities bearing fixed rates of income. This decline leads tO' much trouble in the financial and industrial world. It may in itself be sufficient to cause a crisis. 246 READINGS IN ECONOMIC PROBLEMS 145. The Extent of the Depression.* A few facts and figures will indicate the extent of the present industrial depression. Bank exchanges at all the leading cities of the United States were $2,073,910,424 for the week ending January 30, 1908, a decrease of 23.3% compared with the corresponding week of 1907, and 37.2% compared with the corresponding week of 1906. The decrease in New York and Philadelphia exceeded 28%, compared with 1906, and was greater than in any other cities. For the first two weeks of January, 1908, gross earnings of railroads were about 13% less than in 1907. For the last week in Decemher they were 15.52% below those of 1906. For the entire month of December gross earnings were 1.13%, while net earnings were 17.46% less than were those for December, 1906. Transactions of the New York stock exchange amounted to i6;634,8i7 shares, compared with 22,712,420 in January, 1907. The decline in the prices of commodities in the last few months has been about 10%. The sharp falling off in the net earnings of the United States Steel Corporation in the last quarter of 1907 show the remarkable decline in industry. The net earnings fell from $17,052,211, in Oc- tober, to $10,467,253, in November, and to $5,034,531, in December. This is a decline of over 70%. The unparalleled number of idle cars affords a barometer of our industrial condition. Today there are approximately 320,000 freight cars and 8,000 locomotives standing idle, representing an invest- ment of more than $400,000,000, and there are more than 30,000 unemployed trainmen. And yet three months ago there were not enough railroad cars to move the traffic of the country. The money market affords ,one of the best barometers of the great change that has come over the industrial situation. From a deficit of $54,103,600 on November 23, in the surplus reserves of the New York Associated Banks, there was a surplus of $40,626,725 on February i. From rates of 25% or more, last fall for call money, we now have rates of less than 2%. From rates of from 7 to 12% for time money last fall, we now have rates of from 4 to 4^ % on Stock Exchange collateral, and from 5 to 6% on commercial paper. The return of hoarded money and the slackening demand for money in industrial and c-ommercial operations are mainly responsible for this sudden transformation of the money market. Already gold exports have begun from this country. They may * This was published in Januar}^, 1908. THE CURRENCY PROBLEM 247 reach a considerable volume before next July. Money rates, how- ever, may be expected tO' remain about as at present. Money rates are being followed b}^ rising prices for bonds and other secure securities. During January the price of bonds rose about twice as much as the price of coiTimon stocks. Under existing conditions investors find bonds very attractive in view of the uncertainty of the situation. Many interior banks have put their idle funds in bonds on account of the comparatively high interest return they can secure by such a course. 146, Industrial Effects of the Crisis. Returns as to trade and industry in the month ending yesterday* are of lessened sales and smaller output as compared with a year ago. It is safe to say that estimates of shrinkages of 30 to 50% in sales and general turnover are not unreasonable. Iron output will probably be 50% below a year ago, though probably larger than in December. Shoe shipments are about 30% below January, 1907. Lumber and all kinds of building material are very quiet the country over. Coke production, though larger than in December, is easily 50% below the fullest capacity. Coal has been helped by cold weather, but is dull ; stocks have accumulated because of the past mild weather and of reduced industrial consumption, and there is talk of miners of bituminous being asked to take lower wages as an alternative to reducing production. There are widespread re- ports of large numbers of the ifnemployed in all sections of the countr}^, and some southern reports point to a return of idle city labor to the farms. I. REFORM OF THE CURRENCY. 147. Do We Need an Elastic Currency? BY F. M. TAYLOR. I have now shown the existence of variations in the need for money. I have shown, secondly, that harm results from these vari- ations when not accompanied by corresponding variations in supply. It remains to consider whether the presence of an elastic currency would prevent or dinninish this harm. It might, at first thought, seem that an affirmative answer to this question is already implied * January, 1908. 248 READINGS IN ECONOMIC PROBLEMS and demonstrated in the argumient that the harm in question results from discrepancy between the money need and the money supply. But, as a matter of fact, it is possible to contend that, even if the harm results from the inequality of need and supply, the remedy cannot be reached by manipulating the supply, but only by alter- ing in some way the need. To' borrow an analogy from another science, it is one thing to prove that a given poison, administered without an antidote, will kill a man, and quite another thing to prove that the antidote will save his life. Perhaps the only way to save his life is not to give him the poison at all. To' come back to our ov/n case, it must be admitted at once that any hope of removing altogether the evils we have been considering by the establishment O'f an elastic currency is in the highest degree chimerical. The changes in the need for money are often symptoms rather than causes of disease. To^ secure lasting benefit, the treatment must be deeper than any mere monetary reform. It is, however, possible to make out a pretty good case for the power of elasticity to miti- gate, at least, the evils we have considered. Let us begin with "emergency elasticity," the power to expand so as tO' meet the extraordinary need of a panic. Of course no one expects to increase the circulation rapidly enough fully to satisfy the demand which marks the acute stage of a panic. Such ex- pansion would, perhaps, be a physical impossibility. What the ad- vocates of elasticity do argue is, that if a scheme be provided where- by the public can be assured that practically unlimited supplies will be forthcoming — that all really urgent needs will be satisfied, then the public, thus assured, will immediately cease to feel any extra- ordinary need. It is hardly necessary to remark that this reasoning has been in a high degree confirmed from experience. England, as is well known, has furnished three crucial instances in the suspensions of the Bank Act in 1847, 1857 and 1866. The success of the device on those occasions is almost universally admitted. Again, as is also well known, the idea has been repeatedly tested by the United States Treasury through the prepayment of interest on the public debt and the buying in of bonds. That in several important instances these expedients gave great relief can scarcely be questioned. Our clearing-house loan certificates also illustrate the application of the same idea, and of their great value there can surely be no well founded doubt. Again, the Imperial Bank of Germany, as is well known, has the power of expanding its issue, though under penalty. Since the establishment of that bank in 1875, however, there has been no THB CURRENCY PROBLEM 249 opportunity to test thoroughly the efificiency of the elastic limit in stopping a panic or in mitigating its evils. But is it not reasonable to argue that that very fact is the best possible proof of the efficiency of the device? Consider what it means. Twenty years have passed, in which the United States has had one crisis of the first magnitude, a second of lesser significance, and, besides, a year of great strin- gency -and distress. During the same period England has once been saved only by the altogether exceptional action of the Rothchilds, the Bank of England, and the Bank of France. Yet in all this time, Germany has not experienced a monetary disturbance sufficiently serious tO' test the new scheme. On the whole, it is difficult to see how that scheme could have worked better. But again, experience furnishes some ground for the expec- tation that elasticit}^ will prove valuable in mitigating the evils of those fluctuations in money need which take place in ordinary times. The most important of those evils are traceable to the influence of excessive or deficient reserves on the rate of discount. The good, then, tO' be hoped for from an elastic currency is the prevention of any very considerable or sudden fluctuations in the discount rates. The reasonableness of this hope is more or less confirmed by the experience of various other nations. The case of Canada has re- peatedly been cited in recent years. According to all accounts, the people of the Dominion have from- experience no knowledge of the annual fall stringency with which our business men are painfully familiar. But Canada is a small community, and can scarcely fur- nish decisive evidence. Somie light, perhaps, may be obtained from a comparison of the loan markets of the chief European states. It is notorious that, as compared with London, the continental capitals maintain great steadiness in rates and are almost entirely free from disasterous "squeezes." This greater steadiness of the continental markets has been commonly explained as due to the insignificant development on the Continent of credit operations, the smaller dimensions of the market, the insignificant volume of speculation, etc. I doubt whether this explanation can any longer hold in a large degree. Certainly both France and Germany have experienced during the last twenty years great expansion at every point named. Further, so far as the use of credit in place of money is concerned, its greater extension in London tends to increase the danger of a panic, but does not operate to increase the fluctuations of the rates characteristic of ordinary times. On the contrary, the extreme elasticity of credit-media substitutes for money ought a priori to increase the steadiness of rates ; and, conversely, the greater dependence upon actual money 250 READINGS IN ECONOMIC PROBLEMS characteristic of the Continent would be expected to make the state of the money reserves more effective to cause fluctuations in the rates. Without elasticity, therefore, those markets would be ex- pected to show greater fluctuations. Doubtless something is to be attributed to the superior management of the continental banks ; yet here again it seems natural to argue that their power to furnish better management largely depends on the greater elasticity. As is well known, the Bank oi England keeps out its whole uncovered circulation all the time, and therefore has no power to expand or contract, save as it contracts or expands its reserves. The conti- nental banks, on the other hand, keep the circulation in constant flux, SO' that a change in the volumie of outstanding notes of from twenty to thirty millions of dollars in a single week is no uncommon occurrence. This is more especially true of the Bank of France. It surely is reasonable to argue that this highly elastic condition of the circulation is one cause of importance in explaining the superior steadiness of the continental markets. Finally, as to the matter of protecting the gold reserve of the country, is there any reasonable ground for doubting that a thor- oughly elastic currency would make this task more easy ? Admitting that the inflation of the currency has not been the cause of our recent exports of gold, admitting even that it has not in any consid- erable degree contributed to that export, still it cannot be seriously questioned that a contraction, such as would naturally have taken place in an elastic currency, would have done much to check the outflow of gold. If only the national bank-notes were genuinely elastic, their withdrawal from the country circulation and fromi the holdings oi the private and state banks would have made plenty of room for the Treasury notes and silver without filling New York's reserves to repletion. Or if the Treasury notes were issued on an elastic system then as soon as idle money began toi accumulate in New York after the panic, the notes would have been returned to the Treasury in exchange for low-rate bonds, the reserves would have remained at a reasonable level, rates oi discount would have been kept somewhere near normal, the Treasury receipts would have continued to be in a considerable measure gold, and there would not have been any such easily available supply of greenbacks with which to work the "endless chain" arrangement. With all these conditions established, I venture to afiirm that there would have been no gold export sufficient to arouse serious apprehension. But, in regard to this matter, we are not dependent on theory alone. Experience, also, has shown the efficiency of currency con- traction to check a gold movement. A single illustration on this THB CURRENCY PROBLEM 251 point from the recent history of the Bank of England will close this article. In the fall of 1892, the Bank found itself called upon to stop a gold export. The rate was raised as usual ; but the abun- dance of mouey in the city outside made the action of the Bank impotent to affect the open market rate. At this juncture, following a plan developed in recent years, the Bank began selling consols in order to drain off the surplus funds of the market. In the course of two weeks, about ten million dollars were absorbed in this way. The market quickly responded, the rate rising from about two per cent to three. In turn, the establishment of the higher rate was im- mediately followed by the practically complete cessation of the gold export. That contraction always has worked or always will work so well, no one would affirm; but, of its power to do much toward attaining the object sought, there is little room for reasonable doubt. 148. What America Can Learn from European Banking. BY A. PIATT ANDRe:,W. Already the contrast between American and European banking organization is beginning to be widely understood, and the arrange- ments are being discussed which differentiate banking in Europe from banking in America, and which help to explain why the great countries of Europe have been so free during the greater part of a century from the banking collapses with, which we are still afflicted. (i) The banks of all European countries present a much more coherent organization than our own. In nO' other country has in- dividualism is banking gone so far as in the United States, with its 25,000 banking institutions, each acting for itself and without any organic relation with the rest. In ever}^ other country there is some sort of an institution which forms a common bond between the banks, which, because of its preponderant capital and resources, its relations to the government or its peculiar privileges, is able tO' render peculiar services for them and which exerts a controlling influence over their activities. It holds their reserves; it clears their mutual accounts not only within the same city, but between different cities ; it furnishes an ever-ready and unfailing market for their best commercial paper, very much as the stock exchanges furnish a market for stocks and bonds. When credit expands too actively at certain times or in certain places its influence is directed to impeding the adA'^ance. If, on the other hand, on account of catas- trophes or contingencies which could not have been foreseen, the banks in a given locality find themselves in difficulties, it renders 252 READINGS IN ECONOMIC PROBLEMS assistance until the strain is relaxed and confidence restored. In every case they perform an important fimction in providing at all times facilities for the exchange of money and credit between differ- ent localities, thus rendering impossible such cessations of domestic exchange as are frequently witnessed in the United States. In every case they serve as depositories for the greater part of the reserves of the banks, thus economizing and rendering effective the other- wise idle cash of the individual banks in the same way that those individual banks render active and eff'ective the cash which would otherwise lie idle and useless in the pockets or safes of their cus- tomers. By thus furnishing an immense reservoir of available money these European institutions provide their communities with vast resources of lending power to which resort can be made in moments of pressure or disturbance. Finally, these institutions, through the practice of rediscount, furnish to the banks an agency for making available in times O'f need those sterling assets in the form of first-class commercial paper, which in the United States at such times can find no market and can only be translated into cash when they mature. (2) In the general treatment of reserves the banking arrange- ments of European countries differ fundamentally from, our own. Their reserves are far more available, mobile and alive. Our national banking law differs from the banking laws of all other countries in requiring a proportionate minimum of cash to be held in useless and inviolate idleness against all deposits. This rigid and unreasonable requirement has been copied in greater or less degree in the bank- ing laws of our states, but it has no counterpart elsewhere in the world. It fixes an uncompromising limit to the expansion of loans and discounts, prevents the banks from extending their credit when it is most needed and desei'ved, and sO' inhibits the reserves of the banks from really serving as reserves. The reserves of European banks are much more effective than our own, however, for the further reason, to which allusion has already been made, that in European countries most oi the cash aside from the till money is left in the custody of the central institution, and can therefore be better administered to serve the fluctuating demands of particular seasons and different localities than it possibly could be when in the custody of thousands of separate firms. Moreover, as the banks in those countries are accustomed to- consider the balances held for them by their central institutions as equivalent tO' cash actually held in their own vaults, when a bank requires larger reserves be- cause of increasinsf credit demands it can easilv effect such increases THE CURRENCY PROBLEM 253 by transferring to the central institution some of its commercial paper or bills receivable in exchange for an increased balance upon the books of the central institution. The reserves of European banks are thus peculiarly mobile, not only because the law pre- scribes no rigid minimum, but because they are consolidated, and above all because the banks are able at any time within reasonable limits to transform any solvent assets into available reserve funds. (3) Another respect in which the drift of the world's banking legislation has been in a different direction from that of this country concerns the matter of note issue. The tendency of note issue regu- lations in every other country is toward concentration in its con- trol. In France the Bank of France for more than sixty years has been the sole note-issuing institution; in England the Bank of England has for decades issued all but a fraction of one per cent of the outstanding notes ; in German}^ there remain only four note- issuing banks aside from the Reichsbank ; while within quite recent years in Italy, Switzerland, Sweden, and Japan the note issue priv- ilege has likewise tended toi be placed in the hands of a single insti- tution. The importance of the question of note issue has, doubt- less, been much exaggerated in most countries and with the modern development of deposit banking and the greatly preponderant use of checks in making payments, the question of the proper regulation of the issue privilege, which was formerly the principal problem in banking legislation, bas ceased to have the importance which it used to command. Nevertheless, the coincidence of the world's experi- ence in the treatment of note issues is too complete to be accidental and without significance. It seems to suggest that concentration in note control offers better opportunities than decentralized control for adaptation of currency supply to currency demand, for strong control over credit expansion, and for wise and immediate relief in times of emergency or unsettlement. It would, of course, be preposterous to suppose that we in Amer- ica can solve our banking problem in the same way that any other country has solved it. It would be equally unreasonable in seeking a solution for our own difficulties to overlook those arrangements which belong to the banking systems of all other countries and which are absent from our own. In view of our continued prone- ness to financial troubles and the striking contrast of Europe's long- standing immunity f ro^m them, it is only reasonable that we should carefully examine such features as are common to^ the banking sys- tems of all other countries and as we lack, and that we should con- sider the possibility of devising a plan for equipping our own bank- 254 READINGS IN BCONOMIC PROBLEMS ing system with the most vahnable of these features. In doing so we are only limited by the consideration that any proposed changes must be thoroughly consistent with, and must naturally grow out of, our own peculiar traditions and conditions. 149. Currency Reform and Concentration of Credit. BY the; PUJO COMMITTET!;. We are not unmindful of the important and valuable part that the gentlemen who dominate this inner group and their allies have played in the development of our prosperity. There should be no dispositioin to hamper their activities if a situation can be brought about where their capital, prestige, and connections can be inde- pendently employed in free and open competition. Without the aid of their invaluable enterprise and initiative and their credit and financial power the money requirements of our vast ventures could not have been financed in the past, and mudi less so in the future. It is also recognized that co-operation between them is fre- quently valuable, and often essential tO' the public interest as well as their own, in order to permit of the furnishing or guaranteeing of the requirements of our vast enterprises of the present day and O'f the still larger ones that are probably in store for us. But these considerations do not involve their taking control of the resources of our financial institutions or of the savings of the people in our life insurance companies nor that they shall be able to levy tribute upon every large enterprise ; nor that commercial credits or stock exchange markets and values shall wait upon their beck and call. Other countries finance enterprises quite as important as our own without employing these methods. Far more dangerous than all that has happened tO' us in the past in the way of elimination of competition in industry is the control of credit through the domination of these groups over our banks and industries. It means that there can be no hope of revived competi- tion and no new ventures on a scale commensurate with the needs of modern commerce or that could live against existing combinations, without the consent of those who' dominate these sources of credit. A banking house that has organized a great industrial or railway combination, or that has offerd its securities to the public, is repre- sented on the board of directors and acts as its fiscal agent, thereby assumes a certain guardianship over the corporation. In the ratio in which that corporation succeeds or fails the prestige of the bank- ing house and its capacity for absorbing and distributing future THE CURRENCY PROBLEM 255 issues of securities is affected. If competition is threatened it is manifestly the duty oi the bankers from their point of view of the protection of the stockholders, as distinguished from the standpoint of the public, to prevent it if possible. If they control the sources of credit they can furnish such protection. It is this element in the situation that unless checked is likely to do more to prevent the restoration of competition than all other conditions combined. This power standing- between the trusts and the economic forces of com- petition is the factor most to be dreaded and guarded against by the advocates of revived competition. Mr. Morgan was unable to name an instance in the past 10 years in which there had been any railroad building in competition with any of the existing systems. He attributed it to the restrictions of the Interstate Commerce Commission. The fact is, however, as we all know, that railroad construction is constantly being prose- cuted — necessarily so with out rapidly growing population — but that instead of being done independently as foniierly it is now done by the great systemis. It is impossible that there should be competition, with all the facilities for raising money or selling large issues of bonds in the hands of these few bankers and their partners and allies, who^ to- gether dominate the financial policies of most of the existing systems. There never will be, until this combination or community of inter- est can be dissolved by either closing to them the vaults of the banks, life insurance companies, and other trustees of other people's money, or by opening them to meritorious competing enterprises. Mr. Baker, when upon the witness stand, was unable tO' name a single issue of as much as $10,000,000 of any security, either in the railroad or industrial world, that had been made within 10 years without the participation or co-operation of one of the members of this small group. He subsequently wrote naming only the case of a single issue of $13,500,000. It was proved as to this instance by the notice issued to stockholders that Morgan & Co. were in fact largely interested and received a part of the profits from the issue. Yet it appears that within six years the joint account transactions of that group in public issues alone amounted to over three billion dollars, of which a $10,000,000 issue would have been less than one-third of one per cent. Issues of securities of local or small enterprises requiring moder- ate sums of money are frequently financed without the co-operation of these gentlemen; but from what we have learned of existing conditions in finance and of the vast ramifications of this group 256 READINGS IN ECONOMIC PROBLEMS throughout the country and in foreign countries we are satisfied that their influence is sufficiently potent to prevent the financing of any enterprise in any part of the country requiring $10,000,000 or over, of which for reasons satisfactory to themselves they do not approve. Therein lies the peril of this money power tO' our progress, far greater than the con:ybined danger of all existing combinations. The latter may at last fall of their own weight, especially if de- prived of the protection and support against competition referred to, or they may be disintegrated as unlawful. The men who established our great industries have added to the prO'Sperity of the country during the period of the upbuilding of these industries ; but they none the less violated the law when they reversed the processes under which the country had grown and prospered by combining to throttle the competition upon which they had thrived. Whilst they were struggling against one another for supremacy they were a valuable asset to the country; since they have pursued the opposite policy they have become a menace. The gentlemen constituting this inner circle have, however, vio- lated no law in what they have done, so far as we are able to gather ; but that is rather because of the loose, intangible character of this recently developed community of interests and because the law as yet has not properly safeguarded the community against this form oif control. The acts of this inner group, as here described, have nevertheless been more destructive of competition than anything accomplished by the trusts, for they strike at the verj^ vitals of potential compe- tition in every industry that is under their protection, a condition which, if permitted to continue, will render impossible all attempts to restore normal competitive conditions in the industrial world. It accordingly behooves us to see to it that the bankers who^ re- quire and are bidding for the money held by our banks, trust com- panies, and life insurance companies to use in their ventures are not permitted to control and utilize these funds as though they were their own. If the arteries of credit, now clogged well-nigh to chocking by the obstructions created through the control of these groups, are opened so that they may be permitted freely to play their important part in the financial system, competition in large enterprises will be- come possible and business can be conducted on its merits instead Oif being subject to the tribute and the good will of this handful of self-constituted trustees of the national prosperity. THE CURRENCY PROBLEM 257 150. The Defects in the Present Banking System. EY THE NATIONAL MONETARY COMMISSION. The principal defects in our banking system we believe may be smiimarized as follows : 1. We have vco provision for the concentration of the cash re- serves of the banks and for their mobilization and use wherever needed in times of trouble. Experience has shown that the scat- tered cash reserves of our banks are inadequate for purposes O'f as- sistance or defense at such times. 2. Antiquated Federal and State laws restrict the use of bank reserves and prohibit the lending power of banks at times when, in the presence of unusual demands, reserves should be freely used and credit liberally extended to all deserving customers. 3. Our banks also lack adequate means available for use at any time to replenish their reserves or increase their loaning powers when necessary to meet normal or unusual demands. 4. Of our various forms of currency the bank-note issue is the only one which we might expect to respond to the changing needs of business by automatic expansion and contraction, but this issue is deprived of all such qualities by the fact that its volume is largely dependent upon the amount and price of United States bonds. 5. We lack means to insure such effective co-operation on the part of banks as is necessary tO' protect their own and the public interests in times of stress or crisis. There is no co-operation of any kind among banks outside the clearing-house cities. While clearing-house organizations of banks have been able to render valu- able services within a limited sphere for local communities, the lack of means to secure their co-operation or affiliation in broader fields makes it impossible to use these or similar local agencies to prevent panics or avert calamitous disturbances affecting the country at large. These organizations have, in fact, never been able to pre- vent the suspension oi cash payments by financial institutions in their own localities in cases of emergency. 6. We have no effective agency covering the entire country which affords necessary facilities for making domestic exchanges between different localities and sections, or which can prevent dis- astrous disruption of all such exchanges in times of serious trouble. 7. We have no instrumentality that can deal effectively with the broad questions which, from an international standpoint, affect the credit and status of the United States as one of the great financial powers of the world. In times of threatened trouble or of actual panic these questions, which involve the course of foreign exchange 258 READINGS IN BCONOMIC PROBLEMS and the international movements oi gold, are even more important to us from a national than from an international standpoint. 8. The lack of commercial paper of an established standard, issued for agricultural, industrial, and commercial purposes, avail- able for investments by banks, leads toi an unhealthy congestion of loanable funds in great centers and hinders the development of the productive forces of the country. 9. The narrow character of our discount market, with its lim- ited range of safe and profitable investments for banks, results in sending the surplus money of all sections, in excess of reserves and local demands, to New York, where it is usually loaned out on call on Stock Exchange securities, tending to promote dangerous specu- lation and inevitably leading to injurious disturbances in reserves. This concentration of surplus money and available funds in New York imposes upon the managers oi the banks of that city the vast responsibilities which are inherent in the control of a large propor- tion of the banking resources of the country. 10. The absence of a broad discount market in our system^ taken together with the restrictive treatment of reserves, creates, at times when serious financial disturbances are anticipated, a condition of dependence on the part of individual banks throughout the coun- try, and at the same time places the farmers and others engaged in productive industries at a great disadvantage in securing the credit they require for the growth, retention, and distribution of their products. IT. There is a marked lack of equality in credit facilities be- tween difi^erent sections of the country, reflected in less favored communities, in retarded development, and great disparity in rates of discount. 12. Our system lacks an agency whose influence can be made eft"ective in securing greater unifomiity, steadiness and unreason- ableness of rates of discount in all parts of the country. 13. We have no effective agency that can surely provide ade- quate banking facilities for different regions promptly and on reasonable terms to meet the ordinary or unusual demands for credit or currency necessary for moving crops or for other legiti- mate purposes. 14. We have nO' power tO' enforce the adoption of uniform standards with regard to capital, reserves, examinations and the character and publicity of reports of all banks in the different sec- tions of the country. 15. We have no American banking institutions in foreign coun- THB CURRENCY PROBLBM 259 tries. The organization of such banks is necessary for the develp- ment of our foreign trade. 16. The provision that national banks shall not make loans upon real estate restricts their power to serve farmers and other borrowers in rural communities. 17. The provision of law under which the Government acts as custodian of its own funds results in irregular withdrawals of money from circulation and bank reserves in periods of excessive Govern- ment revenues, and in the return of these funds into circulation only in periods of deficient revenues. Recent efforts to modify the Independent Treasury system by a partial distribution of the public moneys among national banks have resulted, it is charged, in dis- crimination and favoritism in the treatment of different banks. There is a general agreement among intelligent students of the subject that to remedy these and other defects it is necessary to provide a comprehensive reorganization of credit and a thorough reconstruction of our banking systems and methods. J. AGRICULTURAL CREDIT. 151. The High Cost of Farming. BY B. F. YOAKUM. All economists agree that today, in this country as well as in every other country where civilization has become complex, the greatest problem before the administration and the greatest task before the individual is to stop the long-continued rise in the co'St of living. Food and clothing, the fundamentals of life, cost more and more each year. Men who^ a few years ago were relatively prosperous on limited incomes find themselves today unable to maintain even the decencies, let alone the luxuries, of modern life. Of all the causes of the high cost of living that have come di- rectly under my observation and that have forced themselves into my problems as a railroad man, the paramount cause is the excessive burden of interest charges laid upon the agricultural producers of the country because of inadequate money-lending facilities in this country. Cheaper money for the farmer is the first of our agricultural problems. When you come to talk of agricultural borrowing, you have to come down to talk in terms of the "one-bale farm." The farm of 80 to 160 acres, tilled and worked to its limit, is the real agricultural unit. Therefore, the fundamental question in farm 26o READINGS IN ECONOMIC PROBLEMS money is the question whether the individual farmer, owning and operating his own land, is supplied with capital at reasonable rates or whether he is stinted in capital and gouged in his interest account. Let us get down to figures taken from the best data available. They have been made by drawing upon the government census re- ports covering property operated by its owners, and by collecting opinions from the well informed. By my estimate, prepared in this way, the American farmer is indebted today in these amounts : Farm mortgages on land operated by owners — United States Census figures $1,726,000,000. Mortgages on tenant farms, at same rate per acre as above, estimates 1,320,000,000. Average amount of current loans to farmers, on account of crops, chattels, etc 3,000,000,000. $6,046,000,000. This estimate shows that the farmer's debt is about half on ac- count of fixed capital — mostly mortgage loans — and half on account of current loans. The total number of farms in the country is about 6,000,000. Therefore, the average farm has a mortgage debt of $500 and a current debt of about the same amount outstanding against it. The rate of interest paid on this tremendous volume of borrowed capital is, according to the best estimates I can find, between 8 and 9 per cent per annum,. The actual rate of interest itself is only a part of the burden of borrowing. To it must be added the constant drain of renewals for mortgages on farms, of loans, fees for record- ing mortgages, and other loans to farmers, most of whic'h are made on short term, and commission fees and compulsory insurance on re- newals. Fromi all I have been able to gather from the best available sources, I estimate, that an average rate paid by our farmers is 8^ per cent per annum, which is a conservative estimate of the full cost paid on farm money used in the financing and capitalization of the farms of the United States. The annual interest bill, therefore, paid by the farmers, is about $510,000,000. The total value of the wheat crop of the United States as of December i, 191 1, farm value, was $543,000,000. Prac- tically, the interest account of the fanners ate up the total wheat crop of the entire country. Let us see by comparison with other borrowing rates in thfs country if a discrepancy may be observed. In normal times, it is only a decrepit or unsound sort of factory that has tO' pay such a rate as that for money. Manufacturers usually borrow, for capital THB CURRBNCY PRO BLUM 261 account, on long term bonds and mortgage, and if the times are right the average fairly successful manufacturing company can get its needed capital at a gross rate around 6 per cent. The companies manufacturing for farmers' consumption raise what money they need at not much more than 5 per cent per annum. The manufacturer borrows against his piles of textile goods, of copper ingots, of steel bars, of hmiber stored at the saw mills, and almost any sort of manufactured products, at a rate not much more than half the rate charged against the farmer, with his best of col- lateral in the shape of wheat, corn, cotton and other products. No thinking man, looking the facts fairly in the face, believes that the rate to- the farmers is a just and reasonable interest rate. He pays far too much, both for the money he gets on mortgage and for the money he borrows to malce his crop. He has the finest security for current loans there is in the world, namely, products that go into immediate consumption and that sell, in all the markets of the world, every hour of the day ; yet he pays a rate double the rate paid by manufacturers of industrial products that have to be marketed with great skill, often on a treacherous and delicate market. No one contends that a thousand dollars' worth of women's dress goods is as good collateral, fro-m a standpoint of market- ability, solidity of value, or freedom from depreciation, as an equal value in wheat, or corn, or cotton. The only reason is that the bor- rower in the one case is a merchant or a manufacturer — a member of an organized trade — while the borrower in the other case is a farmer, a man who works by himself and buys and sells and bor- rows on his own hook, under an unorganized custom. We take it for granted that in productive power, in character, and in ability, the American farmers, as a class, are equal to the farmers of any other land. Broadly speaking, therefore, there is no good economic reason why, having equal assets and equal character, they s'bould not borrow on mortgage and growing crops at as good a rate of interest as the fanners of any other country in the world. Having this premise in mind, let us discover what the farmers of other countries, as advanced in civilization as the United States, pay for their money borrowed on mortgage and for their temporary demands. Germany is, in a sense, an agricultural nation. A generation ago, the German farmer was a very poor man, perhaps next, as a class, in the scale of poverty, to the men who live in the city slums. Nowadays, on the contrary, the small German farmer is a prosperous citizen, with money in the bank, and with ample credit to carry on all the activities of which he is capable. We find that he borrows 262 READINGS IN ECONOMIC PROBLEMS from an association of land credit, organized under its class name, Landschaften, or Ritterschaften. Under these systems the farmers, in a certain territory, form^ into- co-operative societies, syndicating their farm lands under negotiable bonds which are offered jointly as security for the credit they need. The individual then borrows from this co-operative society. It is just as though all the small farms in a Texas county, nO' one of which is more than i6o acres^ were pooled into one great society which borrowed on a single bond against all this property, and then lent to- any individual farmers forming this pool as they needed money on mortgage. These Ger- man farmers obtain the money that they need on mortgage at a rate never exceeding 5 per cent gross and averaging around 4.40 per cent. In Paris, there is a great institution called the Credit Foncier, which really makes the rate on farm mortgage loans in France. The society started with Government support, but has not since needed Government help, and, up to the present time, the loans to the people have totaled more than twO' billion dollars. The amount lent by this society is generally one-half of the appraised valuation. The in- terest rate varies but is always less than 5 per cent. At the present time it is 4.30 per cent. In other words the French farmers are get- ting money at one-half the rate of interest the American farmer pays. The loans, moreover, are made from ten to seventy-five years, and are retired in very small installments year by year. If a farmer prefers, however, he miay boTrow on short time loans running froan ' one to nine years without paying off any of the principal year by year. If a farmer wishes to build on his land, he can obtain through the Credit Foncier a mortgage credit based on the value of the land and the building to be put up. This is temporary ac- commodation, and when the building is completed, its cost can be added to the loan. It would be possible to adduce a dozen other similar systems ; but these two stand out so- prominently in any study of mortgage lend- ing institutions that it is enough to cite their records and their ac- complishments and consider them as illustrations of maximum efficiency and minimum cost in providing mortgage money to a farming nation. It will be observed that the money in the German system is raised by making a bond on the joint assets of all the farmers in a certain community. In the French system, the money is raised from the people by issuing the bonds of the Credit Foncier itself in convenient units for private investment, with the result that the investors of France supply an abundant flood of permanent cap- ital to the farmers. These two^ systems, while different in detail, are THE CURRENCY PROBLEM 263 similar in principle. They give to- the individual investor the power to buy a divided interest in a mortgage on the best security in the country, namely, the producing farm. In France this sound and sensible principle has done more perhaps than any one factor to raake the whole nation a nation oi investors. The loans of the Credit Foncier are always oversubscribed by the public. Having glanced at these two monumental examples of efficiency in lending on farm mortgage, I pass on to consider the other branch of farm financing, namely, the borrowing of money against current needs, to plant the fields, to- buy equipment, tO' start the farm, to harvest the crops, and tO' carry the crops when harvested. These necessary and inevitable functions of farm; life recpire an average of three billion dollars of current loans to American farmers year by year. We have estimated an average rate of 8^^ per cent as the rate paid by American farmers for this accommodation. Let us see what is the average rate paid by German, French and Italian farmers for the same accoinmodation. In working out the answer to- this cpiestion, one encounters in Germany, France and Italy, as well as in other countries on a similar scale, one of the most interesting and illuminating records that can be conceived. It is the story of the rural banks, so-called. In the German Empire, in 1909, under the purely rural system, about 12,000 little country banks did a business of approximately $1,634,000,000 at an average interest rate of less than 5 per cent, A very large part of this lending was done on current account, much of it without any security except the promise to pay. That is the concrete statement of the business as it exists today. This Raififeisen system was not evolved in a day. It has been a system of slow and steady" growth. It had its inception in pressing needs of a scattered agricultural population and it has developed as years have passed, until today it can probably be cited as the most complete and efficient system known in the world for the supplying of current funds to the greatest producing element in the country. It is more than sixty years since it was founded, and in that time there has not been a single instance of a failure of a Raififeisen bank. It is worth while, therefore, to summarize the story oi the Raififeisen banks from their beginning. In the middle of the last century, the agricultural regions of Germany had fallen into a most deplorable condition. The lending of money to the argiculturists had been taken almost entirely into the hands of usurers. Inevitably agriculture languished under this tremendous tax. Thousands of rich little farms passed out of the hands of their former owners under foreclosure of burdensome 264 READINGS IN ECONOMIC PROBLEMS debts. Famine followed very naturally. In 1847, '^^ one of the little peasant villages of the Rhine Valley, the new! order of things began. A man named Frederick Raiffeisen, the mayor of several villages, stepped in to call a halt to usury. At first, he merely took his stand in the market place and traded for the account of his peo- ple with the middlemen who^ would despoil them. Later on, he took more practical steps. The first was to found a little organization oi the wealthier men, who bought up cattle and stores and sold them, at fair profits, to the people. From that the next step was easy. It was taken fourteen years after the first intervention. At Anhausen, Raiffeisen founded a society in which the farmers themselves supplied the money, whidh, in turn, was lent out at rea- sonable rates to the people who jieeded it. From that little begin- ning the spread O'f the Raiffeisen banl<;ing system across the conti- nent of Europe was one of the marvels of banking history. At the present time, there is a Federation of German Agricul- tural Societies, numbering more than 19,000 farmers' banks, and in- cluding in its membership more than 1,750,000 farmers. It is an agricultural mone}^ trust, the object of which is to see tO' it that the farmer gets his money when he needs it and at rates that are com- mensurate with his security. Germany was not alone in using this system. Italy followed with- in a very few years of the opening of the first Raiffeisen Bank of Anhausen. Switzerland and Belgium took the central idea of coop- eration, but worked it somewhat differently. Ireland, India, Eng- land, and Denmark have studied these same matters and adopted so much of the principle and practice of the cooperative agricultural bank as is needed. Still later, indeed within the very recent past, Quebec and Massachusetts have carried on small experiments along the same lines, but with slight success so far. We have found the one cardinal fact that we set out to find. We have discovered that the German, the French, the Italian, the Irish, the Danis'h, and even the Egyptian and Hindoostanee farmer borrows on current account against his crops, his equipm'ent, and even his chattels at a rate of interest 5 per cent per annum or less. The American farmer, on the contrary, pays an average of 8^ per cent, while in some of our newer states the average will run to more than 10 per cent. Let us turn back now, and complete the summary with which we started out. We find the American farmer borrowing 6 Billion Dollars at an average rate of 8^4 per cent and paying an interest bill every year of 510 Million Dollars. We find the farmers of other lands where agricultural credit is organized pledging the same THE CURRENCY PROBLEM 265 sort of assets under similar loans and paying an average of less than 5 per cent. For the sake O'f rounding out the argument on a conservative basis, let us take 5 per cent as the basis. The differ- ence between 5 per cent and 8}^ per cent on 6 Billion Dollars is 210 Million Dollars a year. That is the undue interest tax paid every year by the American farmer because he has no organized machinery to supply him with the capital he needs and nO' encour- agement from the Government at Washington, D. C. I do not say that any credit system can be adopted and put into immediate operation which would save 200 Million Dollars a year to the farmers of this nation. What I do say is that the develop- ment of our American agricultural sections, more particularly of our Southwest — naturally a land of small farms and intensive growth — cannot reach its full strength or work out to anything approximating its final destiny until such time as there has been provided a new system of farmi finance that will give tO' the small farmer ample opportunity to borrow on a business basis both against his farm and against his crops and other current assets. 152. Agricultural Credit in the United States. BY E. W. KEMMERE^R. If the time is ripe for a greater use of bank credit in agriculture, how is that credit tO' be obtained? Broadly speaking four methods may be mentioned, only the last two of which are deserving of much attention at the present time. They are: (i) Establish govern- ment agricultural banks; (2) Adopt the Egyptian plan of a gov- ernment guaranty to an agricultural bank established with private capital; (3) Encourage the farmers to organize cooperative credit societies on some such plan as the Raiffeisen or Schulze-Delitzsch banks of Germany; (4) Utilize more effectively in the interest of the farmer our present banking machinery, and improve it where it is defective. Although the success of cooperative banks has been great in nearly every country of Continental Europe nowhere else has it been so great as in Germany, the country of their origin, and it is to Germany one naturally turns first for suggestions. There we find four types of cooperative credit banks, Landschaften, Ritter- schaften, Schulze-Delitzsch banks, and Raiffeisen banks. The first two are cooperative associations loaning money on land mortgages. The other two types of banks deal especially with short-time credit, the one chiefly in the towns and cities, and the other with farmers 266 READINGS IN ECONOMIC PROBLEMS in the rural communities. It is with the latter that we are most concerned. Let us therefore consider briefly the essential features of the Raiffeisen system. These features are: (i) Organization on the strictly cooperative principle, none but members having the right to borrow, although non-members may enter deposits. (2) Limitation O'f loan operations to a very small area in which all farmers are acquainted with each other. The banks were tO' be, therefore, purely neighborhood affairs. (3) Unlimited liability of all members for the debts of the bank, a necessary corollary of which is the provision that member- ship is obtained only by election by those already members. (4) The working capital of the bank is obtained chiefly from the following sources: (a) Small savings "drawn, either from within the area covered by the bank, in which case it comes both from members and non-members, the former being rewarded where possible at slightly higher rates in order to encourage member- ship; or from without the area, in which case it of necessity comes from non-members." (b) Loans from the provincial bank of the district, or more importantly from the central bank of the Empire, at which the local bank keeps a current account and with which it may rediscount its paper. (c) A purely nominal share capital which the banks did not originally have, and which they have been forced against their will to issue. The requirement is now usually met by the issue of a few low-priced shares of which no miember can hold more than one and upon which no dividend is paid, (d) Two surplus funds called reserve funds; one used exclusively to cover losses, and the other being the principal reserve fund, com^ monly used for "positive improvements." In this fund m.ust be placed two-thirds of the annual profits. The fund cannot be dis- tributed among the members, even though the bank be dissolved. In such a case it is held in trust for a time for a new bank, should one be established, and if no such bank is established it must be used for some work of public utility. (5) A fifth feature of the Raiffeisen system is that the bank's administrative organization is simple and democratic. Final author- ity on local questions resides in the general meeting in which every member has one vote. There is elected annually a committee of management consisting usually of five or six directors who meet weekly. As a check upon this executive committee there is also elected annually a council of supervision of from six to nine mem- bers. A biennial audit is made of the accounts of each bank by an THE CURRENCY PROBLEM 267 accountant employed by the district or central union. The books of the bank, except the individual deposit ledger, are open to- the inspection of all members. Officers of the local banks serve with- out compensation, except the treasurer who has no vote in the mak- ing of loans. (6) Advances take two forms: the ordinary loan and the cur- rent account. The period of the ordinary loan varies from six months to three years. Loans are repayable in instalments cover- ing interest and part of the principal, or in lump sums. Banks re- serve the right tO' call a loan on four weeks' notice. The average credit advanced per member is 500 marks, and the average interest rate probably somewhere between four and five per cent. Although mortgage and other collateral security is sometimes accepted, the banks' chief reliance is personal security, and the great bulk of the loans are made on two-name paper. The Raiffeisen banks are organized into provincial federations with provincial banks at their head, and these in turn into a national federation with a central bank at its head. These provincial banks and the central bank "equalize the need of credit of the individual banks, supplying them with money when required and employing their surplus funds." A large proportion of the German coopera- tive banks and other cooperative agricultural societies are federated in a single national oirganization. Such are the leading features O'f the greatest agricultural credit system of the world. To the American the surprising thing about it all is that such cooperative credit banks are practically unknown in the United States. What is needed now is a campaign of educa- tion among the farmers themiselves rather than one of legislation ; although the development of such societies will doubtless be fur- thered in many states by legislation, such as was recently enacted in Massachusetts, freeing them from some of the hampering pro- visions of the general banking act of the state. Conditions are so widely different in different sections of the country, and among different classes in the same section, that cooperative agricultural credit societies will need to be given a fairly free hand in such mat- ters as limited or unlimited liability, the amount of share capital, receipt of deposits, etc., so that they may adapt themselves to local needs. A reasonable amount of government supervision on the part of the banking departments of the states seems desirable. Passing now to the question of the better utilization of our existing banking machinery, we may consider it first from the standpoint of the government, then from that of the banks, and finally from that of the farmers themselves. 268 READINGS IN ECONOMIC PROBLEMS The provisions of the national banking act are too rigid in the matter of loans on real estate security. National banks are, of course, intended to be banks for business men, and their assets should be quick assets in so far as their liabilities are quick liabili- ties. But it should not be overlooked that the modern farmer is a business man, that he needs active credit for the efficient conduct of his current business, and that land is the only kind of collateral many farmers can give that is acceptable to bankers. Many worthy farmers are not willing and some are not able tO' secure satisfactory endorsers to their paper. The ability of the farmer to give mort- gage security tO' national banks in case of need would often prove a great help. Furthermore, now that a majority of our national banks have savings departmients, and that savings deposits, might wisely be made withdrawable subject to advance notice, it is not unreasonable that these banks should be permitted to invest at least a substantial part of their savings funds in the same kinds of mort- gage securities that are open to the investment of funds of savings banks. Another form of desirable legislation consists in the abandon- ment of our unscientific bond secured bank-note circulation for a scientific system, and in the rendering of our deposit ctirrency more elastic. The more the fanner resorts tO' bank credit as a means of financing his current business the more will he suffer from the sea- sonal inelasticity of our bank-note and deposit currency. Farming business is preeminently seasonal in character; the farmers over the greater part of the country need funds most at about the same times of the year, i. e., the fall and spring. A great increase in the demand for currency and capital, say in the fall, under an inelastic currency and credit system like our O'wn, means to the farmer, highest interest rates at just the time when he needs most to bor- row, greatest scarcity of cash at just the time when his need for cash is the most urgent, and prices depressed by a tight money market at the time of the year when he has most to sell. It is doubt- ful if any class of people in the country would benefit more from a thoroughgoing reform' of our banking system than would the farmers. The banker must be brought tO' realize that one of the best kinds of paper in the world is short-time business paper bearing the names of two responsible farmers. He should be an adviser and friend to the farmer as much as to the city customer. He should make the farmer feel that a productive loan to him is not oi the nature of a favor reluctantly granted — as so many farmers complain — but rather a business proposition profitable to both,^as gladly given as THB CURRENCY PROBLEM 269 it is received. He should further cooperate with the local business men in preparing financial ratings of farmers, to fill the gap left by the inability of mercantile credit agencies to rate farmers as extensively as they do other business men of like capital. ■ The farmer, on the other hand, must be educated by the banker, the press, and the agricultural school and college, to the advantages of credit as a means to the more efficient working of his farm. This should be done with caution for credit is a two-edged sword. The farmer should be encouraged tO' borrow only when it is very clear that he can use additional capital so productively that it will pay. But v/hat industrious farmer could not use profitably some addi- tional capital every year, could he obtain it at as reasonable rates as does the inerchant? The farmer must learn to keep careful ac- counts. He miist be made to realize that the banks are open to him as to other business men, and that the bulk of the country's short- time commercial loans, as likewise of the agricultural loans of Eu- rope, are made on the very same security he is capable of giving, i. e., two-name paper of honest, industrious business men. VI. THE PROBLEM OF RAILROAD RATES AND REGULATION. A. THE FUNDAMENTAL FACTORS IN THE RAILROAD PROBLEM. 153. The Extent of American Railway Interests. BY I. IvEO SHARFMAN. A discussion of the problems of railway regulation in the United States may well begin with a statement of the extent of the railway interests to be regulated. Some conception may be obtained of the magnitude of these railway interests by a consideration of the extent of mileage, the amO'Unt of equipment, the number of employ- ees engaged in the service, the amount of outstanding securities representing capital invested, the number of passengers and tons of freight carried, the revenues accruing from the service, the ex- penditures involved in rendering it, and the earnings distributed annually as a result of railway enterprise. There are more than 250,000 miles of line in the United States, representing only single track mileage. If we include the length of second, third, and fourth tracks, and the mileage of yard tracks and sidings, the total mileage operated in the United States in 1910 was 351,767. The figures for equipment are equally stupendous. There were 58,947 loco- motives and 2,290,331 cars devoted tO' the service rendered by Amer- ican railways. The number of employees was 1,699,420 — ^the larg- est number of wage-earners engaged in any single American in- dustry wnth the exception of agriculture. The outstanding securi- ties amounted to $18,417,132,238, representing an investment in rail- way transportation which is likewise second only to agriculture. The number of passengers carried during the year 1910, earning revenue for the railroads, was 971,683,199; the number of tons of freight carried during the same year, earning revenue for the rail- roads was, 1,849,900,101. If we take distance into consideration and determine the number of passengers and the number of tons of freight carried one mile, the figures become so large as to pass beyond human conception. The number of passengers carried one mile was 32,338,496,329, and the number of tons of freight carried RAILROAD RATES AND REGULATION 271 one mile was 255,016,910,451. The revenues from operation amount- ed to $2,750,667,435 ; the operating expenditures were $1,822,630,- 433 ; and the earnings actually distributed as dividends during this single year amounted to $293,836,863. The immensity of these fig- ures must be apparent to every one, and no further comment is necessary to indicate the vast extent of American railway interests. 154. The Public Nature of the Railroad Business. BY WALTER CHADWICK N0'YE:S. A railroad corporation is of a dual nature. The State grants to it the right of eminent domain — the power to' condemn for its way and structures — for the public benefit. In accepting its charter it assumes obligations tO' the public and, within constitutional limits, becomes subject to State regulation. In this degree it is a public corporation. On the ot'her hand, the stockholders furnish the means for the construction and equipment of the railroad and are entitled to the profits derived from its operation. To' this extent a railroad company is a private corporation. Being thus, at once a public corporation existing for private gain and a private corporation ow- ing public duties, a railroad company is distinctively a quasi-public corporation — a corporation of double obligations. The public duties of a railroad are not wholly dependent upon its corporate character. If it were under no responsibilities to the State in consideration of the grant of its charter it would still owe obligations to the public. It is a common carrier. Its road is a public highway. It applies its private property to a use in which the public is interested. It is engaged in a business afifecting the public and is subject to governmental control. "Property does be- come clothed with a public interest when used in a manner to make it of public consequence and affect the community at large. When, therefore, one devotes his property to^ a use in which the public has an interest he, in effect, grants to the public an interest in that use, and must submit to be controlled by the public for the common good to the extent of the interest he has thus created." Whether, therefore, the railroad corporation be regarded as of both a public and private nature, or whether its private property be considered as clothed with a public interest, the result is the same — its rates are subject to governmental control. The right of control, however, is not unlimited. Power to regulate is not power to destroy. Limitation is not confiscation. 272 READINGS IN ECONOMIC PROBLEMS 155. The Economic Basis of Regulation. BY I. i,e;o sharfman. The need of a system of governmental control arises from the economic characteristics of the railway. Most of the important questions involved in the so-called railroad problem can be traced to the economic character of the railway business. It is necessary, therefore, to indicate the general nature of those economic partic- ularities and their most striking consequences. The Monopolistic Character of the Raihvay Business. The need of regulation depends chiefly upon the monopolistic character of the railway business. In ordinary industrial enterprises the existence of competition, when free and unrestricted by artificial means, pro- vides an automatic force for the protection of the public. High prices and large profits in a given industry tend to attract additional capital tO' that industry, which results, in the long run, in a read- justment of charges and a reduction of net returns. In like manner, inefficient service and goods of inferior quality cannot pemianently be imposed upon the public because a policy w'hich is clearly detri- mental to the interests of the consumer cannot permanently with- stand the force oi competition. Th.e railway business, on the other hand, tends to be operated under monopolistic conditions. To somie extent railways are entirely exempt from the operation of compe- tition. The amount of capital necessary for the construction of a railway is so large and the task of railway building is so substantial that competition is always relatively slow in becoming active. Cap- italists will not unite so promptly in building a parallel road because of the large sums that must be risked in the enterprise ; and even when they decide to enter upon such an undertaking, the work of construction requires so much time that the appearance of active competition is still further delayed. Moreover, even when the par- allel road is built, it actually competes with the original line only at certain points, usually the more important cities, while at inter- mediate points the lines separate and pass through numerous small communities which have no other railway facilities. At these non- competing points, then, the railways usually enjoy a monopoly of local traffic ; and while the number of non-competing points is grad- ually being reduced by the construction of new steam, roads and the multiplication of electric railway lines, doubtless, because of the very nature of the railway, there will always be many localities which, in the absence of government control, will be at the mercy of one transportation agency. In part, therefore, the railway busi- ness is clearly monopolistic in character. RAILROAD RATBS AND REGULATION 273 The Nature of Raihmy Competition. But the railway business tends to be carried on under monopolistic conditions even when competition does exist, because of the character of railway competi- tion. Railway rivalry tends to be abnormally keen and competition ruinous. This, in turn, leads to cooperation in various forms, and the inevitable result follows that railway competition becomes self- destructive. Competing railway companies, weary of the keen struggle which invariably ensues when competition beconies active, either assent to a truce whereby competition between them is abol- ished and an agreement is reached for the maintenance of rates, or they continue their warfare until one of the roads is driven to insolvency, and the unsuccessful line, upon reorganization, is taken over by its victorious rival. In either case effective competition is destroyed and monopoly conditions are established. The basis of this ruinous competition is to^ be found in two fundamental economic characteristics of the railway business: Joint Cost and Raihvay Management. The services of a rail- way are rendered to a very large degree at joint cost. Fro^m one- half to three-quarters of a railway's expenditures must be incurred regardless of the performance of any particular service. In order to conduct transportation at all, a roadbed must be provided, tracks must be laid, terminals must be built. This plant is equally neces- sary for the transportation of passengers and freight, and express and mail matter. Moreover, it is equally necessary for the trans- portation oi different classes of passengers and dift'erent kinds of freight. The expenditures for the fundamental purpose of pro- viding the plant oi a railway enterprise create the fixed charges of the business : and these fixed charges, the interest on the capital invested in the construction of the railway, form a part of the cost of every service rendered by that railway. As far as expendi- tures for plant are concerned, all railway operations are conducted at joint cost. But even the operating expenses are largely joint. The roadbed and equipment must be maintained in a state of reason- able repair and efficiency, and many oi the employees and much of the material necessary for conducting transportation must be pro- vided and most of the general administrative expenses must be met, regardless of the amount or the kind of traffic carried by the railway. In other words, a substantial proportion of the operating expenses, like the fixed charges, are constant. It is practically im- possible, therefore, for the railway manager to ascertain the exact cost O'f a given service. Rate making must necessarily involve a large degree of guesswork, though it is true that this guesswork is entrusted tO' experts. Railway officials have no means of de- 274 RBADINGS IN ECONOMIC PROBLEMS termining with certainty that rates have been reduced to unprofit- able hmits. Under the stress of keen competition, then, conditions are decidedly favorable to ruinous rate-cutting: and cutthroat com- petition invariably becomes self-destructive. Increasing Returns and Railway Policy. Railway operations are so largely conducted at joint cost because a very large propor- tion oi railway expenditures are fixed or constant. If a railway is built and equipped and is carrying a given amount of traffic, it can usually handle a vastly increased quantity of business at a relatively slight additional expense. Within very wide limits, a given plant and equipment will accommodate a large as well as a small amount of traffic, and the only additional cost involved in handling an in- crease in traffic will consist in that portion of the operating ex- penses which varies with the amount and kind of service rendered. In other words, the expenditures of a railway company do not keep pace with the services which it performs ; an increase in traffic does not involve a proportionate increase in railway ex- penditures. If follows, then, that with each increase in the amount of traffic carried, the cost per unit decreases ; and the net revenues of a railway increase faster than the growth of its traffic. The rail- way business is subject to the law of increasing returns: every in- crease in traffic results in more than a proportionate increase in profits. Railway traffic managers, therefore, work under a powerful incentive to increase the volume of their business, and the compe- tition for traffic is intense. In fact, the passion for traffic becomes the controlling passion of the railway business. Traffic managers consider it their most urgent duty to get business — to get it at the highest rates possible, but in any event to get it. The profitable limit of rate reduction is so uncertain, because railway expenditures are largely joint, and the advantage of extensive traffic is so great, because railway expenditures are largely constant, that there is a natural and compelling tendency on the part of railway officials to reduce rates to whatever point may be necesary in order to attract business from competing lines. Ruinous rate wars follow and com- petition tends to destroy itself. These conditions lie at the basis of the abnormal character of railway competition which almost in- variably leads to railway operation under monopolistic conditions. Raihvay Competition and Discriminatory Practices. The keen rivalry for business leads not merely to rate wars and general rate cuttings, but to discriminatory practices as well. The passion for business is so intense that the traffic manager will resort to any means in order to get it. If the amount of railway traffic can be extended and hence the size of railway profits disproportionately RAILROAD RATES AND REGULATION 275 increased by means of granting special privileges in the transpor- tation of one commodity as compared with another, or in the case of one person or locality as compared with competing shippers or markets, railway officials will not hesitate long to resort tO' these discriminatory practices. The history of American railways, and of our monopolistic industrial combinations or so-called trusts, di- vulges no greater evil than the granting of railway discriminations in rates and service for the benefit of one person, locality, or kind of traffic, to the prejudice and disadvantage of rival shippers, places, and industries. The motive or stimulus for these practices lies in the keen desire for additional business, with its disproportionate in- crease in railway profits. Discrimination has been one of the most baneful as well as one of the most certain effects of railway com- petition. Raikwy Discrifnination and the Public Welfare. The danger as well as the injustice of discriminatory practices cannot be over- emphasized. If our industrial life is to reach its natural and most efficient economic development, there must be freedom of enter- prise and fairness of treatment for all persons, all sections, and all undertakings. In a sense, transportation is a fundamental in- dustry, underlying all others ; for it is essential to the conduct of all business and goes far towards determining the direction and conditions of industrial activity. The item of transportation, what- ever it may be, is one of the elements in all costs, and the outcome of competition between different producers may be largely affected by any divergence in railway rates which must be paid by eadi of two or more competitors. It follows clearly, then, that the railway officials who make transportation rates exercise a tre- mendous power. By the soundness of their adjustment of rates and by the degree of fairness with which established rates are observed, the railways may profoundly affect — or absolutely de- termine even — the prosperity of individuals, of industries, O'f cities and towns, or oi entire sections of the countr}^ By discriminating between competing shippers, they may destroy the business of one and build up that oi another, making one man rich and another poor. By stimulating or discouraging a particular class of traffic they ma}^ increase or diminish the importance of industries and the extent of production of particular articles of commerce, shaping the direction of industrial activity. By discriminating among cities and towns, they may cause one to grow and another to decay, de- termining the commercial importance of business centres. By modifying their rate schedules in special instances, they may de- termine the location of industries, guiding the movements of popu- 276 READINGS IN ECONOMIC PROBLEMS lation and affecting the prosperity and welfare of extensive local- ities. By these unfair practices the railways also have it within their power to build up industrial monopoly ; and the most power- ful of the trusts against which the people are now struggling made their first advances towards control of the market through the agency of special favors in the form of railway discriminations. B. DISCRIMINATORY PRACTICES OF THE RAILROADS. 156. Standard Oil and Railroad Rebates. BY IDA M. TARGEI^Iv. In the fall of 1871, certain men brought tO' Mr. Rockefeller a remarkable scheme, the gist of which was to bring together secretly a large enough body of refiners and shippers to persuade all the railroads handling oil to- give to the company formed special re- bates on its oils, and drawbacks on that of other people. If they could get such rates it was evident that those outside of their combination could not compete with them. Then, too, they could easily persuade the railroads to transport no crude for exportation, so that the foreigners would be forced to^ buy American refined. They believed that the price of oil thus exported could easily be advanced fifty per cent. The control of the refining interests would also enable them to fix their own price on crude. As they would be the only buyers and sellers, the speculative character of the business would be done away with. In short, the scheme they worked out put the entire oil business in their hands. It looked as simple to put into operation as it was dazzling in its results. This proposal resulted in the organization of the South Improve- ment Company, in which the Standard Oil of Cleveland was the leading subsidiary concern. Although the company controlled less than one-tenth of the refining business in the United States, the gentlemen composing it assured the railroads that they controlled the business. Contracts with the railroads were quickly drawn up. By the i8th of January the president of the Pennsylvania road, J. Edgar Thompson, had put his signature to the contract, and soon after Mr. Vanderbilt and Mr. Clark signed for the Central system, and Jay Gould and General McClellan for the Erie. The contracts fixed gross rates of freight from all common points, as the leading ship- ping points within the Oil Regions were called, to all the great re- fining and shipping centres — NeAv York, Philadelphia, Baltimore, RAILROAD RATES AND REGULATION 277 Pittsburg and Cleveland. For example, the open rate on crude to New York was put at $2.56. On this price the South Improvement Company was allowed a rebate of $1.06 for its shipments; but it got not only this rebate, it was given in cash a like amount on each barrel of crude shipped by parties outside the combination. The open rate from Cleveland to New York was two dollars, and fifty cents of this was turned over to the South Improvement Company, which at the same time received a rebate enabling it to ship for $1.50. Again, an independent refiner in Cleveland paid eighty cents a barrel to get his crude from the Oil Regions to his works, and the railroiad sent forty cents of this money to the South Improvement Company. At the same time it cost the Cleve- land refiner in the combination but forty cents to get his crude oil. Like drawbacks and rebates were given for all points — Pittsburgh, Philadelphia, Boston and Baltimore. An interesting provision in tlje contracts was that full waybills of all petroleum shipped over the roads should each day be sent to the South Improvement Company. This, of course, gave them knowledge of just who was doing business outside of their com- pany — of how much business he was doing, and with whom he was doing it. Not only were they to have full knowledge of the- business of all shippers, but they were also to have access to all books of the railroads. The reason given by the railroads in the contract for granting these extraordinary privileges was that the "magnitude and ex- tent of the business and operations" purposed tO' be carried on by the South Improvement Company would greatly promote the in- terest of the railroads and make it desirable for them to encourage their undertaking. The evident advantages received by the rail- road were a regular amount of freight, fixed rates, and freedo^m from the system of cutting which they had all found so harassing and disastrous. That is, the South Improvement Company, which was to include the entire refining capacity of the company, was to act as the evener of the oil business. 157. Discriminations between Commodities. BY ALBERT N. ME^RRITT. Many instances of sudden and arbitrary changes in the differ- entials upon competing classes of commodities might be given, and frequently the public has suffered severe loss in property values as the result of such actions. Take the case of the recent advance in the rate on corn-meal from Kansas points to Texas. For ten years 278 READINGS IN ECONOMIC PROBLEMS the rate on corn-meal had been three cents higher than the rate on corn. On the basis of this differential the Kansas millers had found themselves able to compete with the Texas millers, and a large portion of the corn-meal used in Texas was ground in Kansas. In January, 1905, at the instigation of the millers of Texas, the Railroad Commission of that state announced a hearing for the purpose of determining whether intrastate grain rates should be reduced. In order to prevent this, the railroads went to the millers and made a bargain with them. If the millers would agree to drop their complaint before the Texas Commission, the railroads, on their part, would advance the rate on corn-meal so as to exclude the Kansas millers from the Texas market. The bargain was car- ried out to the letter. The millers failed to appear before the Commission upon the date set for the hearing, and the grain rates within the state were not reduced, while on the 19th of February, the railroads fulfilled their part of the contract by advancing the rate on corn-meal by an average of sV^ cents per 100 lbs., without any corresponding increase in the rate on corn. The result was that the Kansas millers were practically prohibited from shipping any corn-meal into the State of Texas. Thus the principal market of a very important industry of Kansas was swept away by the stroke of a pen. Not only will the Kansas millers lose, but the Texas consumers will loise also. Texas is unsuited for carrying on the milling industry. Mills were introduced into Texas more than twenty years ago. Yet the Kansas mills, handicapped as they were by a differential of three cents per 100 lbs., found themselves able to compete with the millers of Texas in supplying that market. The Texas millers have now secured the monopoly which they de- sired, and the Texas consumers will pay for it in the price of meal. On one occasion the railroads threatened to destroy the whole export flour industry of the Northwest. The rates on wheat and flour had l3een the same for many years. Suddenly the roads ad- vanced the rate on flour till they exceeded those ou wheat by from four to eleven cents per |oo lbs. The result was that the exports of flour instantly fell off as compared with those of wheat. As long as these rates prevailed, the Western millers were entirely excluded from any share in the export flour trade. Not only did the milling industry of that section suffer, but also the resources of the country were weakened. Experts have declared that a most im- portant factor in maintaining the fertility of the soil is the con- sumption of the by-products of the grain near the point of produc- tion. But if the wheat is exported instead of being ground in the Northwest, such products as the bran and the shorts are consumed RAILROAD RATES AND REGULATION 279 in Europe instead of in this country, as they would be if the wheat were ground at home. Other cases of unjust discrimination between competing- classes of commodities have been Oif frequent occurrence. Thus twO' kinds of soap, though substantially similar in price, bulk, and value, were carried at different rates. In another case, common soap was car- ried at 33 cents per 100 lbs., while 73 cents was charged for Pear- line, a competitor of soap. 158, Variety in Railway Discrimination. BY FRANK PARSONS. Numerous substitutes for the direct rebate were used. In some cases $10 a car was paid on shipments oi flour from the Northwest under pretense oi paying the cost of loading the car above the minimum weight. Railroads paid 50 cents for the loading of each private stock car, and % of a cent for every mile the car was hauled. A single railroad coinpany, running out of Chicago, paid car mile- age tO' 65 different companies or firms owning cars. Private cars, owned by the railroads, but chartered for private use, were the subject of discrimination of another kind. For example, a com- mercial salesman travelled over the Northern Pacific in a private car stocked with samples. For the first trip he paid fifteen round- trip fares between St. Paul and Portland, but for subsequent trips the road charged 15 local fares from point tO' point. Terminal charges for delivery at certain points were made a mieans for discrimination. Free cartage for some shippers and not for others, or for one town and not for another, gave a decided ad- vantage to the favored town. To get the business of B, a Pitts- burg dealer in beer, the B. & O. gave B 3^2 cents per hundred for the hauling of his own beer from the station, while K, another beer dealer there, received no such concession. In Grand Rapids, Michi- gan, free cartage had been in vogue for 25 years, but in Ionia, near by, no free cartage was afforded by the railroads. Denial of the stoppage-in-transit privilege at one place while allowing it at another is unlawful. Diff'erences in the time for un- loading may amount tO' a substantial preference. At Philadelphia 96 hours were allowed for unloading, against 72 hours at interior points. Free storage is another method of favoritism, sometimes used systematically and extensively. Overbilling and underbilling have been found tO' be very convenient substitutes for the rebate. A bill of lading may acknowledge the receipt of 70 barrels of flour ; 65 only are shipped, and the railroad pays damages for the loss of 28o READINGS IN ECONOMIC PROBLEMS the five nonexistent barrels. On the other hand, railroads have been known to suggest to millers that they ship flour on the gener- ous plan of shipping 20 barrels and billing 15. At another time the cashier of an important firm is made a nominal agent for the rail- way company, and under the name of commission to him an enor- mous rebate is allowed for all the business his employers send over the line. Or again, the railway company purchases from a favored trader its supplies of the goods in which he deals, at a fancy price. The "expense bill system" has proved tO' be an instrument of preference. On presentation of an expense bill showing payment for shipments into Kansas City the railroads would allow reship- ment of an equal weight from Kansas City to Chicago at the bal- ance of the through rate from the point of origin to Chicago. Re- bate equivalents are given in the form of elevator rebates and allow- ances. Elevators owned or controlled by railroad companies are leased at nominal charges to favored shippers, or secret commissions are paid to favored parties for all grain consigned to specified elevators. The railroads deny equal rates in the building of ele- vators. The head of a road running into Chicago from Missouri River points formed a grain company to buy grain in Kansas City and sell it in Chicago. The railway guaranteed the grain company against loss. When wheat was 50 cents in Kansas City and 60 in Chicago, the grain company paid 51 cents in Kansas City to get the grain. The railroad charged the regular 10 cent tariff. The grain was sold at 60. The railroad paid back the i cent on the guarantee and still made 9 cents. And the railroad-grain-company- combine was able to drive other buyers out of the market and other railroads out of the trafBc. Railroads sometimes seek to evade the law by contracting to de- liver goods at a certain price including the freight and the pay- ment for the goods in one lump sumi, so that the freight charge is merged and cannot be ascertained. Among other substitutes for rebates too numerous to mention are the following: Combination rates of which informed shippers may take advantage ; flying rates, or "midnight tariffs ;" terminal or private railway abuses ; unfair division of rates ; maintaining or paying for the maintenance of tracks or other property belonging to the shipper; unfair classification; use of different classification for local and through traffic ; fictitious entries in the prepaid column of the freight bill; not billing at all, carrying goods free; with- holding cars ; arbitrary routing of shipments ; and refusal to deliver at a convenient point. RAILROAD RATES AND REGULATION 281 159. Recent Forms of Railway Discrimination. BY WILIvIAM Z. EIPLEY. With the passage of time, and especially since 1896, new and even more elaborate schemes for rebating have come to light. One of the most ingenious, which was discovered about 1904 to be very- widespread, was_the use of terminal or spur track railway com- panies. In Hutchinson, Kansas, for example, were salt works hav- ing a capacity of some 6,000 barrels a day. Two railways were available for shipments. A new company was incorporated, all its stock being held by the salt works owners, which constructed sidings to both railroad lines. The spur track was less than a mile long and cost only about $8,000 to build. But the company was chartered as the Hutchinson & Arkansas River Railroad.. Its officers were the owners of the salt mills. It owned neither engines nor cars. Yet it entered into a traffic agreement with the Atchison road for a division of the through rate to many important points, its share being about twenty-five per cent. Obviously, rebates assuming the above- described form are open only to very large shippers, to^ whom it is worth while to incur the considerable expense. The International Harvester Company at Chicago had for years performed much of its own terminal service; and until 1904 was allowed as high as $3.50 per car for switching charges by connecting railroads. It then incorporated the Illinois Northern Railroad, wliich was prornptly conceded twenty per cent of all through rates, with the Missouri river rate as a maximum.. On this traffic it would be allowed as high as $12 per car, instead of $3.50 as before. The so-called "midnight tariff" was a strictly legal way of con- ferring favors upon certain shippers. It was much in evidence dur- ing the grain wars between hues serving the Gulf ports about 1903. And it seems to have been a device used at times all over the country. A traffic manager wishing tO' steal all the business of a large shipper from some competing road, and tO' build himself up at the expense of his rivals, secretly agrees to put into effect a low rate on a given date. The shipper then enters intO' contracts calling for perhaps several hundred car-loads of grain to be delivered at that time. This reduction is publicly filed, perhaps thirty days in advance, with the Interstate Commerce Commission at Washington. But who is to discover it, in the great medley of new tariffs placed on file every day ? Yet this is not all. A second tariff, restoring the full rate, is also filed to take effect very shortly — perhaps only a day — after the reduction occurs. All these are public, and open to all shippers alike. 282 READINGS IN ECONOMIC PROBLEMS But only the one who was forewarned is able to take advantage of them. An entirely different plan of rebating — and a most effective one — has to do with apparently unrelated commercial transactions. Many shippers are large sellers of supplies to the railroad. How easy then to make a concession in rates to an oil refinery, for ex- ample, by paying a little extra for the lubricating oil bought from a subsidiary concern. The Federal authorities in recent years, and especially in connection with the prosecution of the Standard Oil Company in 1908-1911, have discovered the most extraordinary variations in the prices paid by railroads for supplies. Independent concerns were often not allowed tO' compete in the sale of lubri- cants at all. It would be difficult to^ prove any connection between so widely separate sets of dealings; and yet it is clear that rebates are often given in this way. Or even more fruitful as an ex- pedient, especially in these later days, when rebating is a serious offence, why not confer a favor by extra liberality in allowances for damages tO' goods in transit? Personal discrimination may be as effective upon competition through denial of facilities tO' some shippers as through conferring of special favors upon others. P'ractices of this sort have been quite common in the coal business, especially in the matter of fur- nishing or refusing to furnish an ample supply of cars or suitable spur tracks to mines. In 1906 camie the startling revelations upon the Pennsylvania Railroad as to the practice of discrimination in furnishing cars to coal mines. A comiprehensive investigation by the company itself resulted in the discharge of a number of high officials. It appeared, for example, that the assistant to President Cassatt had acquired $307,000 in stock of coal companies without cost; that a trainmaster for $500 had purchased coal mine stock which yielded an annual income of $30,000 ; and that one road fore- man was given three hundred shares of the same company stock for nothing. In all these cases the object was to secure not only an ample supply of cars for the favored companies, but perhaps even the denial of suitable service to troublesome competitors^ Yet other means of favoring large shippers at the expense oi small ones are almost impossible tO' eradicate. The record of the vigorous prosecutions against rebating, under the Elkins law, af- fords conclusive evidences not only as to the widespread extent of the evil, but as to its identification with many of the large industrial combinations. There was collected in fines for rebating between October, 1905, and March, 1907, the sum of $586,000. Several men were sent to jail, for from three to six months. Among the RAILROAD RATES AND REGULATION 283 trusts implicated were the beef packers, who have been indefatigable in concocting rebating devices, the tin plate combination, and, most notable of all, the American Sugar Refining Company. Nearly $300,000 in fines was imposed upon this concern alone. The secret allowances in these cases were most ingeniously arranged. Some were "refund of terminal charges ;" some were ''lighterage de- murrage ;" some were allowances for damages. Many were paid by drafts instead of checks, sO' as tO' preclude identification of in- dividuals ; some were by special bank account ; but the sums in- volved were very large. The following quotation from a letter from an agent of the sugar trust accompanying a claim for overcharge of $6,866 on shipments of syrup, introduced in evidence in one of these cases, aptly describes the situation, both then, now, and always. "We hope to devise some means to enable us tO' conduct our freight mat- ters with the transportation companies satisfactorily even under the new conditions imposed by the Elkins bill ; but there may be some cases that cannot be taken care of, in the event of which we will, like all other shippers, have to take our medicine and look pleasant." The Interstate Commerce Commission reported as to the conditions in 1908 that "many shippers still enjoy illegal advantages." Thus the rebate as an evil in transportation, even since amend- ment of the law in 1906-1910, while under control, is still far from being eradicated. Favoritism lurks in every covert, assuming al- most every hue and form. Practices which outwardly appear to be necessary and legitimate, have been shown to conceal special favors of a substantial sort. C. THE NATURE AND EXTENT OF REGULATION. 160. Causes of Complaint Against the Railroad System.* BY I^OGAN G. MCPHERSON. 1. That local rates were unreasonably high, co'mpared with through rates. 2. That both local and through rates were unreasonably high at noncompeting points, either from the absence of competition or in consequence of pooling agreements that restricted its operation. 3. That rates were established without apparent regard to the * These complaints were made in 1886, just before the establishment of the Interstate Commerce Commission. 284 READINGS IN ECONOMIC PROBLEMS actual cost of the service performed, and are based largely on "what the traffic will bear." 4. That unjustifiable discriminations were constantly made be- tween individuals in the rates charged for like service under similar circumstances. 5. That improper discriminations were made between articles of freight and branches of business of a like character, and between different quantities of the same class of freight. 6. That unreasonable discriminations were made between lo- calities similarly situated. 7. That the effect of the prevailing policy of railroad manage- ment was, by an elaborate system of secret special rates, rebates, draw^backs and concessions, to foster monopoly, to enrich favored shippers, and to prevent free competition in many lines of trade in which the item of transportation is an important factor. 8. That such favoritism and secrecy introduced an element of uncertainty into legitimate business that greatly retarded the devel- opment of our industries and commerce. 9. That the secret cutting of rates and the sudden fluctuations that constantly took place were demoralizing to all business except that of a purely speculative character, and frequently occasioned great injustice and heavy losses. 10. That, in the absence of national and uniform legislation, the railroads were able, by various devices, to avoid their respons- ibility as carriers, especially on shipments over more than one road, or from one State to another, and that shippers found great diffi- culty in recovering damages for loss of property or for injury thereto. 11. That railroads refused to be bound by their own con- tracts, and arbitrarily collected large sums in the shape of over- charges, in addition to the rates agreed upon at the time of ship- ment. 12. That railroads often refused to recognize or be responsible for acts of dishonest agents acting under their authority. 13. That the common law failed to afford a remedy for such grievances and that in cases of dispute the shipper was compelled to submit to the decision of the railroad manager or pool commis- sioner, or run the risk of incurring further losses by greater dis- criminations. 14. That the differences in the classifications in use in various parts of the country, and sometimes for shipments over the same roads in different directions, were a fruitful source of misunder- standings, and were often made a means of extortion. RAILROAD RATES AND REGULATION 285 15. That a privileged class was created by the granting of passes, and that the cost of the passenger service was largely in- creased by the extent of this abuse. 16. That the capitalization and bonded indebtedness of the roads largely exceeded the actual cost of their construction or their present value, and that unreasonable rates were charged in the effort to pay dividends on watered stock and interest on bonds im- properly issued. 17. That railroad corporations had improperly engaged in lines of business entirely distinct from that of transportation, and that undue advantages had been afforded to business enterprises in which railroad officials were interested. 18. That the management of the railroad business was ex- travagant and wasteful, and that a heedless tax was imposed upon the shipping and traveling public by the unnecessary expenditure of large sums in the maintenance of a costly force of agents engaged in a reckless strife for competitive business. 161. The Provisions of the Inter-State Commerce Act. BY IvOGAN G. MCPHERSON. The Interstate Commerce Act, taking effect April 5, 1887, practically applied the principles of the common law which inhere in the unlimited jurisdiction of the State courts to the regulation of interstate trafific by the Federal courts. It provided : First — 'That charges for transportation must be reasonable and just; prohibiting any unjust discrimination by special rates, rebates, or other devices, and any undue or unreasonable preferences ; Second — 'That there should not be a greater charge for a short haul than for a long haul over the same lind in the same direction under substantially similar circum^stances and conditions; Third — ^Prohibited the pooling of freights and the division of earnings ; Fourth — Prohibited any device to prevent the continuous car- riage of freights ; Fifth — Provided for the publicity and filing with the Commis- sioner of all tariffs ; Sixth — The Interstate Commerce Commission created by the Act is given power to investigate complaints against carriers and to make reports of its investigation in writing; Seventh — The Interstate Commerce Commission is authorized, in case it finds that the carrier has violated the law, to order it to 286 READINGS IN ECONOMIC PROBLEMS desist and make reparation for injury done. In case these orders are not obeyed the Comimission is empowered to proceed in a sum- mary way tO' have the Circuit Court of the United States enforce them. 162. The Provisions of the Elkins Act. BY HEJNRY S. HAINE^S. In 1903 the Interstate Commerce Act was still further amended by the passage of '"An Act to further regulate Commerce with For- eign Countries and among the States," commonly known as the Elkins I^aw ; also by "An Act to expedite the Hearing and Deter- mination of Suits in Equity, etc.," that were brought under the Interstate Commerce Act or the Anti-Trust Law. The changes wrought in the Interstate Commerce Eaw by the Elkins Eaw are succinctly stated by the Interstate Commerce Com- mission as follows : I. The carrier is made criminally liable where the individual was before. II. A wilful failure to- publish tariffs is punished by a maximum fine of $20,000, as also^ the offering, soliciting, or accepting of any rebate, concession, or discrimination, amounting to a lower rate than published. The inclusion of a discrimination in this connec- tion is considered an important change. III. All penalties of imprisonment repealed. IV. Shipper as well as carrier included in proceedings before the Commission. V. Circuit Courts are given power to interfere by summary process to prevent departures from published tariffs and to prevent other forbidden discriminations. There is no material change in the things prohibited, but the penalties are changed and the criminal provisions made more definite and punitive. 163. The Provisions of the Hepburn Bill. BY LOGAN G. MCPHERSON. The Hepburn Bill took effect on August 28, 1906. The bill pro- vides : (a) That as "common carriers" under the Interstate Com- merce Law shall be included companies transporting oil by pipe lines, express companies, sleeping car companies, all switches, tracks, terminal facilities, and that "transportation" under the law shall include all cars regardless of their ownership, and all service in transit. RAILROAD RATES AND REGULATION 287 (b) Prohibits the issue of passes, with certain specified ex- ceptions that cover mainly employes, fixing a penalty in case of violation that shall apply to both the giver and the recipient. (c) Makes it unlawful after May ist, 19018, for any railroad company to transport for sale any commodities in which it may have a proprietary interest, except lumber and its products. (d) Provides that a common carrier shall provide, when practicable, and upon reasonable terms, a switch connection for any applicant who' shall furnish sufficient business to- justify its oper- ation. (e) Makes more explicit the specification as to the filing of tarifi^s, especially providing for the posting and filing of through tariffs ; fixing penalty for violation. (f) Provides that "every person or corporation, whether car- rier or shipper, who shall knowingly offer, grant, give or solicit, or accept, or receive rebates, concession, or discrimination, shall be deemed guilty of a misdemeanor, and on conviction thereof shall be punished by a fine of not less than one thousand or more than twenty thousand dollars." Moreover, any person, whether officer or director, agent or employe, convicted of such misdemeanor, "shall be liable to imprisonment in the penitentiary for a term not exceeding twO' years, or both fine and imprisonment in the discre- tion of the court." In addition, the acceptor of any rebate shall forfeit to the United States three times the amount of the rebate. (g) Provides for the publication of the reports and the de- cisions of the Commission and their acceptance as evidence. (h) Empowers the Commission, if upon complaint it finds that a rate, or any regulation or practice affecting a rate, is "Un- just or unreasonable, or unjustly discriminatory, or unduly prefer- ential or prejudicial," to determine and prescribe a maximum rate to be charged thereafter and modify the regulation or practice per- taining thereto. (i) Empowers the Commission to award damages against a carrier in favor of a complainant. (j) Provides for forfeit to the United States, in case of neglect to obey an order of the Commission, in the sum of five thousand dollars for each offense, each violation and each day of its continu- ance to be deemed a separate offense. (k) Empowers the Commission to apply to a circuit court for the enforcement of its order, other than for the payment of money ; for the appeal by either party tO' the Supreme Court of the United States ; and that no order of the Commission shall be sus- 288 READINGS IN ECONOMIC PROBLEMS pended or restrained, except on hearing, after not less than five days' notice to the Commission. (1) Provides for the rehearing by the Commission, upon ap- plication, at its discretion. (m) Authorizes the Commission tO' require annual reports from all common carriers, that shall contain specified information ; to prescribe the form of any and all accounts, records and memor- anda to be kept by carriers, making it unlawful for the carriers to keep any other accounts, records, or miemoranda than those pre- scribed and approved by the Commission ; provides that all accounts of the carriers shall be open to the inspection of the special agents, or examiners employed by the Commission. (n) Provides that a common carrier issuing a through bill of lading shall be responsible for loss, damage or injury to the prop- erty covered thereby upon the lines of any company over which it may pass, leaving it to the line issuing the way-bill to gain re- covery from another line upon which the loss, damiage, or injury may have occurred. (o) Enlarges the Interstate Commerce Commission from five to seven members, with terms of seven years, increasing the salary from seven thousand five hundred to ten thousand dollars per annum. D. ASPECTS OF RATE MAKING. 164. Freight Classification. BY WILWAM Z. RIPLEY. Imagine the Encyclopedia Britannica, a Chicago mail-order catalogue, and a United States pratective tariff law blended in a single volume, and you have a freight classification as it exists in the United States at the present time. Such a classification is, first of all, a list of every possible commodity which may move by rail, from Academy or Artist's Board and Accoutrements to Xylo- phones and Zylonite. In this list one finds Algarovilla, Bagasse, "Pie Crust, Prepared;" Artificial Hamis, Cattle Tails and Wombat Skins ; Wings, Crutches, Cradles, Baby Jumpers and all ; together with Shoo Flies and Grave Vaults. Everything above, on, or under the earth will be found listed in such a volume. To grade justly all these commodities is obviously a task of the utmost nicety. A few of the delicate questions which have puzzled the Interstate Commerce Commission may give some idea of the complexity of the problem. Shall cow peas pay freight as "vegetables, N. O. S., RAILROAD RATES AND REGULATION 289 dried or evaported," or as "fertilizer" — being an active agent in soil regeneration? Are "iron-handled bristle shoe-blacking daub- ers" machinery or toilet appliances? Are patent naedicines dis- tinguishable, for purposes of transportation, from other alcoholic beverages used as tonics? What is the difference, as regards rail carriage, between a perco'lator and an every-day coffee pot? Are Grandpa's Wonder Soap and Pearline to be put in different classes, according to their uses or their market price ? When is a boiler not a boiler? If it be used for heating purposes rather than steam gen- eration, why is it not a stove? What is the difference between raisins and other dried fruits, unless perchance the carrier has not yet established one industry while another is already firmly rooted and safe against competition? The classification of all these articles is a factor of primary im- portance in the making of freight rates both from a public and private point of view. Its public importance has not been fully appreciated until recently as affecting the general level of railway charges. So little was its significance understood, that supervision and control of classification were not apparently contemplated by the original Act to Regulate Commerce of 1887. The anomaly ex- isted for many years of a grant of power intended to regulate freight rates, which, at the same time, omitted provision for control over a fundamentally important element in their make-up. Control over it has now been assured beyond possibility of dispute by the specific provisions of the Hepburn Act of 19 10. The freight rate upon a particular commodity between any given points is compounded oi two separate and distinct factors : one having to do with the nature of the haul, the other with the nature of the goods themselves. Two distinct publications must be consulted in order to determine the actual charge. Although both of them usually bear the name of the railway and are issued over its signature, they emanate, nevertheless, from entirely different sources. The first O'f these is known as the Freight Tariff. It specifies rates in cents per hundred pO'Unds for a number of differ- ent classes of freight, nuinerically designated, between all the places upon each line or its connections. But it does not mention specific commodities. The second publication which must be consulted supplies this defect. This is known as the Classification. Its function is to group all articles more or less alike in character, so far as they affect transportation cost, or are affected in value by carriage from place tO' place. These groups correspond to the several numerical classes already named in the freight tariff. Thus dry goods or boots and shoes are designated 290 READINGS IN ECONOMIC PROBLEMS as first class. It thus appears, as has been said, that a freight rate is made up of two distinct elements equal in importance. The first is the charge corresponding to the distance ; the other is the charge as determined by the character of the goods. Consequently, a vari- ation in either one of the two would result in changing the final rate as compounded. Freight tariffs and classifications are as distinct and independent in source as they are in nature. Tariffs are issued by each railway^ by and for itself alooe and upon its sole authority. Classifications, on the other hand, do not originate with particular railways at all ; but are issued for them by cooperative bodies, known as classifi- cation committees. These committees are composed of represen- tatives from all the carriers operating within certain designated territories. In other words, the United States is apportioned among a number of committees, to each of which is delegated, by the car- riers concerned, the power over classification. New editions of these classifications are published from time to time as called for by additions or amendments, the latest, of course, superseding all earlier ones. Thirty-seven such issues have already appeared in series in trunk lines and southern territory, while fifty have been put forth in western territory, since the practice was standardized in 1888. 165. Competitive Factors in Rate-Making. BY EMOBY R. JOHNSON AND GROVER C. HUEBNER. Railroad rates are, to a large extent, the resultant of competitive forces. In part the competition is of carriers with each other for traffic free to move by more than one line; and, in a still larger way, the competition is between industries and among rival pro- ducing or trading centers and sections. If a railroad company is to prosper, the industries along its lines, the section of country it serves, and the markets it reaches must flourish. In determining the rates which the traffic will bear, the General Freight Agent is influenced by many factors. The strongest force is that of competition among markets, or "of interregional, indus- trial competition." The asphalt of California, for example, com- petes against that of Texas, the West Indies and South America, in American cities, and railway rates on the California product must be fixed so as to give a wide sale. Likewise the rates on cotton goods from southern mills are made so as to allow them tO' find a market side by side with the output of New England mills. In- numerable instances of interregional competition in manufacturing might be cited. The finished product must be carried to market RAILROAD RATES AND REGULATION 291 in rivalry with similar goods from other sections, while raw pro- ducts and coal must be hauled to the factories at rates which will allow all industries to thrive. Were there no indirect bidding of one railway for the traffic of another, this all-pervading competition between producing regions would still exert a constant regulative pressure upon the level of rates. Among the markets themselves the samie forces of commercial competition are effective. The Gulf ports compete with the North Atlantic ports for the grain exports of the West, and the North Atlantic ports strive with each other for this trade. The Gulf ports struggle with those of the South Atlantic for the cotton of the interior; New Orleans is the rival of Galveston. It is chiefly because oi the force of commercial competition that freight rates are tO' a large extent interdependent. To change an unimportant rate may recjuire the modification of but a few others, but to raise or lower the rate on wheat from Chicago tO' New York may require the readjustment of many other charges. The rate structure, like a spider's web, is delicately interwoven. Rival markets and competing producing sections, no matter where located, will be kept on a common level, if it is possible for the carriers to so place them. At the present time the railway's as well as the public realize that artificial limits must often be placed upon interregional competition. The efforts of rival railways to secure trafific free to move by more than one line is a second force influencing the rate maker. Un- like the commercial competition just mentioned, it has become less instead of more~ powerful ; because, as time goes on, it is more largely regulated by the consolidation of competing lines, or by traffic associations, community-of-interest arrangements, and in- formal mutual understandings. These are the means whereby rival railways have sought to substitute cooperation for unrestrained competition. This fact is well illustrated by the perennial strife of the trunk lines over the relative rates tO' be accorded North Atlantic seaports on a traffic tO' and from the central West. The fact that the competition among railroads is in service rather than on the basis of secret rates enables the railways to regulate their struggles so as tO' prevent most, if not all, rate wars ; but reg- ulated competition that stops short of open war may not only be perpetual, but may also be keen, and may be effective in determin- ing both the charges on particular commodities and the general level of rates. From the public point of view, this interrailway competition may not be an adequate regulator of rates; indeed, it may, like interregional industrial competition, lead tO' arbitrary dis- 292 READINGS IN ECONOMIC PROBLEMS criminations that require correction by public authority ; but this does not prove the absence or impotency of comjpetition among rail- roads to secure traffic free to move by more than one route. The influence of water competition upon the policy and practice of railway rate making, though less general and less controlling now than formerh^, is still a factor of much effect in several parts of the country ; and the practical certainty of a general improvement of the inland waterways of the United States indicates that water competition will be more potent in the future than it is at the pres- ent time. The rail charges into and out of the Southern States and the system of rates that has developed in that section, are largely influ- enced by the competitive rates and service of the coastwise vessels. Likewise the rates on the transcontinental traffic moving west and east between the Atlantic and Pacific sections of the United States are absolutely controlled by the competition of the water routes via Panama and the Isthmus of Tehuantepec. Moreover, it should be specially noted that water competition not only controls certain specific railway charges, but also exerts much influence upon the general systems of rate nuaking prevailing in different sections of the country. Railway rates in the future will probably be increasingly sub- ject to the regulation of waterway competition. 1 60. The Futility of Costs as a Basis for Rates. BY SYDNE^Y CHARI.ES WILUAMS. The theory of price-detennination according to cost of produc- tion is usually interpreted to mean that the price of each unit is determined ultimately by the cost of production of that unit. Where the unit is large and simple, e. g., in the case of a boat constructed entirely by hand by one man, the only items of expense will be the material, the man's labour, and some trifling sum tO' cover the cost and wear and tear of his tools ; and the price he will ask will be determined accordingly. Modern industrial conditions, however, are much more complicated. A factory or workshop will turn out very many units of many different kinds ; involving raw material of varying values, processes of all kinds, simple and elaborate, machinery and labour of many sorts, and each unit of each kind must bear some proportion of those general charges which cannot be attributed to any one class of product, but must be borne by the whole. RAILROAD RATES AND REGULATION 293 Now to what extent is it the case that the price charged for each unit of railway transport is determined by the cost of producing that unit? At first sight it may seem a very simple and satisfactory method of arriving at railway charges. The commodity produced is one — and its cost per unit can be arrived at, and the price to^ be charged fixed accordingly. But this seeming simplicity is very far from being present in reality. For when we begin to think of con- crete instances of railway transport we see that they include com- modities very diverse indeed. There are in the first place very many kinds of haulage, pure and simple^ — for long distances, me- dium distances, and short distances, with a cost per mile varying according to- the distance ; there is haulage of all kinds of goods, from coal and limestone tO' fruit, flowers, dynamite, and cigars, and of all manner of passengers, from a Royal party in a special train, or first-class express traffic to the Scotch moors, to workmen's jour- neys at 12 miles a penny or half-day seaside trips at similar low charges ; there are also many subsidiary services sometimes given, sometimes expressly withheld — cartage, delivery, liability for dam- age or loss, refrigeration, use of company's wagons, express speed or slow travel, and so forth. In short, we see that the use of the purely abstract word "transport" gives a. quite misleading air of simplicity to what is really a congeries of operations of the most diverse kind. Railways in fact produce a far greater variety of commodities than most industrial undertakings. But it may be urged, this does not demonstrate the impossibility of basing your railway charges on respective costs of production. This may be done in one or other of two ways. The first and most obvious method is tO' classify your different services and apportion to each the peculiar expenses connected with it. Then take the v/hole of the remaining expenditure of a general kind and appor- tion that among the different services according to their respective prime costs. You will now know the expenditure involved by each service; and as you know the extent of this traffic you will be able to fijx a fair and reasonable charge which will just give you your expenditure with a reasonable margin of profit. If the matter is so simple it should be child's work tO' apply it to the first great division of railway work, that between passenger and goods traffic. The simplest and clearest subdivision of railway working expenditure is as follows : General Charges, Ways and Works, Rolling-Stock, Traffic Department Expenditure. Now of all these a good deal is not merely independent of any particular kind of traffic but is independent of traffic altogether. 294 READINGS IN ECONOMIC PROBLEMS Among such heads of expenditure are directors' fees, the salaries of the managing- and legal staff, the rates and taxes paid, the greater part of the cost of maintenance of way and works, and some part of the traffic working expenses. These items clearly cannot be directly connected with the respective amounts of goods or passenger traffic. The cost of passenger and goods locomotives and rolling-stock can, however, be so allocated ; so also the cost of their respective train-staffs; and some part of the expenditure of buildings. Indeed, the very variety of methods adopted to secure this allocation themselves testify to the difficulty of the operation; train-mileage has been tried and abandoned, working engine hours are believed in by some, but the only unanimity among experts is as to the caution with which the figures arrived at must be viewed and utilized. The varying speeds, the different kinds of accommodation, the great variety in the number and complexity of the services ren- dered, the different sizes of consignments, the different distances for which, the different directions in which, and the different times at which they travel — all these mean some difference in cost; but since this cost is made up of so many countless items, who can undertake to reduce it to a definite schedule of fair prices, how- ever long and complicated? And to achieve a result of even use- ful accuracy when these difficulties are borne in mind, and at the samie time it is remembered that the schedule must be simple, uni- form, impartial, semi-permanent, and, moreover, must be known be- fore, not after the consignment has been handled — is, it will be recognized, indeed a hopeless task. But it may be claimed that there is an alternative method with which no such accuracy is expected or desired. All that need be done is to take the number of units of work done, the passenger- miles and ton-miles, and dividing these by the aggregate expenses, so obtain an average figure which will give a working basis for all rates. But even for this less ambitious project there are insuper- able difficulties. The average ton-mile will link together such dissimilar units as one ton of coal out of a train load of 800 tons carried, say, 200 miles without a stop and with no auxiliary ser- vices, and a ton of cream cheese carried in small consignments over a few miles with many subsidiary services, collection, delivery, pack- ing, weighing, and so forth. The respective rates charged will be as dissimilar as the services rendered. The coal pays a very low rate, but the size, regularity, and easy handling of the traffic make it most acceptable ; the cheese traffic pays a high rate, but nof too RAILROAD RATES AND REGULATION 295 high in view of the care and work it involves. Its very small and variable dimensions, and the high valne of the cheese, make the cost of the transit an appreciable item, besides say the profits of the retail trader, and an addition to the price which the well-to-do consumer willingly if unconsciously pays. Apply such an average figure in defiance of all these dififering conditions, and the result will only be to kill the low grade traffic and to let off too lightly the high grade traffic, thereby seriously impairing the prosperity of the railway and ultimately injuring the trading public which needs its services. 167. The Rate Theory of the Interstate Commerce Commission. BY M. B. HAMMOND. The tendency of the Interstate Commerce Commiission's decis- ions is, on the whole, towards a cost of service theory of rate mak- ing. The following is an attempt at the task of so stating a theory of rates as tO' bring in the various considerations which the Com- mission has emphasized as factors in rate making, and show how they can be related to the fundamental principle. It is perhaps well to say that nowhere has the Commission undertaken tO' state such a comprehensive theory of rate making. 1. In any system of government-made or government-regulated railway rates, it wold seem, that this fundamental economic principle should be kept in mind :-to perform the service of transporting per- sons and goods with the least possible expenditure of social energy. 2. One transportation route or one transportation system should never be allowed to take fromi another route or system, merely as a consequence of competition, traffic which the latter route or system can carry at less expense. 3. Rates should be so' adjusted as never to take from a place its natural geographical advantages of location; but natural advan- tages should not be sO' construed as to mean monopoly privileges. 4. Railway rates as a whole should just cover costs as a whole allowing for a normal rate of return on capital actually invested, a normal return for labor of all sorts, and for depreciation, but not for betterments. This would not mean that superior efficiency in railway manageroent was not entitled to- reap the rewards of its superiority in the same way it does in the ordinary industrial es- tablishment where competition rules. On the other hand, the rule must not be construed to- mean that any investment in a railroad, no matter how foolishly or recklessly made, is entitled to exact high 296 READINGS IN ECONOMIC PROBLEMS rates from persons and industries along- the line in order to earn current interest rates or dividends. Railway property is not more sacred than other property, nor are railway investors immune from the consequences of their own acts. 5. Each commodity transported should, as far as possible, be made to defray its own share, not only of operating and terminal costs, but also of the fixed costs and dividends. It is possible under modern accounting methods to determine these costs with an ap- proximate degree of accuracy for the principal commodities and classes of traffic. The rates on other commodities may be deter- mined by comparing their ascertainable costs with those of the principal commodities, and to a lesser extent by a comparison of the relative values of the commodities. 6. Differences in distance may be made a test of the reason- ableness of differences in rates where other conditions appear to be similar; yet the general rule must be kept in mind that though the aggregate charge should increase as distance increases, the ton- mile rate should decrease. 7. Where the application of none of the above principles seems practicable, competition, which has been conducted in a normal manner over a period of several years, may be assumed to have es- tablished a fair relation of rates. 8. A reasonable rate is one which yields a reasonable compen- sation for the service rendered. If a given rate is reasonable in this sense, an increase in the price of the commodity or in the profits to the producer will not be a valid excuse for increasing the railway rate. The carrier will justly share in the increased pros- perity of the producer by securing a larger traffic in this com^ modity. The possibility of applying these rules to the business of rail- way transportation is proved by the fact that the application of every one of them can be shown by illustrations taken from the Commission's decisions. Their consistent application would mean that the railroads would neither tax the industries of the country nor have their own investments sacrificed ; they would not build up one place of industry; they would not take from^ some persons or commodities their proportionate share of "the costs of transpor- tation and impose them upon other persons and commodities ; and finally they would not by their system oi rate making retard indus- trial progress or have their own development hindered by failing credit or lack of revenue. RAILROAD RATES AND REGULATION 297 H. THE THEORY OF RAILROAD VALUATION. 168. Market Value as a Basis for Rates. BY ROBERT H. WRITTEN. The theory that rates should be based upon market value would allow the railroads a return on monopoly value from^ favorable location. Such a monopoly value is not usually claimed for utili- ties. It is somewhat similar tO' the claim that location in the city streets under a franchise can be capitalized for rate valuation pur- poses, A closer parallel, however, is the case of a water supply plant that has secured the most economical source of supply. It is inconsistent with what is believed to be the governing principle O'f justice and equity which forms the basis of public service control, that rates should be increased, in order to pay a return on the capitalized value Oif exclusive location or other monopoly advantage that represents no actual investment. A railroad exercises the right oi eminent domain to secure its location and the right of eminent domain can only be lawfully exercised for a public purpose. The location secured by this method for a public purpose cannot justly create a monopoly that will be capitalized against the very public purpose that it was intended to serve — the transportation of freight and passengers. By the above method rates are based on cost, but not necessarily on the cast of the road itself, but in many cases on the cost of a competing or hypothetical road. Market value has nothing to do with the rate question as thus considered. It is only set up after the rates are in fact determined. To be sure, the theory is that rates are based on a fair return on the market value of the road under reasonable rates. The impo'ssibility of basing reasonable rates on a market value that is itself determined by reasonable rates is appar- ent. It is a clear case of reasoning in a circle. We have the evi- dent absurdity of requiring the answer to the problem 'before we can undertake its solution. Market value is not reaUy a part of the process but the final result. It includes in many cases a cap- italization oi certain monopoly profits and the monopoly value thus created is set up as justifying the higher rates which have in fact created the monopoly value. 169. Physical Valuation as the Basis of Rates. BY SAMUKI. O. DUNN. In recent years a new theo'ry of the proper way to ascertain the reasonableness of rates has gained wide acceptance. Many believe that the railways of this country are overcapitalized. They think, 298 READINGS IN ECONOMIC PROBLEMS therefore, that the return on their capitalization is not a criterion of the reasonableness of their rates. The sole true criterion, they believe, is a "fair return" on the "fair value" of the properties of the railways; a "fair return" is the current rate of interest; and therefore the government should make a valuation of the properties, and in future so regulate rates as to- restrict net earnings to the current rate of interest on this valuation. Many believe that large amounts of net earnings, that legally might have been paid out to the stockholders, have instead been invested in the properties. The properties also, contain a large amount of so-called "unearned increment." It is argued that, as railways are public service corporations, their owners are not en- titled to receive a return on those parts of their value which have been created by the investment of earnings or by increases in the value of real estate caused by the industrial development of the country. The owners and managers contend, on the other hand, that in any estimate that may be made of the value of the properties on which a return should be allowed to be earned, every factor enter- ing into their present value should be considered. The net earn- ings, they say, belong to- the stockholders. They may either invest them or pay them out as dividends ; and where they have chosen to invest them the value thereb}^ added belongs to^ them. They also own the real estate used for railway purposes as , absolutely — so long as it is used for railway purpose- — as the farmer owns his farm ; and therefore they have the same right, it is said, to profit by increases in its value. From a legal standpoint the spokesmen for the railways seem to have the better of the argument. The fifth and fourteenth amendments to the Federal Constitution prohibit the Nation and the States from taking private property for public use without due process of law and just compensation. When the railway, in the exercise of the power of eminent domain, takes the farmer's land, these provisions are construed to mean that it must pay him for it — not what it cost him — but its reasonable market value at the time that it is taken. A similar construction of the same provisions as they apply to railways would require that rates should be so regu- lated as to enable the railways to earn a return on the value of their properties at the time that the rates are being regulated, however the value may have been created. For if the rates were so regulated as to disable the company from earning a return on any part of the value of its property this would be, in efifect, to take so much of its value. RAILROAD RATES AND REGULATION 299 Any plan for valuation, other than present value is indefensible. Cost of reproduction is no exception. It costs on the average from one and one-third to three times as much to get land for railway as for other purposes. This is because its acquisition and use for railway purposes involve damage tO' adjacent property which must be paid for, and because land that is directly in the path of a com- ing railway attains a monopoly value. The Railroad Commission of Minnesota, in making its valuation of the railways of that state, held that the appraisal of railway land should be based on the value of adjacent land used for other purposes. But how, railway men ask, can what the farmer would have to pay for land properly be used as a factor in estimating what it would cost to reproduce the railway? Suppose that adjacent farm land were worth $100 an acre; that the valuation of an established railway were made on this basis ; and that afterward there was built a new and competing line, to which the actual cost of land was $200 an acre. The competitive rates 011 competing railways must be the same. If the rates of the older railway were tO' be so fixed as to restrict it to a return on $100 an acre, the new railway would have to meet them and might thereby be deprived of the opportunity to earn a return on part of its actual investment. This would tend to discourage new railway construction. The Railroad Commission of Washington met a situation simi- lar to this when it made its valuation of the railways of that state. The Northern Pacific, many years ago, acquired land for extensive terminals on Puget Sound at a low price. The Harriman lines recently built to Puget Sound, and because of the increase in the value of land had to pay very much more for it. The two systems were competitors, and had to make the same competitive rates. To have based the valuation of the Northern Pacific's land on its orig- inal cost, or on its estimated value for other than railway purposes, might have prevented the Harriman lines from earning a fair re- turn on the actual cost of their land. The Commission, therefore, based the valuation of the land of both roads on its present esti- mated cost of acquisition for railway purposes. Another important point in estimating the cost of reproducing the physical plants of railways is what deduction should be made for depreciation, and what addition should be made for apprecia- tion, in the value of their various parts. The moment a rail or tie is laid, or a signal tower or station is finished, it begins to deterior- ate, owing to use, and the ordinarily insidious, but often violent, ravages of the elements. But while the depreciation is going on there is also appreciation going on. As soon as a new line is fin- 300 READINGS IN ECONOMIC PROBLEMS ished maintenance forces are put to^ work, if it is well managed, which limit the depreciation that takes place by making constant repairs and renew-als. If a deduction from the cost of reproduction should be made because oi depreciation, an addition to it should be made because of appreciation. According to the widely accepted theory, as soon as an estimate of the cost of physical reproduction is finished, we should go ahead and so regulate rates on a road as to limit each carrier to the same return. Pint is such an estimate a valuation? Indubitably, other things being equal, a railway having a good physical plant is more valuable than one having a poor one. But, surely, the estimated cost of reproducing a railroad's plant is not the value of the plant ; and the value of the plant is not the value of the railroad. A railway through mountainous country might be more expen- sive to reproduce than one built through easy prairie country ; but the latter's plant may be the more valuabde, simply because it is the better machine for rendering transportation. Again, of two roads having equally good physical plants, that having the larger net earnings is plainly the more valuable. Now, net earnings do not depend solely on rates. They are the margin between gross earnings and operating expenses. Gross earnings depend not only on the rates charged, but on the nature and density of traffic. These, in turn, result largely from the energy and skill used by the traffic department oi the railway in attracting popula- tion to its lines, teaching the farmers how tO' increase the produc- tivity of the soil, securing the opening of mines and the location of factories, and so adjusting rates as to enable producers in the terri- tory to compete successfully in the markets of the entire country and of the world against the producers in other sections and coun- tries. Whether operating expenses shall be high or low in propor- tion to gross earnings depends on the enterprise and skill used by the management in reducing the grades and eliminating the curva- ture in track, in enlarging terminals, developing esprit de corps among officers and employees, increasing shop efficiency, augment- ing tonnage per car and per train load, and in a hundred other ele- ments of good management. A road whose traffic is large and whose operating expenses are relatively small obviously would have larger net earnings, and, therefore, be a more valuable property than a road on which the traffic is relatively small and the operating expenses relatively high, on any basis of rates whatever that might be applied on both. Large traffic and relatively low operating expenses are strong evidences of good management. If valuation were based entirely RAILROAD RATES AND REGULATION 301 on the cost of physical reproduction, and the net earniings of each road could be, and were, limited to the same amount, the better managed roads would be deprived of the fruits of their gfood man- agement. As a matter of fact, such regulation probably would be entirely impracticable; for the competitive rates on different roads must be the same; and, owing to the differences in density of traffic and operating expenses, nO' two roads charging the same rates could be made tO' earn the same percentages on their valuations.. 170. The "Railway- Value" of Land. BY JUSTICE CHARLES H. HUGHES. It is manifest that an attempt to estimate what would be the actual cost of acquiring the right of way if the railroad were not there is to indulge in mere speculation. The railroad has long been established ; to it have been linked the activities of agriculture, in- dustry, and trade. Communities have long been dependent upon its service, and their growth and developmient have been conditioned upon the facilities it has provided. The uses of property in the communities which it serves are to a large degree determined by it. The values of property along its line largely depend upon its existence. It is an integral part of the communal life. The assump- tion of its non-existence, and at the same time that the values that rest upon it remain unchanged, is impossible and cannot be enter- tained. The conditions of ownership of the property and the amounts which would have to be paid in acquiring the right of way, supposing the railroad to be removed, are wholly beyond reach of any process of rational determination. The cost-of-reproduction method is of service in ascertaining the present value of the plant, when it is reasonably applied and when the cost of reproducing the property may be ascertained with a proper degree of certainty. But it does not justify the acceptance of results which depend upon mere conjecture. The question is whether, in detennining the fair present value of the property of the railroad company as a basis of its charges to the public, it is entitled to a valuation of its right of way not only in excess of the amount invested in it, but also in excess of the market value of contiguous and similarly situated property. For the purpose of making rates, is its land devoted tO' the public use to be treated (irrespective of improvements) not only as increasing in value by reason of the activities and general prosperity of the community, but as constantly outstripping in this increase all neigh- boring lands of like character, devoted to other uses? If rates laid 302 READINGS IN ECONOMIC PROBLEMS by competent authority, state or national, are otherwise just and reasonable, are they to be held to be unco-nstituitional and void be- cause they do not permit a return upon an increment so- calculated ? It is clear that in ascertaining the present value we are not limit- ed to the consideration of the amount of the actual investment. If that has been reckless or imrprovident, losses may be sustained which the community does not underwrite. As the company may not be protected in its actual investment, if the value of its property be plainly less, so- the making of a just return for the use of the property involves the recognition of its fair value if it be more than its cost. The property is held in private ownership, and it is that property, and not the original cost of it, of which the owner may not be dep'rived without due process of law. But still it is property employed in a public calling, subject to governmental reg- ulation, and while, under the guise of such regulation, it may not be confiscated, it is ecjually true that there is attached to its use the condition that charges to the public shall not be unreasonable. And where the inquiry is as to the fair value of the property, in order to determine the reasonableness of the return allowed by the rate- making power, it is not admissible to attribute to the property owned by the. carriers a speculative increment of value, over the amount invested in it and beyond the value of similar property owned by others, solely by reason of the fact that it is used in the public service. That would be to disregard the essential conditions of the public use, and tO' make the public use destructive of the public right. The increase sought for "railway value" in these cases is an increment over all outlays of the carrier and over the values of similar land in the vicinity. It is an increment which cannot be referred tO' any known criterion, but must rest on a mere expression of judgment which finds no proper test or standard in the transac- tions of the business world. Assuming that the company is entitled to a reasonable share in the general prosperity of the communities which it serves, and thus to attribute to its property an increase in value, still the increase so allowed, apart from any improvements it may make, cannot properly extend beyond the fair average of the normal market value of land in the vicinity having a similar character. Otherwise we enter the realm of mere conjecture. We therefore hold that it was error to base the estimates of value of the right of way, yards, and terminals upon the so-called "railway value" of the property. The company would certainly have no ground of complaint if it were allowed a value for these lands equal to the fair average market value of sim- ilar land in the vicinity. VII. THE PROBLEM OF THE TRUSTS. A. THE INEVITABLENESS OF MONOPOLY. 171. Monopoly, the Result of Natural Growth. BY GEORGE GUN TON. Many people talk about trusts as if they were a sudden creation, the product of a conspiracy against the public. Nothing' could be farther from the truth than this view. The history of trusts is simply the history of the continuous and almost imperceptible ten- dency in progressive society toward a greater centralization of cap- ital which the most highly developed labor-saving methods of pro- duction make necessary. The impeachniient of trusts as economic institutions is therefore the impeachment of the concentration of capital, without which, it is needless to say, our great railroad, tele- graph, and factory systems would have been impossible. Very few of the industries which use the most approved methods and have contributed most to cheapening the multitude of products can now be conducted with a capital of less than a million dollars; many of them require tens and even hundreds of millions. A hundred or even fifty years ago, a millionaire might have been regarded with as much apprehension as is a hundred-millionaire today ; indeed, he would have sustained about the same relation to the productive needs and methods of the community. The truth is that in this case, as in the growth of all social institutions, the new form came because it was necessary. The small English water-wheel factory on the river bank, in the eighteenth centur}^, came because the iso- lated hand-loom! and spinning-wheel did not permit the utilization of the most economic methods after the spinning- jenny and spinning- frame were invented. The steam-driven factory in thickly popu- lated centers came in the first quarter of the nineteenth century because the water-wdieel shops were incapable of employing the best methods after the invention of steam and the power-loom had been completed. If these had not been capable of lessening the cost of production and so rendering a general benefit to the community, they could not have succeeded, as there would have been no demand for their products. So-, again, by the middle of the century, when machinery had been still further improved, partnership organization 304 READINGS IN ECONOMIC PROBLEMS of industr}' became necessaty because single individuals were not rich enough to furnish plants sufficiently large tO' employ profitably the most improved methods. With the cheapening of products and the increased consumption which followed the use of these successive improvements, and the consequent social advance of the community, a revolution in the methods of distribution and international (*ommiuoication became necessary. Inventions multiplied, which so enlarged the industrial world as to render corporations necessary in order to- obtain the best economic results. Modern trusts are but a single step farther in the same direction. They are simply the organization of corpor- ations in the same way that corporations were the organization of individual capitalists. Trusts, instead of being sudden monopolistic creations that have been sprung on the community by a few designing conspirators, are but the last link in an industrial chain more than a century long; they are no more revolutionary than any one of the previous links, and less so than some of the earlier ones. Each one O'f these links in the great chain of industrial evolution came and stayed only be- cause it was more profitable than its predecessors to those who em- ployed it, lessened the cost O'f production, and served the community more cheaply. Had it not done this, it could not have sustained itself in competition with the old methods. 172. Monopoly, the Result of Artificial Conditions. EY W^OODRO'W WILSON. Gentlemen say, they have been saying for a long time, that trusts are inevitable. They say that the particular kind of combinations that are now controlling our economic development caine into exist- ence naturally and were inevitable ; and that, therefore, we have to accept them as unavoidable and administer our development through them. They take the analogy of the railways. The railways were clearly inevitable if we were to have transportation, but railways after they are once built stay put. You can't transfer a railroad at convenience ; and you can't shut up one part of it and work another part. It is in the nature of what economists, those tedious persons, call natural monopolies ; simply because the circumstances of their use are so stiff that you can't alter them. I admit the popularity of the theory that the trusts have come about through the natural development of business conditions in the United States, and that it is a mistake to try to oppose the pro- cesses by which they have been built up, because those processes THE TRUST PROBLEM 305 belong to the very nature of business in our time, and that therefore the only thing we can do is to accept them as inevitable arrange- ments and make the best out of it that we can by regulation. I answer, nevertheless, that this attitude rests upon a confusion of thought. Big business is no doubt to a large extent necessary and natural. The development of business is inevitable, and, let me add, is probably desirable. But that is a very different matter from the development of trusts, because the trusts have not grown. They have been artificially created ; they have been put together, not by natural processes, but by the will, the deliberate planning will, of men who were more powerful than their neighbors in the business world, and who- wished tO' make their power secure against competition. The trusts do not belong to the period of infant in- dustries. They are not the products of the time, that old laborious time, when the great continent we live on was undeveloped, the yomig nation struggling to find itself and get upon its feet amidst older and more experienced competitors. They belong toi a very recent and very' sophisticated age, when men knew what they wanted and knew how to get it by the favor of the government. Did you ever look into^ the way a trust was made? It is very natural, in one sense, in the same sense in which human greed is natural. If I haven't efficiency enough to beat my rivals, then the thing I am inclined to do' it to get together with my rivals and say : "Don't let's cut each other's throats; let's combine and determine prices for ourselves ; determine the output, and thereby determine the prices ; and dominate and control the market." That is very natural. That has been done ever since f reebooting was established. That has been done ever since power was used to establish control. The reason that the masters of combination have sought to shut out competition is that the basis of control under competition is brains and efficiency. I admit that any large corporation built up by the legitimate processes of business, by econo^my, by efficiency, is natural; and I am not afraid of it, no matter how big it grows. It can stay big only by doing its work more thoroughly than any- body else. And there is a point of bigness where you pass the limit of efficiency and get into the region of clumsiness and unwieldiness. You can make your combine sO' extensive that you can't digest it into a single system,; you can get so many parts that you can't as- semble them as you would an eflfective piece of machinery. The point of efficiency is overstepped in the natural process of develop- ment oftentimes, and it has been overstepped many times in the artificial and deliberate fo^rmiation of trusts. 3o6 READINGS IN BCONOMIC PROBLEMS A trust is foTmed in this way: a few gentlemen "promote"' it— that is to say, they get it up, being given enormous fees for their kindness, which fees are loaded on to the undertaking in the form of securities of one kind or another. The argument of the pro- moters is, not that every one who comes into the combination can carry on his business more efficiently than he did before; the argu- ment is : we will assign to you as your share in the pool twice, three times, four times, or five times what you could have sold your bus- iness for to an individual competitor who would have tO' run it on an economic and competitive basis. We can afford to buy it at such a fig'ure because we are shutting out competition. Talk of that as sound business? Talk of that as inevitable? It is based upon nothing except power. It is not based upon efficiency. It is no wonder that the big trusts are not prospering in proportion to such competitors as they still have in such parts of their business as competitors have access to ; they are prospering freely only in those fields to which competition has no' access. Read the statistics of the Steel Trust, if you don't believe it. Read the statistics of any trust. They are constantly nervous about competition, and they are constantly buying up new competitors in order to narrow the field. The United States Steel Corporation is gaining in its supreme acy in the American market only with regard to the cruder manufac- tures of iron and steel, but wherever, as in the field of more ad- vanced manufactures of iron and steel, it has important competi- tors, its portion of the product is not increasing, but is decreasing, and its competitors, where they have a foothold, are often more efficient than it is. Why? Why, with unlimited capital and innumerable mines and plants everywhere in the United States, can't they beat the other fellows in the market? Partly because they are carrying too much. Partly because they are unwieldy. Their organization is imperfect. They bought up inefficient plants along with efficient, and they have got to carry what they have paid for, even if they have to shut some of the plants up -in order to make any interest ou the investments ; or, rather, not interest on their investments, because that is an in- correct word, — on their alleged capitalization. Here we have a lot of giants staggering along under an almost intolerable weight of artificial burdens, which they have put on their own backs, and con- stantly looking about lest some little pigmy with a round stone in a sling may come out and slay them. THE TRUST PROBLEM 307 B. CONDITIONS FAVORING THE GROWTH OF MONOPOLIES. 173. The Conditions of Monopolization. BY A. C. PIGOU. First, other things being equal, circumstances, which make it structurally economical for the typical individual establishment to be large, pro tanto, increase the likelihood that a single seller will market a considerable part of the aggregate output of his industrial field; for, such circumstances necessarily increase the probability that a single establishment will market a considerable part of that output. Whether any single establishment will become big enough, relatively to the whole of an industry, to procure an element of monopolistic power depends on the general characteristics of the various industries concerned. Such an event is more than usually likely in the case of industries concerned with fancy g'oods liable to become "specialties." When this is so, an individual seller may supply a considerable proportion of his own minor market, without himself being of very great size absolutely. In the case of a few peculiar industries, amiong those concerned with staple goods and services, it may also well be that the prospect of internal economies will lead to the evolution oi single establishments large enough to control a predominant part of the whole output of the industry. The most obvious instance of this is afiforded by the industry of railway transportation along any assigned route. In view of the great engineering cost of preparing a suitable way, it will, obviously, be much less expensive to have one or, at most, a few railways pro- viding the whole of the transport service between any two^ assigned points than to have this ser\nce undertaken by a great number of railways, each performing an insignificant proportion of the whole service. Similar remarks hold good of the industries of furnishing water, gas, electricity or tramway service to a town. In the general body oi industries concerned with staple goods and services, the circumstances peculiar tO' railways and the allied industries are not reproduced. Internal economies reach the limit long before the individual establishment has grown tO' any appre- ciable fraction of the whole industrial field relevant to it. When this is the case, internal economies obviously cannot be responsible for monopolistic power. Secondly, other things being equal, circumstances which make it structurally economical for the typical individual unit of business management to be large, pro tanto, increase the likelihood that a 3o8 READINGS IN ECONOMIC PROBLEMS single seller will market a considerable part of the aggregate out- put of his industry. This proposition has, in recent times, become of predominant importance. Much has been made by some writers of the fact that, when a number of parallel esta:blishments are grouped under a single head, the different plants can be thoroughly specialised to particular grades of work ; and of the other kindred fact that the orders in any place can be met from the plant nearest to- that place, and that, thus, cross freights are saved. It does not appear, however, that a single control over many separate establishments is necessary in order to secure these economies. Even though the different estab- lishments were to remain separate, the industrial organism would lend, under the sway of ordinary economic motives, to evolve them. Nor does it appear that those economies in respect of marketing, which some writers ascribe to large-scale control, are of great im- portance. Nor, again, should much importance be attached to those ad- vantages of large-scale management such as concentration of office work, provision of central warehouse for goods, centralisation of insurance and banking, establishment of a uniform system of ac- counts, and SO' forth. For these econoimies are scarcely practicable at all under the lower types of price-fixing cartel, which is common in Germany, and, even in fusions and holding companies, are very soon outweighed by the immense difficulty of finding people compe- tent properly to manage very large businesses. There are, however, certain structural economies of large-scale management, which are of a different order and have a wider reach. A business combining many establishments is, in general, in con- tact with a number oi different markets, in which the fluctuations of demand are, in some measure, independent. It follows that the operation of such a business involves in the aggregate less uncer- tainty-bearing than the operation of its parts would involve if they were separated. The general economy resulting from this fact may manifest itself in the greater facility with which loans can be ob- tained, or in the lower price charged for them, or in the smaller proportionate reserve fund that the concern needs. The larger the unit of individual control, the larger is this economy. After a point, indeed, its growth, as the unit grows, becomes exceedingly slow. But, until the unit has reached a very large size^ it grows rapidly, and constitutes a powerful force making for larger units. One further point may be mentioned. In certain special cases, large- scale control achieves an indirect economy by reducing the prob- ability that such fluctuations will occur. It does this in fields of THE TRUST PROBLEM 309 work where public confidence is of importance, and where large- ness of capital resource is calculated to create such confidence. These conditions are fulfilled in the case of banks. So far, we have considered exclusively what I have called struc- tural economies. There is also another sort of economy that, in certain circumstances, favours the growth of large-scale manage- ment. So long as a field of industry is occupied by a number of establishments separately controlled, expenditure is likely to be in- curred by all in defending their market against the others. A large part of the expenditure made in respect of advertisements and of travelers is of their character. But, when, instead of a number of competing finnis, there appears, in any portion of am industrial field, a number of firms under a single authority, a great part of this ex- penditure can be dispensed with. If united, the railroads could save vast sums spent in canvassing against each other. The economy is, of course, liable to be largest where, apart from unification, ''com- petitive" expenditure would be largest, namely, not in staple indus- tries providing easily recognized standard articles, but in various sorts of "fancy" trades. Let us next suppose that the size of the individual firm and the size of the individual unit of management in an industry have been adjusted to the structural and other economies obtainable, and that the units evolved in this way are not large enough tO' exercise any element of monopolistic power. In this case, it is clear that monop- olistic power will not be called into being incidentally. But when promoters have reason to believe that the speculative community will think a particular monopoly likely to prove more profitable than it really will do, this fact promises extra gains to those who form amalgamated companies, because it enables them to^ unload their shares at inflated values. Apart from this, however, the mag- nitude of the gains obtainable from monopolisation depends on the elasticity of the demand for the commodity concerned. The less elastic this demand, the greater are the probable gains. The first condition is that the commodity shall be of a kind for which it is not easy to find convenient substitutes. The demand for mutton is made comparatively elastic by the existence of beef, the demand for oil by the existence of gas, and the demand for the service of trains by the existence of omnibuses. As regards the kinds of commodity, little of general interest can be said. It should be observed, however, that the products of a district, or a country. whose efforts are directed tO' leadership in quality, as distinguished from quantity, are less exposed to the competition of substitutes than other products. It is, therefore, a commercially important fact 3IO READINGS IN ECONOMIC PROBLEMS that English manufacturers enjoy a very marked leadership of quality in respect of wall-papers, fine textiles, and cables, whereas, in the electrical and chemical industries, they are in a decidedly in- ferior position. Obviously, from the present point oi view, we must include among the substitutes for any commodity produced by a monopolist the same commodity produced by other sellers. The larger, therefore, is the proportion of the total output of product that a monopolist provides in any market, the less elastic the de- mand for his services will be. Inelasticity of demand for monopoly goods is, therefore, promoted in industries where importation from rival sources is hindered by high transport charges, high tariffs, or international agreements providing for the division of the field between the combined producers of different countries. Further- more, in order that the elasticity of demand may be affected by substitutes, it is not necessary that the rival source of supply should be actually existing. In some cases, mianufacture by people who are normally purchasers is itself a possible ' rival source of supply. The poor housewife has the power, if reason offers, to do her own sewing and laundry. Consequently, the demand for the services of specialists at such tasks is exceptionally elastic. For example, it has been remarked of Binningham : "The washerwomen are among the first to suffer in any period of trade depression, for, as the first economy in bad times is to do your own washing, the tiny laundry with a very local connection is soon emptied." The second condition, making for inelasticity of demand, is that a commodity shall give rise to only a small proportion of the total cost of any further commodities, in the production of which it may be employed. The reason, of course, is that, when the proportion is small, a large percentage rise in the price of the commodity, with which we are concerned, involves only a small percentage rise in the price of these further commodities, and, therefore, only a sm.all percentage contraction of consumption. The third condition is that the further commodities, if any, in whose production our commodity is employed, shall be such that substitutes cannot easily be found for them. Thus, the raw mate- rials of the building trade should be subject to a less elastic demand than those of the engineering trade, because foreign machines can compete with English machines much more easily than foreign houses can compete with English houses. The last condition is that the other commodities or services, that cooperate with our commodity in the making of a finished product, shall be easily "squeezable," or, in technical language, shall have an inelastic supply schedule. THE TRUST PROBLEM 311 The preceding considerations suggest that units of control ade- quate to exercise monoipolistic power will often be found, even though neither structural economies nor advertisement economies dictate their formation. The tendency towards this result is op- posed, in many instances, by the difficulty and cost involved in bringing about agreements among competing sellers. This difficulty and cost depend upon the following general circumstances : First, combination is easier when the number of sellers concerned is small than when it is large ; for small numbers both facilitate the actual process of negotiation, and diminish the chances that some party to an agreement will subsequently violate it. Secondly, combination is easier when the various producers concerned live fairly close to one another, and so can come together easily, than v;hen they are widely scattered. The reason why combination prevails in the German coal industry, and not in the English, is partly that, in Germany, the production of coal is localized, and not spread over a number of different districts, as it is in this country. A similar reason probably accounts, in great measure, for the excess of com- bination that appears among sellers in general, as compared with buyers in general ; for, it may be observed that at auctions, where buyers also are closely assembled, combination among them is not infrequent. Thirdly, comlbinatioii is easier when there is a certain unifomiity about the product of the various firms concerned. Dr. Levy suggests that one reason why English firms are combined to a less extent than foreign firms is that they concern themselves, as a rule, with the higher qualities, and the more specialized kinds, of commodities, rather than with "mass goods." Fourthly, combina- tion is easier when the tradition and habit of the country is favour- able, than when it is unfavourable, to joint action in general. 174, Efficiency, Large-Scale Production versus Monopoly. BY CHARI^ES J. BULLOCK. In favor of the proposition that the tendency of large-scale production is to^ pass over into monopoly, three general lines of argument may be distinguished: (a) the contention that a con- solidated enterprise possesses advantages over independent com- panies in producing and marketing its goods; (b) the claim that mere mass of capital confers powers of destructive warfare so great as to deter possible competitors from entering the field; (c) the belief that modern competition between large rival establishments, representing heavy investments of fixed capital, is injurious tO' the public, ruinous tO' the producers, and in its final outcome self-de- 3 1 2 READINGS IN ECONOMIC PROBLEMS structive. As our discussion proceeds it will become evident to the reader that all of these arguments can be employed, with consist- ency, only by those who believe that the competitive regime is to be replaced by an era of monopoly. First in this list is the contention that a consolidated concern is a more efficient agent o^f production and exchange. Thus it is claimed that trusts, by filling orders from the nearest plant, can effect a great saving in cross-freights. Data upon .this question are available in the recent Bulletin of the Department of Labor. Of the forty-one combinations reporting, twenty-seven failed to answer this question, nine claimed a saving fro-m this source, and five stated that there was no' gain. Of the nine reporting a saving, the Bulletin states the amount only in three cases ; and in two of these the item of cross-freights was combined with other econoniies, the aggregate sumis being $400,000 and "considerably over $500,000." This, be it remembered, is the trusts' own showing, and is certainly not an underestimate. The reason for these com- paratively small results is not difficult to discover. When the mon- opolized product is of a bulky sort, the industry is already localized pretty thoroughly before combination takes place; and, since most of the former independent establishments vv^ere producing chiefly for their natural local constituencies, the trust can save little in cross-freights. When, however, the product is light, transportation charges become a matter of small moment. In either case the room for saving in cross-freights is not nearly as large as has been repre- sented, while Oiften it does not exist. Then it is urged that a trust can draw upon all the patented devices of the constituent companies, and employ only those that are most efficient. But advantages accruing from this fact will in most cases prove tO' be of a temporary nature, as trusts that have tried to base a monopoly upon the control of all available patents have learned in the past, and will learn in the future. Moreover, a simple reform in our patent laws will make the best processes avail- able for all producers for any time that the public finds such a measure to be necessary for protection against monopoly. Here, then, we find no natural law working resistlessly towards combi- nation, but a man-made device which can be regulated as public policy may dictate. Again, we are told that a trust can produce more cheaply than separate concerns, because all the plants utilized can be run at their full capacity ; whereas, under competition, many establishments can be kept in operation but a part of the time. Some observations may be made concerning this claim. THE TRUST PROBLEM 313 In general, it may be denied that, whenever governmental in- terference has not produced unhealthy and abnormal conditions, competition has led to such absurdly excessive investments as is commonly assumed. We must concede, however, that under nor- mal conditions some reduction can be made in the number of plants required to supply the market at ordinary times ; but this does not dispose of the matter. If a trust is to be prepared for supplying the market promptly in times of rapidly increasing demand, it is necessary that some surplus productive capacity must exist in periods oi stationary or decreasing demand ; for, as believers in the tendency tO' monopoly often remind us, many months, or even one or twO' years, are required for the construction of new plants. When this fact is taken into account, the case will stand as follows : except where the action of government has produced abnormal conditions, the. capacity of competing establishments does not ex- ceed the requirements of the market to any such degree as is com^ monly assumed ; even a trust must provide for periods of expanding trade; even then, not all rival establishments suffer seriously from inability to find continuous employment for their plants, so that probably the advantages secured by the trust are of consequence only when the least fortunate or least efficient independent concerns are made the basis of comparison. Again, we are reminded of advantages in buying materials or selling products. It is urged that a combination can purchase its raw materials more cheaply than separate concerns. No one doubts that a large company can often secure better terms than a small establishment ; but it is not so clear that every trust can secure supplies more cheaply than large independent enterprises, unless it is true that all combinations can arbitrarily depress the prices of the materials which they consume. Undoubtedly, this has been done by some of the trusts, although their partisans deny it; but such a saving represents no social gain, and sometimes it may be possible for would-bie competitors to profit by the depressed con- dition of the market for raw materials. And, finally, we cornie tO' economies in advertising and in solicit- ing business, where the wastes of competition are certainly serious and the room for improvement correspondingly great. Those who deny the tendency to monopoly generally admit that a trust can have a material advantage here, while those who affirm the exist- ence of such a tendenc}^ evidently realize that their case is strong- est at this point. Yet an opportunity for saving in these depart- ments does not always exist, and the extent of the economy is easily exaggerated in other cases. Mr. Nettleton is right when he says: 314 READINGS IN ECONOMIC PROBLEMS "But to what extent the trust organizers have counted on prac- tically cancelling expenditure for these two items, on the ground that buyers Avill be obliged to come to the sole manufacturers, they are likely to be surprised. To an extent which few appreciate, the buying public has become accustomed to being reminded of its needs before making purchases. Except in staple and absolutely necessary commodities, demand is largely created and maintained by advertising through periodicals, catalogues, or travelling sales- men. Hence, the trust that expects to save the bulk of this import- ant item must also expect to lose through diminished sales more than the economy represents. This is not theory, but the testimony of leading dealers in many lines." We must now take into account certain counteracting forces, upon which some writers rest their belief that competition will ulti- mately prevail. These economists contend, in the first place, that, O'Utside the field of the natural monopolies, the growth of a busi- ness enterprise is limited by the fact that companies of a certain size will secure "maximum efficiency" of investment, and that be- yond this point concentration brings no increase in productive ca- pacity. This position is based upon the belief that a factory of a certain size will enable machinery to be employed in the most advantageous manner; that a reasonable number of such plants will make possible all needful specialization of production ; that allied and subsidiary industries can be, and are, carried on by large independent concerns ; and that the cost and difficulties of super- visiom increase rapidly after a business is enlarged beyond a certain size, especially when it is attempted to unite plants situated in differ- ent parts of the country. For this reason, increased output does not decrease the burden of fixed charges after a company attains a certain' magnitude; but, on the contrary, new charges arise. Among such new expenses, not the least important are the cost of emploving the most skilled legal talent to steer the combination just close enough to the law, the expenses necessary for "legislative" and "educational" purposes, and the outlays for stifling competition or the continual "buying out" of would-be rivals. It is argued that an established monopoly will suffer actual loss from listless and unprogressive management. As the New York Journal of Commerce rightly insists, "it is not to be denied that such concentrations of management will be subject to countervail- ing offsets from the absence of the stimulus of competition ; from the uncertainty about the management falling into the best pos- sible hands; from the discouragement to invention which always attends monopoly, and from- the possibility that the administration THE TRUST PROBLBM 315 may be intrusted to 'friends' rather than tO' experts." As Professor Clark suggests, an estabhshed monopoly, secure in the possession of the markets of a large country "would not need to be forever pulling out its machines and putting in better," so that, as com- pared Avith countries where industry is upon a competitive basis, such a combination would fall behind in the struggle for interna- tional trade. In ruthlessly and unceasingly displacing expensive machinery with newer and better appliances, American manufac- turers have probably led the world ; but monopolies will inevitably feel reluctant to continue such an energetic policy of improvement. As combinations obtain a greater age, they will persist in old and established methods ; while nepotism and favoritism, tending to- wards hereditary office-holding will replace the energetic manage- ment that some of the trusts nowi display. Here we may refer tO' two of the alleged advantages of trusts. It is said that combinations develop abler management through the opportunity they afford for a specialization of skill upon the part of their ofificials, and that efficiency is increased by a compari- son of the methods and costs of production in the various plants. When it is contended that the "strength of the trust is that it gives the opportunity for the exercise of these highest qualities of industrial leadership," and that it gives us "a process of natural selection of the very highest order," we may question whether stock speculation and other causes lying outside the sphere of mere pro- ductive efficiency have not had more to do with the formation of recent combinations than demonstrated superiority in business man- agement. And, it may be asserted that the establishment of per- manent monopoly will interfere seriously with the future process of selection. It must be remembered that the able leaders now at the head of the successful trusts were developed out of a field which atTorded the widest opportunity for creative ability. The supreme qualities requisite for great industrial leadership are not likely to be fo'Stered by a regime which closes each important branch of manufactures to- new enterprise, and renders hopeless all com- petition with a single consolidated co^mpany. Will successive gen- erations of bureau chiefs or heads of departments in long-estab- lished corporations be able to^ continue the race of masterful leaders, which freedom in originating and organizing independent industries has given us in the present age? The second argument advanced to prove the tendency to mon- opoly is the claim that mere mass of capital confers such powers of destructive warfare as to deter possible competitors from en- tering the industry, at least until prices have long been held above 3 1 6 READINGS IN ECONOMIC PROBLEMS the competitive rate. It is said that a large combination can lower prices below the cost of production in any locality where a small rival concern is established, thus driving it out of the field. With- out doubt the destructive competition waged by combinations is an important consideration, and it may well enough re-enforce mon- opoly where other attendant circumstances favor consolidation. But a monopoly based solely upon this power would be, confessedly, a temporary affair; for probably no one would claim that all capital- ists would be intimidated permanently by such circumstances. The final reason for the belief that combinations must ulti- mately prevail is found in the character of modern competition in these industries which require heavy investments of fixed capital. Under such conditions the difficulty of withdrawing specialized in- vestments and the losses that are entailed by a suspension of pro- duction make competition so intense that prices may be forced far below a profitable level without decreasing the output ; and in- dustrial depression inevitably follows. In support of this line of argument, it is said that trusts are beneficial, because they can "exercise a rational control over indus- try," and "adjust production to- consumption." Thus it is believed that commercial crises can be prevented, or, at least, that their worst effects can be avoided. But such arguments overlook the facts that a restriction placed upon production by a trust, especially if this is sufficient tO' raise prices above the competitive rate, may react injuriously upon other trades; and that monopoly profits, accruing to a small body of capitalists for a long period of time, must con- stitute a tax upon the body of the people that will affect the dis- tribution of v(fealth in such a way as to reduce the consuming power of the masses. A reduction in purchasing power thus produced would render excessive the existing investments in staple indus- tries, and produce crises. Not only is it doubtful whether monopoly is a wise method of regulating industry, hut it is certain that the evils of compe- tition are greatly exaggerated in some cases, while in others they are due to unhealthful conditions for which an interference with industrial freedom is responsible. In miany other industries where trusts have been formed, the excessive investment of which writers complain was caused by the undue stimulus given by high protective duties and by the restriction of foreign competition. Competition is restricted by protective duties in most of the industries where combinations are formed ; these duties increase the severity, and perhaps the frequency, of the fluctuations from which business suffers ; then trusts, a further restriction of freedom, are advocated THE TRUST PROBLEM 317 as a remedy for the ills caused by the initial interference with in- dividual enterprise; and, finally, in order to regulate the trusts, an elaborate system of public supervision is proposed. Would it not be well tO' make a genuine trial of competition before condemning it for producing evils which are greatly increased by governmental interference with industrial freedom? Competition cannot be proved a failure until it is given a trial. The evils from which many economists would seek refuge in im dustrial combination are greatly increased by unwise laws which have now outlived any usefulness that originally they may have possessed. If unhealthful conditions produced by our own inter- ference with the course of business are ever removed, competition will probably develop no evils which could not be borne, as vastly preferable to monopoly, public or private. Indeed, even as things are, the shortcomings of the competitive system are exaggerated ; and attempted monopoly is more likely in the end to increase, rather than mitigate, those periodic fluctuations from which industry suf- fers. 175. The Causes of Trusts. BY CHESTER W. WRIGHT. We have in modern capitalistic industry tendencies toward a widening of the market with increased localization and integration and a steadily enlarging scale of production accompanied by a growing fierceness of competition. The larger the concerns, the smaller their number, the greater their resources for carrying on a fight, the bigger the prize which goes to the winner, and conse- quently the fiercer the competition and the m'ore excessive its wastes. Add to this the difficulties arising from the small margin of profit, the more complicated and prolonged industrial processes, the wider market, and the large use of fixed capital — and finally add the extra gain which comes from the pO'wer of monopoly to extort exorbitant prices, and one understands the forces which are fundamentally responsible for the modern trust movement. The reason for many trusts may be found in more imimediate causes, which, for the very reason that they are more immediate and ob- vious, have often appeared, to the public eye at least, as even more important. It is doubtless true that a considerable number of trusts owe their origin to the profits which it was expected would accrue to the promoter who undertook the task of organizing the trust. This was especiall}^ the case in the proriiotion which went on during the years 1898 and 1901, when the money market and other conditions 3i8 READINGS IN ECONOMIC PROBLEMS' were particularly favorable ; but it is not likely that we shall soon see a recurrence of such an era. There can be no cjuestion, how- ever, that the lax corporation laws, many of which appear to have been especially designed to meet the promoter's needs, did enable him to make certain gains and to dispose of the securities put out at a somewhat higher price than would otherwise have been pos- sible. Still, it must be borne in mind that the more fundamental causes for the growth of trusts were really at the bottom of even these gains. Most prominent among the second group of more immediate causes for the growth of trusts — those which I have called special privileges — are railroad favors, tariff duties, and patent rights. In former years railroad favors of one sort or another were doubtless given tO' many of the trusts. From time to time announcements have been made that these discriminations had been abolished ; but frequently, as some later special investigation or prosecution re- vealed the facts, it has been found that they still exist. However, the evil is undoubtedly much less frecjuent than formerly and today is at best but a minor factor. The tariff is probably of more im- portance as an aid to the trusts, though I am inclined to believe that its influence has been considerably exag"gerated. Probably its chief eft'ect is in enabling trusts, most of which would exist in any case, to exact somewhat higher prices for their products than would otherwise be possible. It should be noted, however, that it is the over-protective tariff" which offers the chief incentive for the for- mation of trusts. It is because the duties are often so much higher than is necessary to- maintain the industry that overproduction en- sues and the domestic manufacturers are led to combine so as to secure the high profits made possible by the tariff. To enact duties of this character is to^ do^ nothing less than to offer a reward for forming a trust. The importance of patent rights as a basis for trusts probably deserves more attention than it has received. The third group of minor causes for the growth of trusts in- cludes certain methods of competition, notably factor agreements and discriminating prices. Under such agreements the manufac- turer or wholesaler may sell his product on condition that the price which he fixes be absolutely maintained, or on condition that the re- tailer shall not deal in the competing product of any rival, or per- haps that he shall not sell such rival product below a certain price. Any concern putting out a product for which there is a considerable demand can use this system,- especially the latter form, against its rivals with tremendous power and effectiveness. The practice of THE TRUST PROBLEM 3»9 discrimiiiatin,!^ prices is also a powerful weapon for building up and maintaining monopoly control. Closely connected with this is the power exercised by control of credit which is sometimes declared to be an important weapon of the trust. On this point it is impossible at present to speak decisively. Information is ver_v difficult to obtain and usually con- flicting. There is some reason to believe that a larg^e concern with the close financial alliances which ordinarily accompany it may oc- casionally find itself in a po'sition where it can control the credit obtainable by a rival at somie crucial moment and through the power thus obtained may force that rival to capitulate, often at a heavy loss, as in the case of the Pennsylvania Sugar Refining Company. There may not be a money trust but apparently there are times when the power of centralized control over large masses of capital proves of great advantage to a big corporation. 176. English Industrial Conditions and Monopoly. BY HKRMANN LKVY. Hie development of cartels and trusts in English industries is restricted v/ithin narrow limits by three facts, the absence of a protective tariff, the comparative insignificance of freights, and the rarity of slowly reproduced mineral products likely to form na- tional or international monopolies. Manufacturers can only set about the monopolistic organization of an industry when it is free from foreign competition, owing tO' the lowness of the cost of pro- duction, to the manufacture of special c]ualities, to traditional dex- terity, or to international agreement. Even in such cases, mon- opoly is subject to certain conditions. On the one hand the profit is relatively small, coniipared with what it is in countries which are not without the three features mentioned above ; and on the other hand the industries affected are such that their materials can be acquired at equal or even less cost by others, whereas many of the most important monopolies abroad are in industries whose materials cannot be multiplied at will, and can be monopolized. Therefore, even where prices could be raised so far as foreign competition is concerned, a successful monopoly can only be established when, in the first place, the number of competing firms is relatively very small ; and, in the second place, when the rise of fresh competition, even if prices are good, is either out of the question or only to be expected after a considerable period. Both conditions can only arise under the existing industrial organization after concentration, England presents the curious contradiction that, in the days when 320 READINGS IN ECONOMIC PROBLEMS cartels were unknown in Germany or America, she had quite a modern cartel in her coal trade, based on freight advantages. When the rest of the wodd was being satiated with cartels and trusts, free trade, the improvement of transit — a very important factor in so small a country — the transition to the preponderating produc- tion of manufactured goods from' imported raw materials and sim- ilar causes kept her from monopoly. In other countries commercial policy, transport facilities, the chance existence of slowly reproducible minerals forming na- tional or even world-wide monopolies, and other similar factors not essentially connected with the natural development of modern in- dustrial capitalism can cause monopoly. Its rise under such con- ditions is not peculiar to a certain advanced stage of capitalism. Like the early cartels in English coal and copper mining, and so many Gemian cartels and American trusts, such monopolies may be shortlived phenomena vanishing with the disappearance of some accidental or temporary condition. In England, on the contrary, the creation of monopoly is direcly connected with the most modern deevlopment of industrial capitalism, and is its logical consequence. The recent rise of cartels and trusts must therefore be regarded as essentially the pure result of that economic law which we have called the movement toward concentration. Very different would the picture be if England broke with the free trade system. Protection would increase the number of trades in which the creation of monopoly would depend solely and singly on the amount of home competition. A great many industries in which at present concentration has very largely reduced the number of firms, but in which foreign competition has so far prevented a monopolist combination, would, under a tariff, straightway be in a position to found cartels or trusts. As it is, many industries threat- ened by foreign competition now find it easier than it used to be to suppress home competition; and, in proportion as this is so, the prolDability that protection would be the last thing requisite for a monopoly increases. Finally, a tariff would encourage the mon- opolistic combination of far more firms than is now possible, be- cause the attraction of monopoly would grow with the possibility of profiting by the protective duty, and therefore monopolies would be conceivable in England even where little or no concentration had taken place. British tariff reformers are so well aware of this con- nection that they often desire a protective tariff simply as a means to creating trusts which they consider to be the most advantageous form O'f industrial organization. Free traders no less than tariff refoirmiers value the advantages O'f combination as a matter of or- : THE TRUST PROBLEM 321 ganization ; but they maintain that under free trade alone can mon- opohst organizations produce desirable economic results. This opinion rests on the argument that under free trade a monopolist combination cannot aim at raising prices, which must sooner or later provoke foreign competition, but only by reducing expenses, and thereby increasing profits. Just because they result from concen- tration it is an undoubted characteristic of English cartels and trusts that by economies and better organization they produce es- pecially large reductions in the working expenses oif an under- taking. In many cases this may have been the chief object of the founders of great combines. It is admittedly a matter of very great difificulty to estimate the effects of English cartels and trusts on prices. In the first place, the fixing of prices exclusively by competition is in general superceded by a more or less entire autonomy of the monopolist combinations, even where there is no complete m'onopoly. We find it almost universally stated in the reports of trade papers and similar documents that monopolist combinations "raised," or "reduced," or "tried to maintain" prices. In other words, prices no longer depend merely on the results of unrestricted competition. In the second place, monopolist combinations usually achieve their avowed aim oi raising prices above competitive prices. Finally, monopolist combinations show their influence in the division of markets so characteristic of trusts and cartels in other countries. C. THE SOCIAL VALUE OF MONOPOLY. 177. The Industrial Efficiency of Monopolies. BY George; w. perkiNvS. Perhaps the most useful achievement of the great corporation has been the saving of waste in its particular line of business. By assembling the best brains, the best genius, the best energy in a given line of trade, and co-ordinating these in work for a common end, great results have been attained in the prevention of waste, the utilizing of by-products, the economizing in the manufacture of the product, the expense of selling, and through better and more uni- form service. This same grouping of men has raised the standard of their efficiency. Nothing develops man like contact with other men. A dozen men working apart and for separate ends do not develop the facility, the ideas, the general effectiveness that will become the 322 READINGS IN ECONOMIC PROBLEMS qualities of a dozen mien working together in one cause. In such work emulation plays a useful part; it does all the good and none of the harmt that the old method oi restrictive competition did ; the old competition was wholly self-seeking and often ruinous, while the new rivalry, within the limits of the same organization, is con- structive and uplifting. Thus the great corporation has developed men of a higher order of business ability than ever appeared under the old conditions ; and what a value this has for the coming gen- eration ! We have heard many warnings that because of the great cor- poration we have been robbing the oncoming generation of its op- portunities. Nothing is more absurd. The larger the corporation, the more certain is the office boy to ultimately reach a foremost place if he is made of the right stuff, if he keeps everlastingly at it, and if he is determined to beconiie master of each position he occupies. In the earlier days, the individual in business, as a rule, left his business to his children. Whether or not they were competent did not determine the succession. But the giant corporation can- not act in this way. Its management must have efficiency ; and nothing has been more noticeable in the management of corpor- ations in the last few years than that "influence," so-called, as an element in selecting men for responsible posts, has been rapidly on the wane. Everything is giving way and must give way to the one supreme test of fitness. And is it not possible that the accumulating of large fortunes in the future may be curtailed to a large extent through the very workings of these corporations? Are there not many advantages in having corporations in which there are a large number of po- sitions carrying with them very handsome annual salaries, in place of firms with comparatively few partners — the annual profits of each one of whom were often so' large that they amassed fortunes in a few years ? A position carr^ang a salary so large as to represent the interest on a handsome fortune can be permanently filled only by a man of real ability, so that in case a man who is occupying such a position dies, it must, in turn, be filled with another man of the same order — ^while the fortune might be and most likely would be passed on regardless of the heir's ability. Therefore, the more positions of responsibility, of trust and of honor, that carry large salaries, the more goals we have for young men whose equipment for life consists of integrity, health, ability and energy. Furthermore, the great coTporation has been of benefit to the public in being able to standardize its wares, so that they have be- THE TRUST PROBLEM 323 come more uniformly good. Wages are unquestionably higher and labor is more steadily emiployed ; for, in a given line of trade, handled to a considerable extent by a corporation, there are prac- tically no failures ; while, under the old methods of bitter, relent- less warfare, failures were frequent, and failure meant paralysis for labor as well as for capital. The great corporation is unquestionably making general busi- ness conditio'ns sounder. It is making business steadier ; because firms inevitably change and dissolve, while a corporation may go on indefinitely ; because it is able to survey the field much better than could a large number of firms and individuals and, therefore, vastly better able to measure the demand for its output and, if prop- erly managed, to prevent the accumulation of large stocks of goods that are not needed — a condition which often arose under the old methods when many firms were in ruthless competition with one another in the same line of business, oftentimes producing serious financial difficulties for one and all. Broadly and generally speaking, the corporation as we know it today, as we see it working and feel its results, is in a formative state. Tn many cases actual and desperately serious situations caused it to be put together hurriedly. In many cases serious mis- takes have been made in the forms of organization, in the methods of management, and in the ends that have been sought. In some instances the necessity for corporations has grown faster than has the ability of men to manage them. Yes, mistakes have been many and serious. But" the corporation is with us ; it is a conditioiU, not a theory, and there are but two- courses open to us — to kill it or to keep it. 178. The Savings of Combination. BY the; INDUSTRIAI, COMMISSION. (a) Among the economies that are generally recognized as resulting from combination is the regulation of production. Where there is no general understanding among producers there is a strong tendency to overproduction, sO' that markets become demoralized and competition excessive. The combination is able so to^ fit the supply to the demand that while customers can be fully supplied at reasonable prices there is no danger of overproduction. It is thus a means of preventing panics and periods of depression. (b) Closely allied with this adaptation of supply to demand is the advantage that comes from the possibility of carrying much smaller stocks of goods. This saves not niicrely the investment of 324 READINGS IN ECONOMIC PROBLEMS capital, but also interest on running capital, insurance, storage charges, shop-work charges, etc. (c) This same control of production enables the combination to keep its factories running full time, thus keeping labor fully em- ployed. It has been found in several special cases that the per- centage saved in the cost of production in the rubber industry by running a factory full time instead of half time was from 4 to 8 per cent. In other cases it is doubtless more. (d) When a large proportion of an industry is under the con- trol of one central management, it becomes essential tO' success that the various products be standardized. In this way the quality of goods can be made much more uniform than would otherwise be the case, and its excellence can be guaranteed. Furthermore, the number of styles of goods can be regularly very much reduced, thus lessening the cost of manufacture and effecting a saving in the amount of stock that needs to be carried. (e) The same influence leads to the larger use of special ma- chinery, and to the adaptation of the workmen and the superintend- ents to the special departments for which they are best suited. In many cases through this specialization more can be saved than thrO'Ugh the introduction even of new machines. In one case, in connection with the manufacture of rubber goods, as much as 20 per cent of the cost was saved by thus specializing the machinery. Mr. Schwab, president of the United States Steel Corporation, men- tions the specialization and adaptation of material as a great saving in the steel industry. (f) The specialization mentioned above saves also materially through a lessening in the cost of superintendence, which is some- times very large. Likewise the increased efficiency often enables the manufacturer to lessen the number of laborers per unit of pro- duct. (g) There are also noteworthy savings along somewhat sim- ilar lines in connection with the cost of selling; for example, the number of travelling men can often be greatly reduced. In the case of the United States Rubber Company there was a saving of 25 per cent in the number of travehng salesmen. Substantial econ- omies can be made through direct sales instead of through middle- men ; and the cost of advertising can be materially lessened, owing to more intelligent distribution and method of advertising. Adver- tising in a large way permits also the securing of more favorable rates. The popularity of a trade-mark can be more readily secured when the sales are direct. THE TRUST PROBLEM 325 (h) There is oft^n through combination a better knowledge and control of credit conditions, so that bad debts may be guarded against. During the year 1890 the United States Rubber Company, doing business of about $28,000,000, lost less than $1,000 in bad debts. The loss by the separate companies on that volume of busi- ness would have averaged doubtless over $100,000 per year. (i) Of course there is a very material saving in many instances through shipping goods to customers from the nearest plants. In this matter of freight saving also the large combinations can often supply themselves with storage facilities at central points and then ship their goods in large quantities during the seasons of the year when freight rates are lowest, thus often securing the advantages of water transportation which otherwise would not be available. 179. Monopoly and Efficiency, BY LOUIS D. BRANDEIS. It will be found that wherever competition has been suppressed it has been due either to resort tO' ruthless processes, or by im- proper use of inordinate wealth and power. The attempt to dis- member existing illegal trusts is not, therefore, an attempt to- inter- fere in any way with the natural law of business. It is not an at- tempt tO' create competition artificially, but it is removing of the obstacle to competition. The policy of regulated competition is dis- tinctly a constructive policy. It is the policy of development as distinguished from the destructive policy of private monopoly. It has always in the past and must always in the future paralyze in- dividual effort and initiative and deaden enterprise. Business progress demands that the industrial advance be unobstructed and private monopoly go. The highways of industrial and commercial development must be left open. Earnest argument is constantly made in support of monopoly by pointing to the wastefulness of competition. Undoubtedly com- petition involves some waste. What human activity does not? The wastes of democracy are among the greatest obvious wastes, but we have compensations in democracy which far outweigh that waste and make it more efficient than absolutism. So it is with competition. The margin between that which men naturally do and which they can do is so great that a system which urges men on to action, enterprise and initiative is preferable in spite of the wastes that necessarily attend that process. I say "necessarily" because there have been and, are today wastes incidental tO' competition that are unnecessary. Those are the wastes which attend that compe- 326 READINGS IN ECONOMIC PROBLEMS tition which does not develop, but kill. Those*wastes the law can and should eliminate. It may do so by regulating competition. It is, of course, true that the unit in business may be too small to be efficient. The larger unit has been a common incident of monopoly. But a unit too small for efficiency is by no means a necessary incident of competition. It is also true that the unit in business may be too large to be efficient, and this is nO' uncommon incident of monopoly. In every business concern there must be a size-limit of greatest efficiency. What that limit is will differ in different businesses and under varying conditions in the same busi- ness. But whatever the business or organization there is a point where it vrould become too large for efficient and economic man- agement, just as there is a point where it would be too small to be an efficient instrument. The limit of efficient size is exceeded when the disadvantages attendant upon size outweigh the advan- tages, when the centrifugal force exceeds the centripetal. Man's work often outruns the capacity of the individual man; and, no matter what the organization, the capacity of an individual man usuallv detennines the success or failure of a particular enterprise, not only financially to the owners, but in service to the community. Organization can do much to make concerns more efficient. Organ- ization can do much to make larger units possible and profitable. But the efficiency even of organization has its bounds; and organ- ization can never supply the combined judgment, initiative, enter- prise and authority which must come from the chief executive of- ficers. Nature sets a limit to their possible accomplishment. As the Germans say : "Care is taken that the trees do not scrape the skies." That mere size does not bring success is illustrated by the records of our industrial history during the past ten years. This record, if examined, will show that: (i) Most of the trusts which did not secure monopolistic positions have failed tO' show marked success as compared with the independent concerns. This is true of many existing trusts, for instance, of the News- paper Trust, the Writing Paper Trust, the Upper Leather Trust, the Sole Leather Trust, the Woolen Trust, the Paper Bag. Trust, the International Mercantile Marine ; and those which have failed, like the Cordage Trust, the Mucilage Trust, the Flour Trust, should not be forgotten. (2) Most of those trusts which have shown marked success secured monopolistic positions either by controlling the whole busi- THE TRUST PROBLEM 327 ness themselves, or by doing so in combination with others. And their success has been due mainly to their ability to fix prices. This is true, for instance, of the Staadard Oil Trust, the Shoe JNIachinery Trust, the Tobacco Trust, the Steel Tn.ist, the Pull- man Car Company. (3) Most of the trusts which did not secure for themselves monopoly in the particular branch of trade, but controlled the situ- ation only through price agreements with competitors have been unable to hold their own share of the market as against the inde- pendents. This is true, for instance, of the Sugar Trust, the Steel Trust, the Rubber Trust. (4) Most of the efficiently managed trusts have found it neces- sar}' to limit the size of their own units for production and for distribution. This is true, for instance, of the Tobacco Trust, the Standard Oil Trust, the Steel Trust. Lack of efficiency is ordinarily manifested either (t) in rising cost of product, (2) in defective quality of goods produced, or (3) in failure to make positive advances in processes and methods. The third of these manifestations is the most serious of all. In this respect monopoly works like poison which infects the system for a long time before it is discovered, and yet a poison so potent that the best of management can devise no antidote. Take the case of the Steel Trust. It inherited through the Car- negie Company the best organization and the most efficient steel makers in the world. It has had since its organization exceptionally able management. It has almost inexhaustible resources. It pro- duces on so large a scale that practicallv no experimental expense would be unprofitable if it brought the slightest advance in the art. And yet: "We are today something like five years behind Germany in iron and steel metallurg}^, and such innovations as are being introduced by our iron and steel manufacturers are most of them merely following the lead set b}^ foreigners years ago." The Shoe Machinery Trust, the result of combining directly and indirectly more than a hundred different concerns, acquired substantially a monopoly of all the essential machiner}' used in bottoming boots and shoes. Its energetic managers were conscious of the constant need of improving and developing inventions and spent large sums in efforts to do so. Nevertheless, in the year 1910 they were confronted with a competitor so formidable that the Com- 328 . READINGS IN ECONOMIC PROBLEMS pany felt itself obliged tO' buy him off, though in violation of the law and at a cost of about $5,000,000. I'hat competitor, Thomas G. Plant, a shoe manufacturer who had resented the domination of the trust, developed an extensive system of shoe machinery, which is believed to be superior to the Trust's own system, which repre- sents the continuous development of that Company and its prede- cessors for nearly half a centur}^ But the efficiency of monopolies, even if established, would not justify their existence unless the community should reap benefit from the efficiency ; the experience teaches us that whenever trusts have developed efficiency, their fruits have been absorbed almost wholly by the Trusts themselves. From such efficiency as they have developed the community has gained substantially nothing. For in- stance : The Standard Oil Trust, an efficiently managed monopoly, in- creased the prices of its principal products between 1895 and 1898, and 1903 to 1906 by 46 per cent. The Tobacco Trust is an efficiently managed monopoly. Be- tween 1899 and 1907 the selling price on smoking tobacco rose from 2 1. 1 cents per pound to 30.1 cents; the profit per pound from- 2.8 cents per pound to 9.8 cents. The selling price of plug tobacco rose from 24.9 cents per pound tO' 30.4 cents ; the profit per pound from 1.9 cents to 8.7 cents. The Steel Trust is a corporation of reputed efficiency. The high prices maintained by it in the industr}^ are matters of common knowledge. In less than ten years it accumulated for its share- holders or paid out as dividends on stock representing merely water, over $650,000,000. D. TYPES OF MONOPOLY. 180. A Classification of Monopolies. BY RICHARD T. ELY. First Classification : A. Public Monopolies. B. Private Monopolies. Second Classification : A. Social Monopolies. I. General Welfare Monopolies. 1. Patents. 2. Copyrights. THE TRUST PROBLEM 329 3. Public Consumption Monopolies. 4. Trade-marks. 5. Fiscal Monopolies. IT. Special Privilege Monopolies. 1. Those based on Public Favoritism. 2. Those based on Private Favoritism. B. Natural Monopolies. I. Those arising from a Limited Supply of Raw Mate- rial. II. Those arising from Properties Inherent in the Busi- ness. III. Those arising from Secrecy. Third Classification : A. Absolute Monopolies. B. Complete Monopolies. C. Partial or Incomplete Monopolies. Fourth Classification : A. Monopolies which admit of No Increase in the Supply of the Monopolized Articles. B. Monopolies which admit of an Increased Supply of the Monopolized Articles. I. With Increasing Difficulty. II. With Constant Difficulty. III. With Decreasing Difficulty. Fifth Classification: A. Local Moiuopolies. B. National Monopolies. C. International or Universal Monopolies. Sixth Classification : A. Sellers' Monopolies. B. Buyers' Monopolies. Seventh Classification: A. Monopolies of Material Goods. B. Monopolies of Services. I. Services Incorporated in Material Goods. II. Personal Services. 330 READINGS IN ECONOMIC PROBLEMS i8i. Forms o£ Monopoly Organization. BY CHARLES R. VAN HISE. Combinations during their history have passed from those of the loosest kind tO' those in which there is complete unity of man- agement. The ditferent kinds of associations and combinations may be roughly classified as follows : (i) Informal or Formal Associations for the General Protec- tion or Advancement of a Business. — These are illustrated by the various business associations. Almost every industry has such an association, and some of them many. Thus, there are associations of brewers, butchers, bankers, hardware men, lumbermen, cattle- men, butter makers, and of practically every producing industry. Similarly there are associations of salesmen, wholesalers, and re- tailers in each of the various industries, whether they be hardware, drugs, dry goods, or groceries. These sales associations may be national, state, or local, or they may be national with state and local branches. Not only are there associations of tradesmen and sales- men, but there are associations of people enaged in the same ser- vice, teachers, dentists, laborers, etc. The laborers' association may be for the entire country or for a definite industry, as, for instance, the American Federation of Labor, and the Brotherhood of Loco- motive Engineers. The purpose of all of these associations is to advance the in- terests of the .group concerned. This is done in the loosest form of association in the public convention at which views are com- pared, experiences exchanged, papers presented, the purposes of which. are to benefit one another merely by the exchange of infor- mation, without any implication whatever that any one will feel impelled to abide by any view presented. Thus the members of the retailers' associations meet and ex- change information to the common advantage. One of the items concerning which information is exchanged is as to the manufac- turers that sell to the so-called mail order house, the severest com- petitors of the retailers. Another aim in this exchange of information is to secure com- mon prices for standard articles. There need not be, indeed usually is not, a formal agreement in a community or association upon this matter. One way to secure a common price is by means of a printed list or catalog. Even without any formal agreement among the dealers, they all understand that the price list is to be followed. The regular and uniform rise and fall of the price of anthracite during any year illustrate the situation. In early summer the price THE TRUST PROBLEM 331- is the lowest; it is increased by regular increments as the autumn comes on. The price is the same in a given community from each dealer for purchases at a given time under similar circumstances. The result is almost as certain and as uniform as if it came about by formal agreement put into legal form. The stage of the association for exchange of information easily passes into the second phase in which regulations are adopted by the association tO' control the actions O'f its constituents ; as,, for in- stance, methods to- be pursued in advertising, quotations, and even scale of prices. Actions of this kind are well illustrated by the brewers' association, which decides as to the price to be charged for beer in the retail trade, issues regulations about rebates to retailers, and even goes into such minor details as the treating of drivers, and the extent to which favors are to be given by adver- tising, etc. It is charged that at the so-called Gary dinners an informal un- derstanding was reached concerning prices for iron and steel. What happened, according to Mr. Gary, was that the steel makers met together and exchanged information with reference to one another's affairs, their outputs, prices, etc., in order that each might have full knowledge of the transactions of other producers to guide his own jtidgment. (2) Formal Agreements. — ^In certain lines of business, corpor- ations have made definite agreements aboiit the management of the business oi the uniting parties. The arrangements, usually called pools, (i) divided the production in a definite manner between the different companies; (2) divided the markets; (3) regulated the sale for the home market, perhaps leaving freedom in the matter of ex- port; or (4) placed the entire profits in a common fund or pool to be divided according to an agreed plan. With the foregoing features, there sometimes went agreements as to prices; but this was not es- sential, since when controlling outputs, dividing markets, regulating sales, and apportioning profits, it is to the interest of all to keep prices at a high level. As the railways developed in this country, relief from excessive competition was found by pools under which the business between two points was definitely divided, and an agreement was made as to rates. The pool was also extensively applied to the industries. Under the mamifacturers' pools, which began as early as i860, each manufacturer was usually allotted a certain percentage of the bus- iness. A manufacturer who received more than the allotted per- centage paid into the pool a sufficient amount to balance the excess ; while the manufacturer who received less than his percentage re- 332 READINGS IN ECONOMIC PROBLEMS ceived from the pool a sum sufficient toi make up the deficiency. The business was done through a supervisor who' acted in the capacity of a clearing house. Pools are very well illustrated by the numerous agreements which were made by the iron companies among themselves before the organization of the United States Steel Corporation. (3) Trusts. — Since the pool was a failure, in order to attain the objects striven for by it, the trust was devised. Under the trust, each unit of the combination transferred its stock to trustees. Thus the entire stock of the constituent coimpanies was held by a group of trustees who' had complete authority over the business of all the companies entering the trust. An establishment or company re- tained its own officers and conducted its business, but under the direction of the trustees, as tO' line of product, amount of output, and price. The trust was able to prevent overbuilding and over- production, to prevent competition in price between its units, to apportion business, to consolidate buying and selling, and thus gave all the advantages of unity oi organization, due tO' concentration of industry. Well-known types of this organization were the Stand- ard Oil trust, the sugar trust, the cotton-seed oil trust, the whisky trust. The great period of the trust was from 1888 to 1897. (4) Holding Corporations.—Under the trust each of the con- stituent companies was an independent legal entity. The stock was simply placed in the hands of the trustee for management. In the holding corporation, the stock is transferred to the holding concern so that this corporation actually owns the stock of the constituent companies. So far as management and operation are concerned, the situation is precisely the same as under the trust and the ad- vantages the same, only the constituent companies are subsidiary companies instead of nominally independent. The subsidiary comi- pany maintains its officers, carries on its business, and competes so far as efficiency is concerned with the other companies of the corru- bination ; but as to nature and quantity of output and price, the policy is completely controlled by the corporation of which it is a constituent member. The era of the holding corporation began in the nineties, and has extended through that decade and the first decade of the twentieth century. Great examples are the Standard Oil Company and the United States Steel Corporation. While some of the holding corporations have remained merely managing companies, others of them, and somie of the more im- portant, have also become manufacturing companies. (5) Complete Merger. — This is the final stage in concentration of management. The stock of the constituent companies of the THB TRUST PROBLEM 333 combination is actually bought in and canceled, the only stock being that of the master company. If, for instance, the different com- panies of the United States Steel Corporation — the Federal Steel, the Carnegie Steel, and others — cease to exist by their stock being canceled and stock of the Steel Corporation be the only existing issue, we should have the final stage of corporation management for this gigantic company. Since the recent decisions of the United States Supreme Court, which seem to indicate that holding companies will be in a stronger position if they are actually manufacturing companies, it is easy to predict that the great consolidations, now forming, so far as prac- ticable will become unified corporations. Just as the pool, the trust, and the holding corporation have been successively attacked in the courts, there can be little doubt that the great merger will also there be attacked. Indeed, for intrastate com- merce, such attack has already been begun. For instance, the Dia- mond Match Company, Avhich bought outright the properties of competing concerns engaged in the manufacture of matches, was declared to be an illegal monopoly in the state of Michigan. Sim- ilar attack is likely to follow for interstate commerce under the Sherman act. It is to be noted that the development from pool to trust, from trust to holding company, from holding company to^ complete con- solidation, has been accelerated by the laws which exist in restraint of trade. The dissolution of pools by the courts led to the trust ; the dissolution of the trust led to the holding corporation; the dis- solution of the holding corporation at the present time is now lead- ing to the consolidated company. E. THE INFLUENCE OF MONOPOLY ON PRICE. 182. Monopoly Price a Competitive Price. BY FRANKUN HENRY GIDDINGS. Imagine a commercial world in which the output of every im- portant product is controlled by a single organization. Imagine that the entire wheat crop is commercially controlled by one trust, the cotton crop by another, the iron and steel output by another, the paper output by yet another, and so on through the entire list of marketable goods. In such a commercial world, soi organized, would each of these great trusts be able to fix prices in accordance with its own desire toi amass wealth and pay dividends, irrespective 334 READINGS IN ECONOMIC PROBLEMS of the wishes and efforts of consumers? The prevaihng opinion among consumers is, I think, that just such a thing would happen. The truth, on the contrary, is that by no conceivable possibility could any such thing happen ; and tO' make the point perfectly clear I will ask you to follow me in a demonstration which, in its reason- ing, is essentially mathematical, but is not especially difficult. Ob'- viously, if every product were controlled by a single trust, the situa- tion would be precisely the same, as far as prices were concerned, that it would be if each product were controlled by a single indi- vidual. Let us, then, designate each product by a single small letter, a, b, c, d, e, etc., and designate the persons in control of each pro- duct by a single capital letter, A, B, C, D, E, etc. The commercial world, then, is made up of the individuals A, B, C, D, E, each of whom is the producer of some great marketable commodity, and each of whom is the consumer oi the commodities controlled by his fellow-producers. Now it may seem that A, who, we will sup- pose, is the producer and controller of wheat, can compel B, C, D, and E to pay extortionate prices for every bushel they demand, because, since no one else in the world can supply wheat, they must buy of A or starve. In like manner, it may appear that B, C, and D, the producers of cotton, steel, and paper, can charge extor- tionate prices because they command the only known supply. This is the assumption that the general public makes. It is, however, an assumption which has all the characteristics of an inadequate, and therefore a false, economic theory. It would be true only on one condition, namely, that the consumption of goods was strictly lim- ited to those small quantities that are absolutely necessary to support existence. That condition, however, practically never exists in the real world ; for human wants are indefinitely expansive, and every known commodity can be applied tO' a great number of different uses besides the primary one of supporting life. Wheat, for ex- ample, is used not only as a food product, but in enormous quanti- ties is converted intO' starch, dyestuffs, and other chemical products. Cotton is used not only for necessary clothing, but in vastly greater quantities for purposes of comfort, convenience, and ornamentation. Paper is used not merely for absolutely necessary records, accounts, and communications, but in enormously greater quantities for pleas- ure, and even for trifling satisfactions. While, therefore, an individual who absolutely controlled the supply of any given commodity might conceivably compel his fel- lows-men to pay extortionate prices for that very small percentage of his product which was absolutely indispensable to their existence, by no possibility could he compel them toi pay such prices for that THE TRUST PROBLEM 335 vastly greater percentage which they desired merely for purposes of convenience, comfort and pleasure. And this is not all. Our comforts and pleasures are extremely variable things. Very few of us feel in any degree bound tO' choose one form of merely convenient or pleasurable satisfaction rather than another. We have preferences, of course, but we subject our preferences, after all, to a rather rigid economic control. What, then, would be the actual situation in which our imaginary producers, A, B, C, D, and E, each having absolute control of a particular product, would find themselves placed ? They could, if they chose, limit production tO' those very small quantities of com,- modity which men must have or die ; but if they did this, A, B, C, D, and E would themselves live and die poor men. No great for- tune would ever be amassed by that policy. The alternative con- fronting them, then, would be tOi encourage the development oi a multiplicity of uses for their respective products, and a liberal con- sumption to be met by a large production ; and this they could do only by offering their goods at reasonable prices. This alternative adopted, oiir imaginary producer would in- stantly make a most interesting discovery — the discovery, namely, that he was living and producing in a world ruled by competition, and not, as he had supposed, by monopoly. Until now he had imagined that the only kind of competition which he had to fear was a competition between himself and some other producer of the same sort of commodity which he was producing and offering. That is to say, A had thought of competition as coming only from some other A, A', A"', etc. But now he discovers that the real com- petition of the real business world is not the competition between A and A', or between B and B' ; it is the competition between A and B, between A and C, between B and C, between C and D, and so on. In other words, it is not the competition between one seller of wheat and another seller of wheat that really rules the business world ; it is rather the competition between the producer of wheat and the producer of cotton. This competition is real, it is inevita- ble, it is controlling, because of the ineradicable fact that each of the producers is appealing to a consuming public whose purchasing power is limited. The consuming public is not at present, and so far as human foresight can now perceive it never will be, in the enjoyment of an unlimited income. Every industry, then, is appeal- ing to a consuming public to which every other industry is appeal- ing, and which cannot buy unlimited quantities of commodity from each industry. This simply means that when one group of pro- ducers demands unusually high prices, all other groups of producers 336 RBADINGS IN ECONOMIC PROBLEMS can very considerably increase their sales, in virtue of that law of human nature according to which men can and do, tO' a great ex- tent, substitute one group of conveniences and pleasures for an- other, postpone certain enjoyments for a time, and distribute their expenditures at all times in such a way as to obtain the greatest satisfaction for a given outlay. 183. Monopoly Control of Price. BY THE; INDUSTRIAL COMMISSION. The rise or fall of prices after a comibination has been formed is often due to causes other than combination itself. In every devel- oping industry the general tendency is for prices tO' fall. Improve- ments in methods of production and distribution are being made continually. This is the nomial condition of American industry, and coimbination is one of its many means. Since the era of combination has been entered upon there is no standard by which to judge accurately whether or not prices are too high, for comparison can be made with former conditions only ; but the method most approved by business men and economists is to compare the changes in price of the product of a given com- bination with the average price (the index number) of many arti- cles of the same general class, regarding which most conditions are the same, except the one of combination. Such a comparison can not be entirely conclusive, as the factors entering into the prob- lem are numerous, but it may at least be suggestive of the effect of combination. With this caution as to the untrustworthiness of many price statistics and the inferences drawn therefrom, some conclusions may still be stated which seem reasonable. If combinations are able to effect large savings, it becomes evi- dent that they can lower the margin between the cost of the raw material and of the finished product, thus giving to the owners larger profits than before and to consumers lower prices. If the combination has a practical monopoly, either through the control of materials or by means of a patent, or through the power of large capital and the control of a very large proportion of the output, it naturally becomes passible for it so tO' increase the mar- gin between cost of materials and finished products as to make larger profits not merely through the lessening oi the cost of pro- duction, but through sheer power over the market. In these two "ways, then, through savings and through the power of monopoly, THE TRUST PROBLEM 337 the marginal profit as well as the price of products may be increased by the combination. The facts regarding prices, so far as they have been carefully studied and interpreted, seem to bear out this conclusion. In the reports of the Industrial Commission there has been an attempt to present a statistical study of this question. In several different lines of industry — such as sugar refining, oil refining, iron and steel man- ufacture, and others — a careful comparison of the margin between the cost of the raw materials and the price of finished products has been made. In some cases it is possible to eliminate practically every other factor excepting that of combination itself. In others, while the evidence is not so clear, it seems to tend in the same direction. The general results of the study show that in most cases the combination has exerted an appreciable power over prices, and in practically all cases it has increased the margin between raw ma- terials and finished products. Since there is reason to believe that the cost of production over a period of years has lessened, the con- clusion is inevitable that the combinations have been able tO' increase their profits. In some cases the increased cost of the raw materials accounts for the greater part of the increase in the price of the finished pro- duct, but the study of the margin makes it clear that there has been also an increase in profit. In other cases there has been an in- crease in the cost of production itself, owing to advances in the price of machinery, wages, etc. ; but in all of the industries most thoroughly investigated, a careful analysis shows that the margin has not been allowed to become so narrow as under a system of free competition. The dividends of the combinations and the testimony of their managers confirm the conclusion reached. On the other hand, on account of the saving effected by manufacturing- on a large scale, it should be possible for the combination to put its product upon the market cheaper than can its competitor. There is reason to believe in some lines of industry this has been done, and that competitors are crushed out simply because of the advantageous offers made to consumers by the combinations. Many times the lowering of price by a combination has not been general, but has been made in comparatively small areas of terri- tory, or sometimes even to single consumers ; while in order to recoup itself for this local lessening of profit, if not even for an abso- lute loss, the combination has maintained or even raised prices else- where. Complaints of this nature have been made especially against the Standard Oil Company, but also against other combinations. "The fact is at times denied, and the practice is comparatively seldom 338 READINGS IN UCONOMIC PROBLEMS defended by officers of conibinations on business reasons, but cer- tain managers do not hesitate to say that it is their policy to meet competitive prices, and that if they are compelled to lose in certain localities, they must raise their prices elsewhere in order to secure what they beileve to be reasonable profit. A similar control over prices, through the power of the combina- tion, is found at times in connection with the purchase of raw ma- terials, although ordinarily the effect is less marked here than in the case of selling prices. There can be no doubt that the Standard Oil Company has for many years, through its control of pipe lines. been able practically tO' fix the price of crude petroleum. The Amer- ican Sugar Refining Company, its president admits, owing to its power in the market, is able to buy at slightly better rates than its competitors, but the difference is so slight as not to affect to any great extent general market conditions. 184. Cut-Throat Prices: The Competition that Kills. BY LOUIS D. BRANDEIS. If a dealer is selling unknown goods or goods under his own name, he alone should set the price; but when a dealer has to use somebody else's name or brand in order tO' sell goods, then the owner of that name or brand has an interest which should be re- spected. The transaction is essentially one between the two prin- cipals — the maker and the user. All others are middlemen or agents ; for the product is not really sold until it has been bought by the consumer. Why should one middleman have the power to depreciate in the public mind the value of the maker's brand and render it unprofitable not only for the maker but for other middle- men? When a trade-marked article is advertised to be sold at less than the standard price, it is generally done to attract persons to the par- ticular store by the offer of an obviously extraordinary bargain. It is a bait — called by the dealers a "leader." But the cut-price article would more appropriately be termed a "mis-leader" ; because ordinarily the very purpose of the cut-price is to create a false im- pression. The dealer who sells the Dollar Ingersoll watch for sixty-seven cents, necessarily loses money in that particular transaction. lie has no desire to sell any article on which he must lose money. He advertises the sale partly to attract customers to his store ; but main- ly to create in the minds of those customers the false impression that other articles in which he deals and which are not of a standard THE TRUST PROBLEM 339 or known value will be sold upon like favorable terms. The cus- tomer is expected to believe that if an Ingersoll watch is sold at thirty-three and one-third per cent less than others charge for it, a ready-to-wear suit or a gold ring will be sold as cheap. The evil results of price-cutting are far-reaching. It is some- times urged that price-cutting of a trade-marked article injures no one; that the producer is not injured, since he received his full price in the original sale to jobber or retailer; and indeed may be benefited by increased sales, since lower prices ordinarily stimulate trade ; that the retailer cannot be harmed, since he has cut the price voluntarily to advance his own interests ; that the consumer is surely benefited because he gets the article cheaper. But this rea- soning is most superficial and misleading. To sell a Dollar Ingersoll watch for sixty-seven cents injures both the manufacturer and the regular dealer; because it tends to make the public believe that either the manufacturer's or the deal- er's profits are ordinarily exorbitant ; or, in other words, that the watch is not worth a dollar. Such a cut necessarily impairs the reputation of the article and, by impairing reputation, lessens the demand. It may even destroy the manufacturer's market. A few conspicuous "cut-price sales" in any market will demoralize the trade of the regular dealers in that article. They cannot sell it at cut prices without losing money. The cut by others, if known, would create the impression on their own customers of having been overcharged. It is better policy for the regular dealer to drop the line altogether. On the other hand, the demand for the article from the irregular dealer who cuts the price is short-lived. The cut-price article cannot long remain his "leader." His use for it is sporadic and temporary. One "leader" is soon discarded for another. Then the cut-price outlet is closed to the producer ; and, meanwhile, the regular trade has been lost. Thus a single prominent price-cutter can ruin a market for both the producer and the reg- ular retailer. And the loss to the retailer is serious. On the other hand, the consumer's gain from price-cutting is only sporadic and temporary. The few who buy a standard article for less than its value do benefit — unless they have, at the same time, been misled into buying some other article at more than its value. But the public generally is the loser; and the losses are often permanent. If the price-cutting is not stayed, and the man- ufacturer reduces the price to his regular customers in order to enable them to retain their market, he is tempted to deteriorate the article in order to preserve his own profits. If the manufacturer cannot or will not reduce his price tO' the dealer, and the regular 340 READINGS IN ECONOMIC PROBLEMS retailers abandon the line, the consumer suffers at least the incon- venience of not being able tO' buy the article. The independent producer of an article which bears his name or trade-mark — be he manufacturer or grower — seeks nO' special priv- ilege when he makes contracts to prevent retailers from cutting his established selling price. The position of the independent producer who establishes the price at which his own trade-marked article shall be sold to the consumer must not be confused with that of a combination or trust which, controlling the market, fixes the price of a staple article. The independent producer is engaged in a business open to compe- tition. He establishes his price at his peril — the peril that if he sets it too high, either the consumer will not buy or, if the article is, nevertheless, popular, the high profits will invite even more com- petition. The consumer who' pays the price established by an inde- pendent producer in a competitive line of business does so volun- tarily ; he pays the price asked, because he deems the article worth that price as compared with the cost of other competing articles. But when a trust fixes, through its monopoly power, the price of a staple article in coiTimon use, the consuirter does not pay the price voluntarily. He pays under compulsion. There being no competi- tor he must pay the price fixed by the trust, or be deprived of the use of the article. Price-cutting has, naturally, played a prominent part in the his- tory of nearly every American industrial monopoly. The competition attained by prohibitinig the producer of a trade- marked article from maintaining his established price offers noth- ing substantial. Such competition is superficial merely. It is spor- adic, temporary, delusive. It fails to protect the public where pro- tection is needed. It is powerless to prevent the trust from fixing extortionate prices for its product. The great corporation with ample capital, a perfected organization and a large volume of bus- iness, can establish its own agencies or sell direct to the consumer, and is in no danger of having its business destroyed by price-cut- ting among retailers. But the prohibition of price-maintenance imposes upon the small and independent producers a serious handi- cap. Some avenue of escape must be sought by thein; and it may be found in combination. Independent manufacturers without the capital or the volume of business requisite for engaging alone in the retail trade will be apt to combine with existing chains of stores, or to join with other manufacturers similarly situated, in establishing new chains of retail stores through which to market their products direct to the consumer. The process of exterminat- THE TRUST PROBLEM 341 ing the small independent retailer already hard pressed by capital- istic combinations — the mail-order houses, existing chains of stores, and the large department stores^ — would be greatly accelerated by such a movement. Already the displacement of the small indepen- dent business man by the huige corporation with its myriad of em- ployees, its absentee ownership, and its financial control, presents a grave danger to our democracy. The social loss is great ; and there is no ecoinoniic gain. But the process of capitalizing free Americans is not an inevitable one. It is not even in accord with the natural law of business. It is largely the result of unwise, man- made, privilege-creating law, which has stimulated existing tenden- cies to inequality instead of discouraging them. Shall we, under the guise of protecting competition, further foster monopoly by creat- ing immunity for the price-cutters ? F. TYPICAL MONOPOLISTIC PRACTICES. 185. Competitive Methods of Standard Oil. BY JAMEiS RUDOLPH GARFIEI.D. Upon the request of its attorney, all the essential facts discov- ered by this Bureau were presented tO' the company at the close of the investigation, and an exhaustive statement relating thereto was made by its chief traffic officer. There was no denial of the facts found, but explanations of particular situatioais were offered, and it was urged that the facts did not show any violation by the Standard of the letter or spirit of the interstate-commerce law. A most careful review of the facts and the explanations -leads to the following conclusions : The Standard Oil Company has habitually received from the railroads, and is now receiving, secret rates and other unjust and illegal discriminations. During 1904 the Standard saved about three-quarters of a mil- lion dollars through the secret rates and there may be other secret rates which the Bureau has not discovered. This amount repre- sents the difference between the open rates and the rates actually paid. Many of these discriminations were clearly in violation of the interstate-commerce law, and others, whether technically illegal or not, had the same effect upon competitors. These discriminations have been so long continued, so secret, so ingeniously applied to new conditions of trade, and so large in amount as to make it certain that thev were due to concerted action 342 READINGS IN ECONOMIC PROBLEMS by the Standard and the railroads. The advantage to the Standard over its competitors from such open discriminations is enormous, probably as important as that obtained through the secret rates. If an unfair discrimination be obtained by one shipper through a device which in itself is seemingly not prohibited by law, that fact shows that the law is defective and should be strengthened; it does not show that the discrimination is proper or just. The following are a few oi the most important discriminations and the methods by which they were obtained: (i) For about ten years the New England territory has been in control of the Standard Oil Company by reason of the refusal of the New York, New Haven and Hartford road and of the Bos- ton and Maine road, on all but a few divisions, to* prorate, i. e., to join in through rates — on oil shipped from west of the Hudson River, and by means of the adjustment of published rates. The refusal to prorate increased the rail rates from the West from 8 to 10 cents per hundred pounds. These railroads do' prorate on all other commodities ; their refusal tO' do so in the case of oil amount- ed to imposing a substantial tax on all consumers in the region they cover, and is also a heavy discrimination against the smaller refiners. (2) The Standard Oil Company has been able to absolutely control for many years the sale of oil in the northeastern part of New York and in a portion of Vermont by means of secret rates from its refineries at Olean and Rochester. The Pennsylvania Railroad has given the Standard a rate of 9 cents a barrel from Olean, N. Y., to Rochester, while the indepen- dent refineries situated in territory adjacent to Olean were given a rate of 38 cents a barrel. By means of this 9-cent rate, in com- bination- with a rate from Rochester to Norwood, N. Y., a virtually secret and veiy low rate from- Norwood, N. Y., to Burlington, and secret local rates therefrom, the Standard has been able to supply central and northern Vermont with oil at a rate of from 15 to 21 cents per hundred pounds whereas no independent refiner could reach that territory from western Pennsylvania save by a rate vary- ing from 33 to 50 cents per hundred pounds. (3) The Standard Oil Company has maintained absolute con- trol of almost the whole section of the country south of the Ohio River and east of the Mississippi by means of secret rates and open discriminations in rates from Whiting, Ind. For example, the published tariff rate from Whiting, Ind., the great western refinery of the Standard, to Birmingham, Ala., was 44 cents per hundred pounds. For at least ten years the Standard, by means of a secret combination of rates by way of Grand June- THE TRUST PROBLEM 343 tion, Tenn., over the lines of the Chicago and Eastern IlHnois, the JlHnois Central, and the Southern Railway, has shipped oil to Bir- mingham for 29^4 cents. The Toledo' competitor, no farther dis- tant, had tO' pay 47^ cents. Again, the open rate from; Whiting to Evansville, Ind., has been for many years 11 cents. The Standard has for about ten years shipped oil to Evansville, for local use and for many points beyond in the South-east, at so-called State rates of 6 cents and 8^4 cents. The freight paid by the Standard in this case has been about $10,000 a year less than the open rate. (4) The Standard Oil Company has for at least ten years shipped oil from Whiting to .East St. Louis, III, at a rate of 6 or 6% cents on three of the five railroads running between those places, while the only duly published rate on all roads has been 18 cents during all that period. This discrimination saved the Standard about $240,000 in 1904. (5) In the Kansas-Territory field there are some unfair open rates. A more important discrimination has been in the arbitrary weights fixed by the railroads on crude oil and fuel oil. This dis- crimination prevents the Kansas producer from selling his crude oil, especially that of low gravity, advantageously in competition with the fuel oil produced by the Standard and the small local re- finers. Crude oil is charged on the basis of 7.4 pounds per gallon; its actual weight is about 7.2 pounds. Fuel oil produced by the refiner- ies is charged at 6.4 pounds ; it actually weighs about 7.6 pounds. A barrel of crude oil shipped from Kansas to St. Louis is charged nearly 10 cents more than a barrel of fuel oil ; this difference in freight charges is equal to more than one-third of the price of low-grade Kansas crude. This discrimination has existed for about four years. It does not exist in any other field. The legislation of Kansas in 1905 put an end to it so far as shipments within the State are concerned. Most of the secret rates, and some of the open discriminations discovered by the Bureau of Corporations, were abolished by the railroads shortly after such discovery. Nevertheless, the wide- spread discriminations in open rates still in force leave the inde- pendents at serious disadvantage. The investigation has only inci- dentally touched State shipments from distributing centers, partic- ularly in less than carloads. The few instances examined suggest the probability of discriminations on such shipments which, taken in connection with through traffic, may result in discriminations on interstate business. 344 READINGS IN ECONOMIC PROBLEMS 1 86. Monopolistic Practices of the American Tobacco Company. BY CHIEF justice; EDWARD D. WHITE. We think the conclusion of wrongful purpose and illegal com- bination is overwhelmingly established by the following considera- tions : (a) By the fact that the very first organization or combination was impelled by a previously existing fierce trade war, evidently inspired by one or more of the minds which broiught about and be- came parties to that combination. (b) Because, immediately after that combination and the .in- crease of capital which followed, the acts which ensued justify the inference that the intention existed to use the power O'f the combina- tion as a vantage ground to further monopolize the trade in tobacco by means of trade conflicts designed to injure others, either by driving competitors out of the business or compelling them to be- come parties to a combination — a purpose whose execution was il- lustrated by the plug war which ensued and its results, by the snuff war which followed and its results, and by the conflicts which im- mediately followed the entry of the combination into England and the division of the world's business by the two foreign contracts which ensued. (c) By the ever-present manifestation which is exhibited of a conscious wrongdoing by the form in which the various transactions were embodied from the beginning, ever changing but ever in sub- stance the same. Now the organization of a new^ company, now the control exerted by the taking of stock in one or another or in sev- eral, so as to obscure the result actually attained, nevertheless uni- form,, in their manifestations of the purpose to restrain others and to monopolize and retain power in the hands of the few who, it would seem, from: the beginning contemplated the mastery of the trade which practically followed. (d) By the gradual absorption of control over all the elements essential to the successful manufacture of tobacco products, and placing such control in the hands of seemingly independent corpora- tions serving as perpetual barriers to the entry of others into the tobacco trade. (e) By persistent expenditure of millions upon millions of dol- lars in buying out plants, not for the purpose of utilizing them, but in order to close them up and render them useless for the purposes of trade. THE TRUST PROBLEM 345 (f) By the constantly recurring stipulations, whose legality, isolatedly viewed, we are not considering, by which numbers of persons, whether manufacturers, stockholders or employees, were required to bind themselves, generally for long periods, not to- com- pete in the future. 187. Dealers' Agreement with the American Tobacco Company. New York, October i, 1895. D^XR Sir : — We will be glad to consign to you for sale, on com- mission, our various brands of cigarettes, such cigarettes to be sent by us, and received, sold and accounted for by you, upon terms and conditions as follows, namely : First. All cigarettes which we may send to you, you are to sell to the retail trade only for retail piiirpoises ; you are to sell none to other than retail dealers except by our written permission. Second. You shall, at all times, sell our cigarettes at such prices only as we may fix in selling lists sent to you. You shall not sell, or dispose of, any cigarettes at lower prices than those so* fixed. Fourth. All cigarettes consigned to you are to remain our prop- erty until sold by yoin, subject only to your lien thereon for all ad- vances which you have made under the terms of this agreement. Seventh. If you do not discriminate against our cigarettes in favor of those of other manufacture, and if you do not sell, or dis- pose of, any of our cigarettes at less than the list price, and if, in all respects, you comply with the terms of this agreement, we will pay you a commission of two and one-half (25^) per cent on the amount realized by you from the sale of the cigarettes which we may con- sign to you. Eighth. If, however, you handle cigarettes of our manufacture exclusively, and do not sell or distribute, or in any way aid in the sale, or distribution of, cigarettes of other manufacture, and, if you, in all respects, fully comply with the terms and conditions of this agreement, we will pay you an additional commission of seven and one-half (7^) per cent on the amount realized by you from the sale of the cigarettes which we may consign to you. Tenth. All obligations upon our part to pay you any commis- sion for the sale of the cigarettes which we may consign to you is, and shall be, dependent upon your strict compliance with the agree- ment hereinbefore contained that you will not sell any of our cigar- ettes for a less price than that fixed in our selling lists sent to you. If you should sell or dispose of any o^f our cigarettes at less than such price, you shall forfeit all right to the payment of any commis- 346 READIXGS IX ECOXOMIC PROBLEMS sions on cigarettes which you may have previously sold, and on Nvhich commissions have not been paid you, and you shall at once, on demand, pay to us the list price for all cigarettes which you have sold, and deliver to us all of our cigarettes then in your possession which may have been previously consigned by us to you. Eleventh. Upon your acceptance in writing of the tenus and conditions of this agreement, yoa understand and agree that you will handle our cigarettes exclusively, on the tenns and conditions herein specified, and in the event that you hereafter detennine to sell cigarettes of other manufacture, you are to notify us, in writing, of such determination: and thereafter, if you have fully complied with all other terms of this agreement, the commissions to be paid to you for sale of our cig"arettes shall be at the rate of two and one- half (2j-'2) per cent. Fourteenth. The rieht is reserved to us at anv time, to decline to sell you any more cigarettes, and to withdraw the cigarettes al- ready consigned to you, upon repaying to you all your legitimate advances thereon, and the right is reserved to you, at any time, to decline to act further for us. after having delivered to us all cigar- ettes then in your hands, and paying over to us the proceeds of all sales of our cigarettes at list price. Sixteenth. Xo employe of this company has any authority whatever to change or modify this agreement, or any circular, let- ter, or price list of this company. Your agreement in writing hereon to receive our cigarettes on consigmnent and to sell and account for the same, under the above conditions, when executed by you. will constitute a binding contract between you and our company. ^'ery truly yours. The American Toracco Company. i88. The Shoe Machinery Trust. BY JAMES H. VAHEY. I would like to present to your readers some of the reasons for the opposition in ^lassachusetts to the leases of the United Shoe IMachiner}- Company. One of these leases would cover practically a whole page of a newspaper. They provide that the lessee shall neither lease nor use from any other concern any other machines which do the same kind of work as those procured from the tnist. A bill has been introduced in the Massachusetts senate to pro- vide that this shall not be done. About seven years ago the Shoe Machiner)- Company acquired THE TRUST PROBLEM 347 control of all the independent shoe machinery companies and con- solidated them mider the present system. It does not sell machinery and will not permit manufacturers to buy any. Its leases provide that patents of the trust shall be incontestable. Many of them have expired. The life of a patent is 17 years. Many of those held by the trust are 24 years old, but it makes the manufacturer agree that he will not contest the validity of the patents, when he takes a lease. It also makes him agree to buy eyelets, nails, tacks and wire from the trust. The profit on some of these things is 500 or 600%. It has driven from business the manufacturers of these articles, be- cause it has tal^ shoe manufacturer in the United States. Last year a bill similar to the one now before the Massachusetts legislature was introduced. It passed the House of Representatives, 348 READINGS IN ECONOMIC PROBLEMS and the trust compelled its defeat in the Senate. If the company was not afraid that it could not succeed in competition, why did it oppose this simple bill, the only object of which was to prevent it from enjoying the absolute monopoly of the shoe machinery busi- ness in that commonwealth? The only logical conclusion to be derived from the whole policy of the shoe machinery trust is that it intends to control the shoe industry of the world. Its ambition is boundless. At the present time it consists in making every man, woman and child who wears shoes pay royalty to it. Its conception of the future is that this shall last forever. The independence of Massachusetts is aroused and will assert itself, because forever is a long time. 189, Practices of the American Sugar Refining Company. BY CHARLUS R. VAN HISiJ. (i) Through collusion of the officers of the sugar company and the officers of the government, duties were paid upon the basis of short weights. There were recovered from the company on ac- count of these weighing frauds $1,835,486. The secretary-treas- urer of the American Sugar Refining Company and the general manager of the Brooklyn Refinery were convicted for participation in them. (2) In the investigation of the weighing frauds illegalities were also discovered under which the company had received draw- backs for exported syrup in excess of the amount justly due. The company settled the case with the government by the payment of $700,000. (3) The company has been convicted of taking rebates from a number of railways ; and in consequence of these practices has been fined sums aggregating $98,000. (4) In addition toi the above, the Congressional Committee finds strikingly developed several evils which they regard as char- acteristic of combinations. These are as follows : "a. Original overcapitalization of great industrial corporations resulting in increased cost of production, if a profit is to be made (as is always insisted upon) on the inflated capitalization, and high- er prices of the product to the consuming public. ''b. The temptations of the persons who organize and control these large corporations to earn dividends on watered stock as soon as possible, so that such stock may be unloaded in the open markets upon the investing public. These dividends can rarely if ever be made without increasing prices tO' the consumer. THE TRUST PROBLEM 349 "c. Exploitation not only O'f the consuming public and of the investing public, as already set out, but alsO' of the corporations themselves, by their officers, directors, and trustees, Avho do not hesitate to overburden the consumer, to deceive the investor, and to take advantage of the corporations that have trusted them, when- ever it will line the pockets of such individual trustees." G. LABOR AND MONOPOLY. I go. Labor and the United States Steel Corporation. BY JOHN A. FITCH. K discussion of the subject "Industrial Combinations and the Wage Earner" with reference to the Steel industry, may well take the form of an answer to- the inquiry, "Has the formation of the United States Steel Corporation proven a good thing for labor or the reverse?" The reasons for choosing the United States Steel Corporation are both logical and obvious, I believe. It is the greatest combina- tion in the industry ; it has more money to- spend on improvemenis than any other, and so furnishes the most favorable basis for judg- ment as to the effect of such combinations ; and it em(ploys over 200,000 workmen, while its largest competitor employs less than 20,000. It may be well first to consider briefly who the steel workers are. Not over twenty per cent of the employees in blast furnaces and rolling mills can be regarded as highly skilled. Twenty to twenty- five per cent more may be termed semi-skilled, and the remaining fifty-five to sixty per cent are unskilled laborers. Roughly, the gradations in skill correspond to gradations in nationality. You will not find an Anglo-Saxon among the unskilled ; you will hardly find one in ten who is American born. Sixty per cent of them are un- naturalized and a third are unable to speak the English language. Twenty-five years ago, and even more thirty years ago-, unskilled labor positions in the steel industry were filled by Irish immigrants. To-day, the Irish employees that remain are foremen, and the com- mon labor is done by representatives of the races of southern and southeastern Europe. But even more than ordinarily this shift has taken place in the steel industry, owing to the fact that it is coming to be more and more an industry of machinery and of unskilled men. There has been great expansion in this industry, and the absolute number of skilled men is much larger than it was even 350 READINGS IN ECONOMIC PROBLEMS fifteen years ago, but the proportion of skilled men to the whole number employed is much less than in former years and the ten- dency is for it to become still less as time goes on. The steel in- dustry has had a great demand in the past for the raw South Euro- pean immigrants and there is every reason to believe that that de- mand will be larger as time goes on. Turning now to the discussion of labor conditions, employees in sheet and tin mills work in three shifts of eight hours each. Except for a negligible fraction of one per cent in other mills, the sheet and tin workers are the only ones who have an eight-hour day. Yard laborers in all the mills have a ten-hour day and so do shop men, that is, moiders, pattern-makers, machinists, blacksmiths, etc. Tube-mill workers and those engaged in fabricating structural and bridge material have a ten-hour day. In the actual manufacturing processes, however, blast-furnaces, open-hearth and Bessemer de- partments, and in the rolling of rails, beams and plates, the regular working day is twelve hours. To give some idea of the numbers, the Federal census of 1910 shows that there were 277,913 employees in blast-furnaces, steel works and rolling mills in the whole country in 1909. Fully half of these were twelve-hour men, for about fifty per cent of all employees engaged in manufacturing processes have a twelve-hour day. Since the beginning' of the industry in this country, blast-fur- naces have regularly, and open-hearth furnaces have often, been operated seven days a week. Toi the long working day in these departments, then, there has been added a long working week. This has led further tO' the introduction of the so-called "long turn." The custom is for the two crews tO' change about each week, that is, the day crew of one week becomes the night crew of the next, and vice versa. This can be accomplished in only one of two ways. The Saturday night crew may work until Sunday noon and then be relieved by the day crew, who remain on duty until Monday morning at 6, when the other crewi comes back on duty again. That makes an eighteen-hour period for each crew. The more general custom, however, is for the crew that goes to- work Sunday morning to remain on duty a full twenty-four hours. These were the hours of labor that were general in the industry when the United States Steel Corporation was fo'rmed. It did not modify them in any material way until 191 1. In that year a plan was adopted for allowing one day of rest in seven for each man in the continuous processes. The plan was to increase the force by one-sixth, and to grant one day of rest each week to the members of the crew by rotation through the week. THE TRUST PROBLEM 351 It is difficult to make a statement regarding wages, because the wage schedule of a steel millis a very complex affair. In 1907 I was given wage figures fronii the pay roll of a Steel Corporation mill in the Pittsburgh district. The figures included all of the men in five departments of a steel mill, including every necessary step in the process of turning pig iron into a finished steel product. There were 2,304 men included, and they were grouped according to earnings as follows: 125, or approximately five per cent, re- ceived over $5 a day ; 524, or twenty-three per cent, received be- tween $2.50 and $5.00, and 1,655, or seventy-two per cent, re- ceived $2.50 a day or less. In May, 1910, a general wage increase was announced by the Steel Corporation, which was described as averaging six per cent. This increase, so far as common labor is concerned, amounted to one cent an hour. The rate in 1908 was 16 1-2 cents an hour in the Pittsburgh district, and it is now 17 1-2 cents. This is the high- est rate paid by the Steel Corporation. In its Chicago^ mills the rate is 17 cents, and in its Birmingham!, Alabama, mills it is 13 to 14 cents. Professor Chapin, in his study made for the Russell Sage Foun- dation, decided that a decent standard of living could not be main- tained in New York City by a family of five persons on an annual income of less than $800, and that there is no assurance that it can be maintained on an income below $900. Noi unskilled steel worker in America can earn even $800 a year on the rate that is being paid today. I now come to what I shall call the ameliorative efforts of the Steel Corporation — the things regarded by the Corporation as done on the credit side of the account. First in this list I shall place the campaign for safety. Steel mills are essentially dangerous places in which to work, not only on account of the vast tonnage of metal that is handled in a molten state, but on account of the great amount of complex machinery. The steel industry has an unenviable record of accidents to work- men. In 1907 several subsidiary companies of the United States Steel Corporation decided to adopt better methods of accident pre- vention. This new move contemplated two important and necessary lines of activity — installation of safety devices and the inculcation of habits of caution. A disinterested observer, who' was qualified to judge, has made the statement to me that the South Chicago plant of the Illinois Steel Company is the safest steel plant in the world. 352 READINGS IN ECONOMIC PROBLEMS The hospital sen'ice of the Steel Corporation is now generally good. The developments of the last three years in this respect have been such as tO' bring the equipment well within the needs of the plants with which I am familiar. When Andrew Carnegie left the steel business, with the for- mation of the Steel Corporation in 1901, he established a fund of four million dollars, the income from' which was to be used to pension superannuated employees of the Carnegie Steel Company. The American Steel and Wire Company had a pension plan in operation when it became a part of the Corporation. In none of the other subsidiary companies, however, were pension systems in operation. In 19 to is was announced that these funds had been consolidated and the capital was tO' be increased by the Corporation to twelve million dollars, the income from it to be used to pension superannuated or disabled employees of the Steel Corporation. Since January i, 191 1, pensions have been available under the rules to all employees of the Corporation. In the period prior to the formation of the Steel Corporation, we find that in the Pittsburgh district there was a considerable amount of unionism in the steel industry. It is a mistake, however, to assume that the steel industry was ever thoroughly organized. The Carnegie Steel Company had eliminated unionism from its plaints in 1892, and of the large plants rolling rails and structural material, the Illinois Steel Company was the only one which came into the corporation in 1901 with union labor. There was a strike in 1901, soon after the formation of the Steel Corporation, in which the Illinois Steel Company plants be- came non-union, and the union also suffered the loss of some of the sheet and tin plants. During the strike of 1901 the executive committee of the Steel Corporation adopted a resolution in opposition to organized labor and declared that it would not permit the extension of it. After this it apparently adopted a policy looking to the extermination of organized labor. As a result, union labor has now been eliminated from' all of its properties, with the possible exception of its rail- roads. The present attitude of the Steel Corporation is one of abso- lute opposition to collective bargaining of any sort. And it has adopted a number of plans that are calculated to prevent an out- break of organization on the part of its employees. The pension plan, although a desirable thing in itself, has the effect of keeping mjen silent who might wish to protest against ex- isting conditions. In order to enjoy its benefits, the men must have THE TRUST PROBLEM 353 served twenty years continuously in the employ of the corporation or of one of its subsidiaries. This effectively prevents any stoppage of work as a protest against anything considered unjust by the workmen, if they would keep their record such as to enable them to draw the pension in old age. The pension rules also specifically set forth the obvious truth that the Corporation does not give up its right to discharge its employees. There is nothing in it to pre- tect a man excepting his subservience to his superior officers, and the nearer he approaches toward twenty years of continuous ser- vice, the greater his subservience may conceivably be — for he might be discharged at the end of nineteen years and eleven months and his right to the pension would be forfeited. The so-called profit-sharing plan also has features designed to keep the employee from standing out vigorously in defense of what he may consider his rights. The rules plainly state that the yearly $5 bonus for each share of stock, and the additional bonus at the end of each five-year period, are to go, not as a matter of right to each employee who holds stock, but only to those whom the ex- ecutive officials may consider loyal. Under these two systems, then, a man will utterly fail of secur- ing the benefits offered if he is offensive to the administrative of- ficials. He may take his choice between exercising his right to register his objections to working conditions or to the labor con- tract and run the risk of losing his right to the benefits offered, or he may withhold his protests, if he has any, and establish his reputation for loyalty by keeping silent. The effect of this attitude of the Corporation tends, in a great many instances, to outweigh anything that it may do in the direction of providing better labor conditions. I have indicated the policies of the Steel Corporation, both good and bad. The effect of such a large aggregation of capital engaged in a single industry has been, it is very apparent to me, to make it possible for a large amount of money to be spent for improving plant conditions. I see no reason for assuming, however, that sim- ilar ends cannot be accomplished by smaller companies working together under a voluntary agreement. On the other hand, the formation of the Steel Corporation has not led to an alteration in labor conditions — meaning by labor con- ditions those things that usually enter into the labor contract — be- yond the recent movement for a six-day week. This is of especial importance in view of the enormous power over labor that was secured by the forming of the corporation. 354 READINGS IN ECONOMIC PROBLEMS Unionism is a very faulty and often a dangerous form of or- ganization. But we have so far worked out no better method of establishing justice in industrial matters than leaving it to the bargaining strength of the two parties to the contract. igi. The United States Steel Corporation and Labor. BY RAYNAI. C. BOIvUNG. The officers of the United States Steel Corporation and its sub- sidiary companies are not indifferent or self-satisfied as to con- ditions among their workmen. They are trying tO' improve those conditions as fast as it is practicable toi do so: They do' not main- tain that the lot of the steel-worker is easy or ideal ; but they do maintain that their workmen are treated as well on the whole as the workmen in any other industry and treated far better than ever before in the steel industry. The United States Steel Corporation has made it possible for every employee, even down to the ordinary laborer, to become an owner of its stock. In its iron mines, a thousand feet underground, I have seen men working with pick and shovel who proved, when questioned, to be stockholders in the company. Over 30,000 of the workmen are thus interested in the business. These employee stock- holders derive the following special benefits from the plant: (i) They are induced to save money, often for the first time in their lives. (2) For five years they receive a very high return upon their investments, and thereafter a large return for such small in- vestments. (3) They are induced to feel a direct interest in the business and to remember that their own interests are tied up with those of the company. (4) They are encouraged to remain with the company and to profit by permanent employment. Before there was any law in this country which required any- thing of the kind, the United States Steel Corporation established a system of voluntary accident relief absolutely regardless of legal liability. Every man injured and the family of every fnan killed is taken care of without need of lawsuits or even of any claims against the companies. Last year we were sued in only two-tenths of one per cent of the cases — showing how satisfactory this plan has proved to our workmen. The United States Steel Corporation has spent six years in the development of a. system of preventing accidents, which I confi- dently believe is not sui-passed anywhere in the United States or abroad. The system which has been worked out comprehends all manner of safety devices and other material safeguards, but, above TUB TRUST PROBLEM 355 all, it is based upon the development of an earnest, constant and determined effort to prevent work accidents — all the way from the president down to the lowest workman. In six years the number of serious and fatal accidents among workmen of the United States Steel Corporation has been reduced forty-three per cent, and more than 2,000 men each year are saved from injury or death in work accidents which would have hap- pened to them under old conditions. At all our mills, mines and plants provision is made for the best surgical and hospital treatment obtainable for employees injured in our work. In the mining regions the arrangements include med- ical attention for the men and for their families. By an arrangement under which $8,000,000 is being added to the $4,000,000 originally given by Mr. Andrew Carnegie, there has been provided a permanent fund of $12,000,000, from the income of which all superannuated employees of the United States Steel Corporation who have remained twenty years in its service are assured support for the rest of their lives. The smallest pension given is $12 a month and the largest $100— thus the lowest paid workman will receive enough to- provide for his necessities and the high-salaried employees do not become a drain on the fund. The most recently organized work for improving conditions among employees of the Steel Corporation is in sanitation and wel- fare. This work is being organized in the sam^e manner in which the system of accident prevention has been worked out and with the same theory of bringing these matters home to the heads of departments, superintendents and foremen, and above all, to the men themselves. This work includes sanitary disposal of sewage and fecal matter, provision for pure water in all plants and houses, the protection of food supplies, especially milk and meat, and the installation of wash-rooms, shower-baths and lockers for a change of clothing. All our companies are donors to hospitals, churches, clubs, li- braries and other organizations established by the communities and the workmen. It is the aim of our managers to make their plants a benefit to the communities in many ways additional to the wages paid the workmen. Few people know how much our plant managers spend in car- rying employees through hard times when there is not work enough, in furnishing groceries and coal, in paying rent and insurance to assist sick employees, in giving a little Christmas cheer to those who are in misfortune. Please do not understand me to say that all of these things are 356 READINGS IN ECONOMIC PROBLEMS done in all the subsidiary companies or in any of them. Many of these things are done in all of the companies, and all these and other means of making better the conditions of its workmen are on trial and under consideration somewhere in the Steel Corporation, with the hope and the purpose of eventually bringing all the com- panies and all the plants to the best standards. The hours of labor in the steel mills of this country grew up with the industry. They were not established by the United States Steel Corporation, and they can only be changed slowly where changes are shown to be practicable and desirable. The twelve-hour day exists among only twenty-five per cent of the workmen employed by the United States Steel Corporation, al- though in the blast furnaces and rolling mJlls, to which the twelve- hour day is largely confined, probably half the workmen have a tv/elve-hour day, more or less modified by periods of rest. The steel industry adopted the two-turn system long before the United States Steel Corporation was organized. The same system pre- vails in Germany, where labor conditions have probably been made the subject of more state supervision than anywhere else in the world. Personally, I am satisfied that the lightening of labor by machinery and the rest periods prevent the twelve-hour day from doing any physical injury to the workmen. Since the Steel Corpor- ation was organized the price of its products has been reduced on the average about ten dollars a ton. Meanwhile, wages have been increased twenty-five per cent. Yet the efficiency of labor has not increased. It would be easy to substitute an eight-honr day for twelve hours if the workman could accept two-thirds his present wages, but the workman, like everyone else, prefers longer hours to lower wages ; and there are more applicants for twelve-hour positions than for those where the work is only ten hours, because the former pay better. This is an economic problem which con- fronts the industry and time is required for its solution. The question of organization among the workmen in the steel industr}^ is too large, too serious and too difficult a subject to dis- cuss in a small portion of a short address. It is a subject where discussion too often engenders ill feeling and most unfortunate bitterness, where differences of opinion are seldom accepted with patience or tolerance on either side. For myself, I believe we must get rid of lawlessness and of violence and oppression on both sides and wherever they appear. I believe no agreement can be reached until the two parties are both prepared to seek an agreement on the basis of mutual advantages offered and of equal responsibilities assumed. THB TRUST PROBLEM 357 H. THE SHERMAN ANTI-TRUST ACT IN THEORY AND PRACTICE. 192. The Sherman Anti-Trust Act.* Section i. Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations, is hereby declared to be illegal. Every person who shall make any such contract or en- gage in any such combination or conspiracy, shall be deemed guilty of a misdemeanor, and, on conviction thereof, shall be punished b}^ fine not exceeding five thousand dollars, or by imprisonment not exceeding one year, or by both said punishments, in the dis- cretion of the court. Section 2. Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or per- sons, tO' monopolize any part of the trade or commerce among the several states, or with foreign nations, shall be deemed guilty of a misdemeanor, and, on conviction thereof, shall be punished by fine not exceeding five thousand dollars, or by imprisonment not ex- ceeding one year, or by both said punishments, in the discretion of the court. 193. The Meaning of Restraint of Trade. BY CHIEF-.TUSTICE EDWARD D. WHITE. In substance, the propositions urged by the Government are reducible to this : That the language of the statute embraces every contract, combination, etc., in restraint of trade, and hence its text leaves nO' room for the exercise of judgment, but simply imposes the plain duty of applying its prohibitions to every case within" its literal language. The error involved lies in assuming the matter to be decided. This is true because, as the acts which may come under the classes stated in the first section and the restraint of trade to which that section applies are not specifically enumerated or de- fined, it is obvious that judgment must in every case be called into play in order to determine whether a particular act is embraced within the statutory classes and whether, if the act is within such classes, its nature or effect causes it to- be a restraint of trade within the intendment O'f the act. To' hold to the contrary would require the conclusion either that every contract, act, or combination of any kind or nature, whether it operated a restraint on trade or not, was within the statute, and thus the statute would be destructive of all * The two sections given form the essential part. 358 READINGS IN ECONOMIC PROBLEMS right to contract or agree or combine in any respect whatever as to subjects embraced in interstate trade or commerce, or if this con- clusion were not reached, then the contention would require it to be held that as the statute did not define the things to which it re- lated and excluded resort to the only means to which the acts to which it relates could be ascertained — the light of reason — the en- forcement of the statute was impossible because of its uncertainty. The merely generic enumeration which the statute makes of the acts to which it refers and the absence of any definition of restraint of trade as used in the statute leaves room for but one conclusion, which is that it was expressly designed not to unduly limit the ap- plication of the act by precise definition, but while clearly fixing a standard — that is, by defining the ulterior boundaries which could not be transgressed with impunity — ^tO' leave it to be determined by the light of reason, guided by the principles of law and the duty to apply and enforce the public policy embodied in the statute in every given case, whether any particular act or contract was within the contemplation of the statute. 194. Unreasonable Restraint of Trade. BY JUSTICE J. M. HARLAN. But my brethren, in their wisdom, have deemed it best to pur- sue a different course. They have now said tO' those who condemn our former decisions and who object tO' all legislative prohibitions of contracts, combinations, and trusts in restraint of interstate com- merce, "You may nozij restrain such commerce, provided you are reasonable about it; only take care that the restraint is not undue." The disposition of the case under consideration, according to the views of the defendants, will, it is claimed, quiet and give rest to "the business of the country." On the contrary, I have a strong conviction that it will throw the business of the country into con- fusion and invite widely extended and harassing litigation, the in- jurious effects of which will be felt for many years to come. When Congress prohibited ezfery contract, combination, or monopoly in restraint of commerce, it prescribed a simple, definite rule that all could understand, and which could be easily applied by every one wishing to obey the law and not to conduct his business in violation of the law. But now, it is to be feared, we are to have, in cases without number, the constantly recurring inquiry — diffi- cult to solve by proof — whether the particular contract, combina- tion, or trust involved in each case is or is not an "unreasonable" or "undue" restraint of trade. Congress, in effect, said that there THB TRUST PRO BLUM 359 should be no restraint of trade, in any form, and this court solemnly adjudged many years ago^ that Congress meant what it thus said in clear and explicit words, and that it could not add to the words of the act. But those who condemn the action of Congress are now, in effect, informed that the courts will allow such restraints of in- terstate commerce as are shown not tO' be unreasonable or undue. 195, An Interpretation of the Court Decisions. BY THEODORlv F,. BURTON. The particular feature of these decisions to which most signifi- cance should be attached is the interpretation placed by a majority of the Court upon the Sherman Anti-trust Law. Much difference of opinion exists as to the ultimate effect and scope of this inter- pretation. The absence of protest by business interests of the country, and the sudden rise in the stock market following the de- cision in the Standard Oil Case, might lead to the inference that the Sherman Law has been seriously emasculated. That this view is alsO' shared by somie legislator, is shown by the fact that a number of amendments, intended to restore to- the Sherman Law its original meaning, as they had interpreted it, were introduced in Congress immediately after the Standard Oil decision was rendered. On the other hand, it is believed by many, that the law has been made to harmonize with existing conditions, and has been strengthened and made more effective as a result of the new interpretation. Chief Justice White, who' rendered the majority opinion in both cases, holds that the words ''restraint of trade" and "monopolize" should have the meaning which they had at common law when the Anti-trust Ace was passed. In the a:bsence of any exact definition of these terms, he holds that they should be interpreted in the light of reason, as they were at common law. Applying this standard, he holds that not all contracts in restraint of trade are illegal, but only thoffe contracts which necessarily develop monopoly, control prices, and limit output. The whol6 controversy over this opinion of the Supreme Court turns around the question whether it has read into the Sherman Law the words "unreasonable" or "undue" before the words "re- straint of trade," and "monopolize." This is the premise on which the dissenting opinion of Justice Harlan is based, and if it is true then there is no escape from the conclusion that the commonly ac- cepted interpretation of its meaning has been erroneous. The Supreme Court in both decisions several times uses the words "undue" or "unduly" in conection with the term^ "restraint 36o READINGS IN ECONOMIC PROBLEMS of trade." Justice Harlan calls attention to the fact that in the Standard Oil case the court practically informs the subsidiary com- panies that they may join in an agreement to restrain co^mmerce among the states, provided such restraint be not "undue." On the other hand, viewing both decisions in their entirety, we may inter- pret them as showing that the intention of the court was simply to remove from the scope of the law only such contracts or agreements as are necessary, normal, and helpful to promote legitimate busi- ness. Justice Harlan in his dissenting opinion in the Standard Oil case maintains that the court has injected the word "unreasonable" into the Sherman Law, and in so doing has not only reversed the decision of the court in preceding cases, but has indulged in judicial legislation. He asserts that the Court has in effect amended the Sherman Law, which right belongs to Congress alone, and not to the courts. In reading the conflicting opinions in the two cases it appears that the difference between the learned judges is largely one of pharaseology. Justice Harlan avers that in defining what is pro- hibited by the Sherman Law the Court, in the most unequivocal terms, has repeatedly held that combinations or acts in restraint of trade were alike violative of the statue whether such acts were considered unreasonable, or reasonable and productive of salutary results in the transaction of business. On the other hand, Chief Justice White, in both decisions maintains that the interpretation of the Sherman Law adopted by the Court is in line with, and not a reversal of, the earlier position of the Court, and bases his con- tention upon the definition of the term "restraint of trade." It is maintained by him that it is of fundamental importance to define at the very outset what is restraint of trade, and that this question must be determined in accordance with the rule of reason. In applying the. rule of reason, resort may be had to the decisions of the common law. It thus appears that in the assertion of this dis- tinction, namely, that it should be first determined what is restraint of trade, a conclusion may be reached by the courts that acts which have been commonly regarded as contrary tO' the Anti-trust Law, because they involve the elimination of competition, are never- theless not in restraint of trade. The Chief Justice also lays stress upon the different conceptions of economic conditions accepted from time to time, and refers to the fact that acts which were at one time deemed to be of such a character as to justify the inference of wrongful intent, were at another period thought not to be of that character. THB TRUST PROBLEM 361 The Court in these recent trust cases was confronted with the difficult problem of giving a more liberal definition of the term "restraint of trade" and yet maintaining substantial consistency with its former decisions. On the one hand, it must interpret the law in such a way that the word unreasonable should not be understood to have been inserted before the words "restraint of trade" and "monopolize." On the other hand, it must refrain from giving such a narrow interpretation as would make the law destructive of all normal business methods. Careful consideration of the two opinions rendered by the Court would seem tO' warrant the belief that it has successfully avoided these two pitfalls, and has simply asserted that, in deciding upon such cases, it is permitted under the law. to use its judgment as to whether the acts or transactions of any defendant are such as would restrict competition tO' an extent detrimental to public welfare. If this has been accomplished by the Court, then undoubtedly the Sherman Law has been greatly strengthened instead of emasculated as a result of this interpre- tation. The narrower viev/ of the law is so drastic as to prohibit, if applied, those business methods which tend tO' promote rather than to restrain interstate trade and commerce. Under such an interpretation, legitimate business might be declared illegal if brought into court, and guilty parties to an illegal combination might on technicalities escape prosecution. 196, Dissolution of the Standard Oil Company. Standard Oil Company (of New Jersey) 26 Broadway, New York, July 28, 191 1. To the Stockholders of the Standard Oil Company (of. New Jersey) : Obedience to th^' final Decree in the case of the United States against the Standard Oil Company (of New Jersey), and others, requires this Company, to distribute, or cause to be distributed, ratably, to its stockholders the shares of stock of the following cor- porations, which it owns directly or through its ownership of stock of the National Transit Company, to wit : Anglo-American Oil Com- pany, Limited; The Atlantic Refining Company; Borne-Scrymser Company ; The Buckeye Pipe Line Company ; Chesebrough Manu- facturing Company, Consolidated ; Colonial Oil Company ; Con- tinental Oil Company; The Crescent Pipe Line Company; Cumber- 362 RBADINGS IN ECONOMIC PROBLEMS land Pipe Line Company, Incorporated; The Eureka Pipe Line Company ; Galena-Signal Oil Company ; Indiana Pipe Line Com- pany ; National Transit Company ; New York Transit Company ; Northern Pipe Line Company ; The Ohio' Oil Company ; Tlie Prairie Oil and Gas Company ; The Solar Refining Company ; Southern Pipe Line Company ; South Penn Oil Company ; South West Penn- sylvania Pipe Lines; Standard Oil Company (California) ; Stand- ard Oil Company (Indiana) ; The Standard Oil Company (Kan- sas) ; Standard Oil Company (Kentucky) ; Standard Oil Company (Nebraska) ; Standard Oil Company of New York; The Standard Oil Company ( Ohio ) ; Swan & Finch Company ; Union Tank Line Company ; Vacuum Oil Company ; Washington Oil Company ; Waters-Pierce Oil Company. Such distribution will be made to the stockholders of the Stand- ard Oil Company (of New Jersey) of record on the ist day of September, 191 1 ; and, for that purpose, the transfer books of the Company will be closed on the 31st day of August, 1911, at 3 o'clock P. M., and kept closed until the date when said stocks are ready for distribution, which it is expected will be about December i, 1911. Notice of the date when said stocks are to be distributed and of the re-opening of the books will be duly given. Yours very truly, H. C. Folger, Jr., Secretary. 197. The Result of the Dissolutions. BY ARTHUR JEROME EDDY. Everybody knows what disintegration means, it means disso- lution — ^"smashing 'em," in the language of the street. The Standard Oil Compan}^ has been disintegrated into some thirty-five, more or less — chiefly less — independent and supposedly competing companies. The Tobacco Company has been disintegrated into fourteen, more or less, independent and — supposedly — competing units. The net result to the public so far has been higher prices for many of the products of the one and no lower prices for any of the products of the other. The net result to many small stockholders has been losses. The net result to "insiders" — the men against whom public clamor was raised — has been golden opportunities for profit in the THE TRUST PROBLEM 363 buying and selling of subsidiary stocks long before stockholders and the public could possibly form any accurate notions of their real value. To illustrate — ^when the Standard Oil Company of New Jersey — the trust — was dissolved by order of court the stockholders of that company received pro rata fractional interests in all the sub- sidiary companies, and for the first time thousands of men and women all over the country learned of the existence of those thirty- five companies. By no possibility could these scattered stockholders form accurate opinions regarding the values of the fractional shares issued to them; only the men in control of the industry were in a position to know. What has been the result? The stockholders and public have sold and bought in ignorance, losing both ways. Take the Standard Oil Company of Indiana, one of the subsidiary compaines. It was capitalized at $1,000,000; the amount cut no figure so long as all its stock was held by the trust, but when the trust was dissolved its many stockholders received each his frac- tional pro rata share in the Indiana Company. There was a gen- eral impression the stock of this company was worth far more than par, but how much? Only the insiders could tell. As a result many stockholders who were in the dark sold their interests at less than a fifth of what the stock sold for inside a few weeks. A few days ago the Indiana Company voted to increase its cap- ital stock from one million dollars to thirty millions and to distribute the $29,000,000 to its stockholders as a stock dividend, and it now appears that the company is earning at least ten millions a year, or 33 1/3 per cent on the new capitalization, but it is stated in the press the "officers refuse toi give any information on this point." Disintegration of trusts and large corporations simply because they are large is a senseless proposition, because both are here to stay in some form. The Sherman Law was passed in 1890. For more than ten years few attempts were made to enforce it against large corporations. Then, in response to popular clamor, due to many flagrant abuses, came a period of indiscriminate "trust-bust- ing." Already there are signs of reaction ; the pendulum is swing- ing back ; it is found the Sherman Law hits large and small, good and bad, labor unions and capital unions alike. At best the law is a destructive measure, and the demand now is for constructive legis- lation. But this demand so far has not assumed any very definite shape. 364 READINGS IN nCONOMIC PROBLEMS 1. PROPOSALS FOR CO'NTROTXING THE TRUSTS. 198. A Proposal of an Interstate Trade Commission. BY fiRUCE WYMAN. I believe that it is high time that we should give up the hope- less attempt to- destroy by law, without making any distinctions, all aggregations of capital, and that we should adopt in its place the promising program of the regulation of the whole situation by appropriate law. The ideal condition, to my way of thinking, is to have monopoly, where that is the more effective form, and com- petition where that is the natural thing. To that end, the law should do its best to see to it that there shall be an open market in which that type which is the economically advantageous one shall survive. What I would urge would be not a repeal of the Sherman Act ; I would leave that for its appropriate work of dissolving combi- nations in restraint of trade. But I would supplement it by an act to regulate concerns that have established a control of their market. My own idea in drafting such an Interstate Trade Act would be to follow the Interstate Commerce Act, as far as that could be done. In doing this, we should have the advantage of using a well-tested code. First. — ^Establish an Interstate Trade Commission of seven miem- bers, with salary and tenure like the Interstate Commerce Commis- sion. Second. — Require every manufacturing and trading concern of a certain size tO' register itself with the commission in order to get a federal license toi engage in interstate commerce. Demand oi every concern registering a full statement of its condition, includ- ing particularly its capitalization and the basis of that capitalization. Require each registered concern tO' make an annual report, including its balance sheet, income account, volume of output, value of out- put, etc. Third. — Give the Interstate Trade Commission power to regu- late all concerns that have substantial control over their market. This can be determined in the first instance by the commission upon the basis of the returns that have been filed by the various concerns upon taking out their federal licenses. Concerns that have a sub- stantial control over their market are so affected with a public in- terest that they may properly be controlled to the extent that the public services are. THB TRUST PROBLEM 365 Fourth. — Define what are unfair practices ; for destructive com- petition in a monopolistic business has various formis, such as (i) sening in one locality at discriminating- prices in order to force out local competition ; ( 2 ) selling one grade or variety at disproportion- ate prices in order to force out competition; (3) refusing to sell to purchasers who will not agree not to deal with a rival ; (4) imposing terms in leases that the lessee shall not buy anything from- any one else; (5) fixing the terms and prices upon which the product shall be resold; (6) establishing a monopoly by requiring the purchase of other things fromi the patentee than the patented article. In other words, prohibit making discriminations against customers who re- fuse to obey the dictates of the trusts. Make this plain by requiring sale to all purchasers upon equal terms under substantially similar circumstances. Fifth. — Give the Interstate Trade Commission power toi give relief against extortionate charges. At first, confine its power over prices to reducing prices against which specific complaint has been made to- it, but in disposing of such complaints let it fix the price in question for the future. Provide that full returns shall be made as to the outstanding securities and actual capital of the concerns subject to the act as the basis for such regulation. But at first provide that dividends shall not be reduced when the concern in question is not making more than a fair per cent of profit upon each transaction. I would go very slowly in this matter at first, giving the commission only power to give relief in particular cases of outright extortion. Sixth. — Persons aggrieved by unfair competition or by extor- tionate prices may bring complaint before the Interstate Trade Commission, which shall give appropriate relief. Aggrieved per- sons may alsO' bring suit in courts for unfair competition or extor- tionate prices. This program ought to accommodate the conflicting interests in- volved in this issue. It should be the abuse, not the possession of monopoly, that should subject a concern to prosecution under the law in the future. The essence of the wrong of monopolization is the excluding of others from the market, not the mere growth of the concern itself, by successful activity. In other words, it is un- natural growth by unreasonable tactics that should be punished, not natural growth by deserved success. Monopolization by exclusive policies and unjustifiable discrimination is the thing to be prevented. Make the law as big as the business and the problem is solved. 366 READINGS IN ECONOMIC PROBLEMS 199. Control of Monopoly by a Trade Commission. BY WILLIAM DUDLEY FOULKE. The remedy for present trust evils which I would suggest in addition to appropriate fines and the imprisonment of guilty per- sons, would be to place the injurious combine under the control of the Trade Commission as completely as railroads are subjected to the Interstate Commerce Commission. What is the character of that* control ? By the "Act to Regulate Commerce," passed February, 1887, and by its amendments it is provided that all charges made for any service by common carriers shall be just and reasonable. Unreasonable charges are prohibited and declared unlawful. The same jurisdiction should be conferred upon the Trade Commission as to prices of the products or services of interstate monopolies. By the commerce act common carriers must make just and reasonable classifications. So' should industrial monopolies be required to do. Common carriers are forbidden to make special rates or rebates but must charge all alike ; they can grant nO' undue preference or advantage to* anyone to the prejudice or disadvantage of another. The same provision should apply to every monopoly. Common carriers must keep open for inspection their rates and charges. The industrial monopolies should be bound by the same rule as to- their price lists except in cases for which the commission should decide that tables of prices are impracticable. If the Interstate Commerce Commission finds that the rates charged by common carriers are unjust, unreasonable, or unjustly discriminatory or prejudicial, the commission is authorized to pre- scribe what shall be just and reasonable charges and may fix a maximum rate. The Trade Commiission should be authorized toi do the same thing in respect tO' industrial monopolies, prescribing not only the maximum' rate but also the minimum prices in cases where an unjust reduction may be used for the oppression of competitors. If any person shall induce a common carrier to discriminate un- justly in his favor, such person may be fined or imprisoned. If any- one dealing with an industrial monopoly secures an unjust discrim- ination of the same kind, similar penalties should be imposed. By the Act to Regulate Commerce the common carrier cannot withhold its cars or other facilities for transportation and may be compelled by mandamus to furnish them, at reasonable rates, equally to all the world. An industrial monopoly ought to be equally pre- vented from withholding its product, especially where that product is necessary to the life and well-being of society. An industrial THB TRUST PROBLEM 367 monopoly must become like the common carrier, the servant of the community at large. If a common carrier may not render dangerous or inadequate service, why may not an industrial monopoly be required to furnish goods that are not deleterious toi the consumer and are of standard quality? Quality too should be under the control of the commis- sion. Whenever a common carrier has a controversy with his em- ployees, a board of arbitration is provided for, whose award may be enforced in equity. No' employer can prevent his employee from becoming a member of a labor union or unjustly discriminate against him because of such membership. Similar provisions should be made in regard to industrial monopolies. Railroads are required to furnish safety appliances for the protection of their employees and the public as well as limit the hours of continuous service for trainmen. Similar protection should be given in all monopolized in- dustries and such requirements made as toi hours of labor, the employment of women and children, and the conditions of labor and the minimum wages therefor, as will secure health and reason- able well-being of employees. In other words, every power exercised by the Interstate Com- merce Commission over common carriers should be applied, wher- ever it can be made applicable, to industrial and commercial mon- opolies which have acted in unreasonable restraint of trade. Indeed, the power of the Trade Commission may properly go even farther in respect to these delinquents. Railroad companies are, up to a certain extent, natural monopolies. It is not always their fault if competition be suppressed. But if competition be wil- fully stifled by industrial monopolies the power to control them may justly become more stringent and drastic than the power to control common carriers. Other governments have not hesitated to assume drastic control over monopolies. In May, 1910, the Ger- man Reichstag passed a law regulating the potash industry, a mon- opoly, since Germany controls the world's output of potash and has the only known deposits. There were fifty-four companies own- ing and operating these deposits and the production was excessive. The government then fixed the proportionate part of the demand which each corporation was permitted to produce and established the maximum and minimum prices. A tribunal was appointed to reapportion from time tO' time the production of the several com- panies according tO' the demand. An elaborate system regulates the industry and protects the labor employed in the business. Sim- ilar regulations are contemplated or are in operation in regard to 368 READINGS IN BCONOMIC PROBLEMS other industries. Wherever Hke conditions prevail in this country the Trade Commission should be invested with power to invoke similar remedies. If the monopoly produces too little, steps should be taken to increase the output ; if too much, to restrain the overpro- duction. Is it not evident that regulation and control of this description is infinitely better for the public, better for employees, and better for independent competition than the mere dissolution of these organizations to be followed inevitably by their reappearance in newer and more inaccessible forms? 200. Prescription of Conditions for Interstate Commerce. BY JOHN SHARP WILLIAMS AND ROBp;RT R. REED. A Bill to prescribe the conditions under which corporations may engage in interstate commerce and to provide penalties for otherwise engaging in the same. Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled. That no cor- poration shall engage in commerce between the States or Territories or in the. District of Columbia by the purchase, sale, or consign- ment of any article of commerce, or otherwise, directly or indi- rectly — First — ^Unless it is organized under laws with a charter that — (a) State the business in which it is authorized to engage and the properties it is authorized to acquire ; (b) Provide that it shall have only such powers as are inci- dental to such business, and shall not have any power to hold the stock of any other corporation or association, to do any act or thing in restraint of trade, or to do anything outside of the state of its incorporation which it is not permitted to do therein ; (c) Provide that all its stockholders shall have an equal right to vote according to the number of shares held by them, respectively, at all meetings and for all directors, subject to any general limita- tion on the number of votes that may be cast by a single stock- holder ; (d) Provide that no- other corporation, association, or partner- ship shall have any vote or voice, directly or indirectly, in its affairs and that no person representing, directly or indirectly, any com- peting business, as owner, stockholder, officer, employee, or agent thereof, or otherwise shall have any such vote or voice, directly or indirectly, in its affairs or be eligible as a director or officer thereof ; THE TRUST PRO BLUM 369 (e) Provide that its capital stock shall be fully paid or pay- able and permit it to be paid in property or services only when the value of such property or services has been determined according to the fact upon competent and specific proof under oath filed in a designated public office ; (f) Limit its surplus at any time to fifty per centum of its outstanding capital stock and its indebtedness at any time to not more than its outstanding capital stock and surplus ; (g) Provide that such corporation shall by an amendment of its charter be subject to and comply with, and, if necessary, shall accept any requirement that may be made by the state of its in- corporation and any requirement that may be imposed by Congress as a condition of its right to engage in interstate commerce. Second — Unless it is conducted and managed in conformity with the said provisions and limitations, and is organized under the laws of a State, Territory, or District in which its executive offices are located and its directors' meetings regularly held. Third — If it, directly or indirectly, of itself or in connection wnth others, destroys or seeks unfairly to stifle fair comipetition in any part of the United States in the manufacture, production, min- ing, purchase, sale, or transportation of any articles of commerce not the subject of any patent, copyright, or trademark held by it either by making or effecting exclusive contracts, rights, or priv- ileges relating thereto, by restricting its customers or other persons with regard to price, by securing the monopoly or control of raw material or sources of supply or of any business connected there- with, by temporarily or locally reducing prices with intent to stifle competition, by accepting rebates, or by any other act, device, or course of business that is unfair and tends to secure an unfair ad- vantage and unreasonably and unfairly to destroy competition. Sec. 2. That eveiy contract made in violation of this act shall be void, and no corporation or association shall bring or maintain any suit or proceeding in any court of the United States unless it is organized, conducted, and managed as required by section one, nor shall this provision prevent the removal of any such suit or pro- ceeding to such courts where such defense may be available to the defendant. Sec. 3. That the prohibitions of section one and section two shall apply to any association membership in which it is represented by shares, and the word "association" used in this act shall include any joint-stock company, business, trust, estate, or any form of as- sociation used for business purposes ; but, said prohibitions shall not apply to any corporation or association not engaged in busi- 370 READINGS IN ECONOMIC PROBLEMS ness for profit or engaged exclusively in any one or more of the following businesses : Education ; a railroad or other comimon or public carrier Oif property or persons or messages ; banking, insur- ance; the supply of water, light, heat, or power; or engaged ex- clusively and independently in any business or businesses the sub- stantial bulk of which is carried on in foreign countries or exclu- sively in any one State or Territory or District, and which does not involve the transmission of goods from one State or Territory or District to another, nor the purchase, sale, or consignment of articles commonly the subject of commerce between the States and Territories, and actualy intended for or becoming the subject of such commerce. Sec. 4. That no person or persons shall form, operate, or act as or for a corporation or association for the purpose or with the effect of violating this act, or conspire thereto and of themiselves or by co-conspirator dO' any act or thing to effect such conspiracy. Sec. 5. That every corporation, association, trust, or person violating this act shall be subject, upon conviction thereof, in case of a corporation or association, tO' a fine not exceeding ten per centum o^f its capital stock, or to a perpetual injunction against en- gaging in interstate commerce, or both, and in the case of a person, to a fine not exceeding ten thousand dollars for each such violation, and, if the violation is willful with intent to defraud or to- create a monopoly or unfairly to^ stifle competition, to such fine and imprison- ment for not exceeding five years. Sec. 6. That the act of February eleventh, nineteen hundred and three, relative to the expedition of certain suits in equity, and sections four and five of the act of July second, eighteen hundred and ninety, known as the Sherman Anti- Trust Act, shall apply to all proceedings and suits in equity under this act. Sec. 7. That the purchase, sale, or consignment of any article intended to become and actually becoming an article of commerce Ibetween the States or Territories, shall be deemed to be an act of engaging in such commerce under this act. Sec. 8. That the foregoing provisions of this act shall take effect January first, nineteen hundred and thirteen, but shall not applv to corporations or associations having a capital stock and sur- plus under ten million dollars until January first, nineteen hundred and fourteen. Sec. 9. That any corporation or association organized, con- ducted, and managed as required by section one shall, after the passage of this act, be entitled to engage in commerce between the States and Territories, and to carry on its authorized business rel- THE TRUST PROBLEM 371 ative to such conTimerce in any part of the United States, subject to the provisions of this act and to all present laws of the United States, and tO' future acts of Congress, and tO' the general laws and taxing power of any State, Territory, or District in which it may do business. 201. A Socialist View of State Regulation. BY JOHN SPARGO AND GKORCxE LOUIS ARNER. The only method of coping with the evils of monopoly left to those who oppose public monopoly is that of regulation by the State. Those who urge this method argue that as the corporation is a cre- ature of the State, an artificial person, the State, is in a special sense responsible for it. The form of regulation which ofifers the- greatest promise and is most generally advocated is federal incor- poration of concerns doing an interstate business, with the right to regulate prices exercised by a commission similar to the Interstate Commerce Commission, which has the power to regulate railway rates. vSuch regulation will probably be extensively tried, and the trial will mean that the theory of the possibility of conducting industry upon a competitive basis is definitely abando^ned. The question of regulation v/ill then resolve itself into a test of strength between the industrial State and the political State. If the industrial State with its plutocracy is able to- dictate tO' the political State and control the commission charged with the task of regulating the corpor- ations, then dividends will continue tO' be paid on watered stock, prices will still remain at the point of highest net return and the corporations will be more safely entrenched than before. From the Socialist point of view, the objections to regulation are its inherent wastefulness, its bureaucratic nature and its in- efifectiveness. (i) Regulation is inherently uneconomical in that practically all the labor it involves is unproductive and unnecessary, or, at least, only necessary to avoid the evils of a defective system which might be replaced by a better one. Regulation really mieans that, in addition tO' the social labor necessary to production, society must, through the State, expend still further social labor, simply to com- pel the monopolist to observe the rules which society in the exercise of its sovereignty has decided shall govern production. These rules the monopolist is constantly tempted to- break, because at every turn they hamper him in his effort to gather profits. No one has yet made a serious and exhaustive study of this question and at- 372 READIXGS IX ECOXOMIC PROBLEMS tempted to compute the cost to the nation of the measure of regu- lation we have already tried. Hiat the sum would" be enomious if computed is evident. (2) The natural and instinctive tendency of the monopolist is to strive to evade all restrictions imposed upon him which in any manner interfere with his profits. To make the regulations adopted effective, it is necessary to demand from the monopolist a vast amount of information concerning his business. To be of any serv'ice this information must be examined, tabulated and checked — for which work the maintenance of an expensive bureau is neces- sar>-. To detect and frustrate attempts to evade the law, and to punish violations of the law, inspectors, detectives, attorneys and prosecutors must be employed in large numbers. (3) Regulation must ultimately fail for the reason that the gain to the monopolist which evasion or violation of the regulations imposes upon him, when it can be accomplished with safety, is an incentive against which the State is unable to contend successfully. It is the same principle which makes it almost impossible for the authorities to prevent the sale of liquor in a prohibition State. So long as the State permits the private monopolist to exist, it can ac- complish little of permanent value by imposing restrictions upon him which make it impossible for him to obtain the profits he would otherwise receive. He will bribe the State's officials where possible, and secure immunity while he violates the law. Where that is im- possible, he will engage the brightest and ablest minds in the nation to make a way whereby the forbidden fruit can be obtained. Thus the State must always be in the position of having many of the ablest and keenest minds devoted to the special task of outwitting it. At best, regulation thus becomes a war between the social or- ganization, the State, and a class of monopolists. VIII. THE PROBLEM OF POPULATION. A. THE QUESTIOX OF XU^rBERS. 202. The Real Impediment to the Establishment of a Perfect Industrial State. BY THOMAS H. HUXLEY. Suppose a shipload of English colonists to form a settlement in such a country- as Tasmania was in the middle of the last century-. On landing they find themselves in the midst of a state of nature^ widely differing from that left behind them. They proceed to put an end to this state of things over the area they wish to occupy. They clear away the native vegetation, and introduce English vege- table and animal life, and English methods of cultivation. Con- sidered as a whole the colony is a composite unit introduced into the old state of nature : and. thenceforward, a competitor in the strug- gle for existence. Under the conditions supposed there is no doubt of the result, if the work of the colonists be carried out intelligently. On the other hand, if they are slothful, stupid, or careless, there is no doubt that the old state of nature will have the best of it. Let us now imagine that some administrative authority-, as far superior to men as men are to their cattle, is set over the colony. The administrator would, so far as possible, put a stop to the in- fluence of external competition by thoroughly extirpating the native rivals, whether man, beasts, or plants. And he would select his human agents with a view to his ideal of a successful colony. Xext, in order that no struggle for means of existence between human agents should weaken the efficiency of the corporate whole, he would make arrangem-cnts by wliich each would be provided with those means. In other words, selection by means of a struggle for ex- istence between man and man would be excluded. At the same time, the obstacles to the development of the full capacities of the colonists would be removed by the creation of artificial conditions of existence of a more favorable character. Protection against heat and cold : drainage and irrigation, as preventitives of excessive rain and drought : roads and canals, to overcome obstacles to locomo- tion: mechanical agencies to supplement the natural strength of men, would all be afforded. With ever\- step in this progress in 374 READINGS IN ECONOMIC PROBLEMS civilization, the colonists woiild become more and more independent of nature. To attain his ends the administrator would avail him- self of the courage, industry and co-ioperative intelligence of the settlers ; and it is plain that the interests of the community would be best served by increasing the proportion of persons whO' possess such qualities, in other .words, by selection directed toward an ideal. Thus the administrator might look for the establishment of an earthly paradise, a true garden of Eden, in which all things should work together toward the well-being of the gardeners, in which men themselves should have been selected with a view to their efficiency as organs for the performance o^f the functions of a per- fected society. But this Eden would have its serpent, and a very subtle beast too. Man shares with the rest of the living world the mighty instinct of reproduction and its consequence, the tendency to multi- ply with great rapidity. The better the measures of the administra- tor achieved their object, the more completely the destructive agen- cies of the state of nature were defeated, the less would that multi- plication be checked. Thus as soon as the colonists began to mul- tiply, the administrator would have tO' face the tendency tO' the reintroduction of natural struggle into his artificial fabric, in con- sequence of the competition, not merely for the commodities, but for the means of existence. When the colony reached the limit of possible expansion, the surplus population must be disposed of somehow ; or the fierce struggle for existence must recommence and destroy the artificially created system. 203 Early Views of the Value of a Large Population.* a) BY SIR WILUAM TEMPLE. The true and natural ground O'f trade and riches is the num- ber of people in proportion tO' the compass of the ground they occupy. This makes all things necessary to- life dear, and forces men to industry and parsimony. These customs which grow first from necessity become with time to be habitual to the country. And wherever they are so, that place must grow great in traffic and riches, if not disturbed by some accident or revolution, by which the people come either to be scattered or destroyed. When things are once in motion trade begets trade as fire does fire; and people go much where people have already gone. * The dates of the birth and death of those whose views are presented here are as follows: Temple, 1628-1699; Child, 1630-1699; Defoe, 1661-1731; Ferguson, 1723-1818; Stewart, 1712-1780; Young, 1741-1820. POPULATION AND IMMIGRATION 375 b) BY SIR JOSIAH CHILD. You cry up the Dutch to be a brave people, rich and full of cities, that they swarm with people as bee-hives with bees ; if a plague come they are filled up presently and such like; yet they do all this by inviting all the world to come and live among them. You complain of Spain, because their inquisition is so high, they'll let nobody come and live among them, and that's the main cause of their weakness and poverty. Will not a multitude of people strengthen us as well as the want of it weaken them? Sure it will. c) BY DANIEL DEFOE. Whence is all this poverty of a country? 'Tis evident "twas want of trade and nothing else. Trade encourages manufacture, prompts invention, increases labor and pays wages. As the num- ber of people increase, the consumption of provisions increases. As the consumption of provisions increases, more lands are cultivated. In a word as the land is employed the people increase of course and the prosperity of a nation rises and falls just as trade is sup- ported or decayed. 'Tis by their multitude, I say, that all wheels of trade are set on foot, the manufacture and produce of the land and the sea are finished, cured and fitted for the markets abroad ; 'tis by the largeness of their gettings that they are supported. d) BY ADAM EEBGUSON. • The number in which we should wish mankind to exist is lim- ited only by the extent of place for their residence and of provision for their subsistence and accommodation ; and it is commonly ob- served that the numbers of mankind in every situation do' multiply up to- the means of subsistence. To extend these limits is good ; to narrow them is evil ; but although the increase in numbers may thus be considered as object of desire, yet it does not follow that we ought to wish the species thus indefinitely multiplied. e) BY SIR JAMES STEUART. The generative faculty resembles a spring with a loaded weight, which always exerts itself in proportion to the diminution of resist- ence ; when food has remained some time without augmentation or diminution the spring is overpowered ; the force of it becomes less than nothing, inhabitants will diminish at least in proportion to the over charge. If on the other hand food be increased the spring will exert itself in proportion as the resistence diminishes : people will begin to be better fed ; they will multiply, and in proportion as they increase in numbers, the food will become scarce again. 376 READINGS IN ECONOMIC PROBLEMS f) BY ARTHUR YOUNG. In spite of the assertions of all political writers for the last twenty years, who place the prosperity of a nation in the greatest possible population, an excessive population without a great amount of work and without abundant productions, is a devouring surplus for a state; for this excessive population does not get the benefits of subsistence, which, without this excess, they would partake of ; the amount of work is not sufficient for the number of hands ; and the price of work is lowered by the great competition of the labor- ers, from which follows indigence to those who' cannot find work. B. THE MALTHUSIAN THEORY OE POPULATION. 204. The Social Crisis at the Time of Malthus. BY FRANCESCO S. NITTI. At the time of Adam Smith's death, in 1790, the French Revolu- tion had just burst forth, and the choice spirits of the whole of Europe followed it with enthusiasmi and trust. Very fortunately for himself, Smith did not see the days of terror and the ruin of the French Revolution, nor did he behold the frightful economic crisis which later resulted from the industrial revolution in his own country. In what different surroundings and under what different conditions Malthus conceived and published his work ! The French Revolution was stifled in blood, and upon the politi- cal horizon of Europe there already appeared the showers which announced the Napoleonic storms. The tyrant had been killed, the old privileges abolished, but the illusion had also proved false in a great and far-reaching way ; for, in spite of reforms, society had remained essentially the same. The life of England beheld by Malthus in his youth was not less saddening. Various successive seasons of scarcity had impov- erished British agriculture, while, influenced by the rapid develop- ment of industries, the population increased and the phenomenon of over-population systematically occurred. Imports and custom du- ties hindered the rapid progress of the means of subsistence and of exchange. The evils of war and famine found a sad counter^ part in the occurrence of a terrible industrial crisis, than which not even England has seen a sadder or a vaster. The great num- ber of discoveries had, in fact, originated the formation of the great industrial system ; and, crushed by this last, the smaller industries POPULATION AND IMMIGRATION 377 were violently injured and unable to resist. Thus the old indus- tries died away on all sides, bringing down in their ruin thousands of workmen, and causing a strong feeling of misfortune to be felt by the whole of England. This evil state of things was the more deeply felt because the new ideas, spread among the educated class- es, augmented the subjective causes of misery. The poor laws became a source of evil ; far from remedying pauperism, they increased it. Government provisions in favour of the poorer classes were inopportune. In short, the whole administration of public relief was defec- tive. J\Iultiplying the relief given, and enlarging the practice of allowances was of no avail : it ended by causing a progressive de- cline in wages. Indeed, at one time, the tithe which the poor-rate levied upon the tax-payers in general, became nothing else than a species of subsidy given to manufacturers. In reality, the taxpay- ers were not burdened for the benefit of the poor, but of the man- ufacturing classes, and the tax increased so^ much that the rate of the wages decreased while that of the reliefs increased. Such were the causes which prepared and produced the pessimistic philosophy and economics of which Malthus was probably then the greatest interpreter. In the great disproportiate distribution of wealth originated by the large growing industry and the rapid technical revolution, So- cialism was already taking its rise. The chief spokesman of the new theories, William Godwin, a very successful agitator and a genial if not always a profound writer, but always most acute and daring, was placed more than any other in this grave contradiction. It is in truth very difficult to gather a broad and complete system from Godwin's disordered work ; what is chiefly wanting to it is stability O'f views. While in his celebrated book, An Inqidry Con- cerning Political Justice, studying the forms of property he distinguishes between the contran,^ systems of private property and of supply and demand, and declares himself favourable to this last system, and hence to that of common property ; nevertheless, he would have the great transformation to occur spontaneously, with- out revolution or the intervention of the legislature. The evils which oppress society belong in no way to the nature of thing's ; on the contrary, it is from human institutions that misery and injus- tice arise. Social ^^^ealth not only exists in sufficient quantity, but, if properly distributed, could afford an easy existence in exchange of moderate labour. Let wealth be properly distributed, and give mankind sufficient time for education and culture, and unaided rea- 378 READINGS IN ECONOMIC PROBLEMS son will become the g-uide of human action, and there will be no further need of coercion and violence. In short, Godwin's ideal was really an anarchical one, but mild and pacific. Among the greatest admirers of Godwin was the father of Rob- ert Malthus. Not so the sou. The study of history had shown him that proigress, won by dint of sacrifices, was always very limited and always gained by main force amid resolute, insurmountable, unceasing obstacles. Therefore, he did not trust the views of his father or the philosophy of Godwin ; and it was while studying them that he conceived the plan of collecting the chief ideas, and in 1798 he published his work: An Essay on the Principle of Popuiation as it Affects the Future Improz'enicnt of Society. 205. The Theory of Population. BY THOMAS ROBERT MAI^THUS. In an inquiry concerning the improvement of society, the mode of conducting the subject which naturally presents itself, is, i, To investigate the causes which have hitherto impeded the progress oi mankind towards happiness ; and 2, To' examine the probability of the total or partial removal of these causes in the future. The principal object of this essay is to examine the effects of one great cause intimately united with the very nature of man. This is the constant tendency of all animated life tO' increase beyond the nour- ishment provided for it. Through the animal and vegetable kingdoms Nature has scat- tered the seeds of life abroad with the most profuse and liberal hand. If the germs of existence contained in the earth could freely develop themselves, they would fill millions of worlds in the course of a few thousand years. Necessity, that imperious, all-pervading' law of nature restrains them and man alike within prescribed bounds. The effects of nature's check on man are complicated.- Impelled to the increase of his species by an equally powerful instinct, rea- son interrupts his career, and asks him whether he may not bring beings into the world, for whoan he cannot provide the means of support. If he hear not this suggestion, the human race will be constantly endeavoring to increase beyond the means of subsistence. But as, by that law of our nature which makes food necessary to the life of man, population can never actually increase beyond the lowest nourishment capable of supporting it, a strong check on pop- ulation, namely, the difficulty of acquiring food, must be constantly in operation. This difficulty must fall somewhere, and must neces- POPULATION AND IMMIGRATION 379 sarily be severely felt in some or other of the various forms of misery by a large portion of mankind. This conclusion will suffi- ciently appear from a review of the different states oi society in which man has existed. But the subject will be seen in a clearer light, if we endeavour to ascertain what would be the natural in- crease in population, if left to exert itself with perfect freedom. Many extravagant statements have been made of the length of the period within which the population of a country can double. To be perfectly sure we are far within the truth, we will take a slow rate, and say that population, when unchecked, goes on doub- ling itself every twenty-five years, or increases in a geometrical ratioi. The rate according to which the productions of the earth may be supposed to increase, it will not be soi easy to determine. However, we may be perfectly certain that the ratio of their in- crease in a limited territory must be of a totally different nature from the ratio of the increase in population. A thousand millions are just as easy doubled every twenty-five years by the power of population as a thousand. But the food will by no means be ob- tained with the same facility. Man is confined in room. When acre has been added tO' acre till all the fertile land is occupied, the yearly increase in food must depend upon the melioration of the land already in possession. This is a fund, which, fromi the nature of all soils, instead of increasing must be gradually diminishing. But population, could it be supplied with food, would go- on with unexhausted vigor; and the increase in one period would furnish a power of increase in the next, and this without an}^ limit. If it be allowed that by the best possible policy the average produce could be doubled in the first twenty-five years, it will be allowing a greater increase than could with reason be expected. In the next twenty-five years it is impossible to suppose that the produce could be quadrupled. It would be contrary to our knowledge of the properties of land. Let us suppose that the yearly additions which might be^ made to the former average produce, instead of decreasing as they cer- tainly would do, were to remain the same ; and that the product of the land might be increased everv^ twenty-five years, by a quantity equal to what it at present produces. The most enthusiastic spec- ulator can not suppose a greater increase than this. Even then the land could not be made to increase faster than in an arithmetical ratio. Taking the whole earth, the human species would increase as the numbers i, 2, 4, 8, 16, 32, 64, 128, 256, and subsistence as I, 2, 3, 4, 5, 6, 7, 8, 9. In two centuries the population would be to the means of subsistence as 256 to 9; in three centuries as 4096 to 38o READINGS IN ECONOMIC PROBLEMS 13, and in twO' thousand years the difference would be almost in- calculable. In this supposition no limits whatever are placed to the produce of the earth. It may increase forever and be greater than any assignable quantity ; yet still the power of population, being in every period so miuch greater, the increase of the human species can only be kept down to the level of the means of subsistence by the constant operation O'f the strong law of necessity, acting as a check upon the greater power. But this ultimate check to population, the want of food, is never the immediate check except in cases of famine. The latter consists in all those customs, and all those diseases, which seem to be gen- erated by a scarcity of the means of subsistence ; and all those causes which tend permanently to weaken the human frame. The checks may be classed under two general heads — the preventative and the positive. The preventative check, peculiar to man, arises from his reason- ing faculties, which enables him to calculate distant consequences. He sees the distress which frequently presses upon those who have large families; he cannot contemplate his present possessions or earnings, and calculate the amount of each share, when they must be divided, perhaps, among seven or eight, wnthout feeling a doubt whether he may be able to support the offspring which probably will be brought into the w^orld. Other considerations occur. Will he lower his rank in life, and be obliged to give up in great meas- ure his former habits? Does any mode of employment present it- self by which he may reasonably hope to maintain a family? Will he not subject himself tO' greater difficulties and more severe labor than in his present state? Will he be able to give his children ade- quate educational advantages? Can he face the possibiHty of ex- posing his children to poverty or charity, b}^ his inability to provide for them,? These considerations prevent a large number of people from pursuing the dictates of nature. The positive checks to population are extremely various, and in- clude every cause, whether arising from vice or misery, which in any degree contributes to shorten the natural duration of human life. Under this head may be enumerated all unwholesomie occu- pations, severe labour, exposure to the seasons, extreme poverty, bad nursing of children, great towns, excesses of all kinds, the whole train of common diseases, wars, plagues, and famines. The theory of population is resolvable into three propositions : 1. Population is necessarily limited by the means of subsistence. 2. Population invariably increases where the means of subsistence POPULATION AND IMMIGRATION 381 increase, unless prevented by some very pow^erful and obvious checks. 3. These checks which keep population on a level with the means of subsistence are all resolvable into- moral restraint, vice, and misery. 206. A Comparison of Malthus and Darwin. BY J. SHIEI^D NICHOLSON. A comparison between Darwin and Malthus both in matter and method is very instructive, but it is a mistake to suppose that the principle of population is one case of the wider Darwinian theory. The truth is, though it has, I believe, been generally overlooked, that although Malthus suggested to Darwin the leading idea of his theory, as a matter of fact, he himself was definitely opposed to Darwin's conclusion. He admits that there may be variations with- in certain limits, alike in man, animals, and plants, but the limits, in his view, are real and insurmountable — they may be undefined but they cannot be indefinite. Malthus gave no countenance to the opinion that in mankind the struggle for existence would lead to the survival of the fittest, and that the ultimate product would be the highest civilization. On the contrary, he draws a distinction not only in degree, but in kind, between the intelligence and morality of man and of other animals, and the progress of man he ascribes to the conquest by his superior attributes oi those lower animal pro- pensities. The resemblance between the two writers is to be found not in the matter of their conclusions, but in the method of their research. Each started with a guiding principle, but neither, to adopt Mai-- thus' description of his own work, entrenched himself in an im- pregnable fortress of abstraction and hypothesis ; on the contrary, both wandered in search of facts over the large field oi experience. Malthus discovered and enumerated the principal causes that affect the actual growth of peoples ; similarly Darwin investigated the actual growth of species. It is a curious and suggestive fact that Malthus, who took a priori views of animals and plants, denied the theory oi Darwin, whilst Darwin, who, in respect to man's higher nature, was equally a priori in reality, denied the theor}^ of Malthus. Like all great writers, Malthus was influenced, not only by the speculative thought, but by the social conditions of his time. The work was composed during the period when the English Poor Taw was gradually bringing tO' maturity many evils. The governing principle during this period was that the people, who, in the words of Pitt, had enriched their country with a number of children. 382 READINGS IN ECONOMIC PROBLEMS should receive relief as a matter of right and honour. Even Adam Smith had declared that the best sign of the prosperity of a country was a rapid increase of population. It must be remembered that during the period in question, the country was engaged in a great war, and a large population was looked upon as a political neces- sity. Accordingly, when Malthus set himself to prove that the Poor Laws had doue much more harm than good, and ought to be gradually aboJished, and when he boldly asserted that, "it is not the duty of a man, simply tO' propagate his' species, but to propagate virtue and happiness, and that if he had not a tolerably fair pros- pect of doing this, he is by no means called upon to have descend- ants," he struck straight at notions universally prevalent, and his teaching was branded with opprobrious epithets. Just as Darwin shocked traditional theologv regarding the origin, so Malthus of- fended it in respect of the continuance, of human species. Those who think that the principle of population is an obvious truism would do well to take note of the controversy which its enunciation excited, and those who imagine that Malthus ever wrote anything opposed to common sense morality should do his memory the jus- tice of reading the essay itself. No man has ever suffered so much from being answered by those who have never seen a line of his works. 207. Malthusianism a Support of Capitalism. BY PIERCY RAVEN STONE. We have new doctrines preached to us. Men, it is now discov- ered grow more readily than plants. Human beings overrun the world with the rapidity of weeds. Hence the hopeless misery. The earth groans under the weight of numbers. The rich it is now dis- covered give bread to the poor. Labour owes its support to idle- ness. Those who produce everything would starve but for the as- sistance of those who produce nothing. The numbers of the poor are to be checked by all possible means: every impediment is to be placed in the way of their marriages, lest they should multiply too fast for the capital of the country. The rich, on the contrary, are to be encouraged, everything is to be done for their benefit. For though they produce nothing themselves, their capital is the cause of everything produced ; it gives fertility to our fields and fecundity to our flocks. These doctrines are new. It was long the established creed oi every statesman, that in the extent of its population consisted the strength, the power, and the opulence of every nation; that it was therefore the duty of every sovereign to increase, by all prac- POPULATION AND IMMIGRATION 383 ticable means, the number of the people commdtted to his charge. On whatever other points statesmen and legislators might differ, on this they were all agreed. From Lyciirgus to Montesquieu the doctrine underwent no change. Marriage was everywhere held up as honourable ; children were considered as entitling their fathers to peculiar privileg'e and the mark of scorn was imprinted on the selfish being who remained single. Poverty gave no exception, it rather increased the obligation. His country gratefully received in children the contribution of him who had nothing else to give. The wealth of a nation consisted in the number and strength of its peasantry. Men did not dream that riches could be separated from numbers. By these newer doctrines pestilence and famine are ministers of God, executing his eternal decrees, and rescuing us fro'm the necessity of overwhelming wretchedness. The doctrine has robbed Divinity of all the charities of his nature, leaving to him little else than the functions of an enemy of mankind. The great and the rich could not be much offended at discover- ing that whilst their rights were augmented, they were entirely absolved from the performance of those actions which the less enlightened judgment of other times had classed amongst the most important and essential of their duties. To be merciful to our own faults, to believe our idle expenses meritoTious, to set up selfishness as the idol of our idolatry, and toi drive away charity, are duties not very repugnant to our nature. They demand no sacrifice in their performance. The temple of virtue will be crowned with votaries, if it be made to^ lead tO' the shrine of self-interest. Those severer morals which taught that the poor were equally partakers of the divine nature with the rich ; that they were equally fashioned in the image and likeness of God; that their industry being the cause of all that was produced, and the rich being in real- ity only pensioners on their bounty, the latter were only trustees for the good of society ; that their wealth was given not for their own enjoyment, but for its better distributioai through the different channels of society, were not likely long tO' maintain their hold on the minds of the wealthy against those sedative doctrines which flattered the passions, converted faults into good qualities, and made even conscience pander toi vices. It is an old and dreary system which represents our fellow- creatures as so many rivals and enemies, which makes as believe that their happiness is incompatible with our own, which builds our wealth on their poverty, and teaches that their numbers cannot con- sist with our comforts and enjoyments; which would persuade us to look on the world as a besieged town, where the death of our 384 READINGS IN ECONOMIC PROBLEMS neighbors is hailed with secret satisfaction since it augments the quantity of provisions hkely to fall to our share. To consider mis- ery and vice as mere arrangements of the Divinity to prevent the inconvenience of a too great population of the world, is tO' adopt predestination in its worst form. In committing crimes we should only be executing the will of God ; in alleviating the distresses of others, in feeding the hungry and clothing the naked, we should be running counter to the decrees of Providence. But before we can adopt these conclusions, it behooves us to examine on what foundation the system is built. We must remem- ber that it is the common interests of all members which holds so- ciety together. Misery is not of God's creation; vice is not the minister of His wall. I shall show that the increase in numbers in the human species is wholly uninfluenced by human institutions. It is by no means so varied in its operation as Mr. Malthus has sup- posed ; it affords nO' ground for alarm ; it calls for no restrictive measures, since the increase in subsistence is entirely dependent, on the increase in numbers. Every man brings intO' the world the means of producing his own sustenance. Wherever the numbers of the people increase more rapidly than the means of subsistence, the faylt is not with Providence, but in the regulations of society. Cap- ital is no addition tO' the wealth of a nation ; it conduces nothing to the improvement of the industry ; it is merely a new distribution of the property of society, beneficial to some, wholly because it is in- jurious to others. 208. An Early American View of Population. BY HENRY C. CAREY. The Malthusian law of population may be briefly given in the following words : — Population tends to increase in a geometrical ratio, while the supplies of food can increase in an arithmetical one only. The former is, therefore, perpetually outstripping the latter, and hence it is, that there is everywhere seen to arise the disease of over-pop- ulation, with its accompanimients, poverty, wretchedness, and death — a disease requiring for its remedy wars, pestilences, and famines on the one hand, or, on the other, the exercise of that "moral re- straint," which shall induce men and women to refrain from matri- . mony, and thus avoid the danger resulting from further addition to the numbers requiring to be fed. Reduced tO' distinct proposi- tions, the theory may now be given as follows : — I. Matter tends tO' take upon itself higher forms, passing from POPULATION AND IMMIGRATION 385 the simple ones of inorganic life to the complex and beautiful ones of vegetable and animal life, and finally terminating in man. 2. This tendency exists in a small degree as relates to the lower forms of life — matter tending to take upon itself the forms of potatoes, turnips, and cabbages, herrings, and oysters, in an arithmetical ratio only. 3. When, however, we reach the highest of all the forms of which matter is capable, we find the tendency to assume that form augmenting in a geometrical ratio ; as a consequence of which, while man tends to increase as i, 2, 4, 8, 16, and 32 — the potatoes and cabbages, the peas and turnips, the herrings and the oysters, in- crease as I, 2, 3, and 4 only — producing the result that the highest form is perpetually outstripping the lower ones, and causing the disease of over-population. Were such things asserted in regard to anything else than man, they would be deemed in the highest degree absurd, and those by w^hom they were asserted would be required to explain why it was that an universal law had here been set aside. Everywhere else, the increase in number is in the inverse ratio of development. The little coral insects are required, in quantity innumerable, to build up islands, for animals and men that count by thousands, or by millions. Of the cUo horealis, thousands are required to furnish a mouthful for the mighty whale. The progeny of a pair of carp would, in a single decade, as we are told, amount to millions. The countless ferns prepare the soil for the single oak ; and the progeny of a pair of rabbits would, in twenty years, count by millions — whereas, that of a pair of elephants, would -not amount to dozens. When, however, we reach the highest condition of which matter is capable, we learn the existence of a new and greater law, in virtue of which man increases in a geometrical ratio', while the increase of herrings, rabbits, oysters, potatoes, turnips, and all other com- modities required for his use, is limited tO' the arithmetical one ! Such is the extraordinary law propounded by ]\Ir. Malthus, as ex- isting in reference to the only being on whom has been impressed the desire for association, as necessary for compliance with the sole condition of his existence ; the only one, to whom has been given an infinite variety of capacities fitting him for association with his fellow men, and requiring it for his development ; and the only one, too, that — having been gifted with the power to distinguish right from wrong, and thus been made responsible for his actions — • might with reason have required, that he should be exempt from any law requiring him to make his election between abstinence 386 READINGS IN ECONOMIC PROBLEMS from that association which, of all others, tends most to the improve- mient of his head and heart, on one hand, and starvation on the other. Such, however, according to the generally received doctrines of modern political economy, is the law of population instituted by. an all-wise, all-powerful, and all benevolent Creator, in reference to the being made in his "own likeness, and gifted with power to control and direct all the forces of nature to his use — ^and, strange as it appears, no proposition ever offered for consideration has exer- cised, or is now exercising, upon the fortunes of the human race a greater amount of influence. That such should have been the case has, in part, resulted from the fact that it has been buttressed up by another one, in virtue of which man is supposed everywhere to have commenced the work of cultivation on rich soils — necessarily those of swamps and river bottoms — with large return to labor ; and to have found himself compelled, with the growth of population and of wealth, to have recourse to poorer ones, with constant de- cline in the return to labor — a theory that, if true, would fully establish the correctness of that of Mr. Malthus. 209. Malthus versus the Malthusians, BY L. T. HOBHOUSE. The appearance of the biological theory of progress, of Avhich we have been hearing much of late, was announced by the terrible douche of coild water thrown by Malthus on the speculative optim- ism of the eighteenth century. The generation preceding the French Revolution was a time of buoyant and sanguine outlook. There floated before men the idea of an age of reason when men should throw off the incubus of the past and resume a life in accordance with nature in a social order founded on a rational consideration of natural rights. Nature both in the politics and the economics of the time assumes a half personal and wholly benevolent character while human restrictions, human conventions, play the part of the villain in the piece. At this point Malthus intervened by calling attention to a "natural" law of great significance. This was the law that human beings multiplied in a geometrical ratio; that it was only by the checks of famine, pestilence, and war that they were prevented from overspreading the earth, and that, to cut the matter short, whatever the available means of subsistence, mankind would always, in the absence of prudential checks, multiply up to the limit at which those means became inadequate. True, the means of subsistence might be extended. New countries might be opened POPULATION AND IMMIGRATION 387 up. New sources of food supply might be discovered. Every such extension, the Malthusian argued, would only redouble the rate of multiplication. Checks would cease, men and women would marry earlier ; Y&ry soon population would again be pressing on the means of subsistence. The advance in civilization told in the same direc- tion. Population was increasing, must increase. It could be held in check only by the one great barrier of the subsistence limit against which the fringe of advancing population must foi'ever beat in misery. There could be no solution oi the social question ; for in the nature of things there must be a line where the surf of the advancing tide breaks upon the shore, and that shore was death from insufficiency of nourishment. You observe that in summariz- ing the argument I speak partly of Malthus, partly of the Malthus- ians, Malthus himself, particularly in his second edition, laid stress on the prudential checks. He cannot fairly be accused of foster- ing the pessimistic views often fastened upon him. But for many a long year after he wrote, the efficacy of the prudential checks ap- peared to be very slight. It was his first edition that was generally absorbed and that profoundly influenced social thought for nearly a century. It was not till the seventies that there came into opera- tion that general fall in the birth-rate, which has justified Malthus against the Malthusians, has put the calculations of the future growth of population on a radically difl^erent basis, and has brought about among other things a complete reconstruction of the biologi- cal argument against progress. I venture to think we may draw a lesson from the fate of Malthusianismi. Mathematical arguments drawn from the assumption that human beings proceed with the statistical regularity of a flock of sheep are exceedingly difficult to refute in detail, and yet they rest on an insecure foundation. Man is not merely an animal. He is a rational being. The Mal- thusian theory was one cause of the defeat of its own prophecies. It was the belief that population was growing too fast that operated indirectly to check it. Those who fear that population is now growing too slowly, may take some comifoTt from the reflection. We are not hastily to assume inevitable tendencies in human socie- ty, because the moment society is aware of its tendencies a new fact is introduced. Man, unlike other animals, is moved by the knowledge of ends, and can and does correct the tendencies whose results he sees tO' be disastrous. The alarmist talk ' of race suicide may serve its purpose if only by admonishing us of the fate of a theory based on what appears to be a most convincing biological calculation. 388 READINGS IN ECONOMIC PROBLEMS C. THE RELATION OF IMMIGRATION TO THE POPU- LATION QUESTION. 210. The Falling Birth-Rate. BY EDWARD AI.S WORTH ROSS. A century ago Malthus startled the world by demonstrating that our race naturally multiplies faster than it can increase its food supply, with the result that population tends ever tO' press painfully upon the means of subsistence. Soi long' as mankind reproduces freely, numbers can be adjusted tO' resources only by the grinding of destructive agencies, such as war, famine, poverty and disease. To be sure, this ghastly train of ills may be escaped if only people will prudently postpone marriage. Since, however, late marriage calls for the exercise of more foresight and self-control than can be looked for in the masses, Malthus painted the future of humanity with a somberness that gave political economy its early nickname of "the dismal science." Malthus is not in the least "refuted" by the fact that, during his century, the inhabitants of Europe leaped in number from one hun- dred and eighty-seven millions to four hundred millions, with no increase but rather diminution of misery. It is true, unprecedented successes in augmenting the food supply have staved off the over- population danger. Within a life time, not only have the arts of food raising made giant strides, but, at the world's rim, great virgin tracts have been brought under the plow, while steam hurries to the larders of the Old World their surplus produce. But such a bounty of the gods is not rashly to be capitalized. While there is no limit to be set to the progress of scientific agriculture, no one can show where our century is to find its Mississippi Valley, Argen- tina, Canada, or New Zealand, to fill with herds or farms. The vaunted plenty of our time adjourns but does not dispel the haunt- ing vision of a starving race on a crowded planet. Nevertheless, the clouds that hung low about the future are breaking. The terrible Malthus failed to anticipate certain influ- ences which in some places have already so far checked multiplica- tion as to ameliorate the lot of even the lower and broader social layers. The sagging of the national birth-rate made its first ap- pearance about fifty years ago in France, thereby giving the other peoples a chance to thank God they were not as these decadent French. But the thing has become so general that today no people dares to point the finge'r of scorn. In 1878, the fall of the birth- rate began in England. During the eighties, it invaded Belgium, POPULATION AND IMMIGRATION 389 Holland, and Switzerland. In 1889 it seized with great virulence upon Australia. Just before the close of the century Finland, Italy, and Hungary fell into line. In Germany and Austria it is only within four or five years that the economists have begun to discuss "our diminishing fecundity." In all Christendom, only Russia, the Balkan states and French Canada show the old-fashioned birth-rates of forty, fifty, or even fifty-five, per thousand. The tendency in the United States is best revealed in the diminishing number of children under five years to each thousand women of child-bearing age. The decline from i860 to 1890 is 24 per cent. Owing tO' the fact that the death rate has been falling even faster than the birth rate, there is, sO' far, no slackening in the. growth of numbers. Indeed, part of the fall in the birth rate merely reflects the increasing proportion of aged. The forces reducing the death-rate are by no means the same as those cutting down the birth-rate, nor have they the same sphere of operation. Deaths are fewer because of advances in medicine, better medical education, public hospitals, pure water supply, milk inspection, housing reformi and sanitation. Births are rarer owing to enlightenment, the ascent of women, and individualistic democ- racy. The former may be introduced quickly, from above. The latter await the slow action of the school, the press, the ballot, the loosening of custo-m. An abrupt fall in the birth-rate of froim 10 to 20 per cent among the four hundred million bearers of the Occidental torch is a phe- nomenon so vast and so pregnant as to excite the liveliest specu- lation. Some lay it to physiological sterility produced by alcohol, city life and over-civilization. There are, indeed, in some quarters, notably in New England, evidences of a decline in female fertility ; but, on the whole, the lower birth-rate reflects the smaller size of families rather than the greater frequency of childless couples. Others insist that vice, club-life, the comfortable celibacy of cities, and the access of women to the occupations are turning peo- ple away from wedlock. It is true that the proportion of single women is increasing with us. Still, few peoples are sO' much mar- ried as Americans, and, for all that, their birth-rate has fallen fast and fallen far. Michigan, which is about as addicted to the mar- ried state as any white community in the world, has only two-thirds the fecundity of England and half that O'f Hungary. Perhaps the master force of our time is democracy. The bar- riers of caste are down so that more and more a man's social stand- ing depends upon himself. The lists oi life are open to all, and the passion to "succeed" grows with the value of the prizes tO' be won. 390 RBADINGS IN ECONOMIC PROBLEMS Never before did so many common people strain to reach a higher rung in the social ladder. But prudence bids these eager climbers avoid whatever will impede one's ascent of imperil one's footing. Children are incumbrances, so the ambitious dread the handicap of an early marriage and a large family. Even the unselfish, whose aim is to assure their children a social position equal to or superior to their own, will see to it that there are not more children than they can properly equip. The effect of democracy is reinforced by the break-up of custom. As fixed class distinctions fade out, people cease to be guided by the traditional standard of comfort. It is nO' longer enough to live as . father and mother lived. Wants and tastes, once confined to the social elect, spread resistlessly downward and infect the masses. Here the decencies, there the comforts, yonder the vanities of life compete with the possible child and bar it from existence. The great movement that has burst the fetters on woman's mind, and opened to her so many careers, exalts her in the marriage part- nership and causes the heavy price of motherhood to be more con- sidered by her husband as well as by herself. However we account for the fall in the birth-rate, there, is no question as to its consequences. The decline registers itself in a rising plane of comfort, a growth of small savings, and a wider difTusion of ownership. Owing tO' the better care enjoyed by the aged when they do not have to compete for attention with an over- large brood of wailing infants, there is a striking increase in lon- gevity. A greater proportion of lives are rounded out to the Psalm- ist's term. There is also a wonderful saving of life among infants, for often prolificacy does nothing but fill the churchyards with wee mounds. When we consider that in 1790 there were in this coun- try just twice as many children under 16 toi adults over 20 as there are today we understand why the law limits child labor and insists on keeping children in school. But the supreme service of forethoughted parenthood is that it bids fair to deliver us from the overpopulation horror, which was becoming more imminent with every stride in medicine or public hygiene. Most of the Western peoples have now an excess of births over deaths of one per cent a year. If even a third of this increase should find a footing over sea, then home expansion would still be such that, at a future date no more remote from us than the found- ing of Jamestown, Europe would groan under a population of three billions, while the United States of that day, with twice as many people as Europe now has, would be tO' China what China is to the present United States. Besides its attendant miser)'' and degrada- POPULATION AND IMMIGRATION 391 tion, population pressure sharpens every form of struggle among men, — competition, class strife, and war — and the dream of a moral redemption of our race would vanish into thin air if the enlightened peoples had failed to meet the crisis created by the reduction of mortality. Once it seemed as if man's propensity to multiply foredoomed him to live ever in the presence of vast immediate woe. However smiling the gardens of Daphne they had always toi slope down into a huge malodo'rous quagmire of wretchedness. The wheel of Ixion, the cup of Tantalus, symbolized humanity striving ever by labor and ingenuity to relieve itsel'f of a painful burden, only tO' have that burden inexorably rolled back upon it by its own fatal fecun- dity. Now that cheap travel stirs the social deeps and far-beckoning opportunity fills the steerages, immigration becomes ever more serious to the people that hopes to rid itself at least of slums, ''masses" and "submerged." What is the good of practising pru- dence in the family if hung'ry strangers may crowd in and occupy at the banquet table of life the places reserved for its children? Shall it, in order to relieve the teeming lands of their unemployed, abide in the pit of wolfish competition and renounce the fair pros- pect of a growth in suavity, comfort, and refinement? If not. then the low-pressure society must not only slam its doors upon the in- draught, but must double-lock them with forts and ironi-clads, lest they be burst open by assault from some quarter where "cannon food" is cheap. The rush of developments makes it certain that the vision of a globe "lapt in universal law" is premature. If the seers of the mid- century who looked for the speedy triumph of free trade had read their Malthus aright, they might have anticipated the tariff barriers that have risen on all hands within the last thirty years. So, today, one needs no prophet's mantle to^ foresee that presently the world will be cut up with immigration barriers which will never be leveled tmtil the intelligent accommodation of numbers to^ resources has greatly equalized population pressure all over the globe. The French resent the million and a third aliens that have been squeezed into hollow and prosperous France by pressure in the neighbor lands. The English restrict immigration from the Continent. The Gennans feel the thrust from the overstocked Slavic areas. The United States, Canada, Australia and South Africa are barring out the Asiatic. Dams ag'ainst the color races, with spillways of course for students, merchants, and travelers, will presently enclose the white man's world. Within this area minor dams will protect the hig'h 392 READINGS IN ECONOMIC PROBLEMS wages of the less prolific peoples against the surplus labor of the more prolific. Assuredly, every small-family nation will try to raise such a dam and every big-family nation will try to break it down. The outlook for peace and disarmament is, therefore, far from bright. One needs but compare the population-pressures in France, Ger- many, Russia and Japan to realize that, even today, the real enemy of the dove of peace is not the eagle of pride or the vulture of greed but the stork ! 211. The Immigrant Invasion. BY P"KANK JULIAN WARNE. At the time of the appearance of the comet in 1910 there was in progress the most remarkable and in many ways the most wonder- ful invasion of one country by peoples of foreign countries that the world had ever seen. In the very month of May, when the comet's appearance in the heavens was being heralded in the newspapers, as many as one hundred and fifty thousand representatives of differ- ent races and countries of the world were entering the immigrant ports of the United States. They were equal to one hundred and fifty full regiments of one thousand each ; they were double the entire fighting strength of the United States Army. More than one million people from all the countries on the globe were that year passing in a seemingly never-ending stream into the United States. They came from the British and the Spanish Americas, from^ Europe and from Africa, from Asia and from India, from the is- lands of the Pacific and the islands of the Atlantic. From the United Kingdom and the Russian Empire, from the Scandinavian countries and the Netherlands, from, the German Empire and the Dual Kingdom' of Austria-Hungary, from Turkey in Europe and Turkey in Asia, from, Italy and China and Japan, they came. There was not a single geographical or politically organized area of im- portance from which they did not come. England, Ireland, Scot- land, Wales, Norway, Sweden, D'enmark, Holland, Belgium, Swit- zerland, France, Spain, Portugal, Roumania, Greece, Armenia, Per- sia, Syria, Sicily and Sardinia, the Cape Verde and Azores Islands, the Canary and Balearic Islands, British Honduras, Tasmania, and New Zealand, the Philippines, Hawaii, the East and the West In- dies, Cuba, Canada, Mexico-, and South and Central American coun- tries — each and all and more were represented. The sources of this stream of immigration are four great stocks of the human race — the Aryan, the Semitic, the Sinitic, and the Sibiric. From the homes of these, as they have scattered them- POPULATION AND IMMIGRATION 393 selves among the 'Teutonic, Celtic, Slavonic, Lettic, Italic, Hellenic, Illyric, Indo-Iranic, Chaldean, Chinese, Japanese, Finnic, and Tar- taric groups, this streanii is pouring. The peoples composing it are Scandinavians, Dutch, Flemish, Germans, English ; Irish, Welsh, Scotch, Bohemians, Dalmatians, Moravians, Croatians, Poles, Slov- enians, Bulgarians, Russians, Servians, Ruthenians, Montenegrins, Bosnians, Herzegovinians, Slovaks ; Letts and Lithuanians ; French, Italians, Portuguese, Roumanians, and Spaniards ; Greeks ; Alban- ians ; Armenians, Persians, and Gypsies ; Hebrews and Syrians ; Chinese ; Japanese and Koreans ; Finns and Magyars ; and Turks. Besides, we have coming to us Berbers and Arabs from northern Africa, Bretons from western France, Esthonians from western Russia, Esquimaux from western Alaska, Spanish Americans from South America. And not even all these exhaust the miultitudinous sources contributing to our foreign-born population. Unlike the invasions of other centuries and of other countries, the present-day immigration to the United States is not by organized armies coming to conquer by the sword. It is made up of detached individuals, or at most, of family or racial groups, afoot, the sword not only sheathed but also^ entirely discarded by those who have no idea of battling with arms for that which they come to seek. They do not come as armed horsemen, with their herds of cattle and skin-canopied wagons. Nor do they present themselves at our doors in "great red ships," with the ensign of the rover hanging from the topmast, and clad in chain-mail shirts and with helmets. More than twenty-eight million have entered the United States from all parts of the world during the ninety years since 1820! In the course of the nineteenth centurs^, and the first decade of the twentieth century, there came more than five ixLillion from Germany, four million from Ireland, more than three million from each of Austria-Hungary, and Italy, three million from England, Scotland, and Wales; nearly two and one-half million from Russia, nearly two million from Norway, Denmark, and Sweden ; and about five hundred thousand from France. More than twenty-five million immigrants came within the sixty years since 1850 ; and more than nineteen million cairte within the last thirty years. The ten years ending with 1910 gave us a total immigration exceeding 8,795,000, nearly five million of those arriv- ing within the past five years. In the single year 1910 the number of arrivals exceeded one million by 41,000; in the twelve months three years before they had reached 1,285,000, this being the largest single yearly inflow of foreign born in the history of the country. Taking the average for the past ten years, we find that there 394 READINGS IN ECONOMIC PROBLEMS came annually more than eight hundred and seventy-nine thousand immigrants ; for every month more than seventy-three thousand ; for every day, Sundays and holidays included, two thousand four hundred and forty, and for every time the clock struck the hour, day and night, one hundred persons born in some foreign coimtrv landed on the shores of the United States. Truly a wonderfiil invasion ! A stupendous army ! An army that has been marching continually all these years — an army whose ranks, although chang'ing racially, have not been depleted but have steadily and at times alarmingly increased in numbers as the decades have gone by. Here is a phenomenon before which we must stand in awe and amazement when contemplating its consequences to the human race! Think you that any such numbers invaded the Romian world when the Huns poured in from, the East? Was Attila's army one- half, even one-tenth, as large when it overran Gaul and Italy? Did the Saxons in the sixth century invade England in any such num- bers? Or, did William the Conqueror lead any such army in the Norman invasion of England in the eleventh century? And yet, upon the peoples of those countries the mark of the invader is seen to this day. Think you that America alone will escape the conse- quences ? Let us look at the volume of this invasion from another angle. There were in the United States in 1910 more than 13,500,000 per- sons who had been born in some foreign country. That is, one out of every seven of our population came here, not through having been bo^rn here, but through immigration. The largest contribu- tion was from Germany, the next largest from Russia ; then came Ireland and Italy in a close race for third place, the number of the former exceeding those from Italy by less than ten thousand. Aus- tria, including Bohemia and a part of what formerly was Poland, held fifth place; Canada was in sixth and England in seventh place, Sweden in eighth, Hungary in ninth, and Norway in tenth. These ten countries contributed more than 11,600,000, of the 13,500,000 or all but 1,900,000 of our foreign born. Their propor- tion of the total was about 86 per cent. The other countries or geo- graphical and political divisions represented in the foreign-born population of the United States in 1910 were Scotland, Wales, Den- mark, Holland, Belgium, Luxemburg, Switzerland, Portugal, Spain, France, Finland, Roumania, Bulgaria, Servia, MontenegrO', Turkey, Greece, Newfoundland, Cuba, West Indies, Mexico, Central Amer- ica, South America, Japan, China, India, Asia, Africa, Australia, Atlantic Islands, Pacific Islands, and other countries hot specified. POPULATION AND IMMIGRATION 395 Religiously they are believers in Roman and Greek Catholicism, Protestantism in its manifold forms and variations, Mohammedan- ism, Armenianism, Buddhism, Confucianism, Judaism, Shamanism, Islamism, Shintoism, and hundreds of diversified sects, some with such strange names as Chiah, Sunni, Parsee, Nestorian, Maronite, Druse, Osmanlis, Laotse, and so. on. Linguistically they are German, Dutch, Scandinavian, including Danish, Norwegian, and Swedish, Flemish, English, Gaelic, Cym- ric, Slavic, including Russian, Serbo-Croatian, Polish, and Bohe- mian; French, Italian, Spanish, Roumianian, Portuguese, Rheto- Roman, Greek, Albanian, Lithuanian, Lettic, Armenian, Persian, Yiddish, Semitic, Turkish, Finnish, Magyar, Chinese, Japanese, Korean, Mexican, Spanish American, and other groups distinguish- ed by the language they speak. Among these are such strange and unfamiliar dialects as Friesian, Thuringian, Franconian, Swabian, Alsatian, Wallon, Gascon, Languedocian,. Rhodanian, Catalan, Gal- ego, Friulan, Gegish, Toskish, Pamir, Caspian, Syriac, Aramaic, Shkipetar, and so on. Some conception of the significance of the numerical strength of the foreign born in the United States is gained by means of a few simple comparisons. They number over three and one-half millions more than all the negro population of the entire country. They equal more than twice the total population, and nearly thret times that of the native, of the six New England States ; they would populate the seven states of Minnesota, Iowa, Missouri, the two Dakotas, Nebraska, and Kansas, with their present density, and still have an extra 1,880,000; they supply a population 1,300,000 in ex- cess of the total found today in the South Atlantic division, includ- ing, besides the District of Columbia, also Delaware, Maryland, the two Virginias, the two Carolinas, Georgia, and Florida. Considering the native population only, which includes also the children born here of foreign-born parents, our total foreign born equals all the natives in the twenty-two states of Maine, New Hamp- shire, Vermont, Massachusetts, Rhode Island, Connecticut, Dela- ware, Florida, the two Dakotas, Kansas, Montana, Idaho, Wyom- ing, Colorado, New Mexico, Arizona, Utah, Nevada, California, Oregon, and Washington. 212. Immigration in a Single Year. BY V. A. OGG. It is not easy to conceive what our immigration has come to be. The figures are too stupendous to be grasped by the mind. Let one who has sat in the magnificent Stadium at Cambridge, as one of the 396 READINGS IN ECONOMIC PROBLEMS 40jO00 spectators at a Harvard- Yale football game, reflect that if the immigrants entering our ports during the fiscal year 1906 were brought together, they would make a throng twenty-five and a half times as large as that which crowds every available foot of space around the great oval. Let him consider that the number admitted in this twelvemonth from Norway and vSweden alone would more than fill the Stadium ; that the number from Germany would do the same; that the influx from Great Britain would fill it two and one-half times. That from Russia would fill it more than five times ; that from Austria-Hungary would fill it more than six times ; and the contributions from Italy would do it seven times with people to spare. Let himi further call to^ mind that, on the average, the Stadium could be packed with the aliens who are landed at Ellis Island every seventeen days throughout the year. Then* let him consider that the total number of immigrants admitted in 1906 would nearly serve to populate either the city of Philadelphia, or the cities of Boston and Baltimore combined; that, in fact it would people all Maryland, or all Nebraska, or the whole region occupied by Arizona, New Mexico, Utah, Idaho, Wyoming, and Montana. These six states and territories have an aggregate area of 649,320 square miles, which is nearly 18 per cent of the total area of the United States. D. THE CAUSES OF IMMIGRATION. 213. The General Causes of Immigration. BY P. I''. HALL. History from one standpoint, may be considered the story of race migration and its effects. In general emigration has always taken a westerly direction. The cause of migration for the most part is the overgrowth of population. This creates a need for fur- ther sustenance, more space, and new opportunities ; and the race either moves en masse, or part splits off. If peaceful expansion be difficult the result is either race-suicide or war. A distinction is to be made between the migration of tribes by means of conquest and the peaceful emigration of individual units. Religions freedom and the chance to establish a new and lofty type of commonwealth have induced men to emigrate; but most of the recent immigration has been caused by the allurements of promised wealth and ma- terial comfort. There is no doubt that the chief influence affecting immigration POPULATION AND IMMIGRATION 397 in recent times is the prosperity of the courLtr}^ This is evidenced by the marked relationship between co'mmercial and industrial ac- tivity in the United States and the volume of immigration. The latter has followed upon the former, and has usually acquired a certain momentum which has caused it tO' continue for a time after the demand for labor here has been diminished. The commercial activity also makes the coming of the immigrant possible. From 40 to 50 per cent of those who arrive have their passage prepaid by friends in this countr}^, and fromi 10 to 15 per cent miore buy their tickets abroad with money sent from the United States. This must come from the savings of immigrants in this country. It is noteworthy that in times of depression it is in skilled immigrants that the decrease takes place. This is due in part to the better knowledge of trade conditions on the part of these men ; in part, to the closing of mills and factories which employ skilled labor. In the early settlement of the country, religious and political per- secution had no small part in promoting immigration. But at the present time comparatively few instances oi persecution take place. The chief exceptions are the Armenians coming from Turkey, and the Jews fleeing from Russia to avoid oppressive legislation. But even in the case of the Jews it is probable that the fear of perse- cution and generally unsatisfactory conditions are far more potent than actual persecution. It is obvious that the cost and the degree of hardship involved in coming tO' this country must be an important factor in determin- ing the volume of immigration at any particular time. The change which has come over conditions of immigration in this respect are well described by AValker: "Fifty years ago there was a presump- tion that the average immigrant was among the most enterprising, thifty, and alert of the community from which he came. It re- quired no small energy, prudence and foresight to conduct the in- quiries relating tO' his migration, to accumulate the necessary means, and to find his way across the Atlantic. Today the presumption is completely reversed. So thoroughly has the continent of Europe been crossed by railways, sO' effectively has the business of emi- gration been exploited, soi much have the rates of railroad fare and ocean passage been reduced, that it is now among the least thrifty of an European community that the emigration agent finds his best recruiting ground. The care and pains required have been reduced to a minimum. The intending emigrants are looked after from the moment they are locked into the cars in their native vil- lage until they stretch themselves on the floors of the buildings on Ellis Island. Illustrations of the ease and facility with which the 398 READINGS IN ECONOMIC PROBLEMS Pipe Ivine Immigration is now carried on might be given in pro- fusion." There are many other causes for immigration. One of the most important causes is the protective tariff. The tariff has the effect not only of developing certain industries in this country but of shutting our foreign goods from our market in these industries. It creates a demand for certain kinds of labor at the same time it destroys the demand for certain sorts of foreign goods. The moment you make the tariff high and the rate of wages high in a particular industry, the goods will be shut out and the producers of the goods will coine in. Mention may also be made of the influence of new machinery on immigration. Today the steam shovel and excavator, the con- crete mixing machine, and the construction railway accomplish more with a few men than could be done with thousands fifty years ago. Electrical coal-cutting machinery is producing the same result in the mines. Machinery has chiefly diminished the need for skilled labor. As tO' skilled labor it has been noted above that there is an over-supply in periods of depression. Whenever there is a large immigration toi the United States of unskilled labor, skilled labor hesitates to enter into a possible competition with it, and either stays at home or emigrates to some other country. A cor- ollary from this principle is that freedom of immigration does not necessarity increase the volume, though it may change the quality, and conversely, a, careful selection may stimulate the emigration of the selected classes. 214. The Demand for White Men. The Congressional Commission that spent the summer in Europe (1907), investigating the emiigration thence tO' the United States, has called attention to facts that show the most interesting con- clusion — ^that there are not enough white men in the world. Parts of the United States still welcome all hale and industrious new- comers, but mo'st of the European governments are lamenting the departure of their subjects, some are taking vigorous micans to prevent more from leaving, and several are even trying to turn . the tide back toward Europe. In the countries that maintain large armies, objection is made to the departure of men who' would do military service. But there is a sounder economic reason than that for discouraging emigra- tion. Laborers are becoming scarce in parts of Europe, especially farm laborers. In a word, white men who can and will work are POPULATION AND IMMIGRATION 399 needed everywhere. Except the jungles of the great cities, there are few parts of the white man's world that are overcrowded. The reasons for the continued flow to the United States are the obvious reasons of higher wages, cheaper lands, the encouragement of kinspeople and friends who have previously come here, and especially the activity of the steamship lines in seeking emigrant traffic. Most European countries have laws forbidding the solici- tation of emigrants; but, in spite of these laws, the trans- Atlantic lines have a thoroughly organized system of drumming them up. The westward migration to our continent, which is the largest movement of population in the history of the human race, will go on for many years, till there will be parts of 'Europe that will need immigrants more than we shall need them. 215. The Slovaks of Hungary. BY UNITED STATES CONSUIv STERNE. None of the Slovak emigrants are paupers, neither is there any danger under reasonable circumstances that they may become such in America; for, unlike the Gypsies O'f Hungary, the Slovaks are not born beggars ; to the contrar}^, they are always willing to work, and all the harder if by doing so their object may be reached sooner. Many of them are strictly day labourers and never possessed prop- erty beyond a little house or hut and an acre or two of the sterile land of their section. Their manner of living' is the very plainest ; their homes are often nothing but scanty huts, of one room, wherein the whole family lives and sleeps promiscuously. The furniture and outfit is very primitive, mostly home-made, and has to last for generations. The sam^e can be said of their clothing, "biled shirts" being quite an unusual luxury with the men.' The body clothes of the latter are made of coarse linen, their summer clothing of the same ma- terial, only coarser, and in winter their clothing consists of suits made from a coarse and thick woolen felting, in the natural colour of the wool ; an everlasting cap O'f sheepskin and a pair of sandals about complete an outfit which has been in vogue with them for generations and which may be an heirloom, since the style hardly ever changes. An important part of their outfit is the roomy and long mantle without sleeves, made up from half a dozen sheepskins which are tanned, the wool being left on ; these "overalls" are ever with them, and, as the season may demand, are worn either with the wool on the in- or out-side, and when the men are away from home these mantles form their complete bed. What these patriarchal 400 READINGS IN ECONOMIC PROBLEMS cloaks may lack in style is generally made up for by some gaudy em- broidery or even painting on the leather side of it. I do not wish to be unjust to these people, but from all I can learn their demand for water is but very limited for the use of the outer body as well as the inner. At home their diet consists principally of milk, potatoes, corn and rye bread, coffee and the meats being reserved luxuries of the wealthier ior Sunday or holi- days. While labouring in cities there is added to the above, if such can be done cheaply or gratis, the remnants or offal from the restaurant, or if times are especially "flush" with them, fresh meat is. bought from the butcher in the shape of the lungs, liver, or other unpopular but cheap portions of the beef. Their preferred drink is a sort of brandy made from potatoes or prunes, the latter called "slivovitz," and since the presence of the Slovaks in America this brandy has become an article of export from here to the United States. In all, it will be seen that the tastes of those people are any- thing but refined, are low, in fact, and the only thing which may be said in their excuse is their ever present object to economize for the sake of their families. With the same stated object, they are, when employed en masse in the cities, not very choice as to the quantity or quality of their bed- fellows. Thus as many of them as can, men and women alike, will pack themselves into a room or cellar over night, and without the least regard to- cleanliness or comfort. Though at all tiroes practising the closest economy, they will when away even strain a point so^ that their object may be attained sooner. At such time they can be said to compete with the Chinese in the most penurious practices of economy ; and were it not for their love of strong drink they could fairly be called the most frugal people living as far as the demands of the body go. They will work similarly cheap as the Chinese, and will inter- fere with a civilized labourer's earning a "white" labourer's wages. Like the Chinese, again, they are very exclusive people, and though American institutions may go a great ways towards removing this defect, it will usually require generations to make them enlightened citizens, where emigrants of other nations only need a few years. Another main objection to them is that, like the Chinese, they do not intend to remain in our country, not even as long as the latter, though like some of these, also, an occasional Slovak may "stick." But to show how sincere and strong their intention is to return home when they emigrate, I will state what I have from very good authority, namely, that some of the better-to-do' families give their daughters in marriage to men upon the special condition, that after POPULATION AND IMMIGRATION 401 a reasonably lengthy honeymoon the husband must go tO' America to make his fortune, when he may come back again tO' his wife. While away they all cDnscientiously supply their families with the necessary means of living, thus again, like the Chinese, becoming no permanent benefit to the United States, their earnings never staying in the country. The little checks of money which the Slovaks in America send to their relatives and friends in Hungary, although usually for very small sums, represent vast fortunes tO' these modest people. This Slovak emigration sometimes depopu- lates whole villages. 216. The Causes of Emigration from Italy. CY EI.IOT LORD. The main underlying cause inciting emigration from Italy was the pressure of population upon the means of subsistence. In spite of despotic oppression, foreign invasion and internal dissen- sion, the population of Italy at the time of the unification was nearly double what it was at the beginning of the eighteenth cen- tury. The census of 1881 showed a population oi 257 to the square mile, and thus was obvio'Usly fast advancing ; for, twenty years later, in spite of the great efflux, the population had increased to 32,475,253, or 294 to the square mile. There was nO' diversification or development of industry through- out the greater part of the kingdom to keep pace with this increase. Except in the Northern Provinces there was practically no industry deserving the name outside of agriculture, and that pursued in a fashion little changed since the days of the Medici. Less than fifty years ago there was not a railroad in vSicily, and in all the Neapol- itan provinces the total length of railways was a scant one hundred and fourteen miles. Tuscany had only 284 miles of railway at the opening oi the year i860. Moreover, the monopoly of the land in the hands of aristocratic proprietors was a discouraging obstacle to- the advancement of the condition of the people in the agricultural districts by a distribution of the land among the peasant proprietary. Even when small hold- ings were secured independently in exceptional cases, they could hardly be maintained under a burden of taxation from which the poorest landholder could obtain no- relief. There was no exemption for any kind of real estate, and the weight of taxation, even after the reconstruction of Italy, continued to fall disproportionately on the agricultural sections. Moreover, the taxes were so^ assessed that the small landholder 402 READINGS IN ECONOMIC PROBLEMS often feared to improve his estate lest the tax should be raised exorbitantly. The soi-called family tax, imposed by the com- munes, was particularly obnoxious from the inc|uisition of its con- duct and its varying with the localities and individual official judg- ment. It was certainly unequal and often corrupt and unfair. The milling monopoly and the government monopolies of salt and tobacco have been particularly irksome also' to the poor man, and his resentment is embittered by the daily parade of armed guards patroling the coast to prevent people from' stealing- sea water in buckets to obtain the salt. There is an attempted relief from the aggravation of these burdens throiigh the protectionist policy strictly adhered to by the governmient of United Italy, yet the heavy duties on the large quantities of foodstuffs, which are neces- sarily imported to supply the demands O'f the people, have made even this protection largely a. burden whose weight is the most grievous to those least able to- bear it. 217. Emigration from Russia. BY JAMES DAVENPORT WHELPI^EY. Nearly all the Russian emigrants to England and the United States are of the Jewish faith, and leave Russia because of con- ditions unfavorable to their happiness and prosperity. The Jews of Russia number about 5,000,000, and most of them live within what is called the Jewish Pale. Within the Jewish ter- ritory must also be included Poland, the combined population of these two districts being something over 40,000,000. Under normal conditions this territory would support this population in comfort and furnish adequate employment to all in the development of its resources ; but the conditions are far from normal. What are called the "May Laws" of 1882, enacted by the Rus- sian Government, provided that only those Jews who had complied with certain requirements, and thus established a legal right of residence prior to that year, should be allowed to live in the rural districts. All other Jews were driven into the towns. This led not only to a congestion of population, but of all em- ployments as well; and as the Russian laws still further limit the outlet for Jewish activity, life became most sadly burdensome for these people. No employment paid for directly or indirectly by the Government is open to the Jew, nor can he obtain any work from the municipality in which he resides. The Government also en- deavours to prevent the Jew from obtaining work upon any enter- prise over which there is Government supervision. They are rigidly POPULATION AND IMMIGRATION 403 excluded from railway positions, even the humblest, and in these and a thousand other ways are made to feel the opprobrium of their descent and religion. Overwhelming competition to obtain a living resulted from these conditions. The population of the cities increased enormously, and in these congested centres began a fierce struggle for existence. Of course, all the Jews in Russia are not poor or persecuted. The occupations of merchants or traders are open tO' them, and hardly a transaction can be brought about in which a Jew does not take part. The reason assigned by the Government for the enactment of the "May Laws" was the charge that the Jews were oppressing the Russian peasantry in the transaction of business. That they did have control oi the commerce of the country is probably true. That they took advantage of this control may be possible. However just these charges may be, there is no question as to the effect of the existing laws and regulations upon the population of that coun- try and indirectly upon England and the United States, for they are the cause of a very large part of the emigration. At the present time there is little prospect oi immediate change in the conditions which are causing the large Russian emigration, and, stimulated alsO' by the desire to escape military service, immi- gration into other countries from Russia will probably continue at or even exceed the present rate for some time to come. 218. The Old Immigration and the New. BY THIS IMMIGR.\TI0N COMMISSION. During the entire period for which statistics are available, 18 19 to 1910, a total of 25,447,180 European immigrants were admitted to the United States. Of these 15,968,689, or 62.8 per cent, came from northern or eastern parts of Europe, and 9,478,491 from southern and eastern Europe and Turkey in Asia. For convenience the former are called "the old immigration'' and the latter "the new immigration." The former was largely a movement of settlers who came from the most enlightened sections oi Europe for the purpose of making their homes in the New World. They entered practically every line of activity in nearly every part of the country. Many of them entered agricultural pursuits, sometimes as inde- pendent farmers, more often as farm laborers, who as a rule soon became independent farmers. They formed a great part oi the westward movement during the last century. They mingled freely with the native Americans and were quickly assimilated. The racial identity of their children has almost been lost and forgotten. 404 ■ READINGS IN ECONOMIC PROBLEMS On the other hand the new immigration has been largely a movement of the unskilled laboring men, who have come, in large part temporarily, from the less enlightened and advanced couintries of Europe in response to the call for industrial workers in the eastern and middle western states. They have almost entirely avoided agricultural pursuits, and in cities have congregated in sections apart from the native Americans. As a class they are far less intelligent than, the old, more than one-third of those over 14 years of age being illiterate when admitted. Racially they are for the most part essentially unlike the people who came in the period prior to 1880, and generally speaking they are actuated by different ideals. They come with the intention of profiting in a pecuniary way by the superior advantages in the New World and then re- turning to the old country. E. IMMIGRATION AND THE INDUSTRIAL SYSTEM. 2ig. Our Industrial Debt to Immigrants. BY Pi;Te:r ROBERTS. The new immigration in one respect differs very markedly from the old; the percentage of farmers and farm laborers in this new stream is sixfold what it was in the old. In the last decade, the countries of southeastern Europe have sent us two and a half mdl- lion men, who, in the old country, were tillers of the soil ; but it is safe to say that the number following that occupation in the new world is insignificant. They are employed in industrial plants, in which their labor brings quick returns, and if dissatisfied with wages and conditions they can, in a day, pull up stakes and go elsewhere. The new immigration consequently contains more un- skilled workers than the old. The vast majority of men entering the industries do so as unskilled laborers. America, two generations ago, was an agricultural nation ; to- day it stands in the van of the industrial nations of the earth. This marvelous development, the astonishment of the civilized world, could never have taken place, if Europe and Asia had not supplied the labor force. From 1880 to 1905 the total capital in manufac- turing plants increased nearly fivefold, the value of the products increased more than two and a half times, and the labor force about doubled. America could never have finished its transcon- tinental railroads, developed its coal and ore deposits, operated its POPULATION AND IMMIGRATION 405 furnaces and factories, had it not drawn upon Europe for its labor force; for it was impossible to secure "white men" to do this work. American industry had a place for the stolid, strong, submis- sive and patient Slav and Finn ; it needed the mercurial Italian and Roumanian ; there was much coarse, rough, and heavy work to dO' in mining and construction camps ; in tunnel and railroad building ; around smelters and furnaces, etc., and nowhere in the world could employers get laborers so well adapted to- their need, as in the countries of southeastern Europe. The new immigration has ad- mirably supplied the need, and at present, there is not an indus- trial community east of the Mississippi and north of the Ohio and Potomac rivers, where the "foreigners" are not found. Eouis N. Hammerling, President of the American Association of Foreign Newspapers, appearing before the Federal Commission on Immigration, said: (i) Sixty-five per cent of the farmers owning farms and working as farm laborers are people whO' came from Europe during the last thirty years. (2) Of the 890,000 miners, mining the coal to operate the great industries, 630,000 are our people. (3) Of the 580,000 steel and iron workers em- ployed in the different plants throughout the United States, 69 per cent, according to the latest statistics of the steel and iron indus- tries, are our people. (4) Ninety per cent of the labor employed for the last thirty years in building the railways has been furnished by our immigrant people, who- are now keeping the same in re- pair. The census of 1900 showed that 75 per cent of the tailors of the country were foreign-born. The investigation of the Immigration Cominission showed 72.2 per cent of the workers in the clothing trades foreign-born, and another 22.4 per cent was made up of the children of foreign-born parents ; thus 94.6 per cent of the men and women v/ho manufacture ready-made garments are of foreign parentage. Rousseau said of his Emile, that he would rather see him: dig than ply the needle and that a young lad should never aspire to be a tailor; the above statistics imply that there is a like aversion on the part of the native-born to the tailoring trade. Wherever unskilled work is needed, the foreigner is the one who does it ; but the managing force is generally made up of the native-born or, at least, English-speaking peoples. In the cloth- ing trade the foreign-born is a skilled workman; in every other industry he is the man who carries the heavy burden — he is the toiler, the drudge, the "choreman." In the slaughtering and meat- packing industry, the foreign-born comprise about 60 per cent of the labor force, but if you want to locate the sons of the new 4o8 READINGS IN ECONOMIC PROBLEMS and previous training, from other countries of Europe. The courage and loyalty O'f these men were tested and tried and not found wanting. They have not shrunk from the dangers of the mines nor the heat of the mills ; hundreds of them have been killed on railroads; and still the foreigners do the work, and the disagree- ableness of foundries and meat packing plants has no deterring effect upon them. Let us be just tO' the workers of the new immi- gration and pay the tribute of praise due them for the part they have played in the industrial expansion of which we are proud. 220. Immigration and Industrial Progress, BY WILTJAM S. ROSSITe;R. It must not be overlooked that society in the United States has been so constructed as to depend upon the continued arrival of large numbers of foreigners. In consequence, labor conditions prevailing in this nation differ radically from those which prevail in most of the countries of Europe, where all econoraic require- ments are met by natives. In England, in France, or in Germany, for example, the man who sweeps the streets, the laborer upon public works or in mines, and the woman who cooks or perfomis other domestic duties, are as truly native as the ruler of the nation or the statesmen who guide its destinies. In the United States, the man who sweeps the streets, who labors upon public works, in mines or on railroads, and the woman engaged in domestic service, if white, are almost all of foreign birth. The native stock has learned to regard such callings as menial and hence as lowering to self- respect. Having accepted the education and opportunity which the Republic offers them, native Americans appear to consider that they are untrue to themselves if they do not avoid humble occupations and seek those regarded as an advance in the social scale. There is, therefore, a coinstant movement away from the lower callings toward the higher; and occupants for the places thus vacated are recruited from foreigners. They in their turn become imbued with the American idea, acquire confidence and develop ambition, and their children abandon to newer arrivals the callings which support- ed their parents. Evidence of this continued movement upward is seen in the unwillingness, not only of the native stock but of the children of the foreign element, to continue in the servant or so- called menial classes, and in the determination on the part of voung women to become shop girls, telephone-operators, typewriters and shop and factory operatives, oftentimes at the penalty of severe privation, rather than to go out to service. POPULATION AND IMMIGRATION 409 This tendency creates the prohlem of a constant shortage of workers in the humibler callings. These callings in themselves are as necessary in a republic as in an empire. Therefore workers in such occupations must in the future, as in the past, continue to> be recruited from abroad, or else a large number of native Americans, and children of foreign parents, must be contented to labor un- complainingly in the lower walks of life. It is possible that the former condition may continue indefinitely, but it unquestionably tends toward instability, for a nation which permanently meets by importation its demand for workers is, in a sense, artificially con- structed. When the young United States started upon a career of inde- pendence, the inhabitants concentrated their efforts upon the de- velopment of national resources. They prayed for wealth, and Providence gaA^e them the immigrant as the means of securing it. After the lapse of a century, our success surpasses the wildest dreams of our ancestors ; the United States has grown marvelously in numbers, and has obtained a prosperity unprecedented in the history of the world. It is unlikely that our portals, thus far ever open to the aliens of all Europe, will be closed to them until it has been conclusively shown that the existence oi the nation is imperiled by their com- ing, or until large numbers of worthy and industrious American citizens are obviously deprived of their means of livelihood by the arriving throngs of foreigners. At the present time there is nothing which points to the realization of these conditions ; and, until there is, discussion concerning the restriction is in reality idle. Therefore let us be practical, nursing no delusions, and face conditions as they are. We have always needed the immigrant to aid us in amassing wealth, and we shall need him in the future, for the United States has now become the great labor mart of the world. 221. Immigration and Wealth Production. BY JOHN R. CO'MMONS. Over four-fifths of the immigrants are in the prime of life, the ages between fourteen and forty-five. The census of 1900 ofifers some interesting comparisons between the native-born and the for- eign-born in this matter of age distribution. It shows quite plainly that a large proportion of the native-born is below the age of in- dustrial production, fully thirty-nine per cent being under fifteen, while only five per cent of the foreign-born are of corresponding ages. On the other hand the ages fifteen to forty-four contain 46 4IO READINGS IN ECONOMIC PROBLEMS per cent of the native and 58 per cent of the foreign-born. Thus, immigration brings to us a population of working ages unhampered by unproductive mouths to be fed, and, if we consider alone that which produces the wealth of the country, the immigrants add more to the country than does the same number of natives of equal abil- ity. Their home countries have borne the expense of rearing them up to the industrial period of their lives, and then America reaps whatever profits there are on the investment. In another respect does immigration add more than an equal increase in the native population would, namely, by the large ex- cess of men over women. In 1906 over two-thirds of the immi- grants were males. Such being the proportions of industrial energy furnished by immigration, what is the quality ? Much the larger proportion of immigrants are classed as unskilled, including laborers and servants. Omitting those who have "no occupation," who are 30.5 of the total, only 21.7 of the remainder who are working immigrants are skilled, and 73.4 per cent are unskilled. The skilled labor which comes tO' America occupies a peculiar position in our industries. The more capable workmicn have per- manent places at home, and it is only those who cannot command situations who seek their fortunes abroad. As for the bulk of skilled immigrants they do not represent the highest skill of the countries from which they come. On the other hand the European skilled workman is usually better trained than the American, and in many branches of industry the English and Scotch immigrants command those superior positions where an all-round training is required. This peculiar situation is caused by the highly specialized char- acter of American industry. In nO' country has division of labor and machinery been carried as far as here. By division of laboir the skilled trades have been split up into simple operations, each of which in itself requires little or no skill. Even in the building trades in the larger cities there are as many kinds of bricklayers as there are kinds of walls to be built, and as many kinds of car- penters as there are varieties of woodwork. So' it is with ma- chinery. Consequently, xA.merican industry is not producing all- round mechanics, and the employers look to Europe for their skilled artisans. In England the trade-unions have made it their business to see that every apprentice learns every part of his trade, and they have prevented employers from splitting up the trades and special- izing machinery, and thereby transforming the mechanic into a hand. Were it not for immisrration, American industries would POPULATION AND IMMIGRATION 411 ere now have been compelled to give more attention to apprentice- ship and the training of competent mechanics. Not omly does immigTation bring to America the strongest, healthiest, and most energetic and adventurous of the work-people of Europe and "Asia, but those who come work much harder than they did at home. Migration tears a man away from the tra- ditions, the routine, the social props, on which he has learned to rely, and throws him among strangers upon his own resources. He must swimi or drown. At the same time he earns higher wages and eats more nourishing food. His ambition is fired, he is stirred by the new tonic of feeling himself actually rising in the world. He pictures to himself a home of his own. He economizes and saves money to^ send to his friends and family, or to return to his beloved land a person of importance. Watch a gang of Italians shoveling dirt under an Irish boss, and you will see such feverish production of wealth as an Amierican-born citizen would scarcely endure. Partly fear, partly hope, make the fresh immigrant the hardest, if not the most intelligent, worker in our industries. 222. Immigration and Crises. BY HENRY PRATT FAIRCHILD. There is a close and peculiar connection between immigration and the frequent recurrence of economic crises. This connection is caused as w^ell as casual. The popular interpretation of this fact is that the emigration movement serves to mitigate the evils of the crisis by removing a large part of the surplus laborers until re- turning prosperity creates a demand for them again. Thus the movements of our alien population are supposed to be an alleviating force as regards crises. The question arises, however, in this connection, whether there is not a converse casual relation ; in other words, whether the con- ditions of immigration are not partly responsible for the recurrence of these periods. Professor Commons demonstrates how immi- gration, instead of helping matters, is really one of the causes of crises. His conclusion is that "immigration intensifies this fatal cycle O'f 'booms' and 'depressions,' " and "instead of increasing the production of wealth by a steady, healthful growth, joins with other causes tO' stimulate the feverish overproduction, with its in- evitable collapse, that has characterized the industry of America more than that of any other country." First of all, it will be desirable to see just what the facts of 412 READINGS IN ECONOMIC PROBLEMS immigration and emigration dinring this period are : then we shall be prepared to attempt their interpretation. The monthly average of arrivals during the first six months of 1907 was a high one. Following a large immigration during the last six months of the preceding year, this made the fiscal year ending June 30, 1907, the record year for immigration in the history of the country. For the next four months the stream of immigration continued high, considering the season, and the num- ber of departures was moderate. Early in October, however, there was signs of disturbance in the New York Stock Exchange. On the sixteenth there was a crash in the market, and within a week the panic had become general. It reached its height on October 24^ and continued for many weeks after. The response of the alien population to this disturbance was almost immediate, and mani- fested itself first in the emigration movement. In November the number of departures almost doubled. But the immigrants who were on the way could not be stopped, and in spite of the large exodus there was a net gain of 38,207 during the month. The next month, December, however, saw a marked decrease in the stream of arrivals, which, accompanied by a departure of aliens almost as great as in November, resulted in a net decrease in population of 11,325 for the month. During the first six months of 1908 the number oi arrivals was small, and the departures numerous, so that, with the exception of March, each month shows a net loss in popuilation. During July the number of departures began to approach the normal but the arrivals were sO' few that there was still a decrease for the months of Juily and August. In September, 1908, the balance swung the other way, and from that time to the present tyery month, with the exception of December, 191 1, has shown a subistantial increase in population through the movement of aliens. It is evident, then, that the effects of the crisis on emigration were immediate, but not of very long duration. During the months of November and December, 1907, when the distress was the keen- est, there were still large numbers of aliens arriving. But when the stream of immigration was once checked, it remained low for some time, and it was not until about January, 1909, that it re- turned to what may be considered a normal figure. The reasons for this are obvious. The stream of immigration is a long one, and its sources are remote. It takes a long time for retarding influences in America to be thoroughly felt on the other side. Now what catches the public eye in such an epoch as this is the large number of departures. But if we stop to add up the monthly POPULATION AND IMMIGRATION 413 figures, we find that for the entire period after the crisis of 1907, when emigration exceeded immigration, the total decrease in ahen population was only 124,124, — scarcely equal to the immigration of a single month during a fairly busy season. This figure is almost infinitesimal compared with the total mass of the American work- ing people, or to the amount of unemployment at a normal time, to say nothing oif a crisis. It is thus evident that the importance of our alien population as an alleviating force at the time of a crisis has been vastly exaggerated. The most that can be said for it is that it has a very trifling palliative effect. The really important relation between immigration and crises is much less conspicuous but much more far-reaching. It rests upon the nature and underlying causes of crises in this country. These are fairly well understood at the present time. A typical crisis may be said tO' be caused by speculative overproduction, or overspeculative production. In a normal business period some slight disturbance, such as ah increase in the quantity of gold, causes prices to rise. A rise in prices is accompanied by increased profits for business men, because the rate of interest on the borrowed cap- ital which they use in their business fails to increase at a cor- responding ratio. Hence, doing' business on borrowed capital be- comes very profitable, and there is an increased demand for loans. This results in an increase of the deposit currency, which is accom- panied by a further rise in prices. The nominal rate of interest rises somewhat, but not sufficiently, and prices tend to outstrip it still further. Thus the process is repeated, until the large profits of business lead to a disproportionate production of goods for an- ticipated future demand, and a vast overextension of credit. Other causes operate with this to produce the same result. The conse- quence is that business men find themselves unable to renew their loans at the old rate, and hence some of them are unable to meet their obligations, and fail. The failure of a few firms dispels the atmosphere of public confidence, which is essential to extended credit. Creditors begin to demand cash payment for their loans ; their is a growing demand for currency ; the rate of interest soars ; and the old familiar symptoms of a panic appear. In this entire process the blame falls primarily upon the failure of the rate of interest to rise promptly in proportion tO' the rise in prices. The rate of interest represents the .payment which the entre- preneur makes for one of the great factors of production — capital. If wages fail to rise along with prices, the effect on business, while not strictly analogous, is very similar to that produced by the slowly rising rate of interest. The entrepreneur is relieved of the neces- 414 READINGS IN ECONOMIC PROBLEMS sity of sharing any of his excessive profits with labor, just as in the other case he is relieved from sharing them with capital. It would probably be hard tO' prove that the increased demand for labor results in further raising prices in general, as an increased demand for capital results in raising prices by increasing the de- posit currency. But if the demand for labor results in increasing the number of laborers in the country, thereby increasing the demand for commodities, it may very well result in raising the prices of commodities as distinguished fromi labor, which is just as satis- factory tO' the entrepreneur. This is exactly what is accomplished when unlimited imimigration is allowed. As soon as the conditions of business produce an increased demand for labor, this demand is met by an increased number oi laborers, produced by immi- gration. In the preceding paragraph it has been assumed that wages do not rise with prices. The great question is, is this true? This is a question very difficult to answer. There is a very general im- pression that during the last few years prices have seriously out- stripped wages. But whether or not wages rose as fast as prices in the years from 1900 to 1907, one thing is certain, they did not rise any faster. That is to say, if real wages did not fall, they assuredly did not rise. But the welfare of the country requires that, in the years when business is moving toward a crisis, wages should rise ; not only money wages, but real wages. What is needed is some check on the vmwarranted activity of the entrepreneurs, which will make them stop and consider whether the apparently bright business out- look rests on sound and permanent conditions, or is illusory and transient. If their large profits are legitimate and enduring, they should be forced to share a part of them with the laborer. If not, the fact should be impressed upon them. We have seen that the rate of interest fails to act as an efficient check. Then the rate of wages should do^ it. And if the entrepreneurs were compelled to rely on the existing labor supply in their own country, the rate of wages would do it. But in the vast peasant population of Europe there is an inexhaustible reservoir oi labor, only waiting a signal from this side to enter the labor market — to enter it, not with a de- mand for the high wage that the business situation justifies, but ready to take any wage that will be oiffered, just so it is a little higher than the pittance to which they are accustomed at home. And we allow them to come, without any restrictions whatever as to numbers. Thus wages are kept from rising, and immigration becomes a powerful factor, tending to intensify and augment the unhealthy, oscillatory character of our industrial life. POPULATION AND IMMIGRATION 415 223. The Standard of Living of the New Immigrants. BY I. A. HOURWICH. The oibjection to the unskilled immigrant is based upon the belief that because of his lower standard of living he is satisfied with lower wages than the American or the older immigrant. It is therefore taken for granted that the effect of the great tide of immigration in recent years has been to- reduce the rate of wages or to prevent it from rising. The fallacy of this reasoning is due to an attempt to compare the standard of living of the unskilled laborer with that of the skilled mechanic. To prove that the newer immigrants have introduced a lower standard of living, the latter ought to be compared with the standard of living of unskilled laborers in the past. Housing conditions have been most dwelt upon, because they strike the eye oi the outsider. Historical studies of housing con- ditions show, however, that congestion was recognized as a serious evil in New York City as far back as the first half of the nine- teenth century. The evil was not confined to the foreign-born population. American-born working-women lived on filthy streets in poorly ventilated houses, crowding in one or tw^o^ rooms, which were used both as dwelling and workshop. No better were the living conditions of the daughters of American farmers in the mill towns of New England. They lived in company houses, half a dozen in one attic room, without tables or chairs, or even wash- stands. The typical tenement house in the Jewish and Italian section of New York today is a decided improvement upon the dwellings of the other immigrant races in the same sections a generation or two ago. On the other hand, in the South, where many of the coal mines are operated without immigrant labor and native white Americans are employed, their homes are primitive and unsanitary. The cause of bad housing conditions is not racial, but economic. Congestion in the cities is produced by industrial factors, over which the immigrants have no control. The funda- mental cause is the necessity for the wage- worker to live within an accessible distance from his place of work. Moreover, the recent immigrants are mostly concentrated in great cities, where rent is high, while the native American workmen live mostly in small towns with low rents. Nor are the food standards of the recent immigrant inferior to those of native Americans with the same income. Meat is con- sumed by the Slav in larger quantities than by native Americans. Rent and food claim by far the greater part of the workman's 4i6 READINGS IN ECONOMIC PROBLEMS wages. It is thus apparent that whatever may have been the immi- grant's standard of living in his home country, his expenditure in the United States is determined by the prices ruhng in the United States. Contrary to common assertion, the living expenses of the native American workman in small cities and rural districts are lower than those of the recent immigrants in the great industrial centres. It is therefore not the recent immigrant that is able to underbid the native American workman, but it is, on the contrary, the latter that is in a position to accept a cheaper wage. Of course the expenses of a single man are necessarily lower than those of a man with a family, and a large proportion of recent immigrants either are single, or have left their families abroad. But, while an unmarried American workman may either save or spend the difference, the recent immigrant is obliged to save a part of his earnings. So when a recent irrtimigrant is seen to deny himself every comfort in order toi reduce his personal expenses to a mini- mum, it is a mistake to assume that he will accept a wage just sufficient toi provide for his own subsistence. The Italian section- hand who lives on vegetables does not save money for the railroad company. The economic interests of the American wage- earner are therefore not affected by the tendency of the recent immigrant to live as cheaply as possible and to save as much as possible. Even if he merely sends his money home, his wants are as urgent as those of the American laborer who spends his all, and he must de- mand a wage that will enable him to satisfy them;. Even if the standard of living of the native wage-earners be higher, it is often maintained with the earnings of children, whereas the Southern and Eastern European immigrants are mostly young people whose children have not yet reached working age. 224. Immigration and Wages. BY I. A. HOURWICH. The primary cause which has determined the movement of wages in the United States during the past thirty years has been the introduction of labor-saving machinery. The effect of the substi- tution of mechanical devices for human skill is the displacement of the skilled mechanic by the unskilled laborer. This tendency has been counteracted in the United States by the expansion of industry; while the ratio of skilled mechanics to the total operating force was decreasing, the increasing scale of operations prevented an actual reduction in numbers. Of course this adjustment did not proceed without friction. While, in the long run, there has been POPULATION AND IMMIGRATION 417 110 displacement of skilled mechanics by unskilled laborers in the industrial field as a whole, yet at certain times and places individual skilled mechanics were doubtless dispensed with and had to seek new employment. The unskilled laborers who replaced them were naturally engaged at lower wages. The fact that most of these unskilled laborers were immigrants disguised the substance of the change — the substitution of unskilled for skilled labor — and made it appear as the displacement of highly paid native by cheap immi- grant labor. To prove that immigration has virtually lowered the rates of wages would rec[uire a comparative study of wages paid for the same class of labor in various occupations before and after the great influx of immigrants. This, however, has never been at- tempted by the advocates of restriction. In fact, the chaotic state of our wage statistics precludes any but a fragmentary comparison for different periods. In a general way, however, all available data for the period of "the old immigration" agree that the wages of unskilled laborers, and even of some of the skilled mechanics did not fully provide for the support of the wage-earner and his family in accordance with their usual standards of living. The shortage had to be made up by the labor of the wife and the children. If the tendency of the new immigration were to lower the rates of wages or to retard the advance of wages, it should be expected that wages would be lower in great cities where the recent immi- grants are concentrated, than in rural districts where the population is mostly of native birth. All wage statistics concur, however, in the opposite conclusion. Since the United States has become a manufacturing country average earnings per worker have been higher in the cities than in the country. The same difference exists within the same trades between the large and the small cities. Country competition of native Americans often acts as a depressing factor upon the wages of recent immigrants. This fact has been demonstrated in the clothing industry, in the cotton mills, and in the coal mines. Furthermore, if immigration tends to depress wages, this ten- dency must manifest itself in lower average earnings in states with a large immigrant population than in states with a predominant native population. No such tendency, however, is discernible from wage statistics. As a rule, annual earnings are higher in States with higher percentage of foreign-born workers. The conditions in some of the leading industries employing large numbers of recent immigrants point to the same conclusions. In the Pittsburgh steel mills the rates of wages of various grades 418 RB A DINGS IN ECONOMIC PROBLEMS of employees have varied directly with the proportion of recent immigrants. The wages of the aristocrats of labor, none of whom are Southern or Eastern Europeans, have been reduced in some cases as much as 40 per cent; the money wages of the skilled and semi-skilled workers, two-thirds of whom are natives or old immi- grants, have not advanced notwithstanding the increased cost of living, while the wages of the unskilled laborers, the bulk of whom are immigrants from Southern and Eastern Europe, have been going up. In the cotton mills of New England the last quarter of the nine- teenth century, when the operatives were practically all of the English-speaking races, was a period of intermittent advances and reductions in wages ; on the Avhole, wages remained stationary. The first years of the present century, up to the crisis of 1908, were marked by the advent of the Southern and Eastern Europeans into the cotton mills, and by an uninterrupted upward movement of wages. The competition of the cheap American labor of the Southern cotton mills, however, tends to keep down the wages of the Southern and Eastern European, Armenian, and Syrian immi- grants employed in the New England mills. As a general rule, the employment of large numbers of recent immigrants has gone together with substantial advances in wages. This correlation between the movements of wages and immigra- tion is not the manifestation of some mysterious racial trait, but the plain woirking of the law of supply and demand. The em- ployment of a high percentage of immigrants in any section, in- dustry, or occupation, is an indication of an active demand for labor in excess of the native supply. Absence of immigrants is a sign of a dull labor market. 225. Immigration and Unionism. BY W. JKTT LAUCK. A significant result of the extensive employment of southern and eastern Europeans in mining and manufacturing is seen in the general weakening and, in some instances, in the entire demor- alization of the labor organizations which were in existence before the arrival of the races of recent immigration. This condition of affairs has been due to the inability of the labor-unions to absorb within a short time the constantly increasing number of new ar- rivals. The southern and eastern Europeans, as already pointed out, because of their tractability, their lack of industrial experience and training, and their necessitous condition on applying for work, have POPULATION AND IMMIGRATION 419 been willing to- accept, without protest, existing conditions of em- ployment. Their desire to earn as large an amount as possible within a limited time has also- rendered the recent immigrant averse to entering into strikes which involved a loss of time and a decrease in earnings. The same kind of thriftiness has led the innmigrant wage-earner to refuse to maintain his membership in the labor- unions for an extended period and has consequently prevented the com,plete unionization of certain occupations in some cases, and, in others, the accumulation of a defense fund by the labor organiz- ations. The high degree of illiteracy among recent immigrants and the inability of the greater number to speak English have also caused their organization into unions by the native Americans and older immigrants to- be a matter of large expense. The diffi- culty of the situation, from the standpoint of the labor organizations, is further increased by the conscious policy of the employers of mixing races in certain departments or divisions of industries and thus decreasing the opportunities for any concerted action because of a diversity of language in the operating forces. In mining oper- ations, by way of illustration, in many sections, no one race is permitted to secure a controlling number in the operating forces of a single mine or mining occupation because of the fear that a comsmon language would enable them: to be readily organized for the purpose of seeking redress for real or fancied grievances. F. RACIAL ASPECTS OF THE IMMIGRATION PROBLEM. 226. The Effects of Emigration on Greece. BY HENRY P. FAIRCHILD. The effects of immigration upon Greece are in the main con- nected with two phenomena — the influx of money from America, and the withdrawal of the laboring force from the country. As to the formxcr it may at first seem surprising that the small sum which covers the amount of the annual remittance should exercise such a profound influence on the economic situation in Greece. But a moment's consideration will make this plain. The average an- nual amount sent from the United States to Greece is $5,000,000. The general imports into Greece in 1905 amounted tO' $27,170,533, and the exports to $16,095,184. It thus appears that the amount of money flowing into Greece each year, without any corresponding outgo, is in the neighborhood of one quarter of the total amount 420 REABFXGS IX EC0X03ITC 77. 1 7 IZMS wfaid* tbe OKUEiXi" receives fir "~ r~«:r:;. ir_i i? ±z.yigh to pay for cme-Sftli o€ ri? r:rr»:rr?. PeEbaps flie : tt : t r r :- r: :: 3MMier is ttae T vniitagiraKlf :\__ \^r - /. .: /. ir /. i i "'t ^t-:"!"".? eSed ot teaser J- r.. :;"..:,..„ ~:.- ::-: :: ./■.:'.:," ::~ " . r'i^rt cufjyrmi Biit, it ii ouiniaijcay t- :- _ r -'- : :: :.-r ixwiaitat aa a soond baas, k _ ;- r : t -: r t . . _- oilier beaieScial lesnli: 1b^5 :e±- it : ::;^ i: ;: i r^r tr of real estate miHl^age- Ii-^t t : tt r ^r wIm^Iv tieed tiOBi! mcnci: r^: Mr- : ' _ : - a^t': _ t "^:t :: inlesiesS has also faOoi decide 1 - ;vt -t - : ~: i:t mdrridnals lead moneir at Ic T~ :t t TTrar rorng ooir to injtttici-f t5r :: t : :: lis had a Terr deaiMHalizia^ euedt i^'i - : r -.ly oi me coantiy- Tbe Gfe^L lores bodi tise appeari :-. : t f;rt of Idsore, s'c -f ^H too readr to ^eod has days :: : t : ~Tr- .ises and on -. t r ;j:- eaaades, soaofen^ and taWrrr y t i ' j :'_ _ i t' t = ' r = 1 1 hmmi^, 'uiiicli aie coiiiii^ iisr : : t : .::.:~ ..: . i\ _^ :r t; :: r^^t tins tendoicr. Tbe Gr^^ wbo cooae back fiom Ameiica with foirtiimes made incsease :'; ' ' " t dass and bdp to incnkaie lore of indc^ence in the rooi." : -; ' 2™d. As a lesnlt, Atfaens : are the orihr citier r^^ : t . " j iom wbicfa bare groir- rt- cssit%-- If ibk. naoney weie i : ' . - :. : : : ' e 'isrdopment of ^txd'uic- tire indas^sy, tbe lesmlts ir _ : rt riToraWe. Aside from wbat is ^jemt in ffeeia^ : r i r : i ' i :, t i;. tbe majorify of it is lased in finmidiiE^ _: ":te : :r : t ^"r in bnildiw^ Sne boisses. in esediii^ bsM tovreis and clocks on tbe cbnitbes. occasion- ally in some public ^oject l&e a road, and often in making pos^ble a life of baxmy. FsobaMy die greatest injury wron^it is in angmentii^ tbe f ef^er f <^ enngsation. It is abnc^ in^os^bie to find a yom^ man or a boy in tbe Tillages or on iSbtt farms wbo does not lire in belies of geiSia^ away to Anaesica as soon as possiMe. Gieece is one of Ibe few cotontiies in Bmope in wbicb tbe male pc^odation is coo^der- abihr in fiEiregig; «^ ^e fenaale. Between tbe years 1896 and 1907 ^btt total population inoeased by less fban e^it per cenL 'SSjok^ inqioftant is Ibe decided deoease in tbe e»£ss of tbe malcis. ^low- m^ tbe sex tsma. wbicb die balk of Ibe enngranfs bare bem le- ouiSed. As yet Ibis e%odns bas not caused any ^predaUe dedine in 1^ adtirafioa of Ibe sdSL Tbe d^ressioa (A c ui i ail indnstry vas o5%inally a cause, not a lesuk of e uiig i ali cM. Tbe caqiianation lies in iS^ fact tbat Ibe women bare taken biM of "Ai^ wmk. Tfaer are caaryii^ cm Ibe agncnbnre of iSae. coaa&ty wdl enou^ to sare POPULATION AXD IMMIGRATION 421 the crops from niin. They have also entered many other depart- ments of manual labor. Immigrants from Albania have also been brought in to do held labor under Greek bosses. Another effect which has alarmed the authorities to a considerable extent is the marked decrease in the number of recruits for the army. This is something which comes close to the heart of the nation. The government has gone so far as to propose legislation regulating very strictly the conditions of emigration. But as yet the governmental proposals have not been passed. 227. Labor and Chinese Competition. BY MARY ROBERTS COOLIDGE. Although there are less than half as many Chinese in California as in 1882, when restrictive legislation was passed, nearly all are receiving twice as much wages. In laundry work, one of the lowest paid of their occupations, the Chinese proprietors complain that the high wages demanded by their countrxTiien will drive them from the business. The Chinese have nearly deserted the factory- trades because they can earn so much more in small independent busi- nesses. Labor pamphlets have asserted that the Chinese had a monopoly of a large number of trades and businesses, that they excluded oth- ers from them, and permitted wages in these lines to fall below a living standard. As to wages the matter has been carefully can- vassed with the conclusion that wages in California, even in times of depression, never fell to the level of eastern cities. The Chinese were chiefly engaged in mining, horticulture, truck gardening, do- mestic senice, washing, and a number in independent businesses. It can scarcely be called a monopoly when the wages of an industry continue above the level of other states. Two facts disprove the monopoly theor\- so far as the Chinese are concerned. First the occupations having the largest number of whites unemployed for many years are not the ones in which the Chinese were chiefly en- gaged. The whites out of employment have been bookkeepers, clerks, blacksmiths, carpenters, painters, engineers, machinists, and |x>rters. The second fact is that Chinese labor has never remained cheap labor for any length of time. The Chinese were thoroughly organized into tongs long before the white laborers in California formed trade unions. Being disciplined in cooperative activity they were able to divert their own immigrant competitors into the occu- pations where opportunity was best. Like many ambitious and thrifty immigrants from Europe, the 422 READINGS IN ECONOMIC PROBLEMS Chinese came to^ make and save money ; one-third at least were married men, and all were imbued with the extreme sense of filial obligations characteristic of their race. They have, therefore, ex- acted as much for their labor as possible. The Chinese might work cheaply to learn, to get a foothold, but he soon demanded all that the business would bear. The fluidity of Chinese labor as compared with the immobility of American labor is its greatest advantage, combined as it is with the discipline of the tong organization and an almost universal tradition of honesty in keeping contracts. The Chinese draws a hard and haggling bargain with the employer ; but, having made it, lives up to it strictly. In all discussions of Chinese competition the factor most fre- quently overlooked is the intelligent ambition of the Chinese immi- grant. He is a Cantonese, from the most progressive province in China ; again, he is often a picked member of his family sent abroad to elevate the family fortune. He is not at all stolid and servile, but keenly alive to the better chance. He is onl}^ cheap when he is newly arrived and unusually stupid. Because of his thrifty habits O'f never spending more than he earns, the Chinaman generally has money and can better endure intermittent employment than the American workman. If necessary they can live frugally; they are self-restrained in their pleasures and vices. It is a mistake to suppose that the ordinary Chinese laborer lives penuriously — ^the truth rather is that he always lives within his in- come, whatever that may be. He can and does live cheaper than the American v.^orkingman because he knows how to feed himself better. In place of bread and potatoes, he uses rice which costs from two to three times as much, but is far more nutritious. He will have chicken and pork whenever he can afiford it. Since the Chinese have become relatively few among California wage earners, their superiority to other foreigners has caused them to become the standard of efficiency by which other labor is meas- ured. Their wages have steadily risen and they have almost wholly deserted the lower paid manufactures and couimon labor. 228. The Italians in Boston, BY ROBERT A. WOODS. There is a special fitness in the Italians' choice of abode just next to the great fruit and vegetable markets. The citizens of Bos- ton owe a great debt to the Italians for organizing and developing the retail fruit trade throughout the city. Their efiforts have cre- ated a wholesome appetite for fruit among the masses O'f the peo- POPULATION AND IMMIGRATION 423 pie. Believing in their goods, they have special skill in selecting, arranging and caring for it. The Italian represents a varied list of occupations. In the North End colony there are artisans, bakers, barhers, confectioners, mu^ sicians, tailors, scissors grinders, shoemakers, marble cutters, and workers in plaster. Many Italian boys are boot-blacks. An in- creasing number of Italian women, with a few men, engage in agri- cultural work in the market gardens of Arlington, Belmont, LyCx- ington, and adjoining tO'wns. The women bring some intelligence and endless assiduity tO' such work. Fully fifty per cent of the men of the Boston colony are engaged more or less regularly at heavy labor with pick and shovel, in railroad building, or in the construc- tion of gas and water-works. When the Italian laborer appeared among us, he was in bondage, nnder a cruel taskmaster. The Italian padrone took a large commis- sion for the purchase of the immigrant's steamer ticket, and, in many cases, with the assistance of the Italian banker, appropriated his savings wholesale. The padrone's methods have been limited as the years have passed. The Italian government now has regula- tions in force to protect its citizens as they leave the country. The absconding banker is becoming rare. One of the Italian banks at the North End does business under a name recognizably Irish, in the hope of convincing Little Italy that it is an American institution. The number of Italian real estate owners is very considerable. In the North End, in 1900, $2,325,800 worth of property was as- cribed in the city records to persons having Italian names. A few artists, musicians, and handicraftsmen have begun tO' appear among them. A considerable number of Italian women work with the men in the garment shops. Many Italians may be seen loafing around North Square, but as a rule they are simply waiting between jobs on large construction woirks. Italian gang laborers formerly received only $1.25 per day, but they are now freely ofl^ered $1.50 to $1.75. This is for work at a distance. They have to pay their car fare, and there are always possibilities that their wages will be heavily drawn upon for the victualling and shanty accommodations. Considering how much time they lose during the year, thc)^ are probably nO' better off than the fruit hav/kers, who make on the average $5 or $6 per week. Italian women on farms earn $1 per day. The Italian hurdy-gurdy grinder with the tambourine girl in peasant garb, who as a rule hires his instrument, makes a somewhat larger income than this. The Italians are frug-al and do not cultivate an appearance of elegance. The women are satisfied with simple fabrics in bright 424 READINGS IN ECONOMIC PROBLEMS colors. The men are content with a gay necktie, curled and unctu- ous hair, and a brilliant polish to their shoes. Even micro'scopic in- comes do not forbid the Italians the practice of thrift. They save to go back to Italy, ov to bring friends over. Some save and be- come landowners and small business men. Many ditch diggers put by one hundred dollars in the course of the year. They do not easily fall back upon charitable agencies. G. THE DANGERS IN UNRESTRICTED IMMIGRATION. 229. The Peril from the Immigrant. BY H. G. WISLLS. Will the reader please remember that I've been just a few weeks in the States altogether, and value my impressions at that! And will he, nevertheless, read of doubts that won't diminish. I doubt very much if America is going to assimilate all that she is taking in now; much more do I doubt that she will assimilate the still 'greater inflow of the coming years. I believe she is going to find infinite difficulties in that task. By "assimilate" I mean make intel- ligently cooperative citizens of these people. She will, I have no doubt whatever, impose upon thenn a bare use of the English lan- guage, and give them votes and certain patriotic persuasions, but I believe that if things go on as they are going the great mass of them will remain a very low class — will remain largely illiterate industrialized peasants. They are decent-minded peasant people, orderly, industrious people, rather dirty in their habits, and with a low standard of life. Wherever they accumulate in numbers they present to my eye a social phase far below the level of either Eng- land, France, north Italy, or Switzerland. And, frankly, I do not find the American nation has either in its schools — which are as backward in some States as they are forward in others— in its press, in its religious bodies or its general tone, any organized means or effectual influences for raising these huge masses of humanity to the requirements of an ideal modern civilization. They are, to my mind, "biting off more than they can chaw" in this matter. Bear in mind always that this is just one questioning individual's impression. It seems to me that th« immigrant arrives an artless, rather uncivilized, pious, goodhearted peasant, with a disposition towards submissive industry and rude effectual moral habits. Amer- ica, it is alleged, makes a man of him. It seems to me that all too POPULATION AND IMMIGRATION 425 often she makes an infuriated toiler of him, tempts him with dol- lars and speeds him up with competition, hardens him, coarsens his mianners, and, worst crime of all, lures and forces him to seil his children into toil. The home of the immigrant in America looks to me worse than the home he came from in Italy. It is just as dirty, it is far less simple and beautiful, the food is no more whole- some, the moral atmosphere far less wholesome; and, as a conse- quence, the child of the immigrant is a worse man than his father. I am fully aware of the generosity, the noibility of sentiment, which underlies the American objection to any hindrance to immi- gration. But either that general sentiment should be carried out to a logical completeness and gigantic and costly machinery organ- ized to educate and civilize these people as they come in, or it should be chastened to restrict the inflow to numbers assimilable under existing conditions.. At present, if we disregard sentiment, if we deny the alleged need of gross flattery whenever one writes of America for Americans, and state the bare facts of the case, they amount to this: that America, in the urgent process of individual- istic industrial development, in its feverish haste to get through with its material possibilities, is importing a large portion of the peasantr}^ of central and eastern Europe, and converting it into a practicall}^ illiterate industrial proletariat. In doing this it is doing a something that, however different in spirit, differs from the slave trade of its early history only in the narrower gap between em- ployer and labo'rer. In the "colored" population America has al- ready ten million descendants of unassimilated and perhaps unas- similable labor immigrants. These people are not only half civilized and ignorant, but they have infected the white population about them with a kindred ignorance. For there can be no doubt that if an Englishman or Scotchman of the year 1500 were to return to earth and seek his most retrograde and decivilized descendants, he would find them at last among the white and colored population south of Washington. And I have a foreboding that in this mixed flood of workers that pours into America by the million today, in this torrent of ignorance, against which that heroic being, the schoolmarm,, battles at present all unaided by men, there is to be found the possibility of another dreadful separation of class and kind, a separation perhaps not so profound but far more universal. One sees the possibility of a rich industrial and mercantile aris- tocracy of western European origin, dominating a darker-haired, darker-eyed, uneducated proletariat from central and eastern Eu- rope. The immigrants are being given votes, I know, but that does 426 READINGS IN ECONOMIC PROBLEMS not free them, it only enslaves the country. The negroes were given votes. These are all mitigations of the outlook, but still the dark shadow of disastrous possibility remains. The immigrant comes in to weaken and confuse the counsels of labor, to serve the pur- poses oi corruption, tO' complicate any economic and social develop- ment, above all to retard enormoush'- the development of that na- tional consciousness and will on which the hope of the future depends. 230. The Economic Argument against Immigration. 1!Y FRANK A. FETTER. The current objections to^ immigration are mainly based on the alleged evil effects to the political, social, and moral standards of the community. It is often asserted that present immigration is inferior in racial quality to that of the past. Whatever be the truth and error mingled in these views, we are not now discussing them. O'ur view is wholly impersonal and without race prejudice. If the present immigration were all of the Anglo-Saxon race, were able to speak, read, and write English, and had the same political senti- ments and capacities as the earlier population, the validity of our present conclusions would be unaffected. When our policy oi unrestricted immiigration is thus opposed to the interests of the mass of the people, its continuation in a democracy where universal manhood suffrage prevails is possible only because of a remarkable complexity of ideas, sentiments, and interests, neutralizing each other and paralyzing action. The Amer- ican sentiment in favor of the open door to the oppressed of all lands is a part of our national heritage. The wish to share with others the blessings of freedom and of economic plenty is the pro- duct of many generations of American experience. The policy had mainlv an economic basis ; land was here a free good on the margin of a vast frontier. Most citizens benefited by a growing population. But the open door policy is vain to relieve the condition of the masses of other lands. Emigration from overcrowded countries, with the rarest exceptions, leaves no permanent gaps. Natural in- crease quickly fills the ranks of an impoverished peasantry. Lands whose people are in economic misery must improve their own in- dustrial organization, elevate their standards of living, and limit their numbers. If they go on breeding multitudes which find an unhindered outlet in continuous migration to more fortunate lands. POPULATION AND IMMIGRATION 427 they can at last but drag others down to their own unhappy eco- nomic level. The pride of immigrants and of their children, sometimes to the second and third generations, is another strong force opposing re- striction. Immigrants; having become citizens, are proud of the race of their origin, and resent restriction as a reflection upon themselves and their people. A strong commercial motive operates in the most influential class of employers in favor of the continuance of immigration. From the beginning of our history, proprietors and employers have looked with friendly eyes upon the supplies of comparatively cheap labor coming from abroad. Large numbers of immigrants or of their children have been able soon, in the conditions of the times, to become proprietors and employers. Thus was hastened the peopling of the wilderness. The interest of these classes harmonized to a certain point with the public interest ; but likewise it was in some respects in conflict with the abiding welfare of the whole nation. It encouraged much defective immigration from Europe. The immigration from Europe has furnished an ever changing group of workers moderating the rate of wages which employers otherwise would have had to pay. The continual influx of cheap labor has aided in imparting values to all industrial opportunities. A large part of these gains have been in the trade, manufactures, and real estate of cities as these have taken and retained an ever growing share of the immigrants. Successive waves of immigration, composed of different races, have been ready to fill the ranks of the unskilled workers at meager wages. This continuous inflow has in many industries come to be looked upon as an indispensable part of the labor supply. Conditions of trade, methods of manufac- turing, prices, profits, and the capital value of the enterprises have become adjusted to the fact. Hence results one of those illusions cherished by the practical world when it identifies its own profits with the public welfare. Without immigration, it is said, the supply of labor would not be equal to the demand. It would not at the present wages. Supply and demand have reference to a certain price. At a higher wage the amount of labor offered and the amount demanded will come to an equality. This would tempor- arily curtail profits, and other prices would, after readjustment, be in a different ratio to wages. Such a prospect is most displeasing to the commercial world, quick to see disaster in a disturbance of profits, slow to see popular prosperity in rising wages. The labor supply coming from countries of denser population 428 READINGS IN ECONOMIC PROBLEMS and with low standards of living creates, in some occupations, an abnormally low level of wages and prices. Children can not be born in American homes and raised on. the American standard of living cheaply enough to maintain at such low wages a continuous supply of laborers. Many industries and branches of industry^ in America are thus parasitical. A condition essentially pathological has come to be looked upon as normal. It is the commercial ideal which imposes itself upon the minds of men in other circles. What tremendous forces are combined in favor of a policy of unrestricted immigration : sentiment and business, generosity, self- ishness, laborers, employers. All men are prone to view immigra- tion in its details, not in its entirety. They see this or that indi- vidual or class advantage, not the larger national welfare. The in- terests oi capitalists and of the newly arriving immigrants are abun- dantly considered ; the interests of the mass of the people now here are overlooked. 231. Resolutions against Immigration. BY UNITED GARMENT WORKERvS OE AMERICA. Resolved, That the unprecedented movement of the very poor to America from Europe in the last three years has resulted in wholly changing the previous social, political, and economic aspects of the immigration question. The enormous accessions to the ranks of our competing v/age- workers, being tO' a great extent unem- ployed, or only partly employed at uncertain wages, are lowering the standard of living among the masses of the working people of this country, without giving promise to uplift the great body of immigrants themselves. The overstocking of the labor market has become a menace to many trade-unions, especially those of the less skilled workers. Little or no benefit can possible accrue to an in- creasing proportion of the great numbers yet coming; they are unfitted to battle intelligently for their rights in this republic, to whose present burdens they but add others still greater. The fate of the majority of the foreign wage-workers now here has served to demonstrate on the largest possible scale that immigration is no solution of the world-wide problem of poverty. Resolved, That we warn the poor of the earth against coming to America with false hopes ; it is our duty to infomi them that the economic situation in this country is changing with the same rapid- ity as the methods of industry and commerce. POPULATION AND IMMIGRATION 429 H. THE FURTHER RESTRICTION OF IMMIGRATION. 232. Recommendations of the Immigration Commission. .\s a result of the investigation the Commission is of the opin- ion that in legislation emphasis should be laid on the following principles : 1. While the American people welcome the oppressed of other lands, care should be taken that immigration be such in quantity and quality as not to make too difficult the process of assimilation. 2. Further general legislation concerning the admission of im- migrants should be based primarily upon economic or business con- siderations touching the prosperity and economic well-being of our people. 3. The measure of the healthy development of a country is not the extent of its investment of capital, its output of products, or its imports and exports, unless there is a corresponding economic opportunity afforded to the citizen dependent upon employment for his material, mental, and moral development. 4. A slow expansion of industry which permits the adaptation and assimilation oi the incoming labor supply is preferable to a very rapid industrial expansion which results in the immigration of laborers of low standards and efficiency, who imperil the Amer- ican standard of wages and conditions of employment. The investigations of the Commission show an oversupply O'f unskilled labor in the basic industries of the country as a whole, and therefore demand legislation which will at the present time re- strict the further admission of such unskilled labor. It is desirable in making these restrictions that : a. A sufficient number be debarred to produce a marked effect upon the present supply of unskilled labor. b. The aliens excluded should be those who come to this coun- try with no intention to become American citizens, but merely to save and return to their own countr3^ c. The aliens excluded should be those who would least readily be assimilated. The following methods of restricting immigration have been suggested : a. The exclusion of those unable to read or write in some lan- guage. 430 READINGS IN ECONOMIC PROBLEMS b. The limitation of the number of each race arriving each year to a certain percentage of the average of that race arriving during a given period of years. c. The exclusion of unskilled laborers unaccompanied by wives or families. d. The limitation oi the number of immigrants arriving an- nually at any port. e. The material increase in the amount of money required to be in the possession of the immigrant at the port of arrival. f. The material increase in the head tax. g. The levy of the head tax so as tO' make a marked discrim- ination in favor of m^en with families. A majority of the Commission favor the reading and writing test as the most feasible single method of restricting undesirable immigration. 233. The Necessity for the Educational Test. BY P. ^. HALL.. If we are to apply some further method of selection to^ immi- grants what shall it be ? It must be a definite test. For one trouble with the present law is that it is soi vague and elastic that it can be interpreted to suit the temper of any of the higher officials who may happen tO' be charged with its execution. While there are ni'any exceptions, those persons who can not read in their own lan- guage are, in general, those who are also ignorant of a trade, who bring little money ^yith them, who- settle in the city slums, wdio have a low standard of living and little ambition to seek a better, and who do not assimilate rapidly or appreciate our institutions. It is not claimed that an illiteracy test is a test of moral character, but it would undoubtedly exclude a good many persons who now fill our prisons and almshouses, and would lessen the burden on our schools and machinery of justice. In a country having uni- versal suffrage, it is also- an indispensable requirement for citizen- ship, and citizenship in its broadest sense means much more than the right to the ballot. The illiteracy test has passed the Senate three times and the House four times in the last eight years. The test has already been adopted by the Commonwealth of Australia and by British Columbia, and w^ould certainly have been adopted here long since but for the opposition of the transportation com- panies. POPULATION AND IMMIGRATION 431 234. Pauperism and the Illiteracy Test. BY KATE H. CLAGHORN. The general conclusion to^ be drawn, with regard to the newer elements in immigration seem to be, first, that among them the un- skilled worker gets along better than the skilled, and the illiterate than the literate. This is not to' say that skill and education in them- selves are a handicap in the industrial contest, or that all racial groups with a large proportion of illiterate, unskilled labor get along better than those having a high degree of literacy and a larger pro- portion O'f skill. Industrial success in this country depends upon adjustment to conditions here. Some groups seem to find suitable openings for skill and education. But on the whole there is more chance for the newcomer intO' any social aggregation if he is willing tO' begin at the bottoin, and in this country, in particular, there is less demand for skilled labor from outside, owing to- the fact that the present inhabitants are willing to follow these lines of work themselves, but are unwilling to occupy themselves in unskilled labor. On the other hand the skill, and especially the education, of the newer European immigrant has been directed along lines that do not suit American conditions. In the evolutionary phrasing, undifferentiated social elements can more easily adapt themselves, by specializing, to fit a new environment, than. can the elements which have been already differentiated to fit a former environment. Any restriction of immigration, then, that is based on an edu- cational qualification, would be meaningless with respect tO' the growth of pauperism. Such a qualification would, among the newer immigrants at least, let in the class which though small is the most difficult to provide for, and would keep out the class that can best provide for itself. 235. A Threat to the American Farmer in Settling Immigrants in Rural Districts. BY ROBERT D. WARD. . To scatter among our rural communities large numbers of aliens whose standards of living are such that they are willing to work for the lowest poissible wage, is to expose our native farming popula- tion to a competition which is distinctly undesirable. In the com belt of the west, as Professor T. N. Carver has recently shown, the newer immigrants, because of their lower standards of living, have been able to put more money into land, buildings, and equipment, 432 READINGS IN ECONOMIC PROBLEMS than the native American farmer ; and hence have an advantage in the struggle for existence. Scattering our aHen population simply spreads more widely the evils which result from exposing our own people to competition with the lower class of foreigners. Even though Italians displace negroes in the agricultural districts of the South, the effect will undoubtedly be to cause a migration of the negroes to the cities, a result which those familiar with the condi- tions of the negroes now congested in cities can not fail to view with the greatest alarmi. Lastly, the more widely we scatter the newer immigrants, the more widespread will be the effect of the competition with the lower grades of aliens in causing a decrease in numbers among the older portion of our population. American fathers and mothers naturally shrink from exposing their sons and daughters tO' competition with those who are contented with lower wages and lower standards of living; and therefore the sons and daughters are never born. Even if the slum population should be distributed throughout the rural sections of the country, congestion in the slums could not be relieved, as long as the tide of new immigration flows on un- checked. Were it not for the continued influx of new immigrants, the problem of the slum burden would not exist. It is quite obvious that the more we try to reduce the pressure of competition among the alien immigrants in our great cities, the more we shall encour- age other immigrants, as ignorant and as poor, to come over and take the place vacated. Distribution and a reduction in the num- ber of our immigrants are both needed. 236. Consular Inspection as a Method of Restriction. BY BROUGHTON BRANDENBURG. Immigration must be either controlled and directed or it must be abolished, and the last-named alternative is eliminated by com- mon sense and considerations of a humane nature. We need the immigrants. Our nation owes its strength today to those who have crossed the ocean in other years. Our great industries need their brawn, our undeveloped regions need their toil, and we can easily accept 1 50,000,000 more human beings as raw material ; but they must come as raw material, — good raw material. That given, our civic atmosphere, our conditions, our national spirit must do the rest, and patriots must look to the children of the immigrants for the results rather than to the immigrants themselves. Diseased, deformed, or physically insufficient persons are not and never can be good raw material, and should not be allowed to POPULATION AND IMMIGRATION 433. leave their homes, nor should any members of their families on whom .they are, or are likely to be, dependent. Convicts, prostitutes, persons engaged in questionable pursuits, anarchists, radical social- ists, and political agitators should be excluded. The true conditions of all such persons is readily ascertainable from the civic, police, and militars'' records in the communes of their residence, to which can be added the supplemental evidence of their neighbors and the local officials of the communes. In the com- ]nunes of their nativity the truth is known and cannot be hidden. At the ports of embarkation combined influences can deceive the best officials. At the ports of arrival the hand of the inspector is still weaker. The conclusion is plain ; seek the grounds on which to deny passage to emigrants who wish to come to the United States in the villages from which they emanate. What seems to me to be the best plan to do this, to keep the expense below that which it is at present, and to avoid the oppor- tunities which are sure to be presented for wholesale corruption of American officials by the transportation interests and by the emi- grants themselves, is this : Select emigrants before itinerant boards of two, three, or more native-born Americans who speak fluently and understand thoroughly the language and dialects of the people who come before them, — these boards to be on a civil-service basis. The long diplomatic delays and ensuing red tape of incorporat- ing the privileges of these boards in treaties with the several Euro- pean governments can be avoided by temporary operation under the present consular system of the United States, and little objec- tion would be met with from an}' of the governments from whose domains the immigrants come. The sittings of the boards should be announced by advertise- ments a sufficient length of time in advance to allow all persons con- templating emigration to prepare to appear for examination. Ex- aminers should be prepared to furnish information as to destinations and opportunities, and could, with care, prevent an increase of the congestion in the cities of the East. In extremity, regulations could be made which would allow them to deny clearance and passage to persons desirous of going to districts already over-populated with aliens. It is easy to see how these visiting boards could promote emigra- tion among the classes which are most desirable in northern and central Europe, and are now so chary of coming-. Families which have something to lose by being turned back from the United States are loath to dispose of their property and make the venture. If 434 READINGS IN ECONOMIC PROBLEMS they knew they were certain of admission before they left their homes, a year's time would see the level of the grade of emigrants greatly elevated. Deportation is the severest punishment which can fall on an alien in comparison with anything less than a several years' impris- onment, and all admissions to the country should be made proba- tionary; the commission of any crime or crimes, and conviction therefor, to be followed by punishment and then by deportation. Many of the minor crimes committed by aliens are done with the intention of getting two or three years in prison in which to learn to read and write English and acquire a trade. IX. THE LABOR PROBLEM. A. THE VIEW-POINTS OF LABORER AND CAPITALIST. 237. The Sons of Martha. BY RUDYARD KIPUNC. The Sons of Mary seldom bother, for they have inherited that good . part, But the Sons of Martha favor their mother of the careful soul and the troubled heart ; And because she lost her temper once, and because she was rude to the Lord, her guest. Her sons must wait upon Mary's sons — world without end, reprieve or rest. It is their care in all the ages to take the buffet and cushion the shock ; It is their care that the gear engages, it is their care that the switches lock: It is their care that wheels run truly; it is their care to embark and entrain. Tally, transport, and deliver duly the Sons of Mary by land and main. They say to the mountain, "Be ye removed !" They say to the lesser floods, "Run dry!" Under their rods are the rocks reproved — they are not afraid of that which is nigh. Then do the hilltops shake to the summit; then is the bed of the deep laid bare. That the Sons of Mary may overcome it, pleasantly sleeping and unaware. They finger Death at their glove's end when they piece and repiece the living wires; . He rears against the gates they tend ; they feed him hungry behind their fires. Early at dawn ere men see clear they stumble into his terrible stall, And bait him forth like a haltered steer and goad and turn him till evenfall. 436 READINGS IN ECONOMIC PROBLEMS To these from birth is beHef forbidden ; from these till death is relief afar — The}' are concerned with matters hidden — under the earth line their altars are: The secret fountains to follow up, waters withdrawn to restore to the mouth, Yea, and gather the floods as in a cup, and pour them ag^ain at a city's drouth. They do not preach that their God will rouse them a little before the nuts work loose; They do not teach that His Pity allows them to leave their work whenever they choose. As in the thronged and lig-htened ways, so in the dark and the desert they stand. Wary and watchful all their days, that their brethren's days may be long in the land. Lift ve the stone, or cleave the wood, to make a path more fair or flat, Lo ! it is black already with the blood Sons of Martha spilled for that. Not as a ladder from earth to heaven, not as an altar to any creed. But simple service, simply given to his own kind, is their common need. And the Sons of Mary smile and are blessed — they know the angels are on their side ; They know in them is the grace confessed, and for them are the mercies multiplied ; They sit at the feet and they hear the word — they know how truly the promise runs ; They have cast their burden upon the Lord — and the Lord, He lays it on Martha's sons. 238. The View-Point of the Laborer. BY ROBERT l'\ HOXIE. Among the main charges brought against the unionist by the employer are these : first, that he refuses to recognize the generally conceded rights of the employing class ; secondly, that he does not recognize the sacredness of contract ; thirdly, that while he is strug- gling to obtain higher wages and shorter hours of work, he per- sistently attempts to reduce the efficiency of labor and the extent LABOR PROBLEMS 437 of the output. Assuming these charges to be substantially correct, let us in the case of each seek without prejudice to discover the real grounds of the laborer's attitude and actioii. I. The "rights" which the employer claims, and which the unionist is supposed to^ deny, may perhaps be summarily expressed in the phrase, "the right of the employer to manage his own busi- ness." To' the employer it is a common-sense proposition that his business is his own. To him this is not a subject of argument. It is a plain matter of fact and carries with it the obvious rights of management unhampered by tlie authority of outside individuals. But tO' the laborer it is different. The laborer, like all the rest of us, is the product of heredity and environment. That is to say, he is not rational in the sense that his response to any given mental stimulus is invariable. On the contrary, like the rest of us, he is a bundle of notions, preju- dices, beliefs, unconscious preconceptions and postulates, the pro- duct of his peculiar heredity and environment. These unconscious and subc'onscious psychic elements necessarily mix with and color his immediate activity. What is or has been outside his ancestral and personal environment must be either altogether incomprehen- sible to- himi, or else must be conceived as cjuite like or analogous to that which has already been mentally assimilated. He cannot comprehend what he has not experienced. Now, it is well known that the environment of the laborer under the modern capitalistic system has tended to become predom- inantly one of physical force. He has been practically cut oft" from all knowledge of market and managerial activities. The ideals, motives, and cares of property-ownership are becoming foreign to him. More and more, in his world, spiritual forces are giving way to the apparent government and sanction of blind physical causation. In the factory and the mine spiritual, ethical, custo- mary, and legal forces and authorities are altogether in the back- ground. Everything to the worker, even his own activity, is the outcome of physical force, apparently undirected and unchecked by the spiritual element. The blast shatters the rock, and whatever of flesh and blood is in range is also torn in pieces. The presence and the majesty of the law and contract are altogether ineffective in the face of physical forces let loose by the explosion. In like manner the knife cuts, the weight crushes, the wheel mangles the man and the material with equal inevitableness. No sanction, re- ligious, moral, customar}^, or legal, is there. Even outside the strictly mechanical occupations the machine and the machine pro- cess are coming to- dominate the worker, and the growth in size 438 READINGS IN ECONOMIC PROBLEMS of the industrial unit renders his economic relationships ever more impersonal — withdraws farther from his knowledge the directing; and controlling spiritual forces. The laborer thus environed in- evitably tends to look upon physical force as the only efficient cause and the only legitimizing sanction. He tends to become mentally blind to spiritual, legal, contractual, and customary forces and their effects. To the laborer, as the product of this environment, the pro- prietary and managerial claims of the employer tend to become, of necessity, simply incomprehensible. The only kind of production which he can recognize is the material outcome of physical force^ — the physical good. Value unattached to and incomm be scientifically developed, and scarcely touched. Mr. Edward Atkinson has shown that in the United States alone, the food produce could be doubled "by merely bring- ing our product up to our average standard of reasonably good agriculture.'' While, even as it is, one-fifth of the arable land of that country has not yet been touched. Again, it is a'bsolutely proven that, whatever be the reason, reproductivity does not keep pace with advancing civilization and education. Over-population is simply a myth to scare the unthinking with. God's laws may be trusted to care for all God's children, provided only that we keep God's laws. Take money out of marriage ; and our children shall be as arrowiS in the hands of the mighty, and blessed will be the man that has his quiver full of them. The real problem of life is not how tO' provide for the children that shall be born, but how to see to it that children be born right, and to this end improved PROJECTS OP SOCL-IL RBPORM 587 social conditions will contribute largely. Under Socialism we shall have none "born tired" and few born diseased. As for the threat- ened deterioration of the race through lack of competition, Social- ism, in the first place, does not propose tO' abolish competition, only to lift it to a higher plane and make it non-industrial, and secondly, it is not proven that competition is the only means to progress. There are many facts showing how altruism has produced progress ; and if healthy environment, fresh air and good food tend to make healthy babies, as we think no scientist will deny, it follows at once that altruism, and any reform which improves the condition of the poor, must improve the race. "Competition is put forth as the law of the universe. This is a lie. The time is come to declare it is a lie bv work and deed." J. SOCIALISM AND INDUSTRIAL INSTITUTIONS. 335- Voluntary Associations under Socialism. BY J. RAMSEY MACDONALD. In discussing Socialist administration, the critics of Socialism have always overlooked the large part that voluntary organizations are to play inside the state. For instance, th^e family will probably enjoy an influence which it could not acquire under commercial- ism, for under commercialism it has been steadily decaying. The relation between parents and children will be closer, and be con- tinued for longer periods than is now possible, and consequently the home will resume its lost religious significance. It will be altar fires that will burn on its hearths, and sacramental meals that will lie on its tables. The free man with leisure will show his social nature not only by living in crowds, but by forming for his own delight groups of men like-minded to himself. One of these volun- tary organizations will undoubtedly be a political party, for I can- not conceive of a time when different practical proposals in state- craft will not exist or not be transformed into great rival policies and principles oi government. The state will have to give these parties free and fair play, because the state will be democratically governed. Each party will have tO' look after its own interest, and it will, therefore, be essential that each party have its own organs. Under Socialism I can easily imagine that the party newspapers would be under party control. The presses might be under party management with safeguards, or party rights might consist in a power to claim the use of presses. The point is trivial, and if critics 588 READINGS IN ECONOMIC PROBLEMS busy themselves devising- all kinds of possible anomalies and diffi- culties, all I can say is that if even today the country decided to nationalize its printing presses and to make parties officially re- sponsible for the papers published in their interests, two or three business men connected v/ith party newspapers could draw up with- in a week a scheme of working- which could set the whole plan going, and produce a freer and a more responsible press than we have now. Once we disabuse our minds of the totally erroneous idea that a government's interests lie in suppressing every opinion but its own, every serious obstacle in the way of free political speech and writing under Socialism disappears, and the problem becomes one oi busi- ness arrangement. The monopoly of the organs of public opinion, which was long supposed to be inevitable under Socialism, is, as a matter of fact, inevitable under capitalism, and the fading privilege of free discussion will only be restored when economic power is better distributed, or, when concentrated, is democraticallv con- trolled. For, it must be observed, the suppression of critical oppo- sition, impossible so far as a government or public authority is con- cerned, is quite possible when a combination of capitalist interests makes up its mind to effect it. 336. Property and Industry under Socialism. BY JOHN SPARGO. Another phase of our discussion concerns the industrial organ- ization of the Socialist State, and the place in it of private industrial enterprise. Socialism does not involve the absolute monopolization of production and distribution, and the total suppression of private initiative and enterprise in these spheres. The economic organiza- tion of the Socialist State will undoubtedly include production and distribution by individuals and voluntary cooperative groups, as well as collective production and distribution under the auspices and control of the State itself. In all our thought upon this question we must bear in mind that the two principal economic arguments for socialization are : First, the elimination of economic parasitism, the exploitation of the wealth producers by a class of non-producers, and, second, the attainment of greater efficiency through the elimination of the wastefulness inseparable from capitalist production, especially in its competitive stages. The first of these reasons constitutes the prime motive of the Socialist movement. The second is the raison d'etre of the develop- PROJECTS OF SOCIAL REFORM 589 ment of monopoly. Every thoughtful Socialist recognizes that cap- italist production involves an enormous amount of waste, and that incalculable gains v^^ould result from' the socialization of industry. The greater part of the production and distribution of our pres- ent economic system is so organized that the exploitation of the workers engaged in it is inevitable. It is a fundamental condition of Socialism that all such processes and functions be socialized. In other words, it is a sine qua non of Socialism that they be so organized as to eliminate profit-making b^■ investors. This does not mean that they must all be taken over by the supreme political organization which we call the State. Nor does it mean that they must all be socialized at once. A few advo- cates of Socialism, more zealous than intelligent, seem to believe that there will be a grand transformation day upon which all the functions of capitalism will be socialized, but that idea is not held by thoughtful Socialists. Great organizations like the Steel Trust represent the progress already made in the direction of Socialism through one channel. Measures for the government regulation of monopolies now being advocated by conservative non-Socialists indicate an increasing- readiness to make progress in the same direction through another channel, the channel of political organization. The process of so- cialization is essentially an evolutionary one. The incentive which operates to bring about the socialization of industries conducted for profit obtained from the exploitation of the workers, obviously does not exist in the case of petty, individu- alistic industries which do not depend upon such exploitation. The market gardner who cultivates his own land and sells his produce without exploiting the labor of others, and the individual craftsman who does all his own work, likewise without exploiting the labor of others,, illustrate very clearly the distinctive character of enterprises which are not characterized by class exploitation. There is a much larger number of these enterprises, both productive and distributive, than is generally recognized. It is exceedingly proba'ble that a large number of them will continue to exist, as individual enterprises, in the Socialist regime. It seems probable, then, that in the Socialist State three forms of economic enterprise will co-exist, namely ( i ) production and dis- tribution on a large scale under the auspices of the government — national, state or municipal; (2) productio'U and distribution by co- operative associations; (3) production and distribution by private individuals. To regulate properly the relation of these three di- 5go READINGS IN ECONOMIC PROBLEMS visions will be the supreme task of the democratic statesmanship of the future. There are some economic activities which from their very nature require > a national organization for their miost efficient direction. This is true of railways, telegraphs, postal and express services among distributive agencies, and of mining, oil production, and steel manufacture among the productive functions. There are other economic activities which can be most efficiently directed by the smaller unit, the State or Province, and yet others which can be most efficiently conducted by the still smaller political unit, the city or commune. It is impossible to make a rigid classification of the economic functions and decide to which political unit each will be entrusted. Moreover, were such a classification possible it would not be of much value. The Socialist State will inherit the economic organ- ization of the capitalist system, and will modify it in the light of its experience and according to the needs of its econom:ic develop- ment. The economic functions entrusted at first to municipalities may later be transferred to- the larger units, the States and prov- inces, the citizens choosing a greater degree of centralizatiou in the interests of efficiency. On the other hand, a certain amount of de- centralization may take place. The State, using the term in its most comprehensive sense to cover the whole political organization of society, thus assumes the functions now performed by the capitalist class in the employment, direction and superintendence of labor. Naturally, the relations of the State to the individual worker will differ materially from those which now exist between employer and employe. The position of the worker will be somewhat analogous tO' that of the employe who is also a shareholder in the concern for which .he works. Misunder- standings and conflicts between them are, therefore, not only pos- sible but highly probable — ^perhaps inevitable. Inseparable from such a system would be the danger of conflict between the decisions of the workers engaged in important branches of the industrial organization and the interests of the people as a whole. It is very evident therefore, that some way must be found to base the industrial organization of the Socialist State upon the dual basis of the interests of the whole- citizenry on the one hand, and the special interests of the workers as such upon the other hand. One Socialist writer has gravely proposed the establishment of an elec- tive "industrial parliament of two chambers, in one of which repre- PROJECTS OP S0CL4L REPOKM 591 sentation will be according- to numbers, while in the other every industry will be represented irrespective of size." One weakness is common to all such ingenious devices. They are all essentially Utopian. Based upon abstract principles, they fail to take into account the important fact that society is an organism subject to the laws of evolution. Social institutions are never the result of the deliberate adoption of clever inventions. It is easy enough and harmless enough for the believer in a certain form of social organization to sit down and ask himself : "What institutions and what methods will best serve that form of social organization in which I believe?" but we must not be disappointed if quite other institutions and methods are developed. Socialism is the child of capitalism. If the Socialist State is ever realized at all it will be a development of the capitalist State, not a new^ creation. Many of us believe that the transition from capitalism wall be a trancjuil process, stretching over a period of many years ; that the "Social Revolution" of which we hear so much, instead of being a terrible upheaval attended with an enormous amount of violence and suffering, which even the stoutest hearts must anticipate with anxiety, is a long-drawn process of social effort and experiment. The Social Revolution is not a sanguinary episode which must attend the birth of the new social order. It is a long period of effort, experiment and adjustment, and is now taking place. The acceptance of this evolutionary view will save us from w^asting time and energy in devising social institutions and methods to conform with abstract principles. Instead, we shall seek the beginnings of such institutions and methods as the new epoch will require within the present order, together with the beginning of the new epoch itself. K. CRITICISM OF SOCIALISM. 337. The Transition to the Socialist State. BY O. D. SKELTON. The first problem that faces the socialist — how catch the hare — is primarily a question of tactics, but its solution largely determines the character and extent of the difficulties facing the collectivist commonwealth at the outset. Is the capitalist to be expropriated without indemnity, or to be offered compensation? The earlier hot- blooded demand for the expropriation of the robber rich without 592 READINGS IN ECONOMIC PROBLEMS one jot of payment is now; heard more rarely in the socialist camp. This attitude was consistent with the catastrophic view of social evolution, the view that the revolution would be "an affair of twen- ty-four lively hours, with Individualism in full swing on Monday morning, a tidal wave of the insurgent proletariat on Monday after- noon, and Socialism) in complete working order on Tuesday." But in these post-Darwinian days this naive expectation is untenable. With the growing admission that the new order must be established by degrees, it is seen that it would be impossible to expropriate certain capitalists and leave the rest in undisturbed possession. Further, forcible expropriation without indemnity would be impos- sible ; even were the; great majority of the manufacturing proletariat won over to the polic}^, they could scarcely hope to overcome the determined resistance of the millions of farmers and the urban middle class. If the other horn of the dilemma is then unanimously chosen, and the capitalists bought out at one hundred cents on the dollar, how is the condition of the poorer classes one jot improved? There will be heaped up an immense debt, a perpetual mortgage on the collective industry ; rent and interest will still remain a first charge, still extract "surplus labor" from the workers. Even if collectivist management were to prove every whit as efficient as capitalistic, the surplus for division among the workers would not be increased beyond that available to-day. Indeed, it would be diminished. To- day a great part of the revenue drawn in the shape of rent and in- terest is at once recapitalized, and makes possible the maintenance and extension of industry. A socialist regime could not permit the paid-off capitalists to utilize their dividends in this manner, increas- ing their grip on industry; they would be compelled to spend it in an orgy of consumption. All provision for capital extension would therefore have to come out of what was left of the national divi- dend. The last state would be worse than the first. Recognizing this, various socialists have proposed, once the cap- ital has been appropriated, to put on the screws by imposing in- come, property, and inheritance taxes which will eventually wipe out all obligations against the state. In other words, they would imitate the humanitarian youngster who thoughtfully cuts off the cat's tail an inch at a time, to save it pain. Doubtless there are, within the existing order, great possibilities of extension of such taxes for the furtherance of social reform. Possibly our withers would be unwrung if the socialistic state confiscated the multimil- lionaire's top hundred million by a progressive tax. But the for- tunes of the multimillionaires, spectacular as they are and politically PROJECTS OF SOCIAL REFORM 593 dangerous as they are, form but a small proportion of the total wealth. So^ soon as the tax came tO' threaten the confiscation of the small income as well as the great, the matter would again be- come one of relative physical force. 338. Socialism No Remedy for Inequality. BY N. G. PIEJRSO'N. Under State socialism, pure and simple, the Government of the country would assume the ownership of the instruments of pro- duction. We take it that this end might be achieved in the follow- ing manner. Just as at the present it already owns the postal sys- tem, just as in certain countries it already owns and works the railways, manufactures cigars and matches, so it might successively assumie the ownership, and undertake the working of all factories and workshops, all means of transport, farms, fisheries, warehouses, and shops. In order to be able to form by degrees a staff oi prop- erly qualified officials, the State would have to be careful not to proceed with undue haste. Beginning with those branches of indus- try, in which no great experience or intelligence was required, it would have to proceed step by step in extending the sphere of its operations, and would have to be content if, at the end of sixty or a hundred years, it had succeeded in bringing the whole of produc- tion within that sphere. From this, however, it follows that the transfer would necessarily have to^ be effected on terms of adequate compensation to the present owners. We are now leaving questions of equity entirely out of consideration, and regarding only the eco- nomic aspects of the question. During the time when the State was engaged in appropriating the instruments oi production, there should be no disturbances of a nature to occasion direct distress, and such disturbances would be inevitable where sentence of con- fiscation was hanging like a sword of Damocles over the head of every capitalist for a number oi years. The more it became evi- dent from experience that the danger was real and no mere bogey, the worse would things grow. People would become much less in- clined to save, and much more disposed to squander. The proper- ties which the State was to take over would ultimately have got into the most melancholy condition of decay, and habits of neglect and recklessness would have become general and would be slow to dis- appear. A State, which meant to become socialist, would have to dO' one of two things : if it offered no full compensation, it would have to take over the whole production in a very short period of time ; if. 594 READINGS IN ECONOMIC PROBLEMS on the other hand, it meant to take over the various branches of production by degrees, it would be unable to escape the necessity of offering compensation. The former alternative v\rould be impos- sible, even in such a small country as Holland. The second alterna- tive would, therefore, have to be chosen on purely economic grounds, apart from all considerations of justice. And the compensation would have to be such as would be deemed sufficient by the recip- ients themselves, otherwise it would fail in its object. It has been suggested that the compensation might be paid in thirty or fifty annuities. Certainly this system, like many another, could be ap- plied; but we must clearly understand that everything which re- duced the compensation would diminish the care given to such goods as the State had not yet appropriated. And it would be of the utmost importance that this care should not be relaxed, but should continue unabated up to the very end. It would of course be possible to create a certain inducement for the owner not to neglect his property, by providing that the number or the amount of the annual payments made by way of compensa- tion should depend upon the state of the property at the time of its transfer to the Government ; it is very much to be questioned, how- ever, whether this would prove a sufficient inducement. Every one would compare the actual advantage that accrued from saving the expense of upkeep with the possible disadvantages of the annual payment system, and it is easy to judge what the result of the com- parison would be in most cases ; more especially if the payments took a form which did not commend itself to the owner, or if there were any reason to suppose that the socialist State might not fulfill its obligations. We look further into the future; sixty, or, say, a hundred years have passed; what condition of things do we see now? What has changed and what has not? The principal survival is the inequality, the very thing that some people found most difficulty in submitting tO' in the past. There are no longer any merchants, shipowners, or manufacturers, there are no landowners or bankers; but, unless the annuity system of com- pensation has been adopted, we find, instead, a very large number of holders of Government stock, so that there are as many owners of property as before. This class will remain and increase. For the socialistic State will have recognised — if not at once, then after being taught by bitter experience — that with growth of population, capital also miust grow, and that it must grow even more rapidly than the population. The State will therefore have to encourage thrift by paying a certain rate of interest on all savings entrusted PROJECTS OP SOCIAL REPORM 595 to its keeping. It will have to maintain the law of inheritance; for there can be no strong incentive to save, unless goods for consump- tion and claims in respect of debt can be handed down from one generation to another. We do not know if this is quite compatible with the socialistic system, but we do- know that it is absolutely necessary, since the need for capital will always remain, no matter on what lines society may be organized. The inequality thus remains; only certain of its causes disap- pear. Fortunes can no longer be accumulated in commerce or in- dustry, nor does increased demand for agricultural or building land tend any longer to enrich the few at the expense of the many. But gambling on the Stock Exchange will fiot have disappeared. Even though the compensation should have taken the form of terminable annuities, it would be many years before all the bonds establishing their holders' claims to such annuities had disappeared, and it is probable that in a socialistic State these bonds would be subject to considerable fluctuations in the market. Even if all the annuities in the country itself were to have expired, there would still, no doubt, be bonds of other countries to speculate in.' Besides, there will never be wanting things tO' serve as the subject of betting and gam- bling transactions. If any one expects that the socialistic State will be able to get rid of these causes of inequalit}', his optimism must be rather extravagant. 339. The Incompatibility of Socialism and Democracy. BY A. SCHAFFI^e:. It is, to begin with, a delusion to imagine that collective produc- tion could be organized and administered at all in a republic which from base to summit of the social pyramid was reared on demo- cratic principles. It is no doubt a mistake to aver that collective production or even an entirely collective industrial system is alto- gether inconceivable, or must come to grief by reason of the over- whelming burden imposed on the central political power. I have myself shown that this is a mistaken view. But it is, on the other hand, quite certain that collective production, the universal panacea of the Social Democrats, would be wholly impossible unless the most carefully graduated authority were vested in the corporate govern- ing organs, authority which should extend from the lowest to the highest and most central parts of the productive system. It would be impossible to allow that either fronii without inwards or from within outwards there should be constant overturning, changing, and all the confusion of new experiments. But if this is not to be. 596 READINGS IN ECONOMIC PROBLEMS then a stable and self-sufficient central authority and a similarly constituted administrative system throughout the state will be ab- solutely necessary. And these two essentials could only for all time stand securely when based on very broad foundation-stones of some powerfully moderating elements. But then where would be your democratic republic from top to bottom and from centre to circumference? Where would be your freedom and equality? Where your security against misuse of power and against exploita- tion? The fact is, collective production on a democratic basis is im- possible. On a basis of "authority" it is possible, and even in part actually existing, but as such it is non-democratic and has no charms for the proletariat. 340. The Case against Socialism. BY WILUAM GRAHAM. To the general scheme of socialism it is easy to see many ob- jections. The first is that nothing could be produced either in the sphere of material or intellectual production that was not pleasing to the chiefs or the heads of the departments of production. At present it is demand which determines what shall be produced, and every conceivable demand is catered to. Under collectivism produc- tion will determine demand ; at least demand will have to accom- modate itself to production. The state would practically control the production of immaterial things. It could print or suppress what books it pleased, because it would control all the printing presses and pay all the printers. The next objection refers to the quantity and quality of the pro- duction. It is urged that the great stimulus to the private interests of the industrial chief being withdrawn, he will take little interest in the result. The workers will be disposed tO' take things easy, work in itself not being pleasant, and no one fearing dismissal under a socialist regime. Were the chiefs restricted to shares equal with the laborers, no economic incentive would be furnished them to make the output of their departments as much and a^ good as possible. In a word, impracticality may be written large over the collectivist scheme so far as it would largely cut down the salaries Oif superiors, discourage inventors, or arbitrarily dictate production. A common objection tO' socialism is that under it the supply of capital to create or to prevent the deterioration of instruments of production would be insufficient, from the withdrawal of the pres- ent potent stimulus to saving in the shape of interest. Under Col- lectivism the new capital would take the form of a tax or a deduc- PROJECTS OF SOCIAL REFORM 597 tion from gross product. Abstinence, necessary to the accumulation of capital would not be paid for by the receipt of interest by the individual. There is reason for thinking that he therefore would refuse tO' sanction the tax which made his abstinence necessary. But the commonest of all the objections to socialism is that lib- erty would be in danger ; liberty, which, as Mill says, is next to food and drink, the mO'St craving want. It is objected that the vState being sole producer, the leaders and directors of industry might be despotic. The power of buying the things we pleased would be narrowed, and liberty of thought and speech there could not be if the State were the sole owner of the printing presses. Mill's main objection to socialism, however, is that under it there would be no asylum left for individuality of character. He fears that public opinion would be a tyrannical yoke; and doubts "whether the absolute dependence of each on all and surveillance of each by all would not grind all down intO' a tame uniformity of thoughts, feelings, and actions." We should thus, all, cast in mo- notonous moulds, become as like as sheep in a flock. The "general average" would become utterly weary, flat, and unprofitable. Doubts have been frequently expressed whether culture would not be in danger under Socialism, Would the mass of the people in a democratic society, appreciate a thing they had not got, and did not know? Would they recognize the necessity of setting aside funds for its support and encouragement? Sidgwick says, "It is only in a society of comparatively rich and leisured persons that these capacities for culture are likely to be developed and trans- mitted in any high degree." 341. Two Disadvantages of Socialism. BY N. G. PIERSO'N. Here, then, we have the first of the disadvantages of socialism: there would be little progress ; and this disadvantage assumes a graver aspect when we consider two things. First, there would be no competition. There might be a certain emulation among the various directing officials to outshine one another, but this emula- tion would not make up for the absence of the powerful stimulus of competition. Secondly there would be no chance of ever placing at the head of an enterprise any person whoi acquired his training outside the circle of officials. Why is it that, in nominating direc- tors of joint-stock companies, care is generally taken not to select one of the staff of the office employees? The reason lies in the qual- ities of officials. The socialistic State, however, would have no al- 598 READINGS IN ECONOMIC PROBLEMS ternative. There would no longer be any persons who had man- aged businesses of their own. The top could only be reached by ascending each of the rungs of the official ladder. When we take all this. into consideration, we think we are justified in expressing a fear that progress with regard to production is scarcely tO' be reconciled with socialism. In the second place, there is reason for fearing that far too little capital would be formed. The State might, of course, encourage the formation of capital by undertaking to accept the custody of people's savings, and to pay a certain interest thereon. But unless the State were to do more than this, it would not be doing anything like enough. The capital now in course of formation has its origin not only in savings effected out of normal incomes, but in the put- ting by of what is in excess of normal incomes. When rents rise, or large profits are made by able or fortunate entrepreneurs, let not our first and exclusive attention be directed to the economic inequal- ities produced in this manner. IY HERBERT SPENCER. Our political practice, and our political theory, alike utterly reject those regal prerogatives which once passed unquestioned. Though our forms of speech and our State-documents still assert the subjection of the citizens to the ruler, our actual beliefs and our daily proceedings implicitly assert the contrar}^ Nor has the rejec- tion of primitive political beliefs resulted only in transferring the authority of an autocrat to a representative body. How entirely we have established the personal liberties of the subject against the invasions of State-power, would be Cjuickly dem- onstrated, were it proposed by Act of Parliament foircibly to take possession of the nation, or of any class, and turn its services to public ends ; as the services of the people were turned by primitive rulers. And should any statesman suggest a redistribution of prop- erty such as was sometimes made in ancient democratic communi- ties, he would be met by a thousand-tongued denial of imperial power over individual possessions. Not only in our day have these fundamental claims of the citizen been thus made good against the State but sundry minor claims likewise. Ages ago, laws regulating dress and mode of living fell into disuse ; and any attempt to revive them would prove the current opinion to be, that such matters lie beyond the sphere of legal con- trol. For some centuries we have been asserting in practice, and have now established in theory, the right of every man to choose his own religious beliefs, instead of receiving such beliefs on State- authority. AVithin the last few generations we have inaugurated complete liberty of speech in spite of legislative attempts to sup- press or limit it. And still more recently we have claimed and finally obtained, under a few exceptional restrictions, freedom to trade with whomsoever we please. Thus our political beliefs are widely different from ancient ones, not only as to^ the proper depos- itory of power to be exercised over a nation, but also as to the extent of that power. Not even here has the change ended. Besides the average opin- ions which we have just described as current among ourselves, there exists a less widely-diffused opinion going still further in the same direction. There are to be found men who contend that the sphere of government should be narrowed even more than it is in England. They hold that the freedom of the individual, limited only by the 6oo READINGS IN ECONOMIC PROBLEMS like freedom of other individuals, is sacred ; and that the legislature cannot equitably put further restrictions upon it, either by forbid- ding any actions which the law of equal freedom permits, or taking away any property save that required to pay the cost of enforcing this law itself. 343. A Socialistic View of Competition. BY W. D. P. BLISS. Individuals producing and struggling each for self, tho^se who have inherited wealth or education, or aibility or advantage of rank and circumstance, have been able to gain the ownership of the most valuable lands and of machinery, and have left the rest of man- kind, deprived of land and machinery, to sustain existence only by working for the possessing classes. Individual competition of man- ufacturers and employers compels them to^ produce as cheaply as possible in order to be able to sell as cheaply as possible. If they do not they must go out of business ; for under free competition he who sells a given article the cheapest will get the trade. Therefore the manufacturer and producer, compelled tO' buy in the cheapest market, strive among other things to buy labour as cheaply as pos- sible. The labourer, meanwhile, having no good land and no ade- quate capital, is compelled to sell his labour force at the best price he can. But since men multiply rapidly while land and capital are limited, and since machinery and invention constantly enable fewer and fewer men to- do work formerly done by many, there soon comes to be competition of two men tO' get the same job. Now, the employer we have seen to be compelled to employ those who will work cheapest. There thus comes to be a competition between workmen to see who* will work cheapest and so get the job. This goes on developing till wages fall to just that which will support and renew the lowest form O'f life, that will turn out the requisite grade of work. It is true that tO' an extent it pays to employ the higher grades of labour, because they turn out more and better work which will command more money ; but this is more than coun- terbalanced, except in a small residium of industry, by machinery and invention, which more and more enable unskilled labour, or at least labour very slightly skilled, to take the place of skilled la- bour. Women, usually partly supported by fathers, husbands, broth- ers, and more and more by lovers, can afford to work cheaper than men. and hence supplant men; boys supplant women; girls, boys; ig- norant races those more educated ; — a process not theoretical, but which can be seen in the history of any factory town. The division PROJECTS OF SOCIAL REFORM 6oi of labour, miarvellously increasing the product, moire and more compels the worker tO' become a mere "hand," dependent on his machine, and knowing only one detail of one branch of one indus- try ; so that when invention changes that detail he is left an un- skilled worker. Competition, toos continually drives machinery at a faster and faster rate; so that while skilled American labourers, for example, get higher wages than those of any other country, they turn out a still greater relative product, and are sooner worn out and left to earn nothing. Organizations of labourers strive to prevent competition amongst themselves, and tO' unite against em- ployers, whO' in their turn are comipelled to unite, bringing on all the evils of strikes and a class war. Meanwhile, in spite of the trades unions, since they are able to organise only a comparatively few of the more skilled workmen, the competition of the unor- ganized either brings down wages or produces miseries which grow more rapidly than trades unionism can do good, causing industrial depression in spite of trades unionism. On the part of employers, too, combinations beget larger combinations. Leading firms unite. Monopoly sets in. Employers see that to combine is better than to compete. Railways, gas companies, various industries develop gi- gantic monopolies. Wealth is concentrated in the hands of the few. This means a decreased demand for ordinary products ; since the masses, though needy, have no money with which to buy. De- mand is reduced, even while the people are starving. Crises grow more and more frequent. Great wealth and great possibilities of gain for the few develop a love for speculation and luxury. The wealthy are educated and cultured; they have time for art and reli- gion. They are often charitable and generous. The workers, mean- while, compelled to work and strain harder and harder under the competition to- live, grow materialistic and reckless. The rich come to appear to- deserve their wealth. But inherited wealth develops fast living ; and inherited poverty, hopelessness, recklessness, and thriftlessness. In a work, we have the modern world. This, say Socialists, is what has happened and must happen as long as indus- trial competition reigns. 344. What Socialized Efficiency Costs Germany. BY SAMUKT-. P. ORTIT. Is Germany a model for our democracy? What price is she paying for her well advertised efficiency? How is her paternalism afir'ecting human nature? The lure is a socialized Germany. The State owns railroads, 6o2 READINGS IN ECONOMIC PROBLEMS canals, river transportation, harlDors, telegraphs, and telephones. Banks, insurance, pawnshops, are conducted by the State. ]\Iunici- palities are landlords of vast estates ; they are capitalists owning street car lines, gas plants, electric light plants, theatres, markets, warehouses. The cities conduct hospitals for the sick, shelters for the homeless, soup-houses for the hungry, asylums for the weak and unfortunate, nurseries for the babies, homes for the aged, and cem- eteries for the dead. Add to this the vast and complex system of State education, a system of training that aims at livelihood. Nothing like the per- fection, the drill, and the earnest, unsmiling efficiency of these ele- mentary and trade schools exists anywhere else in the world. In 1907, there were 9,000,000 children in the elementary schools, taught by 150,000 teachers, nearly all masters, as the "school ma'am'' does not flourish in the Kaisers realm. Every one of these pupils is headed for a bread-and-butter niche in this land of super-orderli- ness. And more than 300,000 persons are employed by the State in some form of educational work, training the youth into adept- ness, in all sorts of schools. The army, as well as the school, brings home to every German family the fact that the State is watchful— and jealous. It demands that two full years of every young man be "socialized" ; and the peasant woman and the artisan's wife must contribute her toil to the toll that the vast system of State discipline demands. Even the Church, that form of organized social effort which is everywhere first to break away fromi the regimen of the State, re- mains "established." So I might continue through almost every activity — ^the vast system of State railroads, mines, shipyards — and include even art and music. This socialized Germany is alsO' an industrialized Germany. Everyone knows how cleverly advertised are German goods. But it is always well to remember that this race of traders and manufac- turers has somehow, in one generation, come from a race of solid scholars, patient artisans, and frugal peasants. The old Germany has disappeared ; the Germany of the spectacles, the shabby coat, and the book; the Germany of Heidelberg and Weimar. A new order has taken its place. As you ride in the great express, from Cologne to Berlin, you never are out of sight of clusters of tall, smoking chimneys. Symbolic of the new Germany are the Deutsche Bank, the trade of Hamburg, and the steel works of Essen. Now, how has it been possible to make this transformation? To create out of a slow, plodding, peasant-artisan people an industrial- ized population, out of a race of scholars a race of manufacturers; PROJECTS OF SOCIAL REFORM 603 to fill a land no larger than one half of Texas with 65,000,000 peo- ple who are breeding at the rate of nearly a million a year, and to engage the State in doing all sorts of things for these thriving fam- ilies? It is the political miracle of the century, and its socialized efficiency is the talk of the hour. How^ has it been accomplished? The Kaiser has adapted, line for line and point for point, the pattern of medieval feudalism to the exigencies of modern indus- trialism. So, to begin with, the Kaiser has an obedient people, in whom the feudal notion of caste is second nature. Every one has his place, and shall keep it. Such shifting as now is tolerated is due to wealth and tO' the kind of ambition which luxury always awakens. You cannot have superimposed classes without obedience. The average German is docile, and wants to be told what to do. The Government has its eager hands in every pocket, its anxious fingers on every pulse. From the cradle tO' the grave, the State watches the individual, commands him and, in a way, cares for him ; always seeing to it that he has a place in the national economv and that he keeps it. Intent on getting more tangible evidence, I visited the office of the Municipal Charities, where I was shown long columns of figures that indicated a heavy and rapid increase in poverty. I was told that this was due largely to the migration of rural lalborers tO' the city, where they soon find themiselves out of work and in need of public aid. I was also- told that the city helps to support many old • people who also receive old age pensions, the amount of this pen- sion being miserably small. To an outsider, of course, the inner workings of the mind and heart are hidden. But the outer aspect of the German State is per- fectly patent. It is mechanism^ — there can be no doubt about it — the mechanism of the solar system. It is a land where every mem- ber of Society has an ordained orbit and moves in it around the central sun, the State, which radiates a mystic gravitation into every activity — almost every thought — of every man, woman, and child. Here you see the most varied activities held to the ideals of efficiency through a perfected feudalism^ So that all Carl and John need to do is to obey ; then they are taught the rudiments of learn- ing and a trade, are insured ag'ainst the most disturbing episodes of life, assured also' of some leisure, considerable amusement, and a decent burial. And that is life ! Of all invented contrivances this German machine is the most amazing, this vast enginery of State with the patents of Hohenzol- lern, Bismarck, & Co. on every part, that has reduced the life of a 6o4 READINGS IN ECONOMIC PROBLEMS great people tO' complacent routine and merged the rough eccentrici- ties of all into a uniformity of effort and ambition. It is true that John and Carl can live their ordered lives in rou- tine and contentment, rounding out year after year of plodding toil, paying their dues to the various funds and their taxes to the Gov- ernment, rearing their families, and entrusting them to the same over-care. But what sort of creatures does it make of John and Carl, and of their children and their childrens' children ? There is no exact way, not even a German way, of measuring originality, individual initiative, and independence. But this also is certain: patience, obedience, minute training, do not foster dar- ing and versatility. John and Carl settle down, literally settle down, to an uneventful life, looking forward to no change, taking no risks, seeking no alternatives. Once a butcher, always a butcher. This makes Germany depressing to a restless American who is always willing to "go it alone" and to get "a run for his money." Some years ago, Mr. Ludwig Max Goldberger gave his country- men the cheering news that Americans need not be feared, because "all that they have done, we can imitate." This is an actual policy. I have been told by American manufacturers that they have found their machines so exactly copied in German shops that only the ab- sence of the patent dates and of the name of the makers told them that the machines were not made in the American shop. Already this land of drill and obedience is becoming an empire of conscious imitators. There are on the German horizon ominous portents. First I should place the moral and psychological effects of luxury. Few nations can stand the sapping suction of plenty. The effect of the profligacy that is everywhere apparent in the New Germany will be particularly swift and fatal in a people who for generations have been frugal and plain. On top of this wealth is an imperial debt that has risen from $490,000,000 in 1901 to $1,345,000,000 in 1912 ; this without reckon- ing the provincial and municipal debt which is four times larger than the imperial. The burden of taxation in 1912 was $70 per average family. And on top of this burden of debt sits the militarist, taking, in 1911-12, 622,520 young men out of the fields and factories for the standing army. This year 130,000 more are to be called out; and a new and unheard-of war program is proposed to this patient and obedient people. One must admire alike the audacity of the pro- posal, the patriotism of the voter, and the magnificent discipline that has wrought such submissiveness. PROJECTS OF SOCIAL REFORM 605 The red omen is the most conspicuous. Socialism is skillfully combining the revolt against this imperial, personal Government, and the desire of the workman for a greater share of the wealth of the land. Then what will happen to this centralized bureaucracy; and what will become of the system oi State aid and municipal social- ism? For without an efficient bureaucracy you cannot have an ef- fective paternalism ; and without centralized administration you can- not run railroads, theatres, and pawnshops. It is the one point usually overlooked by the enthusiasts. They paint glowing pictures of socialized Germany, but they fail to look under the surface. Germany's system is built upon discipline ; hard, military, iron discipline, that grips every baby in its vise and forces every man into his place; a benevolent tyranny, no doubt, but nev- ertheless a tyranny ; an efficient feudalism, but none the less a feud- alism of self-coiiscious caste and fixed tradition. No doubt the time has come when we must modify our system of extreme individualism by some system of social cooperation. How far shall we proceed in this path of socialized efficiency? Are we willing to pay the German price? Could wc do it even if we wished to? Only a few peoples are fitted for such rigor. I believe that America _would be a poor place for a Hohenzollern efficiency test. The carefully trained American barber would quite suddenly take it into his head to be a sailor or a constable, and "all the king's • horses and all the king's men" couldn't hold him to his economic predestination. When all has been said, I cannot escape the conviction that the real significance even of Germany is not in what the State has done for the workman but what the German workman has succeeded in doing for himself, in spite of the State. This brings us back to the first postulate of Anglo-Saxon indi- vidualism : the basis of social cooperation is self-help. M. THE FUTURE OF INDUSTRIAL SOCIETY. 345. An Ethical Aspect of the New Industrialism. BY AI.VIN S. JOHNSO'N. The aristocracies have vanished, we shall never know them again. The work of supplying the world, now and for the future, has become one of such complexity, requiring so broad a diffusion of general intelligence, that merely personal dignitaries can never 6o5 READINGS IN ECONOMIC PROBLEMS again acquire their ancient influence over man's mind, their ancient hold on his conduct. There remains in the world only the common man. Differences in natural endowment, in culture and in wealth persist ; but these can not alter the fact of a fundamental democracy. So far as we serve, we serve the common man. But — and this we must fix in our minds — the common man of today is not the obscure citizen of earlier epochs. The same com- mercial process which has broken down the earlier class organiza- tion has produced a differentiation in economic structure, an interde- pendence of parts, which compels us to conceive of economic' society as a living organism. The common man of today compares with his prototype of yesterday as the cell in an organized tissue com- pares with the cell in the half-coherent mass of protoplasm. The functions of the individual are now organic functions, far trans- cending the narrow confines of his own personality. The pilot, the engineer, the steel worker, the coal-hewer, are significant, not in themselves, but in the social work they perform. With the progress of time, a constantly increasing share of the population assumes functions essentially social. In serving the common man, then, we are performing a work far more worth while than that of supplying the needs of an indi- vidual, of whatever personal worth. We are serving a social func- tionary in the last analysis, society itself. Our work, then, is sig- nificant or meaningless according as we conceive society itself as worthy or not. If we are constrained to think of our society as ninety- million persons, chiefly knaves and fools, the service will be irksome, to be shirked, if possible. If the society we serve is full of brutality and injustice, disfigured with poverty and ignorance, corrupted with cynicism and self-indulgence, it can not inspire us with loyalty in its service. The exhausting toil of the long day, the hopeless mis- ery of the sweatshop, the sordid depravity of he slum, can not much longer cumber the earth if society is to command the best efforts of its servitors. We are not now concerned with the question of justice to those who live and toil in wretchedness. That question is worth considering in its proper place ; it is sufficient here to indi- cate that, for the orderly progress of industry in the coming era, we must remove conditions that destroy our faith in society. Men in the service of society will give their best efforts only if society is worth serving. But it is not sufficient that society should be worth serving, the worth of society and the worth of work in its service must be given concrete expression if these values are to mold men's conduct. To- day these values are perceived, but dimly ; they exercise an influence PROJBCTS OP SOCIAL REFORM 607 in limited fields. Men in the service of the railways, as a rule, en- deavor honestly to realize the ideal of continuous and adequate ser- vice. Coal miners are loth to strike at the opening of winter. Their social function plays, a part — though unfortunately a minor part — in controlling their economic policy. As a rule, however, the ser- vants of society, employers and employees alike regard any peculiar dependence of society upon their services as an element strengthen- ing their bargaining position, a peculiar opportunity for gain. The wheat is falling from the head; the fruit is rotting on the tree; an excellent time for a concerted demand for higher wages ! An in- dustrial city has been built upon the expectation of the continuous supply of material : what an opportunity for the material producers to levy tribute! A whole nation lives from day to day upon the fruits of its mechanical industries ; coal is its bread. A dazzling prospect of gain lies before those who' can possess themselves of the mastery of the mines. Responsibility of function is opportunity for gain ; so prevalent is this conception that when we assert that the use of responsibility for gain, not for service, is a species of treason, we seem to be harking back to the middle ages. And so we are. But there is much in the mediaeval industrial spirit that is eternal : much that must be restored to our society after the dis- orders of an era of expansion and exploitation. The worth of society and of work in its service — these are the social values that must govern in the new industrialism. As mere abstract ideas they can have no potency. As abstract ideas the kings and nobles of an earlier age had no potency ; they were invested with the power of social values by the work of architects and sculptors, poets and philosophers. The poets, as it were, cre- ated kings and knights — ideals toward which actual rulers and no- bles sought to elevate themselves. Architects and sculptors, paint- ers and poets, can transform social man and society intO' values capable of dominating industry. The task may be difficult ; but it is no more difficult than that of vesting glory in the House of Atreus or the House of Bourbon. The ultimate need of the new industrialism, then, is not more trained skill, more applied science — although these two are good things in their way — ^but artists and poets who shall translate so- ciety and social man into terms of values worth serving. When these have done their work we shall hear less of the deterioration of labor and the abuse of responsibility, of industrial decay and social corruption, of irreconcilable conflict and threatened revolution. A revolution will have been accomplished : a revolution in ideals and in values.